-----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, FjwKEda7P4WJdUySSdvkxgSWifwe+UXfA9FhwvWSc9/fzD25UO0WkshTmUkzDcW9 EhjLZx1BFuyw1Bkog8z2Xw== 0001072613-09-000274.txt : 20090213 0001072613-09-000274.hdr.sgml : 20090213 20090213141013 ACCESSION NUMBER: 0001072613-09-000274 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20081031 FILED AS OF DATE: 20090213 DATE AS OF CHANGE: 20090213 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23001 FILM NUMBER: 09601581 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 10-K 1 form10-k_16269.txt FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 2008 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER: 0-23001 SIGNATURE EYEWEAR, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as Specified in its Charter) CALIFORNIA 95-3876317 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 498 NORTH OAK STREET INGLEWOOD, CALIFORNIA 90302 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices, including ZIP Code) (310) 330-2700 - -------------------------------------------------------------------------------- Registrant's Telephone Number, Including Area Code SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.001 PAR VALUE Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. |X| Yes |_| No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. |_| Yes |X| No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act. Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated Filer |_| Smaller reporting company |X| (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $2,154,484. On February 6, 2009, the Registrant had 6,955,639 outstanding shares of Common Stock, $.001 par value. The aggregate market value of the 3,651,667 shares of Common Stock held by non-affiliates of the Registrant as of January 20, 2009 was $1,095,500. DOCUMENTS INCORPORATED BY REFERENCE None. 2 PART I The discussions in this Report contain forward-looking statements that involve risks and uncertainties. Important factors that could cause actual results to differ materially from our expectations are set forth in "Management's Discussion of Financial Condition and Results of Operations--Factors That May Affect Future Operating Results" in Item 7, as well as discussed elsewhere in this Report. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by these factors. Those forward-looking statements relate to, among other things, our plans and strategies, new product lines, relationships with licensors, distributors and customers, and the business environment in which we operate. References in this Report to the "Company", "Signature", "we" or "us" refer to Signature Eyewear, Inc. ITEM 1--DESCRIPTION OF BUSINESS GENERAL Signature designs, markets and distributes prescription eyeglass frames and sunwear primarily under exclusive brand name licenses. In our fiscal year ended October 31, 2008, our eyewear lines included bebe eyes, Carmen Marc Valvo Eyewear, Cutter & Buck Eyewear, Dakota Smith Eyewear, Hart Schaffner Marx Eyewear, Hummer Eyegear, Laura Ashley Eyewear, Nicole Miller Eyewear, and our proprietary Signature line. We will introduce a new line, Michael Stars Eyewear, in the spring of 2009. We sell and distribute our products: (1) to independent optical retailers in the United States, primarily through our national direct sales force and independent sales representatives; (2) to retail chains and department stores; (3) internationally, primarily through exclusive distributors in foreign countries and a direct sales force in Western Europe; and (4) through selected distributors in the United States. BUSINESS STRATEGY Our focus in fiscal 2009 will be to maintain market position of our mature brands while generating additional revenues from our newer brands, the launch of our Michael Stars Eyewear collection and the re-launch of our Signature collection targeted to the value segment of the frame market. We have maintained relatively consistent levels of operating expenses during the past three fiscal years, and believe that we may be able to increase revenues without materially increasing our general and administrative expenses. However, growth in revenues will be challenging in light of the troubled domestic and world economies, continued flat revenues in the optical frame industry and increasing price competition. Our 2009 plan includes the following: o launch Michael Stars Eyewear in the spring of 2009; o re-launch the Signature collection in the spring of 2009, at lower prices targeted to today's value market; o continue to develop and grow our sunwear business; o increase efforts to sell to mid-size optical retail chains and department stores; o continue to build the direct sales force in the United States to increase sales to independent optical retailers, including optometrists, opticians and ophthalmologists, which sales have higher gross margins than sales to optical retail chains; 3 o maintain international sales by expanding into smaller foreign markets and reduce expenses related to operating and promoting the international business; and o continue to focus on unique frame design, outstanding customer service and quality control. Our longer-term strategy for increasing revenues includes the acquisition of additional eyewear and sunwear licenses and companies engaged in the distribution and sale of eyewear and/or sunwear. INDUSTRY OVERVIEW The total vision care industry in the United States generated $25.6 billion in revenues during the 12 months ended September 30, 2008, a 2.5% decrease when compared to the prior 12-month period. Frame sales represented the largest share (30.9%) of the vision care market, generating revenues of approximately $7.9 billion, a 3.2% decrease over the prior 12 months. During this 12-month period, independent optical retailers represented 45.8% of the frame market as compared to 44.7% the prior year. PRODUCTS Our products include prescription eyeglass frames and sunwear. The following table provides certain information about the market segments, introduction dates and approximate retail prices of our products as of January 2009: 4 APPROXIMATE RETAIL BRAND NAME/SEGMENT CUSTOMER GENDER YEAR INTRODUCED PRICES(1) - ------------------ --------------- --------------- --------- bebe eyes Prescription Women 2000 $100-$250 Sunwear Women 2005 $100-$200 Carmen Marc Valvo Prescription Women 2008 $175-$350 Sunwear Women 2008 $100-$300 Cutter & Buck Prescription Men/Women 2006 $100-$150 Sunwear Men/Women 2006 $90-$150 Dakota Smith Prescription Unisex 1992 $90-$150 Sunwear Unisex 1992 $75-$125 Hart Schaffner Marx Prescription Men 1996 $120-$200 Hummer Prescription Men/Women 2005 $100-$175 Sunwear Men/Women 2005 $100-$250 Laura Ashley Prescription Women 1992 $125-$180 Sunwear Women 1993 $75-$100 Michael Stars Prescription Women Launch 2009 $95-$150 Sunwear Women Launch 2009 $75-$130 Nicole Miller Prescription Women 1993 $120-$250 Sunwear Women 1993 $75-$175 Signature Collection Prescription Men/Women 1999 $70-$120 (1) Retail prices are established by retailers, not by us. FRAME DESIGN. Frame styles are developed by our in-house design team, which works in close collaboration with many respected frame manufacturers throughout the world to develop unique designs and technologies. Once the factory develops a prototype, we present the style to the licensor for approval. Following approval, we contract to manufacture the style. By these methods, we are able to choose from the strengths of a variety of factories worldwide and to avoid reliance on any one factory. Our designers continue to work closely with the factory at every stage of the manufacturing process to assure quality. Our metal frames generally require over 200 production steps to manufacture, including hand soldering of bridges, fronts and endpieces. Many of our metal frames take advantage of modern technical advances, such as thinner spring hinges (which flex outward and spring back) and lighter metal alloys, both of which permit the manufacture of frames that are thinner and lighter while retaining strength. We also take advantage of technical advances in plastic frames, such as laminated plastics that are layered in contrasting and/or complementary colors, as well as laser carving these materials to add unique design details. QUALITY CONTROL. We only use manufacturers we believe are capable of meeting our criteria for quality, delivery and attention to design detail. We specify the materials to be used in our frames, and approve drawings and prototypes before committing to production. We place our initial orders for each style approximately six months before the style is released, and require the factory to deliver samples for our quality assurance program. Our designers examine all sample shipments and this process provides sufficient time to resolve problems with a style's quality before its release date. If, at any stage of the quality control process, frames do not meet our quality standards, we return them to the factory with instructions to improve the 5 specific quality problems. Historically, we have had a low defective frame rate and our manufacturers share in the cost of replacing defective frames. Our frame manufacturers test all of our sunwear for optical clarity based on United States, European and Australian standards. All our prescription frames must pass eye shape tolerance requirements with specialized Gerber testing equipment. Our products are subject to governmental health safety regulations in the United States and most countries. Our products are also subject to import duties and tariffs on frames exported to countries outside of the United States. We regularly inspect our products to ensure compliance with applicable requirements and safety standards. MARKETING, MERCHANDISING AND SALES PROGRAMS. We produce marketing, merchandising and sales promotion programs to help optical retailers, as well as our sales representatives, promote sales. For optical retailers, we develop unique in-store displays that are custom made to complement our brands. We also believe product packaging is essential and can be used at point of sale or on displays as an added selling feature. Additionally, we create presentation materials, marketing bulletins, catalogues, graphics and posters, and other sales tools to facilitate professional presentations by our sales representatives. We motivate our sales representatives by sales contests and individual performance awards. CASES. Our frames are sold with cases that are designed and manufactured to our specifications to complement the brand. In many circumstances, the cases are used in our in-store displays. BRANDS BEBE EYES The "bebe look," with its signature hint of sensuality, appeals to hip, sophisticated women who seek current fashion trends interpreted to suit their style and budget. The bebe eyes collection captures the spirit of the bebe brand through sexy, provocative styles with bold colors and logo accents. During the last two fiscal years, we expanded the prescription sunwear line. Eye-catching point-of-purchase displays feature distinctive on-model imagery, and frame displays were revised to reflect the image of the brand at retail. We have the exclusive right to market and sell bebe eyes in the United States, Canada and a number of other countries pursuant to a license agreement that expires in June 2010. The license agreement contains minimum net sales and minimum royalty requirements. The licensor may terminate the license if, without the prior approval of the licensor, a majority of our Common Stock is acquired by: (i) either a women's apparel company or another entity and (ii) either our financial and operational condition is impaired or the acquirer makes material changes in the key management personnel in charge of the license. CARMEN MARC VALVO EYEWEAR Carmen Marc Valvo is a well-known American designer with celebrity clientele whose collections include couture gowns, evening cocktail dresses and swimwear. Carmen Marc Valvo Eyewear includes both sunwear and prescription eyeglass frames of contemporary elegance, with the attention to detail as seen in Carmen's couture clothing and lace designs. The collection includes styles for women over 30, with coloration, fine attention to detail and a fit range that will appeal to women around the world. This luxury collection has expanded our product assortment and has helped us penetrate into new optical retailers. Our Carmen Marc Valvo Eyewear collection was voted the best new product at the international Vision Expo in April 2008. We have the exclusive worldwide right to market and sell Carmen Marc Valvo Eyewear pursuant to a license agreement that expires in January 2012. We have the right to renew the license for an additional three 6 years provided we are in compliance with the license agreement. The license agreement contains minimum annual royalty requirements. CUTTER & BUCK EYEWEAR Cutter & Buck Eyewear is designed to appeal to the consumer who is looking for time-honored styling that has been updated with today's technology, design advancements, and modern color combinations. Inspired by Cutter & Buck's country club heritage, the frames incorporate greens, blues and browns. Materials for our prescription frames include "memory" metals, wearable plastic tones, and high-tech metal styles targeted toward the "big and tall" and traditionally classic consumer. Sunwear includes both performance wraps and fashionable shapes for outdoor activities, with polarized and Cr-39 lenses. Most of the sunwear styles are Rx-able. We have the exclusive worldwide right to market and sell Cutter & Buck Eyewear pursuant to a license agreement that expires in December 2009. We may renew the license through December 2011 provided we are in compliance with the license agreement. The license agreement contains minimum annual royalty requirements. DAKOTA SMITH EYEWEAR Dakota Smith Eyewear targets men and women with eclectic designs that capture the American spirit. The collection features high quality titanium and colorful plastic prescription frames and sunwear at an affordable price. Dakota Smith sunwear features superior lens optics. The collection is showcased at the point of sale with unique displays and casual lifestyle images. For 2009, the collection will have a contemporary, rebellious make-over with new logo and branding elements for attracting a younger consumer. We have the exclusive right to market and sell Dakota Smith Eyewear in the United States, Canada and a number of other countries pursuant to a license agreement that expires in February 2010. The license agreement contains minimum annual royalty requirements. HART SCHAFFNER MARX EYEWEAR The Hart Schaffner Marx Eyewear collection is distinctively masculine, targeted at men who seek quality, comfort and fit. Hart Schaffner Marx, a subsidiary of Hartmarx Corporation and a leading manufacturer of tailored clothing, has an image of enduring quality, and is a recognized name among men who purchase apparel in the medium to high price range. Because men are generally concerned with both function and fashion, the frames contain features that enhance their durability. The highest quality components are utilized for each style and unique accents of garment patterns and leather inlays offer a distinctive touch. Select styles feature titanium, a material renowned for its strength and lightweight qualities. The collection is designed to fit a broad spectrum of men, and selected styles have longer temples and larger sizes than those generally available. We have the exclusive right to market and sell Hart Schaffner Marx Eyewear in the United States and certain other countries through a license agreement that expires on December 31, 2010. We may renew the license agreement for one two-year period provided we are not in default under the license agreement. The license agreement contains minimum annual net sales and minimum annual royalty requirements. The licensor may terminate the license agreement if someone acquires more than 50% of our outstanding voting securities, or we fail to perform our material obligations under the license agreement. 7 HUMMER EYEGEAR Hummer Eyegear differentiates itself by drawing from the unique image of strength, independence and confidence that Hummer embodies. Hummer Eyegear includes optical and sunwear styles, made from durable, innovative lens technology, innovative materials and bold, stylish designs. We have the exclusive right to market and sell Hummer Eyegear in the United States and certain other countries through a license agreement with General Motors Corporation that expires in June 2010. The license agreement contains minimum annual royalty requirements. The licensor may terminate the license agreement if we do not obtain the prior approval of the licensor for any change in the ownership, control or direction of our business. LAURA ASHLEY EYEWEAR As a reflection of one of Europe's strongest retailers, Laura Ashley Eyewear is designed to be feminine and classic, although the newly renewed looks of the brand are much more fashionable without being trendy. The hallmark of Laura Ashley Eyewear is its attention to detail, and the collection is known for its unique designs on the temples of the frames. Our strategy for this collection for 2007 was to introduce a small group of contemporary frames for a new audience. This has proven successful and will be a large part of the design direction for 2009. We have the exclusive right to market and sell Laura Ashley Eyewear in the United States, the United Kingdom and certain other countries through a license agreement that expires in January 2010. The licensor may terminate the license before its term expires under certain circumstances, including if management or control of Signature passes from its present managers, shareholders or controllers to other parties whom Laura Ashley may reasonably regard as unsuitable, or if minimum sales requirements are not met in any two years. MICHAEL STARS EYEWEAR We will introduce Michael Stars Eyewear, including prescription frames and sunwear for women, in the spring of 2009. Michael Stars specializes in beachside lifestyle and sells more than 200 styles of T-shirts, as well as maternity, cashmere and dress collections and, most recently, active wear for women. The Michael Stars Eyewear collection conveys a relaxed, casual lifestyle emphasizing color and style, with subtle logo applications. The frame color palates will be derived from the array of seasonal fabrics inspired by the Michael Stars clothing line. We have the exclusive worldwide right to market and sell Michael Stars Eyewear through a license agreement with Michael Stars, Inc. entered into in May 2008. The license agreement expires October 31, 2011, and we have the right to renew the license for one additional two-year term provided we are in compliance with the license agreement and meet the minimum royalty requirements. The license agreement contains minimum annual royalty requirements. NICOLE MILLER EYEWEAR Nicole Miller Eyewear is targeted at the sophisticated, style-conscious modern woman who creates her own fashion trends with contemporary elegance. For more than 25 years Nicole Miller has designed beautifully cut garments in exquisitely drawn prints in New York City. The Nicole Miller Eyewear collection exudes the essence of Nicole's vision with unusual color treatments and design elements, complementing Nicole's clothing, handbags and accessories. Our Nicole Miller Luxury Collection was voted the best new collection of eyewear at Vision Expo West in 2007. We have the exclusive right to market and sell frames and sunwear using the Nicole Miller trademark throughout the world, excluding Japan, through a license agreement that expires in March 2012. The license agreement contains minimum annual royalty requirements and minimum annual sales requirements. 8 SIGNATURE COLLECTIONS Our house-brand Signature Collections comprise multiple segments, each targeting niches not otherwise filled by our brand-name collections. Our goals related to that line are to position us to compete more effectively against other optical companies that have direct sales forces; to enable us to offer products in segments not served by our licensed collections; to allow us to develop products more quickly; and to reach the value markets by offering good quality, lower-priced styles. The cost to retailers of frames in our own lines is generally less than frames with brand names, because the latter command greater retail prices, and we pay no licensing fees on our own lines. Moreover, the styling of our own lines can be more flexible, because we are able to change the styling and merchandising more rapidly without the often time-consuming requirement of obtaining licensor approval. CUSTOMERS Our products are currently sold in the United States and in approximately 30 other countries. In fiscal 2008, we sold frames to approximately 6,000 independent optical retailers in the United States and to retail chains and department stores that sell our products at more than 1,000 locations. We have a broad customer base with no customer accounting for 10% or more of net sales during the fiscal year. SALES AND DISTRIBUTION We sell and distribute our products (1) to independent optical retailers in the United States, primarily through our national direct sales force; (2) to retail chains and department stores; (3) internationally, primarily through exclusive distributors in foreign countries and a direct sales force in Western Europe; and (4) through selected distributors in the United States. The following table sets forth our net sales by channel for the fiscal years indicated: YEAR ENDED OCTOBER 31, ---------------------- 2007 2008 ------- ------- (In thousands) Direct sales $16,375 $16,515 Retail chains and department stores 3,391 3,364 International 2,788 2,372 Domestic distributors 1,490 1,352 Freight billed to customers/other 982 882 ------- ------- TOTAL $25,026 $24,485 ======= ======= DIRECT SALES. We sell our products to independent optical retailers in the United States primarily through a national direct sales force, including company and independent sales representatives. Our direct sales force, including independent sales representatives, numbered 53 at October 31, 2008. We plan to increase the number of independent sales representatives in fiscal 2009. RETAIL CHAINS AND DEPARTMENT STORES. We sell directly to retail chains and department stores. For several years, national retail optical chains have increasingly marketed their own lower-cost private label frames. Thus, we have focused, and plan to continue to focus, our efforts on increasing sales to mid-size regional optical chains which are less likely to sell their own private label eyewear than the large national optical retail chains and are not experiencing consolidation like the national chains. We also intend to focus on sales of sunwear to department stores, a growing segment of our sunwear market. INTERNATIONAL. We distribute certain of our products internationally through exclusive distributors and in Western Europe through a direct sales force including company and independent sales representatives. We 9 maintain a sales office and warehouse facility in Liege, Belgium. Our international distributors have exclusive agreements for defined territories. At October 31, 2008, we had approximately 25 international distributors and four international sales representatives. Part of our strategy to increase revenues in fiscal 2009 is to develop sales opportunities for our frames in smaller markets throughout the world while reducing our expenses in operating and promoting international sales. DOMESTIC DISTRIBUTORS. We distribute our products through selected distributors in the United States in areas in which we believe we can achieve better penetration than through direct sales. We had five distributors in the United States at October 31, 2008. CONTRACT MANUFACTURING Our frames are manufactured to our specifications by a number of contract manufacturers located outside the United States. The manufacture of high quality metal frames is a labor-intensive process that can require over 200 production steps (including a large number of quality-control procedures) and from 90 to 180 days of production time. In fiscal 2008, we used manufacturers in China, Japan and Italy. In determining which manufacturer to use for a particular style, we consider each manufacturer's expertise (based on type of material and style of frame), its ability to translate design concepts into prototypes, its price per frame, its manufacturing capacity, its ability to deliver on schedule, and its ability to adhere to our rigid quality control standards and quality assurance requirements. We are not generally required to pay for any of our frames prior to shipment. Payment terms currently range from 30 to 120 days on open account. For frames imported other than from China manufacturers, we are obligated to pay in the currency of the country in which the manufacturer is located. In the case of frames purchased from manufacturers located in China, the currency is United States dollars. For almost all of our other frame purchases, our costs vary based on currency fluctuations, and we generally cannot recover increased frame costs (in United States dollars) in the selling price of the frames. COMPETITION The markets for prescription eyeglass frames and sunwear are intensely competitive. There are thousands of frame styles, including thousands with brand names many of which have global recognition. At retail, our eyewear styles compete with styles that do and do not have brand names, styles in the same price range, and styles with similar design concepts. To obtain board space at an optical retailer, we compete against many companies, both foreign and domestic, including Luxottica Group S.p.A, Safilo Group S.p.A., and Marchon Eyewear, Inc. Our largest competitors have significantly greater financial, technical, sales, manufacturing and other resources than us. They also employ direct sales forces that have existed longer, and are significantly larger than our direct sales force. At the major retail optical chains, we compete not only against other eyewear suppliers, but also against the chains themselves, as these chains have increasingly designed, manufactured and sold their own lower-priced private label brands. Luxottica Group, the largest eyewear company in the world, is vertically integrated, in that it manufactures frames, distributes them through a direct sales force in the United States and throughout the world, and owns LensCrafters, Sunglass Hut, Pearle Vision and Cole Vision, which combined is the largest worldwide retail optical chain. We compete in our target markets based on the quality of our brand name frames, our marketing and merchandising, the popularity of our frame designs, the reputation of our styles for quality, our pricing policies and the experience of our sales force. 10 BACKLOG Our backlog of orders believed to be firm was approximately $350,000 at October 31, 2008 and $140,000 at October 31, 2007. Historically, we ship our products upon receipt of orders and do not operate with a material backlog. EMPLOYEES At October 31, 2008, we had 98 full-time employees, including 44 in sales and marketing, 17 in customer service and support, 21 in warehouse operations and shipping and 16 in general administration and finance. Our employees are not covered by a collective bargaining agreement. ITEM 1A--RISK FACTORS Not applicable. ITEM 1B--UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2--PROPERTIES We lease approximately 64,000 square feet of a building located in Inglewood, California, where we maintain our principal offices and warehouse. On January 26, 2009 we amended the lease to extend the lease expiration date from June 30, 2009 to June 30, 2011 and provide us with a two-year renewal option. Monthly rental payments under the lease have been reduced from $51,200 during the current term to $48,000 for the year ending June 30, 2010 and $49,000 for the following year. We are also responsible for our share of common area operating expenses, utilities and insurance (approximately $6,600 per month as of January 2009). We believe that these facilities are suitable and adequate through the end of the lease. We also lease approximately 1,300 square feet of warehouse and office space in Liege, Belgium, which supports our sales in Europe. ITEM 3--LEGAL PROCEEDINGS As of February 6, 2009, we were not involved in any material legal proceedings. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS We did not submit any matters to the vote of our shareholders in the fourth quarter of fiscal 2008. 11 PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES COMMON STOCK Our Common Stock trades in the over-the-counter market. The following table sets forth, for the periods indicated, high and low last reported sales prices for our Common Stock in the over-the-counter market. HIGH LOW ------ ------ FISCAL YEAR ENDED OCTOBER 31, 2007 First Quarter $ 0.53 $ 0.37 Second Quarter $ 0.64 $ 0.43 Third Quarter $ 0.90 $ 0.45 Fourth Quarter $ 0.82 $ 0.57 FISCAL YEAR ENDED OCTOBER 31, 2008 First Quarter $ 0.70 $ 0.56 Second Quarter $ 0.65 $ 0.55 Third Quarter $ 0.75 $ 0.46 Fourth Quarter $ 0.70 $ 0.35 On February 6, 2009, the last reported sales price of the Common Stock in the over-the counter market, was $0.30 per share. At January 10, 2009, there were 43 holders of record of our Common Stock. DIVIDENDS As a California corporation, under the California General Corporation Law, generally we may not pay dividends in cash or property except (1) out of positive retained earnings or (2) if, after giving effect to the distribution, our assets would be at least 1.25 times our liabilities and our current assets would exceed our current liabilities (determined under generally accepted accounting principles). At October 31, 2008, we had an accumulated deficit of $14.8 million and shareholders' equity of $888,000. As a result, we will not be able to pay cash dividends for the foreseeable future. In addition, under our principal credit facilities we may not pay dividends without the consent of the lenders. PURCHASES OF COMMON STOCK We did not repurchase any shares of our Common Stock in fiscal 2008. Under California law, repurchases of Common Stock are subject to the same restrictions as payment of dividends. ITEM 6--SELECTED FINANCIAL DATA Not applicable. ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis, which should be read in connection with our Financial Statements and accompanying footnotes, contain forward-looking statements that involve risks and uncertainties. Important factors that could cause actual results to differ materially from our expectations are set forth in "Factors that May Affect Our Future Operating Results" below, as well as those discussed elsewhere in this Report. All subsequent written and oral forward-looking statements attributable to us or to 12 persons acting on our behalf are expressly qualified in their entirety by such risk factors. Those forward-looking statements relate to, among other things, our plans and strategies, new product lines, and relationships with licensors, distributors and customers, distribution strategies and the business environment in which we operate. The following discussion and analysis should be read in connection with our Financial Statements and related notes and other financial information included elsewhere in this Report. OVERVIEW We generate revenues through the sale of prescription eyeglass frames and sunwear under licensed brand names, including bebe eyes, Carman Marc Valvo Eyewear, Cutter & Buck Eyewear, Dakota Smith Eyewear, Hart Schaffner Marx Eyewear, Hummer Eyegear, Laura Ashley Eyewear and Nicole Miller Eyewear, and under our proprietary Signature brand. Our cost of sales consists primarily of purchases from foreign contract manufacturers that produce frames and cases to our specifications. Our net sales decreased 2.2% from $25.0 million in fiscal 2007 to $24.5 million in fiscal 2008. The decrease in net sales in fiscal 2008 was primarily due to decreases in international sales, as a result of acquisition of major international customers by competitors and deep discounting in many international markets. We were able to maintain domestic sales relatively constant between the years despite the economic downturn and weak optical frame market. Income before taxes increased from $572,000 in fiscal 2007 to $630,000 in fiscal 2008. This increase was principally due to a $209,000 decrease in interest expense resulting primarily from lower interest rates. Our net income decreased from $2.7 million in fiscal 2007 to $622,000 in fiscal 2008. Net income in fiscal 2007 included $2.1 million in net tax benefits due to a reduction in the valuation allowance on our deferred tax asset. There was no tax benefit recognized in 2008. Net income was positively affected by an increase in gross margin from 63.9% in fiscal 2007 to 64.2 % in fiscal 2008 due primarily to increasing sales of higher margin product to the independent optical retailers. General and administrative expenses remained relatively constant at $5.8 million in each fiscal year while interest and depreciation expenses declined. We continued to reduce our long-term debt during fiscal 2008. Long-term debt (including current portion) decreased $238,000 from $5.1 million at October 31, 2007 to $4.9 million at October 31, 2008. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, and which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: o revenue recognition; o inventory valuation; and o valuation of deferred tax asset. 13 REVENUE RECOGNITION. Our policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. In general, revenue is recognized when merchandise is shipped. We have a product return policy that we believe is standard in the optical industry and is followed by most of our competitors. Under that policy, we generally accept returns of non-discontinued product for credit, upon presentment and without charge, and as a policy we do not make cash refunds. On a quarterly basis we review and establish an allowance for estimated product returns based upon actual returns subsequent to quarter-end and estimated future returns. We apply the historical ratio of sales returns to sales to estimate future returns in addition to known information about actual returns in the period subsequent to the balance sheet date. As of October 31, 2008, we had an allowance for product returns of $291,000. Management considered a range of allowances from $200,000 to $400,000. Variances in the allowance for product returns would have a corresponding impact on net sales for fiscal 2008. For example, if our allowance for product returns was $400,000, our net sales would have been $110,000 lower. INVENTORY. Inventory (consisting of finished goods) is valued at the lower of cost or market. Cost is computed using weighted average cost, which approximates actual cost on a first-in, first-out basis. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, selling prices and market conditions. Our inventory includes designer prescription eyeglass frames and sunwear, which are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than our estimates we may be required to take additional inventory write-downs in the future. Similarly, if our inventory is determined to be undervalued due to write-downs below market value, we would be required to recognize such additional operating income at the time of sale. Significant unanticipated changes in demand could have a material and significant impact on the future value of our inventory and reported operating results. VALUATION OF DEFERRED TAX ASSETS. Prior to 2003, we generated material net operating loss carryforwards and differences between the tax bases of assets and liabilities and their financial reporting amounts. These carryforwards and differences resulted in the recognition of a net deferred tax asset. Because of the uncertainty of our ability to realize the benefits of this asset, we established a valuation allowance in the full amount of the asset. As a result of generating net income during the past several fiscal years, we concluded that a portion of the net deferred tax asset is realizable. Accordingly, we reduced the valuation allowance. Realization of this deferred tax asset is dependent on our ability to generate future taxable income. Management believes that it is more likely than not that we will generate taxable income sufficient to realize a portion of the deferred tax asset. However, there can be no assurance that we will meet our expectation of future income. As a result, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced. Such occurrence could materially adversely affect our results of operations and financial condition. 14 RESULTS OF OPERATIONS The following table sets forth for the fiscal years indicated selected statements of operations data shown as a percentage of net sales. 2007 2008 ------- ------- Net sales 100.0% 100.0% Cost of sales 36.1 35.8 ------- ------- Gross profit 63.9 64.2 ------- ------- Operating expenses: Selling 35.8 36.6 General and administrative 23.1 23.5 Depreciation and amortization 0.8 0.4 ------- ------- Total operating expenses 59.7 60.5 ------- ------- Income from operations 4.2 3.7 Other expense (2.0) (1.1) ------- ------- Income before provision for income taxes 2.2 2.6 Provision for (Benefit from) income taxes - net (8.4) 0.1 ------- ------- NET INCOME 10.6% 2.5% ======= ======= COMPARISON OF FISCAL YEARS 2007 AND 2008 NET SALES. Net sales were $24.5 million in fiscal 2008 compared to $25.0 million in fiscal 2007. The following table shows certain information regarding net sales by product line for the fiscal years indicated: 2007 2008 --------------- --------------- bebe eyes $ 8,409 33.6% $ 8,947 36.5% Nicole Miller Eyewear 5,813 23.2 5,764 23.5 Laura Ashley Eyewear 3,664 14.6 3,849 15.7 Other 7,140 28.6 5,925 24.3 ------- ------ ------- ------ TOTAL $25,026 100.0% $24,485 100.0% ======= ====== ======= ====== While we did not increase wholesale frame prices in fiscal 2008, the average price of frames sold increased in fiscal 2008 due to a greater sales of higher-priced frames. Unit sales of frames decreased 14% in fiscal 2008. International sales decreased $416,000 in fiscal 2008 as a result of acquisition of major international customers by competitors and deep discounting in many international markets. International sales benefited somewhat from a weaker United States dollar in fiscal 2008 and growing international sales of bebe eyes. Net sales equal gross sales less returns and allowances. Our product returns as a percentage of gross sales was 12.8% in fiscal 2007 and 12.4% in fiscal 2008. Because of lower net sales in fiscal 2008, product returns decreased $210,000 from $3.7 million in fiscal 2007 to $3.5 million in fiscal 2008. We also maintain an allowance for product returns. See "Critical Accounting Polices." Changes in the allowance in any period will have a corresponding impact on net sales during the period. We made only small changes in our allowance for product returns in fiscal 2007 and fiscal 2008. GROSS PROFIT AND GROSS MARGIN. Gross profit was $15.7 million in fiscal 2008 compared to $16.0 million in fiscal 2007. The gross margin was 64.2% in fiscal 2008 compared to 63.9% in fiscal 2007. The 15 increase in gross margin in fiscal 2008 was primarily due to a higher average frame sale price and a lower cost for frame cases. SELLING EXPENSES. Selling expenses were $9.0 million in each of fiscal 2007 and 2008. Advertising expenses decreased $104,000 from fiscal 2007 to fiscal 2008 while development, point of purchase and international selling expenses increased. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $5.8 million in each of fiscal 2008 and fiscal 2007. Decreases of $107,000 in bad debt expense and $93,000 in legal, accounting and consulting expense were offset in part by a $144,000 increase in salary and payroll expense. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses decreased $91,000 from fiscal 2007 to fiscal 2008. OTHER INCOME (EXPENSE), NET. Interest expense decreased to $281,000 in fiscal 2008 from $490,000 in fiscal 2007. The decrease in fiscal 2008 was primarily due to a lower weighted average interest rate on our borrowings and a reduction in debt. PROVISION FOR INCOME TAXES. We recorded taxes of $8,000 in fiscal 2008 and recognized a net tax benefit of $2.1 million in fiscal 2007. The net tax benefit in fiscal 2007 was due to a decrease of $2.3 million in the valuation allowance on our deferred tax asset; in fiscal 2008 we recorded a decrease of $243,000 in this valuation allowance. We made the change to our valuation allowance as a result of our profitability during the past years and our future outlook. As of October 31, 2008, our net deferred tax asset was $3.0 million and we had a valuation allowance of $5.1 million against our deferred tax asset. As of October 31, 2008, we had net operating loss carry-forwards for federal and state income tax purposes of approximately $15.2 million and $4.3 million, respectively, which expire at various times from 2021 through 2027. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Our accounts receivable (net of allowance for doubtful accounts) were $2.8 million at October 31, 2008 and $2.9 million at October 31,2007. Our inventory (at lower of cost or market) was $5.6 million at October 31, 2008 and $4.8 million at October 31, 2007. This increase was primarily due to the launch of Carmen Marc Valvo Eyewear. At October 31, 2008, our long-term debt included principally a revolving line of credit with Comerica Bank with an outstanding principal balance of $2.9 million and a revolving line of credit with Bluebird Finance Limited ("Bluebird") with an outstanding principal balance of $1.9 million. See Note 4 of Notes to Financial Statements for further information regarding our long-term debt. Our long-term debt (including current portion) decreased from $5.1 million at October 31, 2007 to $4.9 million at October 31, 2008 due principally to continued amortization of the Bluebird credit facility. Borrowing availability under the Comerica Bank revolving line of credit is based on eligible accounts receivable, inventory and a letter of credit, up to a maximum of $4.8 million outstanding at any time. At October 31, 2008, we had $1.5 million of additional borrowing availability under this revolving line of credit. The revolving line of credit bears interest payable monthly at either Comerica Bank's base rate plus 0.5% or LIBOR plus 3.25%, as selected in advance by us, and will expire on February 28, 2010. At October 31, 2008, the interest rate on this revolving line of credit was 4.5% per annum. Our credit facility with Bluebird consists of a revolving credit line and support for the $1,250,000 letter of credit securing the Comerica Bank credit facility. Bluebird's commitment on the revolving credit facility was $1.9 million as of October 31, 2008, and reduces by $72,500 each quarter. The revolving credit 16 line bears interest at the rate of 5% per annum, with payments of principal and interest on a 10-year amortization schedule that commenced in fiscal 2005, and is due and payable in April 2013. The credit facility is secured by a security interest in our assets that is subordinate to the Comerica Bank credit facility. Our shareholders' equity increased from $200,000 at October 31, 2007 to $888,000 at October 31, 2008 due to our net income of $622,000 and the issuance of 100,000 shares of our Common Stock upon exercise of warrants for $0.67 per share. Of our accounts payable at October 31, 2008, $812,000 were payable in foreign currency. To monitor risks associated with currency fluctuations, we from time to time assess the volatility of certain foreign currencies and review the amounts and expected payment dates of our purchase orders and accounts payable in those currencies. During the past two years, we have generated cash primarily through product sales in the ordinary course of business, our bank credit facilities and sales of equity securities. At October 31, 2008, we had working capital of $2.4 million as compared to working capital of $1.9 million at October 31, 2007. Operating activities provided a net of $114,000 during fiscal 2008, while financing activities used a net of $171,000 and investing activities used a net of $99,000 during fiscal year 2008, resulting in a net decrease of $155,000 in cash and cash equivalents. Our business plan for 2009 provides for positive cash flow from operations. We believe that, at least through fiscal 2009, assuming that there are no unanticipated material adverse developments, and continued compliance with our credit facilities, our cash flows from operations and credit facilities will be sufficient to enable us to pay our debts and obligations as they mature. QUARTERLY AND SEASONAL FLUCTUATIONS Our results of operations have fluctuated from quarter to quarter and we expect these fluctuations to continue in the future. A factor which may significantly influence results of operations in a particular quarter is the introduction of a new brand-name collection, which results in disproportionate levels of selling expenses due to additional advertising, promotions, catalogs and in-store displays. Introduction of a new brand may also generate a temporary increase in sales due to initial stocking by retailers. Other factors which can influence our results of operations include customer demand, the mix of distribution channels through which the eyeglass frames are sold, the mix of eyeglass frames sold, product returns, delays in shipment and general economic conditions. The following table sets forth certain unaudited results of operations for the eight fiscal quarters ended October 31, 2008. The unaudited information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Report and includes all normal recurring adjustments which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of future period results. 17
