-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXYImYjtw1s0+oA1YZ9Xg8/kGi0Bx0EhkWgWTGpx3r/oNXBZh8rV4CFLyPupkcLA oh75IwCprUjJ6rV/ch6pdg== 0000898430-97-003165.txt : 19970801 0000898430-97-003165.hdr.sgml : 19970801 ACCESSION NUMBER: 0000898430-97-003165 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNATURE EYEWEAR INC CENTRAL INDEX KEY: 0001036292 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 953876317 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-30017 FILM NUMBER: 97649509 BUSINESS ADDRESS: STREET 1: 498 N OAK ST CITY: INGLEWOOD STATE: CA ZIP: 90302 BUSINESS PHONE: 3103302700 MAIL ADDRESS: STREET 1: 498 NORTH OAK ST CITY: INGLEWOOD STATE: CA ZIP: 90302 S-1/A 1 AMENDMENT #1 TO THE FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997 REGISTRATION NO. 333-30017 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- SIGNATURE EYEWEAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 3851 95-3876317 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
498 NORTH OAK STREET INGLEWOOD, CALIFORNIA 90302 (310) 330-2700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- JULIE HELDMAN, CO-CHAIRMAN OF THE BOARD AND PRESIDENT SIGNATURE EYEWEAR, INC. 498 NORTH OAK STREET INGLEWOOD, CALIFORNIA 90302 (310) 330-2700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: ALAN B. SPATZ, ESQ. CHRISTOPHER C. WHEELER, ESQ. JOHN J. MCILVERY, ESQ. DONALD E. THOMPSON, II, ESQ. TROOP MEISINGER STEUBER & PASICH, LLP PROSKAUER ROSE LLP 10940 WILSHIRE BOULEVARD 2255 GLADES ROAD, SUITE 340W LOS ANGELES, CALIFORNIA 90024 BOCA RATON, FLORIDA 33431 (310) 824-7000 (561) 241-7400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------- If any of the securities being registered in this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SIGNATURE EYEWEAR, INC. CROSS-REFERENCE SHEET
FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS -------------------------------- --------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................ Facing Page; this Cross-Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus................... Inside Front Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors; Summary Financial And Operating Data; The Company 4. Use of Proceeds....................... Use of Proceeds 5. Determination of Offering Price....... Underwriting 6. Dilution.............................. Dilution 7. Selling Security Holders.............. Principal and Selling Shareholders 8. Plan of Distribution.................. Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Description of Capital Stock Registered............................ 10. Interests of Named Experts and Counsel............................... Experts 11. Information with Respect to the Registrant (a) Description of Business............. Prospectus Summary; Risk Factors; The Company; Termination of S Corporation; Use of Proceeds; Management's Discussion and Analysis of Results of Operations and Financial Condition; Business (b) Description of Property............. Business--Properties (c) Legal Proceedings................... Business--Legal Proceedings (d) Market Price, Dividends and Related Stockholder Matters................. Outside Front Cover Page of Prospectus; Risk Factors; Dividend Policy; Management; Description of Capital Stock; Shares Eligible for Future Sale (e) Financial Statements................ Financial Statements (f) Selected Financial Data............. Selected Financial Data; Summary Financial And Operating Data (g) Supplementary Financial Information......................... * (h) Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Management's Discussion and Analysis of Results of Operations and Financial Condition (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............... * (j) Directors and Executive Officers.... Management
FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS -------------------------------- --------------------------------- (k) Executive Compensation................. Management (l) Security Ownership of Certain Beneficial Owners and Management....... Principal and Selling Shareholders (m) Certain Relationships and Related Transactions........................... Certain Relationships and Related Transactions 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. *
- -------- * Omitted because the item is negative or inapplicable ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 31, 1997 1,800,000 SHARES [LOGO OF SIGNATURE EYEWEAR, INC.] COMMON STOCK Of the 1,800,000 shares of Common Stock of Signature Eyewear, Inc. ("Signature" or the "Company") offered hereby (the "Offering"), 1,600,000 shares are being sold by the Company and 200,000 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price of the Common Stock will be between $9.00 and $11.00 per share. For information relating to the factors considered in determining the initial offering price to the public, see "Underwriting." The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "SEYE." SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED BY THIS PROSPECTUS. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS - -------------------------------------------------------------------------------- Per Share.............. $ $ $ $ - -------------------------------------------------------------------------------- Total (3).............. $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include compensation to Fechtor, Detwiler & Co., Inc. and Van Kasper & Company (the "Representatives") in the form of (i) an obligation to reimburse the Representatives for expenses of up to $135,000; and (ii) warrants to purchase up to 180,000 shares of Common Stock. The Company and the Selling Shareholders have also agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $520,000. (3) The Company and the Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an aggregate of 67,500 additional shares from the Company and 202,500 additional shares from the Selling Shareholders on the same terms and conditions set forth above solely to cover over-allotments of shares, if any (the "Over-Allotment Option"). See "Underwriting." If the Over-Allotment Option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ , Proceeds to the Company will be $ , and Proceeds to the Selling Shareholders will be $ . ----------- The shares of Common Stock are offered by the several Underwriters named herein on a "firm commitment" basis, subject to prior sale, when, as and if issued by the Company, delivered to and accepted by the Underwriters and subject to the right of the Underwriters to reject any order in whole or in part and to certain other conditions. It is expected that delivery of the certificates representing the Common Stock will be made against payment therefor at the offices of Fechtor, Detwiler & Co., Inc., 225 Franklin Street, Boston, MA 02110 on or about , 1997. ----------- FECHTOR, DETWILER & CO., INC. VAN KASPER & COMPANY THE DATE OF THIS PROSPECTUS IS 1997. [PICTURES] INSIDE FRONT COVER: Reversing out of solid back is the copy line in all caps "The Signature Brand Names of Signature Eyewear". INSIDE FRONT COVER TWO PAGE COLOR FOLD OUT: Laura Ashley Eyewear lifestyle photograph depicting a woman wearing Laura Ashley Eyewear, sitting up in her bed, reading the newspaper. The Laura Ashley Eyewear logo is placed at the bottom of the image with the brand's trade theme-line "The Premier Feminine Collection" resting just below the logo. At the bottom of the page are the lines "Made by Signature Eyewear under license from Laura Ashley" and "Laura Ashley Eyewear net sales were 73% of the Company's net sales in the six months ended April 30, 1997." Eddie Bauer Eyewear lifestyle photograph depicting a couple wearing Eddie Bauer Eyewear. The Eddie Bauer Eyewear logo is at the bottom of the image. At the bottom of the page are the lines "Sold by Signature Eyewear under license from Eddie Bauer" and "Launch planned for the Spring of 1998. To date the Company has had no revenues from Eddie Bauer Eyewear." No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since that date. Until , 1997 (25 days after commencement of the Offering) all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 7 The Company.............................................................. 14 Termination of S Corporation Status...................................... 14 Capitalization........................................................... 15 Use of Proceeds.......................................................... 15 Dilution................................................................. 16 Dividend Policy.......................................................... 16 Selected Financial Data.................................................. 17 Management's Discussion and Analysis of Results of Operations and Financial Condition .................................................... 18 Business................................................................. 23 Management............................................................... 34 Certain Relationships and Related Transactions........................... 39 Principal and Selling Shareholders....................................... 40 Description of Capital Stock............................................. 41 Shares Eligible For Future Sale.......................................... 42 Underwriting............................................................. 43 Legal Matters............................................................ 44 Experts.................................................................. 44 Additional Information................................................... 44 Index to Financial Statements............................................ F-1
---------------- "Laura Ashley" is a registered trademark of Laura Ashley Manufacturing B.V. and Laura Ashley Limited (collectively, "Laura Ashley"), "Hart Schaffner & Marx" is a registered trademark of Hart Schaffner & Marx ("Hart Schaffner & Marx"), "Jean Nate" is a registered trademark of Revlon Consumer Products Corporation ("Revlon"), and "Eddie Bauer" is a registered trademark of Eddie Bauer, Inc. ("Eddie Bauer"). IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," "Business" and the Financial Statements and notes thereto, appearing elsewhere in this Prospectus. The statements which are not historical facts contained in this Prospectus are forward-looking statements that involve risks and uncertainties, including those described under "Risk Factors." Prospective purchasers of the securities offered by this Prospectus should carefully consider the "Risk Factors" section, as well as the other information and data included in this Prospectus, before making an investment in the securities offered hereby. THE COMPANY Signature designs, markets and distributes prescription eyeglass frames primarily under exclusive licenses for Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear and Jean Nate Eyewear, as well as its own Camelot label. The Laura Ashley Eyewear collection is one of the leading women's brand-name collections in the United States. The Company attributes its success to its brand-name development process and frame designs. The Company's brand-name development process includes identifying a market niche, obtaining the rights to a carefully selected brand name, producing a comprehensive marketing plan, developing unique in-store displays, and creating innovative sales and merchandising programs for independent optical retailers and retail chains. Signature's in-house designers work with many respected frame manufacturers throughout the world to develop high-quality, creative designs which are consistent with each brand-name image. In June 1997, Signature acquired the exclusive license to design and market an Eddie Bauer Eyewear collection, which the Company plans to launch in the Spring of 1998. The Company pursued the Eddie Bauer brand name, which had not previously been licensed for prescription eyewear, for its widespread recognition, outdoor heritage, casual styling and reputation for value and quality. The Eddie Bauer Eyewear collection will offer men's and women's styles and will be positioned in the medium-price segment of the brand-name prescription eyewear market. In 1996, domestic retail sales of all eyewear products were $14.6 billion, and domestic retail sales of eyeglasses were $4.6 billion. Just over 60% of the nation's entire population, and more than 90% of people over the age of 45, needed corrective eyewear in 1996. The average age of the United States population is expected to increase over the next 25 years due to the aging of the "baby-boomers" who were born between 1946 and 1964. As more of the baby- boomers exceed age 45, the Company believes sales of corrective eyewear should increase. Signature produces "turnkey" marketing, merchandising and sales promotion programs to promote sales at each level in the distribution chain. For optical retailers, the Company develops unique in-store displays, such as its Laura Ashley Eyewear "store within a store" environments. For the sales representatives who call on retail accounts, whether they are employed by distributors or by Signature, the Company creates presentation materials, marketing bulletins, motivational audio and video tapes and other sales tools to facilitate professional presentations, and the Company offers attractive incentive awards for reaching targeted sales levels. For its distributors who sell to independent optical retailers, Signature provides its innovative loyalty programs. Under the loyalty programs, which generally last from six to ten months, each participating retailer agrees to purchase a specified quantity of frames of new styles released during the program period. Although a participating retailer may cancel at any time, historically most have completed the program and renewed their participation in ensuing years. These "automatic" sales programs have facilitated the widespread placement of new styles in optical retail stores, have increased the Company's leverage with its manufacturers due to the large size of the Company's orders, and have assisted its inventory planning. The Company's largest loyalty program is its Laura Ashley Loyal Partners program, which at April 30, 1997 had over 4,750 participating retailers in the United States (approximately 16% of all independent optical retailers in the United States) as well as over 800 international participants. 4 The Company contracts with overseas factories to manufacture the frames it designs. Signature distributes its frames through distributors in the United States and through exclusive distributors in foreign countries. In addition, the Company sells directly through its own sales representatives to major retail chains, including LensCrafters, Pearle Vision and Eyecare Centers of America, and to independent optical retailers in California. The Company's principal product line is Laura Ashley Eyewear, which was launched in 1992. Signature designs frames and in-store displays which seek to capture the distinctive, feminine image associated with Laura Ashley clothing and home furnishings. Laura Ashley Eyewear styles are feminine and classic, and are positioned in the medium to mid-high price range to reach a broad segment of the women's eyewear market. The Company's net sales of Laura Ashley Eyewear have increased from $2.2 million in fiscal 1992 to $21.1 million in fiscal 1996. Capitalizing on Signature's customer relationships and the success of Laura Ashley Eyewear, the Company launched Jean Nate Eyewear in March 1996 and Hart Schaffner & Marx Eyewear in September 1996. Jean Nate Eyewear is targeted at women seeking to pay an affordable price for high-quality frames which offer unique designs, attention to detail and brand-name identification. Hart Schaffner & Marx Eyewear is a mid-high priced line targeted at men desiring quality, comfort and craftsmanship. The Company's growth strategy includes: (i) continuing to increase the market penetration of its existing lines of brand-name prescription eyewear; (ii) launching Eddie Bauer Eyewear in the Spring of 1998; (iii) acquiring additional exclusive brand-name licenses to market prescription eyeglass frames; (iv) developing new product lines, which may include expanding the marketing of its own Camelot collection; (v) expanding market penetration of its existing Laura Ashley Sunwear line and acquiring additional exclusive brand-name licenses for sunglass frames; and (vi) continuing to expand its international sales efforts. THE OFFERING Common Stock offered by the Company.......... 1,600,000 shares Common Stock offered by the Selling 200,000 shares Shareholders................................ Common Stock outstanding after the Offering.. 5,200,527 shares (1) Use of proceeds from sale of Common Stock by To retire existing bank debt; to the Company................................. launch Eddie Bauer Eyewear; and for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol................ SEYE
- -------- (1) Excludes 600,000 shares of Common Stock available for issuance pursuant to the Company's Stock Plan. See "Management--Stock Plan." Except as otherwise noted, all information in this Prospectus assumes no exercise of the Over-Allotment Option or the warrants (the "Representatives' Warrants") granted to the Representatives to purchase up to 180,000 shares of Common Stock at 120% of the initial public offering price, no grant of awards under the Company's 1997 Stock Plan (the "Stock Plan"), the adjustment in 1997 of the outstanding shares of Common Stock to give effect to a 3.175-for-1 stock split (the "Stock Split"), and the change of the status of the Company from an S corporation to a C corporation for income tax purposes. See "Underwriting," "Management--Stock Plan" and "Termination of S Corporation Status." 5 SUMMARY FINANCIAL DATA Set forth below are summary data from the Company's statements of income and balance sheets. The following data should be read in conjunction with the Financial Statements and related notes and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ----------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------- ------- ------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales............... $9,185 $13,858 $20,051 $23,571 $28,280 $13,052 $16,038 Gross profit............ 3,383 6,929 10,385 12,582 16,349 7,427 9,406 Total operating expenses............... 3,443 6,562 9,079 10,780 14,027(1) 6,033 7,508 Income (loss) from operations............. (60) 367 1,306 1,802 2,322 1,394 1,898 Net income (loss)....... (131) 137 1,107 1,635 2,012 1,233 1,706 Pro forma net income (2).................... 690 1,030 1,265 761 1,030 Pro forma net income per share (2).............. 0.36 0.22 0.29 Pro forma common shares outstanding............ 3,546,519 3,492,511 3,600,527
AT OCTOBER 31, AT APRIL 30, 1997 ---------------------------------- ---------------------- 1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(3) ------ ------ ------ ------ ------ ------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Current assets....... $3,261 $4,726 $4,676 $6,462 $8,989 $10,581 $19,137 Total assets......... 3,959 5,247 5,211 7,260 10,293 11,977 20,533 Current liabilities.. 3,151 3,792 3,490 4,602 7,207 9,280 4,105 Total liabilities.... 3,635 4,686 4,350 5,314 7,364 9,342 4,113 Stockholders' equity.............. 324 561 861 1,946 2,929 2,635 16,360
- -------- (1) Includes $300,000 in compensation expense recognized by the Company in connection with the issuance of 108,016 shares of Common Stock to an executive officer. (2) The pro forma presentation reflects a provision for income taxes as if the Company had always been a C corporation. (3) As adjusted to reflect (i) the conversion of the Company from an S corporation to a C corporation, (ii) the sale of 1,600,000 shares of Common Stock offered by the Company by this Prospectus at an assumed initial public offering price of $10.00 per share and the application of the net proceeds from the sale and (iii) payment of a $635,000 dividend before the closing of the Offering (the Company intends to pay additional dividends before the closing of the Offering in an amount equal to the net income of the Company from May 1, 1997 through the closing of the Offering). See "Termination of S Corporation Status." 6 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing shares of Common Stock offered by this Prospectus. SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY LICENSE Net sales of Laura Ashley Eyewear accounted for 77.8%, 74.6% and 73.4% of the Company's net sales in fiscal 1995, fiscal 1996 and for the six months ended April 30, 1997, respectively. The Company manufactures Laura Ashley Eyewear through an exclusive license with Laura Ashley entered into in 1991. The Laura Ashley license terminates in 2001, but may be renewed by the Company at least through January 2006 so long as the Company is not in breach of the license agreement and meets certain minimum net sales requirements. Laura Ashley may terminate the license before its term expires if (i) the Company commits a material breach of the license agreement and fails to cure that breach within 30 days after notice is given, (ii) the management or control of the Company passes from Bernard Weiss and Julie Heldman to other parties whom Laura Ashley may reasonably regard as unsuitable, (iii) the Company fails to propose a selection of styles of eyewear which Laura Ashley in exercising good faith is willing to approve for manufacture and distribution, (iv) the Company fails to have net sales of Laura Ashley Eyewear sufficient to generate minimum royalties in each of any two years, (v) the Company is unable to pay its debts in the ordinary course of business or enters into liquidation, becomes bankrupt or insolvent, or is placed in the control of a receiver or trustee, or (vi) the Company in any year fails to spend a specified percentage of net sales of Laura Ashley Eyewear on advertising and promotion. The termination of the Laura Ashley Eyewear license would have a material adverse effect on the Company's business, operating results and financial condition. See "Business-- Products--Laura Ashley Eyewear." APPROVAL REQUIREMENTS OF BRAND-NAME LICENSORS The Company's business is predominantly based on its brand-name licensing relationships. In addition to its licensing relationship with Laura Ashley, the Company licenses the right to use proprietary marks from Hart Schaffner & Marx, Revlon for its Jean Nate brand name, and Eddie Bauer. See "Business-- Products." Each of the Laura Ashley, Hart Schaffner & Marx, Jean Nate and Eddie Bauer licenses requires mutual agreement of the parties for significant matters. Each of these licensors has final approval over all eyeglass frames and other products bearing the licensor's proprietary marks, and the frames must meet the licensor's general design specifications and quality standards. Consequently, each licensor may, in the exercise of its approval rights, delay the distribution of eyeglass frames bearing its proprietary marks. The Company expects that each future license it obtains will contain similar approval provisions. Accordingly, there can be no assurance that the Company will be able to continue to maintain good relationships with each licensor, or that the Company will not be subject to delays resulting from disagreements with, or an inability to obtain approvals from, its licensors. These delays could materially and adversely affect the Company's business, operating results and financial condition. LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS FRAMES Each of the Company's licenses limits the Company's right to market and sell products with competing brand names. The Laura Ashley license prohibits the Company from selling any range of designer eyewear that is similar to Laura Ashley Eyewear in price and any of style, market position and market segment. The Hart Schaffner & Marx license prohibits the Company from marketing and selling another men's brand of eyeglass frames under a well-known fashion name with a wholesale price in excess of $40. The Jean Nate license prohibits the Company from manufacturing and selling eyeglass frames under any brand name primarily known as a cosmetic, toiletry, fragrance or haircare trademark or brand name. The Eddie Bauer license prohibits the Company from entering into license agreements with companies which Eddie Bauer believes are its direct competitors. The Company expects that each future license it obtains will contain some limitations on competition within market segments. The Company's growth, therefore, will be limited to capitalizing on its existing licenses in the prescription eyeglass market, introducing eyeglass frames in other segments of the prescription eyeglass market, and manufacturing and distributing products other than prescription eyeglass frames such as sunglasses. In addition, there can be no assurance that disagreements will not arise between the Company and its licensors regarding whether certain brand- name lines would be prohibited by their respective 7 license agreements. Disagreements with licensors may adversely affect sales of the Company's existing eyeglass frames or prevent the Company from introducing new eyewear products in market segments the Company believes are not being served by its existing products. DEPENDENCE UPON CONTRACT MANUFACTURERS; FOREIGN TRADE REGULATION The Company's frames are manufactured to its specifications by a number of contract manufacturers located outside the United States, principally in Japan, Hong Kong/China, France and Italy. The manufacture of high quality metal frames is a labor-intensive process which can require over 200 production steps (including a large number of quality-control procedures) and from 90 to 180 days of production time. These long lead times increase the risk of overstocking, if the Company overestimates the demand for a new style, or understocking, which can result in lost sales if the Company underestimates demand for a new style. While a number of contract manufacturers exist throughout the world, there can be no assurance that an interruption in the manufacture of the Company's eyeglass frames will not occur. An interruption occurring at one manufacturing site that requires the Company to change to a different manufacturer could cause significant delays in the distribution of the styles affected. This could cause the Company to miss delivery schedules for these styles, which could materially and adversely affect the Company's business, operating results and financial condition. See "Business-- Manufacturing." In addition, the purchase of goods manufactured in foreign countries is subject to a number of risks, including foreign exchange rate fluctuations, economic disruptions, transportation delays and interruptions, increases in tariffs and duties, changes in import and export controls and other changes in governmental policies. For frames purchased other than from Hong Kong/China manufacturers, the Company pays for its frames in the currency of the country in which the manufacturer is located and thus the costs (in United States dollars) of the frames vary based upon currency fluctuations. Increases and decreases in costs (in United States dollars) resulting from currency fluctuations generally do not affect the price at which the Company sells its frames, and thus currency fluctuations can impact the Company's gross margin and results of operations. In fiscal 1996, approximately 40% of the Company's eyeglass frames were manufactured by companies headquartered in Hong Kong that have manufacturing facilities in China. Effective July 1, 1997, the exercise of sovereignty over the British Crown Colony of Hong Kong was transferred from the United Kingdom to China pursuant to a treaty between the two countries, and Hong Kong became a part of China. Any political or economic disruptions in Hong Kong or China may force the Company to manufacture its eyeglass frames in other countries which could increase frame costs. The Company is uncertain as to the impact that the change in government will have on its business operations in Hong Kong. Further, China currently enjoys Most Favored Nation trading status with the United States. Under the Trade Act of 1974, the President of the United States is authorized, upon making specific findings, to waive certain restrictions that would render China ineligible for Most Favored Nation treatment. The President has waived these provisions every year since 1979. China's Most Favored Nation status presently extends until July 1998. No assurance can be given that China will continue to enjoy Most Favored Nation status in the future. Any legislation or administrative action by the United States government that revokes or places further conditions on China's Most Favored Nation status, or otherwise limits imports of Chinese eyeglass frames into the United States, could, if enacted, have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS The Company's management will have broad discretion as to the application of the net proceeds to the Company from the sale of Common Stock offered by the Company by this Prospectus. The net proceeds to the Company are estimated to be approximately $14.4 million. The Company expects to use approximately $7.5 million of the net proceeds to repay all bank debt existing at the closing of the Offering, approximately $2.5 million to launch the Eddie Bauer Eyewear line, and the balance for working capital and general corporate purposes. The Company may change the allocation of these proceeds in response to developments in the manufacturing and retail industries and changes in the Company. See "Use of Proceeds." 8 SUCCESSFUL LAUNCH OF EDDIE BAUER EYEWEAR The Company intends to use approximately $2.5 million of the net proceeds from the Offering to develop and introduce the Company's Eddie Bauer Eyewear line. It is expected that certain members of the Company's management and of its design and marketing teams will devote considerable time towards introducing this new line. There can be no assurance that the Company will be able to introduce Eddie Bauer Eyewear at the budgeted price or through the Company's existing distribution channels, or that the introduction of Eddie Bauer Eyewear will occur when planned. Furthermore, once Eddie Bauer Eyewear is released, there can be no assurance of its acceptance by the market. RELATIONSHIPS WITH DOMESTIC DISTRIBUTORS The Company distributes its eyeglass frames to independent optical retailers in the United States (other than California) largely through distributors who sell competing lines of eyeglass frames. Although the Company believes that its distributors currently devote a great deal of time and resources to promoting the Company's products, there can be no assurance that these distributors will continue to do so. The Company does not have written agreements with its domestic distributors except for written understandings not to resell or divert Laura Ashley Eyewear through unauthorized channels of distribution, and not to expand the territories in which they sell the Company's products without the Company's prior consent. Accordingly, the Company's domestic distributors may spend an increased amount of effort and resources marketing competing products, and may terminate their relationships with the Company at any time without penalty. There can be no assurance that the informal nature of the Company's relationships with its domestic distributors will not lead to disagreements between the Company and its distributors or between the distributors themselves, which could have a material adverse impact on the Company's business, operating results and financial condition. See "Business--Distribution." INTERNATIONAL SALES International sales accounted for approximately 9.0%, 8.8% and 9.5% of the Company's net sales in fiscal 1995, fiscal 1996, and the six months ended April 30, 1997, respectively. These sales were primarily in England, Canada, Australia, New Zealand, France and the Netherlands. The Company's international business is subject to numerous risks, including the need to comply with export and import laws, changes in export or import controls, tariffs and other regulatory requirements, the imposition of governmental controls, political and economic instability, trade restrictions, the greater difficulty of administering business overseas and general economic conditions. Although the Company's international sales are principally in United States dollars, sales to international customers may also be affected by changes in demand resulting from fluctuations in interest and currency exchange rates. There can be no assurance that these factors will not have a material adverse effect on the Company's business, operating results and financial condition. QUARTERLY AND SEASONAL FLUCTUATIONS The Company's results of operations have fluctuated from quarter to quarter and the Company expects these fluctuations to continue in the future. Historically, the Company's net sales in the quarter ending January 31 (its first quarter) have been lower than net sales in other fiscal quarters. The Company attributes lower net sales in the first fiscal quarter in part to low consumer demand for prescription eyeglasses during the holiday season and year-end inventory adjustments by distributors and independent optical retailers. A factor which may significantly influence results of operations in a particular quarter is the introduction of a brand-name collection, which results in disproportionate levels of selling expenses due to additional advertising, promotions, catalogs and in-store displays. Introduction of a new brand may also generate a temporary increase in sales due to initial stocking by retailers. Other factors which can influence the Company's results of operations include customer demand, the mix of distribution channels through which the eyeglass frames are sold, the mix of eyeglass frames sold, product returns, delays in shipment and general economic conditions. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Quarterly and Seasonal Fluctuations." 9 PRODUCT RETURNS The Company has a product return policy which it believes is standard in the optical industry. Under that policy, the Company generally accepts returns of non-discontinued product for credit, upon presentment and without charge. According to the 1996 U.S. Optical Industry Handbook, the existence of this policy in the optical business has led to some companies having return rates as high as 20%. While the Company's product returns for fiscal 1995 and fiscal 1996 amounted to 11.6% and 12.1% of gross sales (sales before returns), respectively, and while the Company maintains reserves for product returns which it considers adequate, the possibility exists that the Company could experience returns at a rate significantly exceeding its historical levels, which could have a material adverse impact on the Company's business, operating results and financial condition. AVAILABILITY OF VISION CORRECTION ALTERNATIVES The Company's future success could depend to a significant extent on the availability and acceptance by the market of vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive (optical) surgery. While the Company does not believe that contact lenses, refractive surgery or other vision correction alternatives materially and adversely impact its business at present, there can be no assurance that technological advances in, or reductions in the cost of, vision correction alternatives will not occur in the future, resulting in their more widespread use. Increased use of vision correction alternatives could result in decreased use of the Company's eyewear products, which would have a material adverse impact on the Company's business, operating results and financial condition. ACCEPTANCE OF EYEGLASS FRAMES; UNPREDICTABILITY OF DISCRETIONARY CONSUMER SPENDING The Company's success will depend to a significant extent on the market's acceptance of the Company's brand-name eyeglass frames. If the Company is unable to develop new, commercially successful styles to replace revenues from older styles in the later stages of their life cycles, the Company's business, operating results and financial condition could be materially and adversely affected. The Company's future growth will depend in part upon the effectiveness of the Company's marketing and sales efforts as well as the availability and acceptance of other competing eyeglass frames released into the market place at or near the same time, the availability of vision correction alternatives, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted. The Company's success also will depend to a significant extent upon a number of factors relating to discretionary consumer spending, including the trend in managed health care to allocate fewer dollars to the purchase of eyeglass frames, and general economic conditions affecting disposable consumer income, such as employment business conditions, interest rates and taxation. Any significant adverse change in general economic conditions or uncertainties regarding future economic prospects that adversely affect discretionary consumer spending generally, and purchasers of prescription eyeglass frames specifically, could have a material adverse effect on the Company's business, operating results and financial condition. COMPETITION The markets for prescription eyewear are intensely competitive. There are thousands of styles, including hundreds with brand names. At retail, the Company's eyewear styles compete with styles that do and do not have brand names, styles in the same price range, and styles with similar design concepts. To obtain board space at an optical retailer, the Company competes against many companies, both foreign and domestic, including Luxottica Group S.p.A. (operating in the United States through a number of its subsidiaries), Safilo Group S.p.A. (operating in the United States through a number of its subsidiaries) and Marchon Eyewear, Inc. Signature's largest competitors have significantly greater financial, technical, sales, manufacturing and other resources than the Company. They also employ direct sales forces that are significantly larger than the Company's, and are thus able to realize a higher gross profit margin. At the distributor level, sales representatives often carry many lines of eyewear, and the Company must vie for their attention. At the major retail chains, the Company competes not only against other eyewear suppliers, but also against the chains themselves, which license some of their own 10 brand names for design, manufacture and sale in their own stores. Luxottica, one of the largest eyewear companies in the world, is vertically integrated in that it manufactures frames, distributes them through direct sales forces in the United States and throughout the world, and owns LensCrafters, one of the largest United States retail optical chains. The Company competes in its target markets through the quality of the brand names it licenses, its marketing, merchandising and sales promotion programs, the popularity of its frame designs, the reputation of its styles for quality, and its pricing policies. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. See "Business--Competition." DEPENDENCE ON KEY PERSONNEL The Company's success has and will continue to depend to a significant extent upon its executive officers, including Bernard Weiss (Chief Executive Officer), Julie Heldman (President), Michael Prince (Chief Financial Officer), Robert Fried (Senior Vice President of Marketing) and Robert Zeichick (Vice President of Advertising and Sales Promotion). The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company has entered into employment agreements with each of Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick, all effective as of the closing of the Offering, pursuant to which they have agreed to render services to the Company until October 31, 2000. See "Management--Employment Agreements." The Company maintains and is the sole beneficiary of "key person" life insurance on Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick in the amount of $1,500,000 each. In the event of the death of an executive officer, a portion of the proceeds of the applicable policy would be used to pay the Company's obligation under the officer's employment agreement (see "Management--Employment Agreements with Executive Officers"). There can be no assurance that the remaining proceeds of these policies will be sufficient to offset the loss to the Company due to the death of that executive officer. In addition, the Company's future success will depend in large part upon its ability to attract, retain and motivate personnel with a variety of creative, technical and managerial skills. There can be no assurance that the Company will be able to retain and motivate its personnel or attract additional qualified members to its management staff. The inability to attract and retain the necessary managerial personnel could have a material adverse effect on the Company's business, operating results and financial condition. See "Management." MANAGEMENT OF GROWTH The Company has grown rapidly in recent years, with net sales increasing from $9.2 million in fiscal 1992 to $28.3 million in fiscal 1996, and the number of employees increasing from 41 at November 1, 1992 to 101 at April 30, 1997. The Company's growth has placed substantial burdens on its management resources, and as a result of its growth, the Company has made additions to its management team. Additionally, the Company plans to expand its operations by introducing Eddie Bauer Eyewear in the Spring of 1998. The Company's ability to manage its growth effectively will require it to continue to improve its operational, financial and management information systems and controls and to train, motivate and manage a larger number of employees. There can be no assurance that the Company will be able to sustain its historic rate of revenue growth, continue its profitable operations or manage future growth successfully. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS Immediately following the Offering, the directors and executive officers of the Company will own approximately 59.0% of the Company's outstanding shares (approximately 54.8% assuming the full exercise of the Over-Allotment Option). As a result, the directors and executive officers will be able to control the Company and its operations, including the approval of significant corporate transactions and the election of at least a majority of the Company's Board of Directors and thus the policies of the Company. The voting power of the 11 directors and executive officers could also serve to discourage potential acquirors from seeking to acquire control of the Company through the purchase of the Common Stock, which might depress the price of the Common Stock. See "Management," "Principal and Selling Shareholders" and "Description of Capital Stock." NO DIVIDENDS ANTICIPATED After the consummation of the Offering, the Company does not currently intend to declare or pay any cash dividends and intends to retain earnings, if any, for the future operation and expansion of the Company's business. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION The proposed initial public offering price is substantially higher than the book value per outstanding share of Common Stock. Specifically, investors will sustain immediate dilution of $6.85 per share based on the net tangible book value of the Company at April 30, 1997 of $0.73 per share. Investors in the Offering therefore will bear a disproportionate part of the financial risk associated with the Company's business while effective control will remain with the Company's directors and executive officers. See "Dilution" and "Principal and Selling Shareholders." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for quotation on the Nasdaq National Market, there can be no assurance that an active trading market for the Common Stock will develop as a result of the Offering or, if a trading market does develop, that it will continue. In the absence of such a market, investors may be unable readily to liquidate their investment in the Common Stock. The trading price of the Common Stock could be subject to wide fluctuations in response to quarter to quarter variations in operating results, news announcements relating to the Company's business (including new product introductions by the Company or its competitors), changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company as well as other developments affecting the Company or its competitors. In addition, the market for equity securities in general has been volatile and the trading price of the Common Stock could be subject to wide fluctuations in response to general market trends, changes in general conditions in the economy, the financial markets or the manufacturing or retail industries and other factors which may be unrelated to the Company's performance. The public offering price of the shares of Common Stock has been determined by negotiations between the Company and the Representatives and does not necessarily bear any relationship to the Company's book value, assets, past operating results, financial condition or any other established criteria of value. There can be no assurance that the shares offered by this Prospectus will trade at market prices in excess of the initial public offering price. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock by existing shareholders could adversely affect the prevailing market price of the Common Stock and the Company's ability to raise capital. Upon completion of the Offering, the Company will have 5,200,527 shares of Common Stock outstanding. Of those shares, the 1,800,000 shares of Common Stock offered by this Prospectus will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 3,400,527 shares of Common Stock outstanding are "restricted securities," as that term is defined by Rule 144. Under lock-up agreements with Fechtor, Detwiler & Co., Inc. ("Fechtor Detwiler"), each existing shareholder has agreed that he or it will not, directly or indirectly, sell, assign or otherwise transfer any shares of Common Stock owned by him or it for a period of 360 days after the date of this Prospectus, except with Fechtor Detwiler's prior written consent and except that each shareholder may transfer up to 104,000 shares in the aggregate after 180 days following the date of this Prospectus. Once the lock-up agreements expire, all of the 3,400,527 shares of Common Stock will become eligible for immediate sale, subject to compliance with the volume limitations of Rule 144 by holders of 3,070,677 of these shares. See "Shares Eligible for Future Sale" and "Underwriting." 12 The Company intends to file a registration statement under the Securities Act to register the 600,000 shares of Common Stock authorized for issuance pursuant to the Stock Plan. See "Management--Stock Plan." This registration statement will become effective immediately upon filing. The availability for sale, as well as actual sales, of currently outstanding shares of Common Stock, and shares of Common Stock issuable pursuant to the Stock Plan, may depress the prevailing market price for the Common Stock and could adversely affect the terms upon which the Company would be able to obtain additional equity financing. POSSIBLE ANTI-TAKEOVER EFFECTS The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. Following the Offering, no shares of Preferred Stock of the Company will be outstanding, and the Company has no present intention to issue any shares of Preferred Stock. However, the rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, which may depress the market value of the Common Stock. See "Description of Capital Stock--Preferred Stock." In addition, each of the Laura Ashley, Hart Schaffner & Marx, Jean Nate and Eddie Bauer licenses allows the licensor to terminate its license upon certain events which under the license are deemed to result in a change in control of the Company. See "--Substantial Dependence Upon Laura Ashley License," and "Business--Products." The licensors' rights to terminate their licenses upon a change in control of the Company could have the effect of discouraging a third party from acquiring or attempting to acquire a controlling portion of the outstanding voting stock of the Company and could thereby depress the market value of the Common Stock. ELIMINATION OF CUMULATIVE VOTING The Articles of Incorporation of the Company provide that at such time as the Company has 800 or more holders of its Common Stock as of the record date of the Company's most recent annual meeting of shareholders, the cumulative voting rights of shareholders will cease. This will have the effect of making it more difficult for minority shareholders to obtain representation on the Board of Directors. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements." All statements other than statements of historical fact included in this Prospectus, including, without limitation, the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business," regarding the Company's strategies, plans, objectives and expectations; the Company's ability to design, develop, import and market eyewear products; the ability of the Company's eyewear products to maintain commercial acceptance; the Company's ability to successfully introduce new brands or products; the anticipated growth of its target markets; its future operating results; and other matters are all forward- looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that those expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations are set forth in these "Risk Factors," as well as elsewhere in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these "Risk Factors." 13 THE COMPANY The Company was incorporated in California in 1983 as USA Optical Distributors, Inc. ("USA Optical"). USA Optical began as a distributor of high-quality selections of brand-name eyeglass frames. Those frames were designed and imported by other eyeglass frame manufacturers and suppliers, purchased by USA Optical and sold directly to optical retailers. In 1986, USA Optical began designing its own eyeglass frames and contracting with overseas manufacturers for the manufacture of the frames. In 1988, Bernard Weiss and Julie Heldman, principal shareholders and directors of Signature and the Chief Executive Officer and President, respectively, formed Optical Surplus, Inc. ("Optical Surplus"). Optical Surplus acquires eyeglass frame close-outs and sells them at a discount directly to optical retailers throughout the United States. Optical Surplus was merged into USA Optical in 1991, and the Company's name was changed to Signature Eyewear, Inc. shortly thereafter. USA Optical and Optical Surplus are now divisions of Signature and complement the Company's primary business of designing, marketing and distributing brand-name eyeglass frames. The Company's executive offices are located at 498 North Oak Street, Inglewood, California 90302, and its telephone number is (310) 330-2700. TERMINATION OF S CORPORATION STATUS The Company has been treated as an S Corporation since 1990. As a result, through the date immediately preceding the termination of its S Corporation status (the "Termination Date"), its earnings have been and will be taxed for federal income tax purposes directly to the holders of the Common Stock, rather than to the Company. Other than a tax imposed on S Corporations by the State of California (currently 1.5% of taxable income), state income taxes on earnings also have been the responsibility of the Company's shareholders. The Termination Date will occur immediately before the closing of the Offering. On the Termination Date, the Company will become subject to federal and state corporate income taxes. See Note 1 of Notes to Financial Statements. The Company paid an aggregate of $4,685,000 in dividends to its shareholders from November 1, 1993 through April 30, 1997. These dividends were paid to the shareholders to pay their income taxes and as a return of their investment. Before the closing of the Offering, the Company intends to pay dividends to the shareholders equal to $635,000 plus an amount equal to the Company's net income from May 1, 1997 through the Termination Date. Before the Offering, the Company and the shareholders at the time of the Offering (the "Existing Shareholders") will enter into a tax indemnification agreement (the "Tax Agreement"). The Tax Agreement is intended to assure that taxes are borne by the Company on the one hand and the Existing Shareholders on the other only to the extent that the parties received the related income. The Tax Agreement generally provides that, if an adjustment is made to the taxable income of the Company for a year in which it was treated as an S Corporation, the Company will indemnify the Existing Shareholders and the Existing Shareholders will indemnify the Company against any increase in the indemnified party's income tax liability (including interest and penalties and related costs and expenses) for any tax year to the extent the increase results in a related decrease in the income tax liability of the indemnifying party for that year. The Company will also indemnify the Existing Shareholders for all taxes imposed upon them as the result of their receipt of an indemnification payment under the Tax Agreement. Any payment made by the Company to the Existing Shareholders under the Tax Agreement may be considered by the Internal Revenue Service or state taxing authorities to be non- deductible by the Company for income tax purposes. 14 CAPITALIZATION The following table sets forth the short term debt and the capitalization of the Company at April 30, 1997 and as adjusted after giving effect to (i) the sale of the 1,600,000 shares of Common Stock offered by the Company by this Prospectus (at an assumed initial public offering price of $10.00 per share) and application of the net proceeds from the sale (see "Use of Proceeds") and (ii) the payment of a dividend equal to $635,000 before the closing of the Offering. This does not include additional dividends to be paid by the Company before the closing of the Offering in an amount equal to the net income of the Company from May 1, 1997 through the Termination Date. See "Termination of S Corporation Status."