2007 2008 --------------------------------------------------------------------- JAN. APR. JULY OCT. JAN. APR. JULY OCT. 31 30 31 31 31 30 31 31 ------ ------ ------ ------ ------ ------ ------ ------ Net sales $5,990 $6,451 $6,175 $6,409 $5,555 $6,686 $6,362 $5,882 Cost of sales 2,215 2,208 2,287 2,317 1,979 2,411 2,406 1,961 Gross profit 3,775 4,243 3,888 4,092 3,576 4,275 3,956 3,921 Operating expenses: Selling 2,093 2,348 2,185 2,345 1,933 2,494 2,248 2,283 General and administrative 1,484 1,502 1,458 1,521 1,411 1,497 1,462 1,490 Total operating expenses 3,577 3,850 3,643 3,866 3,344 3,991 3,710 3,773 Income (loss) from operations 198 393 245 226 232 284 246 148 Other (expense), net (120) (133) (125) (112) (80) (71) (64) (66) Income (loss) before provision for income taxes 78 260 120 114 152 213 182 82 Provision for income taxes (76) (254) (136) (1,624) 1 1 6 1 NET INCOME $ 154 $ 514 $ 256 $1,738 $ 151 $ 212 $ 176 $ 81
INFLATION We do not believe our business and operations have been materially affected by inflation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For recently issued accounting pronouncements that may affect us, see Note 2 of Notes to Financial Statements. FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS THE LOSS OF ANY MATERIAL BRAND NAME LICENSE WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS. Net sales of bebe eyes, Nicole Miller Eyewear and Laura Ashley Eyewear accounted for 36.5%, 23.5% and 15.7%, respectively, or a total of 75.7% of our net sales in fiscal year 2008. While we intend to continue efforts to expand sales of our other eyewear year lines and may acquire other brand name eyewear licenses, we expect these three lines to continue to be our leading sources of revenue for the near future. Our licenses for bebe eyes, Nicole Miller Eyewear and Laura Ashley Eyewear expire in June 2010, March 2012 and January 2010, respectively. These licenses may be terminated prior to expiration for material default and the failure to meet minimum sales and/or royalty requirements. The termination of any of these licenses would have a material adverse effect on our results of operations. OUR PRODUCT RETURN POLICY PERMITS RETURNS OF OUR PRODUCTS FOR CREDIT OR EXCHANGE, WHICH CAN MATERIALLY ADVERSELY AFFECT OUR NET SALES. We have a product return policy that we believe is standard in the optical industry and is followed by our competitors. Under that policy, we must pre-approve all product returns, which we will do only for credit or exchange if the product has not been discontinued. As a general policy, we do not make cash refunds. Our product returns for fiscal years 2007 and 2008 amounted to 12.8% and 12.4% of gross sales (sales before returns), respectively. We maintain an allowance for product returns that we consider adequate; however, an increase in returns that significantly exceeds the amount of those reserves would have a material adverse impact on our results of operations and financial condition. 18 WE COMPETE IN A HIGHLY COMPETITIVE ENVIRONMENT WITH COMPANIES THAT HAVE GREATER RESOURCES. The markets for prescription eyewear and sunwear are intensely competitive. There are thousands of frame styles, including thousands with brand names many of which have global recognition. At retail, our eyewear styles compete with styles that do and do not have brand names, styles in the same price range, and styles with similar design concepts. To obtain board space at an optical retailer, we compete against many companies, both foreign and domestic, including Luxottica Group S.p.A, Safilo Group S.p.A., and Marchon Eyewear, Inc. Our largest competitors have significantly greater financial, technical, sales, manufacturing and other resources than us. They also employ direct sales forces that have existed longer, and are significantly larger, than our direct sales force. At the major retail optical chains, we compete not only against other eyewear suppliers, but also against the chains themselves, as these chains have increasingly designed, manufactured and sold their own lower-priced private label brands. Luxottica, the largest eyewear company in the world, is vertically integrated, in that it manufactures frames, distributes them through a direct sales force in the United States and throughout the world, and owns LensCrafters, Sunglass Hut, Pearle Vision and Cole Vision, which combined is the largest worldwide retail optical chain. We compete in our target markets through the quality of the brand names we license, our marketing, merchandising and sales promotion programs, the popularity of our frame designs, the reputation of our styles for quality, our pricing policies and the quality of our sales force. We cannot assure you that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not materially and adversely affect our business, operating results and financial condition. THE LOSS OF OR MATERIAL REDUCTION IN PURCHASES BY ONE OR MORE OPTICAL RETAIL CHAINS WOULD ADVERSELY AFFECT OUR BUSINESS. Net sales to retail optical chains and department stores amounted to 13.5% and 13.7% of net sales in fiscal years 2007 and 2008, respectively, most of which were to retail optical chains. Retail optical chains have increasingly marketed their own lower-cost private label brands and are experiencing industry consolidation. The loss of one or more optical retail chains or department stores as a customer could have a material adverse affect on our business. THE INCREASING AVAILABILITY AND ACCEPTANCE OF VISION CORRECTION ALTERNATIVES MAY REDUCE CONSUMER DEMAND FOR FRAMES. Our future success could depend to a significant extent on the availability and acceptance by the market of vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive (optical) surgery. While we do not believe that contact lenses, refractive surgery or other vision correction alternatives materially and adversely impact our business at present, there can be no assurance that technological advances in, or reductions in the cost of, or greater consumer acceptance of, vision correction alternatives will not occur in the future, resulting in their more widespread use. Increased use of vision correction alternatives could result in decreased use of our eyewear products, which would have a material adverse impact on our results of operations and financial condition. IF WE HAVE A "CHANGE OF OWNERSHIP" AS DEFINED UNDER THE INTERNAL REVENUE CODE, OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS ("NOLS") WOULD BE SIGNIFICANTLY LIMITED. As of October 31, 2008, we had NOLs for federal and state income tax purposes of approximately $15.2 million and $4.3 million, respectively, that expire at various dates from 2021 through 2027. If a "change of ownership" of Signature occurs within the meaning of Section 382 of the Internal Revenue Code, our ability to use these NOLs in the future would be significantly limited. 19 IF OUR NET INCOME DECREASES MATERIALLY OVER AN EXTENDED PERIOD OF TIME, WE MAY NEED TO INCREASE THE VALUATION ALLOWANCE ON OUR DEFERRED TAX ASSET RELATING TO OUR NET OPERATING LOSS CARRYFORWARDS, WHICH WOULD FURTHER ADVERSELY AFFECT OUR RESULTS OF OPERATIONS FOR THE AFFECTED PERIODS. Prior to 2003, we generated net operating loss carryforwards that resulted in a deferred tax asset. Because of the uncertainty of realizing the benefits of this asset, we established a valuation allowance in the full amount of the asset. As a result of generating net income during the past several fiscal years, we reduced this valuation allowance by $2.3 million in fiscal year 2007 and $243,000 in fiscal year 2008. The change in the valuation allowance materially increased our net income for these periods. If we incur net losses over a sustained period in the future, we may increase the allowance, which would further adversely affect our results of operations in those periods. OUR DIRECTORS AND EXECUTIVE OFFICERS BENEFICIALLY OWN 47.6% OF OUR OUTSTANDING COMMON STOCK AND THUS CONTROL SIGNATURE. As of January 15, 2009, our directors and executive officers owned beneficially 47.6% of the outstanding shares of our Common Stock. As a result, the directors and executive officers control Signature and its operations not only as a result of their current positions, but their ability to elect a majority of the Board of Directors and therefore retain control of the Board. The voting power of the directors and executive officers could also serve to discourage potential acquirers from seeking to acquire control of us through the purchase of our Common Stock, which might depress the market price of our Common Stock. WE ARE UNABLE TO PAY ANY CASH DIVIDENDS FOR THE FORESEEABLE FUTURE. As a California corporation, under the California General Corporation Law, we may not pay dividends in cash or property except (i) out of positive retained earnings or (ii) if, after giving effect to the distribution, our assets would be at least 1.25 times our liabilities and our current assets would exceed our current liabilities (determined on a consolidated basis under generally accepted accounting principles). At October 31, 2008, we had an accumulated deficit of $14.7 million and shareholders' equity of $888,000. As a result, we will not be able to pay dividends for the foreseeable future. In addition, under our principal credit facilities, we may not pay dividends without the consent of the lenders. PROVISIONS IN OUR LICENSE AGREEMENTS THAT ALLOW THE LICENSORS TO TERMINATE THE LICENSES UPON A CHANGE OF CONTROL EFFECTED WITHOUT THEIR APPROVAL COULD HAVE THE EFFECT OF DISCOURAGING A THIRD PARTY FROM ACQUIRING OR ATTEMPTING TO ACQUIRE A CONTROLLING PORTION OF OUR OUTSTANDING VOTING STOCK AND COULD THEREBY DEPRESS THE MARKET VALUE OF OUR COMMON STOCK. Each of the Laura Ashley Eyewear, Hart Schaffner Marx Eyewear, bebe eyes and Hummer Eyegear licenses allows the licensor to terminate its license upon certain events that under the license are deemed to result in a change in control of Signature unless the change of control is approved by the licensor. The licensors' rights to terminate their licenses upon a change in control of Signature could have the effect of discouraging a third party from acquiring or attempting to acquire a controlling portion of our outstanding voting stock and could thereby depress the market value of our Common Stock. THE ABILITY OF OUR BOARD OF DIRECTORS TO AUTHORIZE THE ISSUANCE OF PREFERRED STOCK COULD HAVE THE EFFECT OF DISCOURAGING A THIRD PARTY FROM ACQUIRING OR ATTEMPTING TO ACQUIRE A CONTROLLING PORTION OF OUR OUTSTANDING VOTING STOCK AND COULD THEREBY DEPRESS THE MARKET VALUE OF OUR COMMON STOCK. Our Board of Directors has the authority to cause Signature to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of our Common Stock. We have outstanding 1,200,000 shares of Series A Preferred and have no present intention to issue any other shares of 20 Preferred Stock. However, the rights of the holders of our Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, which may depress the market value of our Common Stock. ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Signature Eyewear, Inc. We have audited the accompanying balance sheet of Signature Eyewear, Inc. as of October 31, 2008 and the related statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2008 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Crowe Horwath LLP Sherman Oaks, California February 11, 2009 21 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Signature Eyewear, Inc. We have audited the accompanying balance sheet of Signature Eyewear, Inc. as of October 31, 2007 and the related statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2007 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Grobstein Horwath & Company LLP Sherman Oaks, California January 18, 2008 22
SIGNATURE EYEWEAR, INC BALANCE SHEETS October 31, - --------------------------------------------------------------------------------------------------- ASSETS 2008 2007 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 305,628 $ 461,080 Accounts receivable - trade, net of allowance for doubtful accounts of $42,163 and $52,836, respectively 2,809,135 2,884,092 Inventory 5,607,178 4,764,490 Promotional products and materials 133,618 176,220 Prepaid expenses and other current assets 394,934 299,930 Deferred income taxes 376,500 376,500 ------------ ------------ Total current assets 9,626,993 8,962,312 PROPERTY AND EQUIPMENT, net 369,935 393,134 DEPOSITS AND OTHER ASSETS 107,656 92,769 DEFERRED INCOME TAXES 2,600,700 2,600,700 ------------ ------------ TOTAL ASSETS $ 12,705,284 $ 12,048,915 ============ ============
The accompanying notes are an integral part of these financial statements. 23
SIGNATURE EYEWEAR, INC BALANCE SHEETS October 31, - --------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 2008 2007 ------------ ------------ CURRENT LIABILITIES Accounts payable - trade $ 5,053,341 $ 4,757,209 Accrued expenses and other current liabilities 1,562,908 1,643,955 Reserve for customer returns 290,678 300,309 Current portion of long-term debt 290,000 365,100 ------------ ------------ Total current liabilities 7,196,927 7,066,573 LONG-TERM DEBT, net of current portion 4,620,000 4,782,500 ------------ ------------ Total liabilities 11,816,927 11,849,073 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, $0.001 par value 5,000,000 shares authorized Series A 2% convertible preferred stock, $0.001 par value (liquidation preference approximately $897,000 at October 31, 2008) 1,360,000 shares authorized 1,200,000 issued and outstanding 1,200 1,200 Common stock, $0.001 par value 30,000,000 shares authorized 6,955,639 shares and 6,855,639 issued and outstanding 6,956 6,856 Additional paid-in capital 15,656,812 15,589,912 Accumulated deficit (14,776,611) (15,398,126) ------------ ------------ Total shareholders' equity 888,357 199,842 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,705,284 $ 12,048,915 ============ ============
The accompanying notes are an integral part of these financial statements. 24
SIGNATURE EYEWEAR, INC STATEMENTS OF INCOME For the Years Ended October 31, - --------------------------------------------------------------------------------------------------- 2008 2007 ------------ ------------ NET SALES $ 24,485,402 $ 25,025,684 COST OF SALES 8,757,048 9,027,684 ------------ ------------ GROSS PROFIT 15,728,354 15,998,000 ------------ ------------ OPERATING EXPENSES Selling 8,958,077 8,971,548 General and administrative 5,751,792 5,765,205 Depreciation and amortization 107,553 198,597 ------------ ------------ Total operating expenses 14,817,422 14,935,350 ------------ ------------ INCOME FROM OPERATIONS 910,932 1,062,650 ------------ ------------ INTEREST EXPENSE (281,097) (490,180) ------------ ------------ INCOME BEFORE TAXES 629,835 572,470 INCOME TAXES 8,320 (2,090,634) ------------ ------------ NET INCOME 621,515 2,663,104 PREFERRED STOCK DIVIDEND (16,000) (16,000) ------------ ------------ NET INCOME AVAIALABLE TO COMMON SHAREHOLDERS $ 605,515 $ 2,647,104 ============ ============ BASIC EARNINGS PER SHARE $ 0.09 $ 0.39 ============ ============ DILUTED EARNINGS PER SHARE $ 0.08 $ 0.33 ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC 6,908,516 6,712,625 ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED 8,246,990 8,024,779 ============ ============
The accompanying notes are an integral part of these financial statements. 25
SIGNATURE EYEWEAR, INC STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended October 31, - ------------------------------------------------------------------------------------------------------------------------------- Series A 2% Convertible Additional Preferred Stock Common Stock Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total --------- ------- --------- ------- ------------ ------------ ------------ BALANCE, OCTOBER 31, 2006 1,200,000 $ 1,200 6,555,639 $ 6,556 $ 15,383,962 $(18,061,230) $ (2,669,512) Issuance of common stock -- -- 300,000 300 205,950 -- 206,250 Net income -- -- -- -- - 2,663,104 2,663,104 --------- ------- --------- ------- ------------ ------------ ------------ BALANCE, OCTOBER 31, 2007 1,200,000 1,200 6,855,639 6,856 15,589,912 (15,398,126) 199,842 Issuance of common stock -- -- 100,000 100 66,900 -- 67,000 Net income -- -- -- -- - 621,515 621,515 --------- ------- --------- ------- ------------ ------------ ------------ BALANCE, OCTOBER 31, 2008 1,200,000 $ 1,200 6,955,639 $ 6,956 $ 15,656,812 $(14,776,611) $ 888,357 ========= ======= ========= ======= ============ ============ ============
The accompanying notes are an integral part of these financial statements. 26
SIGNATURE EYEWEAR, INC STATEMENTS OF CASH FLOWS for the Years Ended October 31, - --------------------------------------------------------------------------------------------------- 2008 2007 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 621,515 $ 2,663,104 Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax asset -- (2,100,000) Depreciation and amortization 107,553 198,597 Provision for bad debts (10,673) 115,090 Reserve for customer returns (9,631) -- (Increase) decrease in: Accounts receivable - trade 85,629 (55,695) Inventories (842,689) (4,597) Promotional products and materials 42,602 (59,826) Prepaid expenses and other current assets (95,004) (159,942) Increase (decrease) in: Accounts payable - trade 296,132 62,391 Accrued expenses and other current liabilities (81,047) 206,701 ------------ ------------ Net cash provided by operating activities 114,387 865,823 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Certificate of Deposit -- 250,000 Purchase of property and equipment (84,352) (96,916) Deposits and other assets (14,887) 4,605 ------------ ------------ Net cash provided by (used in) investing activities (99,239) 157,689 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in lines of credit 200,000 (500,000) Payments on short-term debt (75,100) (402,555) Payments on long-term debt (362,500) (3,245,265) Borrowings on long-term debt -- 2,825,000 Proceeds from sale of common stock 67,000 206,250 ------------ ------------ Net cash used in financing activities (170,600) (1,116,570) ------------ ------------ Net decrease in cash and cash equivalents (155,452) (93,058) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 461,080 554,138 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 305,628 $ 461,080 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION INTEREST PAID $ 172,961 $ 342,479 ============ ============ INCOME TAXES PAID $ 8,320 $ 9,366 ============ ============
The accompanying notes are an integral part of these financial statements. 27 SIGNATURE EYEWEAR, INC. NOTES TO FINANCIAL STATEMENTS October 31, 2008 NOTE 1. ORGANIZATION AND LINE OF BUSINESS Signature Eyewear, Inc. (the "Company") designs, markets and distributes eyeglass frames throughout the United States and internationally. The Company conducts its operations primarily from its principal executive offices and a warehouse in Inglewood, California, and a warehouse and sales office in Belgium. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION For transactions satisfying the conditions for revenue recognition under Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," and Securities and Exchange Commission, Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," product revenue is recorded at the time of shipment, net of estimated allowances and returns. For transactions not satisfying the conditions for revenue recognition under SFAS No. 48 and SAB No. 104, product revenue is deferred until the conditions are met, net of an estimate for cost of sales. The Company had no deferred revenue at October 31, 2008 and 2007. For the fiscal years ended October 31, 2008 and 2007, the Company had sales returns totaling $3,478,510 and $3,688,795, respectively. The Company performs periodic credit evaluations of its customers and maintains allowances for potential credit losses based on management's evaluation of historical experience and current industry trends. Although the Company expects to collect amounts due, actual collections may differ. SHIPPING AND HANDLING COSTS EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the financial statements. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are recorded as a component of cost of sales, which totaled $456,125 and $467,405 in the fiscal years ended October 31, 2008 and 2007, respectively. Other shipping and handling costs are included in selling expenses and totaled $1,477,680 and $1,478,723 in the fiscal years ended October 31, 2008 and 2007, respectively. COMPREHENSIVE INCOME The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. For the fiscal years ended October 31, 2008 and 2007, comprehensive income is not presented in the Company's financial statements because the Company did not have any material translation adjustments or any of the other items of comprehensive income in any period presented. 28 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid securities with original maturities of three months or less. INVENTORY Inventory consists of finished goods, which are valued at the lower of cost or market. Cost is computed using the weighted-average cost, which approximates actual cost on a first-in, first-out basis. The Company regularly and periodically evaluates its inventory to ensure that it is valued at the lower of cost or market based on current market trends, product history, and turnover. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets as follows: Office furniture and equipment 7 years Computer equipment 3 years Software 3 years Machinery and equipment 5 years Leasehold improvements Term of the lease or the estimated life of the related improvements, whichever is shorter Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews the carrying value of other long-lived assets at least annually for evidence of impairment. When indicators of impairment are present, the Company evaluates the carrying value of long-lived assets in relation to the undiscounted future cash flows generated by such assets. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the present value of the expected future cash flows. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments recorded at market or fair value include cash, interest-bearing cash equivalents and debt. The following methods were used by the Company to estimate the fair value of all financial instruments that are not otherwise carried at fair value on the accompanying balance sheets: LONG-TERM DEBT. The fair value of long-term debt is estimated using a model that estimates fair values at market rates. 29 The carrying or notional amounts and fair values of the Company's financial instruments at October 31, 2008 and 2007 were as follows: 2008 2007 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS: FINANCIAL LIABILITIES: Revolving line of credit - Comerica Bank $2,900,000 $2,900,000 $2,700,000 $2,700,000 Term note payable-Ashford $125,000 $125,000 $125,000 $125,000 Revolving line of credit- Bluebird $1,885,000 $1,373,919 $2,247,500 $1,517,446 Note payable - commercial bank $-0- $-0- $75,100 $75,100 STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), established a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments. SFAS No. 123 was amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which required companies to disclose in the financial statements the pro forma effect on net income (loss) and net income (loss) per common share of the estimated fair market value of stock options or warrants issued to employees, officers, directors or affiliates. In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"), a revision to SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123R superseded APB No. 25 and amended SFAS No. 95, "Statement of Cash Flows." The Company adopted SFAS No. 123R effective November 1, 2005, and is using the Black-Scholes method in which compensation cost is recognized for all share-based payments granted during the period. When adopting SFAS No. 123R, the Company applied the provisions of Staff Accounting Bulletin No. 107 ("SAB No. 107"). During the fiscal year ended October 31, 2008, the Company did not issue any stock options. All options outstanding on October 31, 2008 were fully vested. ADVERTISING EXPENSE The Company expenses all advertising costs as they are incurred. Advertising expense for the fiscal years ended October 31, 2008 and 2007, was $534,798 and $638,369, respectively. INCOME TAXES The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods 30 in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for (benefit from) income taxes represents the tax payable (refundable) for the period and the change during the period in deferred tax assets and liabilities. FOREIGN CURRENCY TRANSLATION The Company's Belgium branch's functional currency is the Euro. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at average rates. In addition, some of the Company's liabilities are denominated in foreign currencies. Such liabilities are converted into U.S. Dollars at the exchange rate prevailing at the balance sheet date. The resulting gains or losses were immaterial for the fiscal years ended October 31, 2008 and 2007. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents, a restricted certificate of deposit and trade accounts receivable. The Company's deposits with financial institutions are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amount of funds held in any financial institution in excess of the insurance limit. In assessing the risk, the Company's policy is to maintain cash balances with well capitalized financial institutions. The Company's products are primarily sold to independent optical retailers, optical retail chains, and distributors. These customers can be significantly affected by changes in economic, competitive or other factors. In order to minimize the risk of loss, the Company routinely assesses the financial strength of its customers and the Company maintains an allowance for doubtful accounts. MAJOR VENDORS The Company purchases its frames from a limited number of contract manufacturers. The Company had purchases from four vendors amounting to 24%, 18% 17% and 12%, respectively, of total product purchases for the fiscal year ended October 31, 2008 and from three vendors amounting to 27%, 16% and 11%, respectively, for the fiscal year ended October 31, 2007. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 157, "FAIR VALUE MEASUREMENTS" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. As such, the Company adopted these provisions at the beginning of its fiscal year that began November 1, 2008. The Company does not anticipate the adoption of SFAS No. 157 will have a material impact on the Company's financial statements. In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES" ("SFAS No. 159"). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159's objective is to reduce both complexity in accounting for financial 31 instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS No. 159 also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157 and SFAS No. 107. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. As such, the Company adopted SFAS No. 159 at the beginning of its fiscal year that began November 1, 2008. The Company has determined there should be no impact on its financial statements by adopting SFAS No. 159. In March 2008, the FASB issued SFAS No. 161, "DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT OF FASB STATEMENT NO. 133" ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." The objective of SFAS No. 161 is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 applies to all derivative financial instruments, including bifurcated derivative instruments (and non-derivative instruments that are designed and qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items accounted for under SFAS No. 133 and its related interpretations. SFAS No. 161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company has not yet determined the impact SFAS No. 161 may have on its financial statements. In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the "GAAP hierarchy"). SFAS No 162 applies to financial statements of nongovernmental entities that are presented in conformity with GAAP, and will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "THE MEANING OF PRESENT FAIRLY IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES." An entity must report any effect of applying SFAS No. 162 as a change in accounting principle in accordance with SFAS No. 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS," including the accounting principles that were used before and after the application of SFAS No. 162 and the reason why applying SFAS NO. 162 resulted in a change in accounting principle. The Company has not yet determined the impact SFAS No. 162 may have on its financial statements. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment at October 31, 2008 and 2007 consisted of the following: 32 2008 2007 ----------- ----------- Computer equipment $ 1,628,670 $ 1,624,362 Leasehold improvements 1,275,386 1,254,986 Software 1,224,098 1,153,642 Office furniture and equipment 914,975 914,975 Machinery and equipment 721,785 732,595 ----------- ----------- 5,764,914 5,680,560 Less accumulated depreciation and amortization (5,394,979) (5,287,426) ----------- ----------- TOTAL $ 369,935 $ 393,134 =========== =========== Depreciation and amortization expense was $107,553 and $198,597 for the fiscal years ended October 31, 2008 and 2007, respectively. NOTE 4. LONG-TERM DEBT Long-term debt at October 31, 2008 and 2007 consisted of the following:
2008 2007 ---------- ---------- Revolving line of credit from Comerica Bank $2,900,000 $2,700,000 Revolving line of credit from Bluebird Finance Limited 1,885,000 2,247,500 Term note payable to Ashford Capital, LLC. 125,000 125,000 Note payable to a commercial bank in the original amount of $750,000 0 75,100 ---------- ---------- Total 4,910,000 5,147,600 Less current portion 290,000 365,100 ---------- ---------- LONG-TERM PORTION $4,620,000 $4,782,500 ========== ==========
Future maturities of long-term debt at October 31, 2008 were as follows: YEAR ENDING AMOUNTS OCTOBER 31, MATURING ----------- ---------- 2009 $ 290,000 2010 3,315,000 2011 290,000 2012 290,000 2013 435,000 ---------- TOTAL $4,620,000 ========== COMERICA BANK REVOLVING LINE OF CREDIT In September 2007, the Company obtained a revolving credit facility from Comerica Bank. Borrowing availability is based on eligible accounts receivable, inventory and a letter of credit, up to a maximum of $4.8 million outstanding at any time. The revolving line of credit bears interest payable monthly at either Comerica Bank's base rate plus 0.5% or LIBOR plus 3.25%, as selected in advance by the Company, and will expire on February 28, 2010. At October 31, 2008, the interest rate on this revolving line of credit was 4.50% per annum. The Company pays an annual facility fee equal to 0.25% of its credit limit. The revolving line of credit is secured by the assets of the Company and a letter of credit in the amount of $1,250,000. Financial and operating covenants include: (i) quarterly minimum pre-tax income, (ii) quarterly maximum ratio of total liabilities minus subordinated debt to subordinated liabilities and net worth, (iii) quarterly minimum ratio of cash and accounts receivables to current liabilities and revolving debt minus 33 subordinated debt, (iv) annual capital expenditures limitations, and (v) limitations on acquisitions and incurring future indebtedness without the bank's consent. The Company was in compliance with the Comerica covenants at October 31, 2008. Interest expense on this revolving line of credit was $172,961 and $25,960 for the fiscal years ended October 31, 2008 and 2007, respectively. BLUEBIRD FINANCE LIMITED ("BLUEBIRD") CREDIT FACILITY In April 2003, the Company obtained a credit facility from Bluebird of up to $4,150,000 secured by the assets of the Company. The credit facility includes a revolving credit line in the original amount of $2,900,000 bearing interest at the rate of 5% per annum and a letter of credit in the amount of $1,250,000 that presently serves as collateral for the Comerica Bank revolving line of credit. The maximum amount on the revolving line of credit declines $72,500 per quarter, commencing in 2005, and was $1,885,000 at October 31, 2008. This credit facility is subordinate to the Comerica Bank revolving line of credit. The Company must comply with certain financial and non-financial covenants, which include that without the consent of Bluebird, the Company may not make any acquisition or investment in excess of an aggregate of $150,000 each fiscal year outside the ordinary course of business or enter into any merger or similar reorganization. The Company was in compliance with the covenants at October 31, 2008. Interest expense on this credit facility was $102,487 and $118,102 for the fiscal years ended October 31, 2008 and 2007, respectively. Accrued interest payable to Bluebird as of October 31, 2008 and 2007 was $694,709 and $592,222, respectively. Bluebird owns all of the outstanding Series A 2% Convertible Preferred Stock of the Company. On an as-converted basis, these shares would represent approximately 16.1% of the outstanding Common Stock of the Company as of October 31, 2008. See Note 6. ASHFORD CAPITAL, LLC NOTE In May 2007, the Company issued at par an unsecured note to Ashford Capital, LLC in the amount of $125,000 bearing interest at 8% per annum, principal and interest payable on May 15, 2010. Interest expense on the Ashford Capital, LLC note was $10,000 and $5,233 for the fiscal years ended October 31, 2008 and 2007, respectively, all of which was accrued and unpaid. NOTE 5. COMMITMENTS AND CONTINGENCIES LEASES The Company maintains its principal offices and warehouse in leased facilities in Inglewood, California. The lease expires in June 2009 and provides for monthly rental payments of $51,200. The Company is also responsible for the monthly payment of $6,624 for the common area operating expenses, utilities and insurance. In January 2009 this lease was amended. See Note 11. The Company operates a warehouse and sales office in Belgium under a lease that expires in September 2009. The lease provides for minimum monthly rental payments of $2,012. The Company leases two automobiles under operating leases with aggregate monthly lease payments of approximately $2,300. The leases expire in February 2009 and May 2012. The Company also leases office equipment under operating leases requiring aggregate monthly payments of approximately $1,200. The leases expire in April 2009 and October 2012. 34 Future minimum lease payments on these leases as of October 31, 2008 were as follows: YEAR ENDING LEASE OCTOBER 31, PAYMENTS ----------- -------- 2009 $498,047 2010 33,246 2011 23,819 2012 13,895 -------- TOTAL $569,007 ======== Rent expense was $568,626 and $692,442 for the fiscal years ended October 31, 2008 and 2007, respectively (net of sublease income of $36,000 and $6,000, respectively). EMPLOYMENT AGREEMENTS In March 2008 the Company entered into employment agreements with its four executive officers. The employment agreement with Michael Prince, the Company's President, Chief Executive Officer and Chief Financial Officer, superseded his prior employment agreement. Under these employment agreements, the officers' annual base salaries are as follows: Michael Prince--$320,000; Kevin Seifert--$120,000; Raul Khantzis--$120,000 and Jill Gardner--$110,000. The annual base salaries increase a minimum of 5% on April 15 each year, commencing April 15, 2009. In addition, the Company has agreed to make contributions to the officers' accounts in the Company's 401(k) plan each year in an amount equal to a specified percentage, ranging from 40% to 100% depending on the officer's age, of the maximum allowable employee contribution for such year under the rules of the Internal Revenue Service, up to a maximum of $30,000 each year. The Company may terminate an officer's employment at any time and each officer may terminate his or her employment at any time upon 30 days' prior notice. If an officer's employment is terminated by the Company without cause or by the officer for "good reason," the officer will be entitled to continue to receive base salary until the later to occur of six months from termination of employment or March 1, 2011 (2013 for Mr. Prince) and continuation of certain other benefits. "Good reason" is defined to include, among other things, an adverse change in the employee's position, responsibilities or duties, a reduction in compensation or assignment to an office or location outside the Los Angeles metropolitan area on other than a temporary basis. CONSULTING AGREEMENTS In June 2000, the Company entered into a consulting agreement with a consultant to provide advice and assistance to the Company. Pursuant to the agreement, as amended, this unsecured consulting obligation is payable in monthly installments of $4,000 through October 2008. Total fees paid for this consulting obligation for the fiscal years ended October 31, 2008 and 2007 were $40,000 and $36,000, respectively. Total remaining minimum payments under this consulting obligation at October 31, 2008 are $8,000. The Company has a consulting agreement with Dartmouth Commerce of Manhattan, Inc. that provides for compensation of $55,000 per year. Richard M. Torre, the Chairman of the Board of the Company, owns Dartmouth Commerce. The Consulting Agreement may be terminated by either party at any time. The Company paid consulting fees under this agreement of $55,000 in each of the fiscal years ended October 31, 2008 and 2007. LICENSE AGREEMENTS The Company has entered into license agreements that grant to it the exclusive right to distribute, market and sell prescription eyeglass frames and in certain cases sunwear under various brand names in the United States and other designated territories. All of these license agreements contain minimum net sales and/or minimum royalty requirements, and certain of the license agreements have minimum advertising 35 expenditure requirements. All of the license agreements permit the licensor to terminate the license upon material breach or default by the Company. The Company was in compliance with its license agreements as of October 31, 2008. LICENSE EXPIRATION DATE RENEWABLE THROUGH - --------------------------- --------------- ----------------- bebe eyes June 2010 -- Carmen Marc Valvo Eyewear January 2012 January 2015 Cutter & Buck Eyewear December 2009 December 2011 Dakota Smith Eyewear February 2010 -- Hart Schaffner Marx Eyewear December 2010 December 2012 Hummer Eyegear June 2010 -- Laura Ashley Eyewear January 2010 -- Michael Stars Eyewear October 2011 October 2013 Nicole Miller Eyewear March 2012 -- The Company may not renew a license if it is in material default under the license agreement or, in certain cases, does not meet certain minimum sales and/or royalty requirements. Total minimum royalties payable under all of the Company's license agreements at October 31, 2008 were as follows: YEAR ENDING OCTOBER 31, MINIMUM ROYALTIES ----------- ----------------- 2009 $2,082,909 2010 1,572,917 2011 506,250 2012 233,333 ---------- TOTAL $4,395,409 ========== Total royalty expense charged to operations for the fiscal years ended October 31, 2008 and 2007, was $1,995,727 and $1,961,840, respectively. LITIGATION At October 31, 2008, the Company was not involved in any material litigation. NOTE 6. SHAREHOLDERS' EQUITY GENERAL The Company's Articles of Incorporation authorize 5,000,000 shares of preferred stock, par value $0.001 per share, and 30,000,000 shares of Common Stock, par value $0.001 per share. The Board of Directors has the authority to issue the preferred stock in one or more series with such designations, rights, and preferences as may be determined from time to time by the Board of Directors without shareholder approval. DESIGNATION AND ISSUANCE OF SERIES A 2% CONVERTIBLE PREFERRED STOCK In April 2003, Board of Directors authorized a new series of preferred stock, consisting of 1,300,000 shares and designated the "Series A 2% Convertible Preferred Stock" (the "Series A Preferred"). Pursuant to such authorization, the Company issued 1,200,000 shares to Bluebird for $800,000, or $0.6667 per share. The Series A Preferred provides for cumulative dividends at the rate of 2% per annum payable in cash or additional shares of Series A Preferred, and has a liquidation preference equal to $0.67 per share plus accrued and unpaid 36 dividends. The Company has the right to redeem the Series A Preferred, commencing on April 21, 2005 at the liquidation preference plus accrued and unpaid dividends and a premium of $450,000. The Company must redeem the Series A Preferred upon certain changes of control, as defined in the agreement, to the extent the Company has the funds legally available at the same redemption price. The Series A Preferred is convertible into Common Stock on a share-for-share basis, subject to adjustments for stock splits, stock dividends, and similar events. The holders of the Series A Preferred do not have voting rights, except as required by law, provided, however, that at any time two dividend payments are not paid in full, the Board of Directors of the Company will be increased by two and the holders of the Series A Preferred, voting as a single class, will be entitled to elect the additional directors. Bluebird received demand and piggyback registration rights for the shares of Common Stock into which the Series A Preferred may be converted. As of October 31, 2008, the Board of Directors had not declared any dividends on the Series A Preferred and dividends in arrears were approximately $92,778 (138,474 shares of Series A Preferred). Accordingly, the holders of the Series A Preferred have the right to increase the size of the Board by two and elect the two new directors. There is only one holder of record of the Series A Preferred, and that holder of the Series A Preferred has waived that right through 2009. STOCK OPTIONS AND WARRANTS The Company had one stock-based compensation plan, the 1997 Stock Plan, which terminated in May 2007. Options granted under the Plan remain outstanding and expire in accordance with their terms through 2009. The following is a summary of stock option activity under the 1997 Stock Plan for the last two fiscal years ended October 31, 2008: NUMBER OF EXERCISE WEIGHTED AVERAGE SHARES PRICE EXERCISE PRICE --------- -------- ---------------- Outstanding, October 31, 2006 97,200 $4-$10 $7.64 Canceled (59,900) $4-$10 $4.00 Outstanding, October 31, 2007 37,300 $4 $4.00 Canceled (3,000) $4 $4.00 Outstanding, October 31, 2008 34,300 $4 $4.00 EXERCISABLE, OCTOBER 31, 2008 34,300 $4 $4.00 No options were granted during the fiscal years ended October 31, 2008 and 2007. WARRANTS The following is a summary of warrants activity during the two fiscal years ended October 31, 2008: NUMBER OF EXERCISE WEIGHTED AVERAGE SHARES PRICE EXERCISE PRICE --------- ------------- -------------- Outstanding, October 31, 2006 100,000 $0.67 $0.67 Issued 300,000 $0.6875 $0.6875 Outstanding, October 31, 2007 400,000 $0.67-$0.6875 $0.6831 Exercised (100,000) $0.67 $0.67 Outstanding, October 31, 2008 300,000 $0.6875 $0.6875 EXERCISABLE, OCTOBER 31, 2008 300,000 $0.6875 $0.6875 The 300,000 warrants outstanding at October 31, 2008 are held by Ashford Capital, LLC. The warrants have an exercise price of 68.75 cents per share and expire on May 15, 2010. If the Company issues any common stock or common stock equivalents for a purchase price less than the current exercise price of the warrants, the exercise price of the warrants will be reduced by 200% of the difference between the exercise price of the warrants and the purchase price of such common stock. Ashford Capital, LLC has agreed not to exercise the warrants if such exercise would result in it beneficially owning more than 9.9% of the outstanding common stock of the Company. At the date of issuance, the value of these warrants was determined to be nominal. NOTE 7. EARNINGS PER SHARE The Company calculates earnings per share in accordance with SFAS No. 128, "EARNINGS PER SHARE." Diluted earnings per share is computed similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: Income Shares Per Share Year ended October 31, 2008 (Numerator) (Denominator) Amount - --------------------------------------- ----------- ------------- --------- Basic earnings per share $ 605,515 6,908,516 $ 0.09 Conversion of preferred stock 16,000 1,338,474 (0.01) ----------- --------- --------- Diluted earnings per share $ 621,515 8,246,990 $ 0.08 =========== ========= ========= Income Shares Per Share Year ended October 31, 2007 (Numerator) (Denominator) Amount - --------------------------------------- ----------- ------------- --------- Basic earnings per share $ 2,647,104 6,712,625 $ 0.39 Conversion of preferred stock 16,000 1,312,154 (0.06) ----------- --------- --------- Diluted earnings per share $ 2,663,104 8,024,779 $ 0.33 =========== ========= ========= The following potential common shares have been excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive: 2008 2007 --------- --------- Stock options 34,300 37,300 Warrants 300,000 400,000 --------- --------- TOTAL 334,300 437,300 ========= ========= 38 NOTE 8. INCOME TAXES On November 1, 2007, the Company adopted the provision of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN No. 48"). FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, disclosure, and other topics. The adoption of FIN No. 48 had no impact on the financial statements, as the Company had no material uncertain income tax positions which would result in a liability to the Company. The Company recognized no interest or penalties on income taxes in its statement of operations for the years ended October 31, 2008. Management believes that with few exceptions, the Company is no longer subject to income tax examinations by any tax authorities for years before October 31, 2004. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of October 31, 2008 and 2007 consisted of the following: 2008 2007 ---------- ---------- Allowance for doubtful accounts $ 18,000 $ 23,000 Capitalization of inventory costs 259,000 229,000 Sales returns reserve 125,000 193,000 Depreciation and amortization 2,441,000 2,430,000 Net operating loss carry-forward 5,530,000 5,557,000 Other 18,000 22,000 Valuation allowance (5,413,800) (5,476,800) ---------- ---------- TOTAL DEFERRED TAX ASSETS $2,977,200 $2,977,200 ========== ========== The following table presents the current and deferred income tax provision for (benefit from) federal and state income taxes for the fiscal years ended October 31, 2008 and 2007: 2008 2007 ---------- ---------- Current Federal $ -- $ -- State 8,320 9,366 ---------- ---------- 8,320 9,366 ---------- ---------- Deferred taxes Federal, current -- (121,500) Federal, non-current -- (1,978,500) ---------- ---------- -- (2,100,000) ---------- ---------- TOTAL PROVISION (BENEFIT) FOR INCOME TAXES $ 8,320 $(2,090,634) ========== =========== A reconciliation of the benefit from income taxes and the amount computed by applying the federal statutory rate to income before benefit for income taxes for the fiscal years ended October 31, 2008 and 2007 is as follows: 2008 2007 ---------- ---------- Computed income tax provision at federal statutory rate $ 214,144 $ 194,640 Increase (decrease) resulting from State income taxes 37,193 34,406 Permanent items 2,596 972 Change in valuation allowance (243,013) (2,320,652) Other, net (2,600) -- ---------- ----------- TOTAL $ 8,320 $(2,090,634) ========== =========== 39 The Company recorded taxes of $8,320 in the fiscal year ended October 31, 2008 and recognized a net tax benefit of $2,090,634 in the fiscal year ended October 31, 2007. The Company recorded decreases in the valuation allowance on its deferred tax asset of $243,013 and $2,320,652 in the fiscal years ended October 31, 2008 and 2007. respectively. The Company reduced the valuation allowance as a result of its profitability during the prior years and its future outlook. As of October 31, 2008, the Company's net deferred tax asset was $2,977,000 and it had a valuation allowance of $5,057,000 against the deferred tax asset. As of October 31, 2008, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $15,156,000 and $4,271,000, respectively, which expire at various times from 2021 through 2027. As of October 31, 2007, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $15,224,000 and $4,299,000, respectively. The Company has net operating loss carry-forwards for which partial benefit for income taxes has been provided. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not a portion of deferred tax assets will not be realized. Realization of this deferred tax asset is dependent on the Company's ability to generate future taxable income. Management believes that it is more likely than not that the Company will generate taxable income to utilize some of the tax carry-forwards before their expiration. However, there can be no assurance that the Company will meet its expectation of future income. As a result, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced. Such occurrence could materially adversely affect the Company's results of operations and financial condition. The Company recognized the reversal of the deferred tax asset valuation of $2,100,000 during the fourth quarter of the fiscal year ended October 31, 2007. There were no other extraordinary, unusual or infrequently occurring items recognized in the fourth quarter of the fiscal years ended October 31, 2008 and 2007. As of October 31, 2008 and 2007, the Company had available alternative minimum tax credit carry-forwards for tax purposes of approximately $114,000 that may be used indefinitely to reduce regular federal income tax until exhausted. NOTE 9. EMPLOYEE BENEFIT PLAN The Company has a 401(k) profit sharing plan covering all eligible employees. Eligible employees may elect to contribute up to $15,500 of their annual compensation and, if they are 50 years old or above, may elect a catch-up contribution of $5,000. The Company may also elect to make discretionary contributions. In the fiscal years ended October 31, 2008 and 2007 the Company provided matching contributions of $27,500 and $40,049, respectively. NOTE 10. FOREIGN OPERATIONS The Company operates a warehouse and sales office in Belgium. The following is a summary of the Company's foreign operations: 2008 2007 ---------- ---------- Balance Sheet Identifiable assets $ 391,367 $ 426,978 2008 2007 ---------- ---------- Statement of Operations Net sales $ 871,491 $ 996,397 Net income (loss) $ (55,216) $ (178,394) The Company also exports directly from the United States to foreign countries. During the fiscal years ended October 31, 2008 and 2007, exports from the United States amounted to $1,500,926 and $1,791,640, respectively. 40 NOTE 11. SUBSEQUENT EVENT On January 26, 2009 the Company amended the lease for its principal offices and warehouse in Inglewood, California. The amendment extended the term for two years to June 30, 2011, granted the Company a two-year renewal option, and reduced the monthly rent during the extended term to $48,000 for the year ending June 30, 2010 and $49,000 for the year ending June 30, 2011. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Grobstein Horwath & Company LLP ("GHC") audited our financial statements for fiscal years 2004 through 2007. Effective December 8, 2008, the personnel of GHC joined Crowe Horwath LLP ("Crowe") and GHC resigned as the Company's independent auditors. On December 9, 2008, the Company engaged Crowe as its independent auditor for the audit of the Company's financial statements for the year ended October 31, 2008. The Company's Audit Committee approved this engagement. The audit reports of GHC on the financial statements of the Company as of and for fiscal years 2007 and 2006 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years ended October 31, 2007 and 2006 and through December 9, 2008, the Company did not consult with Crowe on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's financial statements, and Crowe did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K. In connection with the audits of the Company's financial statements for the fiscal years 2007 and 2006 and through December 8, 2008, there were: (i) no disagreements between the Company and GHC on any 41 matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of GHC, would have caused GHC to make reference to the subject matter of the disagreement in their reports on the Company's financial statements for such years, and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K. ITEM 9A--CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control objectives, and management necessarily is required to apply its judgment in weighting the costs and benefits of possible new or different controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within we have been detected. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (the same person has both titles), evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of that date. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of October 31, 2008. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors ; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the same person has both titles), we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the above evaluation, our management has concluded that, as of October 31, 2008, we did not have any material weaknesses in our internal control over financial reporting and our internal control over financial reporting was effective. This annual report does not include an attestation report of a registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. 42 CHANGES IN INTERNAL CONTROLS There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B--OTHER INFORMATION On January 23, 2009 we amended our lease with Roxbury Property Management for our principal offices and warehouse in Inglewood, California. The amendment extended the term for two years to June 30, 2011, granted us a two-year renewal option, and reduced our monthly rent during the extended term. See "Item 2--Properties" for information on the lease, as amended. PART III ITEM 10--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information under the captions "Election of Directors - Information About the Nominees, and - Board Committees - Audit Committee" and "Other Information - Executive Officers, - Compliance with Section 16(a) Beneficial Ownership Reporting and - Code of Ethics" in our definitive proxy statement for the 2008 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference. ITEM 11--EXECUTIVE COMPENSATION The information under the caption "Other Information - Compensation of Executive Officers" in the Proxy Statement is incorporated herein by reference. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under the captions "Other Information - Security Ownership of Principal Shareholders, Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Other Information - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. ITEM 14--PRINCIPAL ACCOUNTANT FEES AND SERVICES The information under the caption "Independent Public Accountants" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 15--EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents Filed as Part of Report: 43 1. Financial Statements: Independent Auditor's Reports Balance Sheets at October 31, 2008 and 2007 Statements of Operations for the years ended October 31, 2008 and 2007 Statements of Changes in Shareholders' Equity for the years ended October 31, 2008 and 2007 Statements of Cash Flows for the years ended October 31, 2008 and 2007 2. Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts 3. Exhibits: See attached Exhibit List 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURE EYEWEAR, INC. By: /s/ MICHAEL PRINCE ------------------------ Michael Prince Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Michael Prince Chief Executive Officer, Chief February 12, 2009 -------------------- Financial Officer and Director Michael Prince (Principal Financial and Accounting Officer) /s/ Edward Meltzer Director February 12, 2009 -------------------- Edward Meltzer /s/ Drew Miller Director February 12, 2009 -------------------- Drew Miller /s/ Ted Pasternack Director February 12, 2009 -------------------- Ted Pasternack /s/ Richard M. Torre Chairman of the Board February 12, 2009 -------------------- Richard M. Torre 45 EXHIBIT INDEX Exhibit Number Exhibit Description - ------ ------------------- 3.1 Restated Articles of Incorporation of Signature Eyewear, Inc. ("Signature"). Certificate of Determination of Series A 2% Convertible Preferred Stock of Signature Eyewear, Inc., filed April 21, 2003 with the California Secretary of State. 3.2 Amended and Restated Bylaws of Signature. Incorporated by reference to Exhibit 3.2 to Signature's Form S-1 (SEC Registration No. 333-30017), filed with the Commission on June 25, 1997, as amended. 4.1 Specimen Stock Certificate for Common Stock. Incorporated by reference to Exhibit 4.1 to Signature's Form S-1 (SEC Registration No. 333-30017), filed with the Commission on June 25, 1997, as amended. 4.2 Specimen Stock Certificate for Series A 2% Convertible Preferred Stock. 10.1 1997 Stock Plan. Incorporated by reference to Exhibit 10.1 to Signature's Form S-1 (SEC Registration No. 333-30017), filed with the Commission on June 25, 1997, as amended. 10.2 Form of Signature's Stock Option Agreement (Non-Statutory Stock Option). Incorporated by reference to Exhibit 10.2 to Signature's Form S-1 (SEC Registration No. 333-30017), filed with the Commission on June 25, 1997, as amended. 10.3 Form of Indemnification Agreement for Directors and Officers. Incorporated by reference to Exhibit 10.3 to Signature's Form S-1 (SEC Registration No. 333-30017), filed with the Commission on June 25, 1997, as amended. 10.4 License Agreement dated May 28, 1991, between Laura Ashley Manufacturing B.V. and Signature, as amended August 2, 1993; Further Amending Agreement dated December 18, 2002; Letter Amendment dated as of April 14, 2003; and Letter Agreement dated February 9, 2007. [Portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a grant of Confidential Treatment.] 10.5 Lease Agreement, dated March 7, 2005, between Signature and Roxbury Property Management Incorporated by reference to Exhibit 10.1 to Signature's Quarterly Report on Form 10-Q for the quarter ended April 30, 2005. 10.6 Agreement dated April 21, 2003: US $4,150,000 Credit Facility for Signature provided by Bluebird Finance Limited; Security Agreement dated April 21, 2003 between Signature as Debtor and Bluebird Finance Limited as Secured Party. 10.7 Stock Purchase Agreement dated April 21, 2003 between Bluebird Finance Limited and Signature. 46 10.8 Consulting Agreement dated as of April 1, 2003 between Signature and Dartmouth Commerce of Manhattan, Inc. 10.9 Trademark License Agreement dated October 12, 2005 between Signature and Kobra International, Ltd. T/A Nicole Miller. Incorporated by reference to Exhibit 10.16 of Signature's Annual Report on Form 10-K for the year ended October 31, 2005. [Portions of this Exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a grant of Confidential Treatment.] Amendment One dated July 7, 2008 to the License Agreement by and between Kobra International, Ltd. d/b/a Nicole Miller and the Company, dated October 12, 2005. Incorporated by reference to Exhibit 10.1 of Signature's Quarterly Report on Form 10-Q for the quarter ended July 31, 2008. [Portions of this Amendment have been deleted and filed separately with the Commission pursuant to a grant of Confidential Treatment.] 10.10 License Agreement dated September 23, 1999 between Signature and bebe stores, inc.; Amendment dated September 23, 1999; Amendment Two dated June 4, 2002; Amendment Three dated July 3, 2003; and Amendment Four dated April 5, 2005. Incorporated by reference to Exhibit 10.19 of Signature's Annual Report on Form 10-K for the year ended October 31, 2005. Amendment Five dated June 28, 2006. Incorporated by reference to Exhibit 10.16 of Signature's Annual Report on Form 10-K for the year ended October 31, 2006. Amendment Six dated December 31, 2006. Incorporated by reference to Exhibit 10.2 of Signature's Quarterly Report on Form 10-Q for the quarter ended January 31, 2007. Amendment Seven dated August 23, 2007. Incorporated by reference to Exhibit 10.16 of Signature's Annual Report on Form 10-K for the year ended October 31, 2007. [Portions of this Exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a grant of Confidential Treatment.] 10.11 Loan and Security Agreement dated September 14, 2007 between Signature and Comerica Bank. Incorporated by reference to Exhibit 10.17 of Signature's Annual Report on Form 10-K for the year ended October 31, 2007. [Portions of this Exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a grant of Confidential Treatment.] 10.12 Employment Agreement dated March 11, 2008 between Signature and Michael Prince. Incorporated by reference to Exhibit 10.1 of Signature's Quarterly Report on Form 10-Q for the quarter ended April 30, 2008. 10.13 Employment Agreement dated March 11, 2008 between Signature and Jill Gardner. Incorporated by reference to Exhibit 10.2 of Signature's Quarterly Report on Form 10-Q for the quarter ended April 30, 2008. 10.14 Employment Agreement dated March 11, 2008 between Signature and Raul Khantzis. Incorporated by reference to Exhibit 10.3 of Signature's Quarterly Report on Form 10-Q for the quarter ended April 30, 2008. 10.15 Employment Agreement dated March 11, 2008 between Signature and Kevin D. Seifert. Incorporated by reference to Exhibit 10.4 of Signature's Quarterly Report on Form 10-Q for the quarter ended April 30, 2008. 23.1 Consent of Crowe Horwath LLP 23.2 Consent of Grobstein Horwath & Company LLP 31.1 Certification Pursuant to SEC Rule 13a-14(a)/15d-14(a) 32.1 Certification Pursuant to 18 U.S.C. ss. 1350 99.1 Schedule II--Valuation and Qualifying Accounts. 47 EX-3.1 2 ex3-1_16269.txt RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 ----------- RESTATED ARTICLES OF INCORPORATION OF SIGNATURE EYEWEAR, INC. The undersigned, Julie Heldman and Michael Prince, do hereby certify that: 1. They are the President and Chief Financial Officer, respectively, of Signature Eyewear, Inc., a California corporation (the "Corporation"). 2. The Articles of Incorporation of this Corporation are restated to read as follows: I. The name of this Corporation is Signature Eyewear, Inc. II. The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. III. (a) The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) This Corporation is authorized to provide for, whether by bylaw, agreement or otherwise, the indemnification of agents (as defined in Section 317 of the General Corporation Law of California) of this Corporation in excess of that expressly permitted by such Section 317 for those agents, for breach of duty to this Corporation and its shareholders to the extent permissible under California law (as now or hereafter in effect). In furtherance and not in limitation of the powers conferred by statute: (i) this Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of this Corporation, or is serving at the request of this Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not this Corporation would have the power to indemnify against such liability under the provisions of law; and 1 (ii) this Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. No such bylaw, agreement or other form of indemnification shall be interpreted as limiting in any manner the rights which such agents would have to indemnification in the absence of such bylaw, agreement or other form of indemnification. (c) Any repeal or modification of the foregoing provisions of this Article III by the shareholders of this Corporation shall not adversely affect any right or protection of a director of this Corporation existing at the time of such repeal or modification. IV. (a) This Corporation is authorized to issue 30,000,000 shares of Common Stock, par value $.001 per share (hereinafter referred to as the "Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.001 per share (hereinafter referred to as the "Preferred Stock"). (b) Such Preferred Stock may be issued from time to time in one or more series as shall be authorized by the Board of Directors of this Corporation. The Board of Directors of this Corporation shall, prior to the issuance of any such shares of any series of Preferred Stock, fix (i) the number of shares of each such series of Preferred Stock and (ii) such distinctive designation or title of each such series of Preferred Stock with such rights, privileges, powers and preferences thereof. (c) Upon the filing of this restatement of the Articles of Incorporation of this Corporation, each outstanding share of Common Stock shall, without any further action on the part of the Corporation, be split and converted into 3.175 shares of Common Stock. V. Cumulative voting for the election of directors of this Corporation shall be eliminated effective upon the date this Corporation becomes, and for as long as this Corporation is, a "listed corporation" within the meaning of Section 301.5 of the General Corporation Law of California. 3. The foregoing restatement of the Articles of Incorporation has been duly approved by the Board of Directors of this Corporation. 2 4. The foregoing restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the General Corporation Law of California. The total number of outstanding shares of this Corporation is 1,134,021 shares of Common Stock. The number of shares voting in favor of the restatement equaled or exceeded the vote required. The percentage vote required was more than 50% of the Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at Los Angeles, California, on June 6, 1997. /s/ Julie Heldman --------------------------------------- Julie Heldman, President /s/ Michael Prince --------------------------------------- Michael Prince, Chief Financial Officer 3 CERTIFICATE OF DETERMINATION OF SERIES A 2% CONVERTIBLE PREFERRED STOCK OF SIGNATURE EYEWEAR, INC. The undersigned hereby certify that: 1. They are the President and Secretary, respectively, of Signature Eyewear, Inc., a California corporation ("CORPORATION"). 2. The authorized number of shares of this Corporation's Preferred Stock is 5,000,000, and the number of shares of the Series A Preferred Stock (which is the series created by this Certificate of Determination) is 1,360,000. None of the shares of the Series A Preferred Stock has been issued. 3. Pursuant to authority granted by Article IV of this Corporation's Restated Articles of Incorporation, the following resolutions have been duly adopted and approved by this Corporation's Board of Directors: "WHEREAS, the Restated Articles of Incorporation of this Corporation provide for a class of shares known as Preferred Stock, issuable from time to time in one or more series; and WHEREAS, the Board of Directors of this Corporation is authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on any wholly unissued series of Preferred Stock, to fix a number of shares constituting any such series, and to determine the designation of that series, or any of them; and WHEREAS, the Board of Directors of this Corporation has determined it to be in the best interests of this Corporation and its shareholders to issue a Series A Preferred Stock and to fix the rights, preferences, privileges, and restrictions relating to that Series A Preferred Stock and the number of shares constituting that series; NOW, THEREFORE, BE IT HEREBY RESOLVED, THAT pursuant to Article IV of the Articles of Incorporation which authorizes 5,000,000 shares of preferred stock, $0.001 par value ("PREFERRED STOCK"), the Board of Directors hereby fixes the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of a series of Preferred Stock. RESOLVED FURTHER, that each share of such series of Preferred Stock shall rank equally in all respects and shall be subject to the following provisions: 1. NUMBER AND DESIGNATION. 1,360,000 shares of the Preferred Stock of the Corporation shall be designated as Series A 2% Convertible Preferred Stock (the "SERIES A PREFERRED STOCK") (including 160,000 shares of Series A Preferred Stock reserved exclusively for the payment of dividends pursuant to paragraph 4 and referred to therein as "Additional Shares"). After the initial issuance of 1,200,000 shares of Series A Preferred Stock, the Corporation may not issue additional shares of Series A Preferred Stock except as Additional Shares issued in lieu of payment of dividends on outstanding shares of Series A Preferred Stock or upon the transfer, exchange or replacement of existing shares of Preferred Stock. 2. DEFINITIONS. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated. 10 DAY MARKET PRICE means the average of the daily Market Prices of the Common Stock for the 10 consecutive trading days ending the day prior to the date for which such value is to be computed 30 DAY MARKET PRICE means the average of the daily Market Prices of the Common Stock for the 30 consecutive trading days ending the day prior to the date for which such value is to be computed. AFFILIATE means, with respect to any specified Person, any other Person that, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling," and "controlled" have meanings correlative to the foregoing. BOARD OF DIRECTORS means the Board of Directors of the Corporation. BUSINESS DAY means any day except Saturday, Sunday and any day that is a legal holiday or a day on which banking institutions in Los Angeles, California generally are authorized or required by law or other governmental actions to close. CAPITAL STOCK means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of such Person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of indebtedness), warrants or options exchangeable for or convertible into such capital stock. CHANGE OF CONTROL means the occurrence of any of the following events: (a) any Person or Group is or becomes the beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the Corporation; or (b) the Corporation consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into the Corporation, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Corporation is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Corporation is converted into or exchanged for Voting Stock of the surviving or transferee corporation or its parent corporation and/or cash, securities or other property in an amount which could be paid by the Corporation under the terms of the Corporation's credit and financing agreements and (ii) immediately after such transaction no Person or Group is the beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the 2 passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation, as applicable; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Corporation was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. COMMON STOCK means the Corporation's common stock, par value $0.001 per share. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder. FIRST CALL DATE means April 21, 2005. GROUP means a group within the meaning of Section 13(d)(3) of the Exchange Act. ISSUE DATE means the first date of issuance of shares of Series A Preferred Stock. HOLDER means a person who owns Series A Preferred Stock. LIQUIDATION PREFERENCE is an amount equal to US$0.67 per share plus accrued but unpaid dividends per share of Series A Preferred Stock. MARKET PRICE means, with respect to the Common Stock, on any given day, (i) the price of the last trade, as reported on the Nasdaq National Market, not identified as having been reported late to such system, or (ii) if the Common Stock is so quoted, but not so traded, the average of the last bid and ask prices, as those prices are reported on the Nasdaq National Market, or (iii) if the Common Stock is not listed or authorized for trading on the Nasdaq National Market or any comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose; provided that, in connection with (i) or (ii), the Corporation may from time to time specify in advance the time at which the trade price or bid and ask prices, respectively, shall be determined for purposes of a particular calculation . If the Common Stock is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be the fair value per share of such security as determined in good faith by the Board of Directors. OUTSTANDING, when used with reference to shares of stock, means issued shares, excluding shares held by the Corporation or a subsidiary. PERSON means an individual, corporation, partnership, limited liability company, association, trust and any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. REDEMPTION PREMIUM means US$450,000. VOTING STOCK means, with respect to any Person, the Capital Stock of any class or kind (other than the Series A Preferred Stock) ordinarily having the power to vote for the election of directors or other members of the governing body of such Person. 3 3. RANK. (a) Any class or series of stock of the Corporation shall be deemed to rank: (i) prior to the Series A Preferred Stock, either as to the payment of dividends or as to distribution of assets upon liquidation, dissolution or winding up, or both, if the holders of such class or series shall be entitled by the terms thereof to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up, in preference or priority to the holders of Series A Preferred Stock ("SENIOR SECURITIES"); (ii) on a parity with the Series A Preferred Stock, either as to the payment of dividends or as to distribution of assets upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Stock if the holders of the Series A Preferred Stock and of such class of stock or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, or both, in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences (including, but not limited to preferences as to payment of dividends or other amounts distributable upon liquidation), without preference or priority one over the other and such class of stock or series is not a class of Senior Securities ("PARITY SECURITIES"); and (iii) junior to the Series A Preferred Stock, either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, or both, if such stock or series shall be Common Stock or if the holders of the Series A Preferred Stock shall be entitled by the terms thereof to receipt of dividends, and of amounts distributable upon liquidation, dissolution or winding up, in preference or priority to the holders of shares of such stock or series (including, but not limited to preferences as to payment of dividends or other amounts distributable upon liquidation) ("JUNIOR SECURITIES"). (b) The respective definitions of Senior Securities, Junior Securities and Parity Securities shall also include any rights or options exercisable or exchangeable for or convertible into any of the Senior Securities, Junior Securities and Parity Securities, as the case may be. (c) The Series A Preferred Stock shall be subject to the creation of Junior Securities and Parity Securities. 4. DIVIDENDS. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive with respect to each share of Series A Preferred Stock, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative dividends at a rate per annum equal to two percent (2%) of the then effective Liquidation Preference per share, payable in (A) cash, (B) additional shares of Series A Preferred Stock ("ADDITIONAL SHARES") or (C) any combination of the foregoing in accordance with the terms of this paragraph 4; provided, however, that dividends must be payable solely in cash unless, with respect to each Dividend Payment Date (as hereinafter defined) on which the Corporation elects to pay all or a portion of the applicable dividend in Additional Shares, the Corporation delivers to the holders a certified resolution of the Board of Directors of the Corporation finding that payment of the dividend solely in cash would materially adversely affect the financial condition of the Corporation; and provided, further, however that the Corporation may not issue Additional Shares in lieu of cash dividends 4 unless sufficient shares of Series A Preferred Stock remain authorized and available for issuance. Such dividends shall be cumulative from the Issue Date regardless of when actually issued (except that dividends on Additional Shares shall accrue from the date such Additional Shares are issued), whether or not in any Dividend Period or Dividend Periods there shall be funds of the Corporation legally available for the payment of such dividends and whether or not dividends are declared, and shall be payable on April 21, 2003 of each year (unless such day is not a Business Day, in which event such dividends shall be payable on the next succeeding Business Day) (each such date being a "DIVIDEND PAYMENT DATE" and each such annual period being a "DIVIDEND PERIOD"). Each such dividend shall be payable to the holders of record of shares of the Series A Preferred Stock as they appear on the share register of the Corporation on the corresponding Record Date. As used herein, the term "RECORD DATE" means, with respect to the dividend payable on the April 21, 2003 of each year, the date 45 days preceding April 21, 2003. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such record date, not more than 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. Dividends shall accumulate to the extent that they are not paid on the Dividend Payment Date for the Dividend Period to which they relate. (b) Holders of shares of Series A Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series A Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Stock that may be in arrears; provided that if dividends are not paid in full on any Dividend Payment Date, the amount so payable, to the extent not paid, shall be added to the then effective Liquidation Preference on such Dividend Payment Date. (c) So long as any shares of the Series A Preferred Stock are outstanding, no dividend, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any Parity Securities, nor shall any Parity Securities be redeemed, purchased or otherwise acquired for any consideration (or moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly, (except by conversion into or exchange for Junior Securities) unless in each case full cumulative dividends have been or contemporaneously are declared and paid or declared and consideration sufficient for the payment thereof set apart for such payment on the Series A Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Securities or the redemption, purchase or other acquisition thereof. When dividends are not paid in full or consideration sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Series A Preferred Stock and all dividends declared upon any other class or series of Parity Securities shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series A Preferred Stock and accumulated and unpaid on such Parity Securities. (d) So long as any shares of the Series A Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or to effectuate a stock split on, or options, warrants or rights to subscribe for or purchase shares of, Junior Securities) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired (other than a 5 redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan of the Corporation or any subsidiary) (any such dividend, distribution, redemption or purchase being hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Securities), unless in each case (i) the full cumulative dividends on all outstanding shares of the Series A Preferred Stock and accrued and unpaid dividends on any other Parity Securities shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series A Preferred Stock and all past dividend periods with respect to such Parity Securities and (ii) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and the current dividend period with respect to such Parity Securities. (e) The number of Additional Shares to be issued as dividends in lieu of cash will equal the quotient of (X) the cash amount of the dividend that otherwise would have been payable in cash and (Y) the then effective Liquidation Preference per share. 5. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of Junior Securities, the holders of the shares of Series A Preferred Stock shall be entitled to receive with respect to each share of Series A Preferred Stock an amount in cash equal to the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid thereon to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on the Series A Preferred Stock and all Parity Securities, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series A Preferred Stock and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of Series A Preferred Stock and any such other Parity Securities if all amounts payable thereon were paid in full. (b) Subject to the rights of the holders of any Parity Securities, after payment shall have been made in full to the holders of the Series A Preferred Stock, as provided in this paragraph 5, any other series or class or classes of Junior Securities shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Preferred Stock and any Parity Securities shall not be entitled to share therein. 6. REDEMPTION. (a) The Series A Preferred Stock shall not be redeemable by the Corporation prior to the First Call Date. On and after the First Call Date, to the extent the Corporation shall have funds legally available for such payment, the Corporation may redeem at its option all the shares of Series A Preferred Stock, at any time in whole only at a redemption price per share equal to the Liquidation Preference (which for the avoidance of doubt shall be deemed to include all accrued and unpaid dividends thereon) plus the Redemption Premium thereon to the date fixed for redemption (the "REDEMPTION PRICE"). 6 (b) (i) Subject to paragraphs (iii) and (iv) below, upon the occurrence of a Change of Control (the date of such occurrence being the "CHANGE OF CONTROL DATE"), the Corporation shall, to the extent funds are legally available therefor, make an offer (the "CHANGE OF CONTROL OFFER") to Holders to repurchase 100% of each Holder's share of Series A Preferred Stock at a price per share in cash equal to (A) if the Change of Control Payment Date is prior to the First Call Date, 110% of the product of (x) one plus the number (or fraction) of shares of Series A Preferred Stock accrued and unpaid as dividends on such share to the Change of Control Payment Date, times (y) the Conversion Ratio (as defined in paragraph 8) in effect immediately prior to the Change of Control, times (z) if the Change of Control is the result of a tender or exchange offer, merger or other form of business combination, the price paid per share of Common Stock in such tender or exchange offer, merger or other form of business combination (with the fair market value of any non-cash consideration being determined in good faith by the Board of Directors of the Corporation), or if the Change of Control is not the result of a tender or exchange offer, merger or other form of business combination, the 10-Day Market Price of the Common Stock on the Change of Control Date and (B) if the Change of Control Payment Date is on or after the First Call Date, the Redemption Price; provided, that a Holder shall not be entitled to tender any Series A Preferred Stock under this provision until such time as the Corporation has repurchased such debt securities as are required to be repurchased by the Corporation upon such event pursuant to the Corporation's credit and financing agreements. The Corporation shall promptly take all actions required to make such repurchases of debt securities. (ii) The Corporation shall make the Change of Control Offer not later than 30 days following the Change of Control Date by giving notice to each Holder specifying a date, not less than 20 days nor more than 30 days after the date of such notice, on which the Corporation will purchase any shares of Series A Preferred Stock subject to such offer (the "CHANGE OF CONTROL PAYMENT DATE"). Not less than 2 Business Days prior to the Change of Control Payment Date, each Holder shall notify the Corporation (an "ELECTION NOTICE") as to the number of shares of Series A Preferred Stock in respect of which it is accepting the Change of Control Offer. If a Holder does not deliver the Election Notice by such date, its rights under this paragraph 6(b) will terminate. If a Holder does deliver an Election Notice by such date, then (A) such Election Notice will be a binding commitment of such Holder to sell to the Corporation on the Change of Control Payment Date the number of shares of Preferred Stock specified in such Election Notice, subject to paragraph 6(b)(i) and (B) on the Change of Control Payment Date, (x) the Corporation will deliver to such Holder an amount of cash equal to the purchase price for the Series A Preferred Stock to be purchased and (y) such Holder will deliver to the Corporation free and clear of any Liens one or more certificates representing the Series A Preferred Stock to be sold duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto. (iii) Notwithstanding the foregoing, the Corporation shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the price and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Corporation and purchases all shares of Series A Preferred Stock validly tendered under such Change of Control Offer. (iv) The Corporation's obligations under this paragraph 6(b) are subject to compliance with the California Corporations Code. If the Corporation is limited by the California Corporations Code from fully complying with its obligations hereunder, the Corporation agrees that: (A) it will comply with its obligations hereunder to the extent it is able to do so and (B) it will use its best 7 efforts to remove any such legal impediment. If, at any time, the Corporation is obligated to make a Change of Control Offer hereunder but is not able to fully perform its obligations hereunder because of a legal impediment, each Holder may elect to have the Corporation defer such Change of Control Offer until the Corporation is legally able to fully perform its obligations hereunder. The Series A Preferred Stock will continue to accrue dividends until repurchased, redeemed or converted. (c) If the Shares of Series A Preferred Stock are purchased or redeemed, then they shall (upon compliance with any applicable provisions of the laws of the State of California) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock; provided that no such issued and reacquired shares of Series A Preferred Stock shall be reissued or sold as Series A Preferred Stock. 7. PROCEDURE FOR REDEMPTION. (a) In the event the Corporation shall elect to redeem shares of Series A Preferred Stock, notice of such redemption (the "REDEMPTION NOTICE") shall be given by international overnight courier or first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date (the "REDEMPTION DATE"), to each Holder of record of the shares to be redeemed at such Holder's address as the same appears on the stock register of the Corporation. Each Redemption Notice shall state: (i) the Redemption Date (which shall be a date on or after the First Call Date); (ii) the number of shares of Series A Preferred Stock to be redeemed, which shall be all the shares held by such holder; (iii) the Redemption Price; (iv) that on the Redemption Date, the Redemption Price, will become due and payable upon each such share of Series A Preferred Stock to be redeemed and that dividends thereon will cease to accrue on and after said date; (v) (if the Redemption Date is stated to be at any time after 30 days following the First Call Date) the Conversion Ratio, the date on which the right to convert shares of Series A Preferred Stock to be redeemed will terminate and the place or places where such shares of Series A Preferred Stock may be surrendered for conversion; and (vi) the place or places where certificates for such shares are to be surrendered for payment of the redemption price. (b) Prior to such Redemption Date, the Corporation, in its capacity acting as its own paying agent, shall segregate and hold in trust an amount of consideration sufficient to pay the Redemption Price of all the shares of Series A Preferred Stock that are to be redeemed on the Redemption Date. If the Redemption Date is stated to be at any time after 30 days following the First Call Date and any share of Series A Preferred Stock called for redemption is converted, any consideration so segregated and held in trust for the redemption of such share of Series A Preferred Stock shall be discharged from such trust. (c) Redemption Notice having been mailed as aforesaid, from and after the Redemption Date, dividends on the shares of Series A Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such share shall be redeemed by the Corporation at the Redemption Price aforesaid. 