AT APRIL 30, 1997 ------------------ ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Short-term debt............................................. $5,167 $ 0 ====== ======= Long-term debt, less current portion........................ 62 0 ------ ------- Stockholders' equity: Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding........................ 0 0 Common Stock, $0.001 par value; 30,000,000 shares authorized; 3,600,527 shares outstanding; 5,200,527 shares outstanding as adjusted........................... 8 10 Paid-in capital........................................... 413 14,771 Retained earnings......................................... 2,214 1,579 ------ ------- Total stockholders' equity.............................. 2,635 16,360 ------ ------- Total capitalization.................................. $2,697 $16,360 ====== =======
USE OF PROCEEDS The net proceeds to the Company from its sale of the 1,600,000 shares of Common Stock offered by this Prospectus (at an assumed initial public offering price of $10.00 per share), after deducting the estimated underwriting discounts and offering expenses, are estimated to be approximately $14.4 million ($15.0 million if the Over-Allotment Option is exercised in full). The Company expects to use approximately $7.5 million of the net proceeds to repay all bank debt existing at the closing of the Offering. At April 30, 1997, the bank debt consisted of (i) $4,625,000 in loans under the Company's revolving line of credit with interest rates ranging from 8.375% to 9.25%, and (ii) three installment loans totaling $604,000, maturing at various times in 1997 and 1998 and bearing interest at a weighted average rate of 9.11% per annum. Subsequent to April 30, 1997 and before the closing of the Offering, the Company will borrow an additional amount equal to approximately $2,250,000 for working capital purposes and shareholder distributions. The Company intends to use approximately $2.5 million of the net proceeds to launch the Eddie Bauer Eyewear collection which the Company expects to release in the Spring of 1998. The balance of the net proceeds will be used for working capital and general corporate purposes. The Company intends to maintain flexibility in the use of the proceeds of the Offering (other than amounts to retire existing bank debt). The amounts actually expended for each use of the proceeds, if any, are at the discretion of the Company and may vary significantly depending upon a number of factors, including requirements for launching new product lines, marketing, advertising and working capital to support growth. Accordingly, management reserves the right to reallocate the proceeds of the Offering as it deems appropriate. The Company may also use a portion of the net proceeds to acquire businesses, products or proprietary rights; however, the Company currently has no commitments or agreements relating to any of these types of transactions other than those disclosed in this Prospectus. Until the net proceeds of the Offering are used, the Company intends to invest them in United States government securities, short-term certificates of deposit, money market funds or other short-term interest bearing investments. 15 DILUTION The net tangible book value of the Common Stock as of April 30, 1997 was $2,635,000 or $0.73 per share. Net tangible book value per share is equal to the total tangible assets of the Company, less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of 1,600,000 shares of Common Stock offered by the Company by this Prospectus and the application of the net proceeds from the sale (at an assumed initial public offering price of $10.00 per share, after deducting (i) the underwriting discount, and (ii) estimated offering expenses of $520,000), the net tangible book value of the Company as of April 30, 1997 would have been approximately $16,360,000 or $3.15 per share. This represents an immediate increase in net tangible book value of $2.60 per share to the Existing Shareholders and an immediate dilution of $6.85 per share to new shareholders purchasing shares in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $10.00 Net tangible book value per share as of April 30, 1997.... $ 0.73 Decrease attributable to dividends (1).................... (0.18) Increase per share attributable to new shareholders....... 2.60 ------ Pro forma net tangible book value per share as of April 30, 1997 after the Offering........................................ 3.15 ------ Dilution per share to new shareholders...................... $ 6.85 ======
- -------- (1) Based on a $635,000 dividend which will be paid before the closing of the Offering. Does not include additional dividends which will be paid before the closing of the Offering in an amount equal to the net income of the Company from May 1, 1997 through the Termination Date. See "Termination of S Corporation Status." The following table summarizes, for Existing Shareholders and new investors, a comparison of the number of shares of Common Stock acquired from the Company, the percentage ownership of those shares, the total consideration, the percentage of total consideration and the average price per share.
SHARES OF COMMON STOCK ACQUIRED TOTAL CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing Shareholders........... 3,600,527 69.2% $ 401,000 2.4% $ 0.11 New investors................... 1,600,000 30.8 16,000,000 97.6 $10.00 --------- ----- ----------- ----- 5,200,527 100.0% $16,401,000 100.0% ========= ====== =========== ======
The foregoing tables and calculations assume no exercise of the Over- Allotment Option. DIVIDEND POLICY The Company does not currently intend to pay dividends on its Common Stock following the Offering and plans to follow a policy of retaining earnings to finance the growth of its business. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, contractual and legal restrictions and other factors deemed relevant by the Board of Directors at that time. 16 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company for the periods and as of the dates indicated. The statement of income data for each of the three years ended October 31, 1994, 1995 and 1996, and the balance sheet data as of October 31, 1995 and 1996 are derived from the financial statements and related notes audited by Altschuler, Melvoin and Glasser LLP, independent public accountants, as set forth in their report included elsewhere in this Prospectus. The statement of income data for the six-month periods ended April 30, 1996 and 1997, and the balance sheet data as of April 30, 1997, are derived from unaudited financial statements of the Company prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations. The results of operations for an interim period are not necessarily indicative of results to be expected for a full year. The following data should be read in conjunction with the Financial Statements and related notes and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing elsewhere in this Prospectus.
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30, --------------------------- -------------------------- 1994 1995 1996 1996 1997 ------- ------- --------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales............... $20,051 $23,571 $28,280 $13,052 $16,038 Cost of sales........... 9,666 10,989 11,931 5,625 6,632 ------- ------- --------- ------------- ------------- Gross profit............ 10,385 12,582 16,349 7,427 9,406 ------- ------- --------- ------------- ------------- Operating expenses: Selling............... 5,855 6,510 8,328 3,682 4,701 General and administrative....... 3,224 4,035 5,612(1) 2,302 2,807 Relocation expense.... 0 235 87 49 0 ------- ------- --------- ------------- ------------- Total operating expenses........... 9,079 10,780 14,027 6,033 7,508 ------- ------- --------- ------------- ------------- Income from operations.. 1,306 1,802 2,322 1,394 1,898 Other expense, net...... (198) (166) (309) (160) (191) ------- ------- --------- ------------- ------------- Income before pro forma provision for income taxes.................. 1,108 1,636 2,013 1,234 1,707 Pro forma provision for income taxes(2)........ 418 606 748 473 677 ------- ------- --------- ------------- ------------- Pro forma net income(2).............. $690 $1,030 $1,265 $761 $1,030 ======= ======= ========= ============= ============= Pro forma net income per share(2)............... $0.36 $0.22 $0.29 ========= ============= ============= Pro forma common shares outstanding............ 3,546,519 3,492,511 3,600,527 ========= ============= ============= Supplementary pro forma net income(3).......... $1,458 $1,176 ========= ============= Supplementary pro forma net income per share(3)............... $0.37 $0.28 ========= ============= Supplementary pro forma common shares outstanding(3)......... 3,892,847 4,126,448 ========= =============
AT OCTOBER 31, ----------------- AT APRIL 30, 1995 1996 1997 -------- -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Current assets................................... $6,462 $8,989 $10,581 Total assets..................................... 7,260 10,293 11,977 Current liabilities.............................. 4,602 7,207 9,280 Total liabilities................................ 5,314 7,364 9,342 Stockholders' equity............................. 1,946 2,929 2,635
- ------- (1) Includes $300,000 in compensation expense recognized by the Company in connection with the issuance of 108,016 shares of Common Stock to an executive officer. (2) The pro forma presentation reflects a provision for income taxes as if the Company had always been a C corporation. (3) Supplementary net income and per share amounts are adjusted to reflect the repayment of debt and related reduction of interest expense as if the debt was repaid on November 1, 1995 and 1996. The number of shares required to be issued, assuming a $10.00 price per share, have been added to the number of common shares outstanding for the period. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in connection with the Company's Financial Statements and the notes thereto and other financial information included elsewhere in this Prospectus. OVERVIEW The Company derives revenues primarily through the sale of brand-name eyeglass frames, including Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear and Jean Nate Eyewear. The Company also has a division which distributes prescription eyeglass frames under the Company's own Camelot brand and a division which sells brand-name close-outs at discounted prices. In June 1997, the Company acquired an exclusive license from Eddie Bauer to market a collection of men's and women's prescription eyewear under the Eddie Bauer brand name. The Company anticipates spending approximately $2.5 million to launch the Eddie Bauer Eyewear collection in the Spring of 1998. The Company's revenues have grown from $9.2 million in fiscal 1992 to $28.3 million in fiscal 1996. Since 1993, the Laura Ashley Eyewear collection has been the leading source of revenue for the Company. Net sales of Laura Ashley Eyewear accounted for 77.8%, 74.6%, and 73.4% of the Company's net sales during fiscal 1995, fiscal 1996, and the six months ended April 30, 1997, respectively. While the Company continues to reduce its dependence on the Laura Ashley Eyewear line through the development of other brand names and additional product offerings, the Company expects this line to continue to be the Company's leading source of revenue for the foreseeable future. See "Risk Factors--Substantial Dependence Upon Laura Ashley License." The Company's cost of sales consists primarily of payments to foreign contract manufacturers who produce frames to the Company's specifications. The complete development cycle for a new frame design typically takes approximately twelve months from the initial design concept to the release. Generally, at least six months are required to complete the initial manufacturing process. For frames purchased other than from Hong Kong/China manufacturers, the Company pays for its frames in the currency of the country in which the manufacturer is located and thus the costs (in United States dollars) of the frames vary based upon currency fluctuations. Increases and decreases in costs (in United States dollars) resulting from currency fluctuations generally do not affect the price at which the Company sells its frames, and thus currency fluctuation can impact the Company's gross margin. In 1994, the Company recognized that it was dependent on frame manufacturers located in Japan. Starting in 1995, the Company implemented a program to reduce that dependence by purchasing an increasing percentage of its frames from manufacturers located in other countries, particularly in Hong Kong/China and to a lesser extent in France and Italy. The use of Hong Kong/China manufacturers has also reduced the Company's average frame cost, which has increased the Company's gross margin. EFFECT OF CHANGE IN FORM FROM AN S CORPORATION TO A C CORPORATION As a result of the Offering, the Company will be required to change in form from an S Corporation to a C Corporation, which will affect its operations and financial condition by increasing the level of federal and state income taxes. As such, the change in form will affect the net income and the cash flows of the Company. As an S Corporation, the Company's income, whether or not distributed, was taxed at the shareholder level for federal and state income tax purposes. In addition, for California franchise tax purposes, S Corporations were taxed at 2.5% of taxable income through 1993 and 1.5% of taxable income in 1994, 1995 and 1996, net of income tax credits under the Los Angeles Revitalization Zone Act. Currently, the highest federal tax rate for C Corporations is 38% (although the majority of the taxable income is taxed at 35%) and the corporate tax rate in California is 9.3%. The pro forma provision for income taxes in the statement of income data included elsewhere in this Prospectus shows results as if the Company had always been a C Corporation and had adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". 18 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.
SIX MONTHS YEAR ENDED OCTOBER 31, ENDED APRIL 30, ------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................... 48.2 46.6 42.2 43.1 41.3 ------- ------- ------- ------- ------- Gross profit..................... 51.8 53.4 57.8 56.9 58.7 ------- ------- ------- ------- ------- Operating expenses: Selling........................ 29.2 27.6 29.4 28.2 29.3 General and administrative..... 16.1 17.1 19.9 17.6 17.5 Relocation expense............. 0 1.0 0.3 0.4 0 ------- ------- ------- ------- ------- Total operating expenses..... 45.3 45.7 49.6 46.2 46.8 ------- ------- ------- ------- ------- Income from operations........... 6.5 7.7 8.2 10.7 11.9 ------- ------- ------- ------- ------- Other expense, net............... (1.0) (0.7) (1.1) (1.2) (1.2) ------- ------- ------- ------- ------- Income before pro forma provision for income taxes................ 5.5 7.0 7.1 9.5 10.7 Pro forma provision for income taxes........................... 2.1 2.6 2.6 3.6 4.2 ------- ------- ------- ------- ------- Pro forma net income............. 3.4% 4.4% 4.5% 5.9% 6.5% ======= ======= ======= ======= =======
Comparison of Six Months Ended April 30, 1997 to Six Months Ended April 30, 1996 Net Sales. Net sales increased by 23% from $13,052,000 in the six months ended April 30, 1996 (the "1996 period") to $16,038,000 in the six months ended April 30, 1997 (the "1997 period"). This increase in net sales was due principally to an increase of $1,801,000 in net sales of Laura Ashley Eyewear and net sales of $938,000 of Hart Schaffner & Marx Eyewear (which was introduced in the fourth quarter of fiscal 1996). The increase in Laura Ashley net sales was due principally to an increase in unit sales. Net sales also increased as a result of the Company's decision in March 1996 to sell directly to independent optical retailers in California through its own sales representatives, rather than through a distributor, which resulted in a higher sales price per frame. Gross Profit. Gross profit increased from $7,427,000 in the 1996 period to $9,406,000 in the 1997 period. This increase was due to an increase in net sales and to an increase in the gross margin from 56.9% in the 1996 period to 58.7% in the 1997 period. This increase was due principally to lower average frame costs resulting from the Company's continued shift to lower cost frame manufacturers and to favorable currency fluctuations. Operating Expenses. Operating expenses increased 24% from $6,033,000 in the 1996 period to $7,508,000 in the 1997 period, which included an increase of $1,019,000 or 28% in selling expenses and an increase of $505,000 or 22% in general and administrative expenses. The increase in selling expenses resulted principally from a $226,000 increase in convention and trade show expenses, a $214,000 increase in advertising expense and a $206,000 increase in royalty expense. General and administrative expenses increased principally as a result of a $372,000 increase in compensation expense, primarily due to an increase in the number of employees (including a number of mid-level manager employees). Other Expense, Net. The $31,000 increase in other expenses in the 1997 period was due primarily to increased interest expense. 19 Pro Forma Provision for Income Taxes. While an S Corporation, the Company's income taxes primarily consisted of California state franchise taxes. On a pro forma basis, income taxes would have been $473,000 and $677,000 in the 1996 period and the 1997 period, respectively. Pro Forma Net Income. Pro forma net income increased from $761,000 in the 1996 period to $1,030,000 in the 1997 period due to the factors set forth above. Comparison of Fiscal Years 1994, 1995 and 1996 Net Sales. Net sales increased by 18% from $20,051,000 for fiscal 1994 to $23,571,000 in fiscal 1995 and by 20% to $28,280,000 for fiscal 1996. The increase in net sales from fiscal 1994 to fiscal 1995 was due to a 22% increase in net sales of Laura Ashley Eyewear from $15,008,000 to $18,348,000. The increase in net sales from fiscal 1995 to fiscal 1996 resulted primarily from a 15% increase in net sales of Laura Ashley Eyewear to $21,109,000 and net sales of $1,889,000 of Jean Nate Eyewear and Hart Schaffner & Marx Eyewear, which were introduced by the Company in the second and fourth quarters, respectively, of fiscal 1996. The increase in Laura Ashley Eyewear net sales in both fiscal years was due principally to an increase in unit sales and to a lesser extent to an increase in prices for selected frames. Gross Profit. Gross profit was $10,385,000 in fiscal 1994, $12,582,000 in fiscal 1995 and $16,349,000 in fiscal 1996. These increases in gross profit were attributable to increases in net sales as well as improvements in the gross margin, which increased from 51.8% in fiscal 1994, to 53.4% in fiscal 1995 and to 57.8% in fiscal 1996. During these years, the Company utilized lower cost frame manufacturers for an increasing percentage of its frames, which has resulted in lower average frame costs. This positive impact on gross margin was offset in part in fiscal 1995 due to adverse currency fluctuations, and was augmented in fiscal 1996 due to beneficial currency fluctuations. Gross margin was also positively impacted in fiscal 1995 and fiscal 1996 by increases in the average selling price of frames and by reductions in import duties and tariffs. Operating Expenses. Operating expenses were $9,079,000 in fiscal 1994, $10,780,000 in fiscal 1995 and $14,027,000 in fiscal 1996. These increases resulted primarily from higher selling and general and administrative expenses commensurate with the Company's growth. Selling expenses were $5,855,000 in fiscal 1994, $6,510,000 in fiscal 1995 and $8,328,000 in fiscal 1996, representing 29%, 28% and 29%, respectively, of net sales for such periods. The 11% increase from fiscal 1994 to fiscal 1995 resulted principally from a $280,000 increase in expenses associated with sales incentive programs, a $209,000 increase in royalty expense, a $182,000 increase in sales compensation expense and a $123,000 increase in in-store display expenditures. These increases were offset in part by a decrease of $446,000 in advertising expenses; the higher advertising expenses in 1994 were due to a special consumer advertising campaign implemented in connection with the Company's initial Laura Ashley Loyal Partners program. The 28% increase from fiscal 1995 to fiscal 1996 was due primarily to a $494,000 increase in advertising expenses and a $406,000 increase in in-store display expenditures, due primarily to the introduction of the Jean Nate and Hart Schaffner & Marx Eyewear lines in fiscal 1996. In addition, in fiscal 1996, royalty expenses increased by $288,000, expenses associated with sales incentive programs increased by $223,000 and convention and trade show expenses increased by $155,000. General and administrative expenses were $3,224,000 in fiscal 1994, $4,035,000 in fiscal 1995 and $5,612,000 in fiscal 1996, representing 16%, 17% and 20%, respectively, of net sales in these periods. The 25% increase from fiscal 1994 to fiscal 1995 resulted principally from a $505,000 increase in compensation expense. The 39% increase from fiscal 1995 to fiscal 1996 resulted principally from a $567,000 increase in salaries, a $385,000 increase in employee bonuses, and compensation expense of $300,000 in connection with the issuance of 108,016 shares of Common Stock to an executive officer. The Company incurred expenses of $235,000 and $87,000 in fiscal 1995 and fiscal 1996, respectively, in connection with the relocation of the Company's corporate offices and warehouse. 20 Other Expense, Net. Other expense, net, consisted principally of interest expense. Interest expense was $201,000 in fiscal 1994, $201,000 in fiscal 1995 and $338,000 in fiscal 1996. The increase in fiscal 1996 was due, in part, to the increase in borrowings of the bank's credit line as a result of (i) an increase in accounts receivable resulting from higher sales, (ii) a higher level of inventories that the Company maintained to support higher sales levels and better customer service, (iii) capital expenditures relating to improvements of the Company's facilities and the modernization of its computer equipment; and (iv) larger S corporation distributions. Pro Forma Provisions for Income Taxes (unaudited). On a pro forma basis, income taxes would have been $418,000 in fiscal 1994, $606,000 in fiscal 1995 and $748,000 in fiscal 1996. Pro Forma Net Income (unaudited). Pro forma net income was $690,000 in fiscal 1994, $1,030,000 in fiscal 1995 and $1,265,000 in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has relied primarily on internally generated funds, credit from suppliers and bank lines of credit to meet its liquidity needs. The Company has a credit agreement (the "Credit Agreement") with a commercial bank which provides for the use of letters of credit, banker's acceptances and loans in the aggregate amount of $7,935,417. The commitment formula limits the amount available to the sum of 75% of eligible accounts receivable and 40% of eligible inventory, with the inventory portion limited to the lesser of $3,000,000 or the accounts receivable borrowing base. At the Company's option, interest may be based on the London Interbank Offered Rate ("LIBOR") plus 2.25% or at the bank's prime rate plus .25%. At April 30, 1997, interest rates ranged from 8.375% to 8.437% on a loan balance of $4,000,000 under the LIBOR option and 9.25% on the remaining balance of $625,000 under the prime rate option. The Credit Agreement also governs three term loans, which are due at various times in 1997 and 1998, bear interest at a weighted average rate of 9.11% per annum, and had an aggregate outstanding principal balance of $604,000 at April 30, 1997. The Credit Agreement (which expires in May 1998) is secured by substantially all of the assets of the Company. The Credit Agreement provides for certain limitations on capital expenditures and requires the Company to satisfy certain financial tests, including the maintenance of minimum tangible net worth. The Company intends to repay the outstanding balance under the Credit Agreement (estimated to be approximately $7.5 million at the closing of the Offering) with a portion of the proceeds of the Offering. The increase in borrowings since April 30, 1997 will be due to borrowings for working capital and shareholder distributions. As a result of the Company's treatment as an S Corporation for federal and state income tax purposes, the Company historically has provided its shareholders, through dividends, with funds for the payment of income taxes on the earnings of the Company which have been included in the taxable income of the shareholders. In addition, the Company has paid dividends to shareholders to provide them with a return on their investment. The Company paid dividends of $807,000, $550,000 and $1,328,000 for fiscal 1994, fiscal 1995 and fiscal 1996, respectively, and $2,000,000 in the first six months of fiscal 1997. The Company also intends to pay the Existing Shareholders dividends equal to $635,000 plus the amount of the Company's net income from May 1, 1997 through the Termination Date. These dividends will be paid before the closing of the Offering. The Company does not currently intend to pay dividends on its Common Stock following the Offering and plans to follow a policy of retaining earnings to finance the growth of its business. Of the Company's accounts payable at October 31, 1996 and April 30, 1997, $865,069 and $1,086,638, respectively, were payable in foreign currency. To monitor risks associated with currency fluctuations, the Company on a weekly basis assesses the volatility of certain foreign currencies and reviews the amounts and expected payment dates of its purchase orders and accounts payable in those currencies. Based on those factors, 21 the Company may from time to time mitigate some portion of that risk by purchasing forward commitments to deliver foreign currency to the Company. The Company held forward commitments for foreign currencies in the amount of $1,459,457 at October 31, 1996, and held no forward commitments at April 30, 1997. The Company's bad debt write-offs were less than 0.2% of net sales for the year ended October 31, 1996 and for the six months ended April 30, 1997. As part of the Company's management of its working capital, the Company performs most customer credit functions internally, including extensions of credit and collections. The Company believes that cash generated from operations, the net proceeds received by the Company from this Offering, borrowings under its credit facility, and credit from its suppliers will be sufficient to fund its working capital requirements at least through fiscal 1998. QUARTERLY AND SEASONAL FLUCTUATIONS The Company's results of operations have fluctuated from quarter to quarter and the Company expects these fluctuations to continue in the future. Historically, the Company's net sales in its first fiscal quarter (the quarter ending January 31) have been lower than net sales in other fiscal quarters. The Company attributes lower net sales in the first fiscal quarter in part to low consumer demand for prescription eyeglasses during the holiday season and year-end inventory adjustments by distributors and independent optical retailers. A factor which may significantly influence results of operations in a particular quarter is the introduction of a new brand-name collection, which results in disproportionate levels of selling expenses due to additional advertising, promotions, catalogs and in-store displays. Introduction of a new brand may also generate a temporary increase in sales due to initial stocking by retailers. Other factors which can influence the Company's results of operations include customer demand, the mix of distribution channels through which the eyeglass frames are sold, the mix of eyeglass frames sold, product returns, delays in shipment and general economic conditions. See "Risk Factors--Quarterly and Seasonal Fluctuations." The following table sets forth certain unaudited results of operations for the ten fiscal quarters ended April 30, 1997. The unaudited information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus and includes all normal recurring adjustments which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of future period results.
1995 1996 1997 ---------------------------------- ---------------------------------- ----------------- JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 ------- -------- ------- ------- ------- -------- ------- ------- ------- -------- Net sales.................... $4,481 $6,309 $6,469 $6,312 $5,308 $7,744 $7,050 $8,178 $6,802 $9,236 Cost of sales................ 2,128 3,041 3,056 2,764 2,449 3,177 2,895 3,410 2,882 3,750 Gross profit................. 2,353 3,268 3,413 3,548 2,859 4,567 4,155 4,768 3,920 5,486 Operating expenses: Selling..................... 1,056 1,682 1,853 1,919 1,472 2,209 2,055 2,592 2,021 2,680 General and administrative.. 782 970 1,057 1,226 969 1,334 1,554 1,755 1,364 1,443 Relocation expense.......... 0 34 65 136 30 19 17 21 0 0 Total operating expenses..... 1,838 2,686 2,975 3,281 2,471 3,562 3,626 4,368 3,385 4,123 Income from operations....... 515 582 438 267 388 1,005 529 400 535 1,363 Other expense, net........... (38) (44) (29) (55) (67) (92) (84) (66) (85) (106) Income before pro forma provision for income taxes.. 477 538 409 212 321 913 445 334 450 1,257
INFLATION The Company does not believe its business and operations have been materially affected by inflation. 22 BUSINESS GENERAL Signature designs, markets and distributes prescription eyeglass frames primarily under exclusive licenses for Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear and Jean Nate Eyewear, as well as its own "Camelot" label. The Laura Ashley Eyewear collection is one of the leading women's brand-name collections in the United States. The Company attributes its success to its brand-name development process and high quality, creative frame designs. The Company's brand-name development process includes identifying a market niche, obtaining the rights to a carefully selected brand name, producing a comprehensive marketing plan, developing unique in-store displays and creating innovative sales and merchandising programs for independent optical retailers and retail chains. Signature's in-house designers work with many respected frame manufacturers throughout the world to develop high-quality, creative designs which are consistent with each brand-name image. In June 1997, Signature acquired the exclusive license to design and market an Eddie Bauer Eyewear collection, which the Company plans to launch in the Spring of 1998. The Company pursued the Eddie Bauer brand name, which had not previously been licensed for prescription eyewear, for its widespread recognition, outdoor heritage, casual styling, and reputation for value and quality. The Eddie Bauer Eyewear collection will offer men's and women's styles and will be positioned in the medium-price segment of the brand-name prescription market. Signature produces "turnkey" marketing, merchandising and sales promotion programs to promote sales at each level in the distribution chain. For optical retailers, the Company develops unique in-store displays, such as its Laura Ashley Eyewear "store within a store" environments. For the sales representatives who call on retail accounts, whether they are employed by distributors or by Signature, the Company creates presentation materials, marketing bulletins, motivational audio and video tapes and other sales tools to facilitate professional presentations, and the Company offers attractive incentive awards for reaching targeted sales levels. For its distributors who sell to independent optical retailers, Signature provides its innovative loyalty programs. Under the loyalty programs, which generally last from six to ten months, each participating retailer agrees to purchase a specified quantity of frames of new styles released during the program period. Although a participating retailer may cancel at any time, historically most have completed the program and renewed their participation in ensuing years. These "automatic" sales programs have facilitated the widespread placement of new styles in optical retail stores, have increased the Company's leverage with its manufacturers due to the large size of the Company's orders, and have assisted its inventory planning. The Company's largest loyalty program is its Laura Ashley Loyal Partners program, which at April 30, 1997 had over 4,750 participating retailers in the United States (approximately 16% of all independent optical retailers in the United States) as well as over 800 international participants. The Company contracts with overseas factories to manufacture the frames it designs. Signature distributes its frames through distributors in the United States and through exclusive distributors in foreign countries. In addition, the Company sells directly through its own sales representatives to major retail chains, including LensCrafters, Pearle Vision and Eyecare Centers of America, and to independent optical retailers in California. The Company's principal product line is Laura Ashley Eyewear, which was launched in 1992. Signature designs frames and in-store displays which seek to capture the distinctive, feminine image associated with Laura Ashley clothing and home furnishings. Laura Ashley Eyewear styles are feminine and classic, and are positioned in the medium to mid-high price range to reach a broad segment of the women's eyewear market. The Company's net sales of Laura Ashley Eyewear have increased from $2.2 million in fiscal 1992 to $21.1 million in fiscal 1996. Capitalizing on Signature's customer relationships and the success of Laura Ashley Eyewear, the Company launched Jean Nate Eyewear in March 1996 and Hart Schaffner & Marx Eyewear in September 1996. Jean Nate Eyewear is targeted at women seeking to pay an affordable price for high-quality frames which offer unique designs, attention to detail and brand-name identification. Hart Schaffner & Marx Eyewear is a mid-high priced line targeted at men requiring quality, comfort and craftsmanship. 23 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
AGE GROUP OF 1996 PURCHASERS AS % OF % OF AGE GROUP POPULATION TOTAL PURCHASERS OF NEEDING VISION AGE (IN MILLIONS) VISION CORRECTION CORRECTION --- ------------- -------------------- --------------- 0-14................... 58.0 5.7% 15.5% 15-24................... 35.9 11.5 51.0% 25-44................... 83.7 33.0 62.8% 45-64................... 53.7 32.0 95.0% 65 and up............... 33.9 19.8 93.1% ----- ----- Total................. 265.2 100.0% ===== =====
The average age of the United States population is expected to increase over the next 25 years, due to the aging of the "baby-boomers" who were born between 1946 and 1964. As more of the baby-boomers exceed age 45, the Company believes sales of corrective eyewear should increase. Sales of eyewear are also increasing due to the evolution of eyewear into a fashion accessory. Until the mid-1970s, eyeglass frames were viewed as medical implements which were "dispensed" but never "sold." Because styling was not emphasized, successful frames often remained popular for years, and sometimes for decades. In the mid-1970s, experts from other industries introduced designer names and consumer advertising to the optical industry, as well as sweeping design changes. These changes resulted in increased consumer demand for the new products. Although eyeglass frames are a fashion accessory for many people, the styles are not subject to seasonal changes, and they change less rapidly than styles in the apparel industry. Competitive Vision Correction Methods. Currently, there are two methods of correcting vision impairment which compete with prescription eyeglasses: contact lenses and surgery. Although retail sales of contact lens remained flat from 1995 through 1996 at $1.9 billion, their sales as a percentage of total retail sales decreased from 13.5% in 1995 to 13.0% in 1996. The Company believes that sales of contact lenses do not currently materially threaten eyeglass frame sales because many people who wear contact lenses need a pair of eyeglasses for night time and for the days when they decide not to wear their lenses. A number of surgical techniques have been developed to correct vision problems such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company does not believe that these techniques will materially and adversely affect sales of prescription eyewear in the near future. The Company believes that a number of people who have had successful eye surgery may still need some form of corrective eyeglasses, and others may need eyeglasses at a later date due to the onset of presbyopia. - -------- (1) Unless otherwise noted, all the data in this Industry Overview section relates to the eyewear market in the United States. The source for this data is the 1997 U.S. Optical Industry Handbook published by Jobson Publishing Corporation in May 1997. 24 Optical Retail Outlets. Optical retailers consist of optometrists, opticians and ophthalmologists. There are two main types of optical retailers: independents (with one or two stores) and chains. Chains include national optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary Pearle Vision, and Eyecare Centers of America, and mass merchandisers such as Wal-Mart and Price Club. In 1996, independent optical retailers had a 63.0% market share, chains had a 35.5% market share, and others had a 1.5% market share. GROWTH STRATEGY The Company intends to capitalize on the success of the Laura Ashley Eyewear line by further diversifying into new lines, adding new products and expanding its distribution. Specific elements of the Company's growth strategy include: . Existing Brands. The Company intends to continue to create innovative marketing, merchandising and sales promotion programs to increase the market penetration of its existing lines of brand-name eyewear. . Eddie Bauer Eyewear. The Company plans to launch Eddie Bauer Eyewear in the Spring of 1998. . Additional Brands. The Company will continue its efforts to acquire exclusive brand-name licenses to market prescription eyeglass frames in market niches in which the Company does not currently compete. . New Product Lines. The Company intends to expand the marketing of its own Camelot collection of frames and may develop one or more additional brand-name lines of its own. . Sunwear. The Company intends to expand the market penetration of its existing Laura Ashley Sunwear line and may acquire additional exclusive brand-name licenses for sunglass frames. . International Sales. The Company plans to expand the international markets into which it distributes its eyewear lines. BRAND DEVELOPMENT The Company attributes its success to its brand-name development process and frame designs. The Company's brand-name development process includes identifying a market niche, obtaining the rights to a carefully selected brand name, producing a comprehensive marketing plan, designing frames consistent with each brand image, developing unique in-store displays, and creating innovative sales and merchandising programs for independent optical retailers and retail chains. Identifying a Market Niche and Obtaining the Rights to a Brand Name. Signature's brand-name development process begins with identifying an eyewear market niche. The Company characterizes a market niche by referring to the target customer's gender and age (e.g., adult, child, teenage), the niche's general image and styling (e.g., feminine, masculine, casual), its price range, and the applicable channels of distribution. Once the Company chooses a market niche, a brand name is identified which the Company believes will appeal to the target customer in that niche. The Company believes that for a brand name to have the potential for widespread sales in the optical industry, the name must have strong, positive consumer awareness, a distinctive personality and an image of enduring quality. Brands that are aimed at narrower niches can also have optical industry impact (albeit smaller), so long as consumer awareness exists within the targeted niche. After the Company has determined that a targeted brand name is available, the Company develops a preliminary marketing plan to present to the potential licensor. The development process is a team effort which includes determining the market position of the brand name outside the optical industry and the availability of cross-marketing opportunities. The preliminary marketing plan demonstrates the Company's (i) in-depth understanding of the potential licensor's market position, (ii) innovative strategies for extending the brand's image to the eyewear market, (iii) preliminary plans for merchandising, advertising and sales promotion, and (iv) broad concepts for frame design. The Company then formally presents the preliminary marketing plan to the potential licensor. The final steps in acquiring an exclusive eyewear license for a brand name are receiving the licensor's approval and entering into a license agreement. 25 The Company's existing license agreements contain terms limiting the ability of the Company to market competing brand names. See "Risk Factors--Limitations on Ability to Distribute Other Brand-Name Eyeglass Frames." Final Marketing Plan. Once the Company has acquired an exclusive eyewear license for a brand name, it creates a final marketing plan. The final marketing plan contains detailed concepts for frame designs, establishes the brand's identity within the optical industry, and sets forth the first year's merchandising, advertising and sales promotion plans. The Company's ongoing focus on its marketing plans, including annual updates, provides a framework for keeping the Company's marketing and sales strategies current with changes in the eyewear industry and the licensor's marketing. Frame Design and Quality. The Company's frames are designed by its in-house design team, which consists of two designers and a management frame committee which reviews each style. The designers work with many respected frame manufacturers throughout the world to develop unique designs, and continue to work closely at each stage of a style's development to assure quality. The Company's frames generally require over 200 production steps to manufacture, including hand soldering of bridges, fronts and endpieces. Some frames require labor-intensive decorative features such as cloisonne color treatments, which involve painting each frame by hand under a magnifying glass, using tiny bristle brushes. Quality Control. The Company uses only manufacturers capable of meeting Signature's criteria for quality, delivery and attention to design detail. Signature specifies the materials to be used in the frames, and examines prototypes before committing to production. The Company places its initial orders for each style at least six months before the style is released, and requires the factory to deliver several advance shipments of samples. The Company's quality committee examines every frame in the sample shipments. The Company believes this process permits sufficient time to resolve problems with a style's quality before its release date. The Company's quality committee selectively examines frames in subsequent shipments to ensure ongoing quality standards. Limited Quantity of Style Releases. The Company has historically launched each brand-name collection with only three styles. Further, although for each brand the Company has many designs in different stages of development, it has released no more than three styles per brand per month (each style generally comes in two or three colors and one or two sizes). This strategy has contrasted with many of the Company's competitors, who release many more styles than Signature. The Company believes that its limited release strategy helps to ensure focus on each new style. Further, the Company believes that this strategy has resulted in larger orders per style, which has increased its leverage with the contract manufacturers of its frames. Marketing, Merchandising and Sales Programs. Signature produces "turnkey" marketing, merchandising and sales promotion programs to promote sales at each level in the distribution chain. For optical retailers, the Company develops unique in-store displays, such as its Laura Ashley Eyewear "store within a store" environments. For the sales representatives who call on retail accounts, whether they are employed by distributors or by Signature, the Company creates presentation materials, marketing bulletins, motivational audio and video tapes and other sales tools to facilitate professional presentations, and the Company offers attractive incentive awards for reaching targeted sales levels. For its distributors who sell to independent optical retailers, Signature provides its innovative loyalty programs. Loyalty Programs. The Company attributes a significant portion of its success with independent optical retailers in the United States to its loyalty programs. Under these programs, which generally last from six to ten months, each participating retailer agrees to purchase a specified quantity of frames (generally three to six frames per month) of new styles released for that brand during the program period. The Company's loyalty programs benefit the Company, its distributors and participating retailers. The Company and its distributors benefit from the automatic sales and the reorders they generate. The distributors also benefit from the retailers' agreement not to change distributors for that specific program. Retailers benefit from sales of new styles, program-ending gifts, and from the special in-store merchandising (often available first--or only--to participating retailers). 26 Although a retailer may drop out of a loyalty program at any time without penalty, historically most participating retailers have completed the program and renewed their participation in ensuing years. The Company believes this is principally because the frames have sold well and retailers have wanted to earn the attractive incentive awards provided by the Company and its distributors at the end of the program. Signature's first loyalty program was the 1994 Laura Ashley Eyewear Loyal Partners Program which had 2,494 participants. The 1997 Laura Ashley Loyal Partners Program had approximately 4,750 United States participants and 800 international participants at April 30, 1997. Each United States participant in the 1997 program has agreed to purchase a total of 39 Laura Ashley frames in accordance with its distributor's release schedule. Approximately 16% of the independent optical retailers in the United States are participating in the 1997 Laura Ashley Loyal Partners Program. The Company introduced its Hart Schaffner & Marx Eyewear collection in September 1996 with a loyalty program. Over 1,200 independent optical retailers participated in the program, each agreeing to purchase a total of 18 frames from the collection's first six styles. PRODUCTS The Company's principal products are eyeglass frames sold under the brand names Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear and Jean Nate Eyewear. In June 1997, the Company acquired an exclusive license to design, market and distribute eyeglass frames under the name Eddie Bauer Eyewear, and the Company plans to release this line in the Spring of 1998. The Company also has a division which distributes eyeglass frames under the Company's own Camelot brand and a division which sells brand-name close-outs at discounted prices. The following table provides certain information about the market segments, introduction dates and approximate retail prices of the Company's products.
CUSTOMER INTRODUCTION APPROXIMATE BRAND NAME / SEGMENT GENDER/AGE DATE RETAIL PRICES(1) Laura Ashley Prescription Women March 1992 $125 - 180 Sunwear Women March 1993 $ 80 - 100 Children Girls June 1993 $ 80 - 100 ------------------------------------------------------------------------------- Jean Nate Women April 1996 $ 70 - 90 ------------------------------------------------------------------------------- Hart Schaffner & Marx Men September 1996 $140 - 170 ------------------------------------------------------------------------------- Eddie Bauer Men/Women Spring 1998(2) $100 - 135 ------------------------------------------------------------------------------- Signature's Camelot Line Men/Women 1986 $ 70 - 130 Unisex 1987 $ 70 - 130 Boys/Girls 1987 $ 60 - 90
(1) Retail prices are established by retailers, not the Company. (2) Scheduled launch date. Laura Ashley Eyewear Signature's sales growth since 1992 has been primarily attributable to the success of its Laura Ashley Eyewear collection. The Company's net sales of Laura Ashley Eyewear have increased from $2.2 million in fiscal 1992 to $21.1 million in fiscal 1996. Signature pursued Laura Ashley for its strong female following; its feminine styling and image which are renowned worldwide; its distinctive, high quality fabrics, home furnishings and clothing; and its reputation for producing products of enduring quality. At the time Signature obtained the license in 1991, Laura Ashley had never previously licensed its name outside the home furnishings industry. As of April 1997, there were over 550 Laura Ashley retail stores worldwide, many of which were located in finer shopping malls. 27 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 environments were covered with colorful Laura Ashley textured floral-print fabric, which provided the retailer with an instant new look, and, in effect, a Laura Ashley "store within a store." The third-generation display environments, released in March 1997, have as their centerpiece a wooden chest modeled after antique English furniture. The new environments use a subdued Laura Ashley fabric to provide a subtle feminine accent. The principal market segment for Laura Ashley Eyewear is women's prescription eyewear, and each year since 1993 the Company has released approximately 12 women's prescription eyewear styles. Net sales for those styles were $16.5 million in fiscal 1995, $19.0 million in fiscal 1996, and $10.4 million in the six months ended April 30, 1997. Each Spring since 1993, the Company has released three Laura Ashley Sunwear styles during its second fiscal quarter. These frames are delivered to optical retailers with ready-to-wear non-prescription sunglass lenses containing quality UV 400 protection. These lenses can be replaced with prescription sunglass lenses if the customer desires. Net sales of Laura Ashley Sunwear were $0.8 million in fiscal 1995, $0.9 million in fiscal 1996 and $0.8 million in the six months ended April 30, 1997. In addition to Laura Ashley Sunwear, almost all of the Company's styles can be fitted with sunglass lenses to make them into sunwear. Each Summer since 1993, Signature has released three Laura Ashley for Girls styles, with their own specialized displays, targeting girls aged 7-13. This collection is one of the few adult optical brand names to be marketed toward girls in that age range. Because the frames are designed and produced in small sizes, they are also purchased from time to time by petite women. Net sales of Laura Ashley for Girls Eyewear were $1.1 million in fiscal 1995, $1.2 million in fiscal 1996, and $0.55 million in the six months ended April 30, 1997. Results for the first six months of fiscal 1997 did not include sales of the Company's 1997 Laura Ashley for Girls styles, which were released in the third quarter of fiscal 1997. The Company has the exclusive right to market and sell Laura Ashley Eyewear through a license with Laura Ashley entered into in May 1991. The license covers a specified territory including the United States, Canada, the United Kingdom, Australia, New Zealand, Colombia, France, Belgium and the Netherlands. The Company also has a right of first refusal to distribute Laura Ashley Eyewear in Mexico and all other European countries. The Laura Ashley license terminates in 2001, but may be renewed by the Company at least through January 2006 so long as the Company is not in breach of the license agreement and generates the required amount of minimum net sales. Laura Ashley may terminate the license before its term expires if (i) the Company commits a material breach of the license agreement and fails to cure that breach within 30 days after notice is given, (ii) the management or control of the Company passes from Bernard Weiss and Julie Heldman to other parties whom Laura Ashley may reasonably regard as unsuitable, (iii) the Company fails to propose a selection of styles of eyewear which Laura Ashley in exercising good faith is willing to approve for manufacture and distribution, (iv) the Company fails to have net sales of Laura Ashley Eyewear sufficient to generate minimum royalties in each of any two years, (v) the Company is unable to pay its debts in the ordinary course of business or enters into liquidation, becomes bankrupt or insolvent, or is placed in the control of a receiver or trustee, or (vi) the Company in any year fails to spend a specified percentage of net sales of Laura Ashley Eyewear on advertising and promotion. 28 Jean Nate Eyewear In 1995, the Company identified an underdeveloped niche for feminine brand- name eyeglass frames marketed in the mid-low price range (approximately $70 to $90 at retail). To capitalize on this opportunity, the Company pursued and obtained the eyewear license for Jean Nate, a brand name that is widely recognized within the target niche for its women's fragrance and bath products, especially its after-bath splash. The Jean Nate Eyewear collection is targeted at women who are seeking to pay an affordable price for quality brand-name frames which offer unique designs, attention to details, features such as spring hinges that flex outwards and spring back, and brand-name identification. Jean Nate Eyewear advertisements have had an eyecatching "splash of water" theme, and most of the frames incorporate sea shells in their design. Sales promotional tools for Jean Nate Eyewear have included in-store displays and two-for-one specials. The Company has the exclusive right to market and sell Jean Nate Eyewear in the United States and Canada through a license with Revlon entered into in June 1995. "Jean Nate" is a registered trademark of Revlon. The Jean Nate license terminates in September 1998, but may be renewed by the Company for two additional terms of three and four years, respectively, so long as the Company is in compliance in all material respects with all of its terms and conditions, including the minimum net sales requirements for the two years preceding the renewal date. Revlon may terminate the license before its term expires if (i) someone other than Bernard Weiss, Julie Heldman, Robert Fried or Robert Zeichick acquires in excess of 50% of the Company's outstanding voting securities; (ii) the Company sells or otherwise transfers substantially all its assets used in the manufacture, promotion and distribution of eyeglass frames, (iii) the Company does not generate the minimum net sales required by the license for two consecutive years, (iv) the Company fails to pay royalties and any other amounts when due, (v) the Company is unable to pay its debts as they become due, enters into liquidation, makes an assignment for the benefit of creditors, enters bankruptcy proceedings or ceases doing business as a going concern, or (vi) the Company fails to perform its other obligations under or otherwise breaches the license agreement and fails to cure that breach within 30 days after notice is given. Hart Schaffner & Marx Eyewear Signature expanded its presence to the brand-name men's eyewear market in fiscal 1996 when it acquired a license from Hart Schaffner & Marx, a subsidiary of Hartmarx Corporation, a leading manufacturer of tailored clothing. Hart Schaffner & Marx has an image of enduring quality, and is a recognized name among men who purchase apparel in the medium to high price range. The Hart Schaffner & Marx Eyewear collection is targeted at men who are somewhat conservative and interested in quality, comfort and craftsmanship. The Company determined that men are generally concerned about both function and fashion, so the frames contain features which enhance their durability-- the highest quality screws, nosepads and spring hinges--and come with a two- year "no fault, worry-free" warranty. The collection is designed to fit a broad spectrum of men, and selected styles have longer temples and larger sizes than those generally available. Further, many of the styles integrate Hart Schaffner & Marx fabric patterns into the frame designs. The Company has the exclusive right to market and sell Hart Schaffner & Marx Eyewear in the United States through a license with Hart Schaffner & Marx entered into in January 1996. The license agreement provides that Hart Schaffner & Marx may not grant to any third person the right to distribute eyeglass and sunglass frames, lenses and other eyewear products under the Hart Schaffner & Marx brand name in any country in the world without first offering the Company the exclusive right to do so. As of the date of this Prospectus, no Hart Schaffner & Marx Eyewear is sold anywhere outside of the United States. The Hart Schaffner & Marx 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 29 ceases to be involved the Company fails within 90 days to submit a marketing plan for Hart Schaffner & Marx Eyewear that is acceptable to Hart Schaffner & Marx, (iii) the Company sells or otherwise transfers substantially all its assets used in the manufacture, promotion and distribution of eyeglass frames, (iv) the Company does not generate the minimum net sales required by the license for two consecutive years, (v) the Company fails to perform its material obligations under the license agreement and fails to cure that breach within 30 days after notice is given, or (vi) after written notice in the event any of the Company's representations and warranties are not correct in any material respect. Eddie Bauer Eyewear In June 1997, the Company acquired the exclusive license from Eddie Bauer to market Eddie Bauer Eyewear, a collection of men's and women's prescription eyewear styles. Eddie Bauer, which was founded in 1920, is a subsidiary of Spiegel, Inc. The Company pursued the Eddie Bauer name, which had not previously been licensed for prescription eyewear, for its widespread name recognition, outdoor heritage, casual styling, and reputation for value and quality. Eddie Bauer currently has over 400 retail stores worldwide, and annually distributes approximately 100 million Eddie Bauer merchandise catalogs. The Eddie Bauer Eyewear collection, which the Company expects to launch in the Spring of 1998, will be aimed at a different market niche than any of the Company's other brand names. The Company's marketing plan calls for the coordination of the collection's frame designs and its marketing, merchandising and sales promotion programs so that they capture the free spirit of the Eddie Bauer casual lifestyle and its heritage of the great outdoors. In keeping with Eddie Bauer's commitment to value, the collection will consist of medium priced frames, a market-pricing niche which does not currently have many brand-name competitors. The Company believes that its purchasing power and its commitment to frame quality will result in the Eddie Bauer Eyewear collection having higher quality and better features than other brand-name collections currently targeting the same niche. The Company has the exclusive worldwide right to market and sell Eddie Bauer Eyewear through a license agreement with Eddie Bauer entered into in June 1997. Without the prior written consent of Eddie Bauer, however, the Company may market and sell Eddie Bauer Eyewear only in the United States and in the other countries specified in the license agreement, most notably Japan, the United Kingdom, Germany, France, Australia and New Zealand. The license agreement terminates in December 2002, but the Company may renew it for two three-year terms provided the Company meets certain minimum net sales and royalty requirements and is not in material default. Eddie Bauer may terminate the license before the expiration of its term if (i) a person or entity acquires more than 30% of the Company's outstanding voting securities, and thereby becomes the largest shareholder and owns more shares than the Existing Shareholders, or (ii) the Company commits a material breach of the license agreement and fails to cure that breach within 30 days after notice is given. Signature's Camelot Collection From its inception in 1983 until 1986, the Company, then known as USA Optical Distributors, Inc., sold only brand-name frames purchased from other frame suppliers. To take advantage of the increased margins available to importers, the Company in 1986 began designing its own styles for contract manufacture overseas. Those styles became the Camelot collection, which contains a broad range of high-quality men's, women's, unisex, girls' and boys' styles. To date, the Company has sold the Camelot collection only through USA Optical, which is now a division of Signature. The Camelot collection's net sales were $2,005,000 in fiscal 1995, $2,012,000 in fiscal 1996 and $1,007,000 for the six months ended April 30, 1997. USA Optical continues to sell frames from other suppliers as part of its sales mix. USA Optical had total net sales of $3,771,000 in fiscal 1995, $3,709,000 in fiscal 1996, and $1,775,000 for the six months ended April 30, 1997. Brand Name Close-Outs Another Signature division, Optical Surplus, sells brand-name close-outs (discontinued styles) at discounts. Optical Surplus has also served as a useful outlet for selling the Company's overstocks of its own brand-name products, as well as of its Camelot collection. Using Optical Surplus, the Company is able to control the distribution of its overstocks without disturbing the market. Optical Surplus had net sales of $1,075,000 in fiscal 1995, $1,153,000 in fiscal 1996, and $492,000 for the six months ended April 30, 1997. 30 DISTRIBUTION The Company distributes its products through its distributors in the United States and through exclusive distributors in foreign countries; through its own account managers to major optical retail chains, including LensCrafters, Pearle Vision and Eyecare Centers of America; through its own direct sales force, which sells directly to independent optical retailers in California; and through telemarketing (USA Optical and Optical Surplus). The following table sets forth the Company's net sales by distribution channel for the periods indicated:
YEAR ENDED OCTOBER 31, ---------------------- SIX MONTHS ENDED 1994 1995 1996 APRIL 30, 1997 ------ ------- ------- ---------------- (IN THOUSANDS) Domestic distributors............... $9,155 $10,792 $12,965 $6,995 Optical retail chains............... 4,593 5,798 7,120 4,593 Telemarketing(1).................... 4,809 4,846 4,862 2,268 International distributors.......... 1,494 2,135 2,486 1,330 Direct sales (California)(2)........ -- -- 847 852
- -------- (1) USA Optical and Optical Surplus. (2) The Company began selling directly to independent optical retailers in California in March 1996. Domestic Distributors. The Company believes that, to maximize sales of its brand-name eyeglass frames, it must selectively limit its distributors to those who (i) adhere to and implement the Company's marketing strategies, (ii) distribute eyewear to optical retailers that market products consistent with each brand's image and pricing strategy, and (iii) provide a high level of customer service and technical expertise. Moreover, Signature's marketing plans require a significant commitment of time, effort and money on the part of the distributors. At April 30, 1997, the Company had 25 domestic distributors. Signature believes that it has good working relationships with all of its distributors. Because its distributors sell frames supplied by more than one company, the Company attempts to motivate the distributors' sales representatives to show Signature's frames first. The Company provides them with various sales tools, which have included automatic sales through its loyalty programs, and other tools which are created and produced by the Company's in-house team, including motivational audio tapes and videotapes, marketing bulletins and high impact sales promotions. The Company also offers incentive awards, such as first- class trips, for reaching targeted sales levels, which promote long-term relationships with customers. The Company has no written agreements with its domestic distributors except written understandings not to resell or divert Laura Ashley Eyewear through unauthorized channels of distribution, and not to expand the territories in which they sell the Company's products without the Company's prior consent. Accordingly, the relationships may be terminated by either party at any time, without penalty (subject, in Signature's case, to any restrictions under applicable state law). Optical Retail Chains. Signature sells directly, through its own key account managers, to optical retail chains whose images are compatible with the images of the Company's brand-name eyewear, including LensCrafters, Pearle Vision and Eyecare Centers of America. Pearle Vision and Eyecare Centers of America have each used in-store displays which were customized by the Company to feature the Company's products, and Eyecare Centers of America has dedicated prime floor space to Laura Ashley Eyewear. 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. 31 International Distributors. Since 1993, the Company has sold Laura Ashley Eyewear internationally through distributors who have exclusive agreements for defined territories. Before establishing a distributor relationship, Signature reviews the distributor's financial condition and its ability to work closely with the Company in marketing and selling its brand-name products. International distributors must meet specific unit volumes within specified time periods. Substantially all international sales have been of Laura Ashley Eyewear in England, Canada and Australia. Direct Sales (California). In March 1996, in connection with the retirement of Signature's California distributor, the Company decided to sell directly to independent optical retailers in California rather than engage another distributor. Direct sales to independent optical retailers in California for the first six months of fiscal 1997 were $852,000, an increase of $519,000 (or 256%) over net sales of $333,000 made to the Company's California distributor in the first five months of fiscal 1996 and through the Company's direct sales force in April 1996. One reason for the increase in net sales is the higher unit price the Company receives when it sells directly to the optical retailer. Another reason was an increase in the number of units sold in California from 9,571 for the first six months of fiscal 1996 to 22,501 for the first six months of fiscal 1997. The Company believes the combined increase in dollar and unit volume in California is attributable to the Company's ability to work closely with its own direct sales representatives, who, unlike distributors' sales representatives, are dedicated to selling only the Company's products, and the Company's increased ability to require its sales representatives to implement the Company's marketing plans. CONTRACT MANUFACTURING The Company's frames are manufactured to its specifications by a number of contract manufacturers located outside the United States. The manufacture of high quality metal frames is a labor-intensive process which can require over 200 production steps (including a large number of quality-control procedures) and from 90 to 180 days of production time. Signature has used manufacturers principally in Japan, Hong Kong/China, France and Italy. Historically, most of the Company's frames have been manufactured in Japan, which accounted for approximately 41.8%, 56.7%, 39.9% and 41.2% (in cost) of the frames purchased by the Company in fiscal 1994, fiscal 1995, fiscal 1996 and in the six months ended April 30, 1997, respectively. During the past several years, the Company has expanded the number and geographic locations of its contract manufacturers. The Company believes that throughout the world there are a sufficient number of manufacturers of high-quality frames so that the loss of any particular frame manufacturer, or the inability to import frames from a particular country, would not materially and adversely affect the Company's business in the long-term. However, because lead times to manufacture the Company's eyeglass frames generally range from 90 to 180 days, an interruption occurring at one manufacturing site that requires the Company to change to a different manufacturer could cause significant delays in the distribution of the styles affected. This could cause the Company not to meet delivery schedules for these styles, which could materially and adversely affect the Company's business, operating results and financial condition. In determining which manufacturer to use for a particular style, the Company considers manufacturers' expertise (based on type of material and style of frame), their ability to translate design concepts into prototypes, their price per frame, their manufacturing capacity, their ability to deliver on schedule, and their ability to adhere to the Company's quality control and quality assurance requirements. Because of the long lead times required for the Company's frames, the Company has developed a computer model which helps project the Company's needs for each frame style. This model takes into account the inventory on hand by style, its three-month and six-month sales rate, the quantity and scheduled delivery date of any future purchase orders, and other adjustments which the Company's purchasing department may need to make to model future proposed changes. 32 The Company is not required to pay for any of its frames prior to shipment. Payment terms for the Company's products currently range from cash upon shipment (with a 2% discount) to terms ranging from 60 to 90 days. For frames purchased other than from Hong Kong manufacturers, the Company is obligated to pay in the currency of the country in which the manufacturer is located. In the case of frames purchased from manufacturers located in Hong Kong/China, the currency is United States dollars. For almost all of the Company's other frame purchases, its costs vary based on currency fluctuations, and it generally cannot recover increased frame costs (in United States dollars) in the selling price of the frames. The purchase of goods manufactured in foreign countries is subject to a number of risks. See "Risk Factors--Dependence Upon Contract Manufacturers; Foreign Trade Regulation." COMPETITION The markets for prescription eyewear are intensely competitive. There are thousands of frame styles, including hundreds with brand names. At retail, the Company's eyewear styles compete with styles that do and do not have brand names, styles in the same price range, and styles with similar design concepts. To obtain board space at an optical retailer, the Company competes against many companies, both foreign and domestic, including Luxottica Group S.p.A. (operating in the United States through a number of its subsidiaries); Safilo Group S.p.A. (operating in the United States through a number of its subsidiaries); and Marchon Eyewear, Inc. Signature's largest competitors have significantly greater financial, technical, sales, manufacturing and other resources than the Company. They also employ direct sales forces that are significantly larger than the Company's, and are thus able to realize a higher gross profit margin. At the distributor level, sales representatives often carry many lines of eyewear, and the Company must vie for their attention. At the major retail chains, the Company competes not only against other eyewear suppliers, but also against the chains themselves, which license some of their own brand names for design, manufacture and sale in their own stores. Luxottica, one of the largest eyewear companies in the world, is vertically integrated, in that it manufactures frames, distributes them through direct sales forces in the United States and throughout the world, and owns LensCrafters, one of the largest United States retail optical chains. The Company competes in its target markets through the quality of the brand names it licenses, its marketing and merchandising, the popularity of its frame designs, the reputation of its styles for quality, and its pricing policies. See "Brand Development" and "Products". BACKLOG The Company generally ships eyeglass frames upon receipt of orders, and does not operate with a material backlog. EMPLOYEES At April 30, 1997, the Company had 101 full-time employees, including 31 in sales and marketing, 24 in customer service and support, 25 in warehouse operations and shipping and 21 in general administration and finance. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be good. PROPERTIES The Company leases a building of approximately 44,000 square feet in Inglewood, California. The building is used as the Company's principal executive offices and as a warehouse. The lease for this facility expires in 2005. The Company believes that its existing facility is well maintained and in good operating condition and is adequate for the Company's level of operations through October 31, 2000. LEGAL PROCEEDINGS The Company is not involved in any pending, nor is the Company aware of any threatened, legal proceedings which the Company believes could reasonably be expected to have a material adverse effect on the Company's business, operating results or financial condition. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information about the directors and executive officers of the Company:
NAME AGE POSITION ---- --- -------- Bernard Weiss (1)..... 59 Co-Chairman of the Board and Chief Executive Officer Julie Heldman (1)..... 51 Co-Chairman of the Board and President Michael Prince........ 48 Chief Financial Officer and Director Robert Fried.......... 52 Senior Vice President, Marketing Robert Zeichick....... 46 Vice President, Advertising and Sales Promotion Daniel Warren......... 40 Director