8 8. CONVERSION. (a) (i) Subject to the provisions of this paragraph 8, (A) a holder of shares of Series A Preferred Stock shall have the right, on or after the date which is 30 days after the First Call Date (or, in the event that a Change of Control has occurred, at any time), at such holder's option, to convert any or all outstanding shares (and fractional shares) of Series A Preferred Stock held by such holder, in whole or in part, into fully paid and non-assessable shares of Common Stock. (ii) The number of shares of Common Stock deliverable upon conversion of a share of Series A Preferred Stock (including the Additional Shares), subject to adjustment as hereinafter provided, shall be 1.0 (the "CONVERSION RATIO"). In the event that at the time of conversion of a share of Series A Preferred Stock there are accrued and unpaid dividends on such share with respect to which Additional Shares have not been issued (including, with respect to any interim period since the last Dividend Payment Date, the product of the full dividend payable for the current Dividend Period ending on the next Dividend Payment Date, multiplied by a fraction, the numerator of which is the number of days that have elapsed since the last Dividend Payment Date and the denominator of which is 360), then, upon such conversion, the holder thereof shall be entitled to receive such number of shares of Common Stock (in addition to the shares of Common Stock otherwise issuable upon the conversion of any such shares of Series A Preferred Stock and Additional Shares converted therewith) as would have been issued in accordance with the preceding sentence if Additional Shares had been issued in respect of such accrued and unpaid dividends and had been converted simultaneously therewith. (b) (i) In connection with any Conversion pursuant to this paragraph 8, the holder of the shares of Series A Preferred Stock to be converted shall surrender the certificates representing such shares at the office of the Corporation with a written notice (a "CONVERSION NOTICE") of election to convert completed and signed, specifying the number of shares to be converted. Unless the shares issuable on conversion are to be issued in the same name as the name in which such shares of Series A Preferred Stock are registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or the holder's duly authorized attorney, and an amount sufficient to pay any transfer or similar tax. (ii) As promptly as practicable after the surrender by a holder of certificates for shares of Series A Preferred Stock under paragraph 8(b)(i), the Corporation shall issue and shall deliver to such holder, or on the holder's written order to the holder's transferee, (w) a certificate or certificates for the whole number of shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this paragraph 8, (x) any cash adjustment required pursuant to paragraph 8(f) and (y) in the event of a conversion in part, a certificate or certificates for the whole number of Series A Preferred Stock not being so converted. (iii) Each conversion shall be deemed to have been effected (the "EFFECTIVE TIME") immediately prior to the close of business on the date of delivery of the Conversion Notice. At the Effective Time, the Person in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby at such time on such date and such conversion shall be into a number of whole shares of Common Stock in the aggregate equal to the product of the number of shares of Series A Preferred Stock surrendered and the Conversion Ratio in effect at such time on such date. All shares of Common Stock delivered upon conversion of the Series A Preferred Stock will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. At 9 the Effective Time, the shares to be so converted shall no longer be deemed to be outstanding and all rights of a holder with respect to such shares surrendered for conversion shall immediately terminate except the right to receive the Common Stock and other amounts payable pursuant to this paragraph 8 and a certificate or certificates representing the shares of Series A Preferred Stock not converted. (c) (i) Upon delivery to the Corporation of a Conversion Notice by a holder of shares of Series A Preferred Stock, the right of the Corporation to redeem such shares of Series A Preferred Stock shall terminate, regardless of whether a notice of redemption has been mailed pursuant to paragraph 7. (ii) Except as provided above and in paragraph 8(g), the Corporation shall make no payment or adjustment for accrued and unpaid dividends on shares of Series A Preferred Stock, whether or not in arrears, on conversion of such shares or for dividends in cash on the shares of Common Stock issued upon such conversion. (d) (i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Series A Preferred Stock. (ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Series A Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation. (e) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Series A Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Series A Preferred Stock to be converted and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (f) In connection with the conversion by a holder of any shares of Series A Preferred Stock, no fractions of shares of Common Stock shall be required to be issued to such holder, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest on the business day on which such shares of Series A Preferred Stock are deemed to have been converted. (g) (i) In case the Corporation shall at any time after the date of issue of the Series A Preferred Stock (A) declare a dividend or make a distribution on Common Stock payable in Common Stock, (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a smaller number of shares, (D) issue any shares of its Capital Stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) or, (E) consolidate with, or merge with or into, any other Person, or engage in any reorganization, recapitalization, sale of all or substantially all of the Corporation's assets to any entity or any other transaction which, in the case of any of the transactions referred in this subclause (E), is effected in such a manner that the holders of Common Stock are entitled to receive stock, securities or assets with respect to or in exchange for Common Stock (any such transaction described in this 10 subclause (E), an "ORGANIC CHANGE"), the Conversion Ratio in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, split, combination, consolidation, merger, reclassification or Organic Change shall be proportionately adjusted, or other provision shall be made, so that the conversion of the Series A Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock, or other securities of the Corporation (or shares of any security or cash or other property into which such shares of Common Stock have been combined, consolidated, merged, reclassified or changed, or which were otherwise receivable with respect to or in exchange for shares of Common Stock, pursuant to paragraph 8(g)(i)(C), 8(g)(i)(D) or 8(g)(i)(E) above) which, if the Series A Preferred Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger, reclassification or Organic Change, assuming such holder of Common Stock of the Corporation (x) is not a Person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or in connection with which such reclassification or Organic Change was made, as the case may be ("CONSTITUENT PERSON"), or an affiliate of a Constituent Person and (y) failed to exercise any rights of election as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change (provided, that if the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change, is not the same for each share of Common Stock of the Corporation held immediately prior to such reclassification, change, consolidation, merger or Organic Change by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("NON-ELECTING SHARE"), then for the purpose of this paragraph 8(g) the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such adjustment shall be made successively whenever any event listed above shall occur. (ii) In case the Corporation shall issue or sell any Common Stock (other than Common Stock issued (A) pursuant to the Corporation's existing or future stock option plans or pursuant to any other existing or future Common Stock-related director or employee compensation plan of the Corporation approved by the Board of Directors, (B) as consideration for the acquisition of a business or of assets, (C) in a firmly committed underwritten public offering, (D) to the Corporation's joint venture partners in exchange for interests in the relevant joint venture, (E) upon conversion of shares of any series of Preferred Stock or (F) upon exercise or conversion of any security the issuance of which caused an adjustment under paragraph 8(g)(i), 8(g)(iii) or 8(g)(iv) hereof or the issuance of which did not require adjustment hereunder) without consideration or for a consideration per share less than the 30 Day Market Price on the date of such issuance, or shall issue securities convertible into Common Stock (other than such securities paid as dividends on any class of Preferred Stock) having a conversion price per share less than the 30 Day Market Price at the date of issuance of such convertible security, the Conversion Ratio to be in effect after such issuance or sale shall be determined by multiplying the Conversion Ratio in effect immediately prior to such issuance or sale by a fraction, (1) the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance or sale and the number of additional shares of Common Stock to be issued or sold (or, in the case of convertible securities, issued on conversion), and (2) the denominator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issuance or sale and (y) the number of shares of Common Stock which the 11 aggregate consideration receivable by the Corporation for the total number of additional shares of Common Stock so issued or sold (or issuable on conversion) would purchase at the 30 Day Market Price in effect on the date of such issuance or sale. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such noncash consideration shall be utilized in the foregoing computation. Such fair market value shall be determined in good faith by the Board of Directors. (iii) In case the Corporation shall fix a record date for the issuance of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into shares of Common Stock) at a price per share of Common Stock (or having a conversion price per share of Common Stock, if a security convertible into shares of Common Stock) less than the 30 Day Market Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Conversion Ratio shall be adjusted pursuant to paragraph 8(g)(ii) hereof, as though such maximum number of shares of Common Stock had been so issued for an aggregate consideration payable by the holders of such rights, options, warrants or convertible securities prior to their receipt of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value of such noncash consideration shall be determined as set forth in paragraph 8(g)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed. In the event that after fixing a record date such rights, options or warrants are not so issued, the Conversion Ratio shall be readjusted to the Conversion Ratio that would then be in effect if such record date had not been fixed. In the event that such rights, options or warrants expire in whole or in part unexercised or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this paragraph 8(g)), the Conversion Ratio shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Conversion Ratio shall be the Conversion Ratio that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Conversion Ratio shall be adjusted pursuant to paragraph 8(g)(ii) to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled, the Conversion Ratio shall be adjusted to reflect the Conversion Ratio which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Conversion Ratio shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Conversion Ratio was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this clause 8(g)(iii). (iv) In case the Corporation shall fix a record date for the making of a distribution to holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of evidences of indebtedness, assets or other property (other than dividends or distributions for which an adjustment is made pursuant to paragraph 8(g)(i) or 8(g)(iii) hereof), the Conversion Ratio to be in effect after such record date shall be determined by multiplying the Conversion Ratio in effect immediately prior to such 12 record date by a fraction, (A) the numerator of which shall be the 30 Day Market Price on such record date, and (B) the denominator of which shall be the 30 Day Market Price on such record date, less the fair market value (determined as set forth in paragraph 8(g)(ii) hereof) of the portion of the assets, other property or evidence of indebtedness so to be distributed which is applicable to one share of Common Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date had not been fixed. (v) No adjustment to the Conversion Ratio pursuant to paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Ratio; provided however, that any adjustments which by reason of this paragraph 8(g)(v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 8(g) shall be made to the nearest four decimal points. (vi) In the event that, at any time as a result of the provisions of this paragraph 8(g), a holder of Series A Preferred Stock upon subsequent conversion shall become entitled to receive any shares of Capital Stock of the Corporation other than Common Stock, the number of such other shares so receivable upon conversion of Series A Preferred Stock shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained herein. (h) All adjustments pursuant to this paragraph 8 shall be notified to the holders of the Series A Preferred Stock and such notice shall be accompanied by a schedule of computations of the adjustments. (i) In the event that any adjustment is made to the Conversion Ratio, a corresponding adjustment shall be made to the number of shares of Common Stock issuable upon conversion in respect of accrued and unpaid dividends, pursuant to the second sentence of paragraph 8(a)(ii). 9. VOTING RIGHTS. (a) The holders of Series A Preferred Stock shall not be entitled to vote with the holders of Common Stock except with respect to shares of the Series A Preferred Stock that have been converted into Common Stock. (b) If and whenever two dividends payable on the Series A Preferred Stock have not been paid in full, the number of directors then constituting the Board of Directors shall be increased by two and the holders of shares of Series A Preferred Stock, voting as a single class, shall be entitled to elect the additional directors to serve on the Board of Directors at any annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the holders of the Series A Preferred Stock called as hereinafter provided. Whenever all arrears in dividends on the Series A Preferred Stock then outstanding shall have been paid and dividends thereon for the current dividend period shall have been paid or declared and set apart for payment, then the right of the holders of the Series A Preferred Stock to elect such additional directors shall cease (but subject always to the same provisions for the vesting of such voting rights in the case of any similar future arrearage in two dividends), and the term of office of any person elected as director by the holders of the Series A Preferred Stock shall forthwith terminate and the number of the Board of Directors shall be reduced accordingly. At any time after voting power to elect a 13 director shall have become vested and be continuing in the holders of Series A Preferred Stock pursuant to this paragraph, or if a vacancy shall exist in the office of a director elected by the holders of Series A Preferred Stock, a proper officer of the Corporation may, and upon the written request of the holders of record of at least ten percent (10%) of the shares of Series A Preferred Stock then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the holders of Series A Preferred Stock for the purpose of electing the director which such holders are entitled to elect. If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of at least ten percent (10%) of the outstanding shares of Series A Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders. Any holder of Series A Preferred Stock so designated shall have, and the Corporation shall provide, access to the lists of stockholders to be called pursuant to the provisions hereof. (c) Without either (i) the written consent of holders of a majority of the outstanding shares of Series A Preferred Stock or (ii) the vote of holders of a majority of the outstanding shares of Series A Preferred Stock which vote is taken at a meeting of the holders of Series A Preferred Stock called for such purpose, the Corporation will not amend, alter or repeal any provision of the Articles of Incorporation or this Certificate of Determination (including by way of merger), so as to adversely affect the preferences, rights or powers of the Series A Preferred Stock; provided that any such amendment that changes the dividend payable on or the Liquidation Preference of the Series A Preferred Stock shall require either (i) the written consent of holders of two-thirds of the outstanding shares of Series A Preferred Stock (ii) or the vote of holders of two-thirds of the outstanding shares of Series A Preferred Stock which vote is taken at a meeting of the holders of Series A Preferred Stock called for such purpose. (d) Without either (i) the written consent of holders of a majority of the outstanding shares of Series A Preferred Stock or (ii) the vote of holders of a majority of the outstanding shares of Series A Preferred Stock which vote is taken at a meeting of such holders called for such purpose, the Corporation will not create, authorize or issue any Senior Securities nor split or combine the Preferred Stock. (e) The Corporation shall not, in a single transaction or series of related transactions, consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person or adopt a plan of liquidation unless: either (1) the Corporation is the surviving or continuing Person and the Series A Preferred Stock shall remain outstanding without any amendment that would adversely affect the preferences, rights or powers of the Series A Preferred Stock or (2) (i) the Person (if other than the Corporation) formed by such consolidation or into which the Corporation is merged or the Person which acquires by conveyance, transfer or lease the properties and assets of the Corporation substantially as an entirety or in the case of a plan of liquidation, the Person to which assets of the Corporation have been transferred, shall be a corporation, partnership or trust organized and existing under the laws of the United States or any State thereof or the District of Columbia and (ii) the Series A Preferred Stock shall be converted into or exchanged for and shall become shares of such successor, transferee or resulting Person, having in respect of such successor, transferee or 14 resulting Person, the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Preferred Stock had immediately prior to such transaction except as provided in paragraph 8(g)(i). (f) In exercising the voting rights set forth in Clauses (b), (c) and (d) of this paragraph 9, each shares of Series A Preferred Stock shall have one vote per share. (g) The consent or votes required above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's articles of incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation or as otherwise required by applicable law or the Corporation's Articles of Incorporation or bylaws. 10. REPORTS. So long as any of the Series A Preferred Stock is outstanding, in the event the Corporation is not required to file quarterly and annual financial reports with the Securities and Exchange Commission pursuant to Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish the holders of the Series A Preferred Stock with reports containing the same information as would be required in such reports at the same time such reports would be required to be filed if the Corporation were required to file reports with the Securities and Exchange Commission. 11. GENERAL PROVISIONS. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Determination are for convenience of reference only and shall not define, limit or affect any of the provisions hereof". 15 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: ______________, 2003 ______________________________ Bernard Weiss, President ______________________________ Michael Prince, Secretary EX-4.2 3 ex4-2_16269.txt SPECIMEN STOCK CERTIFICATE EXHIBIT 4.2 ----------- See Legend on Reverse Incorporated August 24, 1983 INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA 1 1,200,000 SIGNATURE EYEWEAR, INC. AUTHORIZED 30,000,000 SHARES COMMON STOCK 5,000,000 SHARES PREFERRED STOCK This Certifies that Bluebird Finance Limited is the ----------------------------------------------------- registered holder of One Million Two Hundred Thousand (1,200,000) Shares of the -------------------------------------------- Series A 2% Convertible Preferred Stock of the above named Corporation, transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this 18th day of April A.D. 2003 ---------- ----------- -------- /s/ Michael Prince /s/ Bernard Weiss --------------------------- -------------------------- Michael Prince, Secretary Bernard Weiss, President THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR HYPOTHECATED WITHOUT PRIOR REGISTRATION UNDER SAID ACT OR AN EXEMPTION THEREFROM ESTABLISHED TO THE SATISFACTION OF THE ISSUER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ALL OF THE PROVISIONS OF THE ARTICLES OF INCORPORATION AND THE BYLAWS OF SAID CORPORATION, A COPY OF EACH OF WHICH IS ON FILE AT THE OFFICE OF THE CORPORATION AND MADE A PART HEREOF AS FULLY AS THOUGH THE PROVISIONS OF SAID ARTICLES OF INCORPORATION AND BYLAWS WERE IMPRINTED IN FULL ON THIS CERTIFICATE, TO ALL OF WHICH THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE HEREOF, ASSENTS AND AGREES TO BE BOUND. ANY SHAREHOLDER MAY OBTAIN FROM THE PRINCIPAL OFFICE OF THE CORPORATION, UPON REQUEST AND WITHOUT CHARGE, A COPY OF THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED TO OR IMPOSED UPON THE RESPECTIVE CLASSES OR SERIES OF STOCK AND UPON THE HOLDERS THEREOF BY SAID ARTICLES OF INCORPORATION AND THE BYLAWS. For Valued Received ______________________ hereby sell, assign and transfer unto ___________________________________________________________________________ _____________________________________________________________________ Membership Interests represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________ Attorney to transfer the said Membership Interests on the books of the within named Company with full power of substitution in the premise. Dated: ___________________ ______________ In presence of ____________________________ ____________________________ NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER EX-10.4 4 ex10-4_16269.txt LICENSE AGREEMENT EXHIBIT 10.4 ------------ LICENSE AGREEMENT LAURA ASHLEY MANUFACTURING B.V. AND USA OPTICAL DISTRIBUTORS, INC. Certain portions of this agreement and the amendments thereto marked by [***]have been omitted pursuant to previously granted Orders Granting Confidential Treatment Under the Securities Exchange Act of 1934 and were filed separately with the Securities and Exchange Commission pursuant to the initial requests for confidential treatment. LICENSE AGREEMENT THIS AGREEMENT is made the 28th day of May, 1991. BETWEEN 1. LAURA ASHLEY MANUFACTURING B.V., a company incorporated in the Netherlands and having its principal place of business at Luchthavenweg 24, 5507 SK Veldhoven, The Netherlands (hereinafter called "the Licensor") of the one part; and 2. USA OPTICAL DISTRIBUTORS, INC., a company incorporated in the State of California having its principal office at 419A South Hindry Avenue, Inglewood, CA 90301, U.S.A. (hereinafter called "the Licensee") of the other part WHEREAS: 1. The Licensor is a member of the Laura Ashley group of companies which designs, manufactures and retails home furnishing products and garments, marketed and sold in many countries of the world, including North America. 2. The Licensor is the registered proprietor of the trademarks LAURA ASHLEY and a distinctive oval device. 3. The Licensor is the proprietor of a wide range of distinctive textile designs and patterns featured on Laura Ashley home furniture products and garments. 4. The Licensee is an established designer, importer and wholesaler of fashionable eyeglass frames, including in its range of eyewear styles a portfolio of recognized brand names. 5. The Licensee now wishes to design, import and sell in North America certain styles of eyeglass frames under the LAURA ASHLEY brand name. 1 IT IS THEREFORE AGREED AND DECLARED AS FOLLOWS: 1. DEFINITIONS As used in this Agreement: 1.1 "Affiliate" of a party means a company which is affiliated to such party by one or more shareholdings such that, directly or indirectly, one of them is subject to the control of the other or both are subject to the common control of a third party; 1.2 "Approved Outlets" means first class retail outlets of a quality and standing consistent both with the high reputation of the Licensor for design, merchandising excellence and service and having the image and market positioning of the LAURA ASHLEY brand; 1.3 "Commencement Date" means September 1, 1991, or such later date prior to October 1, 1991 when the Licensor notifies the Licensee of its approval of the Marketing Plan for the First Contract Year. 1.4 "Contract Term" means the term of this Agreement as provided in Clause 13; 1.5 "Contract Year" means a period of twelve consecutive months from 1st February to 31st January during the Contract Term save that the first Contract Year shall be deemed to commence on the Commencement Date and to end on 31st January 1993 and the last Contract Year shall be deemed to commence on 1st February of the Year during which the Contract Term terminates and to end on the date of actual termination; 1.6 "Laura Ashley Designs" means surface prints originated or developed by the Licensor or its Affiliates; 1.7 "Laura Ashley Group" means the Licensor and its Affiliates referred to collectively; 1.8 "Laura Ashley Outlets" means outlets operated by a member of the Laura Ashley Group in the Territory under the LAURA ASHLEY name with the consent of the Licensor; 1.9 "Licensee" means USA Optical Distributors, Inc., and any of its Affiliates; 1.10 "Licensor" means Laura Ashley Manufacturing B.V.; 1.11 "Marketing Plan" means a plan for marketing Products prepared by the Licensee and agreed with the Licensor for each Contract Year as provided in Clause 6; 1.12 "Minimum Royalty" means the minimum sum payable to the Licensor by the Licensee by way of Royalty in respect of each Contract Year as provided in sub-clause 9.3; 2 1.13 "Net Sales" means the gross amount of wholesale sales of Products invoiced by the Licensee less any deductions for returns, discounts or allowances granted to customers, all of which are reasonable and customary in the eyewear industry in the Territory, and less any bad debts, as that term is recognized under generally accepted accounting principles in the Territory; 1.14 "Parties" means the Licensor and the Licensee; 1.15 "Products" means ophthalmic frames for prescription eyeglasses, eyeglass cases and other accessories and related items, all of which are agreed as Products intended for sale bearing the Trademarks, and which are listed in Schedule I to this Agreement; 1.16 "Royalty" means the Royalty payable by the Licensee to the Licensor and described in Clause 9; 1.17 "Selected Designs" means Laura Ashley Designs selected from time to time by agreement between the Parties for application to the Products or packaging or promotional materials therefor; 1.18 "Territory" means the United States of America, its territories and possessions and Canada; 1.19 "Trademarks" means the trademarks of the Licensor listed in Schedule II, together with such additional trademarks (if any) as may be included in this Agreement from time to time by agreement between the parties; 2. CONDITION PRECEDENT The Licensor's approval of the Marketing Plan for the first Contract Year under sub-clause 6.4 is a condition precedent to the Licensor's grant of the license under clause 3, and to all other rights, duties and obligations under this Agreement which are unrelated to the Licensor's approval of the Licensee's first Marketing Plan or to the Parties' confidentiality obligations under clause 10. If the Licensor does not approve the Licensee's first Marketing Plan by October 1, 1991, then this Agreement shall (unless the Parties otherwise agree in writing) terminate on that date. Upon such a termination, the parties shall have no further rights, duties or obligations under this Agreement, except the confidentially obligations under clause 10. 3. GRANT OF LICENSE 3.1 With effect from the Commencement Date the Licensor hereby grants to the Licensee exclusive rights throughout the Contract Term (a) to use the Trademarks on or in connection with the importation, distribution, marketing and sale of Products, and 3 (b) to apply Selected Designs to packaging or promotional materials for the Products in the Territory upon the terms and conditions of this Agreement. 3.2 Whilst the Licensor shall not, throughout the Contract Term, grant to any third party the right to use the Trademarks for the sale of Products within the Territory, nothing herein shall restrict the use, licensing, manufacture or sale (as the case may be) by the Licensor or any Licensor Affiliate either in the Territory or elsewhere of any goods other than Products. 4. PRODUCT QUALITY AND APPROVAL 4.1 The type and quality of each item to be imported, marketed, distributed or sold as a Product by the Licensee shall be the subject of discussion and agreement with the Licensor prior to its adoption as a Product. 4.2 The Licensee may propose new styles to the Licensor at two possible times: either at the same time as it is proposing a new Marketing Plan pursuant to sub-clause 6.5, or at other times during the course of any Contract Year. Styles proposed by the Licensee at the same time as the Marketing Plan shall fall within categories of Products approved in that Marketing Plan. Styles proposed at any other time during the Contract Year must fall within categories of Products previously approved by the Licensor as part of the most recently approved Marketing Plan. 4.3 Each style approved by the Licensor as a Product shall be included in Schedule I. 4.4 Approval of a Product shall be evidenced by the authorized officers of the Licensor and Licensee initialing that item when it is newly included therein; PROVIDED THAT, without prejudice to the Licensor's absolute right to approve the quality of any Product sold by the Licensee as elsewhere herein provided, the Licensor's approval of any style as a Product shall be deemed to have been granted if the Licensor fails to respond to the Licensee's request therefor: (a) in the case of styles submitted with the Marketing Plan, within TWENTY (20) business days of receiving that request; (b) in the case of styles submitted at other times during the Contract Year, within FIFTEEN (15) business days of receiving that request. 4.5 Products shall be of the best quality materials and consistent both with the highest standards of craft and skill associated with the reputation of the Licensor as designer, manufacturer and retailer of high quality fashion goods. 4.6 Prior to commissioning production in commercial quantities of any Product the Licensee shall: 4 (a) procure that the Licensor shall, if it so chooses, have the right to inspect the places of proposed manufacture of such Product for the purpose of ascertaining that the Licensor's quality standards are being met, and (b) submit free of charge at least three samples of each such Product to the Licensor for approval. No Product shall be sold by the Licensee in the absence of such approval. All Products thereafter offered for sale shall correspond with the approved sample. 4.7 No item which fails to meet the quality standards set forth in sub-clause 4.2 shall be sold as a Product. The Licensee shall procure that its suppliers are held to the same requirement. 4.8 The Licensee shall ensure that all Products shall conform with all laws and regulations applicable thereto in the Territory. 5. SALES AND PROMOTION 5.1 The Licensee shall use its best efforts to promote and extend the sale of Products throughout the Territory to all potential Approved Outlets. 5.2 The Licensee shall secure and maintain the distribution of adequate stocks of Products to (and only to) Approved Outlets such that the Products may be made readily and continuously available to customers. 5.3 The Licensor hereby places the Licensee on notice that it may inspect such Approved Outlets at any time throughout the Contract Term to assure itself that the provisions of this Clause are being complied with. If the Licensor notifies the Licensee that an outlet at which Products are sold does not (in the absolute discretion of the Licensor) meet the standards of an Approved Outlet, the Licensee shall procure that sales of Products at such outlets be discontinued at the earliest possible opportunity. 5.4 Products shall not be exported or sold by the Licensee for re-sale outside the Territory. 5.5 All advertising and promotional materials and activities relating to the Products shall require the Licensor's prior approval and all advertising and promotional proposals for the Products shall accordingly be submitted by the Licensee to the Licensor for prior approval. In respect of proposals by the Licensee for promotional materials and activities which have been contemplated by the Marketing Plan for the period to which they relate, the Licensor shall respond as quickly as practicable and in any event within FIFTEEN (15) business days from receipt of the same, in default of which response the Licensor's approval shall be deemed to have been granted. 5.6 The Licensor and its Affiliates in the Territory may purchase Products from the Licensee at the lower of 5 (a) Licensee's standard wholesale price, including customary trade discounts and advertising allowances, or (b) the lowest wholesale price at which the Licensee sells equivalent quantities of Products to its customers in the Territory, on at least net THIRTY (30) day terms. 6. MARKETING Marketing Plans --------------- 6.1 The Licensee shall, in consultation with the Licensor, prepare and propose to the Licensor a Marketing Plan in respect of each Contract Year. 6.2 The Marketing Plan shall summarize all market information relevant to the period to which it relates including (without limitation): (a) a description of the Products to be sold, together with proposals for categories and for designs of Products, and including proposed sources of supply; (b) the number and identity of prospective customer accounts; (c) suggested wholesale price points for the Products; (d) the anticipated volume expected to be sold of each of the Products; (e) an analysis of competitors' Products by price band; (f) proposals for the interpretation of the Laura Ashley brand image in terms of advertising concepts and point of sale and other promotional materials; (g) proposed advertising and promotional activities and expenditures for the Products; and (h) proposed methods of sales and distribution. 6.3 To the extent practicable, the Licensee shall, upon submission of the Marketing Plan, provide the Licensor with three (3) samples of each Product which is described in the Marketing Plan and which is being submitted for approval. 6.4 The Marketing Plan for the First Contract Year shall be proposed to the Licensor by the Licensee no later than 31st July 1991. The Licensor shall respond to such proposal no later than 31st August 1991. Subsequent Marketing Plans shall be submitted to the Licensor for 6 approval no later than SIX (6) months in advance of the commencement of the Contract Year to which they relate. Approval by Licensor -------------------- 6.5 No Marketing Plan shall be implemented unless and until the written approval of the Licensor has been obtained, provided that if the Licensor fails to respond to the proposal for a Marketing Plan referred to in sub-clause 6.4 within TWENTY (20) business days after receipt thereof, the Plan shall be deemed approved as submitted. 6.6 The Licensee shall spend no less than THREE PER CENT (3%) of its annual Net Sales of Products on advertising and promotional activities for the Products in the Territory. Additional Products ------------------- 6.7 The Parties recognize a request by the Licensee to sell sunglasses bearing the Trademarks, either under this Agreement or a separate agreement. Accordingly the Licensor agrees to enter into good faith discussions with the Licensee within ONE HUNDRED AND EIGHTY (180) days from the Commencement Date, with a view to accommodating the Licensee's proposal. The Licensor further agrees that, until such period has expired, it will not approach other potential distributors for sunglasses in the Territory, provided that such restriction shall not in any event endure beyond a period of ONE HUNDRED AND EIGHTY (180) days from the Commencement Date. If the Licensor and the Licensee do not enter into an agreement for the Licensee to sell sunglasses bearing the Trademarks, whether pursuant to this or another agreement, and the Licensor enters into an agreement with a third party to sell sunglasses bearing the Trademarks in the Territory, the Licensor shall hold that third party to the same standards as the Licensee under this Agreement with respect to quality, styling and Approved Outlets. 7. MARKET REPORT Within two months of the end of each Contract Year the Licensee shall submit to the Licensor a written report giving a full resume of sales and promotional activities and expenditures during the Year. 8. TRADEMARKS AND COPYRIGHT 8.1 The Licensee acknowledges that the Trademarks and the goodwill attaching thereto are and shall remain the property of the Licensor. 8.2 The Licensee shall not promote or sell Products except in conjunction with Trademarks and shall not use Trademarks or Selected Designs except in relation to Products in a manner approved by the Licensor. 7 8.3 All labels, packaging, display, and promotional and advertising materials relating to the Products and their promotion and sale shall bear an acknowledgement as to the proprietorship of the Trademarks and the license granted to the Licensee as follows: "Sold by USA Optical under license from Laura Ashley" 8.4 Wherever Selected Designs are used on packaging (and elsewhere as the Licensor may require or approve) the Licensee shall affix or apply a notice acknowledging the Licensor's copyright ownership as follows: "(C) Laura Ashley 19 [date* of design]" 8.5 Save as provided in sub-clause 8.3 and except as otherwise agreed in writing, there shall be no use of the Licensee's name or trademarks on the Products or on any labels, packaging, display or advertising materials related to the Products. 8.6 All rights arising from the use by the Licensee of the Trademarks shall enure to the benefit of the Licensor. This license shall operate solely as a permission for the Licensee to use the Trademarks and Selected Designs in the manner herein specified and shall not be deemed to confer on the Licensee any proprietary right in the Trademarks or Selected Designs, nor shall the Licensee acquire any registered design, registered trademark or other industrial property rights relating thereto. 8.7 If the Licensee becomes aware of any infringements of the Trademarks or copyrights in the Selected Designs, or any act of unfair competition or any trademark application in the Territory which in any way may impair the value or validity of the Trademarks, or the other rights granted by the Licensor hereunder, the Licensee will promptly notify the Licensor of that event. The Licensor undertakes that it will respond to such notification by taking such steps as it may deem reasonably necessary to protect the Licensee's rights hereunder, it being understood that the institution and conduct of any litigation which ensues, the selection of counsel and the settlement of the litigation and claims affecting the Trademarks or Selected Designs shall be entirely within the discretion of the Licensor, under the Licensor's control and at the Licensor's expense. Should legal action against a third party be deemed necessary or desirable by the Licensor, the Licensee will, if requested by the Licensor, cooperate with the Licensor in rendering appropriate assistance in instituting and prosecuting such legal action, provided that the reasonable expenses which the Licensee thereby incurs and the other costs and expenses of such legal action, including legal fees, shall be borne by the Licensor. 8.8 During the Contract Term, or upon the termination of this Agreement for any reason, the Licensee shall, upon request of the Licensor, execute such documents as the Licensor may reasonably require, including registered user agreements, to reflect the Licensor's ownership of the Trademarks. The Licensee hereby grants to the Licensor a power of attorney coupled with an interest to execute such agreements as Licensee's attorney-in-fact. The Licensor shall promptly provide the Licensee with copies of any such agreements. 8 8.9 The Licensor represents to the Licensee: (a) that it is the owner of the Trademarks and of the copyrights in all the Selected Designs; (b) that it has the sole and exclusive right to deal with the same and to enter into license agreements therefor; (c) that none of the Trademarks or the Selected Designs infringes any trademark, service mark, trade name, copyright design or work of any other party. 9. ROYALTY 9.1 In consideration for the rights herein granted (and subject to the payments of Minimum Royalty herein contained), the Licensee shall pay to the Licensor a royalty at such rate as, after deduction of any withholding or other taxes (if any) imposed within the Territory and required to be deducted by the Licensee, shall amount to *** of the Net Sales of all Products sold by the Licensee. 9.2 The Royalty shall be determined and paid in respect of each Contract Year quarter ending on 30th April, 31st July, 31st October and 31st January during the Contract Term. 9.3 In respect of each Contract Year, the amount of Royalty payable to the Licensor shall in no event be less than the Minimum Royalty quoted below: Contract Year US $ ------------- ---- 1991/93 *** 1993/94 *** 1994/95 *** 1995/96 *** Minimum Royalty shall be appropriately pro-rated for any period during the Contract Term that is less than a full Contract Year. 9.4 the Minimum Royalty shall be payable as follows: 9.4.1 with respect to the Contract Year 1991/93 (a) on the ***, a first *** 9 installment of ***; (b) within *** of the end of each of the last ***, further installments each of ***; 9.4.2 with respect to each subsequent Contract Year, within *** of the end of each ***, a sum equivalent to *** attributable to such ***; provided that, in each Contract Year, any excess of actual Royalty paid per quarter over the applicable installment of Minimum Royalty shall be carried forward and credited against subsequent installments of Minimum Royalty payable in respect of such Contract Year. 9.5 Except as provided in subclauses 13.4 and 13.5, failure to pay the Minimum Royalty as provided in sub-clause 9.4 shall constitute a material breach of this Agreement within the meaning of sub-clause 13.2(a). 9.6 Royalty payments pursuant to sub-clause 9.7 shall credit the Licensee with amounts of Minimum Royalty, and Minimum Royalty payments pursuant to sub-clause 9.4.2 shall credit the Licensee with amounts of Royalty paid during the Contract Year in excess of the Minimum Royalty. 9.7 Payment of Royalty in respect of each quarter shall be effected within *** of the end thereof, and payment shall be accompanied by a report from the Licensee showing the names of customers to whom the Licensee sold Products during the period, and a precise computation of Net Sales upon which the Royalty payment was based, including the quantity, description and value of Products sold by the Licensee during the quarter, and any deductions for returns, discounts, allowances granted to customers, or bad debts. 10 9.8 The Licensee shall keep adequate and accurate records in sufficient detail to enable the Royalty to be readily determined and shall, upon the Licensor's request, permit such records to be examined by the Licensor's representative at any time during normal business hours to verify Royalty reports and payments. In the event that such examination reveals an understatement of Royalty due to the Licensor in excess of FOUR PER CENT (4%), the Licensee shall be liable for costs of the Licensor's audit and the incidental expenses incurred in connection with the audit. Those costs and expenses shall be separate from and in addition to the Royalties owed to the Licensor. 9.9 Unless otherwise specified by the Licensor, all payments due by the Licensee to the Licensor hereunder shall be computed and paid in US dollars. 9.10 All overdue amounts shall bear interest at the rate of ONE PER CENT (1%) per month. 9.11 Until further notice from Licensor, all sums due to the Licensor hereunder shall be paid in US dollars by international wire transfer to the following account: ABN Bank Vijzelstraat 68-78 Amsterdam 1000 AK The Netherlands Account Name: Laura Ashley Manufacturing B.V. Account No.:54 02 74 348 Swift Code: ABN ANL 2A 10. CONFIDENTIALITY Any information acquired by one Party (the "First Party") in the course of this Agreement regarding the affairs and business of the other Party (the "Second Party") and its Affiliates shall, during the Contract Term and for TEN (10) years thereafter, be treated by it as confidential and shall not be disclosed without the prior consent of the Second Party, whether such information is disclosed to the Second Party by the First Party or otherwise obtained by the First Party as a result of its association with Second Party except to the extent either required to be divulged in the performance of this Agreement or that such information falls within the public domain. Information to be treated as confidential under this Agreement shall include, without limitation, the Parties' customer lists, unpublished designs, marketing and business plans, telemarketing and other unique sales techniques, and sources of supply. 11. LIABILITY, INDEMNITY AND INSURANCE 11.1 The Licensor and the Licensee each acknowledges and represents to the other that it is not a joint venturer, partner or co-venturer with the other and that neither party shall incur any liability on behalf of the other party or purport to pledge the credit of the other party or accept any order or obligation to be binding upon the other party. 11 11.2 The Licensee shall indemnify and hold the Licensor, its Affiliates and their respective officers and directors, harmless from all claims, suits, demands, actions, losses, damages and costs, including reasonable legal fees and court costs, which the Licensor may incur or suffer by reason of any acts or omissions of the Licensee in connection with the importation, distribution, marketing or sale of the Products, including, but not limited to (a) any manufacturing defect in a Product; (b) the Licensee's manufacture, distribution or sale of the Products; or (c) the labelling, packaging or advertising of the Products in violation of any applicable federal, state or local law or regulation. 11.3 So long as this Agreement remains in effect and for a period of not less than THREE (3) years thereafter, the Licensee agrees at its expense to carry product liability insurance with respect to the Products with limits of liability of not less than ONE MILLION US DOLLARS (US$1,000,000) per accident and ONE MILLION US DOLLARS (US$1,000,000) per person and to name the Licensor and its Affiliates and their respective officers, employees and directors, as a party insured under such insurance policy (with a waiver of subrogation in favor of the Licensor). Prior to offering any of the Products for sale and within TEN (10) days of a request by the Licensor, the Licensee shall furnish the Licensor a certificate of insurance evidencing that the policy with the minimum of coverage limits set forth in the preceding sentence is in full force and effect. 12. COMPETITION The Licensee undertakes that it will not without the prior consent of the Licensor, throughout the Contract Term and for a period of SIX (6) months thereafter, engage directly or indirectly in the Territory in the importation, distribution, promotion or sale (either on its own account or for or on behalf of any other party) of any range of ladies' designer eyewear that is similar to the Products in price and any of (i) style, (ii) market position and (iii) market segment, nor engage in activities which would prejudice the performance of its obligations under this Agreement, provided that the Parties acknowledge that: (a) the wholesale distribution of ladies' and men's designer eyewear as currently carried on by the Licensee; and (b) the importation, distribution, promotion and sale of the lines of ladies designer eyewear set forth in Schedule III do not constitute prejudicial activities. 12 13. DURATION 13.1 The Contract Term shall commence on the Commencement Date and shall continue, unless terminated earlier according to sub-clause 13.2, until 31st January 1996. 13.2 Either party may terminate this Agreement at any time by giving the other party notice to that effect, stating the precise reasons therefor, effective on the date when notice is given or any subsequent date specified in the notice, in any of the following events: (a) any material breach by the other party for which effective remedial action has not been undertaken within THIRTY (30) days after notice is given specifying the breach and requiring remedy of the same; (b) if the other party shall be unable to pay its debts in the ordinary course of business or shall enter into liquidation (otherwise than for reason of corporate amalgamation or reconstruction) or shall become bankrupt or insolvent, or shall be placed in the control of a receiver or trustee, whether compulsorily or voluntarily. 