- -------- (1) Mr. Weiss and Ms. Heldman are married to each other. Directors are elected at each annual meeting of shareholders and hold office until the following annual meeting and their successors are duly elected and qualified. The Bylaws of the Company presently provide that the number of directors shall not be less than 4 nor more than 7, with the exact number to be fixed from time to time by resolution of the Board of Directors. The current number of directors is 4. Any vacancy on the Board of Directors, including a vacancy resulting from an increase in the size of the Board of Directors, may be filled by the remaining directors. In no case may the Board of Directors decrease the number of directors or shorten the term of any incumbent director. Pursuant to the Underwriting Agreement, for a period of three years from the consummation of the Offering, Fechtor Detwiler may designate one representative to sit on the Company's Board of Directors. See "Underwriting." Executive officers are appointed and serve at the discretion of the Board of Directors, subject to applicable employment contracts. BERNARD WEISS has served as Chief Executive Officer of the Company since 1983. Mr. Weiss served as Chairman of the Board from 1983 to 1988, and has served as Co-Chairman of the Board since 1989. Mr. Weiss started in the optical industry in 1975 as Vice President of Sales and Marketing for Optique du Monde. From 1977 until he founded the Company in 1983, Mr. Weiss worked in a variety of executive positions at companies in the optical industry. Mr. Weiss has a degree in business administration from the University of Pittsburgh. JULIE HELDMAN has served as Co-Chairman of the Board since 1989 and President of the Company since 1995. Ms. Heldman joined the Company in 1985 and since that time has served in various executive positions including Chief Financial Officer and Executive Vice President of Operations. She held the position of Chief Operating Officer from 1992 until she was appointed President of the Company in 1995. Ms. Heldman graduated from Stanford University in 1966 and has a law degree from UCLA Law School which she obtained in 1981. Ms. Heldman worked as an attorney from 1981 until she joined the Company in 1985. MICHAEL PRINCE joined the Company in 1993 and has served as the Chief Financial Officer and as a Director of the Company since March 1994. For more than 14 years before joining the Company, Mr. Prince's principal occupation was as a consultant with Prince & Co., a business consulting firm which he owned. Mr. Prince has a degree in business administration from Babson College. ROBERT FRIED has served as the Company's chief marketing executive since joining the Company in 1990. In 1995, he was appointed Senior Vice President, Marketing of the Company. Prior to joining the Company in 1990, Mr. Fried served in various executive marketing positions at Motorola, Quasar Electronics, Rockwell International, Starcraft Leisure Products, Marantz Stereo Company, Nautilus Fitness, Inc. and Hansen Foods. 34 Mr. Fried has a bachelors degree from Providence College and a masters degree in marketing from Boston University. ROBERT ZEICHICK has served as the Company's chief advertising and promotion executive since joining the Company in November 1990. In 1995, he was appointed Vice President, Advertising and Sales Promotion of the Company. From 1988 until joining the Company in 1990, Mr. Zeichick served as Vice President of Advertising and Sales Promotion at Nautilus Fitness, Inc. and Hansen Foods. Mr. Zeichick worked as an independent advertising consultant from 1984 until 1988 and worked on such brand names as Applause, Walt Disney Home Video and Marantz. Mr. Zeichick has degrees in journalism and mass communications from California State University. DANIEL WARREN has served as a director of the Company since 1993. From January 1996 until the present, Mr. Warren has been self-employed as a consultant. From March 1992 until January 1996, Mr. Warren was Vice President of Planning and Accounting of National Vision Associates, Ltd. BOARD COMMITTEES The Board of Directors intends to establish an Audit Committee and a Compensation Committee following the closing of the Offering. The Audit Committee's functions include recommending to the Board of Directors the engagement of the Company's independent certified public accountants, reviewing with those accountants the results of their audit of the financial statements and determining the independence of the accountants. The Compensation Committee reviews and makes recommendations about compensation payable to the Company's executive officers and key employees and about the Company's employee benefit plans. A majority of the members of the Audit and Compensation Committees will consist of independent directors. DIRECTOR COMPENSATION Before the Offering, the Company has not paid fees to its directors. Following the Offering, the Company intends to pay non-employee directors a fee of $8,000 per year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company does not currently have a compensation committee. For the fiscal year ended October 31, 1996, all decisions regarding executive compensation were made by the Company's Board of Directors. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. 35 EXECUTIVE COMPENSATION The following table sets forth information concerning compensation for fiscal 1996 to the Chief Executive Officer and each of the four most highly compensated executive officers of the Company (the "Named Executive Officers") in that fiscal year: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION --------------------------- -------------------- ------------ Bernard Weiss, Chief Executive Officer..... $ 145,414 $ 0 $ 1,335(1) Julie Heldman, President................... $ 161,700 $ 0 $ 5,542(1) Michael Prince, Chief Financial Officer.... $ 157,345 $ 300,000 $ 300,000(2) Robert Fried, Senior Vice President, Marketing................................. $ 138,692 $ 50,000 $ 0 Robert Zeichick, Vice President, Advertising and Sales Promotion........... $ 138,692 $ 50,000 $ 0
- -------- (1) Consists of auto allowances. (2) Represents the value in May 1996 (as determined by the Board of Directors) of 108,016 shares of Common Stock issued to Mr. Prince in consideration of services rendered to the Company. EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS Bernard Weiss, Julie Heldman, Michael Prince, Robert Fried and Robert Zeichick have each entered into an employment agreement with the Company to take effect as of the closing of the Offering. Pursuant to those agreements, these executive officers have agreed to render services until October 31, 2000, and will be entitled to salary at the following annual rates during the term of their contracts (subject to increases from time to time approved by the Board of Directors or Compensation Committee): Mr. Weiss--$190,000; Ms. Heldman--$190,000; Mr. Prince--$175,000; Mr. Fried--$175,000; and Mr. Zeichick--$160,000. Upon termination of employment by the Company without cause or by an executive officer upon an adverse event, an executive officer will continue to receive salary and benefits until the later to occur of October 31, 2000 or one year following termination. The employment agreements define an "adverse event" to include the occurrence of any of the following, without the prior written consent of the executive officer: (i) the executive's demotion as evidenced by the loss of the executive officer's title, (ii) a significant diminution of the executive's on-going duties and responsibilities, (iii) the relocation of the Company's principal executive offices outside the Los Angeles Metropolitan area, or (iv) the Company requiring executive to relocate to an office outside the Los Angeles Metropolitan area for a period exceeding three months in any calendar year. If employment terminates as a result of death, the executive officer's estate will receive a payment equal to the aggregate amount of unpaid salary through October 31, 2000. The payment will be made, if insured, upon receipt of the proceeds of the key person life insurance maintained by the Company. Otherwise the payment will be made over the term of the executive's employment agreement. If employment terminates as a result of disability, the executive officer will continue to receive salary and benefits through October 31, 2000, offset by any government benefits and any benefits the employee receives under disability insurance provided by the Company. STOCK PLAN The Company adopted a Stock Plan (the "Stock Plan") in May 1997. Each executive officer, other employee, non-employee director or consultant of the Company or any of its future subsidiaries is eligible to be considered for the grant of awards under the Stock Plan. A maximum of 600,000 shares of Common Stock may be issued pursuant to awards granted under the Stock Plan, subject to certain adjustments to prevent dilution. Any shares of Common Stock subject to an award which for any reason expires or terminates unexercised are again available for issuance under the Stock Plan. The Plan terminates in 2007. The Stock Plan will be administered by the Company's Board of Directors or by a committee of two or more directors appointed by the Board of Directors (the "Administrator"). Subject to the provisions of the Stock Plan, the Administrator will have full and final authority to select the executives and other employees to whom awards will be granted thereunder, to grant the awards and to determine the terms and conditions of the awards and the number of shares to be issued pursuant thereto. 36 The Stock Plan authorizes the Administrator to enter into any type of arrangement with an eligible employee that, by its terms, involves or might involve the issuance of (i) shares of Common Stock, (ii) an option, warrant, convertible security, stock appreciation right or similar right with an exercise or conversion privilege at a price related to the Common Stock, or (iii) any other security or benefit with a value derived from the value of the Common Stock. No person may receive awards representing more than 25% of the number of shares of Common Stock covered by the Stock Plan (150,000 shares). Awards under the Stock Plan are not restricted to any specified form or structure and may include arrangements such as sales, bonuses and other transfers of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock or securities convertible into or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares. An award may consist of one such arrangement or two or more such arrangements in tandem or in the alternative. An award may provide for the issuance of Common Stock for any lawful consideration, including services rendered or, to the extent permitted by applicable state law, to be rendered. An award under the Stock Plan may permit the recipient to pay all or part of the purchase price of the shares or other property issuable pursuant to the award, and/or to pay all or part of the recipient's tax withholding obligations for that issuance, by delivering previously owned shares of capital stock of the Company or other property, or by reducing the amount of shares or other property otherwise issuable pursuant to the award. If an option granted under the Stock Plan permits the recipient to pay for the shares underlying the option with previously owned shares, the option may grant the recipient the right to "pyramid" his or her previously owned shares, i.e., to exercise the option in successive transactions, starting with a relatively small number of shares and, by a series of exercises using shares acquired from each transaction to pay the purchase price of the shares acquired in the following transaction, to exercise the option for a larger number of shares with no more investment than the original share or shares delivered. The Administrator may amend or terminate the Stock Plan at any time and in any manner, subject to the following: (i) no recipient of any award may, without his or her consent, be deprived of the award or of any of his or her rights under or relating to the award as a result of the amendment or termination; and (ii) if any rule or regulation promulgated by the Securities and Exchange Commission (the "Commission"), the Internal Revenue Service or any national securities exchange or quotation system upon which any of the Company's securities are listed requires that the amendment be approved by the Company's stockholders, then the amendment will not be effective until it has been approved by the Company's shareholders. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Articles of Incorporation include a provision that eliminates the personal liability of its directors to the Company and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") (concerning contracts or transactions between the Company and a director) or (vii) under Section 316 of the California Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation also include an authorization for the Company to indemnify its agents (as defined in Section 317 of the California Code), through bylaw provisions, by agreement or otherwise, 37 to the fullest extent permitted by law. Pursuant to this provision, the Company's Bylaws provide for indemnification of the Company's directors, officers and employees. In addition, the Company, at its discretion, may indemnify persons whom the Company is not obligated to indemnify. The Bylaws also allow the Company to enter into indemnity agreements with individual directors, officers, employees and other agents. The Company has entered into indemnification agreements designed to provide the maximum indemnification permitted by law with all the directors and executive officers of the Company. These agreements, together with the Company's Bylaws and Articles of Incorporation, may require the Company, among other things, to indemnify these directors and executive officers against certain liabilities that may arise by reason of their status or service as directors or executive officers (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. The Company maintains directors' and officers' liability insurance. Section 317 of the California Code, the Company's Bylaws and the Company's indemnification agreements with its directors and executive officers make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify those persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 38 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has been treated as an S Corporation since 1990. The Company paid an aggregate of $4,685,000 in dividends to the Existing Shareholders from November 1, 1993 through April 30, 1997. These dividends were paid to the Existing Shareholders to pay their income taxes, and as a return on their investment. The Company intends to pay to the Existing Shareholders dividends equal to $635,000 plus the amount of the Company's net income from May 1, 1997 through the Termination Date. These dividends will be paid to the Existing Shareholders before the closing of the Offering. The Company and the Existing Shareholders have entered into a tax indemnification agreement relating to their respective income tax liabilities. See "Termination of S Corporation Status." Until April 1997, Mr. Weiss and Ms. Heldman personally guaranteed the Company's obligation under the loan from its commercial bank. Mr. Weiss and Ms. Heldman have personally guaranteed the Company's performance under the lease for its corporate offices and warehouse (the "Lease Guarantee"). The Lease Guarantee has been suspended and shall remain suspended so long as the Company's net worth equals or exceeds $1,500,000, and will terminate upon the closing of the Offering. Robert Fried and Robert Zeichick, executive officers of the Company, are officers, directors and significant shareholders of Brandmark, Inc., a corporation which has a license from Laura Ashley to produce timepieces bearing the Laura Ashley trademark. In fiscal 1996, the Company purchased from Brandmark, Inc. an aggregate of $362,000 of timepieces bearing the Laura Ashley trademark. The Company, with the financial participation of its distributors, gave these timepieces to its 1996 Laura Ashley Loyal Partners as a promotional incentive. The Company did not make any purchases from Brandmark, Inc. during the six months ended April 30, 1997; however, by the end of fiscal 1997, the Company plans to purchase from Brandmark, Inc. approximately $450,000 of Laura Ashley timepieces for its 1997 Laura Ashley Loyal Partners. The activities of Mr. Fried and Mr. Zeichick with Brandmark, Inc. have not interfered with their responsibilities as executive officers of the Company. In January 1995, the Company purchased from The Weiss Family Trust a limited partnership interest in International Business Center, a California limited partnership ("IBC"), which owns the premises formerly used by the Company as its principal executive offices. Bernard Weiss and Julie Heldman, the Chief Executive Officer and President, respectively, and Co-Chairmen of the Board of the Company, are trustees of The Weiss Family Trust. The Company paid $75,000 for the limited partnership interest, an amount equal to the purchase price originally paid by The Weiss Family Trust. The Company paid for the limited partnership interest with a non-interest bearing promissory note which was paid in full in January 1996. In March 1993, the Company issued two subordinated notes (the "Subordinated Notes"), each in the principal amount of $200,000, to Edward Weiner and Daniel Warren in consideration of the cancellation of demand loans made by Messrs. Weiner and Warren to the Company. Mr. Warren is a director of the Company and Messrs. Weiner and Warren are significant shareholders of the Company. The Subordinated Notes, which provided for an annual interest rate of 5.5%, payable annually, were due on March 1, 1998. One of the Subordinated Notes was repaid in April 1995 and the other was repaid in October 1996. In June 1992, Mr. Weiss and Ms. Heldman loaned the Company $400,000. The promissory note evidencing the loan provided for an annual interest rate equal to one and one-half percent over the prime rate of Wells Fargo Bank, adjusted annually, and was due on May 31, 1997. The loan was repaid in October 1996. The Company believes that the transactions described above were on terms no less favorable to the Company than could have been obtained in arm's length transactions from unaffiliated third parties. 39 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of April 30, 1997, and as adjusted to reflect the sale of 1,600,000 shares of Common Stock by the Company and the sale of 200,000 shares of Common Stock by the Selling Shareholders offered by this Prospectus, for (i) each person who is known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. The address of each person listed is in care of the Company, 498 North Oak Street, Inglewood, California 90302, unless otherwise set forth below such person's name.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING(1) AFTER THE OFFERING(1)(2) ---------------------------- ---------------------------- NUMBER OF NUMBER OF PERCENT SHARES NUMBER OF PERCENT NAME AND ADDRESS SHARES OF CLASS OFFERED(2) SHARES OF CLASS ---------------- --------------- ------------ ---------- --------------- ------------ The Weiss Family Trust (3).................... 2,393,543 66.5% 132,954 2,260,589 43.5% Bernard Weiss (3)....... 2,393,543 66.5 132,954 2,260,589 43.5 Julie Heldman (3)....... 2,393,543 66.5 132,954 2,260,589 43.5 Edward Weiner (4)....... 349,250 9.7 19,400 329,850 6.3 600 Golden Harbor Drive Boca Raton, Florida 33431 Daniel Warren........... 349,250 9.7 19,400 329,850 6.3 85 Old Stratton Chase Atlanta, GA 30328 Robert Fried............ 200,234 5.6 11,123 189,111 3.6 Robert Zeichick......... 200,234 5.6 11,123 189,111 3.6 Michael Prince.......... 108,016 3.0 6,000 102,016 2.0 All of the directors and executive officers as a group (6 Persons)...... 3,251,277 90.3 180,600 3,070,677 59.0
- -------- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that deem shares to be beneficially owned by any person who has or shares voting or investment power for those shares. Unless otherwise indicated, the persons named in this table have sole voting and sole investment power for all shares shown as beneficially owned, subject to community property laws where applicable. (2) Assumes no exercise of the Over-Allotment Option. If the Over-Allotment Option is exercised in full, the Company will sell an additional 67,500 shares of Common Stock and the Selling Shareholders will sell an additional 202,500 shares of Common Stock. In such event, upon the closing of the Offering (i) The Weiss Family Trust will sell an aggregate of 267,571 shares and beneficially own 2,125,972 shares, or 40.4% of the Company's outstanding Common Stock, (ii) Bernard Weiss will beneficially own 2,125,972 shares, or 40.4% of the Company's outstanding Common Stock, (iii) Julie Heldman will beneficially own 2,125,972 shares, or 40.4% of the Company's outstanding Common Stock, (iv) Edward Weiner will sell an aggregate of 39,042 shares and beneficially own 310,208 shares, or 5.9% of the Company's outstanding Common Stock, (v) Daniel Warren will sell an aggregate of 39,042 shares and beneficially own 310,208 shares, or 5.9% of the Company's outstanding Common Stock, (vi) Robert Fried will sell an aggregate of 22,385 shares and beneficially own 177,849 shares, or 3.4% of the Company's outstanding Common Stock, (vii) Robert Zeichick will sell an aggregate of 22,385 shares and beneficially own 177,849 shares, or 3.4% of the Company's outstanding Common Stock, (viii) Michael Prince will sell an aggregate of 12,075 shares and beneficially own 95,941 shares, or 1.8% of the Company's outstanding Common Stock, and (ix) all directors and executive officers as a group will beneficially own 2,887,819 shares, or 54.8% of the Company's outstanding Common Stock. (3) Bernard Weiss and Julie Heldman are married. Mr. Weiss and Ms. Heldman are co-trustees of The Weiss Family Trust, and have voting and investment power for shares held by The Weiss Family Trust. (4) Edward Weiner served as a director of the Company from March 1993 until June 2, 1997. 40 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 30,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share. At April 30, 1997, the Company had six holders of record of the Common Stock. The following statements are brief summaries of certain provisions relating to the Company's capital stock. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters on which the holders of Common Stock are entitled to vote and have cumulative voting rights for the election of directors. The right to cumulate votes will automatically cease as of the first record date of the Company's annual meeting of shareholders where the Company has at least 800 holders of its equity securities (as determined under the California General Corporation Law). The holders of Common Stock are entitled to receive dividends ratably when, as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled, subject to the rights of holders of Preferred Stock issued by the Company, if any, to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the Common Stock. The holders of Common Stock have no preemptive or conversion rights and they are not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. The outstanding shares of Common Stock are, and the shares of Common Stock issuable pursuant to this Prospectus will be, when issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority to issue the authorized and unissued Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, as a way of discouraging, delaying or preventing an acquisition or change in control of the Company. The Company does not currently intend to issue any shares of its Preferred Stock. REGISTRATION RIGHTS Pursuant to an agreement between the Company and the Existing Shareholders, the Existing Shareholders have the right to include all shares of Common Stock from time to time held by them in any registered public offering by the Company for cash (subject to customary provisions regarding underwriter cutbacks). The Board of Directors of the Company has the right to terminate this agreement in its sole and absolute discretion in the event of any merger or consolidation between the Company and another entity in which the Company is not the surviving corporation. TRANSFER AGENT The Company's transfer agent and registrar for its Common Stock is American Stock Transfer and Trust Company, 40 Wall Street, New York, New York 10005. 41 SHARES ELIGIBLE FOR FUTURE SALE Before the Offering, there has been no public market for the Company's Common Stock. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have outstanding an aggregate of 5,200,527 shares of Common Stock, assuming no exercise of the Over-Allotment Option. Of these shares, the 1,800,000 shares sold in the Offering will be freely tradeable without restriction or further registration under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 3,400,527 shares of Common Stock held by the Existing Shareholders are "restricted" securities within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, as summarized below. Each Existing Shareholder has agreed not to sell, transfer, assign, or otherwise dispose of, any beneficial interest in the Common Stock held by him or her (except for transfers to and/or among their respective family members) for a period of 360 days following the date of this Prospectus, except with Fechtor Detwiler's prior written consent and except that each shareholder may transfer up to 104,000 shares in the aggregate after 180 days following the date of this Prospectus. As a result of these contractual restrictions, no shares will be eligible for immediate sale on the effective date of the Offering. All of the 3,400,527 shares will become eligible for sale upon expiration of or earlier release from the lock-up provisions, subject to compliance with the volume limitations of Rule 144 (summarized below) by holders of 3,070,677 of these shares. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year but less than two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 52,000 shares immediately after the Offering) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell these shares pursuant to Rule 144(k) without regard to the limitations described above. The Company has reserved an aggregate of 600,000 shares of Common Stock for issuance pursuant to the Stock Plan. The Company intends to file a registration statement under the Securities Act to register the 600,000 shares of Common Stock reserved for issuance under the Stock Plan. The registration statement is expected to be filed following the date of this Prospectus and will become effective immediately upon filing with the Securities and Exchange Commission. Shares issued under the Stock Plan after the effective date of such registration statement generally will be available for sale to the public without restriction, except for shares issued to affiliates of the Company, which will remain subject to the volume and manner of sale limitations of Rule 144 and the 360 day lock-up provisions. See "Underwriting." 42 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by Fechtor, Detwiler & Co., Inc. and Van Kasper & Company (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the Company and the Selling Shareholders, and the Company and the Selling Shareholders have agreed to sell to the Underwriters, the number of shares of Common Stock set forth opposite the Underwriter's name below:
UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Fechtor, Detwiler & Co., Inc. ................................. Van Kasper & Company........................................... --------- Total........................................................ 1,800,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and the Selling Shareholders and their counsel and independent auditors. The nature of the underwriting commitment is such that the Company is obligated to sell and the Underwriters are obligated to purchase all, if any, of the shares of Common Stock offered by this Prospectus. The Company has been advised by the Underwriters that they propose initially to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to allow to certain dealers concessions not in excess of $ per share of Common Stock. Such dealers may re-allow a concession not in excess of $ per share of Common Stock to other dealers. After the commencement of the Offering, the public offering price, concession and reallowance may be changed by the Underwriters. The Underwriters have advised the Company that they do not anticipate sales to discretionary accounts by the Underwriters to exceed five percent of the total number of shares of Common Stock offered by this Prospectus. At the request of the Company, up to 150,000 shares of Common Stock offered in the Offering will be reserved for sale to employees and others having a business relationship with the Company. The price of these shares to these persons will be the public offering price set forth on the cover page of this Prospectus. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, the Exchange Act and any other statute or at common law or otherwise under the laws of foreign countries, arising out of or based upon any untrue statement of or failure to state a material fact in any preliminary Prospectus, final Prospectus, the Registration Statement of which this Prospectus is a part or in certain other documents and to contribute to certain payments that the Underwriters may be required to make. The Company has also agreed to reimburse the Underwriters for their actual out-of-pocket expenses not to exceed $135,000 in the aggregate, of which none has been paid to date. The Company and the Selling Shareholders have granted to the Underwriters the Over-Allotment Option, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 67,500 additional shares from the Company and 202,500 additional shares from the Selling Shareholders at the initial public offering price per share of Common Stock offered by this Prospectus, less underwriting discounts. The option may be exercised only for the purpose of covering over-allotments, if any, incurred in the sale of the Common Stock offered by this Prospectus. Pursuant to the Underwriting Agreement, the Company has granted Fechtor Detwiler a right of first refusal to represent the Company in any subsequent financing or other transaction for which the Company requires the services of an investment banker or broker/dealer for a three-year period commencing upon the consummation of the Offering. 43 In connection with the Offering, the Company has agreed to sell to the Representatives, for nominal consideration, the Representatives' Warrants to purchase from the Company 180,000 shares of Common Stock which have been registered in the Registration Statement of which this Prospectus is a part. The Representatives' Warrants are initially exercisable at a price equal to 120% of the initial public offering price for a period of four years commencing one year from the effective date of the Registration Statement. The Representatives' Warrants contain anti-dilution provisions for, among others, stock dividends, stock splits, mergers, sale of substantially all of the Company's assets (but not the sale or issuance of Common Stock at a price below the then current exercise price of the Representatives' Warrants). Pursuant to the Underwriting Agreement, for a period of three years from the consummation of the Offering, Fechtor Detwiler may designate one representative to sit on the Board of Directors of the Company. Before the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representatives and is not necessarily related to the Company's asset value, net worth or other established criteria of value. The factors considered in such negotiations, in addition to prevailing market conditions, included the history of, and prospects for, the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure and certain other factors which were deemed relevant. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to a copy of each such agreement which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. See "Additional Information." LEGAL MATTERS Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California, will render an opinion to the effect that the Common Stock offered by the Selling Shareholders is, and the Common Stock offered by the Company upon sale will be, duly and validly issued, fully paid and non-assessable. Proskauer Rose LLP, Boca Raton, Florida, has acted as counsel to the Underwriters in connection with certain legal matters relating to the Offering. EXPERTS The financial statements of Signature Eyewear, Inc. at October 31, 1996 and October 31, 1995, and for each of the three years in the period ended October 31, 1996 have been audited by Altschuler, Melvoin and Glasser LLP, independent auditor, as set forth in their reports appearing elsewhere in this Prospectus and Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission in Washington, D.C., a Registration Statement under the Securities Act for the shares offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits included with the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and with respect to any contract or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by this reference. For further information about the Company and the shares offered by this Prospectus, reference is hereby made to the Registration Statement and 44 exhibits included with the Registration Statement. A copy of the Registration Statement, including exhibits, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates. Upon consummation of the Offering, the Company will become subject to the information requirements of the Exchange Act and, in accordance therewith, will file reports and other information with the Securities and Exchange Commission in accordance with its rules. These reports and other information concerning the Company may be inspected and copied at the public reference facilities referred to above as well as certain regional offices of the Securities and Exchange Commission. The Securities and Exchange Commission maintains a Web Site which contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission (such as the Company) at http://www.sec.gov. 45 SIGNATURE EYEWEAR, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.............................................. F-2 Balance Sheets at October 31, 1995 and 1996 and (Unaudited) April 30, 1997..................................................................... F-3 Statement of Income for the years ended October 31, 1994, 1995 and 1996 and (Unaudited) for the Six Months Ended April 30, 1996 and 1997......... F-4 Statement of Changes in Stockholders' Equity for the years ended October 31, 1994, 1995 and 1996 and (Unaudited) for the Six Months Ended April 30, 1997................................................................. F-5 Statement of Cash Flows for the years ended October 31, 1994, 1995 and 1996 and (Unaudited) for the Six Months Ended April 30, 1996 and 1997.... F-6 Notes to the Financial Statements......................................... F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Signature Eyewear, Inc. We have audited the accompanying balance sheets of SIGNATURE EYEWEAR, INC. (an S corporation) as of October 31, 1995 and 1996, and the related statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Signature Eyewear, Inc. at October 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. ALTSCHULER, MELVOIN AND GLASSER LLP Los Angeles, California January 15, 1997 F-2 SIGNATURE EYEWEAR, INC. BALANCE SHEETS OCTOBER 31, 1995 AND 1996 AND UNAUDITED APRIL 30, 1997
APRIL 30, 1997 ----------------------- PRO FORMA 1995 1996 ACTUAL (NOTE 1) ---------- ----------- ----------- ----------- UNAUDITED ASSETS Current Assets: Cash.......................... $ 28,724 $ 214,399 $ 59,673 $ 59,673 Accounts receivable, trade (net of allowance for doubtful accounts of $24,028 in 1995, $45,000 in 1996 and $65,000 in 1997)............. 2,745,291 3,849,750 4,724,307 4,724,307 Inventories................... 3,627,951 4,635,928 5,338,000 5,338,000 Prepaid expenses and other current assets............... 60,182 288,859 458,793 458,793 ---------- ----------- ----------- ----------- 6,462,148 8,988,936 10,580,773 10,580,773 ---------- ----------- ----------- ----------- Property and Equipment (net of accumulated depreciation and amortization--Note 2).......... 599,461 1,040,374 1,132,822 1,132,822 ---------- ----------- ----------- ----------- Other Assets: Deferred charges (net of amortization of $194,743 in 1995, $210,972 in 1996 and $210,972 in 1997--Note 1).... 16,229 0 0 0 Deposits and other............ 181,985 263,747 263,747 263,747 ---------- ----------- ----------- ----------- 198,214 263,747 263,747 263,747 ---------- ----------- ----------- ----------- $7,259,823 $10,293,057 $11,977,342 $11,977,342 ========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade....... $1,566,019 $ 2,571,945 $ 2,941,903 $ 2,941,903 Note payable, bank (Note 3)... 1,755,000 3,100,000 4,625,000 4,625,000 Current portion of long-term debt (Note 4)................ 202,826 206,394 571,790 571,790 Accrued expenses and other current liabilities.......... 1,078,767 1,328,698 1,140,992 1,140,992 Dividends payable............. 0 0 0 635,000 ---------- ----------- ----------- ----------- 4,602,612 7,207,037 9,279,685 9,914,685 ---------- ----------- ----------- ----------- Long-term Debt (Note 4)......... 349,199 156,883 62,415 62,415 Notes Payable, Stockholders (Note 7)....................... 362,500 0 0 0 ---------- ----------- ----------- ----------- 711,699 156,883 62,415 62,415 ---------- ----------- ----------- ----------- Commitments (Note 5) Stockholders' Equity (Note 6): Preferred stock............... 0 0 0 0 Common stock (3,492,511 shares issued and outstanding at October 31, 1995 and 3,600,527 shares issued and outstanding at October 31, 1996 and April 30, 1997)..... 7,500 7,732 7,732 7,732 Paid-in capital............... 113,261 413,029 413,029 1,912,341 Retained earnings............. 1,824,751 2,508,376 2,214,481 80,169 ---------- ----------- ----------- ----------- 1,945,512 2,929,137 2,635,242 2,000,242 ---------- ----------- ----------- ----------- $7,259,823 $10,293,057 $11,977,342 $11,977,342 ========== =========== =========== ===========
The accompanying notes are an integral part of this statement. F-3 SIGNATURE EYEWEAR, INC. STATEMENT OF INCOME YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997
SIX MONTHS ENDED APRIL 30, ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- UNAUDITED Net Sales............... $20,050,685 $23,570,513 $28,280,086 $13,052,354 $16,038,054 Cost of Sales........... 9,666,062 10,988,106 11,931,299 5,625,371 6,632,110 ----------- ----------- ----------- ----------- ----------- Gross Profit............ 10,384,623 12,582,407 16,348,787 7,426,983 9,405,944 ----------- ----------- ----------- ----------- ----------- Operating Expenses: Selling............... 5,854,838 6,509,752 8,328,296 3,681,742 4,700,464 General and administrative....... 3,223,909 4,035,432 5,611,874 2,302,726 2,807,433 Relocation expense ... 0 235,419 86,871 48,942 0 ----------- ----------- ----------- ----------- ----------- 9,078,747 10,780,603 14,027,041 6,033,410 7,507,897 ----------- ----------- ----------- ----------- ----------- Income from Operations.. 1,305,876 1,801,804 2,321,746 1,393,573 1,898,047 ----------- ----------- ----------- ----------- ----------- Other Income (Expense): Interest expense...... (200,814) (201,196) (338,373) (166,612) (188,654) Sundry income (expense)............ 3,124 35,448 29,196 6,879 (2,488) ----------- ----------- ----------- ----------- ----------- (197,690) (165,748) (309,177) (159,733) (191,142) ----------- ----------- ----------- ----------- ----------- Income before State Income Taxes........... 1,108,186 1,636,056 2,012,569 1,233,840 1,706,905 Provision for State Income Taxes (Note 1).. 1,072 1,352 800 800 800 ----------- ----------- ----------- ----------- ----------- Net Income.............. $ 1,107,114 $ 1,634,704 $ 2,011,769 $ 1,233,040 $ 1,706,105 =========== =========== =========== =========== =========== Pro Forma Data (unaudited): Income before provision for state income taxes (from above)............... $ 1,108,186 $ 1,636,056 $ 2,012,569 $ 1,233,840 $ 1,706,905 Income tax provision.. 418,000 606,000 748,000 473,000 677,000 ----------- ----------- ----------- ----------- ----------- Net income............ $ 690,186 $ 1,030,056 $ 1,264,569 $ 760,840 $ 1,029,905 =========== =========== =========== =========== =========== Net income per common share................ $ 0.36 $ 0.22 $ 0.29 =========== =========== =========== Common shares outstanding ......... 3,546,519 3,492,511 3,600,527 =========== =========== ===========
The accompanying notes are an integral part of this statement. F-4 SIGNATURE EYEWEAR, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1997
COMMON STOCK ---------------- NO. OF SHARES PAID-IN RETAINED ISSUED AMOUNT CAPITAL EARNINGS TOTAL --------- ------ -------- ----------- ----------- Balance, November 1, 1993 (Note 6)................. 3,492,511 $7,500 $113,261 $ 440,183 $ 560,944 Net Income................ 0 0 0 1,107,114 1,107,114 Dividends Paid............ 0 0 0 (807,250) (807,250) --------- ------ -------- ----------- ----------- Balance, October 31, 1994..................... 3,492,511 7,500 113,261 740,047 860,808 Net Income................ 0 0 0 1,634,704 1,634,704 Dividends Paid............ 0 0 0 (550,000) (550,000) --------- ------ -------- ----------- ----------- Balance, October 31, 1995..................... 3,492,511 7,500 113,261 1,824,751 1,945,512 Net Income................ 0 0 0 2,011,769 2,011,769 Issuance of Common Stock.. 108,016 232 299,768 0 300,000 Dividends Paid............ 0 0 0 (1,328,144) (1,328,144) --------- ------ -------- ----------- ----------- Balance, October 31, 1996..................... 3,600,527 7,732 413,029 2,508,376 2,929,137 Net Income (unaudited).... 0 0 0 1,706,105 1,706,105 Dividends Paid (unaudited).............. 0 0 0 (2,000,000) (2,000,000) --------- ------ -------- ----------- ----------- Balance, April 30, 1997 (unaudited).............. 3,600,527 $7,732 $413,029 $ 2,214,481 $ 2,635,242 ========= ====== ======== =========== ===========
The accompanying notes are an integral part of this statement. F-5 SIGNATURE EYEWEAR, INC. STATEMENT OF CASH FLOWS YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997