13.3 Without prejudice to the foregoing, the Licensor shall have the right to terminate this Agreement as in the manner aforesaid in the following events: (a) the Licensee fails in respect of each of any two Contract Years to generate and pay to the Licensor amounts by way of Royalty which exceed the Minimum Royalty relative to such Year; (b) the Licensee fails to propose a selection of styles of eyewear and/or accessories which the Licensor is willing to approve as Products after consideration in good faith and having regard to the nature of the target market and the particular requirements of the Product customer; (c) the Licensee fails in any Contract Year to spend more than THREE PERCENT (3%) of annual Net Sales on advertising and promotional activities as contemplated by sub-clause 6.6; (d) the management and/or control of the Licensee passes from the present managers, shareholders, owners or controllers to other parties whom the Licensor may reasonably regard as unsuitable. 13.4 Without prejudice to the foregoing, any acts or omissions by the Licensor resulting in one or more of the following events shall be deemed a material breach of this Agreement by the Licensor: (a) a third-party licensee of sunglasses bearing the Trademarks, as contemplated by sub-clause 6.7, is not held to the same standards as the Licensee under this Agreement 13 with respect to quality, styling or Approved Outlets, and as a result the value of the Trademarks is significantly impaired; (b) any claim or litigation referred to in sub-clause 8.7 is not pursued with sufficient rigor, resulting in significant impairment to the value or validity of the Trademarks. 13.5 In the event of a material breach under sub-clause 13.4, the Licensee shall have the right to withhold all Minimum Royalty and Royalty payments until such time as the material breach has been remedied, at which time all such Minimum Royalty and Royalty payments shall be due and payable. No withholding of Minimum Royalty or Royalty payment under this sub-clause 13.5 shall constitute a material breach of this Agreement. 14. CONSEQUENCES OF TERMINATION On termination of this Agreement (other than a termination pursuant to sub-clause 3.3): 14.1 the Licensee shall promptly pay to the Licensor all amounts due by way of Royalty or otherwise to the date of termination (which shall be deemed to be the end of the calendar quarter in which it falls); 14.2 the Licensee shall make no further use of the Trademarks or Selected Designs (subject to sub-clause 14.3); 14.3 the Licensor will, except where termination based on material breach was occasioned by the Licensor by reason of the Licensee's gross misconduct, permit the Licensee to dispose of any stock then in hand within up to SIX (6) months following the date of termination subject to payment of Royalty in respect of such sales as provided in Clause 9; and 14.4 the Licensor shall be given a right of first refusal to purchase stocks of Products on the terms, subject to the conditions, and at a price, no less favorable than the terms conditions and price offered to third party purchasers. 15. EXPENSES The expenses incurred by the Licensee in performance of this Agreement, including all travel and out-of-pocket expenses, shall be solely for its own account. 16. AGREEMENT PERSONAL This Agreement is personal to the Parties and may not be assigned or sub-contracted by either party without the consent of the other. 17. DISPUTES 17.1 Any controversy arising out of or relating to this Agreement shall be submitted to and decided 14 by arbitration only in the City of New York, pursuant to the Rules then outstanding of the American Arbitration Association. Unless the parties agree otherwise, there shall be three arbitrators in the arbitration proceedings. Each party shall choose one arbitrator, and the two arbitrators chosen shall choose a third arbitrator. The New York State laws of evidence at trial, and of discovery in civil matters, shall apply to the arbitration proceedings. The arbitrators sitting in any controversy shall have no power to alter or modify any provision of this Agreement or to render any award which, by its terms, effects any such alteration or modification. The parties consent to the jurisdiction of the Supreme Court of the State of New York for all purposes in connection with this agreement to arbitrate, and the parties consent that such Court may take the necessary proceedings for the confirmation or disaffirmance of any award and may enter judgment thereon. Any process, notice of motion or other application to said Court or to a Justice thereof may be served within or without the territorial jurisdiction of said Court, by registered or certified mail, return receipt requested, or by personal service, or in such other manner as is permissible under the Rules of said Court, provided a reasonable time for appearance, not less than TEN (10) business days, is allowed. In the event of a dispute or controversy arising under this Agreement, the prevailing party shall have the right to recover its reasonable attorney's fees and costs. 17.2 This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of New York. 18. PURCHASE OF SELECTED DESIGNS The Licensee may purchase materials bearing Selected Designs from the Licensor or its Affiliates at the lower of (a) the Licensor's or its Affiliates' standard wholesale price, including customary trade discounts, or (b) the lowest wholesale price at which the Licensor or its Affiliates sell such materials to its customers, on at least net THIRTY (30) day terms, provided that the Licensee's purchase orders relate to similar quantities of the Selected Designs, to the extent that such materials may be reasonably required by the Licensee for the production of Products or for the purposes of marketing or promoting the Products hereunder. 19. GENERAL PROVISIONS Entire Understanding -------------------- 19.1 This Agreement (including the Marketing Plans and other documents to be agreed to pursuant this Agreement) constitutes the sole agreement between the Parties. Modifications ------------- 15 19.2 This Agreement may not be modified otherwise than by written instrument signed by both Parties. Communications -------------- 19.3 Every notice or other communication under this Agreement shall be in writing delivered personally, by telex, or by facsimile addressed to the relevant Party, with its address set out below, or to any telex or facsimile number published as belonging to it (or such other address, telex or facsimile number as is notified in the manner herein provided by one Party to the other). Every notice or other communication shall be deemed to have been received, in the case of a telex message or facsimile transmission, at the time of dispatch or transmission, and in the case of a letter when delivered personally. 19.4 In proving the giving of a notice hereunder it shall be sufficient to prove that the notice was left or that the telex bears the correct answerback of the Party to whom the notice was sent, or that the sender's original facsimile has printed on it or attached to it a proper automated endorsement to the effect that it was received by or at the facsimile number of the Party to whom the facsimile was sent. Communications to the Licensor: ------------------------------- Laura Ashley Manufacturing B.V. Luchthavenweg 24 5507 AZ The Netherlands For the Attention of the Managing Director with copy to: Laura Ashley Holdings plc 150 Bath Road Maidenhead Berkshire SL6 4YS United Kingdom For the Attention of the Company Secretary Communications to the Licensee: ------------------------------ USA Optical Distributors, Inc. 419A South Hindry Avenue Inglewood CA 90301 16 United States of America For the Attention of the President Severability ------------ 19.5 The provisions contained in this Agreement are considered reasonable by the Parties, but if any such provision is found to be invalid or unenforceable but would be valid if some part thereof were deleted or the scope of application reduced, such provision shall apply with such modifications as may be necessary to render it valid or enforceable. In any event the balance of this Agreement shall remain in effect. IN WITNESS WHEREOF the Parties hereto have caused this Agreement to be executed by their duly authorized representatives the day and year first above written. SIGNED by A.M.S. ) /s/ A.M.S. -------------------------- ------------------------------- for and on behalf of ) LAURA ASHLEY MANUFACTURING B.V. ) - ------------------------------- SIGNED by Bernard Weiss ) /s/ Bernard Weiss -------------------------- -------------------------------- for and on behalf of ) USA OPTICAL DISTRIBUTORS, INC. ) - ------------------------------------ 17 SCHEDULE I PRODUCTS [Agreed styles to be described] 18 SCHEDULE II TRADEMARKS LAURA ASHLEY [Trademark Graphic] 19 SCHEDULE III LINES OF LADIES DESIGNER EYEWEAR WHICH DO NOT CONSTITUTE PREJUDICIAL ACTIVITIES WIMBLEDON CALIFORNIA ATTITUDES GENERIKA CAMELOT 20 AMENDING AGREEMENT THIS AGREEMENT is made the 2nd day of August, 1993. BETWEEN 1. LAURA ASHLEY MANUFACTURING B.V. a company incorporated in the Netherlands and having its principal place of business at Luchthavenweg 24, 5507 SK Veldhoven, The Netherlands (hereinafter called "the Licensor") of the one part; and 2. SIGNATURE EYEWEAR, INC., (formerly known as USA OPTICAL DISTRIBUTORS, INC.), a company incorporated in the State of California having its principal office at 460 South Hindry Avenue, Inglewood, CA 90301, U.S.A. (hereinafter called "the Licensee") of the second part; and 3. LAURA ASHLEY LIMITED, a company incorporated in England and having its registered office at 150 Bath Road, Maidenhead, Berkshire, England (hereinafter called "the Additional Licensor") of the third part. WHEREAS: 1. The Licensor and the Licensee entered into a License Agreement dated 28 May, 1991 (the "License Agreement") granting the Licensee certain rights to use the Trademarks in connection with the importation, distribution, marketing and sales of Products; and 2. The Licensor and the Licensee desire to amend the License Agreement as set forth herein; and 3. The Additional Licensor is the owner of.the Trademarks in the United Kingdom, and the Licensor is the owner of the Trademarks in territories outside the United Kingdom. IT IS THEREFORE AGREED AND DECLARED AS FOLLOWS: 1. Except as otherwise set forth in this Agreement, all defined terms shall have the same meaning as set forth in the License Agreement. 2. Sub-clause 1.15 is hereby deleted, and the following substituted in its place: "1.15 "Products" means such ophthalmic frames for prescription eyeglasses, sunglasses, eyeglass cases and other accessories and related items, all of which are intended for sale bearing the Trademark, which are listed in Schedule I to this Agreement, as amended from time to time;" 1 3. Sub-clause 1.18 is hereby deleted, and the following substituted in its place: "1.18 "Territory" means the United States of America (including its territories and possessions) and Canada, as well as the following countries added as of the date of this Amending Agreement, subject to the restrictions set forth in sub-clauses 3,1.2 and 3.1.3 below: Mexico, New Zealand, Australia, South Africa, the United Kingdom, and every other country in Europe (individually, an "Additional Country"); " 4. Clause 3.1 is hereby deleted, and the following is substituted in its place: "3.1.1 The Commencement Date of this Agreement was 19 September, 1991. As of February 1, 1993, the Licensor and the Additional Licensor (in respect of the United Kingdom) hereby grant to the Licensee exclusive rights, subject to sub-clauses 3.1.2 and 3.1.3 below, throughout the Contract Term (a) to use the Trademarks on or in connection with the importation, distribution, marketing and sale of Products, and (b) to apply Selected Designs to packaging or promotional materials for the Products in the Territory upon the terms and conditions of this Agreement; 3.1.2 Until January 31, 1994, the Licensee shall have the exclusive right to present a marketing plan relating to the Licensee's marketing and sales of Products in any country outside the United States or Canada (an "Additional Country Marketing Plan"). The Licensor's approval of the Licensee's Additional Country Marketing Plan for any specific country, as presented to the Licensor, shall be a condition precedent to the Licensee's sales of Products in that country. If the Licensor fails to respond to any such Additional Country Marketing Plan within 30 days after receipt thereof, that Additional Country Marketing shall be deemed approved as submitted. If the Licensor has not approved an Additional Country Marketing Plan for any specific Additional Country after 31 January, 1994 (or, in the case of an Additional Country Marketing Plan presented during January 1994, 30 days after Licensor's receipt thereof), then the Licensee shall no longer have the exclusive right to present to the Licensor an Additional Country Marketing Plan for that Additional Country. Instead, the Licensee shall have the right of first refusal to sell Products in any such country, in accordance with sub-clause 3.1.3 below. 3.1.3. Under the right of first refusal granted in sub-clause 3.1.2, on or after 1 February, 1994, the Licensor shall have the right to grant to a third party the exclusive right to sell Products in any specified Additional Country for which the Licensor has not 2 already approved a plan by Licensee to sell Products, subject to the terms of this subclause 3.1.3. In the event that the Licensor grants such a right to a third party, the definition of the term "Territory" under sub-clause 1.18 of this Agreement shall be amended to reflect that grant. The procedures for granting such a right are as follows. If, on or after 1 February, 1994, the Licensor receives an Additional Country Marketing Plan from a third party, the Licensor shall deliver a written notice (the "Licensor's Notice") to the Licensee specifying the following material terms of the offer: the amount of any advance payment, the amount of minimum royalty payable, the territory covered by the offer, the length of the proposed license, and the commencement date of the proposed license. The Licensor shall not be required to deliver to the Licensee any information with respect to any other term of the third party's offer. The Licensor's Notice shall further state (a) that the third party licensee shall be held to the same standards as the Licensee under this Agreement with respect to quality, styling and Approved Outlets, and (b) that the third party licensee shall not be permitted to use the marketing materials or the eyeglass frame styles developed by the Licensee pursuant to this Agreement. The Licensee shall have 30 days to respond to the Licensor's Notice. If the Licensee does not respond to the Licensor's Notice within 30 days, then the Licensor shall have the right to grant an exclusive license to the third party, under the terms set forth in the Licensor's Notice (the "Third Party License"). If the Licensee responds to the Licensor's Notice within that 30 day period, delivering an Additional Country Marketing Plan for the territory specified in the notice, and specifying terms that do not exceed the third party's offer in all material respects (the "Licensee's Notice"), then the Licensor shall have the right to determine in the Licensor's sole discretion whether to grant the exclusive right to sell Products in that Additional Country to the Licensee or the third party, or to refrain from granting that right at that time. If the Licensee's Notice specifies terms that exceed the third party's offer in all material respects, then the Licensor shall not have the right to grant the exclusive right to sell Products in that Additional Country to the third party at that time, but may, in its discretion, (a) grant that right to the Licensee, (b) solicit from the third party an offer which matches or exceeds the Licensee's offer in all material respects, or (c) refrain from granting that right at that time. If Licensor elects to solicit such an offer from the third party, and then within a reasonable period of time obtains from the third party an offer which matches or exceeds the Licensee's offer in all material respects, the Licensor shall have the right to grant the exclusive right to sell Products in that Additional Country to the third party. In determining whether or not the Licensee's offer matches or exceeds the third party's offer, the Licensor shall examine the Licensee's past performance in countries outside the United States and Canada, taking into consideration the Licensee's decisions, after consultation with Licensor, to grow slowly in order to ensure success. 3 The Licensee's right of first refusal relating to the territory covered by the Licensor's Notice shall terminate once the Licensor and the third party have entered into the Third Party License. If the Third Party License is terminated for any reason, the Licensor shall notify the Licensee within a reasonable period of time of such termination, and the Licensee shall have the right to make an offer to have the exclusive license for the territory previously covered by the Third Party License, but shall no longer have a right of first refusal related to that territory. Any disputes arising out of or otherwise related to the right of first refusal granted under sub-clauses 3.1.2 and 3.1.3 of this Agreement shall be submitted to arbitration pursuant to the rules of the American Arbitration Association." 5. The portion of Clause 8 in quotation marks is hereby deleted, and the following substituted in its place: "Sold by Signature Eyewear under license from Laura Ashley" 6. Clause 9.3 is hereby deleted, and the following substituted in its place: "9.3 The Amount of Royalty in U.S. dollars payable for each Contract Year for each Category defined in sub-clause 13.1.4 shall in no event be less than the Minimum Royalty amount for that Category as set forth below: Minimum Minimum Minimum Royalty Royalty Royalty for for for USA & Additional Non- Canada Countries Optical Total Contract Optional Optical Sunwear Minimum Year Sales Sales Sales Royalty INITIAL TERM: 1993/94 *** 1994/95 *** 1995/96 *** FIRST RENEWAL TERM 1996/97 *** 1997/98 *** 1998/99 *** 1999/00 *** 2000/01 *** 4 ADDITIONAL RENEWAL TERMS 2001/02 *** 2002/03 *** 2003/04 *** 2004/05 *** 2005/06 *** 7. Clause 13.1 is hereby deleted, and the following substituted in its place: "13.1.1 The Contract Term commenced 19 September, 1991, and shall, unless terminated earlier in accordance with sub-clauses 13.2, 13.3 or 13.4(b) below, remain in effect for an initial term ending on 31 January, 1996 (the "Initial Term"). The Contract Term is subject to a first automatic renewal term of five Contract Years (the "First Renewal Term"), as set forth in sub-clause 13.1.2, and additional one-year renewal terms (individually, an "Additional Renewal Term"), as set forth in sub-clause 13.1.3 below. 13.1.2 Subject to sub-clauses 13.2 and 13.4(b), on February 1, 1996 the Contract Term shall be automatically renewed for the First Renewal Term for all Categories (as defined in sub-clause 13.1.4), provided that the amount of Royalty payable to the Licensor for each of the final two Contract Years of the Initial Term for each such Category is equal to or greater than the Minimum Royalty for that Category during those Contract Years, as set forth in sub-clause 9.3 above. The Licensor shall have the right, for a period of 90 days after 31 January, 1996, to terminate the Licensee's rights with respect to any Category defined under sub-clause 13.1.4 above if the Licensee fails in respect of any two Contract Years to have sufficient Net Sales to generate Royalty amounts which equal or exceed the Minimum Royalty for that Category and those Contract Years; if the Licensor does not exercise such right to terminate the Licensee's rights within the 90 day period, the Licensor's right to terminate shall be deemed to be waived. 13.1.3 Subject to sub-clauses 13.2 and 13.4(b), on February 1, 2001, and on February 1 of each succeeding year, the Contract Term shall be automatically renewed for an Additional Renewal Term, for all Categories (as defined in sub-clause 13.1.4), provided that the amount of Royalty payable to the Licensor for each of the previous two Contract Years for each Category is equal to or greater than the Minimum Royalty for that Category during those Contract Years, as set forth in sub-clause 9.3 above. The Licensor shall have the right, for a period of 90 days after 31 January of any Additional Renewal Term Contract Year, to terminate the Licensee's rights with respect to any Category defined under sub-clause 13.1.4 above if 5 the Licensee fails, in respect of the two Contract Years then ended, to have sufficient Net Sales to generate Royalty amounts which equal or exceed the Minimum Royalty for that Category and those Contract Years; provided that, if the Licensor does not exercise such right to terminate the Licensee's rights within the 90 day period, the Licensor's right to terminate shall be deemed to be waived. 13.1.4 For the purposes of determining the Minimum Royalty payable under this Agreement, the following categories (the "Categories") have the meanings set forth below: "USA & Canada Optical Sales" means sales of Products in the United States of America (including its territories and possessions) and Canada which are made to stores specializing in ophthalmic frames for prescription eyeglasses, whether those sales are made directly to such stores or through distributors which specialize in selling to such stores. "Additional Countries Optical Sales" means sales of Products in all other countries within the Territory other than the United States and Canada which are made to stores specializing in ophthalmic frames for prescription eyeglasses, whether those sales are made directly to such stores or through distributors which specialize in selling to such stores. "Non-Optical Sunwear Sales" means sales of sunglasses which are Products made to stores which do not specialize in ophthalmic frames for prescription eyeglasses, whether those sales are made directly to such stores or through distributors which specialize in selling to such stores." 8. Sub-clause 13.2 is hereby amended (a) to be known hereafter as sub-clause 13.2.1, and (b) to add the following sub-clause 13.2.2: "13.2.2 The Licensor shall have the right, for a period of 90 days after any Contract Year, to terminate the Licensee's rights with respect to any Category defined under sub-clause 13.1.4 above if the Licensee fails in respect of any two Contract Years to have sufficient Net Sales to generate Royalty amounts which equal or exceed the Minimum Royalty for that Category and those Contract Years; provided that, if the Licensor does not exercise such right to terminate the Licensee's rights within a 90 day period after the end of any Contract Year, that right shall be deemed to be waived. 9. Sub-clause 13.4(a) is hereby deleted, and the following substituted in its place: (a) a third-party licensee which obtains the license to sell eyeglass frames bearing the Trademarks, in any of the Categories, as contemplated by sub-clauses 13.1.2, 13.1.3 and 13.1.4 above, is not held to the same standards as the Licensee under this 6 Agreement with respect to quality, styling or Approved Outlets, and as a result the value of the Trademarks is significantly impaired;" 10. The portion of Clause 19.4 entitled "Communications to the Licensee" is hereby deleted, and the following is substituted in its place: "Communications to the Licensee: -------------------------------- Signature Eyewear, Inc. 460 South Hindry Ave. Inglewood, CA 90301 United States of America For the Attention of the President Communications to the Additional Licensor: ----------------------------------------- Laura Ashley Limited 150 Bath Road Maidenhead, Berkshire England For the Attention of the Company Secretary" 11. Clause 6.7 and sub-clause 13.3(a) are hereby deleted. 12. Except as otherwise stated herein, all remaining clauses of the License Agreement shall remain in full force and effect, provided that all references to the Licensor therein shall be deemed to include the Additional Licensor where applicable. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives the day and year first above written. SIGNED by ) /s/ for and on behalf of ) ------------------------ LAURA ASHLEY MANUFACTURING B.V. ) - ------------------------------- SIGNED by ) /s/ for and on behalf of ) ------------------------ LAURA ASHLEY LIMITED ) - -------------------- SIGNED by ) /s/ Julie Heldman for and on behalf of ) -------------------------- SIGNATURE EYEWEAR, INC. ) - ------------------------------- (formerly known as USA OPTICAL DISTRIBUTORS, INC.) 7 SCHEDULE I PRODUCTS The following are the styles of eyeglass frames approved by Licensor, as of April 30, 1993. 1. Laura Ashley eyeglass frames for women: ANNE ARABELLA DIANA ELIZABETH EMMA HEATHER ISABELLE JAINE JOY JULIET KATE KATHRYN ROSALIND SOMERSET TESS 2. Laura Ashley sunglasses: SUN 101 SUN 102 SUN 103 3. Laura Ashley for Girls eyeglasses: AMY JULIE LILY 8 FURTHER AMENDING AGREEMENT -------------------------- THIS AGREEMENT is made on 18 December, 2002 B E T W E E N: 1. SIGNATURE EYEWEAR, INC. (formerly known as USA Optical Distributors, Inc.), a company incorporated in the State of California having its principal office at 498 North Oak Street, Inglewood, CA 90302, USA ("the Licensee") of the first part; and 2. LAURA ASHLEY LIMITED, a company incorporated in England and having its registered office at 27 Bagley's Lane, London, SW6 2QA (the "Licensor") of the second part. INTRODUCTION 1 The Licensor's assignor and the Licensee entered into a licence agreement dated 28 May 1991 (the "Licence Agreement"). 2 The Licence Agreement was amended by agreements dated 2 August 1993, 31 May 1994, 30 January 1995, 21 August 1995, and 4 October 2000. 3 The parties now wish to amend the Licence Agreement further. IT IS THEREFORE AGREED: 1. Clause 13.2.1 (b) of the Licence Agreement is hereby deleted and replaced with the following: "(b) if the other party shall enter into liquidation (otherwise than for reason of corporate amalgamation or reconstruction) or shall become bankrupt or shall be placed in the control of a receiver or trustee, whether compulsorily or voluntarily." 2. There shall be added a new clause 13.2.1A as follows: "For the avoidance of doubt, and without affecting the meaning of material breach for any other purpose, non-payment of Royalty shall be a material breach for the purpose of clause 13.2.1(a)." 3. Any definition in the Licence Agreement shall apply to this agreement. 4. For this agreement, Licence Agreement shall mean the Licence Agreement as amended unless the context otherwise dictates. 5. This agreement shall be effective from 24 October 2002. 6. Save as provided here, the Licence Agreement shall remain unaffected. IN WITNESS whereof, the parties hereto have caused this Agreement to be executed by their duly authorized representatives the day and year first above written SIGNED by ) for and on behalf of ) SIGNATURE EYEWEAR, INC. ) SIGNED by ) for and on behalf of ) LAURA ASHLEY LIMITED ) PLEASE REPLY TO FAX NO: +44 20 7880 5111 Our ref: WGW/vcm/Letter 14042003 14 April 2003 Mr Michael Prince Signature Eyewear, Inc. 498 N Oak Street Inglewood CA 90302 USA Dear Mr Prince LICENCE AGREEMENT BETWEEN LAURA ASHLEY LIMITED (BY ASSIGNMENT FROM LAURA ASHLEY MANUFACTURING BV) AND SIGNATURE EYEWEAR, INC. DATED 28 MAY 1991 (AS AMENDED FROM TIME TO TIME) (THE "LICENCE") We refer to the Licence. The terms used in this letter shall have the same meaning as in the Licence unless the contrary is indicated. We refer to your e-mail dated 17 March 2003 addressed to Angie Yam. In consideration for the sum of [***], which shall be added to the sum of [***] due by 7 April 2003 mentioned below, we are agreeable to the following: 1. The actual royalties from the quarter ending 31 January 2003 which remain unpaid as of the date hereof ($121,851) must be paid on or before the following dates: (i) [***] (plus with the consideration of $1 mentioned above giving a total of [***]) by 7 April 2003; (ii) [***] by 21 April 2003; and (iii) [***] by 3 May 2003. 2. The table for the Minimum Royalties for the Additional Renewal Terms ending 31 January 2004 through 2008 shall be deleted and replaced with the following: Minimum Additional Renewal Terms ending Royalty ------------------------------- ------- January 2004 [***] January 2005 [***] January 2006 [***] January 2007 [***] January 2008 [***] 3. The Additional Renewal Terms ending in January 2007 and 2008 are subject to the additional proviso that no material breach which, if capable of remedy, has not been within the prescribed grace period has been committed from the date hereof up to 31 January 2006. 4. The Minimum Royalty for the Additional Renewal Term ending 31 January 2004 shall be payable as follows: (i) [***] on or before 30 April 2003; (ii) [***] on or before 31 July 2003; (iii) [***] on or before 31 October 2003; (iv) [***] on or before 28 February 2004; and, (v) the balance [***] shall be payable in accordance with Section 9.4 of the License as if it were the sole Minimum Royalty for such Additional Renewal Term. 5. For the avoidance of doubt, the Minimum Royalties for the Additional Renewal Term ending 31 January 2004 and each Additional Renewal Term thereafter are intentionally not segregated by product type or territory. 6. At least six months prior to the end of the Contract Year ending 31 January 2008 provided that Siganture Eyewear, Inc. has not committed any material breach of terms of the Licence, the parties will discuss and consider the renewal of the Agreement for a further Additional Renewal Terms. If there is no agreement on further Additional Renewal Terms, the Licence shall end on 31 January 2008. 7. Laura Ashley waives any right to terminate the Licence as may exist as of 31 January 2003 based on clause 13.2.2, and agrees that for all purposes under the Licence and the Licensee shall be deemed to have not failed in the Contract Year ended 31 January 2003 to have sufficient Net Sales to generate Royalty amounts which equal or exceed the Minimum Royalty in any Category of such Year. 8. The revised Minimum Royalties shall revert to the original Minimum Royalties with retrospective effect if Laura Ashley shall be entitled to terminate the Licence in accordance with its terms, or, if applicable, under the common law. Any amendment or waiver made by this letter shall be void or ineffective AB INITIO should a change of control to which Laura Ashley approves does not occur by 30 April 2003. Further, any consent to any change of control relating to the Transaction (as defined in the relevant Consent document) signed by or on behalf of Laura Ashley Limited on or around the date hereof is signed subject to acceptance of this offer, and subject to the condition that you replace your existing bank credit facility or facilities (term and/or revolving) in an aggregate amount not less than [***] and that you obtain an additional term facility in the amount not less than [***]. To accept this offer of variation, please sign below on both copies of this letter and return one to me by post and by fax. A transaction report showing that the fax has been received at +44 20 7880 5111 or actual receipt at the above fax number constitutes communication of acceptance. Yours sincerely /s/ ANGIE YAM Director of Corporate and Strategic Affairs - ------------------------------------------- For and on behalf of Laura Ashley Limited cc: Ms Olivia Smales, Licensing Manager, Laura Ashley Mr Alan Spatz, Messrs Troy Gould Signed: /s/ Michael Prince Date: 4/14/03 ---------------------------------------------- ----------- For and on behalf of Signature Eyewear, Inc. Chief Financial Officer [SIGNATURE EYEWEAR LETTERHEAD] February 9, 2007 Sean Anglim Head of Operations Laura Ashley Limited 27 Bagleys Lane Fulham, London SW6 2QA Dear Sean: Per our conversation, Laura Ashley confirms there is no minimum sales requirement for the 2006/07 contract year. 1. For the 2006/07 contract year ending January 31, 2007, Signature will pay a royalty minimum of *** (a final payment of *** to be made March 19, 2007). 2. For royalty and administrative support in conjunction with building the brand, in respect of the year ending January 27, 2007, Signature will pay Laura Ashley *** (three payments of *** in May 07, August 07, November 07, and the balance of *** in January 08). 3. Signature also agrees to a fee of ***, in respect of the year ending January 27, 2007, to be paid in March of 2007. 4. Signature and Laura Ashley agree to extend the license agreement until January 2010 under the following terms and conditions: a.) Signature will pay Laura Ashley the greater of *** royalty or the minimum royalty as outlined below: b.) Year Minimum Royalty ---- --------------- 2007/06 *** 2006/09 *** 2009/10 *** Signature truly appreciates Laura Ashley's understanding in regard to the future development of the Laura Ashley eyewear brand. We are excited to work together to build a strong and profitable eyewear business in the years to come. Please sign our memorandum of understanding and fax back to 310-330-270. If you have any questions please call us at 9 am (PST) on Thursday. Best, Michael Prince /s/ Sean Anglim - ---------------------- ------------------------------ CEO Approved and Accepted Signature Eyewear Sean Anglim-Head of Operations Laura Ashley Limited EX-10.6 5 ex10-6_16269.txt SECURITY AGREEMENT EXHIBIT 10.6 ------------ AGREEMENT DATED APRIL 21, 2003 US$4,150,000 CREDIT FACILITY FOR SIGNATURE EYEWEAR, INC. PROVIDED BY BLUEBIRD FINANCE LIMITED CONTENTS CLAUSE PAGE 1. Interpretation......................................................1 1.1 Definitions............................................1 1.2 Construction...........................................5 2. Facility............................................................6 3. Purpose.............................................................7 3.1 Loans..................................................7 3.2 Letter of Credit.......................................7 3.3 No obligation to monitor...............................7 3.4 Security...............................................7 4. Conditions Precedent................................................7 4.1 Conditions precedent documents.........................7 4.2 Further conditions precedent...........................7 5. Utilization - Loans.................................................7 5.1 Giving of Requests.....................................7 5.2 Completion of Requests.................................8 5.3 Advance of Loan........................................8 5.4 Consolidation..........................................8 6. Utilization - Letters of Credit.....................................8 6.1 Giving of Requests.....................................8 6.2 Completion of Requests.................................8 6.3 Issue of Letter of Credit..............................9 7. Letters of Credit...................................................9 7.1 General................................................9 7.2 Fees in respect of the Letter of Credit...............10 7.3 Claims under a Letter of Credit.......................10 7.4 Indemnities...........................................10 8. Repayment..........................................................10 9. Prepayment and Cancellation........................................10 9.1 Mandatory prepayment - illegality.....................10 9.2 Mandatory prepayment - change of control..............11 9.3 Voluntary prepayment..................................11 9.4 Automatic cancellation................................11 9.5 Voluntary cancellation................................12 9.6 Involuntary prepayment and cancellation...............12 9.7 Re-borrowing of Loans.................................12 9.8 Miscellaneous provisions..............................12 10. Interest...........................................................12 10.1 Calculation of interest...............................12 10.2 Payment of interest...................................13 10.3 Interest on overdue amounts...........................13 11. Terms..............................................................13 12. Taxes..............................................................13 12.1 Tax gross-up..........................................13 12.2 Tax indemnity.........................................14 12.3 Stamp taxes...........................................14 12.4 Value added taxes.....................................14 13. Increased Costs....................................................14 13.1 Increased Costs.......................................14 13.2 Exceptions............................................15 13.3 Claims................................................15 14. Payments...........................................................15 14.1 Place.................................................15 14.2 Funds.................................................15 14.3 Currency..............................................15 14.4 No set-off or counterclaim............................15 14.5 Business Days.........................................16 14.6 Timing of payments....................................16 15. Representations....................................................16 15.1 Representations.......................................16 15.2 Status................................................16 15.3 Powers and authority..................................16 15.4 Legal validity........................................16 15.5 Non-conflict..........................................16 15.6 No default............................................17 15.7 Authorizations........................................17 15.8 Financial statements..................................17 15.9 No material adverse change............................18 15.10 Litigation............................................18 15.11 Information...........................................18 15.12 Pari passu ranking....................................19 15.13 Taxes on payments.....................................19 15.14 Stamp duties..........................................19 15.15 Immunity..............................................19 15.16 Pre-existing relationship; Capacity to protect own interest.............................19 15.17 Regulatory laws.......................................20 15.18 Times for making representations......................20 16. Information Covenants..............................................21 16.1 Financial statements..................................21 16.2 Form of financial statements..........................21 16.3 Asset reports.........................................21 16.4 Information - miscellaneous...........................22 16.5 Notification of Default...............................22 16.6 Year end..............................................22 17. General Covenants..................................................22 17.1 General...............................................22 17.2 Authorizations........................................23 17.3 Compliance with laws..................................23 17.4 Pari passu ranking....................................23 17.5 Negative pledge.......................................23 17.6 Disposals.............................................24 17.7 Financial Indebtedness................................24 17.8 Change of business....................................25 17.9 Mergers...............................................25 17.10 Acquisitions..........................................25 17.11 Environmental matters.................................25 17.12 Insurance.............................................26 17.13 ERISA.................................................26 17.14 Securities Laws.......................................27 17.15 No new Subsidiaries...................................27 18. Default............................................................27 18.1 Events of Default.....................................27 18.2 Non-payment...........................................28 18.3 Breach of other obligations...........................28 18.4 Misrepresentation.....................................28 18.5 Cross-default.........................................28 18.6 Insolvency............................................29 18.7 Insolvency proceedings................................29 18.8 Creditors' process....................................30 18.9 Cessation of business.................................30 18.10 Effectiveness of Finance Documents....................30 18.11 Material adverse change...............................30 18.12 Acceleration..........................................30 19. Evidence and Calculations..........................................31 19.1 Accounts..............................................31 19.2 Certificates and determinations.......................31 19.3 Calculations..........................................31 20. Indemnities........................................................31 20.1 Currency indemnity....................................31 20.2 Other indemnities.....................................32 21. Expenses...........................................................32 21.1 Initial costs.........................................32 21.2 Subsequent costs......................................32 21.3 Enforcement costs.....................................33 22. Waivers............................................................33 23. Changes to the Parties.............................................33 23.1 Assignments and transfers by the Company..............33 23.2 Assignments and transfers by the Lender...............33 24. Disclosure of Information..........................................33 25. Set-Off............................................................34 26. Severability.......................................................34 27. Counterparts.......................................................34 28. Notices............................................................35 28.1 In writing............................................35 28.2 Contact details.......................................35 28.3 Effectiveness.........................................35 29. Language...........................................................36 30. Governing Law......................................................36 31. Enforcement........................................................36 31.1 Waiver of immunity....................................36 31.2 Waiver of trial by jury...............................36 32. Integration........................................................37 Signatories.................................................................38 SCHEDULES 1. Conditions Precedent Documents.....................................39 2. Form of Request....................................................41 3. Security Interests.................................................42 4. Form of Security Agreement.........................................43 5. Defaults...........................................................44 6. Material Adverse Change............................................45 7. Litigation.........................................................46 8. Form of Legal Opinion of the Company's Counsel.....................47 9. Letter of Credit...................................................55 THIS AGREEMENT is dated April 21, 2003 BETWEEN: (1) SIGNATURE EYEWEAR, INC., a corporation organized under the laws of the State of California (the Company); and (2) BLUEBIRD FINANCE LIMITED as lender, a company organized under the laws of the British Virgin Islands (the LENDER). IT IS AGREED as follows: 1. INTERPRETATION 1.1 DEFINITIONS In this Agreement: AFFILIATE means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company. AVAILABILITY PERIOD means the period from and including the date of this Agreement to and including: (a) with respect to Loans, the date falling three months before the Final Maturity Date; and (b) with respect to the Letter of Credit, close of business on the date of this Agreement. BUSINESS DAY means a day (other than a Saturday or a Sunday) on which banks are open for general business in California, USA. COMMITMENT means the Letter of Credit Commitment and the Loan Commitment. CREDIT means a Loan or the procurement of the Letter of Credit. DECEMBER FINANCIAL STATEMENTS means the draft unaudited consolidated financial statements of the Company for the period ended December 31, 2002. DEFAULT means: (a) an Event of Default; or (b) an event which would be (with the expiry of a grace period, the giving of notice or the making of any determination under the Finance Documents or any combination of them) an Event of Default. EVENT OF DEFAULT means an event specified as such in Clause 18 (Default). FACILITY means the credit facility made available under this Agreement. 1 FINAL MATURITY DATE means the tenth anniversary of the date of this Agreement. FINANCE DOCUMENT means: (a) this Agreement; (b) a Security Document; (c) the Subordination Agreement; or (d) any other document designated as such by the Lender and the Company. FINANCIAL INDEBTEDNESS means any indebtedness for or in respect of: (a) moneys borrowed; (b) any acceptance credit; (c) any bond, note, debenture, loan stock or other similar instrument; (d) any redeemable preference share; (e) any agreement treated as a finance or capital lease in accordance with generally accepted accounting principles in the jurisdiction of incorporation of the Company; (f) receivables sold or discounted (otherwise than on a non-recourse basis); (g) the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset; (h) any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and, except for non-payment of an amount, the then mark to market value of the derivative transaction will be used to calculate its amount); (i) any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing; (j) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or (k) any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in the above paragraphs. GROUP means the Company and its Subsidiaries. HOLDING COMPANY of any other person, means a company in respect of which that other person is a Subsidiary. 2 INCREASED COST means: (a) an additional or increased cost; (b) a reduction in the rate of return from the Facility; or (c) a reduction of an amount due and payable under any Finance Document, which is incurred or suffered by the Lender or any of its Affiliates but only to the extent: (i) attributable to the Lender having entered into any Finance Document or funding or performing its obligations under any Finance Document; and (ii) such costs, reduction or amounts exceeds US$25,000 in aggregate. LC ISSUER means Bank of America (Asia) Limited. LETTER OF CREDIT means the US$1,250,000 letter of credit issued by the LC Issuer in favor of the Senior Lender at the request of the Lender as collateral for the obligations of the Company under the Senior Credit Agreement in the form of Schedule 9 (Letter of Credit). LETTER OF CREDIT COMMITMENT means US$1,250,000, as such amount shall be automatically reduced to zero on the earlier of: (a) the Utilization Date of the Letter of Credit; and (b) close of business in California on the date of this Agreement. LOAN means, unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing. LOAN COMMITMENT means US$2,900,000, as such amount shall be automatically reduced by an amount equal to US $72,500 on: (a) the date falling 27 months after the date of this Agreement; and (b) every 3 months after such date, to the extent not cancelled, transferred or otherwise reduced under this Agreement. MATERIAL ADVERSE EFFECT means a material adverse effect on: (a) the business, financial condition or results of operations of any member of the Group or the Group as a whole; (b) the ability of the Company to perform its obligations under any Finance Document; (c) the validity or enforceability of any Finance Document; or (d) any right or remedy of the Lender in respect of a Finance Document. 3 OCTOBER FINANCIAL STATEMENTS means the draft consolidated financial statements of the Company for the year ended October 31, 2002. PARTY means a party to this Agreement. REPEATING REPRESENTATIONS means the representations which are deemed to be repeated under Clause 15.18 (Times for making representations). REQUEST means a request for a Credit, substantially in the form of Schedule 2 (Form of Request). SECURITY AGREEMENT means a security agreement in the form of Schedule 4 (Form of Security Agreement) with such amendments as the Lender may approve or reasonably require. SECURITY DOCUMENT means: (a) each Security Agreement; and (b) any other document evidencing or creating security over any asset of the Company to secure any obligation of the Company to the Lender under the Finance Documents. SECURITY INTEREST means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest or any other agreement or arrangement having a similar effect. SENIOR CREDIT AGREEMENT means the US$3,500,000 loan and security agreement dated on or about the date hereof between the Senior Lender and the Company and the two promissory notes issued by the Company pursuant thereto. SENIOR LENDER means Home Loan and Investment Company, a Colorado corporation. SUBORDINATION AGREEMENT means the subordination agreement dated on or about the date of this Agreement between the Senior Lender, the Company and the Lender. SUBSIDIARY means an entity of which a person has direct or indirect control or owns directly or indirectly more than 50% of the voting capital or similar right of ownership and CONTROL for this purpose means the power to direct the management and the policies of the entity whether through the ownership of voting capital, by contract or otherwise. TAX means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest). TAX DEDUCTION means a deduction or withholding for or on account of Tax from a payment under a Finance Document. TAX PAYMENT means a payment made by the Company to the Lender in any way related to a Tax Deduction or under any indemnity given by the Company in respect of Tax under any Finance Document. TERM means: 4 (a) three months or each period determined under this Agreement by reference to which interest on an overdue amount is calculated; or (b) the period for which the Lender or any Affiliate of the Lender may be under any liability with respect to the Letter of Credit. UTILIZATION DATE means each date on which the Facility is utilized. 1.2 CONSTRUCTION (a) In this Agreement, unless the contrary intention appears, a reference to: (i) an AMENDMENT includes a supplement, novation, restatement or re-enactment and AMENDED will be construed accordingly; (II) ASSETS includes present and future properties, revenues and rights of every description; (iii) an AUTHORIZATION includes an authorization, consent, approval, resolution, license, exemption, filing, registration or notarization; (IV) DISPOSAL means a sale, transfer, grant, lease or other disposal, whether voluntary or involuntary, and DISPOSE will be construed accordingly; (V) INDEBTEDNESS includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money; (vi) a PERSON includes any individual, company, corporation, limited liability partnership, limited liability company, unincorporated association or body (including a partnership, trust, joint venture or consortium), government, state, agency, organization or other entity whether or not having separate legal personality; (vii) a REGULATION includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type with which any person to which it applies is accustomed to comply) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organization; (viii) a currency is a reference to the lawful currency for the time being of the relevant country; (ix) a Default being OUTSTANDING means that it has not been remedied or waived; (x) a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation; (xi) a Clause, a Subclause or a Schedule is a reference to a clause or subclause of, or a schedule to, this Agreement; (xii) a Party or any other person includes its successors in title, permitted assigns and permitted transferees; 5 (xiii) a Finance Document or another document is a reference to that Finance Document or other document as amended; and (xiv) a time of day is a reference to California time. (b) Unless the contrary intention appears, a reference to a MONTH or MONTHS is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or the calendar month in which it is to end, except that: (i) if the numerically corresponding day is not a Business Day, the period will end on the next Business Day in that month (if there is one) or the preceding Business Day (if there is not); (ii) if there is no numerically corresponding day in that month, that period will end on the last Business Day in that month; and (iii) notwithstanding sub-paragraph (b)(i) above, a period which commences on the last Business Day of a month will end on the last Business Day in the next month or the calendar month in which it is to end, as appropriate. (c) Unless expressly provided to the contrary in a Finance Document, a person who is not a party to a Finance Document may not enforce any of its terms and, notwithstanding any term of any Finance Document, no consent of any third party is required for any variation (including any release or compromise of any liability) or termination of that Finance Document. (d) Unless the contrary intention appears: (i) a reference to a Party will not include that Party if it has ceased to be a Party under this Agreement; (ii) an amount in US Dollars is only payable in US Dollars; (iii) a word or expression used in any other Finance Document or in any notice given in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement; and (iv) any obligation of the Company under the Finance Documents which is not a payment obligation remains in force for so long as any payment obligation of the Company is or may be outstanding under the Finance Documents. (e) The headings in this Agreement do not affect its interpretation. 2. FACILITY Subject to the terms of this Agreement, the Lender makes available to the Company: (a) a revolving credit facility in an aggregate amount equal to the Loan Commitment; and (b) a credit facility in an aggregate amount equal to the Letter of Credit Commitment. 6 3. PURPOSE 3.1 LOANS Each Loan may only be used for: (a) payments to creditors of the Company designated by the Lender; and (b) the general working capital needs of the Company. 3.2 LETTER OF CREDIT The Letter of Credit may only be issued as collateral for the obligations of the Company under the Senior Credit Agreement. 3.3 NO OBLIGATION TO MONITOR The Lender is not bound to monitor or verify the utilization of the Facility. 3.4 SECURITY The obligations of the Company under the Finance Documents are secured by the Security Documents. 4. CONDITIONS PRECEDENT 4.1 CONDITIONS PRECEDENT DOCUMENTS A Request may not be given until the Lender has notified the Company that it has received all of the documents and evidence set out in Schedule 1 (Conditions precedent documents) in form and substance satisfactory to the Lender. The Lender must give this notification to the Company promptly upon being so satisfied. 4.2 FURTHER CONDITIONS PRECEDENT The obligations of the Lender to make any Credit available are subject to the further conditions precedent that on both the date of the Request and the Utilization Date for that Credit: (a) the Repeating Representations are correct in all material respects; and (b) no Default is outstanding or would result from the Credit. 5. UTILIZATION - LOANS 5.1 GIVING OF REQUESTS (a) The Company may borrow a Loan by giving to the Lender a duly completed Request. (b) Unless the Lender otherwise agrees, the latest time for receipt by the Lender of a duly completed Request is 11:00 a.m. two Business Days before the Utilization Date for the proposed Loan. 7 5.2 COMPLETION OF REQUESTS A Request for a Loan will not be regarded as having been duly completed unless: (a) the Utilization Date is a Business Day falling within the applicable Availability Period; and (b) the amount of the Loan requested is: (i) a minimum of US$25,000 and an integral multiple of US$25,000; or (ii) the maximum undrawn amount available under this Agreement for Loans under the Facility on the proposed Utilization Date. Only one Loan may be requested in a Request. 5.3 ADVANCE OF LOAN (a) The Lender is not obliged to make a Loan if, as a result, the Loans would exceed the Loan Commitment. (b) If the conditions set out in this Agreement have been met, the Lender must make the Loan available to the Company on the Utilization Date set out in the Request for the Loan. 5.4 CONSOLIDATION Immediately upon being made available to the Company a Loan shall be consolidated with any other Loan and treated as one Loan. 6. UTILIZATION - LETTERS OF CREDIT 6.1 GIVING OF REQUESTS (a) The Company may request the Lender to procure that the Letter of Credit be issued by giving to the Lender a duly completed Request. (b) Unless the Lender otherwise agrees, the latest time for receipt by the Lender of a duly completed Request is 11.00 a.m. two Business Days before the proposed Utilization Date for the Letter of Credit. 6.2 COMPLETION OF REQUESTS A Request for the procurement of the Letter of Credit will not be regarded as being duly completed unless: (a) it specifies that it is for the Letter of Credit; (b) the Utilization Date is a Business Day falling within the applicable Availability Period; and (c) the delivery instructions for the Letter of Credit are specified. 8 Only the Letter of Credit may be requested in a Request. 6.3 ISSUE OF LETTER OF CREDIT (a) The Lender is not obliged to procure the issue of the Letter of Credit if as a result the Credit attributable to the Letter of Credit would exceed the Letter of Credit Commitment. (b) If the conditions set out in this Agreement have been met, the Lender must procure the issue of the Letter of Credit on the Utilization Date set out in the Request for the procurement of the Letter of Credit. 7. LETTERS OF CREDIT 7.1 GENERAL (a) The Letter of Credit is REPAID or PREPAID if: (i) the Company provides cash cover to the Lender for the Letter of Credit; (ii) the maximum amount payable under the Letter of Credit is reduced in accordance with its terms; or (iii) the Lender is satisfied that neither it nor any of its Affiliates has any further liability with respect to the Letter of Credit. The amount by which the Letter of Credit is repaid or prepaid under sub-paragraphs (i) and (ii) above is the amount of the relevant cash cover or reduction. (b) If the Letter of Credit or any amount outstanding under the Letter of Credit is expressed to be immediately payable, the Company must repay or prepay that amount immediately. (C) CASH COVER is provided for the Letter of Credit if the Company pays an amount in the currency of the Letter of Credit to an interest-bearing account with the Lender in the name of the Company and the following conditions are met: (i) until no amount is or may be outstanding under the Letter of Credit, withdrawals from the account may only be made to pay the Lender amounts due and payable by it or any of its Affiliates with respect to the Letter of Credit or under this Clause; and (ii) the Company has executed a security document over that account, in form and substance satisfactory to the Lender, creating a first ranking security interest over that account in favor of the Lender. (d) The OUTSTANDING or PRINCIPAL amount of the Letter of Credit at any time is the maximum amount that is or may be payable by the Company or any of its Affiliates to the LC Issuer or any other person in respect of the Letter of Credit at that time. 9 7.2 FEES IN RESPECT OF THE LETTER OF CREDIT (a) The Company must pay to the Lender immediately on demand an amount equal to the letter of credit fee payable to the LC Issuer on the outstanding amount of the Letter of Credit for the period from the issue of the Letter of Credit until its maturity date. (b) The letter of credit fee is payable annually in advance. 7.3 CLAIMS UNDER A LETTER OF CREDIT (a) The Company irrevocably and unconditionally authorizes the Lender to pay to the LC Issuer an amount equal to any claim made or purported to be made under the Letter of Credit which appears on its face to be in order (a CLAIM). (b) The Company must immediately on demand pay to the Lender an amount equal to the amount of any claim. (c) The Company acknowledges that the Lender and the LC Issuer: (i) are not obliged to carry out any investigation or seek any confirmation from any other person before paying a claim; and (ii) deal in documents only and will not be concerned with the legality of a claim or any underlying transaction or any available set-off, counterclaim or other defence of any person. (d) The obligations of the Company under this Clause will not be affected by: (i) the sufficiency, accuracy or genuiness of any claim or any other document; or (ii) any incapacity of, or limitation on the powers of, any person signing a claim or other document. 7.4 INDEMNITIES The Company must immediately on demand indemnify the Lender against any loss or liability which the Lender incurs under or in connection with the Letter of Credit. 8. REPAYMENT (a) The Company must repay the Loan so that the Loan never exceeds the Loan Commitment. (b) The Company must repay the Letter of Credit in full on its maturity date. 9. PREPAYMENT AND CANCELLATION 9.1 MANDATORY PREPAYMENT - ILLEGALITY (a) The Lender must notify the Company promptly if it becomes aware that it is unlawful in any jurisdiction for the Lender to perform any of its obligations under a Finance Document or to fund or maintain any Credit. 10 (b) After notification under paragraph (a) above: (i) the Company must repay or prepay the Lender each Credit on the date specified in paragraph (c) below; and (ii) the Commitment will be immediately cancelled. (c) The date for repayment or prepayment of a Credit will be: (i) the last day of the current Term of that Credit; or (ii) if earlier, the date specified by the Lender in the notification under paragraph (a) above and which must not be earlier than the last day of any applicable grace period allowed by law. 9.2 MANDATORY PREPAYMENT - CHANGE OF CONTROL (a) For the purposes of this Clause: a CHANGE OF CONTROL occurs if any person or group of persons acting in concert cease(s) to be the beneficial owner directly or indirectly through wholly owned Subsidiaries of more than 50% of the issued share capital of the Company; and ACTING IN CONCERT means acting together pursuant to an agreement or understanding (whether formal or informal) (b) The Company must promptly notify the Lender if it becomes aware of any change of control. (c) After a change of control, the Lender may, by notice to the Company: (i) cancel the Commitment; and (ii) declare all outstanding Credits, together with accrued interest and all other amounts accrued under the Finance Documents, to be immediately due and payable. Any such notice will take effect in accordance with its terms. 9.3 VOLUNTARY PREPAYMENT (a) The Company may, by giving not less than five Business Days' prior notice to the Lender, prepay any Credit at any time in whole or in part. (b) A prepayment of part of a Credit must be in a minimum amount of US$25,000 and an integral multiple of US$25,000. 9.4 AUTOMATIC CANCELLATION (a) The Loan Commitment will be automatically cancelled at the close of business on the Final Maturity Date. 11 (b) The Letter of Credit Commitment will be automatically cancelled at the close of business on the date of this Agreement. 9.5 VOLUNTARY CANCELLATION (a) The Company may, by giving not less than five Business Days' prior notice to the Lender, cancel the unutilized amount of the Loan Commitment in whole or in part. (b) Partial cancellation of the Loan Commitment must be in a minimum amount of US$25,000 and an integral multiple of US$25,000. If the Loan Commitment is cancelled in part, it may not be reduced below US$300,000. 9.6 INVOLUNTARY PREPAYMENT AND CANCELLATION (a) If the Company is, or will be, required to pay to the Lender a Tax Payment or an Increased Cost, the Company may, while the requirement continues, give notice to the Lender requesting prepayment and cancellation. (b) After notification under paragraph (a) above: (i) the Company must repay or prepay each Credit on the date specified in paragraph (c) below; and (ii) the Commitment will be immediately cancelled. (c) The date for repayment or prepayment of a Credit will be the last day of the current Term for that Credit or, if earlier, the date specified by the Company in its notification. 9.7 RE-BORROWING OF LOANS Any voluntary prepayment of all or any part of the Loan may be re-borrowed on the terms of this Agreement. Any mandatory or involuntary prepayment of all or part of the Loan may not be re-borrowed. 9.8 MISCELLANEOUS PROVISIONS (a) Any notice of prepayment and/or cancellation under this Agreement is irrevocable and must specify the relevant date(s) and the affected Credits. (b) All prepayments under this Agreement must be made with accrued interest on the amount prepaid. (c) No prepayment or cancellation is allowed except in accordance with the express terms of this Agreement. 10. INTEREST 10.1 CALCULATION OF INTEREST The rate of interest on the Loan is 5 (five) percent per annum. 12 10.2 PAYMENT OF INTEREST (a) Up to and including the second anniversary of the date of this Agreement, the Company must pay accrued interest on the Loan on the first and on the second anniversary of the date of this Agreement. (b) After the second anniversary of the date of this Agreement the Company must pay accrued interest on the Loan on the last day of each Term. 10.3 INTEREST ON OVERDUE AMOUNTS (a) If the Company fails to pay any amount payable by it under the Finance Documents, it must immediately on demand by the Lender pay interest on the overdue amount from its due date up to the date of actual payment, both before, on and after judgment. (b) Interest is payable for successive Terms selected by the Lender: (i) on an overdue amount with respect to the Loan, at a rate two percent per annum above the rate of interest referred to in Clause 10.1 (Calculation of interest) above; and (ii) on an overdue amount with respect to the Letter of Credit, at the rate notified by, and payable to, the LC Issuer (as notified by the Lender to the Company) from time to time. (c) Interest (if unpaid) on an overdue amount will be compounded with that overdue amount at the end of each of its Terms but will remain immediately due and payable. 11. TERMS The Loan has successive Terms of three months starting on the date of this Agreement or on the expiry of the preceding Term. 12. TAXES 12.1 TAX GROSS-UP (a) The Company must make all payments to be made by it under the Finance Documents without any Tax Deduction, unless a Tax Deduction is required by law. (b) If the Company or the Lender is aware that the Company must make a Tax Deduction (or that there is a change in the rate or the basis of a Tax Deduction), it must notify the other Party promptly. (c) If a Tax Deduction is required by law to be made by the Company, the amount of the payment due from the Company will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required. (d) If the Company is required to make a Tax Deduction, it must make the minimum Tax Deduction allowed by law and must make any payment required in connection with that Tax Deduction within the time allowed by law. 13 (e) Within 30 days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, the Company must deliver to the Lender evidence satisfactory to the Lender (acting reasonably) that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority. 12.2 TAX INDEMNITY (a) Except as provided below, the Company must indemnify the Lender against any loss or liability which the Lender (in its absolute discretion) determines will be or has been suffered (directly or indirectly) by it for or on account of Tax in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document. (b) Paragraph (a) above does not apply to any Tax assessed on the Lender under the laws of the jurisdiction in which the Lender is incorporated or, if different, the jurisdiction (or jurisdictions) in which the Lender is treated as resident for tax purposes if that Tax is imposed on or calculated by reference to the net income received or receivable by the Lender. However, any payment deemed to be received or receivable, including any amount treated as income but not actually received by the Lender, such as a Tax Deduction, will not be treated as net income received or receivable for this purpose. (c) If the Lender makes, or intends to make, a claim under paragraph (a) above, it must promptly notify the Company of the event which will give, or has given, rise to the claim. 12.3 STAMP TAXES The Company must pay and indemnify the Lender against any stamp duty, documentary, property, registration or other similar Tax payable in the jurisdictions of its incorporation, operations or where any of its assets are located in connection with the entry into, performance or enforcement of any Finance Document. 12.4 VALUE ADDED TAXES Any amount (including costs and expenses) payable under a Finance Document by the Company is exclusive of any value added tax or any other Tax of a similar nature which might be chargeable in connection with that amount. If any such Tax is chargeable, the Company must pay to the Lender (in addition to and at the same time as paying that amount) an amount equal to the amount of that Tax. 13. INCREASED COSTS 13.1 INCREASED COSTS Except as provided below in this Clause, the Company must pay to the Lender the amount of any Increased Cost incurred by the Lender or any of its Affiliates as a result of: (a) the introduction of, or any change in, or any change in the interpretation, administration or application of, any law or regulation; or (b) compliance with any law or regulation, 14 made after the date of this Agreement. 13.2 EXCEPTIONS The Company need not make any payment for an Increased Cost to the extent that the Increased Cost is: (a) compensated for under another Clause or would have been but for an exception to that Clause; (b) a tax on the overall net income of the Lender or any of its Affiliates; or (c) attributable to the Lender or its Affiliate willfully failing to comply with any law or regulation. 13.3 CLAIMS The Lender must notify the Company promptly of the circumstances giving rise to, and the amount of, the claim. 14. PAYMENTS 14.1 PLACE Unless a Finance Document specifies that payments under it are to be made in another manner, all payments under a Finance Document must be made to the relevant Party to its account at such office or bank as it may notify to the other Party for this purpose by not less than five Business Days' prior notice. 14.2 FUNDS Payments under the Finance Documents to the Lender must be made for value on the due date at such times and in such funds as the Lender may specify to the Company as being customary at the time for the settlement of transactions in that currency in the place for payment. 14.3 CURRENCY (a) Unless a Finance Document specifies that payments under it are to be made in a different manner, the currency of each amount payable under the Finance Documents is determined under this Clause. (b) Amounts payable in respect of costs and expenses are payable in the currency in which they are incurred. (c) Each other amount payable under the Finance Documents is payable in US Dollars. 14.4 NO SET-OFF OR COUNTERCLAIM All payments made by the Company under the Finance Documents must be made without set-off or counterclaim. 15 14.5 BUSINESS DAYS (a) If a payment under the Finance Documents is due on a day which is not a Business Day, the due date for that payment will instead be the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not) or whatever day the Lender determines is market practice. (b) During any extension of the due date for payment of any principal under this Agreement interest is payable on that principal at the rate payable on the original due date. 14.6 TIMING OF PAYMENTS If a Finance Document does not provide for when a particular payment is due, that payment will be due within three Business Days of demand by the Lender. 15. REPRESENTATIONS 15.1 REPRESENTATIONS The representations set out in this Clause are made by the Company to the Lender. 15.2 STATUS (a) It is a corporation, duly incorporated and validly existing under the laws of the State of California. (b) It and each of its Subsidiaries has the power to own its assets and carry on its business as it is being conducted. 15.3 POWERS AND AUTHORITY It has the power to enter into and perform, and has taken all necessary action to authorize the entry into and performance of, the Finance Documents to which it is or will be a party and the transactions contemplated by those Finance Documents. 15.4 LEGAL VALIDITY Each Finance Document to which it is a party is its legally binding, valid and enforceable obligation. 15.5 NON-CONFLICT The entry into and performance by it of, and the transactions contemplated by, the Finance Documents do not conflict with: (a) any law or regulation applicable to it; (b) its or any of its Subsidiaries' constitutional documents; or (c) any document which is binding upon it or any of its Subsidiaries or any of its or its Subsidiaries' assets other than documents with respect to which the Company's maximum potential liability does not exceed US$75,000 in aggregate and the payment of such liability would not have a Material Adverse Effect. 16 15.6 NO DEFAULT (a) No Default is outstanding or will result from the execution of, or the performance of any transaction contemplated by, any Finance Document other than as described in Schedule 5 (Defaults). (b) No other event is outstanding which constitutes a default under any document which is binding on it or any of its Subsidiaries or any of its or its Subsidiaries' assets other than: (i) as described in Schedule 5 (Defaults); (ii) any document with respect to the counterparty of which the Company's maximum aggregate potential liability is greater than US$100,000 and which liability will be repaid in full within 30 days of the date of this Agreement; or (iii) any document with respect to the counterparty of which the Company's maximum aggregate potential liability does not exceed US$100,000 and the payment of such liability would not have a Material Adverse Effect. 15.7 AUTHORIZATIONS All authorizations required by it in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, the Finance Documents have been obtained or effected (as appropriate) and are in full force and effect. 15.8 FINANCIAL STATEMENTS (a) The October Financial Statements have been prepared in good faith with due care and diligence and fairly represent its financial condition and results of operations as at the date to which they were drawn up, subject to: (i) normal year end adjustments and completion of the footnotes; and (ii) adjustments required by the Company's auditors to be made as follows: (A) increase in inventory reserves as a result of obsolescence or slow movement of inventory; (B) increase in the reserves for returns of goods, inventory and merchandise; and (C) increase in the bad debt reserve, all such adjustments to be notified to the Lender promptly upon agreement thereof by the Company and its auditors. 17 (b) The December Financial Statements have been prepared in good faith with due care and diligence and fairly represent its financial condition and results of operations as at the date to which they were drawn up, subject to: (i) normal year end adjustments; and (ii) adjustments directly resulting from any adjustments made to the October Financial Statements in accordance with paragraph (a)(ii) above. The December Financial Statements contain no footnotes. (c) Its audited consolidated financial statements most recently delivered to the Lender: (i) have been prepared in accordance with accounting principles and practices generally accepted in its jurisdiction of incorporation, consistently applied; and (ii) fairly represent its consolidated financial condition and results of operations as at the date to which they were drawn up, except, in each case, as disclosed to the contrary in those financial statements. 15.9 NO MATERIAL ADVERSE CHANGE There has been no material adverse change in the consolidated financial condition or results of operations of the Company since December 31, 2002 other than: (a) as set out in Schedule 6 (Material Adverse Change); or (b) as otherwise known to the Lender. 15.10 LITIGATION No litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which, if adversely determined, are reasonably likely to have a Material Adverse Effect other than: (a) as set out in Schedule 7 (Litigation); or (b) threatened claims for an amount not exceeding US$100,000 in aggregate. 15.11 INFORMATION (a) All written information (including, for the avoidance of doubt, information supplied by, or attached to, e-mail) supplied by it to the Lender in connection with the Finance Documents is true and accurate in all respects as at its date or (if appropriate) as at the date (if any) at which it is stated to be given other than inaccuracies which are not material in the context of: (i) the overall business, financial condition or results of operations of the Company; or (ii) the ability of the Company to perform its obligations under any Finance Document. 18 (b) It has not omitted to supply any information which, if disclosed, might make the information supplied by it to the Lender in connection with the Finance Documents untrue or misleading in any material respect other than: (i) omissions which are not material in the context of: (A) the overall business, financial condition or results of operations of the Company; or (B) the ability of the Company to perform its obligations under any Finance Document; (ii) information that is known to the Lender; or (iii) information that is available to the general public in the city where the management of the Lender is located through: (A) major media sources; or (B) relevant optical industry press. 15.12 PARI PASSU RANKING Its payment obligations under the Finance Documents rank at least pari passu with all its other present and future unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally. 15.13 TAXES ON PAYMENTS All amounts payable by it under the Finance Documents may be made without any Tax Deduction. 15.14 STAMP DUTIES No stamp duty, documentary, property, registration or similar Tax or charge is payable in its jurisdiction of incorporation in respect of any Finance Document. 15.15 IMMUNITY (a) The execution by it of each Finance Document constitutes, and the exercise by it of its rights and performance of its obligations under each Finance Document will constitute, private and commercial acts performed for private and commercial purposes. (b) It will not be entitled to claim immunity from suit, execution, attachment or other legal process in any proceedings taken in its jurisdiction of incorporation in relation to any Finance Document. 15.16 PRE-EXISTING RELATIONSHIP; CAPACITY TO PROTECT OWN INTEREST (a) The Lender and the Company, or any of their respective officers, directors or controlling persons, have a pre-existing business or personal relationship. 19 (b) The Company has the capacity to protect its interests in connection with its obligations under the Finance Documents by reason of its business and financial experience or that of its professional advisors. 15.17 REGULATORY LAWS (a) In this Subclause: HOLDING COMPANY, AFFILIATE AND SUBSIDIARY COMPANY have the meanings given to them in the United States Public Utility Holding Company Act of 1935. INVESTMENT COMPANY has the meaning given to it in the United States Investment Company Act of 1940. PUBLIC UTILITY has the meaning given to it in the United States Federal Power Act of 1920. (b) No member of the Group is: (i) a holding company, an affiliate of a holding company or a subsidiary company of a holding company, or subject to regulation, under the United States Public Utility Holding Company Act of 1935; (ii) required to register as an investment company; (iii) a public utility, or subject to regulation, under the United States Federal Power Act of 1920; or (iv) subject to regulation under any United States Federal or State law or regulation that limits its ability to incur or guarantee indebtedness. 15.18 TIMES FOR MAKING REPRESENTATIONS (a) The representations set out in this Clause are made by the Company on the date of this Agreement. (b) Unless a representation is expressed to be given at a specific date, each representation is deemed to be repeated by the Company on the date of each Request and the first day of each Term. (c) When a representation is repeated, it is applied to the circumstances existing at the time of repetition. 20 16. INFORMATION COVENANTS 16.1 FINANCIAL STATEMENTS (a) The Company must supply to the Lender: (i) its audited consolidated financial statements for each of its financial years; and (ii) its interim financial statements for the first three quarters of each of its financial years. (b) All financial statements must be supplied as soon as they are available and: (i) in the case of the Company's audited consolidated financial statements, within 180 days; and (ii) in the case of the Company's interim financial statements, within 120 days, of the end of the relevant financial period. 16.2 FORM OF FINANCIAL STATEMENTS (a) The Company must ensure that each set of financial statements supplied under this Agreement fairly presents its financial condition and results of operations (consolidated or otherwise) as at the date to which those financial statements were drawn up. (b) The Company must notify the Lender of any change to the manner in which its audited consolidated financial statements are prepared. (c) If requested by the Lender, the Company must supply to the Lender: (i) a full description of any change notified under paragraph (b) above; and (ii) sufficient information to enable it to make a proper comparison between the financial position shown by the set of financial statements prepared on the changed basis and its most recent audited consolidated financial statements delivered to the Lender under this Agreement. 16.3 ASSET REPORTS (a) The Company must supply to the Lender an asset report in form and substance satisfactory to the Lender, together with such additional information, reports and/or statements as the Lender may require, setting out: (i) a listing and aging (by invoice date) of all accounts receivable and accounts payable together with applicable sales and payment terms, details of outstanding balances due from all account debtors (as that term is defined in the Uniform Commercial Code as in effect in the State of California) and the Company's worksheet for applicable reserves; (ii) a reconciliation of the aging referred to in paragraph (i) above with the previous aging delivered to the Lender; 21 (iii) a listing of all the Company's inventory (as that term is defined in the Uniform Commercial Code as in effect in the State of California) setting out types, locations and values (calculated in accordance with generally accepted accounting principles); and (iv) details of reserves for obsolete inventory and the Company's applicable worksheet. (b) The asset report referred to in paragraph (a) above must be supplied within 15 days after the end of each calendar month. 16.4 INFORMATION - MISCELLANEOUS The Company must supply to the Lender: (a) copies of all documents dispatched by the Company to its shareholders (or any class of them) or its creditors generally or any class of them at the same time as they are dispatched; (b) promptly upon becoming aware of them, details of any litigation, arbitration or administrative proceedings which are current, threatened or pending and which might, if adversely determined, have a Material Adverse Effect; (c) promptly on request, a list of the then current Subsidiaries; and (d) promptly on request, such further information regarding the financial condition and operations of the Group as the Lender may reasonably request. 16.5 NOTIFICATION OF DEFAULT (a) The Company must notify the Lender of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence. (b) Promptly on request by the Lender, the Company must supply to the Lender a certificate, signed by two of its authorized signatories on its behalf, certifying that no Default is outstanding or, if a Default is outstanding, specifying the Default and the steps, if any, being taken to remedy it. 16.6 YEAR END The Company must not change its financial year end. 17. GENERAL COVENANTS 17.1 GENERAL The Company agrees to be bound by the covenants set out in this Clause relating to it and, where the covenant is expressed to apply to a member or members of the Group, the Company must ensure that any member of the Group that is its Subsidiary performs that covenant. 22 17.2 AUTHORIZATIONS The Company must promptly obtain, maintain and comply with the terms of any authorization required under any law or regulation to enable it to perform its obligations under, or for the validity or enforceability of, any Finance Document. 17.3 COMPLIANCE WITH LAWS Each member of the Group must comply in all respects with all laws to which it is subject where failure to do so is reasonably likely to have a Material Adverse Effect. 17.4 PARI PASSU RANKING The Company must ensure that its payment obligations under the Finance Documents rank at least pari passu with all its other present and future unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally. 17.5 NEGATIVE PLEDGE (a) Except as provided below, no member of the Group may create or allow to exist any Security Interest on any of its assets. (b) Paragraph (a) above does not apply to: (i) any Security Interest constituted by the Security Documents; (ii) any Security Interest granted to the Senior Lender in connection with the Senior Credit Agreement, but only to the extent such Security Interest is in respect of the personal property subject to the Security Documents; (iii) any Security Interest listed in Schedule 3 (Security Interests) except to the extent the principal amount secured by that Security Interest exceeds the amount stated in that Schedule; (iv) any Security Interest comprising a netting or set-off arrangement entered into by a member of the Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances; (v) any lien arising by operation of law and in the ordinary course of business; and (vi) any Security Interest on an asset, or an asset of any person, acquired by a member of the Group after the date of this Agreement but only for the period of 6 months from the date of acquisition and to the extent that the principal amount secured by that Security Interest has not been incurred or increased in contemplation of, or since, the acquisition. (c) No member of the Group may: (i) sell, transfer or otherwise dispose of any of its assets on terms where it is or may be leased to or re-acquired or acquired by a member of the Group or any of its related entities; or 23 (ii) sell, transfer or otherwise dispose of any of its receivables on recourse terms, in circumstances where the transaction is entered into primarily as a method of raising Financial Indebtedness or of financing the acquisition of an asset. 17.6 DISPOSALS (a) Except as provided below, no member of the Group may, either in a single transaction or in a series of transactions and whether related or not, dispose of all or any part of its assets. (b) Paragraph (a) above does not apply to any disposal: (i) made in the ordinary course of trading of the disposing entity; (ii) of assets in exchange for other assets comparable or superior as to type, value and quality; or (iii) where the higher of the market value or consideration receivable (when aggregated with the higher of the market value or consideration for any other disposal not allowed under the preceding sub-paragraphs) does not exceed US$150,000 or its equivalent in any financial year of the Company. 17.7 FINANCIAL INDEBTEDNESS (a) Except as provided below, no member of the Group (other than the Company) may incur any Financial Indebtedness. (b) Paragraph (a) above does not apply to: (i) any Financial Indebtedness incurred under the Finance Documents; (ii) any Financial Indebtedness incurred under the Stock Purchase Agreement dated the date of this Agreement between the Company and the Lender relating to the purchase and sale of Series A 5% convertible preferred stock; (iii) any Financial Indebtedness incurred under the Senior Credit Agreement; (iv) any Financial Indebtedness incurred under the Promissory Note dated February 4, 2003 issued by the Company in favor of Axwood Investments Limited; (v) any Financial Indebtedness incurred under the Promissory Note dated on or about March 26, 2003 issued by the Company in favor of Wells Fargo Equipment Finance, Inc. and US Bancorp Oliver-Allen Technology Leasing; (vi) any Financial Indebtedness owed by a member of the Group to another member of the Group; (vii) any Financial Indebtedness of any person acquired by a member of the Group which is incurred under arrangements in existence at the date of acquisition, but only for a period of 6 months from the date of acquisition; 24 (viii) any derivative transaction protecting against or benefiting from fluctuations in any rate or price entered into in the ordinary course of business; or (ix) Financial Indebtedness which in aggregate does not exceed US$150,000 or its equivalent at any time. 17.8 CHANGE OF BUSINESS The Company must ensure that no change is made to the general nature of the business of the Company or the Group from that carried on at the date of this Agreement. 17.9 MERGERS The Company may not enter into any amalgamation, demerger, merger or reconstruction without the prior consent of the Lender. 17.10 ACQUISITIONS (a) Except as provided below, no member of the Group may make any acquisition or investment. (b) Paragraph (a) above does not apply to: (i) acquisitions or investments made in the ordinary course of trade; or (ii) acquisitions where the consideration (when aggregated with the consideration of any other acquisition not allowed under the preceding sub-paragraphs) does not exceed US$150,000 or its equivalent in any financial year of the Company. 17.11 ENVIRONMENTAL MATTERS (a) In this Subclause: ENVIRONMENTAL APPROVAL means any authorization required by an Environmental Law. ENVIRONMENTAL CLAIM means any claim by any person in connection with: (i) a breach, or alleged breach, of an Environmental Law; (ii) any accident, fire, explosion or other event of any type involving an emission or substance which is capable of causing harm to any living organism or the environment; or (iii) any other environmental contamination. ENVIRONMENTAL LAW means any law or regulation concerning: (i) the protection of health and safety; (ii) the environment; or (iii) any emission or substance which is capable of causing harm to any living organism or the environment. 25 (b) Each member of the Group must ensure that it is, and has been, in compliance with all Environmental Law and Environmental Approvals applicable to it, where failure to do so is reasonably likely to have a Material Adverse Effect or results in any liability for the Lender. (c) The Company must promptly upon becoming aware notify the Lender of: (i) any Environmental Claim current, or to its knowledge, pending or threatened; or (ii) any circumstances reasonably likely to result in an Environmental Claim, which, if substantiated, is reasonably likely to either have a Material Adverse Effect or result in any liability for the Lender. 17.12 INSURANCE Each member of the Group must insure its business and assets with insurance companies to such an extent and against such risks as companies engaged in a similar business normally insure. 