SIX MONTHS ENDED APRIL 30, ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- UNAUDITED Cash Flows from Operating Activities: Net income............. $ 1,107,114 $ 1,634,704 $ 2,011,769 $ 1,233,040 $ 1,706,105 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......... 124,047 218,956 249,013 117,099 209,560 Provision for bad debts................. 25,000 (26,952) 20,972 15,972 20,000 Stock compensation..... 0 0 300,000 0 0 Loss on abandonment of property and equipment............. 0 92,123 0 0 0 Changes in assets-- (increase) decrease: Accounts receivable, trade................ 155,767 (851,423) (1,125,431) (1,004,132) (894,557) Inventories........... (46,647) (1,134,544) (1,007,977) (1,118,084) (702,072) Prepaid expenses and other assets......... 15,009 (142,549) (310,439) (309,197) (169,934) Changes in liabilities--increase (decrease): Accounts payable, trade................ 223,076 79,003 1,005,926 (107,490) 369,958 Accrued expenses and other liabilities.... 262,808 409,828 249,931 (56,989) (187,706) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities............ 1,866,174 279,146 1,393,764 (1,229,781) 351,354 ----------- ----------- ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment......... (128,478) (464,200) (655,074) (135,289) (302,008) Net proceeds on sale of equipment............. 3,583 0 0 0 0 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities.. (124,895) (464,200) (655,074) (135,289) (302,008) ----------- ----------- ----------- ----------- ----------- Cash Flows from Financing Activities: Borrowings on long-term debt.................. 0 525,000 0 0 0 Borrowings on note payable, bank......... 7,520,000 9,275,000 9,310,000 5,085,000 4,900,000 Repayments on note payable, bank......... (8,100,000) (8,820,000) (7,965,000) (2,740,000) (3,375,000) Principal payments on long-term debt........ (41,775) (66,936) (207,371) (217,069) (229,072) Principal payments on notes payable, stockholders.......... (200,000) (437,500) (362,500) 0 0 Proceeds from long-term debt.................. 0 0 0 0 500,000 Dividends paid......... (807,250) (550,000) (1,328,144) (640,000) (2,000,000) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities............ (1,629,025) (74,436) (553,015) 1,487,931 (204,072) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Cash................ 112,254 (259,490) 185,675 122,861 (154,726) Cash, Beginning of Period................. 175,960 288,214 28,724 28,724 214,399 ----------- ----------- ----------- ----------- ----------- Cash, End of Period..... $ 288,214 $ 28,724 $ 214,399 $ 151,585 $ 59,673 =========== =========== =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest.............. $ 200,810 $ 193,044 $ 337,575 $ 159,932 $ 179,787 =========== =========== =========== =========== =========== Income taxes.......... $ 1,072 $ 1,352 $ 800 $ 800 $ 800 =========== =========== =========== =========== =========== Supplemental Schedule of Noncash Investing and Financing Activities: Purchase of equipment financed by capital lease obligation..... $ 0 $ 0 $ 18,623 $ 18,623 $ 0 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. F-6 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS OCTOBER 31, 1994, 1995 AND 1996 AND UNAUDITED APRIL 30, 1997 NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES: Signature Eyewear, Inc. (the "Company") designs, markets and distributes prescription eyeglass frames throughout the United States and internationally. Operations are conducted from leased premises in Inglewood, California. In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of significant accounting policies is as follows: Inventories--Inventories (consisting of finished goods) are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. Revenue Recognition--Revenue is recognized when merchandise is shipped and invoiced. An allowance for estimated product returns is established based upon actual historical return percentages multiplied by current period sales less actual returns. Depreciation and Amortization--Depreciation and amortization of property and equipment are computed using the straight-line method over the useful economic life of the assets. Deferred Charges--Costs of product development incurred in connection with establishing the Laura Ashley Eyewear line (Note 5) were amortized on the straight-line basis over 39 months. The deferred charges were fully amortized as of January 31, 1996. Provision for amortization charged to operations for the years ended October 31, 1994, 1995 and 1996 amounted to $12,711, $64,914 and $16,229, respectively. Product development costs incurred subsequent to the Laura Ashley Eyewear line have been charged as expenses when and as incurred. Income Taxes--Pursuant to its S corporation status under the Internal Revenue Code, the Company is not subject to federal income taxes, and its income is allocated and taxed to the stockholders' individual income tax returns. Accordingly, no liability or provision for federal income taxes attributable to S corporation operations is included in the accompanying financial statements, nor are any deferred taxes provided for temporary differences between tax and financial reporting. Provision for state income taxes has been provided based upon the applicable state income tax rate, net of income tax credits and deductions as provided under the provisions of the Los Angeles Revitalization Zone. The impact on the Company's financial position and results of operations had the change in income tax status to a C corporation been effected as of April 30, 1997 would be to record a deferred tax asset and a deferred tax benefit in the amount of approximately $100,000. Management estimates that this amount will not materially differ at the actual S corporation termination date. Financial Instruments--The Company's financial instruments, when valued using market interest rates, would not be materially different from the amounts presented in the financial statements. Impairment of Assets--In November 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Statement establishes accounting standards for the impairment of long- lived assets, certain identifiable intangibles, and goodwill related to those assets. There was no material effect on the financial statements from the adoption of SFAS 121. Under provisions of the Statement, impairment losses are F-7 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment and intangibles in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than book value. Unaudited Pro Forma Net Income--The unaudited pro forma net income represents the results of operations adjusted to reflect a provision for income tax on historical income before provision for income taxes, which gives effect to the change in the Company's income tax status to a C corporation subsequent to the public sale of its common stock. The difference between the pro forma income tax rates utilized and federal statutory rate of 35% relates primarily to state income taxes (approximately 6%, net of federal tax benefit). Unaudited Pro Forma Net Income Per Share--Historical net income per common share is not presented because it is not indicative of the ongoing entity. Unaudited pro forma net income per common share has been computed by dividing unaudited pro forma net income by the weighted average number of shares of common stock outstanding during the period. Unaudited Interim Financial Data--The interim financial data as of April 30, 1997 and for the six months ended April 30, 1996 and 1997 have been derived from unaudited financial statements of the Company. Management believes the Company's unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods. Results for the six months ended April 30, 1997 have not been audited and are not necessarily indicative of results to be expected for the full fiscal year. Unaudited Interim Pro Forma Balance Sheet--The interim unaudited pro forma balance sheet as of April 30, 1997 has been adjusted to reflect dividends payable of $635,000 and the reclassification of undistributed S corporation earnings to paid-in capital upon termination of the S corporation election. NOTE 2--PROPERTY AND EQUIPMENT: Property and equipment (stated at cost) as of October 31, 1995 and 1996 and April 30, 1997 consisted of the following:
PERIODS OF APRIL 30, DEPRECIATION 1995 1996 1997 ------------- ---------- ---------- ---------- UNAUDITED Office furniture and fixtures... 7 years $ 243,190 $ 372,368 $ 417,233 Computer equipment.............. 3 to 7 years 401,077 574,510 633,517 Software........................ 3 years 0 317,536 498,833 Vehicles........................ 7 years 162,744 153,141 153,141 Leasehold improvements.......... term of lease 146,582 164,685 178,880 Machinery and equipment held under capitalized leases....... 5 years 102,411 137,857 140,438 ---------- ---------- ---------- 1,056,004 1,720,097 2,022,042 Less accumulated depreciation and amortization (including amortization on capitalized leases of $66,578, $94,693 and $103,769, respectively)........ 456,543 679,723 889,220 ---------- ---------- ---------- Net book value.................. $ 599,461 $1,040,374 $1,132,822 ========== ========== ==========
F-8 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) Provision for depreciation and amortization charged to operations for the years ended October 31, 1994, 1995 and 1996 and the six months ended April 30, 1996 and 1997 amounted to $111,336, $154,042, $232,784, $100,870 and $209,560, respectively (including capitalized lease amortization of $20,169, $17,484, $26,587, $11,898 and $9,075, respectively). NOTE 3--NOTE PAYABLE, BANK: At October 31, 1996, the Company had available, pursuant to a revolving Credit Agreement (the "Credit Agreement") with its commercial bank (the "Bank"), the use of letters of credit, banker's acceptances and loans in the aggregate amount of $5,000,000 ($4,025,000 at October 31, 1995). The commitment formula limited the amount available to the sum of 75% of eligible accounts receivable (as defined) and 40% of eligible inventory (as defined), with the inventory portion limited to the lesser of $2,000,000 or the accounts receivable borrowing base (as defined). At the Company's option, interest under the agreement was based on the London Interbank Offered Rate ("LIBOR") plus 2.75% and at the Bank's prime rate plus .75%. At October 31, 1996, interest rates ranged from 8.125% to 8.378% (8.617% to 8.625% at October 31, 1995) on a loan balance of $2,500,000 ($1,500,000 at October 31, 1995) under the LIBOR option and 9% (9.5% at October 31, 1995) on the remaining balance of $600,000 ($255,000 at October 31, 1995) under the prime rate option. The weighted average interest rate was 8.23% for the year ended October 31, 1996 (9.16% for the year ended October 31, 1995). The Credit Agreement was secured by substantially all of the assets of the Company and was guaranteed by the major stockholders of the Company up to $1,750,000. Under the commitment formula, the Company had available for borrowing approximately $1,077,000 and $1,011,000 as of October 31, 1996 and 1995, respectively. The Credit Agreement contains various covenants including requirements for the maintenance of minimum tangible net worth (as defined) and certain financial ratios, and provisions restricting the payment of dividends without the consent of the Bank, except for dividends in 1997 in an amount equal to the net income of the Company during the period it is an S corporation. The Company was in compliance with these covenants at October 31, 1996 and 1995. In April 1997, the Company executed an amendment to the Credit Agreement (the "Amendment"), which expires in May 1998. The Amendment provides for an increase in the total commitments to $6,760,417. In connection with the Amendment, the interest rate option decreased to LIBOR plus 2.25% or the Bank's prime rate plus .25%. The weighted average interest rate was 8.19% for the six months ended April 30, 1997. Additionally, the Amendment provides that the major stockholders of the Company no longer guarantee the credit facility. Under the commitment formula, the Company had available for borrowing approximately $701,000 as of April 30, 1997. In June and July 1997, the Company executed two additional amendments to the Credit Agreement. The amendments provide for an increase in the total commitments to $7,935,417. The Amendments also provide for an increase in the inventory portion of the borrowing base to the lesser of $3,000,000 or the accounts receivable borrowing base (as defined), and the elimination of the provision restricting the payment of dividends without the consent of the Bank. F-9 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT: Long-term debt at October 31, 1995 and 1996 and April 30, 1997 consisted of the following:
APRIL 30, 1995 1996 1997 -------- -------- ---------- UNAUDITED Note payable, bank (secured by substantially all the assets of the Company, payable in monthly installments of $41,667, plus interest at the Bank's prime rate plus .5% per annum)........... $ 0 $ 0 $375,000 Note payable, bank (secured by substantially all the assets of the Company, payable in monthly installments of $11,111, plus interest at 9.75% per annum)...................................... 366,667 233,333 166,667 Note payable, Bank (secured by certain vehicles, payable in monthly installments of $3,472, plus interest at 8.75% per annum).................... 125,000 83,334 62,500 Liability for transportation equipment under a purchase agreement (interest at 8.9%)........... 19,124 13,306 10,192 Liability for machinery and equipment under various capitalized lease agreements (interest rates ranging from approximately 12% to 21%).... 41,234 33,304 19,846 -------- -------- -------- 552,025 363,277 634,205 Less current portion............................. 202,826 206,394 571,790 -------- -------- -------- Long-term portion................................ $349,199 $156,883 $ 62,415 ======== ======== ========
Future minimum payments as of October 31, 1996, under the aforementioned long-term debt, are as follows:
NOTES CAPITALIZED PAYABLE PURCHASE LEASE OCTOBER 31, BANK AGREEMENTS AGREEMENTS TOTAL ----------- -------- ---------- ------------ -------- 1997............................. $175,000 $ 6,365 $27,883 $209,248 1998............................. 141,667 6,941 7,639 156,247 1999............................. 0 0 1,229 1,229 -------- ------- ------- -------- 316,667 13,306 36,751 366,724 Less imputed interest thereon..... 0 0 3,447 3,447 -------- ------- ------- -------- $316,667 $13,306 $33,304 $363,277 ======== ======= ======= ========
NOTE 5--COMMITMENTS: Operating Leases--The Company maintains its offices and warehouse in leased facilities in Inglewood, California under an operating lease which expires on May 31, 2005. The lease agreement provides for minimum monthly rental payments ranging from $23,000 presently and escalating to $29,000 for the last five years of the lease. The Company is also responsible for the payment of (i) common area operating expenses (as defined), (ii) utilities, and (iii) insurance. The security deposit on the lease includes a $70,000 irrevocable standby letter of credit in favor of the lessor. The lease agreement provides for an option to extend the term of the lease for five additional years. F-10 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) Future minimum lease payments (excluding common area operating expenses, property taxes, utilities and insurance) under the lease at October 31, 1996, are as follows:
OCTOBER 31, AMOUNT ----------- ---------- 1997.......................................................... $ 269,000 1998.......................................................... 281,000 1999.......................................................... 293,000 2000.......................................................... 320,000 2001.......................................................... 348,000 Thereafter..................................................... 1,247,000 ---------- $2,758,000 ==========
Total rent expense for the years ended October 31, 1994, 1995 and 1996 and the six months ended April 30, 1996 and 1997 amounted to $210,074, $201,333, $254,091, $116,936 and $143,312, respectively. License Agreements--The Company has a license agreement with Laura Ashley Manufacturing, B.V., which grants the Company certain rights to use the "Laura Ashley" trademark in connection with the distribution, marketing and sale of Laura Ashley eyewear products. The license period extends through January 31, 2001, with automatic one-year renewals thereafter through at least 2006, provided that specified minimum sales are achieved. The Company has a license agreement with Revlon Consumer Products Corporation, which grants the Company certain rights to use the "Jean Nate" trademark in connection with the distribution, marketing and sale of Jean Nate eyewear products. The license period extends through September 30, 1998, with automatic renewal terms (as defined) thereafter, provided that specified minimum sales are achieved. The Company has a license agreement with Hart Schaffner & Marx, which grants the Company certain rights to use the "Hart Schaffner & Marx" trademark in connection with the distribution, marketing and sale of Hart Schaffner & Marx eyewear products. The license period extends through June 30, 1999, with automatic three year renewal terms (as defined) thereafter, provided that specified minimum sales are achieved. Total minimum royalties under all of the Company's license agreements are as follows:
OCTOBER 31, AMOUNT ----------- ---------- 1997.......................................................... $ 812,500 1998.......................................................... 883,750 1999.......................................................... 898,750 2000.......................................................... 763,750 2001.......................................................... 195,000 ---------- $3,553,750 ==========
Total royalty expense charged to operations for the years ended October 31, 1994, 1995 and 1996 and the six months ended April 30, 1996 and 1997 amounted to $962,205, $1,171,091, $1,459,559, $641,961 and $848,393, respectively. F-11 SIGNATURE EYEWEAR, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--STOCKHOLDERS' EQUITY: In July 1995, the Company's Articles of Incorporation were amended to increase the total number of authorized shares of Common Stock, par value $.001 per share, to 30,000,000, and to authorize the issuance of up to 5,000,000 shares of Preferred Stock, par value $.001 per share. Additionally, in July 1995 an 800 to 1 split of the Company's Common Stock was effected. In June 1997, a 3.175 to 1 split of the Company's Common Stock was effected. All share and per share amounts included in the accompanying financial statements and footnotes have been restated to reflect the stock splits. The Board of Directors has the authority to issue the authorized and unissued Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board of Directors, without shareholder approval. No shares of the Preferred Stock were issued as of October 31, 1995 and 1996 and April 30, 1997. NOTE 7--RELATED PARTY TRANSACTIONS: Notes Payable, Stockholders--As of October 31, 1995, the following amounts were due to stockholders of the Company: Note payable (unsecured, interest at 5.5% per annum)................. $162,500 Notes payable (unsecured, interest at the Bank's prime rate plus 1.5% per annum).......................................................... $200,000 -------- $362,500 ========
These amounts were repaid during fiscal 1996. Interest expense paid on the notes payable to the stockholders amounted to $65,086, $46,579, $21,337, $13,286 and $0 for the years ended October 31, 1994, 1995 and 1996 and the six months ended April 30, 1996 and 1997, respectively. Purchases from Related Party--Two executive officers, who are also shareholders of the Company, are officers, directors and significant shareholders of Brandmark, Inc., a corporation which has a license from Laura Ashley to produce timepieces bearing the Laura Ashley trademark. In fiscal 1996, the Company purchased from Brandmark, Inc. an aggregate of $362,000 of timepieces bearing the Laura Ashley trademark, which amount is included in selling expenses for the year ended October 31, 1996. Limited Partnership Investment--In January 1995, the Company purchased from The Weiss Family Trust a limited partnership interest in a California limited partnership which owns the premises formerly used by the Company as its principal executive offices. Bernard Weiss and Julie Heldman, the Chief Executive Officer and President, respectively, and Co-Chairmen of the Board of the Company, are trustees of The Weiss Family Trust. The Company paid $75,000 for the limited partnership interest, an amount equal to the purchase price originally paid by The Weiss Family Trust. The investment is included in the deposits and other assets balance at October 31, 1995 and 1996 and April 30, 1997. F-12 INSIDE BACK COVER--TWO PAGE COLOR FOLD OUT: Across the top of the gatefold is the headline "The Signature Marketing of Signature Eyewear". Across the gatefold is a collection of photographs of various marketing in- store displays and trade show booths. Across the bottom of the gatefold is a full left to right photograph of 18 Signature eyeglass frames. [PICTURES] INSIDE BACK COVER Jean Nate Eyewear lifestyle photograph of a woman wearing Jean Nate Eyewear being "splashed" from below, up towards her face. At the bottom of the image is the Jean Nate Eyewear logo with the phrase "Always make a splash" at the bottom of the page and the lines "Jean Nate is used under license (C) 1997" and "Jean Nate Eyewear net sales were 4% of the Company's net sales in the six months ended April 30, 1997." [PICTURES] OUTSIDE BACK COVER Hart Schaffner & Marx Eyewear lifestyle photograph of a man wearing Hart Schaffner & Marx Eyewear in front of a swimming pool. At the bottom of the image is the Hart Schaffner & Marx logo and trade theme-line "For A Man's Frame of Mind." At the bottom of the page are the lines "Hart Schaffner & Marx Eyewear net sales were 6% of the Company's net sales in the six months ended April 30, 1997" and "Made by Signature Eyewear under license from Hart Schaffner & Marx." PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the expenses incurred by the Registrant in connection with the issuance and distribution of the Securities being registered, other than underwriting discounts. All the amounts shown are estimates except the Securities and Exchange Commission registration fee and the NASD filing fee. Registration fee--Securities and Exchange Commission............ $ 7,620 NASD filing fee................................................. 3,015 Nasdaq National Market fee...................................... 30,532 Accounting fees and expenses.................................... 50,000 Legal fees and expenses (other than blue sky)................... 150,000 Blue sky fees and expenses, including legal fees................ 10,000 Representatives' expenses....................................... 135,000 Printing; stock certificates.................................... 125,000 Transfer agent and registrar fees............................... 2,500 Miscellaneous................................................... 6,333 -------- Total....................................................... $520,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Articles of Incorporation include a provision that eliminates the personal liability of its directors to the Registrant and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the Registrant or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") (concerning contracts or transactions between the Registrant and a director) or (vii) under Section 316 of the California Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Registrant's shareholders for any violation of a director's fiduciary duty to the Registrant or its shareholders. The Registrant's Articles of Incorporation also include an authorization for the Registrant to indemnify its agents (as defined in Section 317 of the California Code), through bylaw provisions, by agreement or otherwise, to the fullest extent permitted by law. Pursuant to this latter provision, the Registrant's Bylaws provide for indemnification of the Registrant's directors, officers and employees. In addition, the Registrant, at its discretion, may provide indemnification to persons whom the Registrant is not obligated to indemnify. The Bylaws also allow the Registrant to enter into indemnity agreements with individual directors, officers, employees and other agents. These indemnity agreements have been entered into with all directors and provide the maximum indemnification permitted by law. These agreements, together with the Registrant's Bylaws and Articles of Incorporation, may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they II-1 undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. The Company and certain of the Company's shareholders (the "Existing Shareholders") plan to enter into a tax indemnification agreement (the "Tax Agreement") relating to their respective income tax liabilities. Because the Company will be fully subject to corporate income taxation after the termination of the Company's S Corporation status, the reallocation of income and deductions between the period during which the Company was treated as an S Corporation and the period during which the Company will be subject to corporate income taxation may increase the taxable income of one party while decreasing that of another party. Accordingly, the Tax Agreement is intended to assure that taxes are borne by the Company on the one hand and the Existing Shareholders on the other only to the extent that such parties received the related income. The Tax Agreement generally provides that, if an adjustment is made to the taxable income of the Company for a year in which it was treated as an S Corporation, the Company will indemnify the Existing Shareholders and the Existing Shareholders will indemnify the Company against any increase in the indemnified party's income tax liability (including interest and penalties and related costs and expenses), with respect to any tax year to the extent such increase results in a related decrease in the income tax liability of the indemnifying party for that year. The Company will also indemnify the Existing Shareholders for all taxes imposed upon them as the result of their receipt of an indemnification payment under the Tax Agreement. Section 317 of the California Code and the Registrant's Bylaws make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto sets forth certain provisions with respect to the indemnification of certain controlling persons, directors and officers against certain losses and liabilities, including certain liabilities under the Securities Act. The Registrant maintains director and officer liability insurance. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
DOCUMENT EXHIBIT NUMBER -------- -------------- Proposed form of Underwriting Agreement....................... 1.1 Registrant's Restated Articles of Incorporation............... 3.1 Registrant's Amended and Restated Bylaws...................... 3.2 Registrant's Form of Indemnification Agreement................ 10.3 Tax Indemnification Agreement................................. 10.4
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In May 1996, the Company issued 108,016 shares of Common Stock to Michael Prince, the Company's Chief Financial Officer, for services which had been rendered by Mr. Prince valued by the Board of Directors at $300,000 ($2.78 per share). The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering. II-2 ITEM 16. EXHIBITS.
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1 Form of Underwriting Agreement. 1.2 Form of Representatives' Warrant. 3.1 Restated Articles of Incorporation of Registrant.# 3.2 Amended and Restated Bylaws of Registrant.# 4.1 Specimen Stock Certificate of Common Stock of Registrant. 5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP* 10.1 1997 Stock Plan.# 10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).# 10.3 Form of Indemnification Agreement for Directors and Officers.# 10.4 Tax Indemnification Agreement among Registrant and the Existing Shareholders.* 10.5 License Agreement, dated May 28, 1991, between Laura Ashley Manufacturing B.V. and Registrant, as amended.+# 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.# 10.7 Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated April 21, 1997, between Registrant and City National Bank,# First Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated June 26, 1997, between Registrant and City National Bank, and Second Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated July 23, 1997, between Registrant and City National Bank. 10.8 Employment Agreement between the Registrant and Bernard Weiss.* 10.9 Employment Agreement between the Registrant and Julie Heldman.* 10.10 Employment Agreement between the Registrant and Michael Prince.* 10.11 Employment Agreement between the Registrant and Robert Fried.* 10.12 Employment Agreement between the Registrant and Robert Zeichick.* 23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion filed as Exhibit 5.1 hereto).* 23.2 Consent of Altschuler, Melvoin and Glasser LLP. 24.1 Power of Attorney (included on signature page).# 27.1 Financial Data Schedule. 99.1 Schedule II--Valuation and Qualifying Accounts.#
- -------- * To be filed by Amendment. + Confidential treatment requested. # Previously filed. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (a) To provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, II-3 the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, ON JULY 31, 1997. Signature Eyewear, Inc. /s/ Julie Heldman By: _________________________________ JULIE HELDMAN, CO-CHAIRMAN OF THE BOARD AND PRESIDENT PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED. SIGNATURE TITLE DATE Co-Chairman of the * Board and Chief July 31, 1997 - ------------------------------------- Executive Officer BERNARD WEISS /s/ Julie Heldman Co-Chairman of the - ------------------------------------- Board and President July 31, 1997 JULIE HELDMAN Chief Financial * Officer and July 31, 1997 - ------------------------------------- Director (Principal MICHAEL PRINCE Financial and Accounting Officer) * Director July 31, 1997 - ------------------------------------- DANIEL WARREN *By /s/ Julie Heldman - ------------------------------------- his attorney-in-fact II-5 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1 Form of Underwriting Agreement. 1.2 Form of Representatives' Warrant. 3.1 Restated Articles of Incorporation of Registrant.# 3.2 Amended and Restated Bylaws of Registrant.# 4.1 Specimen Stock Certificate of Common Stock of Registrant. 5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP* 10.1 1997 Stock Plan.# 10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).# 10.3 Form of Indemnification Agreement for Directors and Officers.# 10.4 Tax Indemnification Agreement among Registrant and the Existing Shareholders.* 10.5 License Agreement, dated May 28, 1991, between Laura Ashley Manufacturing B.V. and Registrant, as amended.+# 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.# 10.7 Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated April 21, 1997, between Registrant and City National Bank,# First Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated June 26, 1997, between Registrant and City National Bank, and Second Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement, dated July 23, 1997, between Registrant and City National Bank. 10.8 Employment Agreement between the Registrant and Bernard Weiss.* 10.9 Employment Agreement between the Registrant and Julie Heldman.* 10.10 Employment Agreement between the Registrant and Michael Prince.* 10.11 Employment Agreement between the Registrant and Robert Fried.* 10.12 Employment Agreement between the Registrant and Robert Zeichick.* 23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion filed as Exhibit 5.1 hereto).* 23.2 Consent of Altschuler, Melvoin and Glasser LLP. 24.1 Power of Attorney (included on signature page).# 27.1 Financial Data Schedule. 99.1 Schedule II--Valuation and Qualifying Accounts.#
- -------- * To be filed by Amendment. + Confidential treatment requested. # Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1,800,000 SHARES OF COMMON STOCK* SIGNATURE EYEWEAR, INC. UNDERWRITING AGREEMENT ---------------------- August ___, 1997 FECHTOR, DETWILER & CO., INC. VAN KASPER & COMPANY C/o Fechtor, Detwiler & Co., Inc. 155 Federal Street Boston, MA 02110 as Representatives of the several Underwriters named in Schedule I attached hereto. Ladies and Gentlemen: The undersigned, Signature Eyewear, Inc., a California corporation (the "Company"), hereby confirms its agreement with you (the "Representatives") and - -------- --------------- the other underwriters named in Schedule I hereto (the Representatives and the other underwriters being herein collectively referred to as the "Underwriters") ------------ as follows: 1. General. Subject to the terms and conditions stated herein, the ------- Company proposes to issue and sell to the Underwriters 1,600,000 shares of common stock, $.001 par value per share, of the Company (the "Common Stock"), ------------ and the stockholders of the Company named in Schedule II attached hereto (the "Selling Stockholders") propose to sell to the Underwriters an aggregate of - --------------------- 200,000 shares of the Common Stock. In addition, solely for the purpose of covering over-allotments, if any, the Company and Selling Stockholders propose to grant the Underwriters the option to purchase up to an additional 270,000 Shares. The Company also proposes to grant to the Representatives Warrants to purchase 180,000 additional shares (the "Representatives' Warrants") of Common Stock on the terms and for the purposes set forth in Section 4(g) hereof. The aggregate 1,800,000 shares of the Common Stock to be sold by the Company and the Selling Stockholders are herein called the "Firm Shares" and the aggregate ----------- 270,000 additional shares of the Common Stock to be sold by the Company and the Selling - ----------------------------- * PLUS AN OPTION TO PURCHASE FROM THE COMPANY AND SELLING STOCKHOLDERS UP TO 270,000 ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS. Stockholders for the purpose of covering over-allotments, if any, are herein called the "Additional Shares".The Firm Shares, the Additional Shares and the ----------------- share of Common Stock issuable upon exercise of the Representatives' Warrants are together called the "Shares".The Shares and the Common Stock are more fully ------ described in the Prospectus referred to below. Bernard Weiss and Julie Heldman, whom are indirectly included within the Selling Stockholders, are sometimes collectively referred to herein as the "Founding Stockholders". 2. Representations and Warranties of the Company. The Company and the --------------------------------------------- Founding Stockholders, jointly and severally, represent and warrant to, and agree with, the several Underwriters that: (a) SEC Filing. The Company has filed with the Securities and ---------- Exchange Commission (the "Commission") a registration statement, and may have ---------- filed one or more amendments thereto, on Form S-1 (Registration No. 333-30017), including in such registration statement and each such amendment a related preliminary prospectus, for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"). As used in this Agreement, the term --- "Registration Statement" means such registration statement, as amended, on file - ----------------------- with the Commission at the time such registration statement becomes effective under the Act (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof), provided, however, that such ----------------- registration statement, at the time it becomes effective under the Act, may omit such information as is permitted to be omitted from such registration statement when it becomes effective under the Act pursuant to Rule 430A of the General Rules and Regulations of the Commission promulgated under the Act (the "Regulations"), which information (the "Rule 430A Information") shall be deemed - ------------ --------------------- to be included in such registration statement when a final prospectus is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the term "Preliminary Prospectus" means each Prospectus included in ---------------------- the Registration Statement, or any amendments thereto, before the Registration Statement becomes effective under the Act, the form of prospectus omitting the Rule 430A Information included in the Registration Statement when the Registration Statement becomes effective under the Act, if applicable (the "Rule ---- 430A Prospectus"), and any prospectus filed by the Company with your consent - --------------- pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the ---------- final prospectus included as part of the Registration Statement in the form first filed with the Commission pursuant to Rule 424(b)(1) or (4) of the Regulations or, if no such filing is required, the final form of the prospectus forming a part of the Registration Statement. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of the foregoing, shall be deemed to include the respective copies thereof filed with the Commission pursuant to the Commission's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). ----- (b) Completeness. When the Registration Statement becomes or ------------ became effective under the Act, and at all times subsequent thereto, to and including the Closing Date (as defined in Section 4) and each Additional Closing Date (as defined in Section 4), and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective 2 amendment thereto shall become effective under the Act, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations in all material respects, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading (or, in the case of the Prospectus, will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading), and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is contemplated at the time the Registration Statement becomes effective under the Act, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) of the Regulations will contain all Rule 430A Information and all statements which are required to be stated therein in accordance with the Act or the Regulations, will comply with the Act and the Regulations in all material respects, and will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and each Preliminary Prospectus, as of the date filed with the Commission, contained all statements required to be stated therein in accordance with the Act and the Regulations, complied with the Act and the Regulations in all material respects, and did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation or warranty is made in this Section 2(b), however, with respect to statements or omissions from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto made in reliance upon, and in conformity with, written information furnished to the Company as stated in Section 9(d) with respect to any Underwriter expressly for inclusion in the Registration Statement, the Prospectus, or any related Preliminary Prospectus, or any amendment or supplement thereto. (c) Stop Orders. Neither the Commission nor the "blue sky" or ----------- securities authority of any jurisdiction has issued an order (a "Stop Order") ---------- suspending the effectiveness of the Registration Statement, or preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, or refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Shares, nor to the knowledge of the Company has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (d) Descriptions. Any contract, agreement, instrument, lease, ------------ license, certification or permit or other arrangement, whether written or oral, required by the Act or the Regulations to be described in the Registration Statement or the Prospectus has been properly described as required therein. Any contract, agreement, instrument, lease, license, certification, permit or other arrangement required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to the Registration Statement. The statements in the Registration Statement or the Prospectus summarizing the provisions of laws, rules, 3 regulations, contracts, leases and other arrangements, whether written or oral, including, without limitation, the statements set forth under the captions "Risk Factors -- Substantial Dependence Upon Laura Ashley License," "-- Approval Requirements of Brand-Name Licensors," "--Limitations on Ability to Distribute Other Brand-Name Eyeglass Frames," "--Relationships with Domestic Distributions," "Business --Products," "Certain Relationships and Related Transactions" and "Shares Eligible for Future Sale" are accurate in all material respects and do not omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. To the Company's knowledge, there are no proposed amendments or additions to any such provisions of laws, rules, regulations, contracts, leases or other arrangements. (e) Corporate Governance. The Company is a corporation duty -------------------- organized, validly existing and in good standing under the laws of the state of its incorporation, with full power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with all federal, state, local and other governmental authorities and all courts and other tribunals (collectively, the "Consents"), to own, lease, license and use its properties and assets and to - --------- conduct its business in the manner described in the Prospectus, except where the failure to obtain such Consents would not have a material adverse effect on the Company. The Company is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which its ownership, leasing, licensing or use of property and assets or the conduct of its business makes such qualification necessary, except where the failure to be so qualified would not have a material adverse effect upon the Company. (f) Capitalization. The authorized capital stock of the Company -------------- consists of 30,000,000 shares of Common Stock, of which 3,600,527 shares are outstanding, and 5,000,000 shares of Preferred Stock, $.001 par value, of which there are no shares outstanding. Each outstanding share of capital stock of the Company is validly authorized and issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive or other similar rights of stockholders. There is no commitment, plan or arrangement to issue, and no outstanding option, warrant or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as described in the Prospectus. Except as set forth in the Prospectus, there is outstanding no security or other instrument which by its terms is convertible into, or exchangeable for, capital stock of the Company. The certificates evidencing the Common Stock are in due and proper form. (g) Financial Statements. The financial statements of the Company -------------------- (including the notes thereto and the supporting schedules) included in the Registration Statement and the Prospectus (collectively, the "Financial --------- Statements") fairly present, with respect to the Company, the financial - ---------- position, the results of operations, the cash flows, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and are in accordance 4 with the books and records of the Company. Altschuler, Melvoin and Glasser LLP, the accountants ("Accountants") whose report on the audited financial statements ----------- is filed with the Commission as a part of the Registration Statement, are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations. No other financial statements are required by Form S-1 or otherwise to be included in the Registration Statement or the Prospectus. The assumptions used in preparing the "As adjusted" financial information included in the Prospectus under the caption "Capitalization" are reasonable. The selected and summary financial and statistical data appearing in the Prospectus, including without limitation, under the captions "Summary Financial Data", "Dilution" and "Selected Financial Data" presents fairly the information purported to be shown therein, on the basis stated in the Prospectus as of the dates and for the periods indicated. ` (h) Litigation. Except as disclosed in the Prospectus, there is no ---------- litigation, arbitration, claim, governmental or other proceeding (formal or informal) or investigation pending or, to the knowledge of the Company, threatened, or any basis therefor known to the Company, with respect to the Company or any of its operations, businesses, properties or assets. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment or decree of any agency or body of the United States or of any state, county or locality, except such as individually or in the aggregate do not now have, and will not in the future have, a material adverse effect upon the financial condition, operations, business, properties or assets of the Company; nor is the Company required to take any action in order to avoid any such violation or default of any order, judgment or decree. (i) Properties. The Company has (i) good and marketable title in ---------- fee simple absolute to all real properties, and good title to all other material properties and assets, which the Prospectus indicates are owned by it, free and clear of all liens, claims, security interests, pledges, charges, encumbrances and mortgages, except as described in the Prospectus, and (ii) valid, subsisting and enforceable leases for the property described in the Prospectus as leased by it. No real property owned, leased, licensed or used by the Company lies in an area which is, or to the knowledge of the Company after due inquiry will be, subject to zoning, use or building code restrictions which would prevent the continued effective ownership, leasing, licensing or use of such real property in the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting. (j) Compliance. Neither the Company nor, to the knowledge of the ---------- Company after due inquiry, any other party, is now or is expected to be in violation or breach of, or in default with respect to, any material provision of any material contract, agreement, instrument, lease, license, arrangement or understanding to which the Company is a party or by which its properties or assets may be bound, and each such contract, agreement, instrument, lease, license, arrangement and understanding is in full force and effect and is the legal, valid and binding obligation of the Company and is enforceable as to the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights generally, by equitable principles and applicable laws governing indemnification and contribution provisions. The Company enjoys peaceful and 5 undisturbed possession under all leases and licenses under which it is operating. The Company is not a party to, nor bound by, any contract, agreement, instrument, lease, license, arrangement or understanding, whether written or oral, or subject to any charter or other restriction, which has had, or is expected to have, individually or in the aggregate, a material adverse effect on the financial condition, operations, business, properties, assets, liabilities or future prospects of the Company (a "Material Adverse Effect"). The Company is ----------------------- not in violation or breach of, or in default with respect to, any term of its Articles of Incorporation or By-Laws. (k) Trademarks, Licenses. All trademarks, trademark applications, -------------------- trade names, service marks, copyrights, franchises, licenses, and other intangible properties and assets (all of the foregoing being herein called "Intangibles") that the Company owns or has pending, or under which it is - ------------ licensed, which are material to its business are in good standing and, to the knowledge of the Company after due inquiry, uncontested. There is no right under any Intangible necessary to the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting, except as described in the Prospectus. To the knowledge of the Company, the Company has not infringed, is not infringing, or has not received notice of infringement or conflict with respect to asserted Intangibles of others. To the knowledge of the Company, there is no infringement by others which has had, or is expected to have, individually or in the aggregate, a Material Adverse Effect. (l) Insurance. The Company is insured by insurers of recognized --------- financial responsibility against such losses and risks and in such amounts as are, in the opinion of the Company's management, customary and adequate for the businesses in which it is engaged, including, but not limited to, general liability insurance and insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by any company that is comparable to the Company in terms of its financial condition, all of which insurance is in full force and effect. The Company has no reason to believe that it will not be able to renew existing insurance coverage with respect to the Company as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not now have, individually or in the aggregate, a Material Adverse Effect. (m) Contributions; Payments. Neither the Company nor any director, ----------------------- officer, agent, employee or other person associated with, or acting on behalf of, the Company has, directly or indirectly at any time since the inception of the Company: used any Company funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from Company funds; violated any provision of the Foreign Corrupt Practices Act of 1977 (the "FCPA"), as amended; or made any unlawful payment. The Company's internal ---- accounting controls and procedures are sufficient to cause the Company to comply in all respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the FCPA. - ------------- (n) Corporate Authority. The Company has all requisite power and ------------------- authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated 6 hereby, including but not limited to, the power and authority to issue, sell and deliver the Shares being delivered by the Company in accordance with and upon the terms set forth in this Agreement. All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery, and performance of this Agreement by the Company and to consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company, is the legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights generally, by equitable principles and applicable laws governing indemnification and contribution provisions. No consent, authorization, approval, order, registration, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local or other governmental or regulatory authority or any court or other tribunal is required for the execution, delivery or performance by the Company of this Agreement or the consummation of the transactions contemplated hereby (including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company), except filings under the Act which have been or will be made before the Closing Date and such consents consisting only of consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement. No consent of any party to any contract, agreement, instrument, lease, license, arrangement or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby except such as have been obtained. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not: (i) violate, result in a breach of any of the terms and provisions of, conflict with, result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company pursuant to the terms of, or, with or without the giving of notice of the passage of time or both, entitle any party to terminate or call a default under, any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party or by which its properties or assets may be bound; (ii) violate, result in a breach of, or conflict with, any term of the Articles of Incorporation or By-Laws of the Company; or (iii) violate, result in a breach of, or conflict with, any law, rule, regulation, order, judgment or decree of any court or any public, governmental or regulatory authority having jurisdiction over the Company or any of its operations, businesses, properties or assets. (o) Issuance of Shares. The Shares are validly authorized and, ------------------ when issued, delivered and sold in accordance with this Agreement, will be validly issued and outstanding, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof and will not have been issued in violation of or subject to any preemptive or similar rights of shareholders to subscribe for or to purchase such Shares. The Underwriters will receive good and valid title to the Shares purchased from the Company, free and clear of liens, claims, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts and other defects in title. The Shares and the Common Stock conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (p) Recent Events. Subsequent to the respective dates as of which ------------- information is given in the Registration Statement and the Prospectus, and except as may otherwise be 7 properly described in the Prospectus, the Company has not (i) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (ii) entered into any transaction not in the ordinary course of business, (iii) declared or paid any dividend on its capital stock, (iv) experienced any adverse change or any development which is expected to have a Material Adverse Effect, or (v) made any change in its capital stock or made any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company. (q) Stabilization. Neither the Company nor any of its officers, ------------- directors or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company or to facilitate the sale or resale of any of the Shares. (r) Lock-Up Agreements. The Company has obtained from each of its ------------------ directors and executive officers (as defined in the Regulations), and from each other person who beneficially owns shares of Common Stock (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for, shares of Common Stock), his, her or its enforceable written agreement, in form attached hereto as Appendix A (the "Lock-Up Agreement") that ---------- ----------------- he, she or it will not, for a period of one year after the date of the Prospectus, without the prior written consent of Fechtor, Detwiler & Co., Inc. ("Fechtor Detwiler") indirectly, offer to sell, sell, hypothecate, contract to ---------------- sell, grant any option to purchase, or otherwise dispose of (collectively, "transfer"), any shares of Common Stock beneficially owned as of the date such lockup agreement is executed (including, without limitation, shares of Common Stock which may be deemed to be beneficially owned in accordance with the Rules and Regulations and shares of Common Stock which may be issued upon exercise of a stock option or warrant) or any securities convertible into or exercisable or exchangeable for such Common Stock except (i) pursuant to a bona fide gift to any person or other entity which agrees in writing to be bound by this restriction; (ii) in connection with a merger of the Company or a tender offer made to all of the Company's stockholders for control of the then outstanding shares of Common Stock; and (iii) after a period of 180 days from the date of this Prospectus, in an amount not in excess of 104,000 shares of Common Stock in the aggregate. (s) Investment Company Act. The Company is not, and does not ---------------------- intend to conduct its business in a manner in which it would become, an investment company as defined in Section 3(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act"). ---------------------- (t) Registration Rights. Except as described in the Prospectus, no ------------------- person or entity has the right to require registration of shares of Common Stock or other securities of the Company. (u) Finders. Except as described in the Prospectus, the Company ------- has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. 8 (v) Environmental Matters. The Company is (i) in compliance with --------------------- any and all applicable federal, state and local environmental laws, rules, regulations, treaties, statutes and codes promulgated by all governmental authorities relating to the protection of human health and safety, the environment or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other - -------------------- approvals required of it under applicable Environmental Laws to conduct its business, and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, have a Material Adverse Effect. No action, proceeding, revocation proceeding, writ, injunction or claim is pending or, to the Company's knowledge, threatened (nor, to the Company's knowledge, is there any basis therefor) relating to the Environmental Laws or to the Company's activities involving Hazardous Materials. "Hazardous Materials" means any material or substance (i) that is prohibited or regulated by any Environmental Law, or (ii) that has been designated or regulated by any governmental authority as radioactive, toxic, hazardous or otherwise a danger to health, reproduction or the environment. There has been no costs or liabilities, to the Company's knowledge after due inquiry, associated with the effect of Environmental Laws on the business, operations, properties or assets of the Company that would, individually or in the aggregate, have a Material Adverse Effect. (w) NASD Affiliation. To the knowledge of the Company after due ---------------- inquiry, no officer, director or shareholder of the Company has any affiliation or association with the National Association of Securities Dealers, Inc. (the "NASD") or any member thereof, except as described in the Prospectus. - ----- (x) Taxes. The Company has filed all necessary federal, state, ----- local and foreign income, franchise and other tax returns and other reports required to be filed and has paid all taxes shown as due thereon; and there is no tax deficiency which has been, or, to the knowledge of the Company might be, asserted against the Company. (y) Distribution of Prospectus. The Company has not distributed -------------------------- and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares, other than the Preliminary Prospectus or the Prospectus or other materials permitted by the Act and the Regulations to be distributed. (z) Cuba. The Company confirms as of the date hereof that it is in ---- compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of doing Business with Cuba, and the Company - --------------------------------------------------------- further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, ---------- or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any 9 material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (aa) Labor. The Company is not involved in any labor dispute or ----- disturbance nor, to the knowledge of the Company, is any such dispute or disturbance threatened; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers, customers or contractors which, in either case may reasonably be expected to result in a Material Adverse Effect. (bb) NASDAQ Qualification. The Common Stock is registered pursuant -------------------- to Section 12(g) of the Exchange Act. The Shares have been duly authorized for quotation on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System ("Nasdaq National Market"). The Company ---------------------- has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the Commission or the Nasdaq National Market is contemplating terminating such registration or listing. (cc) ERISA. Except as disclosed in the Prospectus, the Company does ----- not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute ----- ----------- now, or at any time previously maintained or contributed, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code, which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. The Company has not ever completely or partially withdrawn from a "multiemployer plan." 3. Representations and Warranties of the Selling Stockholders. Each of ---------------------------------------------------------- the Selling Stockholders, severally and not jointly, represents and warrants to, and agrees with, the several Underwriters and the Company that: (a) Authority. All consents, approvals, authorizations and orders --------- necessary for the execution and delivery by such Selling Stockholder of this Agreement and the Power-of-Attorney (the "Power-of-Attorney") and the Custody ----------------- Agreement (the "Custody Agreement") hereinafter referred to, and for the sale ----------------- and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been obtained; and such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power-of-Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder. 10 (b) Execution and Delivery. This Agreement, the Power-of-Attorney ---------------------- and the Custody Agreement have each been duly authorized, executed and delivered by such Selling Stockholder and each such document constitutes a valid and binding obligation of such Selling Stockholder in accordance with its terms. (c) Consents. No consent, approval, authorization, order, -------- registration or qualification of or with any court or governmental body is required in connection with the sale of Shares by such Selling Stockholder or the consummation by such Selling Stockholder of the transactions contemplated by this Agreement, the Power-of-Attorney and the Custody Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, resignations, or qualification as may be required under the state securities or "blue sky" laws or the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters. (d) No Conflict. The sale of the Shares to be sold by such Selling ----------- Stockholder hereunder and the compliance by such Selling Stockholder with all applicable provisions of this Agreement, the Power-of-Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach of violation of any of the terms or provisions of, or constitute a default under, any statute, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or to which such Selling Stockholder is subject, nor will such action result in any violation of the provisions of the charter documents or by-laws of such Selling Stockholder if such Selling Stockholder is a corporation, the organization documents of such Selling Stockholder if such Selling Stockholder is another form of entity or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder; (e) Title to Shares. Such Selling Stockholder has, and immediately --------------- prior to the Closing Date and each Additional Closing Date such Selling Stockholder will have, good and valid title to the Shares to be sold by such Selling Stockholder hereunder at the Closing Date or Additional Closing Date, as the case may be, free and clear of all liens, claims, security interests, pledges, charges, encumbrances, stockholders' agreements, voting trusts and other defects in title; and, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, claims, security interests, pledges, charges, encumbrances, stockholders' agreements, voting trusts and other defects in title will pass to each of the several Underwriters; (f) Stabilization. Neither such Selling Stockholder nor any of ------------- such Selling Stockholder's affiliates (as defined in the Act and the Exchange Act) has taken nor will take, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company or to facilitate the sale or resale of any of the Shares; and 11 (g) No Omissions or Misstatements. To the extent that any ----------------------------- statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, each of the Selling Stockholders agrees to deliver to you prior to or on the Closing Date a properly completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). Each of the Selling Stockholders represents and warrants that certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you, duly executed and delivered by such Selling Stockholder, to ___________________, as custodian (the "Custodian"), and --------- that such Selling Stockholder has duly executed and delivered a Power-of- Attorney, in the form heretofore furnished to you, appointing ________________ or ___________, and each of them, as such Selling Stockholder's attorneys-in- fact (the "Attorneys-in-Fact") with authority to execute and deliver this ----------------- Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided in Section 4 hereof, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. Each of the Selling Stockholders specifically agrees that the Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and that the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Attorneys-in- Fact by the Power-of-Attorney, are to that extent irrevocable. Each of the Selling Stockholders specifically agrees that his or its obligations hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Stockholder or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a corporation or other entity, by the dissolution of such corporation or other entity, or by the occurrence of any other event. If any individual Selling Stockholder or any such executor or trustee should die or become incapacitated, or if any such estate or trustee should be terminated, or if any such partnership, corporation or other entity should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of 12 the Selling Stockholders in accordance with the terms and conditions of this Agreement and the Custody Agreements, and actions taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event. 4. Purchase, Sale, and Delivery of the Firm Shares, the Additional ---------------------------------------------------------------- Shares and the Representatives' Warrant. - --------------------------------------- (a) Firm Shares. On the basis of the representations, warranties, ----------- covenants and agreements of the Company and the Selling Stockholders herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agree to sell to the several Underwriters, and the Underwriters agree to purchase from the Company and each of the Selling Stockholders, the number of Firm Shares set forth opposite the respective names of the Underwriters in column (2) of Schedule II hereto. (b) Purchase Price. The purchase price per Firm Share to be paid -------------- by the several Underwriters shall be $_______. The initial public offering price per Firm Share shall be $______. (c) Payment for Firm Shares. Payment for the Firm Shares by the ----------------------- several Underwriters shall be made by wire transfer or by certified or official bank checks in New York Clearing House funds (or similar next day funds) payable to the order of the Company and each Selling Stockholder in the applicable amount at the offices of ________________________________________________, or at such other place as you shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the Firm Shares to you for the respective accounts of the Underwriters (the "Closing"). Such delivery and ------- payment shall be made at 10:00 A.M., Boston local time, on the fourth business day following the Effective Date (as defined in Section 12), unless postponed in accordance with the provisions of Section 10, or at such other time as shall be agreed upon between you and the Company. The time and date of such delivery and payment are herein called the "Closing Date". ------------ (d) Certificates. Certificates for the Firm Shares shall be ------------ registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Closing Date. The Company and the Selling Stockholders shall permit you to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (e) Over-allotment Shares. The Company and the Selling --------------------- Stockholders hereby grant to the several Underwriters the option to purchase all or a portion of the Additional Shares solely to cover over-allotments, if any, at the same purchase price per share to be paid by the several Underwriters to the Selling Stockholders for the Firm Shares as provided for in this Section 4. The Additional Shares shall be purchased by the several Underwriters from the Company and the Selling Stockholders as provided herein. This option may be exercised only to cover over-allotments in the sale of the Firm Shares by the several Underwriters. This option 13 may be exercised by the several Underwriters on the basis of the representations, warranties, covenants and agreements of the Company and the Selling Stockholders herein contained, but subject to the terms and conditions herein set forth, at any time and from time to time on or before the thirtieth day following the date on which the Registration Statement was declared effective under the Act, by written notice from the Representatives to the Company and the Selling Stockholders. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, the name or names in which the certificates for the Additional Shares are to be registered, the authorized denominations in which the Additional Shares are to be issued, and the time and date, as determined by the Representatives, when such Additional Shares are to be delivered (such time and date are herein called the "Additional Closing Date"); provided, however, that the Additional Closing ----------------------- ----------------- Date shall not be earlier than the Closing Date nor earlier than the second business day after the date on which the notice of the exercise of the option shall have been given nor later than the eighth business day after the date on which such notice shall have been given. If the over-allotment option is exercised with respect to fewer than all of the Additional Shares, it shall be exercised on a pro rata basis among the Company and the Selling Stockholders based on the number of Additional Shares that the Company and each Selling Stockholder intended to sell. The aggregate number of Additional Shares to be sold by the Company and the Selling Stockholders to the Underwriters shall be the number set forth in Schedule II. (f) Payment for Additional Shares. Payment for the Additional ----------------------------- Shares by the Underwriters shall be made by certified or official bank check in New York Clearing House funds (or similar next day funds) payable to the order of the Company and each Selling Stockholder at the offices of _____________________________ __________________ or at such other place as you shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the Additional Shares to you for the respective accounts of the Underwriters. (g) Representatives' Warrants. On the basis of the ------------------------- representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, upon the Closing Date the Company will sell to the Representatives, for a consideration of one mil ($.001) per warrant, 180,000 warrants. Each Warrant represents the right to purchase one (1) Share. The Representatives' Warrants and all underlying securities shall be registered in the Registration Statement. The exercise price of each Warrant is a price equal to 120% of the offering price to the public. The Representatives' Warrants shall be exercisable for a period of four years commencing one year after the Closing Date, and shall contain appropriate anti-dilution provisions. Such anti- dilution provisions shall include, without limitation, protection against dilution in both price and percentage of the Company if there is (a) any issuance of shares of common stock or other securities convertible into Common Stock as a dividend or (b) a subdivision or combination of the outstanding shares of Common Stock or other securities convertible into Common Stock as the result of a merger, consolidation, spin-off or otherwise. The Representatives' Warrants shall be in substantially the form filed as Exhibit 1.2 to the Registration Statement. 14 5. Offering. Upon your authorization of the release of the Firm Shares -------- and on or after the date the Registration Statement is declared effective under the Act, the several Underwriters propose to offer the Firm Shares to the public at the initial public offering price as provided for in Section 4(a) (such price being hereinafter called the "public offering price"). After the initial public --------------------- offering, you may from time to time increase or decrease the public offering price, in your sole discretion, by reason of changes in general market conditions or otherwise. 6. Covenants of the Company. The Company covenants and agrees with the ------------------------ several Underwriters that: (a) SEC Effectiveness. If the Registration Statement has not yet ----------------- been declared effective under the Act, the Company will use its best efforts to cause the Registration Statement to become effective under the Act as promptly as possible. If the Registration Statement has become or becomes effective under the Act with a form of prospectus omitting Rule 430A Information, or filing of the Prospectus is otherwise required under Rule 424(b) of the Regulations, the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) of the Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. (b) Stop Order. The Company will notify you immediately, and ---------- confirm such notice in writing, (i) when the Registration Statement and any post-effective amendment thereto becomes effective under the Act, (ii) the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post- effective amendment thereto, the Prospectus, or any amendment or supplement thereto, (iii) of the filing with the Commission of any supplement to the Prospectus, and (iv) the receipt of any notification with respect to a Stop Order or the initiation or threatening of any proceeding with respect to a Stop Order. The Company will use its best efforts to prevent the issuance of any Stop Order and, if any Stop Order is issued, to obtain the lifting thereof as promptly as possible. (c) Compliance. During the time when a prospectus relating to the ---------- Shares is required to be delivered under the Act or the Regulations, the Company will comply with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of, or dealings in, the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act or the Regulations, any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or counsel for the several Underwriters, the Registration Statement or the Prospectus as then amended or supplemented contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of either of such counsel, it is necessary at any time to amend or supplement the Registration Statement or the Prospectus to comply with the Act or the Regulations, the Company will immediately notify you and promptly prepare and file with the Commission an appropriate amendment or supplement (in form and substance 15 satisfactory to you) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any such amendment declared effective under the Act as soon as possible. After receipt of any such notice, you agree to promptly refrain from making any further offers or sales of the Common Stock pursuant to the Registration Statement until the Registration Statement is appropriately amended or supplemented. (d) Registration Statement; Prospectus. The Company will deliver ---------------------------------- without charge to each of the several Underwriters such number of copies of each Preliminary Prospectus as may reasonably be requested by the Underwriters and, as soon as the Registration Statement, or any amendment thereto, becomes effective under the Act or a supplement is filed with the Commission, deliver without charge to you two signed copies of the Registration Statement, including exhibits, or such amendment thereto, as the case may be, and two copies of any supplement thereto, and deliver without charge to each of the several Underwriters such number of copies of the Prospectus, the Registration Statement, and amendments and supplements thereto, if any, without exhibits, as you may request. To the extent applicable, the copies of the Registration Statement and each amendment thereto (including all exhibits filed therewith), any Preliminary Prospectus or Prospectus (in each case, as amended or supplemented) furnished to the Underwriters will be identical to the electronic copies filed with the Commission pursuant to EDGAR except to the extent permitted by Regulation S-T. (e) State Qualification. The Company will endeavor in good faith, ------------------- in cooperation with you, at or prior to the time the Registration Statement becomes effective under the Act, to qualify the Shares, to the extent required, for offering and sale under the "blue sky" or securities laws of such jurisdictions as you may designate and maintain such qualification in effect for so long as is required for the distribution of such Shares; provided, however, -------- ------- that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction to which it is not then subject. In each jurisdiction, where such qualification shall be effected, the Company will, unless you agree in writing that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. (f) Earnings Statement. The Company will make generally available ------------------ (within the meaning of Section 11(a) of the Act and the Regulations) to its security holders and to you as soon as practicable, but not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs under the Act, an earnings statements (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Section 11(a) of the Act and the Regulations) covering a period of least twelve months beginning after the date on which the Registration Statement was declared effective under the Act. (g) Additional Sales. For a period of 180 days after the date of ---------------- the Prospectus, the Company will not, without your prior written consent, directly or indirectly, register, offer, sell, offer to sell, contract to sell, hypothecate, pledge or otherwise dispose of any shares of Common Stock (or any security or other instrument which by its terms is convertible into, 16 exercisable for, or changeable for shares of Common Stock), except for the grant of stock options pursuant to the Company's Stock Option Plan and the issuance of Common Stock upon the exercise of such options, as described in the Prospectus. (h) Periodic Reports. For a period of five years after the date ---------------- the Registration Statement was declared effective under the Act, the Company will furnish you, without charge, the following: (i) within 90 days after the end of each fiscal year, three copies of financial statements certified by independent certified public accountants, including a balance sheet, statement of income and statement of cash flows of the Company and its then existing subsidiaries, if any, with supporting schedules, prepared in accordance with generally accepted accounting principles, as at the end of such fiscal year and for the 12 months then ended, which may be on a consolidated basis; (ii) as soon as practicable after they have been sent to stockholders of the Company or filed with the Commission or the Nasdaq National Market System (or a similar market), three copies of each annual, quarterly and interim financial and other report or communication sent by the Company to its shareholders or filed with, or furnished to, the Commission or the Nasdaq National Market System (or a similar market); to the extent applicable such reports or documents shall be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T; (iii) as soon as practicable, two copies of every press release issued by the Company in respect of the Company or its affairs; and (iv) such additional documents and information with respect to the Company and its affairs, and the affairs of its subsidiaries, if any, as you may from time to time reasonably request. (i) Use of Proceeds. The Company will apply the net proceeds --------------- received by it from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (j) Interim Financial Statements. The Company will furnish to ---------------------------- you as early as practicable prior to the Closing Date and the Additional Closing Date, if any, as the case may be, but no less than two full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company which, if such interim financial statements are included in the Registration Statement, shall have been reviewed by the Company's independent certified public accountants, as stated in their letters to be furnished pursuant to Section 8(h). (k) Amendments to Registration Statement. The Company will not ------------------------------------ file any amendment or supplement to the Registration Statement or Prospectus at any time, whether before or after the date on which the Registration Statement was declared effective under the Act, unless such filing shall comply with the Act and the Regulations in all material respects and unless you 17 shall previously have been advised of such filing and furnished with a copy thereof, and you and counsel for the Underwriters shall have approved such filing. Until the later of (i) the completion by you of the distribution of the Firm Shares and the Additional Shares (but in no event more than nine months after the date on which the Registration Statement shall have been declared effective under the Act), and (ii) 25 days after the date on which the Registration Statement shall have been declared effective under the Act, the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus which, in your reasonable opinion, may be necessary or advisable in connection with the distribution of the Firm Shares and the Additional Shares. (l) Exchange Act Requirements. The Company will comply, in a ------------------------- timely manner, with all registration, filing, and reporting requirements of the Exchange Act, which may from time to time be applicable to the Company. (m) Registration Statement Undertakings. The Company will comply ----------------------------------- with all provisions of all undertakings contained in the Registration Statement. (n) Publicity. Prior to the Closing Date or the Additional Closing --------- Date, as the case may be, the Company will not issue any press release or other communication, directly or indirectly, or hold any press conference with respect to the Company, the financial condition, results of operations, business. properties, assets or liabilities thereof, or this offering, without your prior written consent, which consent will not be unreasonably withheld. (o) Exchange Act Registration. The Company will file timely with ------------------------- the Commission an appropriate form to register the Common Stock pursuant to Section 12(b) or 12(g) under the Exchange Act. (p) Form SR. The Company will file timely with the Commission ------- accurate reports on Form SR in accordance with Rule 463 of the Regulations or any successor provision. (q) NASDAQ National Market. The Company will use its best efforts ---------------------- to complete and maintain, for a period of five (5) years from the effective date of the Registration Statement, the listing of the Shares and the Common Stock underlying the options issued under the stock option plans and the Representatives' Warrants on the Nasdaq National Market System or upon another national securities exchange. (r) Closing Binders. The Company will deliver to you, without --------------- charge, within a reasonable period after the Additional Closing Date or the expiration of the period in which the Underwriters may exercise the over- allotment option (but in no event later than six (6) months from the date of the Prospectus), such bound volumes of the Registration Statement and all related materials as you may reasonably request. (s) Stock Transfer Information. For a period of three years after -------------------------- the date on which the Registration Statement is declared effective under the Act, the Company will provide 18 to you, on a confidential basis and at its sole expense, copies of the Company's daily transfer sheets, if so requested by you. (t) Lock-Up Agreements. The Company will execute a letter ------------------ addressed to the transfer agent for the Company which instructs the transfer agent to note stop transfer instructions with respect to all of the shares of Common Stock which are subject to Lock-Up Agreements. Prior to or simultaneously with the execution and delivery of this Agreement, the Company will obtain a Lock-Up Agreement from each of the Company's stockholders, executive officers and directors. Each such person or entity shall also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of shares of Common Stock held by such person or entity, except in compliance with the foregoing restriction. (u) Other Matters. The Company will do and perform all things ------------- reasonably required or necessary to be done and performed under this Agreement by it prior to the Closing Date and the Additional Closing Date and to satisfy all conditions precedent to the delivery of the Shares. (v) Board of Directors. At its option, Fechtor Detwiler, following ------------------ the Closing Date and for a period of three (3) years thereafter, may designate a representative to serve on the Company's Board of Directors, and the Company will use its best efforts to cause such designee to be elected to the Board. Alternatively, a representative of Fechtor Detwiler shall be entitled to notice of, to attend as an observer, and to participate in the discussion (but not vote) at all meetings of the Company's Board of Directors; provided, however, that the Company may exclude such observer from portions of any meeting relating to: (i) any matter between the Company and Fechtor Detwiler and (ii) any claim or potential claim by any third party, or matter which may result in a claim or potential claim by a third party, which is to be discussed with Company counsel and with respect to which counsel advises the Board that the presence of such observer could result in a loss of the attorney-client privilege. The Company will reimburse Fechtor Detwiler's designee, whether a director or observer, for all reasonable out-of-pocket travel, lodging, meal and ancillary expenses incurred in attendance at any Board meeting. (w) Employment Agreements. At the Closing Date, the Company will --------------------- be a party to employment agreements with each of Bernard Weiss, Julie Heldman, Michael Prince, Robert Fried and Robert Zeichick on terms that are satisfactory to the Representatives. (x) Future Transactions; Rights of First Refusal. Following the -------------------------------------------- Closing Date and for a period of three (3) years thereafter, Fechtor Detwiler shall have a right of first refusal to provide investment banking or brokerage services with respect to: (i) any public or private offering of securities (including without limitation, debt, equity and convertible instruments) of the Company, (ii) any merger, reorganization, recapitalization, sale, license or other disposition of all or substantially all of the assets of the Company or any acquisition of assets or securities of another (other than in the ordinary course of business) or similar type of transaction, or (iii) any other type of transaction for which the Company desires to engage the services of an investment banker or brokerage firm (collectively, a "Covered Transaction"). In the event that the Company desires to undertake a Covered Transaction it shall first provide written notice of 19 the proposed Covered Transaction, which notice shall describe in reasonable detail the material terms of such Covered Transaction, including without limitation, the proposed terms of compensation of Fechtor Detwiler for its services with respect to the Covered Transaction. Fechtor Detwiler shall have thirty (30) days from receipt of such notice to notify the Company whether it intends to participate in the Covered Transaction. The Company shall promptly comply with all reasonable requests and inquiries for additional information with respect to the Covered Transaction. In the event Fechtor Detwiler does not elect to participate in the Covered Transaction, then the Company may engage the services of another investment banking or brokerage firm for such purposes; provided, however, that (i) the terms of such engagement are no more favorable than those offered to Fechtor Detwiler, (ii) the terms of the proposed Covered Transaction do not materially change from the terms described in the Company's notice to Fechtor Detwiler, and (iii) both the engagement of any such other investment banking or brokerage firm and the commencement of the Covered Transaction occur within six (6) months of the date after which Fechtor Detwiler elected not to participate in such Covered Transaction. (y) Public Relations Firm. Following the Closing Date and for a --------------------- period of (2) two years thereafter, the Company agrees to engage a financial public relations firm that is reasonably acceptable to Fechtor Detwiler. (z) Minimum Shareholder Equity. On the Closing Date, without -------------------------- giving effect to the proceeds from the sale of the Shares, the Company shall have Shareholders' Equity of at least Two Million Dollars ($2,000,000). 7. Payment of Expenses. -------------------- (a) Expenses of the Offering. Whether or not the transactions ------------------------- contemplated in this Agreement are consummated or this Agreement is terminated, the Underwriters hereby agree with the Company that they will bear all of their expenses incurred in connection with syndication and the Company hereby agrees with the several Underwriters that it will pay all other costs and expenses (other than fees of counsel for the Underwriters, except as provided in Section 12(e)) in connection with the sale of the Shares, including (a) the preparation, printing, filing, distribution and mailing of the Registration Statement, as originally filed and all amendments, and the Prospectus and the printing, filing, distribution and mailing of this Agreement, any selected dealers agreement and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and. any amendments or supplements thereto supplied to you in quantities as stated in this Agreement, (b) the issuance, sale, transfer and delivery of the Shares, including any transfer or other taxes payable thereon, (c) the qualification of the Shares under state or foreign "blue sky"or securities laws, including the costs of printing and mailing the preliminary and final "Blue Sky Survey" and the fees of counsel for the Underwriters and its disbursements in connection therewith, (d) the filing fees payable to the Commission, the NASD and the jurisdictions in which such qualification is sought, (e) any fees relating to the listing (and maintaining the listing) of the Shares on the Nasdaq National Market System, (f) the fees of the transfer agent for the Shares, (g) the cost of printing certificates representing the Shares, (h) the cost and charges of any meetings with prospective investors in the Shares, and (i) all other costs and expenses incident to the performance of the 20 Company's obligations hereunder and not otherwise specifically provided for in this Section. Notwithstanding the foregoing, the Company and the Underwriters will bear their respective portions of all expenses associated with the "road show." (b) Underwriters' Expenses. Except as specifically provided in ---------------------- paragraph 7(a), the Company will reimburse the Underwriters for their accountable expenses (including without limitation, the fees and expenses of Underwriters' Counsel) incurred in connection with reviewing the Registration Statement and the Prospectus and in otherwise investigating, preparing to market or marketing the Shares; provided, however, that the Company's obligations under this paragraph 7(b) shall not exceed $135,000 in the aggregate. 