17.13 ERISA (a) In this Subclause: CODE means the United States Internal Revenue Code of 1986. ERISA means the United States Employee Retirement Income Security Act of 1974. ERISA AFFILIATE means any person treated as a single employer with any member of the Group for the purpose of section 414 of the Code. PLAN means an employee benefit plan as defined in section 3(3) of ERISA: (i) maintained by any member of the Group or any ERISA Affiliate; or (ii) to which any member of the Group or any ERISA Affiliate is required to make any payment or contribution. REPORTABLE EVENT means: (i) an event specified as such in section 4043 of ERISA or any related regulation, other than an event in relation to which the requirement to give notice of that event is waived by any regulation; or 26 (ii) a failure to meet the minimum funding standard under section 412 of the Code or section 302 of ERISA, whether or not there has been any waiver of notice or waiver of the minimum funding standard under section 412 of the Code. (b) Each member of the Group must promptly upon becoming aware of it notify the Lender of: (i) any Reportable Event; (ii) the termination of or withdrawal from, or any circumstances reasonably likely to result in the termination of or withdrawal from, any Plan subject to Title IV of ERISA; and (iii) a claim or other communication alleging material non-compliance with any law or regulation relating to any Plan. (c) Each member of the Group and its ERISA Affiliates must be, and remain, in compliance in all respects with all laws and regulations relating to each of its Plans. (d) Each member of the Group and its ERISA Affiliates must ensure that no event or condition exists at any time in relation to a Plan which is reasonably likely to result in the imposition of a Security Interest on any of its assets or which is reasonably likely to have a Material Adverse Effect. 17.14 SECURITIES LAWS (a) In this Subclause: MARGIN STOCK has the meaning given to it in Regulations U and X issued by the Board of Governors of the United States Federal Reserve System. (b) No member of the Group may: (i) extend credit for the purpose, directly or indirectly, of buying or carrying Margin Stock; or (ii) use any Loan, directly or indirectly, to buy or carry Margin Stock or to extend credit to others for the purpose of buying or carrying Margin Stock. (c) No member of the Group may use any part of any Loan to acquire any security in a transaction that is subject to sections 13 or 14 of the United States Securities Exchange Act of 1934. 17.15 NO NEW SUBSIDIARIES No member of the Group may create, acquire or invest in a Subsidiary. 18. DEFAULT 18.1 EVENTS OF DEFAULT Each of the events set out in this Clause is an Event of Default. 27 18.2 NON-PAYMENT The Company does not pay on the due date any amount payable by it under the Finance Documents in the manner required under the Finance Documents, unless the non-payment: (a) is caused by technical or administrative error; and (b) is remedied within three Business Days of the due date. 18.3 BREACH OF OTHER OBLIGATIONS (a) The Company does not comply with any term of Clause 17 (General Covenants) above. (b) The Company does not comply with any other term of the Finance Documents not already referred to in this Clause, unless the non-compliance: (i) is capable of remedy; and (ii) is remedied within fourteen days of the earlier of the Lender giving notice and the Company becoming aware of the non-compliance. 18.4 MISREPRESENTATION A representation made or repeated by the Company in any Finance Document or in any document delivered by or on behalf of the Company under any Finance Document is incorrect in any material respect when made or deemed to be repeated, unless the circumstances giving rise to the misrepresentation: (a) are capable of remedy; and (b) are remedied within fourteen days of the earlier of the Lender giving notice and the Company becoming aware of the misrepresentation. 18.5 CROSS-DEFAULT (a) Any of the following occurs in respect of a member of the Group: (i) any of its Financial Indebtedness is not paid when due (after the expiry of any originally applicable grace period); (ii) any of its Financial Indebtedness: (A) becomes prematurely due and payable; (B) is placed on demand; or (C) is capable of being declared by a creditor to be prematurely due and payable or being placed on demand, in each case, as a result of an event of default (howsoever described); or 28 (iii) any commitment for its Financial Indebtedness is cancelled or suspended as a result of an event of default (howsoever described), unless the aggregate amount of Financial Indebtedness falling within all or any of paragraphs (i) and (ii) above is less than US$150,000 or its equivalent. (b) Any Event of Default (under and as defined in the Senior Credit Agreement) occurs. 18.6 INSOLVENCY Any of the following occurs in respect of a member of the Group: (a) it is, or is deemed for the purposes of any law to be, unable to pay its debts as they fall due or insolvent; (b) it admits its inability to pay its debts as they fall due; (c) it suspends making payments on any of its debts which in aggregate exceed US$150,000 or announces an intention to do so; (d) by reason of actual or anticipated financial difficulties, it begins negotiations with any creditor for the rescheduling of any of its indebtedness which in aggregate exceed US$150,000; or (e) a moratorium is declared in respect of any of its indebtedness which in aggregate exceeds US$150,000. If a moratorium occurs in respect of any member of the Group, the ending of the moratorium will not remedy any Event of Default caused by the moratorium. 18.7 INSOLVENCY PROCEEDINGS (a) Except as provided below, any of the following occurs in respect of a member of the Group: (i) other than as provided in Clause 18.6 (Insolvency) above, any step is taken with a view to a moratorium or a composition, assignment or similar arrangement with any of its creditors; (ii) a resolution of its shareholders or directors is passed or adopted to petition for or to file documents with a court or any registrar for, its bankruptcy, winding-up, administration or dissolution; (iii) any person presents a petition, or files documents with a court or any registrar, for its bankruptcy, winding-up, administration or dissolution; (iv) an order for its bankruptcy, winding-up, administration or dissolution is made; (v) any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer is appointed in respect of it or any of its assets; 29 (vi) its shareholders, directors or other officers request the appointment of, or give notice of their intention to appoint, a liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer; or (vii) any other analogous step or procedure is taken in any jurisdiction. (b) Paragraph (a) above does not apply to a petition for bankruptcy, dissolution or winding-up presented by a creditor which is being contested in good faith and with due diligence and is dismissed, discharged or struck out within 45 days. 18.8 CREDITORS' PROCESS Any attachment, sequestration, distress, execution or analogous event affects any asset(s) of a member of the Group, having an aggregate value of at least US$150,000, and is not discharged within 30 days. 18.9 CESSATION OF BUSINESS A member of the Group ceases, or threatens to cease, to carry on business except as a result of any disposal allowed under this Agreement. 18.10 EFFECTIVENESS OF FINANCE DOCUMENTS (a) It is or becomes unlawful for the Company to perform any of its obligations under the Finance Documents. (b) Any Finance Document is not effective or is alleged by the Company to be ineffective for any reason. (c) The Company repudiates a Finance Document or evidences an intention to repudiate a Finance Document. 18.11 MATERIAL ADVERSE CHANGE Any event or series of events occurs which has or will have a Material Adverse Effect. 18.12 ACCELERATION (a) If an Event of Default is outstanding, the Lender may, by notice to the Company: (i) cancel the Loan Commitment; and/or (ii) declare that all or part of any amounts outstanding under the Finance Documents are: (A) immediately due and payable; and/or (B) payable on demand by the Lender; and/or (iii) declare that full cash cover in respect of the Letter of Credit is immediately due and payable. 30 Any notice given under this Subclause will take effect in accordance with its terms. (b) If any of the following in respect of any member of the Group occurs, the Loan Commitment will, if not already cancelled under this Agreement, be immediately and automatically cancelled and the Loan, together with accrued interest, and all other amounts outstanding under the Finance Documents will be immediately due and payable: (i) it makes a general assignment for the benefit of creditors; (ii) it commences a voluntary case or proceeding under the United States Bankruptcy Code of 1978 or any other United States Federal or State bankruptcy, insolvency or similar law (U.S. Bankruptcy Law); or (iii) an involuntary case under any U.S. Bankruptcy Law is commenced against it and is not controverted within 20 days or is not dismissed or stayed within 60 days after commencement of the case. 19. EVIDENCE AND CALCULATIONS 19.1 ACCOUNTS Accounts maintained by the Lender in connection with this Agreement are prima facie evidence of the matters to which they relate for the purpose of any litigation or arbitration proceedings. 19.2 CERTIFICATES AND DETERMINATIONS Any certification or determination by the Lender of a rate or amount under the Finance Documents will be, in the absence of manifest error, conclusive evidence of the matters to which it relates. 19.3 CALCULATIONS Any interest accruing under this Agreement accrues from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 days. 20. INDEMNITIES 20.1 CURRENCY INDEMNITY (a) The Company must, as an independent obligation, indemnify the Lender against any loss or liability which the Lender incurs as a consequence of: (i) the Lender receiving an amount in respect of the Company's liability under the Finance Documents; or (ii) that liability being converted into a claim, proof, judgment or order, in a currency other than the currency in which the amount is expressed to be payable under the relevant Finance Document. 31 (b) Unless otherwise required by law, the Company waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency other than that in which it is expressed to be payable. 20.2 OTHER INDEMNITIES (a) The Company must indemnify the Lender against any loss or liability which the Lender incurs as a consequence of: (i) the occurrence of any Event of Default; (ii) any failure by the Company to pay any amount due under a Finance Document on its due date; (iii) (other than by reason of negligence or default by the Lender) a Credit not being made after the Request has been delivered for that Credit; (iv) a Credit (or part of a Credit) not being prepaid in accordance with a notice of prepayment; (v) reasonable investigation of any event which the Lender reasonably believes to be a Default; or (vi) acting or relying on any notice relating to the Finance Documents (or the transactions contemplated thereby) which the Lender reasonably believes to be genuine, correct and appropriately authorized. (b) The Company's liability in each case includes any loss or expense on account of funds borrowed, contracted for or utilized to fund any amount payable under any Finance Document, any amount repaid or prepaid or any Credit. 21. EXPENSES 21.1 INITIAL COSTS (a) Each Party shall be responsible for the amount of all costs and expenses (including legal fees) incurred by it in connection with the negotiation, preparation, printing and execution of the Finance Documents. (b) The Company will promptly on demand pay to the Lender the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with the negotiation, preparation, printing, execution and maintenance (including any issuance, utilization, non-utilization, per annum or arrangement fee) of the Letter of Credit. 21.2 SUBSEQUENT COSTS The Company must pay to the Lender the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with: 32 (a) the negotiation, preparation, printing and execution of any Finance Document executed after the date of this Agreement; and (b) any amendment, waiver or consent requested by or on behalf of the Company or specifically allowed by this Agreement. 21.3 ENFORCEMENT COSTS The Company must pay to the Lender the amount of all costs and expenses (including legal fees) incurred by it in connection with the enforcement of, or the preservation of any rights under, any Finance Document. 22. WAIVERS The rights of the Lender under the Finance Documents: (a) may be exercised as often as necessary; (b) are cumulative and not exclusive of its rights under the general law; and (c) may be waived only in writing and specifically. Delay in exercising or non-exercise of any right is not a waiver of that right. 23. CHANGES TO THE PARTIES 23.1 ASSIGNMENTS AND TRANSFERS BY THE COMPANY The Company may not assign or transfer any of its rights and obligations under the Finance Documents without the prior consent of the Lender. 23.2 ASSIGNMENTS AND TRANSFERS BY THE LENDER (a) The Lender may, subject to the following provisions of this Subclause, at any time assign or transfer (including by way of novation) any of its rights and obligations under this Agreement to any other person (the New Lender). (b) A transfer of obligations will be effective only if the New Lender confirms to the Company that it is bound by the terms of this Agreement as the Lender. On the transfer becoming effective in this manner the Lender will be released from its obligations under this Agreement to the extent that they are transferred to the New Lender. 24. DISCLOSURE OF INFORMATION (a) The Lender must keep confidential any information supplied to it by or on behalf of the Company in connection with the Finance Documents. However, the Lender is entitled to disclose information: (i) which is publicly available, other than as a result of a breach by the Lender of this Clause; 33 (ii) in connection with any legal or arbitration proceedings; (iii) if required to do so under any law or regulation; (iv) to a governmental, banking, taxation or other regulatory authority; (v) to its professional advisers; (vi) to the extent allowed under paragraph (b) below; or (vii) with the agreement of the Company. (b) The Lender may disclose to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement (a participant): (i) a copy of any Finance Document; and (ii) any information which the Lender has acquired under or in connection with any Finance Document. However, before a participant may receive any confidential information, it must agree with the Lender to keep that information confidential on the terms of paragraph (a) above. This Clause supersedes any previous confidentiality undertaking given by the Lender in connection with this Agreement. 25. SET-OFF The Lender may set off any matured obligation owed to it by the Company under the Finance Documents (to the extent beneficially owned by the Lender) against any obligation (whether or not matured) owed by the Lender to the Company, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. 26. SEVERABILITY If a term of a Finance Document is or becomes illegal, invalid or unenforceable in any jurisdiction, that will not affect: (a) the legality, validity or enforceability in that jurisdiction of any other term of the Finance Documents; or (b) the legality, validity or enforceability in other jurisdictions of that or any other term of the Finance Documents. 27. COUNTERPARTS Each Finance Document may be executed in any number of counterparts. This has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document. 34 28. NOTICES 28.1 IN WRITING (a) Any communication in connection with a Finance Document must be in writing and, unless otherwise stated, may be given in person, by courier service, post, fax, e-mail or any other electronic communication approved by the Lender. (b) For the purpose of the Finance Documents, an electronic communication will be treated as being in writing. (c) Unless it is agreed to the contrary, any consent or agreement required under a Finance Document must be given in writing. 28.2 CONTACT DETAILS (a) The contact details of the Company for this purpose are: Address: 498 North Oak Street Inglewood, CA 90302 USA Fax number: +1 310 330 2764 Attention: Chief Executive Officer (b) The contact details of the Lender for this purpose are: Address: PO Box 957 Road Town, Tortola British Virgin Islands Attention: The Directors (c) The Company or the Lender may change their contact details by giving five Business Days' notice to the other Party. (d) Where a Party nominates a particular department or officer to receive a communication, a communication will not be effective if it fails to specify that department or officer. 28.3 EFFECTIVENESS (a) Except as provided below, any communication in connection with a Finance Document will be deemed to be given as follows: (i) if delivered in person or by courier service, at the time of delivery; (ii) if posted, five days after being deposited in the post, postage prepaid, in a correctly addressed envelope; (iii) if by fax, when received in legible form; and 35 (iv) if by e-mail or any other electronic communication, when received in legible form. (b) A communication given under paragraph (a) above but received on a non-working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place. (c) A communication to the Lender will only be effective on actual receipt by it. 29. LANGUAGE (a) Any notice given in connection with a Finance Document must be in English. (b) Any other document provided in connection with a Finance Document must be: (i) in English; or (ii) (unless the Lender otherwise agrees) accompanied by a certified English translation. In this case, the English translation prevails unless the document is a statutory or other official document. 30. GOVERNING LAW This Agreement is governed by the law of the State of California. 31. ENFORCEMENT 31.1 WAIVER OF IMMUNITY The Company irrevocably and unconditionally: (a) agrees not to claim any immunity from proceedings brought by the Lender against the Company in relation to a Finance Document and to ensure that no such claim is made on its behalf; (b) consents generally to the giving of any relief or the issue of any process in connection with those proceedings; and (c) waives all rights of immunity in respect of it or its assets. 31.2 WAIVER OF TRIAL BY JURY EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED ON, ARISING FROM OR IN CONNECTION WITH ANY FINANCE DOCUMENT OR ANY TRANSACTION CONTEMPLATED BY ANY FINANCE DOCUMENT. THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO TRIAL BY COURT. 36 32. INTEGRATION The Finance Documents contain the complete agreement between the Parties on the matters to which they relate and supersede all prior commitments, agreements and understandings, whether written or oral, on those matters. This Agreement has been entered into on the date stated at the beginning of this Agreement. 37 SIGNATORIES COMPANY Signature Eyewear, Inc. By: _______________________________ Name: Michael Prince Title: Chief Financial Officer LENDER Bluebird Finance Limited By: __________________________________ Name: ________________________________________ Title: _______________________________________ 38 SCHEDULE 1 CONDITIONS PRECEDENT DOCUMENTS COMPANY 1. A copy of the constitutional documents of the Company. 2. A copy of a resolution of the board of directors of the Company approving the terms of, and the transactions contemplated by, this Agreement. 3. A specimen of the signature of each person authorized on behalf of the Company to execute or witness the execution of any Finance Document or to sign or send any document or notice in connection with any Finance Document. 4. A copy of the October Financial Statements and the December Financial Statements. 5. A certificate of an authorized signatory of the Company certifying that each copy document specified in this Schedule is correct (other than as provided in Clause 15.8(a) (Financial statements) above with respect to the October Financial Statements), complete and in full force and effect as at a date no earlier than the date of this Agreement. SECURITY 6. The Security Agreement dated on or about the date of this Agreement between the Company and the Lender duly executed by the parties to it. 7. UCC-1 forms required to be filed under the Security Document. 8. Evidence of insurance cover in compliance with this Agreement. 9. Evidence that all Security Interests granted in favor of City National Bank, N.A. have been released. LEGAL OPINIONS 1. A legal opinion of Jeffer, Mangels, Butler & Marmaro LLP, legal advisers in California to the Company, addressed to the Lender, substantially in the form of Schedule 8 (Form of Legal Opinion of the Company's Counsel). OTHER DOCUMENTS AND EVIDENCE 1. Evidence that all fees and expenses then due and payable from the Company under this Agreement have been or will be paid by the first Utilization Date. 2. Evidence that the all amounts owing to City National Bank, N.A. on the date of this Agreement will be repaid or prepaid, and cancelled, in full on or by the first Utilization Date. 39 3. Written confirmation from the Senior Lender that all conditions precedent to utilization of the credit facilities provided pursuant to the Senior Credit Agreement have been satisfied and that US$3,500,000 will be advanced to, or to the order of, the Company on the first Utilization Date. 4. A copy of any other authorization or other document, opinion or assurance which the Lender has notified the Company is necessary or desirable in connection with the entry into and performance of, and the transactions contemplated by, any Finance Document or for the validity and enforceability of any Finance Document. 5. Executed copies of the following documents: (a) Stock Purchase Agreement dated the date of this Agreement between the Company and the Lender relating to the purchase and sale of Series A 2% Convertible Preferred Stock of the Company (the STOCK PURCHASE AGREEMENT); (b) Certificate of Determination dated the date of this Agreement issued by the Company pursuant to authority granted by article IV of its Restated Articles of Incorporation; (c) Registration Rights Agreement dated the date of this Agreement entered into pursuant to the Stock Purchase Agreement; (d) Settlement Agreements with various creditors, the details of which have been disclosed to the Lender; (e) Agreement Re Assignment of Claims and Mutual General Release dated March 31, 2003 between Moulin Optical Manufactory Limited, Allied Industrial Limited, Dartmouth Commerce of Manhattan, Inc., a California corporation (DARTMOUTH) and the Company; (f) Agreement for the Purchase and Sale of Debt dated April 1, 2003 between Dartmouth and the Company; (g) Senior Credit Agreement; and (h) Subordination Agreement. 40 SCHEDULE 2 FORM OF REQUEST To: Bluebird Finance Limited From: Signature Eyewear, Inc. Date: [ ] SIGNATURE EYEWEAR, INC. - US$4,150,000 CREDIT AGREEMENT DATED [ ], 2003 (the AGREEMENT) 1. We refer to the Agreement. This is a Request. 2. We wish to [borrow a Loan/request the procurement of the Letter of Credit]o on the following terms: (a) Utilization Date: [ ]; (b) Amount: [ ]. 3. Our [payment/delivery]o instructions are: [ ]. 4. We confirm that each condition precedent under the Agreement which must be satisfied on the date of this Request is so satisfied. 5. This Request is irrevocable. By: ________________________________ SIGNATURE EYEWEAR, INC. 41 SCHEDULE 3 SECURITY INTERESTS 1. The Security Interest granted by the Company to City National Bank, N.A. with respect to certain of the Company's assets, which Security Interest will be released on the date of this Agreement. 2. The Security Interest granted by the Company to Wells Fargo Equipment Finance, Inc. and US Bancorp Oliver-Allen Technology Leasing with respect to certain equipment pursuant to a security agreement dated March 26, 2003 to secure the Company's obligations under the Financial Indebtedness referred to in Clause 17.7(b)(v) (Financial Indebtedness). 3. The Security Interest granted by the Company to Axwood Investments Limited with respect to certain inventory pursuant to a security agreement dated February 4, 2003 to secure the Company's obligations under the Financial Indebtedness referred to in Clause 17.7(b)(iv) (Financial Indebtedness). 4. The Security Interests granted by the Company to the lessors of certain office equipment (including, a telephone system, postage meter, photocopier, certain computer equipment and a warehouse storage racking system referred to as the "Carousel") utilized by the Company in its business. 42 SCHEDULE 4 FORM OF SECURITY AGREEMENT [Insert form of Security Agreement] 43 SCHEDULE 5 DEFAULTS 1. As a result of the Company's current financial condition and cash flow situation, it is in actual or technical default with most of the companies and entities with which it has, or currently does, transact its business, other than as previously disclosed to the Lender. 2. The Company is in contravention of certain financial covenants contained in certain license agreements and is accordingly in technical or actual default under such licenses. The Company has not received any written notices of default from any of the licensors under such license agreements. 44 SCHEDULE 6 MATERIAL ADVERSE CHANGE The Company has continued to suffer operating losses in the ordinary course of its business since December 31, 2002. In addition, given the Company's current financial condition and cash flow, the Company is in actual or technical default with most of the companies and entities with which the Company has, or currently does, transact its business. 45 SCHEDULE 7 LITIGATION 1. The Chapter 7 trustee in bankruptcy of an optical company which holds a disputed claim against the Company of approximately US$58,000 contacted the Company with respect to such claim approximately nine months ago. When advised of the dispute, the trustee advised that it would enquire into the matter. The Company has had no further contact from either the trustee or any other party with respect to this disputed claim. 2. Walker v. Signature Eyewear - case pending in Washington State Court arising out of an employment dispute. The amount claimed does not exceed US$25,000. 3. Gary Raymond v. Signature Eyewear - Mr. Raymond, a former employee of the Company, has made a written demand in the amount of approximately US$138,000 to the Company for certain vacation pay and commissions he claims he is owed. The Company disputes the claims made by Mr. Raymond. 4. Amplicon Financial has threatened in writing to bring a claim against the Company in an amount of approximately US$30,000. 5. The Company intends to use the proceeds from the transactions contemplated by the Finance Documents and the Senior Credit Agreement, in part, to settle certain outstanding claims against the Company and thereby curing certain outstanding defaults. The Company has previously delivered to the Lender a schedule of the pending or threatened claims that the Company intends to settle using the proceeds from these transactions. The Company intends to settle these matters within thirty days of the date of this Agreement or such later date as has been agreed with certain claimants. 6. As a result of the Company's current financial condition and cash flow, the Company is in actual or technical default with most of the companies and entities with which the Company has, or currently does, transact its business. Some of these parties have asserted, or may assert, claims against the Company and some of these claims will be in excess of US$100,000 in the aggregate. 46 SCHEDULE 8 FORM OF LEGAL OPINION OF THE COMPANY'S COUNSEL APRIL ___, 2003 Bluebird Finance Limited P.O. Box 957 Road Town, Tortola British Virgin Islands Re: Bluebird Finance Limited - $4,650,000 Loan to Signature Eyewear, Inc. --------------------------------------------------------------------- Ladies and Gentlemen: We have acted as special counsel for Signature Eyewear, Inc., a California corporation (the "Company"), in connection with the loan (the "Loan") contemplated by that certain Credit Facility Agreement (the "Loan Agreement"), of even date, between the Company and Bluebird Finance Limited, a British Virgin Islands company (the "Lender"). We do not represent the Company in all of its legal matters, and the Company has retained other legal counsel to represent it in connection with certain other legal matters. We do not assume any responsibility for any transaction or matter where the Company has been represented by other counsel. Capitalized terms, which are used herein but not defined herein, shall have the meanings ascribed to them in the Loan Agreement. In connection with this opinion, we have examined and relied upon (i) the representations and warranties as to factual matters contained in and made pursuant to the Purchase Agreement by various parties, and (ii) originals or copies, certified or otherwise identified to our satisfaction as being true copies, of the following documents (collectively, the "Documents"): (1) the Loan Agreement; (2) The Security Agreement between the Company and Lender; (3) [the Financing Statement]; (4) Officers' Closing Certificate of the Company; (5) Articles of Incorporation of the Company, as amended, as certified by the office of the Secretary of State of the State of California as of March 26, 2003 (the "Articles"); (6) Amended and Restated Bylaws of the Company, dated June 6, 1997 (the "Bylaws"); (7) Certificate of Status Domestic Corporation for the Company issued by the California Secretary of State and dated March 26, 2003 (the "Domestic Status Certificate"); and 47 (8) the Representation Letter from Bernard Weiss and Michael Prince (the "Representation Letter"). Except as set forth above, the documents listed in clauses (1), (2) and (3) are each dated as of April ___, 2003 and are referred to herein collectively as the "Transaction Documents." We have rendered these opinions based solely upon our review of the Documents, and upon our examination of such statutes, decisions and matters of law as we deem necessary to express the opinions set forth below. In particular, our opinion that the Company is "in good standing under the laws of the State of California" set forth in opinion number 1, below, is based solely on the Domestic Status Certificate. We have made no examination of public records (including, without limitation, the plaintiff or defendant indices of state and federal courts), nor have we undertaken any independent investigation to determine the existence or nonexistence of facts contained or asserted in the Documents or the assumptions set forth herein and you acknowledge we have no duty to perform any such independent investigation. In addition, in rendering this opinion, we have not taken into consideration the effect, if any, that certain other transactions that will be occurring on or about the time of the Closing, may have upon the Company or the opinions set forth herein, including, without limitation, transactions between (i) the Company and Home Loan Investment Company (the "Senior Loan Documents"), (ii) the Company, Moulin Optical Manufactory Limited, Allied Industrial Limited and Dartmouth Commerce of Manhattan, Inc. ("Dartmouth"), (iii) the Company and Dartmouth, and (iv) the Weiss Family Trust and Dartmouth. In rendering this opinion, we have assumed (i) the genuineness and authenticity of all signatures on original documents, (ii) the authenticity of all documents submitted to us as originals and the conformity to originals of documents submitted to us as certified or photostatic copies, (iii) the accuracy, completeness and authenticity of certificates of public officials, (iv) each person signing a document is a competent adult person not operating under any legal disability, duress or having been defrauded in the execution of documents, and (v) the due authorization, execution and delivery of all documents (except the due authorization, execution and delivery by the Company of the Transaction Documents), and (vi) that the parties to the Transaction Documents will act in good faith in connection with their obligations under the Transaction Documents. For purposes of this opinion, we have made the following additional assumptions: (a)......Other than the Documents, there are no documents, understandings or agreements between or among the parties which would expand or otherwise modify the obligations of the respective parties to the Documents regarding the transactions contemplated thereby and which would have an effect on this opinion; (b)......To the extent that the obligations of the Company may be dependent upon such matters, we have assumed for purposes of this opinion, that: (i) each party to the Transaction Documents other than the Company ("Other Party") is duly organized, validly existing and in good standing under the laws of its jurisdiction of formation and qualified to do business in other jurisdictions, to the extent necessary; (ii) each Other Party has the requisite organizational or other power and authority to execute and deliver, and to perform its obligations under, the Transaction Documents to which it is a party; (iii) the Transaction Documents to which each Other Party is a party have been duly authorized, executed and delivered by it, and each of such Transaction Documents constitutes the legally valid and binding obligation of such Other Party, enforceable against such party in accordance with its terms; and (iv) that each such Other Party is, at all relevant times in connection with the origination and enforcement of the Loan, duly qualified and authorized to conduct intrastate business and to make the Loan within the State of California and holds any and all licenses to conduct such activity as may be required by applicable California law. 48 (c)......The Lender will exercise any rights or remedies it may have under the Transaction Documents in good faith, in circumstances in which it is commercially reasonable to do so, in a commercially reasonable manner to the extent required by applicable law, and otherwise pursuant to the Uniform Commercial Code as adopted in the State of California (the "UCC"); (d)......The representations and warranties of the Company and the Lender in the Transaction Documents are true and correct; and (e) The choice of California law in the Transaction Documents will be enforced. In addition, we have assumed that the documents necessary to perfect the security interests of the Lender under the Transaction Documents have been or will be correctly filed in the Office of the Secretary of State of California, and with all appropriate officials or in all applicable offices of agencies and departments of the government of the United States of America and any other governmental authorities having jurisdiction over the subject matter therein described and over the filing thereof. We have also assumed without undertaking any investigation that the Company has good and enforceable title to the Collateral. Whenever used in this opinion, the phrase "to the best of our actual knowledge" or words of similar import mean to the actual conscious knowledge of those attorneys in this Firm who have given substantive attention to the transaction contemplated by the Transaction Documents. We are licensed to practice law only in the State of California. The opinions set forth below apply only insofar as the substantive laws of the State of California (without application of the principle of conflicts of laws) and the United States' federal laws may be concerned, and we express no opinion with respect to the laws of any other state or jurisdiction. Based on the foregoing and subject to the assumptions, qualifications and limitations set forth herein, it is our opinion that: 1........The Company has been duly incorporated, is validly existing is in good standing under the laws of the State of California, with the requisite corporate power and corporate authority to own its properties and assets, to conduct its business as presently conducted, to enter into and deliver the Transaction Documents, and to perform its obligations under the Transaction Documents. 2........The execution, delivery and performance of the Transaction Documents have been duly authorized by all necessary corporate action on the part of the Company, and the Transaction Documents have been duly executed and delivered by the Company. 3........Each of the Transaction Documents constitutes the legally valid and binding obligation of the Company, and except as otherwise provided in the Senior Loan Documents, enforceable against the Company in accordance with its terms. 4........The Company's execution, delivery and performance of the Transaction Documents do not violate the Restated Articles of Incorporation or Bylaws of the Company. 5........The execution, delivery and performance by the Company of the Transaction Documents to which it is a party, to the best of our actual knowledge, will not violate any law or 49 regulation, including, without limitation, any usury or similar law regulating the rate of interest that may be charged to a borrower. 6........Except as set forth on the schedules to the Loan Agreement, to the best of our actual knowledge, no consent of, authorization from or registration or filing with any governmental authority, agency or body is required in connection with the execution, delivery and performance by the Company of the Transaction Documents. 7........Except for (i) any actions, suits or proceedings before any court, arbitrator or governmental agency which may result in damages against the Company in excess of $100,000 ("Legal Proceedings"), which are described on the schedules to the Loan Agreement, and (ii) those Legal Proceeding that have been represented to us will settle within thirty (30) days of the Closing as is set forth on Exhibit B to the Representation Letter, we are not and have not represented the Company in any currently pending Legal Proceedings. 8........The Security Agreement creates a valid security interest in the Collateral, and such security interest will be duly perfected upon the filing of the Financing Statement with the Secretary of State of California to the extent that a security interest in the Collateral may be perfected by the filing of a financing statement. We express no opinion with respect to: (i) The applicability of Sections 547 and 548 of the Bankruptcy Code, 11 U.S.C. Sections 547 and 548, Sections 500 et seq. of the California Corporations Code, or any other federal or state laws regarding fraudulent conveyances or preferences; (ii) Compliance by any party with state or federal securities laws including, without limitation, anti-fraud, disclosure or similar laws, rules or regulations relating to securities or the issuance and sale thereof; (iii) Compliance by any party with (A) antitrust laws including, but not limited to, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or (B) the Employee Retirement Income Security Act of 1974, as amended; (iv) Compliance by any party, or any of the Transaction Documents, with any federal, state or local land use, subdivision, zoning, planning, tax, labor or communications law, ordinance or regulation; (v) The fairness of any consideration given or received in connection with any of the Transaction Documents or any transaction contemplated thereby; (vi) The impact of local, state, federal or foreign tax laws on the transactions contemplated by any of the Transaction Documents, including, without limitation, the effect of any failure of the Company to pay any employment, withholding, sales or other taxes when due; (vii) Any provisions of the Transaction Documents which permit the enforcement of the remaining provisions of the Transaction Documents where some provision has been declared unenforceable, unless the unenforceable portion is not an essential part of the agreement therein contained; 50 (viii) Any covenant not to compete, non-solicitation, confidentiality or similar provisions contained in any of the Transaction Documents; (ix) the validity of the Company's title to the Collateral or the priority of any liens or security interests therein; (x) Any Legal Proceeding in which we are not counsel of record. This opinion is subject to, and limited by the following qualifications, exceptions and reservations: (a)......The enforceability of the Transaction Documents may be limited or affected by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws), (ii) general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and (iii) judicial discretion and the valid exercise of sovereign power of the State of California and the constitutional powers of the United States of America; (b)......Limitations imposed by equitable principles of California or federal law upon the specific enforceability of any of the remedies, covenants, or other provisions of the Transaction Documents and upon the availability of injunctive relief or other equitable remedies; (c)......The unenforceability under certain circumstances, under any state or federal law or court decision, of (i) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, defenses to obligations or rights created by law, (ii) provisions indemnifying a party against liability for its own negligent or wrongful acts, where such waivers or indemnifications are against public policy or prohibited by law, and (iii) provisions which impose late charges, default rates of interest or other similar penalty terms, or restrict or condition prepayment; (d)......The effect of California court decisions invoking statutes or principles of equity, which have held that certain covenants and provisions of agreements are unenforceable where (i) the breach of such covenants or provisions imposes restrictions or burdens upon an obligor, including the acceleration of indebtedness due under such instruments, and it cannot be demonstrated that the enforcement of such restrictions or burdens is reasonably necessary for the protection of the creditor, or (ii) the creditor's enforcement of such covenants or provisions under the circumstances would violate the creditor's implied covenant of good faith and fair dealing. (e)......The effect of Section 1670.5 of the California Civil Code, which provides, in substance, that if a court as a matter of law finds a contract or any clause of a contract to have been "unconscionable" at the time it was made, the court may refuse to enforce the contract, or the court may enforce the remainder of the contract without the "unconscionable" clause or so as to avoid an "unconscionable" result. That Section also permits parties to present evidence as to the commercial setting, purpose and effect of any contract or clause thereof claimed to be "unconscionable," to aid the court in making its determination; (f)......The unenforceability under certain circumstances of provisions to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, that election of a particular remedy or remedies does not preclude recourse to one or more other remedies or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy; 51 (g)......The unenforceability under certain circumstances of contractual provisions which allow the exercise of self-help or summary remedies without requiring notice or opportunity for hearing or correction; (h)......The effect of California law providing that, where a contract permits one party to the contract to recover attorneys' fees, the prevailing party in any action to enforce any provision of the contract shall be entitled to recover its reasonable attorneys' fees; (i)......The effect of California Civil Code section 2924.5, and California common law, on the ability to assess a late, default, or delinquency charge on any delinquent payment of a loan installment without providing the borrower written notice of the delinquency or default and the amount or method of computing the amount of the charge to be imposed in the event of delinquency or default and the date by which the delinquent payment must be made in order to avoid such charge; and the effect of the unenforceability of any provision of the Transaction Documents which constitutes or which is held by a court or arbitrator to constitute an unlawful forfeiture or penalty, or an unenforceable liquidation of damages, including, without limitation, provisions of the Transaction Documents providing for any increase in the rate of interest or the payment of a prepayment fee or any other amount upon or as a result or consequence of any breach or default by Borrowers under the Transaction Documents (refer to case citations set forth in paragraph (n) below); (j)......We note that the collectibility of interest under any of the Transaction Documents, to the extent that interest computed at the rate set forth in such Transaction Documents based upon a 360-day year exceeds interest that would accrue at the same rate but computed upon a 365-day year, is subject to certain judicial precedents in California, including but not limited to Fletcher v. Security Pacific National Bank, 23 Cal.3d 442 (1979), and Chern v. Bank of America, 15 Cal.3d 866 (1976), which indicate that a California court may enjoin collection of such interest and award restitution thereof to a borrower, if on the basis of the facts and circumstances then before the court, the court determined that such relief was necessary to prevent the use or employment of an unfair trade practice; (k)......The effect of Section 9-610 of the California Uniform Commercial Code which places limitations on the circumstances under which a secured party may purchase collateral at a private sale; (l)......The effect of the unenforceability of the Transaction Documents due to a failure to file the Financing Statement, any defect or omission in the title to the real or personal property therein described, any failure of consideration, or any failure by Lender Parties to perfect the security interest in the Collateral in the manner required by applicable law; (m)......The effect of the unenforceability of the Transaction Documents, or any of them, based upon or resulting from the unenforceability to any extent of any other instrument, agreement, document, or instruction executed or entered into in connection with the Transaction Documents; (n)......The effect of California Civil Code section 1671, and California common law, on the ability to assess a late, default, or delinquency charge on any delinquent payment of a loan installment without providing the borrower written notice of the delinquency or default and the amount or method of computing the amount of the charge to be imposed in the event of delinquency or default and the date by which the delinquent payment must be made in order to avoid such charge; and the effect of the unenforceability of any provision of the Transaction Documents which constitutes or which is held by a court or arbitrator to constitute an unlawful forfeiture or penalty, or an unenforceable liquidation of damages, including, without limitation, provisions of the Transaction Documents providing for any increase in the rate of interest or the payment of a prepayment fee or any other amount upon or as a result or 52 consequence of any breach or default by Borrowers under the Transaction Documents (see Garrett v. Coast & Southern Federal Savings and Loan Association (1973) 9 Cal.3d 731; Ridgley v. Topa Thrift and Loan Association (1998) 98 Daily Journal D.A.R. 3991); (o)......The effect of Article XV, Section 1 of the California Constitution, which limits the rate of interest upon any loan or forbearance of money, to the extent applicable to the transactions contemplated by the Loan Documents; and (p)......We express no opinion as to the provisions of the Transaction Documents which (1) purport to waive, limit, or restrict various rights of the Company except to the extent permitted by law, (2) permit a party to act as the agent and attorney-in-fact of the Company after a default, (3) select the forum for the resolution of any disputes or consent to the jurisdiction of any jurisdiction (both as to personal jurisdiction and subject matter jurisdiction), (4) attempt to change or waive rules of evidence or fix the method or quantum of proof to be applied in litigation or similar proceedings, (5) provide for the confession of judgment, (6) provide that time is of the essence, (7) permit the enforcement of the remaining provisions of a Transaction Document, where some provision has been declared unenforceable, unless the unenforceable portion is not an essential part of the agreement therein contained, (8) provide for the appointment of a receiver except in accordance with applicable laws, or (9) provide the Lender with the right to establish reserves or limit advances based upon its sole and unfettered discretion. This opinion is rendered only with respect to the laws, and the rules, regulations and orders under those laws, that are in effect as of the date hereof, and we disclaim any obligation to update this opinion for events occurring after the date hereof. We assume no responsibility to advise you or any other person or entity of changes which may hereafter be brought to our attention. This opinion is rendered only to the Lender and is solely for its benefit in connection with the above transaction. Except as provided above, this opinion may not be quoted or used in whole or in part for any purpose, nor may copies be provided to any person, without our prior written consent. Very truly yours, 53 EXHIBIT A [Representation Letter] 54 SCHEDULE 9 LETTER OF CREDIT FROM: BANK OF AMERICA (ASIA) LIMITED ADVISING BANK: BANK OF AMERICA N.A. USA TO: HOME LOAN INVESTMENT COMPANY 145 N. 4th STREET, P.O. BOX 100 GRAND JUNCTION, CO 81502 U.S.A. STANDBY L/C THE ADVISING BANK IS REQUESTED TO ADD CONFIRMATION ON THIS STANDBY LETTER OF CREDIT WITH CONFIRMATION CHARGES FOR ACCOUNT OF [ ]. AT THE REQUEST OF [ ], WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. [ ] UP TO AN AGGREGATE AMOUNT OF UNITED STATES DOLLARS ONE MILLION AND TWO HUNDRED FIFTY THOUSAND ONLY (US$1,250,000) AVAILABLE WITH US BY PAYMENT AGAINST YOUR WRITTEN STATEMENT THROUGH YOUR BANKER SPECIFYING THE AMOUNT CLAIMED REPRESENTS PART OR ALL OF THE UNPAID BALANCE OF INDEBTEDNESS DUE TO YOU IN CONNECTION WITH YOUR GRANTING CREDIT FACILITY TO SIGNATURE EYEWEAR, INC., 498 N. OAK ST., INGELWOOD, CA90302, UNITED STATES OF AMERICA IN RESPECT OF WHICH SAID BORROWER IS IN DEFAULT. THE STANDBY LETER OF CREDIT AMOUNT COVERS THE PRINCIPAL, INTEREST AND YOUR CHARGES. YOUR WRITTEN STATEMENT MUST REACH THE OFFICE OF THE CONFIRMING BANK ON OR BEFORE [ ]. PARTIAL DRAWING ALLOWED, MULTIPLE PRESENTATION NOT ALLOWED. ALL BANKING CHARGES ARE FOR ACCOUNT OF APPLICANT. THIS STANDBY LETTER OF CREDIT WILL EXPIRE ONE YEAR AFTER DATE OF ISSUANCE AT THE COUNTER OF THE CONFIRMING BANK. THE CONFIRMING BANK IS ALLOWED TO DEBIT THE ACCOUNT OF ISSUING BANK IN SETTLEMENT UPON RECEIPT OF A COMPLIED CLAIM. THE CONFIRMING BANK IS REQUIRED TO SWIFT INFORM ISSUING BANK UPON RECEIPT OF A CLAIM. 