8. Conditions of Underwriters' Obligations. The obligations of the --------------------------------------- several Underwriters to purchase and pay for the Shares, as provided herein, shall be subject, in your discretion, to the continuing accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein and in each certificate and document contemplated under this Agreement to be delivered to you, as of the date hereof and as of the Closing Date (or the Additional Closing Date, as the case may be), to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following conditions: (a) SEC Effectiveness. The Registration Statement shall have become ----------------- effective under the Act, and no stop order suspending the effectiveness the Registration Statement or any part thereof shall have issued and no proceeding for that purpose shall have been initiated or threatened by the Commission. (b) Opinion of Company Counsel. You shall have received, at no -------------------------- cost to you, on the Closing Date and on any later Additional Closing Date, as the case may be, the opinion of Troop Meisinger Steuber & Pasich, LLP, corporate counsel to the Company, dated the Closing Date or such later Additional Closing Date, in the form attached hereto on Appendix B addressed to the Underwriters. ---------- (c) Selling Stockholder Opinion. The Selling Stockholders shall --------------------------- have furnished to you, the opinion of Troop Meisinger Steuber & Pasich, LLP counsel for the Selling Stockholders, dated the Closing Date or such later Additional Closing Date, in the form attached hereto on Appendix C, addressed to ---------- the Underwriter. (d) Opinion of Underwriters' Counsel. You shall have received from -------------------------------- Proskauer Rose LLP, Underwriters' Counsel, an opinion or opinions, dated the Closing Date or on any later Additional Closing Date, as the case may be, in form and substance reasonably satisfactory to you, with respect to the sufficiency of all corporate proceedings undertaken by the Company and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as it may have reasonably requested for the purpose of enabling it to pass upon such matters. (e) Other Documents. On or prior to the Closing Date and the --------------- Additional Closing Date, as the case may be, you shall have been furnished such additional information, 21 documents, certificates and opinions as you may reasonably require for the purpose of enabling you to review the matters referred to in Section 8(b) and in order to evidence the accuracy, completeness, or satisfaction of any of the representations, warranties, covenants, agreements, or conditions herein contained, or as you may reasonably request. (f) Conformity of Registration Statement. At the Closing Date or the ------------------------------------ Additional Closing Date, as the case may be, (i) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Regulations, and in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) there shall have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, no material adverse change, or any development involving a prospective material adverse change, in the business, properties, or condition (financial or otherwise), results of operations, capital stock, long-term or short-term debt, or general affairs of the Company from that set forth in the Registration Statement and the Prospectus, except changes which the Registration Statement and the Prospectus indicate might occur after the date on which the Registration Statement becomes effective under the Act, and the Company shall not have incurred any material liabilities or entered into any agreements not in the ordinary course of business, other than as referred to in the Registration Statement and the Prospectus, (iii) except as set forth in the Prospectus, no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation shall be pending, threatened, or in prospect (or any basis therefor) with respect to the Company or any of its operations, businesses, properties or assets which would be required to be set forth in the Registration Statement, and (iv) the Common Stock shall have been approved for listing on the Nasdaq National Market System. (g) Officer's Certificate. At the Closing Date and the Additional --------------------- Closing Date, as the case may be, you shall have received a certificate of the Company, executed by the President and the Chief Financial Officer of the Company, dated the Closing Date or such Additional Closing Date, as the case may be, to the effect that, among other things, (i) the conditions set forth in Sections 8(a) and 8(f) have been satisfied, (ii) as of the date of this Agreement and as of the Closing Date or such Additional Closing Date, as the case may be, the representations and warranties of the Company contained herein were and are accurate and correct in all material respects, and (iii) as of the Closing Date or such Additional Closing Date, as the case may be, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed. (h) Reasonable Satisfaction. All proceedings taken in connection ----------------------- with the issuance, sale, transfer and delivery of the Shares shall be reasonably satisfactory in form and substance to you and to counsel for the Underwriters. (i) Accountant's Comfort Letter. At the time this Agreement is --------------------------- executed and at the Closing Date and the Additional Closing Date, as the case may be, you shall have received 22 a letter from the Accountants dated the date of delivery, and addressed to the Underwriters, and in form and substance satisfactory to you: (i) confirming that they are, and during the period covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations and stating that the answer to Item 13 of the Registration Statement is correct insofar as it relates to them; (ii) stating that, in their opinion, the Financial Statements of the Company included in the Registration Statement and Prospectus and covered by their opinion therein comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) stating that, on the basis of procedures (but not an examination made in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes (and consents) of the stockholders and Board of Directors of the Company and committees of such Board of Directors, inquiries to certain officers and other employees of the Company responsible for financial and accounting matters, and other specified procedures and inquiries to a date not more than five (5) business days prior to the date of such letter, nothing has come to their attention that cause them to believe that: (A) the unaudited financial statements of the Company included in the Registration Statement and Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations under the Act of the Exchange Act or are not fairly presented in conformity with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any interim period may have been omitted in accordance with the applicable rules of the Commission under the Exchange Act) applied on a basis consistent with that of the audited financial statements appearing therein; (B) except as contemplated by the Prospectus, there was any change in the capital stock or increase in long-term debt of the Company or any decrease in the net current assets or shareholders' equity of the Company as of the date of the latest available monthly financial statements of the Company or as of a specified date not more than five (5) business days prior to the date of such letter, each as compared with the amounts shown in the March 31, 1997 balance sheet included in the Registration Statement and Prospectus or any change or decrease (which shall be set forth therein) which you, in your sole discretion, shall accept; or (C) there was any decrease in net sales or any decrease in net income or net income per share of Common Stock of the Company, during the period from March 31, 1997 to the date of the latest available monthly financial statements of the Company or to a specified date not more than five business days prior to the date of such letter, as compared with the corresponding period in 1996, other than as properly described in the Registration Statement and the Prospectus or any increase (which shall be set forth therein) which you, in your sole discretion, shall accept; and 23 (iv) stating that they have compared specific numerical data and financial information pertaining to the Company set forth in the Registration Statement, which have been specified by you prior to the date of this Agreement, to the extent that such data and information may be derived from the general accounting records of the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. (j) NASD Matters. The NASD, upon review of the terms of the public ------------ offering of the Shares, shall not have objected to the Underwriters' participation in such offering nor the terms of compensation of the Representatives. (k) Lock-Up Agreements. Prior to or on the Closing Date, the ------------------ Company shall have provided to you copies of the Lock-Up Agreements referred to in Section 2(r). Any certificate or other documents signed by any officer of the Company and delivered to the Representatives or to counsel to the Underwriters shall be deemed a representation and warranty by the Company hereunder to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be fulfilled by the Company prior to or at the Closing Date or any Additional Closing Date, as the case may be, is not so fulfilled, you may terminate this Agreement or, if you so elect, in writing waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 9. Indemnification and Contribution. -------------------------------- (a) By the Company and Founding Stockholders. The Company and the ---------------------------------------- Founding Stockholders, jointly and severally, agree to indemnify and hold harmless each Underwriter, its officers, directors, partners, employees, agents and counsel, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever (which shall include, for all purposes of this Section 9, but not limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever whether or not in connection with any litigation in which an indemnified party is a party and whether or not involving a third party claim and any and all amounts paid in settlement of any claim or litigation), joint or several, as to which they or any of them may be subject as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact or any omission or alleged commission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, contained in (A) the Registration Statement, any Preliminary Prospectus, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto or (B) any application or other document or communication (for purposes of this Section 9, collectively called an "application") executed by, or on behalf of, the Company or based upon ----------- written information furnished by, or on behalf of, the Company filed in any 24 jurisdiction in order to qualify the Shares under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company as stated in Section 9(b) by any Underwriter through you expressly for inclusion in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be, (ii) any breach of any representation, warranty, covenant or agreement of the Company or the Founding Stockholders contained in this Agreement, or (iii) any of the matters which were the subject of the Letter of Intent dated March 7, 1997, between the Company and Fechtor Detwiler. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Agreement. (b) By the Selling Stockholders. Each of the Selling Stockholders, --------------------------- severally and not jointly, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case to the extent that such statement or omission arises from or is based on information furnished by such Selling Stockholder for use in connection therewith, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with the investigating or defending any such action or claim as such expenses are incurred; provided, however, that (A) the Selling Stockholders shall not be -------- ------- liable to any Underwriter under the indemnity agreement of this subsection (a) with respect to any Preliminary Prospectus to the extent that any such loss, claim, damage or liability of such Underwriter results from the fact that such Underwriter sold Shares to a person as to whom it shall be established that there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus or of the Prospectus as then amended or supplemented in any case where such delivery is required by the Act if the Company has previously furnished copies thereof in sufficient quantity to such Underwriter and the loss, claim, damage or liability of such Underwriter results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus which was identified in writing at such time to such Underwriter and corrected in the Prospectus or in the Prospectus as amended or supplemented, and (B) the liability of each Selling Stockholder under the indemnity agreement in this Section 9(b) shall not exceed the product of (i) the purchase price paid by the Underwriters for the Shares and (ii) the number of Shares sold by such Selling Stockholder under this Agreement. (c) Notification and Procedure. If any action is brought against -------------------------- any Underwriter or any of its officers, directors, partners, employees, agents or counsel, or any controlling persons of any Underwriter (an "indemnified ----------- party") in respect of which indemnity may be sought against the Company or any - ----- of the Selling Stockholders pursuant to the foregoing paragraphs, such indemnified party or parties shall promptly notify the Company or such Selling 25 Stockholder, as the case may be, in writing of the institution of such action (but the failure to so notify, shall not relieve the Company or such Selling Stockholders from any liability it may have other than pursuant to this Section 9) and the Company or such Selling Stockholders shall promptly assume the defense of such action, including, without limitation, the employment of counsel satisfactory to such indemnified party or parties and payment of expenses. Notwithstanding the foregoing, such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties, unless (i) the employment of such counsel shall have been authorized in writing by the Company or such Selling Stockholder, as the case may be, in connection with the defense of such action, (ii) the Company or such Selling Stockholder, as the case may be, shall not have promptly employed counsel satisfactory to such indemnified party or parties to have charge of the defense of such action or within a reasonable time after notice of commencement of the action, or (iii) the indemnified party or parties shall have reasonably concluded that there are defenses available to it or them not available to the Company or Selling Stockholders, which counsel for the Company or Selling Stockholders would be precluded from asserting. Anything in this Section 9 to the contrary notwithstanding, the Company or such Selling Stockholder, as the case may be, shall not be liable for any settlement of any such claim or action effected without its written consent, which consent shall not be unreasonably withheld. The Company or such Selling Stockholder, as the case may be, shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought thereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company and each of the Selling Stockholders agrees promptly to notify the Representatives of the commencement of any litigation or proceedings against the Company, such Selling Stockholder or any of its officers or directors in connection with the sale of the Shares, the Registration Statement, any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or any application. (d) By the Underwriters. Each Underwriter, severally and not ------------------- jointly, agrees to indemnify and hold harmless the Company, each Selling Stockholder, each director of the Company, each officer of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company and Selling Stockholders to the several Underwriters in Section 9(a), but only with respect to statements or omissions, if any, made in the Registration Statement, any Preliminary Prospectus, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon, and in conformity with, written information furnished to the Company with respect to the Underwriters through you expressly for inclusion in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be; provided, however, that any obligation of any -------- ------- Underwriter to provide indemnity under the provisions of this Section 9(d) shall not be in excess of the underwriting discount and commission applicable to the Shares purchased by such Underwriter hereunder. For all purposes of this 26 Agreement, the Company and the Selling Stockholders acknowledge that the statements set forth in the second paragraph under the caption "Underwriting," as they relate to the selling concession and reallowance, constitute the only information furnished in writing by, or on behalf of, any Underwriter expressly for inclusion in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company, any selling Stockholder or any other person so indemnified based on the Registration Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or supplement thereto, or any application, and in respect of which indemnity may be sought against any Underwriter pursuant to this Section 9(d), any Underwriter shall have the rights and duties given to the Company or such Selling Stockholder, and the Company or such Selling Stockholder and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 9(c). (e) Contribution. To provide for just and equitable contribution, ------------ if (i) an indemnified party makes a claim for indemnification pursuant to Section 9(a), 9(b) or 9(d) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including for this purpose any contribution made by, or on behalf of, any director of the Company, any officer of the Company who signed the Registration Statement, and any controlling person of the Company) and the Selling Stockholders, as one entity and the Underwriters (including for this purpose any contribution by, or on behalf of, an indemnified party ), as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, so that the Underwriters are responsible for the proportion thereof equal to the percentage which the underwriting discount per Share set forth on the cover of the Prospectus represents of the initial public offering price per share set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; provided, however, that if applicable law does not permit -------- ------- such allocation, then other relevant equitable considerations, such as the relative fault of the Company, the Selling Stockholders and the Underwriters in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses shall also be considered. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission, relates to information supplied by the Company, the Selling Stockholders or by the Underwriters, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company, the Selling Stockholders and the Underwriters agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriters for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Underwriters and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 9(e). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 9(e), each person, if any, who 27 controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent, and counsel of any Underwriter shall have the same rights to contribution as such Underwriter and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement, and each director of the Company shall have same rights to contribution as the Company, subject in each case to the provisions of this Section 9(e). Anything in this Section 9(e) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 9(e) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 10. Default by an Underwriter. ------------------------- (a) 10% or Less. If any Underwriter or Underwriters shall default ----------- in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates does not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of shares of Firm Shares or Additional Shares, as the case may be, which all Underwriters have agreed to purchase hereunder, then such shares of Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective proportions by which the number of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of shares of Firm Shares set forth opposite the names of all the non-defaulting Underwriters. (b) Greater than 10%. In the event that such default relates to ---------------- more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within two (2) business days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 10, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase Additional Shares, shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Section 7, 9 and 12 hereof) or the several Underwriters (except as provided in Sections 9 and 12 hereof), but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other several Underwriters, and the Company for damages occasioned by its or their default hereunder. (c) Closing Matters. In the event that the Firm Shares or --------------- Additional Shares to which the default relates are to be purchased by the non- defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or additional Closing Date, as the case may be, for a period, not exceeding five (5) business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and 28 arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 10 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and the Additional Shares. 11. Representations and Agreements to Survive Delivery. All -------------------------------------------------- representations, warranties, covenants and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants and agreements at the Closing Date and any Additional Closing Date, and such representations, warranties, covenants and agreements of the Underwriters and the Company and the Selling Stockholders, including the agreements contained in Section 6, the indemnity and contribution agreements contained in Section 9, shall remain operative and in full force and effect regardless of any investigation made by, or on behalf of, the Company or any person or entity which is entitled to be indemnified under Section 9(d), and shall survive delivery of the Firm Shares or the Additional Shares. In addition, the provisions of Sections 7, 9, 11, 12, 13, 15 and 16 shall survive termination of this Agreement, whether such termination occurs before or after the Closing Date or any Additional Closing Date. 12. Effective Date of This Agreement and Termination Thereof. -------------------------------------------------------- (a) Effective Date. This Agreement shall become effective upon the -------------- later of (i) 9:30 A.M., [Boston] local time, on the first full business day following the day on which the Registration Statement becomes effective under the Act or (ii) the execution of this Agreement (the "Effective Date"). -------------- (b) Failure to Price. If the purchase price of the Firm Shares has ---------------- not been determined as provided for in Section 4 prior to 4:30 P.M., [Boston] local time, on the fourth full business day after the date on which the Registration Statement was declared effective under the Act, this Agreement may be terminated at any time thereafter either by you or by the Company by giving notice to the other unless before such termination the purchase price for the Firm Shares has been so determined. If the purchase price of the Firm Shares has not been determined prior to 4:30 P.M., Boston local time, on the tenth full business day after the date on which the Registration Statement was declared effective under the Act, this Agreement shall automatically terminate forthwith. (c) Termination Events. In addition to the right to terminate this ------------------ Agreement pursuant to Section 8 hereof, you shall have the right to terminate this Agreement at any time prior to the Closing Date or any Additional Closing Date, as the case may be, by giving notice to the Company if (i) any domestic or international event, act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, the securities markets; or (ii) if there shall have been a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange, the American Stock Exchange, the Nasdaq Stock Market or any regional stock exchange or in the over-the-counter market; or (iii) if there shall have been an outbreak or increase in the level of major hostilities or other national or international calamity; or (iv) if a banking moratorium has been declared by a state or federal 29 authority; or (v) if a moratorium in foreign exchange trading by major international banks or persons has been declared; or (vi) if there shall have been a material interruption in the mail service or another means of communications within the United States; or (vii) if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion make it inadvisable to proceed with the offering, sale or delivery of the Shares; or (viii) if any material governmental restrictions shall have been imposed on trading in securities in general, which restrictions are not in effect on the date hereof; or (ix) if there shall be passed by the Congress of the United States or by any state legislature any act or measure, or adopted by any governmental body or authoritative accounting institute or board, or any governmental executive orders, rules or regulations, which you believe are likely to have a material adverse effect on the business, financial condition or financial statements of the Company or the market for any of the Company's securities; or (x) if there shall have been such change in the market for Company's securities or securities in general or in political, financial or economic conditions as in your judgment makes it inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus; or (xi) the Company or any Selling Stockholder shall have failed, refused or been unable to perform in any material respect any agreement or covenant on its, his or her part to be performed hereunder, failed to satisfy any condition required to be performed or satisfied by it, he or she, or breached in any material respect any representation or warranty contained herein; or (xii) if in your judgment any Material Adverse Effect shall have occurred since the respective dates as of which information is given in the Registration Statement or the Prospectus. (d) Notice. If you elect to prevent this Agreement from becoming ------ effective, as provided in this Section 12, or to terminate this Agreement pursuant to Section 8 or this Section 12, you shall notify the Company and the Selling Stockholders promptly by telephone, telex, telegram or facsimile, confirmed by letter. If, as so provided, the Company or the Selling Stockholders elect to prevent this Agreement from becoming effective or to terminate this Agreement, the Company or the Selling Stockholders, as the case may be, shall notify you promptly by telephone, telex, telegram or facsimile, confirmed by letter. (e) Failure of Conditions. Anything in this Agreement to the --------------------- contrary notwithstanding other than Section 12(f), the sole liability of the Company to you, in addition to the obligations the Company assumed pursuant to Section 7, if this Agreement shall not become effective by reason of: (i) an election by you pursuant to Section 12(c)(xi), will be to reimburse the Underwriters for such out-of-pocket expenses (including the fees and disbursements of Underwriters' counsel and "blue sky" expenses) as shall have been incurred by them in connection with this Agreement or the proposed offer, sale and delivery of the Shares, or (ii) any other reason, will be to reimburse the Underwriters for such out-of-pocket blue sky fees and expenses (including the fees and disbursements of blue sky counsel) as shall have been incurred by them. Upon demand the Company agrees to pay promptly the full amount due to you under this paragraph. 30 (f) Survival of Provisions. Notwithstanding any election hereunder ---------------------- or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Sections 7, 9, 11 and 13 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 13. Notices. All communications hereunder, except as may be otherwise ------- specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to Fechtor, Detwiler & Co., Inc., [155 Federal Street, Boston, Massachusetts, Attention: Mr. Sheldon Fechtor,] with a copy to Proskauer Rose LLP, 2255 Glades Road, Suite 340 West, Boca Raton, Florida 33431, Attention: Christopher C. Wheeler and Donald E. Thompson, II, or, if sent to the Company or any Selling Stockholder, shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to Signature Eyewear, Inc., 498 N. Oak Street, Inglewood, CA 09302, Attention: Michael Prince, with a copy to Troop Meisinger Steuber & Pasich, LLP, 10940 Wilshire Boulevard, 8/th/ Floor, Los Angeles, California 90024, Attention: Alan Spatz. 14. Parties. This Agreement shall inure solely to the benefit of, and ------- shall be binding upon the several Underwriters, the Selling Stockholders and the Company and the persons and entities referred to in Section 9 who are entitled to indemnification or contribution, and their respective successors, legal representatives and assigns (which shall not include any buyer, as such, of the Shares), and no other person shall, have or be construed to have, any legal or equitable right, remedy or claim under, or in respect of, or by virtue of this Agreement or any provision herein contained. Notwithstanding anything contained in this Agreement to the contrary, all of the obligations of the Underwriters are several and not joint. 15. Partial Unenforceability. The invalidity or unenforceability of any ------------------------ Section, paragraph or provision of this Agreement shall not effect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as is necessary to make it valid and enforceable. 16. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the internal laws of The Commonwealth of Massachusetts without giving effect to be laws pertaining to conflicts of laws. 17. Submission to Jurisdiction. The Company and the Selling Stockholders -------------------------- hereby irrevocably submit to the exclusive jurisdiction of any state or federal court sitting in the County of Suffolk, The Commonwealth of Massachusetts in connection with any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby or thereby. The Company each hereby irrevocably waives any objection that it may now or hereafter have to the laying of the venue of any such action or proceeding brought in any court and any claim that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 31 18. General. This Agreement may be executed in one or more counterparts, ------- each of which, when so executed and delivered, shall be deemed to be an original, but all of which when taken together, shall constitute one and the same document binding on all of the parties thereto. Transmission by telecopier of an executed counterpart of this Agreement shall be deemed to constitute due and sufficient delivery of such counterpart, provided that the party so delivering such counterpart shall, promptly after such delivery, deliver the original of such counterpart of this Agreement to the other party thereto. [Signatures appear on following page] 32 If the foregoing correctly sets forth the understanding between you, the Selling Stockholders and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, SIGNATURE EYEWEAR, INC. By: --------------------------------------------- Julie Heldman, Co-Chairman of the Board and President SELLING STOCKHOLDERS (named in Schedule II to this Agreement) By: --------------------------------------------- Attorney-in-Fact Accepted as of the date first above written: FECHTOR, DETWILER & CO., INC. By: ------------------------------------------- On behalf of itself and the other several Underwriters named in Schedule I hereto. Boston, Massachusetts 33 SCHEDULE I NUMBER OF FIRM SHARES NAME OF UNDERWRITER TO BE PURCHASED - ------------------- -------------------------- Fechtor, Detwiler & Co., Inc. Van Kasper & Company --------- Total 1,800,000 ========= SCHEDULE II
(1) (2) (3) ADDITIONAL SELLING STOCKHOLDERS FIRM SHARES SHARES - -------------------- ----------- ---------- The Weiss Family 132,954 134,617 Trust* Edward Weiner 19,400 19,642 Daniel Warren 19,400 19,642 Robert Fried 11,123 11,262 Robert Zeichick 11,123 11,262 Michael Prince 6,000 6,075 ------- ------- 200,000 202,500**
_________________ * Including for purposes of the Lock-Up Agreements, Bernard L. Weiss and Julie Heldman. ** An additional 67,500 Shares shall be purchased from, and sold by, the Company. APPENDIX A Public Offering of Common Stock ------------------------------- ____________, 1997 Fechtor Detwiler & Co., Inc. 2255 Glades Road, Suite 234-W Boca Raton, FL 33431 Dear Sirs: This letter agreement is being delivered to you in connection with the proposed Underwriting Agreement (the "Underwriting Agreement") between Signature Eyewear, Inc., a California corporation (the "Company"), certain Selling Stockholders named therein and you as one of the Representatives of the Underwriters named therein, relating to an underwritten public offering of Common Stock, $0.001 par value ("Common Stock"), of the Company. In order to induce you to enter into the Underwriting Agreement, the undersigned agrees not to offer, sell, pledge, hypothecate or contract to sell, grant any option to purchase or otherwise dispose of, directly or indirectly (collectively, "transfer"), any shares of Common Stock beneficially owned by the undersigned or any securities convertible into, or exchangeable for, shares of Common Stock for a period of one year following the day on which the Underwriting Agreement is executed without your prior written consent, other than: (i) shares of Common Stock transferred as bona fide gifts, and pursuant to which the recipient agrees in writing to be bound by the terms of this letter to the same extent as the undersigned; (ii) transfers in connection with a merger of the Company or a tender offer to all of the stockholders of the Company for control of the then outstanding shares of Common Stock; and (iii) the transfer of up to 104,000 shares in the aggregate, if such transfer is after 180 days following the effective date of the Registration Statement. If for any reason the Underwriting Agreement shall be terminated prior to the Closing Date (as defined in the Underwriting Agreement), this letter agreement shall likewise be terminated. Yours very truly, [Signature] [Name and address] APPENDIX B Opinion of Corporate Counsel to the Company. ------------------------------------------- [Note: Defined terms have the same meanings as ascribed to such terms in the Underwriting Agreement.] Troop Meisinger Steuber & Pasich, LLP shall opine to the effect that: (A) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California; (B) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (C) To the knowledge of such counsel, the Company does not own or control, directly or indirectly, any corporation, association or other entity; (D) The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, of which there are outstanding no shares of Preferred Stock and [5,200,527] shares of Common Stock (including the Company Firm Shares). The issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued and are fully paid and nonassessable, and have not been issued in violation of any preemptive right, co-sale right, registration right, right of first refusal or other similar right known to such counsel; (E) The Shares to be issued by the Company pursuant to the Agreement and the Representatives' Warrant have been duly authorized and will be, upon issuance and delivery against payment therefor in accordance with the terms hereof, validly issued, fully paid and nonassessable, and, to the knowledge of such counsel, the stockholders of the Company do not have any preemptive right, co-sale right, registration right, right of first refusal or other similar right, which rights have not previously been waived or complied with, in connection with the purchase or sale of any of the Shares. Upon payment for and delivery of the Shares in accordance with the terms of this Agreement, and assuming that the Underwriters are acquiring the Shares in good faith and without notice of any "adverse claim" (as such term is used in Section 8102 of the Uniform Commercial Code as in effect in the State of California), the Underwriters will receive title to the Shares purchased by them from the Company, free and clear of any adverse claims; (F) The terms and provisions of the capital stock of the Company conform to the description thereof contained in the Registration Statement and the Prospectus, and the information in the Prospectus under the captions "Description of Capital Stock" and "Shares Eligible for Future Sale", to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions, and the form of certificate evidencing the Common Stock complies with the applicable provisions of California law; (G) The statements in the Registration Statement and the Prospectus summarizing statutes, rules and regulations, including the California Corporation Law and the description of the Articles of Incorporation and By-laws are accurate and fairly and correctly present the information required to be presented by the Act or the Rules and Regulations in all material respects; and such counsel does not know of any statutes, rules or regulations required to be described in the Registration Statement or the Prospectus that are not described or referred to therein as required; (H) The Company has full corporate power and authority to enter into the Underwriting Agreement and to issue, sell and deliver to the Underwriters the Company Firm Shares, the Additional Shares, and the Representatives' Warrant, as the case may be, to be issued and sold by it thereunder; (I) The Underwriting Agreement and the Representatives' Warrant have been duly authorized by all necessary corporate action on the part of the Company and have been duly executed and delivered by the Company and are valid and binding agreements of the Company, enforceable in accordance with their respective terms, except that rights to indemnity and contribution thereunder may be limited by applicable laws or equitable principles and except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (J) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (K) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, financial data and supporting schedules included therein, as to which no opinion is expressed) comply as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations and to such counsel's knowledge, there are no agreements, contracts, leases or documents of a character required to be described in, or filed as an exhibit to, the Registration Statement which are not described or filed as required by the Act and the applicable Rules and Regulations; (L) The statements under the captions "Risk Factors -- Substantial Dependence Upon Laura Ashley License," "-- Approval Requirements of Brand-Name Licensors," "-- Limitations on Ability to Distribute Other Brand-Name Eyeglass Frames," "Management -- Limitation of B-2 Liability and Indemnification Matters" (insofar as such statements relate to indemnification under California law) and the statements set forth in the last paragraph under each of "Business -- Products -- Laura Ashley Eyewear, Jean Nate Eyewear, Hart Schaffner & Marx Eyewear and Eddie Bauer Eyewear" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are a fair summary and correctly present, in all material respects, the information called for with respect to such documents and matters; provided that such counsel shall be entitled to rely on representations of the Company with respect to certain factual matters contained in such statements, and provided further that such counsel shall state that nothing has come to the attention of such counsel which leads them to believe that such representations are not true and correct in all material respects; (M) The execution, delivery and performance of the Agreement, the Representatives' Warrant, and the consummation of the transactions therein contemplated do not and will not (a) conflict with or result in a breach of any of the terms or provisions of or, constitute a default under, the Articles of Incorporation or By-laws of the Company, any agreement or document filed as an exhibit to the Registration Statement (the "Material Contracts"), or any California or Federal statute, rule or regulation applicable to the Company (except that no opinion need to be expressed with respect to compliance with federal and state securities laws) or (b) to the knowledge of such counsel, result in the creation or imposition of any lien or encumbrance upon any of the assets of the Company pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default or result in the acceleration of any obligation under, any Material Contract or other agreement or instrument of the Company (including all license agreements) identified by the Company for review in the attached Officer's Certificate or (c) to the knowledge of such counsel, conflict with or result in a violation or breach of, or constitute a default under, any applicable license, authorization, approval, permit, judgment, franchise, order, writ or decree of any court or governmental agency or body; (N) The Company is not in violation of its Articles of Incorporation or By-laws; (O) To such counsel's knowledge, there are no pending or threatened actions, suits, claims, proceedings or investigations that would limit, revoke, cancel, suspend, or cause not to be renewed any existing license, certificate, registration, approval or permit, known to such counsel, from any state, federal, or regulatory authority that is material to the conduct of the business of the Company as presently conducted, or that is of a character otherwise required to be disclosed in the Registration Statement or the Prospectus under the Act or the applicable Rules and Regulations which is not so disclosed; (P) No transfer taxes are required to be paid in connection with the sale or delivery to the Underwriters of the Company Firm Shares or the Additional Shares; (Q) The Company will not, upon consummation of the transactions contemplated by this Agreement, be an "investment company, or a "promoter" or "principal underwriter" for, a "registered investment company," as such terms are defined in the Investment Company Act of 1940, as amended; and B-3 (R) The Shares issued and sold by the Company have been duly approved for quotation by the Nasdaq National Market. In addition, such counsel shall include a statement to the effect that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which caused them to believe that, at the time the Registration Statement became effective the Registration Statement (except as to financial statements, financial and statistical data and supporting schedules contained therein, as to which no opinion is expressed) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later Additional Closing Date, as the case may be, the Registration Statement or the Prospectus (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. [Counsel rendering the foregoing may rely (i) as to questions of law not involving the laws of the State of California or the United States upon opinions of local counsel, and (ii) representations or certificates of officers of the Company and of governmental officials, as the case may be, in which case its opinion is to state that it is so doing and that it has no actual knowledge of any material misstatement or inaccuracy in such opinions, representations or certificates, and that they believe that they and the Underwriters are justified in relying on such opinions or certificates. Copies of any opinion, representation or certificate so relied upon shall be delivered to you and to Underwriters' Counsel.] B-4 APPENDIX C Opinion of Counsel to the Selling Stockholders. ---------------------------------------------- [Note: Defined terms have the same meanings as ascribed to such terms in the Underwriting Agreement.] [Further Note: If desired, this opinion may be combined with the opinion set forth in Appendix B] Troop Meisinger Steuber & Pasich shall opine to the effect that: 1. The Agreement, the Power of Attorney, and the Custody Agreement have been duly executed and delivered by or on behalf of each Selling Stockholder; each Selling Stockholder has full legal right and authority to sell, transfer and deliver in the manner provided in the Underwriting Agreement the Selling Stockholder Shares being sold by such Selling Stockholder thereunder; and the Agreement, the Power of Attorney and the Custody Agreement constitute the legal, valid and binding agreement of each such Selling Stockholder and are enforceable against each such Selling Stockholder in accordance with their respective terms, except that rights to indemnity and contribution thereunder may be limited by applicable law or equitable principles and except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws thereof relating to or affecting creditors' rights generally or by general equitable principles. 2. Upon delivery on behalf of each of the Selling Stockholders to the Underwriters of certificates for the Selling Stockholder Shares being sold hereunder by such Selling Stockholder against payment therefor as provided herein, the Underwriters will acquire all the rights of such Selling Stockholder to such Selling Stockholder Shares and will acquire such Selling Stockholder Shares free and clear of any "adverse claim" (as such term is used in Section 8201 of the Uniform Commercial Code as in effect in the State of California), assuming the Underwriters acquire such Selling Stockholder Shares in good faith and without notice of any such "adverse claim". 3. No consent, approval, authorization or order of any federal or California court or governmental agency or body is required for the consummation by any Selling Stockholder of the transactions contemplated herein, except such as may have been obtained under the Act and such as may be required under the Blue Sky of any jurisdiction in connection with the purchase and distribution of the Selling Stockholder Shares by the Underwriters and such other approvals (specified in such opinion) as have been obtained. 4. Neither the sale of the Selling Stockholder Shares being sold by any Selling Stockholder nor the consummation of any other of the transactions herein contemplated by any Selling Stockholder or the fulfillment of the terms hereof by any Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law or the terms of any indenture or other agreement or instrument actually known to such counsel and to which any Selling Stockholder is a party or bound, or any judgment, order or decree actually known to such counsel to be applicable to any Selling Stockholder of any federal State court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over any Selling Stockholder. C-2 EX-1.2 3 FORM OF REPRESENTATIVES' WARRANT THESE WARRANTS AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF CAN BE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF COUNSEL TO THE COMPANY, SUCH REGISTRATION IS NOT THEN REQUIRED. SIGNATURE EYEWEAR, INC. 498 NORTH OAK STREET INGLEWOOD, CA 90302 Warrant No. ______ ____________ Warrants REPRESENTATIVES' WARRANT CERTIFICATE - -------------------------------------------------------------------------------- Date of Issuance: As of ____________, 1997 Expiration Date: As of ____________, 2002 - -------------------------------------------------------------------------------- THIS CERTIFIES THAT, in consideration of the payment by the party named immediately below (an "Underwriter," as defined in Section 1 hereof) of one mil ($.001) per Warrant, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [_______________________________] or permitted transferees in accordance with Section 2 or its registered assigns (the "Registered Holder"), is entitled to purchase from SIGNATURE EYEWEAR, INC., a California corporation (the "Company"), the number of shares of common stock, par value $.001 per share (the "Common Stock"), of the Company set forth above, subject to adjustment pursuant to Section 5 hereof, at the price of [$_______] (120% of the initial public offering price of the Common Stock) per share of Common Stock (as adjusted from time to time pursuant to Section 4 or Section 6 hereof, the "Exercise Price"). These Warrants are part of an issuance of 180,000 Warrants as contemplated by that certain Underwriting Agreement dated as of ___________, 1997 between Fechtor, Detwiler & Co., Inc., Van Kasper & Company, the Company and certain underwriters named on Schedule I thereto (the "Agreement"). These Warrants are also subject to the following provisions: SECTION 1 CERTAIN DEFINITIONS ------------------- As used herein, the following terms have the meanings set forth below: "AGREEMENT" is the Underwriting Agreement dated as of August ___, 1997 among the Company and Fechtor, Detwiler & Co., Inc. and Van Kasper & Company, as representatives of the several Underwriters. "CERTIFICATE" means this Representatives' Warrant Certificate representing the Warrants set forth on the face hereof. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's common stock, $.001 par value per share. "DATE OF ISSUANCE" is the date set forth on the front page of these Warrants, and the terms "date hereof," "date of these Warrants," and similar expressions shall be deemed to refer to the Date of Issuance, as specified in Section 12 of these Representatives' Warrants. "EFFECTIVE DATE" means the date on which the Registration Statement is declared effective by the Commission. "EXERCISE PERIOD" means the period of time commencing at 12:01 A.M., Eastern Time, on the first anniversary date of the Effective Date and ending at 5:00 P.M., Eastern Time, on the fifth anniversary date of the Effective Date. "MARKET PRICE" on any day means the last reported sale price on such day, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or by Nasdaq, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or by Nasdaq, the average closing bid price as furnished by the NASD through Nasdaq or similar organization if Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information then available to it. Should the Market Price be determined by the Board of Directors of the Company pursuant to the last clause of the previous sentence, such determination shall, absent manifest error, be binding upon the Registered Holder. "NASDAQ" means The Nasdaq National Market or the Nasdaq Small Cap Market, as the case may be, or such other similar interdealer quotation system as may in the future be used generally by members of the National Association of Securities Dealers, Inc. ("NASD") for over-the-counter transactions in securities. "PERSON" means an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization, and a government or any department or agency thereof. 2 "REGISTRATION STATEMENT" means the Company's registration statement on Form S-1, File No. 333-30017, filed with the Commission. "REPRESENTATIVES' WARRANTS" means the Warrants represented by this Certificate and all other Representatives' Warrants issued as contemplated by the Agreement, and all Warrants issued in exchange or substitution for such Warrants or any such other Warrants pursuant to the terms hereof or thereof, as the case may be. "STOCK" means shares of the Common Stock issued or issuable upon exercise of the Warrants represented by this Certificate or any other of the Representatives' Warrants; provided that if there is a change such that the -------- securities issuable upon exercise of a Warrant are issued by an entity other than the Company, or there is a change in the class of securities so issuable, then the term "Stock" will mean one share of the security issuable upon exercise of the Representatives' Warrants if such security is issuable in shares, or will mean the smallest unit in which such security is issuable if such security is not issuable in shares. "UNDERWRITER" or "UNDERWRITERS" means Fechtor, Detwiler & Co., Inc., Van Kasper & Company, and such other broker-dealers participating as underwriters with respect to the public offering of Common Stock as contemplated by the Agreement. "WARRANTS" mean the Warrants evidenced by this Representatives' Warrant Certificate and all Warrants issued in exchange or substitution for such Warrants pursuant to the terms hereof. SECTION 2 TRANSFER RESTRICTIONS UNTIL EXERCISE PERIOD ------------------------------------------- Until the commencement of the Exercise Period, the Registered Holder may not sell, assign, transfer or hypothecate the Warrants, in whole or in part, except: (i) to the officers and partners of any Underwriter; (ii) to selected dealers, whether or not named in the Agreement, which participated in the initial public offering pursuant to the Registration Statement, and their officers or partners; and (iii) by operation of law. SECTION 3 EXERCISE OF WARRANTS -------------------- 3.1 EXERCISE PERIOD. The Registered Holder may exercise the Warrants, in --------------- whole or in part, at any time and from time to time, during the Exercise Period. 3.2 EXERCISE PROCEDURE ------------------ (a) The Warrants will be deemed to have been exercised at such time as the Company has received all of the following items (the "Exercise Date"): (i) a completed Exercise Agreement, as described below, executed by the Person exercising all or part of the purchase rights represented by this Certificate (the "Purchaser"); 3 (ii) this Certificate (subject to delivery by the Company of a new Certificate with respect to any unexercised portion, as provided in Subsection 3.2(b)); (iii) if the Purchaser is not the Registered Holder, an Assignment or Assignments in the form set forth as Exhibit II hereto, evidencing the assignment of Warrants to the Purchaser of the Warrants to be exercised; and (iv) except as provided in Section 3.3 below, a certified or bank check or other certified funds payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Stock being purchased upon such exercise. (b) Certificates for shares of Stock purchased upon exercise of these Warrants will be delivered by the Company to the Purchaser within three (3) business days after the Exercise Date. Unless these Warrants have expired or all of the purchase rights represented hereby have been exercised, the Company will prepare a new certificate evidencing such number of Warrants that have not expired or been exercised. The Company will, within seven (7) business days after the Exercise Date, deliver such new certificate to the Person designated for delivery in the Exercise Agreement. (c) The Stock issuable upon the exercise of these Warrants will be deemed to have been issued to the Purchaser on the Exercise Date, and the Purchaser will be deemed for all purposes to have become the record holder of such Stock on the Exercise Date. (d) The issuance of certificates for Common Stock upon exercise of these Warrants will be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or any other cost incurred by the Company in connection with such exercise and the related issuance of Stock; provided, however that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any certificate or instrument in a name other than that of the Registered Holder and the Company shall not be required to issue or deliver any such certificate unless and until the Person or Persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (e) The Company will not close its books for the transfer of these Warrants or the Stock issued or issuable upon the exercise of these Warrants in any manner that interferes with the timely exercise of these Warrants. The Company will from time to time take all such action as may be necessary to assure that the par value per share of the Stock is at all times equal to or less than the Exercise Price. 3.3 EXERCISE BY SURRENDER OF WARRANTS. In addition to the method of --------------------------------- payment set forth in Section 3.2 and in lieu of any cash payment required thereunder, the Registered Holder shall have the right at any time and from time to time subject to Section 3.1, and further subject to such Registered Holder having a sufficient number of shares of Stock remaining to be purchased under these Warrants so as to allow for the payment as provided for below, to exercise these Warrants in whole or in part by surrendering hereof in the manner specified in Section 3.2 as payment of the aggregate Exercise Price per share of the Stock. The number of Warrants to be surrendered in payment of the aggregate Exercise Price of the Stock for the Warrants to be exercised shall be determined by multiplying the number of Warrants to be exercised by the Exercise Price, and then dividing the product thereof by an amount equal to the Market Price per share of Stock minus the Exercise Price. Solely for the purposes of this Section 3.3, Market Price shall be the average of the Market Price for the three (3) trading days preceding the 4 date on which the form of Exercise Agreement attached hereto is deemed to have been sent to the Company pursuant to Section 15.3 hereof ("Notice Date"). 3.4 EXERCISE AGREEMENT. The Exercise Agreement will be substantially in ------------------ the form set forth as Exhibit I hereto, except that if the Stock is not to be issued in the name of the Registered Holder, the Exercise Agreement will also state the name of the Person to whom the certificates or instrument for the Stock is to be issued, and if the number of shares of Stock purchasable does not include all of such securities purchasable hereunder, it will also state the name of the Person to whom a new Certificate for the unexercised Warrants is to be delivered. 3.5 FRACTIONAL SHARES OR WARRANTS. If a fractional share of Stock would, ----------------------------- but for the provisions of Subsection 3.1, be issuable upon exercise of the rights represented by these Warrants, the Company will, within twenty days after the Exercise Date, deliver to the Purchaser a check payable to the Purchaser, in lieu of such fractional share of Stock, in an amount equal to the Market Price as of the close of business on the Exercise Date multiplied by the fractional share of Stock. SECTION 4 EXERCISE PRICE -------------- 4.1 GENERAL. The initial Exercise Price of these Warrants is set forth ------- on the front page of this Certificate. In order to prevent dilution of the rights granted under these Warrants, the initial Exercise Price will be subject to adjustment from time to time pursuant to this Section 4. 4.2 SUBDIVISION OR COMBINATION OF COMMON STOCK; AND STOCK DIVIDENDS. If --------------------------------------------------------------- the Company shall at any time after the date hereof (a) issue any shares of Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "Convertible Securities"), or any rights to purchase Common Stock or Convertible Securities, as a dividend upon Common Stock, (b) issue any shares of Common Stock, in subdivision of outstanding shares of Common Stock by reclassification or otherwise, or (c) combine outstanding shares of Common Stock, by reclassification or otherwise, then the Exercise Price that would apply if purchase rights hereunder were being exercised immediately prior to such action by the Company shall be adjusted by multiplying it by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such dividend, subdivision, or combination and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such dividend, subdivision, or combination. 4.3 CERTAIN DIVIDENDS OR DISTRIBUTIONS. If the Company shall declare a ---------------------------------- dividend or distribution upon the Common Stock payable otherwise than out of earnings or earned surplus and otherwise than in Common Stock or Convertible --- Securities, the Exercise Price shall be reduced by an amount equal, in the case of a dividend or distribution in cash, to the amount thereof payable per share of the Common Stock or, in the case of any other dividend or distribution, to the fair value of such dividend or distribution per share of the Common Stock as reasonably determined in good faith by the Board of Directors of the Company. For purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as reasonably determined in good faith by the Board of Directors of the Company. Such reductions shall take effect as of the date on which a record is taken for the purpose of such dividend or distribution, or, 5 if a record is not taken, the date as of which the holders of Common Stock of record entitled to such dividend or distribution are to be determined. 4.4 NO DE MINIMIS ADJUSTMENTS. No adjustment of the Exercise Price shall ------------------------- be made if the amount of such adjustment would be less than one cent per share. In such case any adjustment that otherwise would be required to be made shall be carried forward and shall be made at the time and together with the next subsequent adjustment that, together with any adjustment or adjustments so carried forward, shall amount to not less than one cent per share. SECTION 5 ADJUSTMENT OF NUMBER OF SECURITIES ISSUABLE UPON EXERCISE --------------------------------- Upon each adjustment of the Exercise Price pursuant to Section 4 hereof, the Registered Holder shall thereafter (until another such adjustment) be entitled to purchase, at the adjusted Exercise Price in effect on the date purchase rights under these Warrants are exercised, the number of shares of Stock, calculated to the nearest number of shares of Stock, determined by (a) multiplying the number of shares of Stock purchasable hereunder immediately prior to the adjustment of the Exercise Price by the Exercise Price in effect immediately prior to such adjustment, and (b) dividing the product so obtained by the adjusted Exercise Price in effect on the date of such exercise. SECTION 6 EFFECT OF REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE ------------------------------------------------ If at any time while these Warrants are outstanding there shall be any reorganization or reclassification of the capital stock of the Company (other than a subdivision or combination of shares provided for in Subsection 4.2 hereof), any consolidation or merger of the Company with another corporation (other than a consolidation or merger in which the Company is the surviving entity and which does not result in any change in the Common Stock), or any sale or other disposition by the Company of all or substantially all of its assets to any other corporation, then the Registered Holder shall thereafter upon exercise of these Warrants be entitled to receive the number of shares of capital stock or other securities or property of the Company, or of the successor corporation resulting from such consolidation or merger, as the case may be, to which the Stock (and any other securities and property) of the Company, deliverable upon the exercise of these Warrants, would have been entitled upon such reorganization, reclassification of capital stock, consolidation, merger, sale, or other disposition if such Warrants had been exercised immediately prior to such reorganization, reclassification of capital stock, consolidation, merger, sale, or other disposition. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth in these Warrants with respect to the rights and interests thereafter of the Registered Holder to the end that the provisions set forth in this Certificate (including those relating to adjustments of the Exercise Price and the number of shares and warrants issuable upon the exercise of these Warrants) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof as if these Warrants had been exercised immediately prior to such reorganization, reclassification of capital stock, consolidation, merger, sale, 6 or other disposition and the Registered Holder had carried out the terms of the exchange as provided for by such reorganization, reclassification of capital stock, consolidation, or merger. If in any such reorganization, reclassification, consolidation, or merger, additional shares of Stock be issued in exchange, conversion, substitution, or payment, in whole or in part, for or of a security of the Company other than Stock deliverable from exercise of these Warrants, any such issue shall be treated as an issue of Stock covered by the provisions of Section 4. The Company shall not effect any such reorganization, consolidation, or merger unless, upon or prior to the consummation thereof, the successor corporation shall assume by written instrument the obligation to deliver to the Registered Holder hereof such shares of stock or other securities, cash, or property as such Registered Holder shall be entitled to purchase in accordance with the foregoing provisions. Notwithstanding any other provisions of these Warrants, in the event of sale or other disposition of all or substantially all of the assets of the Company as a part of a plan for liquidation of the Company, all rights to exercise the these Warrants shall terminate upon the earlier of the expiration of the Exercise Period or nine (9) months after the Company gives written notice to the Registered Holder that such sale or other disposition has been consummated. SECTION 7 NOTICE OF ADJUSTMENT -------------------- Immediately upon any adjustment of the Exercise Price, or increase or decrease in the number of shares of Stock purchasable upon exercise of these Warrants, the Company will send written notice thereof to the Registered Holder, stating the adjusted Exercise Price and the increased or decreased number of shares of Stock purchasable upon exercise of these Warrants and setting forth in reasonable detail the method of calculation for such adjustment and increase or decrease. When appropriate, such notice may be given in advance and included as part of any notice required to be given pursuant to Section 8 below. SECTION 8 PRIOR NOTICE OF CERTAIN EVENTS ------------------------------ If at any time: (a) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than cash dividends payable out of earnings or earned surplus) to the holders of its Common Stock; (b) the Company shall offer for subscription pro rata to the -------- holders of its Common Stock any additional shares of stock of any class or any other rights; (c) there shall be any reorganization or reclassification of the capital stock of the Company, any consolidation or merger of the Company with another corporation, or a sale or disposition of all or substantially all its assets; or (d) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company, 7 then, in each such case, the Company shall give prior written notice, by hand delivery or by first class mail, postage prepaid, addressed to the Registered Holder at the address of such holder as shown on the books of the Company, of the date on which (i) the books of the Company shall close or a record shall be taken for such stock dividend, distribution, or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up shall take place, as the case may be. A copy of each such notice shall be sent simultaneously to each transfer agent of the Common Stock. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in said dividend, distribution, or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the record date or the effective date, whichever is earlier, of the subject action or other event. SECTION 9 NEW PRO RATA PURCHASE RIGHTS ---------------------------- If at any time prior to the expiration of the Exercise Period the Company grants, issues, or sells any Convertible Securities, options, or rights to purchase stock, warrants, securities, or other property pro rata to the record holders of Common Stock (the "Purchase Rights"), then the Registered Holder of this Certificate will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights that such Registered Holder could have acquired if such Registered Holder had held the number of shares of Stock acquirable upon exercise of the Warrants had the Warrants been fully exercised immediately prior to the date on which a record was taken for the grant, issuance, or sale of such Purchase Rights, or, if no such record was taken, the date as or which the record holders of Common Stock were determined for the grant, issuance, or sale of such Purchase Rights. SECTION 10 RESERVATION OF COMMON STOCK --------------------------- The Company will at all times reserve and keep available for issuance upon the exercise of these Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Representatives' Warrants and Purchase Rights, and the Company covenants and agrees that, upon such issuance such shares of Common Stock will be validly issued, fully paid, and nonassessable and not subject to the preemptive right of any stockholder. As long as any Representatives' Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Stock issuable upon the exercise of the Warrants to be approved for listing (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on Nasdaq. 8 SECTION 11 NO STOCKHOLDER RIGHTS OR OBLIGATION ----------------------------------- These Warrants will not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company, except as specifically provided in this Agreement. No provision of this Certificate, in the absence of affirmative action by the Registered Holder to purchase Stock, and no enumeration in this Certificate of the rights or privileges of the Registered Holder, will give rise to any obligation of such Registered Holder for the Exercise Price of Stock acquirable by exercise hereof or as a stockholder of the Company. SECTION 12 EXCHANGE AND REPLACEMENT FOR DIFFERENT DENOMINATIONS --------------------------- This Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Certificates of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Certificates, as set forth on the front page hereof, will represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of loss, theft or destruction or mutilation of this Certificate and, in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it and reimbursement of all reasonable expenses, and upon surrender and cancellation of this Certificate, if mutilated, the Company will make and deliver a new Certificate of like tenor, in lieu thereof. The date the Company initially issued these Warrants, which is set forth on the front page hereof, will be deemed to be the "Date of Issuance" of these Warrants and any Warrants exchanged or substituted therefor, regardless of the number of times (and dates on which) new certificates representing the unexpired and unexercised rights formerly represented by the Representatives' Warrants are issued. SECTION 13 TRANSFERABILITY --------------- Subject to the transfer conditions referred to in Section 2 or in the remaining provisions or this Section 13, these Warrants and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Certificate with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company located at 498 N. Oak Street, Inglewood, CA 09302. The Warrants and the Stock issued upon exercise hereof may not be offered, sold, or transferred except in compliance with the Securities Act of 1933, as amended (the "Act"), and any applicable state securities laws; and then only against receipt of an agreement of the Person to whom such offer or sale is made to comply with the provisions of this Section 13 with respect to any resale or other disposition of such securities; provided that no such agreement shall be required from any Person purchasing any Warrants or any underlying security pursuant to a registration statement effective under the Act. The Registered Holder agrees that, prior to the disposition of any Stock purchased on the exercise hereof under circumstances that might require registration of such Stock under the Act, or any similar statute then in effect, the Registered Holder shall give written notice to the Company, expressing 9 his intention as to such disposition. Promptly upon receiving such notice, the Company shall present a copy thereof to its securities counsel. If, in the opinion of such counsel, the proposed disposition does not require registration of such Stock under the Act, or any similar statute then in effect, the Company shall, as promptly as practicable, notify the Registered Holder of such opinion, whereupon the Registered Holder shall be entitled to dispose of such Stock in accordance with the terms of the notice delivered by the Registered Holder to the Company. The above agreement by the Registered Holder shall not be deemed to limit or restrict in any respect the exercise of rights set forth in Section 14 hereof. SECTION 14 REGISTRATION RIGHTS ------------------- 14.1 DEMAND RIGHTS. At any time during the Exercise Period, the ------------- registered holders of Stock whose holdings thereof comprise a "majority" (as hereinafter defined) of the shares of Stock purchasable upon the exercise of outstanding Representatives' Warrants shall have the right (which right is in addition to the registration rights under Section 14.2 hereof), exercisable by written notice to the Company, to require the Company to prepare and file with the Commission, on one occasion, a new registration statement under the Act (or, in lieu thereof, a post-effective amendment or amendments to the Registration Statement, if then permitted under the Act), covering all or any portion (as designated by the registered holders) of the Warrant Securities (as hereinafter defined) and to use its best efforts to obtain promptly and maintain the effectiveness thereof for at least nine (9) months. For purposes hereof, the term "Warrant Securities" shall mean the shares of Stock purchasable upon the exercise of outstanding Warrants and outstanding shares of Stock from exercise of Representatives' Warrants not previously sold pursuant to a registration statement as contemplated by this Section 14. The Company covenants and agrees to give written notice of any registration request under this Section 14.1 by any Registered Holder to all other Registered Holders of the Warrant Securities within ten (10) days from the date of receipt of any such registration request. Registered holders electing to participate in any registration statement pursuant to this Section 14.1 or Section 14.2 hereof, are referred to herein as "Participating Holders". 14.2 "PIGGYBACK RIGHTS". In addition, if at any time during the ------------------ seven (7) years after the Effective Date, the Company shall prepare and file one or more post-effective amendments to the Registration Statement, or new registration statements under the Act, with respect to a public offering of equity or debt securities of the Company, or of any such securities of the Company held by its security holders, other than registration statements on forms S-4 or S-8 (or their successor forms), the Company will include in any such post-effective amendment such information as may be required to permit a public offering of the Warrant Securities by the Participating Holders thereof or their respective designees or transferees, or will include in any such new registration statement such information as is required, and such number of Warrant Securities held by the Participating Holders thereof or their respective designees or transferees as may be requested by them, to permit a public offering of the Warrant Securities so requested; provided, however, that in the -------- ------- case of an underwritten offering, if, in the written opinion of the Company's managing underwriter for such offering, the inclusion of the Warrant Securities requested to be registered, when added to the securities being registered by the Company or any other selling security holder(s), would exceed the maximum amount of the Company's securities that can be marketed without otherwise materially and adversely affecting the entire offering, then such managing underwriter may exclude from such offering that portion of the Warrant Securities requested to be so registered, so that the total number of securities to be registered is within the maximum number of shares that, in the opinion of the managing underwriter, may be marketed without otherwise materially and adversely affect the entire offering, provided that at least a pro rata amount of the securities that otherwise were proposed to be registered for other stockholders (but not the Company and other than with respect to securities 10 registered pursuant to demand registration rights if such securities are otherwise included in the underwriting) is also excluded. In the event of such a proposed registration, the Company shall furnish the then Registered Holders of Warrant Securities with not less than twenty (20) days' written notice prior to the proposed date of filing of such post-effective amendment or new registration statement. Such notice shall continue to be given by the Company to Registered Holders of Warrant Securities, with respect to subsequent registration statements or post-effective amendments filed by the Company, until such time as all of the Warrant Securities have been registered or may be sold without registration under the Act or applicable state securities laws and regulations, and without limitation as to volume, pursuant to Rule 144 of the Act. The holders of Warrant Securities shall exercise the rights provided for in this Subsection 14.2 by giving written notice to the Company, within fifteen (15) days of receipt of the Company's notice of its intention to file a post- effective amendment or new registration statement. In the event the offering involves an underwritten offering of newly issued securities of the Company, the Participating Holders shall also execute, and be a party to, the underwriting agreement of the Company. 14.3 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In ----------------------------------------------------- connection with any registration under Section 14.1 or 14.2 hereof, the Company covenants and agrees as follows: (a) For any registration undertaken pursuant to Section 14.1 hereof, the Company shall use its best efforts to file a registration statement within sixty (60) days of receipt of any demand therefor, shall use its best efforts to have any registration statements declared effective at the earliest possible time, and shall furnish each Participating Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be required; provided, however, that the Company may at any time, delay the filing or delay - -------- ------- or suspend the effectiveness of such demand or piggyback registration or, without suspending such effectiveness, instruct the Participating Holder(s) not to sell any securities included in such demand or piggyback registration, (i) if the Company shall have determined upon the written advice of counsel (confirmation of which notice shall be provided to the Participating Holder(s) in writing by such counsel) that the Company would be required to disclose any actions taken or proposed to be taken by the Company in good faith and for valid business reasons, including without limitation, the acquisition or divestiture of assets, which disclosure would have a material adverse effect on the Company or on such actions, or (ii) if required by law, to update the prospectus relating to any such registration to include updated financial statements (a "Suspension Period") by providing the Participating Holder(s) with written notice of such Suspension Period and the reasons therefor; and provided further, -------- ------- that the Suspension Periods, in the aggregate, do not exceed sixty (60) days. The Company shall provide such notice as soon as practicable and in any event prior to the commencement of such a Suspension Period. In the event of a Suspension Period, the nine-month effective period during which a demand registration is to remain effective pursuant to Section 14.1 shall be tolled until the end of any such Suspension Period. Provided the Participating Holders(s) requesting registration shall have timely furnished the Company with all information and taken such other actions as may be required by the Company in order to effect such registration, if the Company shall willfully fail to comply with the provisions of Section 14.3(a), the Company shall, in addition to any other equitable or other relief available to the Participating Holder(s), extend the Exercise Period by such number of days as shall equal the delay caused by the Company's failure. (b) The Company shall pay all costs (excluding fees and expenses of the Registered Holder(s)' counsel and any underwriting or selling commissions or other charges of any broker-dealer acting on behalf of the Participating Holder(s)), fees and expenses in connection with all post-effective amendments or new registration statements filed pursuant to Sections 14.1 and 14.2 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. 11 (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as is reasonably requested by the Participating Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) Nothing contained in this Agreement shall be construed as requiring the Registered Holder(s) to exercise the Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (e) The Company shall furnish to each Participating Holder a signed counterpart, addressed to such Participating Holder, of (i) if such registration includes an underwritten public offering, an opinion of counsel to the Company, dated the effective date of such registration statement and an opinion dated the date of the closing under the underwriting agreement, and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (f) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within fifteen (15) months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least twelve (12) consecutive months beginning after the effective date of the registration statement. (g) The Company shall deliver promptly to each Participating Holder who shall have requested in writing the correspondence and memoranda described below and to the managing underwriters, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Participating Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Participating Holder or underwriter shall reasonably request. (h) The Company agrees that until all the Warrant Securities have been sold under a registration statement or pursuant to Rule 144 under the Act, it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit Registered Holders of the Warrant Securities to sell such securities under Rule 144. (i) For purposes of this Agreement, the term "majority" in reference to the Registered Holder(s) of Warrant Securities, shall mean in excess of fifty percent (50%) of the then outstanding Warrant Securities that (i) are not held by the Company, an affiliate (excluding any director 12 who is also an affiliate of an Underwriter), officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith, and (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 14.4 INDEMNIFICATION. The sellers of Warrant Securities issuable upon --------------- exercise thereof shall be indemnified by the Company in the same manner as is contained in Section 9(a)(c) and (e) of the Agreement between the Company and the Underwriters, with respect to such post-effective amendments, additional registration statements and prospectuses to the same extent as the Underwriters are covered by indemnity agreements with respect to the Registration Statement, and each seller of Warrant Securities shall indemnify the Company and any Underwriter in the same manner as is contained in Section 9(b), (c) and (e) of the Agreement to the same extent as the Company and Underwriters are covered by the indemnity provisions of Section 9(b) of the Agreement. 14.5 SURVIVAL. The rights and obligations set forth in this Section 14 -------- shall survive the exercise and surrender of these Warrants. SECTION 15 MISCELLANEOUS ------------- 15.1 ORIGINAL ISSUE TAXES. The Company will pay all United States, -------------------- state and local (but not foreign) original issue taxes, if any, upon the issuance of these Warrants or the Stock deliverable upon exercise hereof. 15.2 AMENDMENT AND WAIVER. Except as otherwise provided herein, the -------------------- provisions of this Certificate may be amended, and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holders representing at least fifty percent (50%) of the Representatives' Warrants outstanding at the time of such consent. 15.3 NOTICES. Any notices required to be sent to a Registered Holder ------- or of any Common Stock purchased upon the exercise hereof will be delivered to the address of such Registered Holder shown on the books of the Company. All notices referred to herein will be delivered in person or sent by registered or certified mail, postage prepaid, and will be deemed to have been given when so delivered in person, by facsimile, overnight courier or on the third business day following the date so sent by mail. Whether or not Fechtor, Detwiler shall then be a Registered Holder, a copy of any notice sent to such a Registered Holder shall be sent to it, in the manner provided above, at the following address: Fechtor, Detwiler & Co., Inc. 70 East 55/th/ Street, 24/th/ Floor New York, NY 10022 (212) 888-0808 Telephone No. (212) 888-8008 Fax No. Attn: _______________________ and 13 Fechtor, Detwiler & Co., Inc. 2255 Glades Road Suite 234W Boca Raton, FL 33431 (561) 998-1577 Telephone No. 561) 998-0370 Fax No. Attn: Maurice Buchsbaum, with a copy to: Proskauer Rose Goetz & Mendelsohn LLP 2255 Glades Road, Suite 340 West Boca Raton, FL 33431 Attn: Christopher C. Wheeler, Esq. Donald E. Thompson, II, Esq. (561) 241-7400 Telephone No. (561) 241-7145 Fax No. 15.4 DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings of the ----------------------------------- sections and paragraphs of this Certificate are inserted for convenience only and do not constitute a part of these Representatives' Warrants. The construction, validity, and interpretation of these Warrants will be governed by the laws of the Commonwealth of Massachusetts, without giving effect to choice of law or conflict of laws principles thereof. IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and attested by its duly authorized officers under its corporate seal. SIGNATURE EYEWEAR, INC., a California corporation By: ______________________________ Name: ____________________________ Title: ___________________________ [Corporate Seal] Attest: _____________________________ Name: _______________________ Title: ______________________ 14 EXHIBIT I --------- EXERCISE AGREEMENT ------------------ To: Dated: THE UNDERSIGNED Registered Holder, pursuant to the provisions set forth in the within Representatives' Warrants, hereby exercises _________ of the Warrants covered by such Warrants and herewith either makes full cash payment of $______________ for such Common Stock or otherwise tenders that number of the Warrants for cashless exercise as is permitted by Section 3.3 thereof, at the Exercise Price provided by such Representatives' Warrants. _____________________________________ (Signature) ______________________________________ (Print or type name) ______________________________________ (Address) ______________________________________ ______________________________________ NOTICE: The signature on this Exercise Agreement must correspond with the name as written upon the face of the within Certificate, or upon the Assignment thereof if applicable, in every particular, without alteration, enlargement, or any change whatsoever, and must be Medallion guaranteed by a bank, other than a saving bank, having an office or correspondent in New York, New York, Boca Raton or Miami, Florida, or Boston, Massachusetts, or by a firm having membership on a registered national securities exchange and an notice in New York, New York, Boca Raton or Miami, Florida, or Boston, Massachusetts. SIGNATURE GUARANTEE Authorized Signature: __________________________________________________________ Name of Bank or Firm: __________________________________________________________ Dated: _________________________________________________________________________ 15 EXHIBIT II ---------- ASSIGNMENT ---------- FOR VALUE RECEIVED, the undersigned Registered Holder hereby sells, assigns, and transfers all of the rights of the undersigned under the within Certificate with respect to the number of Securities covered thereby set forth below, unto the Assignee identified below, and does hereby irrevocably constitute and appoint ___________________ ______________________________ to effect such transfer of rights on the books of the Company, with full power of substitution:
- ----------------------------------------------------------------------------- No. of Shares Name of Assignee Address of Assignee of Common Stock No. of Warrants - ---------------- ------------------- --------------- --------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
Dated:_______________________________ _________________________________ (Signature of Registered Holder) _________________________________ (Print or type name) NOTICE: The signature on this Assignment must correspond with the name as written upon the face of the within Certificate, in every particular, without alteration, enlargement, or any change whatsoever, and must be Medallion guaranteed by a bank, other than a savings bank, having an office or correspondent in New York, New York, Boca Raton or Miami, Florida, or Boston, Massachusetts, or by a firm having membership on a registered national securities exchange and an office in New York, New York, Boca Raton or Miami, Florida, or Boston, Massachusetts. SIGNATURE GUARANTEE Authorized Signature: __________________________________________________________ Name of Bank or Firm: __________________________________________________________ Dated: _________________________________________________________________________ 16 EX-4.1 4 SPECIMEN STOCK CERTIFICATE OF COMMON STOCK OF REG EXHIBIT 4.1 SIGNATURE EYEWEAR, INC. NUMBER SHARES INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS OF THE STATE OF CALIFORNIA CUSIP 826918 10 4 This certifies that is the record holder of FULLY PAID AND NONASSECCABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF ===============================SIGNATURE EYEWEAR, INC.========================== transferable on the books of the Corporation by the holder hereof in person of by duly authorized ttorney upon surrender of this certificate property endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ Julie Heldman /s/ Bernard Weiss CO-CHAIRMAN OF THE BOARD CO-CHAIRMAN OF THE BOARD AND PRESIDENT AND CHIEF EXECUTIVE OFFICER [SEAL OF SIGNATURE EYEWEAR, INC.] COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER AND TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE EX-10.7 5 AMENDED AND RESTATED ACCOUNTS RECEIVABLE AND INV. Exhibit 10.7 FIRST AMENDMENT TO AMENDED AND RESTATED ACCOUNTS RECEIVABLE AND INVENTORY LOAN AGREEMENT This First Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement is entered into as of June 26, 1997, by and between Signature Eyewear, Inc., a California corporation ("Borrower") and City National Bank, a national banking association ("CNB"). RECITALS A. Borrower and CNB are parties to that certain Amended and Restated Accounts Receivable and Inventory Loan Agreement dated as of April 21, 1997 (the Amended and Restated Accounts Receivable and Inventory Loan Agreement, as amended, hereinafter the "Loan Agreement"). B. Borrower and CNB desire to supplement and amend the Loan Agreement as hereinafter set forth. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. Capitalized terms used in this Amendment without definition shall have the meanings set forth in the Loan Agreement. 2. AMENDMENTS. The Loan Agreement is amended as follows: 2.1 Section 1.26 is amended in its entirety to provide as follows: "1.26 "LIBOR LOAN COMMITMENT" is $6,000,000.00." 2.2 Section 2.5.2 is amended in its entirety to provide as follows: "2.5.2 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 $100,000.00. Borrower may have no more than $6,000,000.00 of LIBOR Loans outstanding at any one time under this Agreement. Borrower may have Prime Loans and LIBOR Loans outstanding simultaneously." 3. CONDITIONS PRECEDENT. This Amendment shall become effective upon the fulfillment of all of the following conditions to CNB's satisfaction: 3.1 CNB shall have received this Amendment duly executed by Borrower. 4. EXISTING AGREEMENT. Except as expressly amended herein, the Loan Agreement shall remain in full force and effect, and in all other respects is affirmed. 5. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 6. GOVERNING LAW. This Amendment and the rights and obligations of the parties hereto shall be construed in accordance with, and governed by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. "Borrower" SIGNATURE EYEWEAR, INC. a California corporation By: /s/ Julie Heldman --------------------------------------- Julie Heldman, President/Secretary "CNB" CITY NATIONAL BANK, a national banking association By: /s/ Kenneth Barton -------------------------------------- Kenneth E. Barton, Vice President 2 SECOND AMENDMENT TO AMENDED AND RESTATED ACCOUNTS RECEIVABLE AND INVENTORY LOAN AGREEMENT This Second Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement is entered into as of July 23, 1997, by and between Signature Eyewear, Inc., a California corporation ("Borrower") and City National Bank, a national banking association ("CNB"). RECITALS A. Borrower and CNB are parties to that certain Amended and Restated Accounts Receivable and Inventory Loan Agreement dated as of April 21, 1997, as amended by that certain First Amendment to Amended and Restated Accounts Receivable and Inventory Loan Agreement dated as of June 26, 1997 (the Amended and Restated Accounts Receivable and Inventory Loan Agreement, as amended, hereinafter the "Loan Agreement"). B. Borrower and CNB desire to supplement and amend the Loan Agreement as hereinafter set forth. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. Capitalized terms used in this Amendment without definition shall have the meanings set forth in the Loan Agreement. 2. AMENDMENTS. The Loan Agreement is amended as follows: 2.1 Section 1.6 ("BORROWING BASE") is amended by deleting the number "$2,000,000.00" from the last sentence and inserting in its place and stead the number "$3,000,000.00". 2.2 Section 1.13 ("COMMITMENT") is amended by deleting the phrase and number "Six Million Seven Hundred Sixty Thousand Four Hundred Seventeen Dollars ($6,760,417.00)" and inserting in its place and stead the phrase and number "Seven Million Nine Hundred Thirty Five Thousand Four Hundred Seventeen Dollars ($7,935,417.00)". 2.3 Section 1.26 is amended in its entirety to provide as follows: "1.26 "LIBOR LOAN COMMITMENT" is $7,500,000.00." 2.4 Section 1.36 ("REVOLVING CREDIT COMMITMENT") is amended by deleting the phrase and number "SIX MILLION DOLLARS ($6,000,000.00)" and inserting in its place and stead the phrase and number "SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00)". 2.5 Section 7.10 (DIVIDENDS AND PURCHASE OF STOCK) is deleted in its entirety and the number is reserved. 3. CONDITIONS PRECEDENT. This Amendment shall become effective upon the fulfillment of all of the following conditions to CNB's satisfaction: 3.1 CNB shall have received this Amendment duly executed by Borrower. 4. EXISTING AGREEMENT. Except as expressly amended herein, the Loan Agreement shall remain in full force and effect, and in all other respects is affirmed. 5. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 6. GOVERNING LAW. This Amendment and the rights and obligations of the parties hereto shall be construed in accordance with, and governed by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. "Borrower" Signature Eyewear, Inc., a California corporation By: /s/ Julie Heldman ------------------------------------- Julie Heldman, President/Secretary "CNB" City National Bank, a national banking association By: /s/ Kenneth E. Barton ------------------------------------- Kenneth E. Barton, Vice President 2 EX-23.2 6 CONSENT OF ALTSCHULER, MELVOIN AND GLASSER LLP. EXHIBIT 23.2 [LETTERHEAD OF ALTSCHULER, MELVOIN AND GLASSER LLP] To the Board of Directors and Stockholders Signature Eyewear, Inc. We have issued our report dated January 15, 1997, accompanying the financial statements of Signature Eyewear, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts". /s/ Altschuler, Melvoin and Glasser LLP Los Angeles, California July 29, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS OF SIGNATURE EYEWEAR, INC. FOR THE YEAR ENDED OCTOBER 31, 1996 AND UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR 6-MOS OCT-31-1996 OCT-31-1997 NOV-01-1995 NOV-01-1996 OCT-31-1996 APR-30-1997 214,399 59,673 0 0 3,894,750 4,789,307 45,000 65,000 4,635,928 5,338,000 8,988,936 10,580,773 1,720,097 2,022,042 679,723 889,220 10,293,057 11,977,342 7,207,037 9,279,685 0 0 0 0 0 0 7,732 7,732 2,921,405 2,627,510 10,293,057 11,977,342 28,280,086 16,038,054 28,280,086 16,038,054 11,931,299 6,632,110 14,027,041 7,507,897 309,177 191,142 20,972 20,000 338,373 188,654 2,012,569 1,706,905 800 800 2,011,769 1,706,105 0 0 0 0 0 0 2,011,769 1,706,105 .567 .474 .567 .474
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