55 THIS STANDBY LETTER OF CREDIT IS SUBJECT TO INTERNATIONAL CHAMBER OF COMMERCE INTERNATIONAL STANDBY PRACTICE ISP98. THIS IS THE OPERATIVE INSTRUMENT. 56 ================================================================================ SECURITY AGREEMENT DATED APRIL 21, 2003 BETWEEN SIGNATURE EYEWEAR, INC. AS DEBTOR AND BLUEBIRD FINANCE LIMITED AS SECURED PARTY ALLEN & OVERY NEW YORK ================================================================================ CONTENTS CLAUSE PAGE 1. INTERPRETATION........................................................... 1 1.1 UCC and Credit Agreement Defined Terms...................... 1 1.2 Other Definitions........................................... 1 1.3 Construction................................................ 3 2. CREATION AND PERFECTION OF SECURITY INTEREST............................. 3 2.1 Grant....................................................... 3 2.2 Continuing security interest................................ 3 2.3 Filing of financing statements.............................. 4 2.4 No liability................................................ 4 3. REPRESENTATIONS AND WARRANTIES........................................... 4 3.1 Representations and warranties.............................. 4 3.2 The Debtor.................................................. 4 3.3 The Collateral.............................................. 5 3.4 Security interest........................................... 5 3.5 Intellectual Property Rights................................ 6 3.6 Times for making representations and warranties............. 7 3.7 Survival.................................................... 7 4. UNDERTAKINGS............................................................. 7 4.1 Undertakings................................................ 7 4.2 The Debtor.................................................. 7 4.3 The Collateral.............................................. 8 4.4 Security interest........................................... 8 4.5 Notices..................................................... 9 5. RIGHTS AND REMEDIES...................................................... 9 5.1 Events of Default........................................... 9 5.2 Collections after an Event of Default....................... 9 5.3 Secured Party's rights upon default......................... 10 5.4 No marshaling............................................... 11 6. MISCELLANEOUS............................................................ 11 6.1 Further assurances.......................................... 11 6.2 Costs and indemnity......................................... 12 6.3 Successors.................................................. 12 6.4 Amendments and waivers...................................... 13 6.5 Rights cumulative........................................... 13 6.6 Severability................................................ 13 6.7 Counterparts................................................ 13 6.8 Notices..................................................... 13 6.9 Complete Agreement.......................................... 14 6.10 Waiver of Jury Trial........................................ 14 6.11 Governing Law............................................... 14 Signatories.................................................................. 15 SCHEDULES 1. Commercial Tort Claims................................................... 16 2. Intellectual Property.................................................... 17 3. Countries and States in which Collateral consisting of goods is located.. 18 THIS AGREEMENT is dated April 21, 2003 BETWEEN: (1) SIGNATURE EYEWEAR, INC., a corporation organized under the laws of the State of California (the DEBTOR); and (2) BLUEBIRD FINANCE LIMITED, as Lender under the Credit Agreement described below, a company organized under the laws of the British Virgin Islands (in that capacity the SECURED PARTY). BACKGROUND: (A) The Debtor and the Secured Party are concurrently entering into the US$4,150,000 credit agreement dated the date of this Agreement (the CREDIT AGREEMENT). (B) It is a condition precedent to the obligations of the Secured Party under the Credit Agreement that the Debtor enter into this Agreement and grant the security described in this Agreement. IT IS AGREED as follows: 1. INTERPRETATION 1.1 UCC AND CREDIT AGREEMENT DEFINED TERMS Any term defined in the Uniform Commercial Code as in effect from time to time in the State of California (the UCC) and not defined in this Agreement has the meaning given to the term in the UCC. Any term defined in the Credit Agreement and not defined in this Agreement or the UCC has the meaning given to the term in the Credit Agreement. 1.2 OTHER DEFINITIONS In this Agreement: COLLATERAL means all personal property, wherever located, in which the Debtor now has or later acquires any right title or interest, including all: (a) accounts, chattel paper (including tangible chattel paper and electronic chattel paper), goods (including equipment, inventory and fixtures), health-care-insurance receivables, instruments (including promissory notes), investment property, documents, deposit accounts, letter-of-credit rights, general intangibles (including payment intangibles), software, supporting obligations, 1 other assets (including any and all proprietary and intellectual property rights of any kind or nature whatsoever, anywhere in the world, including any and all inventions, discoveries, trade secrets, intellectual property rights, patents, trademarks, trade names, service marks and copyrights, all registrations of and applications relating to any of the foregoing, and all associated goodwill); and (b) Intellectual Property Rights and any associated Contracts, and to the extent not listed above as original Collateral, proceeds and products of, and accessions to, the foregoing. The term COLLATERAL also includes all existing commercial tort claims of the Debtor as described in Schedule 1 (Commercial Tort Claims). Notwithstanding the foregoing, COLLATERAL shall not include: (a) any property, right or interest in which a security interest may not be granted under applicable law or under enforceable contractual restrictions binding on the Debtor; or (b) Eyewear Licenses but not any inventory derived from such Eyewear Licenses. CONTRACTS means any contract, indenture, mortgage, deed of trust, note, instrument, lease, license, arrangement or other agreement, whether oral or written, including without limitation, all acquisition, development, production, distribution, exploitation and/or licensing agreements. EVENT OF DEFAULT has the meaning given to that term in Clause 5.1 (Events of Default). EYEWEAR LICENSES means the licenses held today or hereafter acquired by the Debtor pursuant to which a person licenses to the Debtor the right to manufacture, market, sell and/or distribute eyeglass frames and related eyewear accessories using trademarks, tradenames and other intellectual property owned by such person. INTELLECTUAL PROPERTY RIGHTS means any inventions, discoveries, patent and patent applications, trademarks, trade names, service marks and registrations and applications in respect thereto, and copyrights, copyright registrations and copyright applications including those described in Schedule 2 (Intellectual Property) and those created or acquired after the date of this Agreement. LIEN means any security interest, lien, mortgage, pledge, encumbrance, charge, assignment, hypothecation, agreement or arrangement having the effect of conferring security, adverse claim, claim, or restriction on assignment, transfer or pledge. RELEVANT STATES means the State of the Debtor's incorporation, the State where the Debtor has its chief executive office and the States in which Collateral consisting of goods is located. SECURED OBLIGATIONS means: (a) the Credits and all other amounts payable or owing to the Secured Party under the Finance Documents; (b) all other obligations of the Debtor under the Finance Documents; 2 (c) all obligations of the Debtor under this Agreement; (d) all amounts owed under any modifications, renewals or extensions of any of the foregoing obligations; and (e) any of the foregoing that arises after the filing of a petition by or against the Debtor under the U.S. Bankruptcy Code, even if the obligations do not accrue because of the automatic stay under U.S. Bankruptcy Code ss. 362 or otherwise. 1.3 CONSTRUCTION (a) No reference to PROCEEDS in this Agreement authorizes any sale, transfer, or other disposition of Collateral by the Debtor. (b) INCLUDES and INCLUDING are not limiting. (c) OR is not exclusive. (d) ALL includes ANY and ANY includes ALL. (e) The term LAW includes any law, statute, regulation, regulatory requirement, rule, ordinance, ruling, decision, treaty, directive, order, guideline, regulation, policy, writ, judgment, injunction or request of any court or other governmental, inter-governmental or supranational body, fiscal or monetary authority, or other ministry or public entity (and their interpretation, administration and application), whether or not having the force of law. (f) A reference to a law is a reference to that law as amended or re-enacted. (g) A reference to an agreement is a reference to that agreement as amended, supplemented, restated or novated. (h) Clause headings used in this Agreement are for convenience only. They are not a part of this Agreement and shall not be used in construing it. 2. CREATION AND PERFECTION OF SECURITY INTEREST 2.1 GRANT As security for the prompt and complete payment and performance of the Secured Obligations when due (whether due because of stated maturity, acceleration, mandatory prepayment, or otherwise) and to induce the Secured Party to make the Credits, the Debtor grants to the Secured Party a continuing security interest in the Collateral. 2.2 CONTINUING SECURITY INTEREST (a) This Agreement creates a continuing security interest in the Collateral and will remain in full force and effect until the irrevocable and indefeasible payment in full of the ultimate balance of the Secured Obligations, regardless of any intermediate payment or discharge in whole or in part. 3 (b) If, at any time for any reason (including the bankruptcy, insolvency, receivership, reorganization, dissolution or liquidation of the Debtor or the appointment of any receiver, intervenor or conservator of, or agent or similar official for, the Debtor or any of its properties), any payment received by the Secured Party in respect of the Secured Obligations is rescinded or avoided or must otherwise be restored or returned by the Secured Party, that payment shall not be considered to have been made for purposes of this Agreement, and this Agreement will continue to be effective or will be reinstated, if necessary, as if that payment had not been made. 2.3 FILING OF FINANCING STATEMENTS (a) The Debtor authorizes the Secured Party to prepare and file, at the Debtor's expense, financing statements describing the Collateral, as well as continuation statements and amendments in respect of those financing statements. The Debtor expressly authorizes the Secured Party, if it so elects, to file financing statements with the collateral description "all assets of the Debtor", "all personal property of the Debtor" or other words to that effect. (b) Promptly after the filing of an initial financing statement in respect of the Collateral, the Debtor shall provide the Secured Party with an official report from the Secretary of State of each Relevant State indicating that the Secured Party's security interest is prior to all other security interests or other interests reflected in the report other than any security interests referred to in clause 17.5(b) (Negative pledge) of the Credit Agreement. 2.4 NO LIABILITY The Debtor represents, warrants and agrees that: (a) its liabilities and obligations under contractual obligations that constitute part of the Collateral shall not be affected by this Agreement or the exercise by the Secured Party of its rights under this Agreement; (b) unless it expressly agrees in writing, the Secured Party shall not have any liabilities or obligations under any contractual obligation that constitutes part of the Collateral as a result of this Agreement, the exercise by the Secured Party of its rights under this Agreement or otherwise; and (c) the Secured Party does not and shall not have any obligation to collect upon or enforce any contractual obligation or claim that constitutes part of the Collateral, or to take any other action with respect to the Collateral. 3. REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES The Debtor makes the representations and warranties set out in this Clause 3 to the Secured Party. 3.2 THE DEBTOR (a) The Debtor is incorporated in the State of California. 4 (b) The Debtor's exact legal name, as it appears in the public records of its jurisdiction of incorporation, is Signature Eyewear, Inc. The Debtor has not changed its name, whether by amendment of its charter, reorganization, merger or otherwise, since its date of incorporation. (c) The Debtor's organizational identification number, as issued by its jurisdiction of incorporation, is 01209237. (d) The Debtor's chief executive office is located at 498 North Oak Street, Inglewood, CA 90302, USA. The Debtor has not changed its chief executive office within the past four months. (e) The Debtor keeps its corporate records and all records, documents and instruments relating to or evidencing Collateral at its address indicated in Clause 6.8 (Notices) below. 3.3 THE COLLATERAL (a) The Debtor has exclusive possession and control of all Collateral. (b) Except as permitted under the Credit Agreement: (i) the Debtor has good and marketable title to, and is the sole legal and beneficial owner of, and has the power to transfer and grant a security interest in, the Collateral; (ii) none of the Collateral is subject to any Lien other than the Secured Party's security interest; (iii) Debtor has not agreed or committed to sell, assign, pledge, transfer, license, lease or encumber any of the Collateral, or granted any option, warrant or right with respect to any of the Collateral; and (iv) no effective mortgage, deed of trust, financing statement, security agreement or other instrument similar in effect is on file or of record with respect to any Collateral, except for those that create, perfect or evidence the Secured Party's security interest. (c) All Collateral consisting of goods is located solely in the countries and States of the United States listed in Schedule 3 (Countries and States in which Collateral consisting of goods is located). 3.4 SECURITY INTEREST (a) This Agreement confers the security interest it purports to confer over the Collateral in favor of the Secured Party, and, subject to the provisions of section 552 of the U.S. Bankruptcy Code, that security interest is not liable to avoidance on liquidation or bankruptcy, composition or any other similar insolvency proceedings. (b) The description of the Collateral contained in this Agreement is true, correct, and complete and is sufficient to describe the Collateral for the purpose of creating, attaching, and perfecting the security interest in favor of the Secured Party intended to be created by this Agreement. (c) As of the first Utilization Date, all necessary and appropriate deliveries, notices, recordings, filings, and registrations have been effected to perfect a first-priority (except as described in the Credit Agreement) security interest in the Collateral in favor of the Secured Party in all relevant jurisdictions, and the Secured Party has as of the first Utilization Date, and will continue to have until the Secured Obligations have been repaid in full and the Secured Party's security interest has been released, a duly and validly created, attached, perfected and enforceable (except as described in the Credit Agreement) security interest in the Collateral in all relevant jurisdictions. 5 3.5 INTELLECTUAL PROPERTY RIGHTS (a) All the Debtor's Intellectual Property Rights as at the date of this Agreement are listed in Schedule 2 (Intellectual Property). Comprehensive details of all Intellectual Property Rights acquired by the Debtor after the date of this Agreement have been notified to the Secured Party. (b) All Intellectual Property Rights forming part of the Collateral are, and at all times have been, valid, subsisting, enforceable, and in full force and effect. (c) All Intellectual Property Rights forming part of the Collateral are solely and exclusively held by the Debtor and the Debtor is the sole and exclusive owner of all such Intellectual Property Rights. (d) No Intellectual Property Rights forming part of the Collateral have lapsed or fallen into the public domain or been abandoned. (e) To the Debtor's best knowledge, no third party is violating, infringing or misappropriating any of the Intellectual Property Rights forming part of the Collateral. (f) All items of Collateral which are subject to copyright protection constitute original works of authorship and, to the extent created by parties other than the Debtor or the Debtor's predecessor(s)-in-interest, were created pursuant to valid work-for-hire arrangements or agreements which were not and/or have not been breached by any party thereto. (g) Any item of Collateral which is subject to copyright protection, and which was published prior to March 1, 1989, was published with a copyright notice in full compliance with the U.S. Copyright Act. (h) The chain-of-title with respect to each item of Collateral is clear and complete, and there are no gaps with respect thereto. (i) All material items of Collateral which are subject to copyright protection have been registered in the U.S. Copyright Office. (j) All material items of Collateral which constitute trademarks or service marks have been registered in the United States Patent and Trademark Office. (k) No Intellectual Property Rights forming part of the Collateral have been declared invalid, null or void, or been cancelled, rejected or refused, or have been the subject of any challenge, dispute, opposition or cancellation, in any judicial or administrative proceeding. (l) Exploitation of the Collateral does not and will not violate, infringe or misappropriate the patent, inventorship, trademark, service mark, trade name, copyright, droit morale, privacy, publicity, trade secret, or other proprietary or intellectual property rights, of any kind or nature whatsoever, of any third person or entity. 6 (m) Exploitation of the Collateral does not and will not violate any laws, rules, statutes or regulations, including those related to obscenity, morals, health, welfare or safety, or those related to the broadcast, transmission, distribution or exhibition of audiovisual works. (n) Except as described in the Credit Agreement, all Contracts are valid, subsisting, enforceable, and in full force and effect, and no party to any such Contract is in breach or violation thereof. (o) The Debtor has secured all consents, permissions, releases, authorizations and waivers necessary for the full and continued exploitation of the Collateral, and has fully performed all obligations with respect thereto. (p) The Debtor is in compliance with all union, guild, collective bargaining, performance rights society and similar agreements and obligations arising out of or related or applicable to any exploitation of the Collateral. 3.6 TIMES FOR MAKING REPRESENTATIONS AND WARRANTIES The representations and warranties set out in this Clause 3: (a) are made on the date of this Agreement; and (b) are deemed to be repeated by the Debtor on the date of each Request and the first day of each Term with reference to the facts and circumstances then existing. 3.7 SURVIVAL The representations and warranties of the Debtor contained in this Agreement or made by the Debtor in any certificate, notice or report delivered under the Finance Documents will survive each Utilization Date, the making and repayment of the Credits, and any novation, transfer or assignment of the Credits. 4. UNDERTAKINGS 4.1 UNDERTAKINGS The Debtor covenants and agrees that, so long as the Secured Party has any commitment under the Credit Agreement and until payment in full of the Secured Obligations, it will perform and observe each of the undertakings in this Clause 4. 4.2 THE DEBTOR (a) The Debtor will preserve its corporate existence and will not, in one transaction or a series of related transactions, merge into or consolidate with any other entity, or sell all or substantially all of its assets. (b) The Debtor will not change the jurisdiction of its incorporation. (c) The Debtor will not change its name without providing the Secured Party with 30 days' prior written notice. 7 (d) The Debtor will keep its corporate records and all records, documents and instruments relating to or evidencing Collateral at its address indicated in Clause 6.8 (Notices) below. (e) The Debtor agrees to permit the Secured Party and its agents and representatives (at the Debtor's expense), during normal business hours, to inspect the Collateral, to examine and make copies of and abstracts from the records referred to in paragraph (d) above, and to discuss matters relating to the Collateral directly with the Debtor's officers and employees and relevant third parties (including account debtors). (f) Upon request, the Debtor shall provide the Secured Party with such information concerning the Collateral as the Secured Party shall reasonably request, including the current list of names and addresses of all account debtors. 4.3 THE COLLATERAL (a) Except as permitted by the Credit Agreement: (i) the Debtor will maintain good and marketable title to, and sole legal and beneficial ownership of, the Collateral; (ii) the Debtor will not permit any Collateral to be subject to any Lien other than the Secured Party's security interest and will at all times and at its own cost warrant and defend the Secured Party's security interest in the Collateral against all other Liens; and (iii) the Debtor will not, and is not authorized to, sell, assign, transfer, pledge, license, lease or encumber, or grant any option, warrant, or right with respect to, any of the Collateral, or agree or contract to do any of the foregoing. (b) The Collateral shall remain personal property at all times. The Debtor shall not affix any of the Collateral to any real property in any manner which would change its nature from that of personal property to real property or to a fixture. (c) The Debtor shall mark conspicuously all Collateral consisting of chattel paper with a legend, in form and substance satisfactory to the Secured Party, indicating that the Secured Party has a security interest in the chattel paper. (d) The Debtor shall pay when due (and in any case before any penalties are assessed or any Lien is imposed on any Collateral) all taxes, assessments and charges imposed on or in respect of Collateral and all claims against the Collateral, including claims for labor, materials and supplies. (e) In any suit, legal action, arbitration or other proceeding involving the Collateral or the Secured Party's security interest, the Debtor will take at its own cost all lawful action necessary or desirable to avoid impairment of the Secured Party's security interest or the Secured Party's rights under this Agreement or the imposition of a Lien on any Collateral. 4.4 SECURITY INTEREST The Debtor shall take all actions necessary or desirable to ensure that the Secured Party has and continues to have in all relevant jurisdictions a duly and validly created, attached, perfected and enforceable 8 first-priority (except as described in the Credit Agreement) security interest in the Collateral (including after-acquired Collateral). 4.5 NOTICES The Debtor will give the Secured Party prompt notice of the occurrence of any of the following events: (a) any pending or threatened claim, suit, legal action, arbitration or other proceeding involving or affecting the Debtor or any Collateral which could reasonably be expected to impair the Secured Party's security interest or the Secured Party's rights under this Agreement or result in the imposition of a Lien on any Collateral; (b) any loss or damage to any material portion of the Collateral; or (c) any representation or warranty contained in this Agreement is or becomes untrue, incorrect or incomplete in any material respect. In each notice delivered under this Clause, the Debtor will include reasonable details concerning the occurrence that is the subject of the notice as well as the Debtor's proposed course of action, if any. Delivery of a notice under this Clause will not affect the Debtor's obligations to comply with any other provision of this Agreement. 5. RIGHTS AND REMEDIES 5.1 EVENTS OF DEFAULT EVENT OF DEFAULT for the purposes of this Agreement means: (a) failure to comply with Clause 4.3(a) (The Collateral) above; (b) failure to comply with any other provision of this Agreement if the failure continues for 14 days after the earlier of: (i) notice from the Secured Party; and (ii) the Debtor becoming aware of the non-compliance; (c) failure, in any material respect, of any representation or warranty contained in this Agreement to be true and correct on the date made or deemed to be repeated; (d) any attachment, execution or levy on any of the Collateral; or (e) an "Event of Default", as that term is defined in the Credit Agreement. 5.2 COLLECTIONS AFTER AN EVENT OF DEFAULT Subject to the Subordination Agreement, after the occurrence and during the continuation of an Event of Default, the Debtor will hold all funds and other property received or collected in respect of the Collateral in trust for the Secured Party, and will keep those funds and that other property separate and apart from all other funds and property so as to be capable of 9 identification. The Debtor will deliver those funds and that other property to the Secured Party in the identical form received, properly endorsed or assigned when required to enable the Secured Party to complete collection. After the occurrence and during the continuation of an Event of Default, the Debtor shall not settle, compromise, adjust, discount or release any claim in respect of Collateral and shall not accept any returns of merchandise. 5.3 SECURED PARTY'S RIGHTS UPON DEFAULT (a) Upon the occurrence and during the continuation of an Event of Default, the Secured Party may, in its sole discretion, take any of the following actions, in each case at the Debtor's expense, and without prior notice to the Debtor except as required under applicable law: (i) transfer or assign to, or register in the name of, the Secured Party or its nominees any of the Collateral; (ii) exercise all consent and other rights relating to any Collateral; (iii) perform or comply with any contractual obligation that constitutes part of the Collateral; (iv) receive, endorse, negotiate, execute and deliver or collect upon any check, draft, note, acceptance, chattel paper, account, instrument, document, letter of credit, contract, agreement, bill of lading, invoice, assignment, bill of sale, deed, security, share certificate, stock power, proxy, or instrument of conveyance or transfer constituting or relating to any Collateral; (v) assert, institute, file, defend, settle, compromise, adjust, discount or release any suit, action, claim, counterclaim or right of set-off relating to any Collateral; (vi) execute and deliver acquittances, receipts and releases in respect of Collateral; and (vii) exercise any other right or remedy available to the Secured Party under applicable law, the other Finance Documents, or any other agreement between the parties. (b) The Debtor agrees that the Secured Party will have, with respect to the Collateral, in addition to the rights and remedies described in this Agreement, all of the rights and remedies available to a secured party under applicable law and under the UCC (whether or not the UCC applies to the affected Collateral and regardless of whether or not the UCC is the law of the jurisdiction where the rights or remedies are asserted) as if those rights and remedies were fully set forth in this Agreement. (c) The Secured Party may exercise the rights and remedies described in this Agreement and those available under applicable law in such order, at such times and in such manner as the Secured Party may, in its sole discretion, determine from time to time. The Secured Party may at any time and from time to time release or relinquish any right, remedy, or security interest it has with respect to a particular item of Collateral without releasing, relinquishing, or in any way affecting its rights, remedies, or security interests with respect to any other item of Collateral. (d) The Debtor irrevocably constitutes and appoints the Secured Party, with full power of substitution, as the Debtor's true and lawful attorney-in-fact, in the Debtor's name or in the Secured Party's name or otherwise, and at the Debtor's expense, to take any of the actions 10 authorized by this Agreement or permitted under applicable law upon the occurrence and during the continuation of an Event of Default, without notice to, or the consent of, the Debtor. This power of attorney is a power coupled with an interest and cannot be revoked. The Debtor ratifies and confirms all actions taken by the Secured Party or its agents under this power of attorney. (e) The Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of Collateral. (f) The grant to the Secured Party under this Agreement of any right or power does not impose upon the Secured Party any duty to exercise that right or power. The Secured Party will have no obligation to take any steps to preserve any claim or other right against any person or with respect to any Collateral. (g) All risk of loss, damage, diminution in value, or destruction of the Collateral will be borne by the Debtor. (h) The Debtor agrees that the sale, transfer or other disposition under this Agreement of any right, title, or interest of the Debtor in any item of Collateral will operate to permanently divest the Debtor and all persons claiming under or through the Debtor of that right, title, or interest, and will be a perpetual bar, both at law and in equity, to any claims by the Debtor or any person claiming under or through the Debtor with respect to that item of Collateral. 5.4 NO MARSHALING The Secured Party has no obligation to attempt to satisfy the Secured Obligations by collecting them from any other person liable for them and the Secured Party may release, modify or waive any collateral provided by any other person to secure any of the Secured Obligations, all without affecting the Secured Party's rights against the Debtor. The Debtor waives any right it may have to require Secured Party to pursue any third person for any of the Secured Obligations. Except to the extent required by applicable law, the Secured Party will not be required to marshal any Collateral or any guaranties of the Secured Obligations, or to resort to any item of Collateral or any guaranty in any particular order, and the Secured Party's rights with respect to the Collateral and any guaranties will be cumulative and in addition to all other rights, however existing or arising. To the extent permitted by applicable law, the Debtor irrevocably waives, and agrees that it will not invoke or assert, any law requiring or relating to the marshaling of Collateral or any other law which might cause a delay in or impede the enforcement of the Secured Party's rights under this Agreement or any other agreement. 6. MISCELLANEOUS 6.1 FURTHER ASSURANCES At any time and from time to time upon the request of the Secured Party, the Debtor will execute and deliver such further documents and instruments and do such other acts as the Secured Party may reasonably request in order to effect fully the purposes of this Agreement, to create, perfect, maintain, and preserve a first-priority (except as described in the Credit Agreement) security interest in the Collateral in favor of the Secured Party for the benefit of the Secured Party, to facilitate any sale, transfer or other disposition of Collateral and to make any sale, transfer or other disposition of Collateral valid, binding, and in compliance with applicable law. 11 6.2 COSTS AND INDEMNITY (a) The Debtor will pay to the Secured Party all costs incurred by the Secured Party for the purpose of enforcing its rights under this Agreement, including: (i) costs of foreclosure and of disposition and sale of the Collateral; (ii) costs of maintaining or preserving the Collateral or assembling it or preparing it for sale; (iii) costs of obtaining money damages; and (iv) fees and expenses of attorneys employed by the Secured Party for any purpose related to this Agreement or the Secured Obligations, including consultation, drafting documents, sending notices or instituting, prosecuting or defending litigation or arbitration. (b) The Debtor agrees to indemnify the Secured Party and its respective affiliates, directors, officers, representatives and agents (each an INDEMNIFIED PARTY) from and against all claims, liabilities, obligations, losses, damages, penalties, judgments, costs and expenses of any kind (including attorney's fees and expenses) which may be imposed on, incurred by or asserted against any of them by any person in any way relating to or arising out of: (i) this Agreement; (ii) the Collateral; (iii) the Secured Party's security interest in the Collateral; (iv) any Event of Default; (v) any action taken or omitted by the Secured Party under this Agreement or any exercise or enforcement of rights or remedies under this Agreement; or (vi) any sale or other disposition of, or any realization on, Collateral, but the Debtor will not be liable to an indemnified party to the extent any liability results from that indemnified party's gross negligence or willful misconduct. Payment by an indemnified party will not be a condition precedent to the obligations of the Debtor under this indemnity. (c) This Clause 6.2 (Costs and indemnity) will survive the initial Utilization Date, the making and repayment of the Credits and any novation, transfer or assignment of the Credits. 6.3 SUCCESSORS This Agreement shall be binding upon and inure to the benefit of the Debtor and the Secured Party and their respective successors and assigns, except that the Debtor may not assign or transfer all or any part of its rights or obligations under this Agreement without the prior written consent of the Secured Party, and any assignment by the Debtor in violation of this provision shall be void and of no effect. The Debtor waives and will not assert against any assignee of the Secured Party any claims, defenses or set-offs which the Debtor could assert against the Secured Party except for defenses which cannot be waived under applicable law. 12 6.4 AMENDMENTS AND WAIVERS Any term of this Agreement may be amended or waived only by the written agreement of the Debtor and the Secured Party. 6.5 RIGHTS CUMULATIVE The rights and remedies of the Secured Party under this Agreement: (a) may be exercised as often as necessary; (b) are cumulative and not exclusive of its rights under applicable law; and (c) may be waived only in writing and specifically. The Secured Party's delay in exercising, or failure to exercise, any right or remedy under this Agreement is not a waiver of that right or remedy. 6.6 SEVERABILITY If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect: (a) the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or (b) the legality, validity or enforceability in any other jurisdiction of that or any other provision of this Agreement. 6.7 COUNTERPARTS This Agreement may be executed in counterpart, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. 6.8 NOTICES (a) All notices or other communications under or in connection with this Agreement shall be given in writing. Any such notice will be deemed to be given: (i) if by mail or courier, when delivered; and (ii) if by facsimile, when sent with confirmation of transmission, except that a notice given on a non-working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place. (b) The address and facsimile number of the Debtor are: Address: 498 North Oak Street Inglewood, CA 90302 USA 13 Fax number: +1 310 330 2764 Attention: Chief Executive Officer (c) The address and facsimile number of the Secured Party are: Address: PO Box 957 Road Town, Tortola British Virgin Islands Attention: The Directors (d) Either party may change its address or facsimile number for notices by a notice to the other party given in accordance with this Clause 6.8. 6.9 COMPLETE AGREEMENT This Agreement contains the complete agreement between the parties on the matters to which it relates and supersedes all prior commitments, agreements and understandings, whether written or oral, on those matters. 6.10 WAIVER OF JURY TRIAL THE DEBTOR AND THE SECURED PARTY WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED ON OR ARISING FROM THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 6.11 GOVERNING LAW This Agreement is governed by the laws of the State of California, except to the extent that the validity, perfection or enforcement of any security interest granted under this Agreement or any remedy in respect of any particular Collateral is mandatorily governed by the law of another jurisdiction. The undersigned, intending to be legally bound, have executed and delivered this Agreement on the date stated at the beginning of this Agreement. 14 SIGNATORIES DEBTOR SIGNATURE EYEWEAR, INC. By: --------------------------------- Name: Michael Prince ------------------------------- Title: Chief Financial Officer ------------------------------- SECURED PARTY BLUEBIRD FINANCE LIMITED By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 15 SCHEDULE 1 COMMERCIAL TORT CLAIMS None. 16 SCHEDULE 2 INTELLECTUAL PROPERTY TRADEMARKS 1. Intuition 2. Bravado 3. Latitudes 4. Lifescape 5. Search 6. Small Print 7. Kensington & James Riding Club and Design 17 SCHEDULE 3 COUNTRIES AND STATES IN WHICH COLLATERAL CONSISTING OF GOODS IS LOCATED 1. Belgium 2. California 3. Texas 18 EX-10.7 6 ex10-7_16269.txt STOCK PURCHASE AGREEMENT EXHIBIT 10.7 ------------ STOCK PURCHASE AGREEMENT DATED APRIL 21, 2003 BETWEEN BLUEBIRD FINANCE LIMITED AND SIGNATURE EYEWEAR, INC. RELATING TO THE PURCHASE AND SALE OF SERIES A 2% CONVERTIBLE PREFERRED STOCK OF SIGNATURE EYEWEAR, INC. CONTENTS CLAUSE PAGE 1. Definitions..........................................................1 2. Purchase and Sale....................................................4 3. Representations and Warranties of the Corporation....................5 4. Representations and Warranties of Buyer..............................9 5. Covenants of the Corporation........................................10 6. Covenants of Buyer and the Corporation..............................13 7. Survival; Indemnification...........................................14 8. Miscellaneous.......................................................15 Signatories..................................................................18 EXHIBITS A. Certificate of Determination........................................19 B. Registration Rights.................................................33 C. Legal Opinion of special counsel to the Corporation.................41 SCHEDULES 3.4 Non-Contravention...................................................47 3.5 Capitalization......................................................48 3.9 Material Adverse Change.............................................49 3.10 Litigation..........................................................50 3.12 Subsidiaries........................................................51 3.14 Compliance with Laws................................................52 3.14 Taxes...............................................................53 3.15 Trademarks..........................................................54 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "AGREEMENT") dated as of April 21, 2003 BETWEEN (1) SIGNATURE EYEWEAR, INC., a California corporation (the "CORPORATION"), and (2) BLUEBIRD FINANCE LIMITED, a British Virgin Island corporation ("BUYER"). WHEREAS, the Corporation desires to sell the Preferred Shares (as defined herein) to Buyer, and Buyer desires to purchase the Preferred Shares from the Corporation, upon the terms hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS 1.1 DEFINITIONS (a) The following terms, as used herein, have the following meanings: 10-DAY MARKET PRICE means the average of the daily Market Prices of the Common Stock for the 10 consecutive trading days ending the day prior to the date for which such value is to be computed. AFFILIATE means, with respect to any specified Person, any other Person that, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling," and "controlled" have meanings correlative to the foregoing. BENEFICIAL OWNER has the meaning set forth in Rule 13d-3 under the Exchange Act, and derivative terms such as "beneficially own" shall be given corresponding meanings. BOARD OF DIRECTORS means the Board of Directors of the Corporation. BUSINESS DAY means any day except Saturday, Sunday and any day that is a legal holiday or a day on which banking institutions in Los Angeles, California generally are authorized or required by law or other governmental actions to close. CERTIFICATE OF DETERMINATION means the certificate of determination executed on or before the date of this Agreement substantially in the form attached as Exhibit A. CHANGE OF CONTROL means the occurrence of any of the following events: (i) any Person or COC Group (with the exception of the Buyer or any of its affiliates) is or becomes the beneficial owner (as defined herein, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Securities of the Corporation; or (ii) the Corporation consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or 1 substantially all of its assets to any Person, or any Person consolidates with, or merges with or into the Corporation, in any such event pursuant to a transaction in which the outstanding Voting Securities of the Corporation are converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Securities of the Corporation are converted into or exchanged for Voting Securities of the surviving or transferee corporation or its parent corporation and/or cash, securities or other property in an amount which could be paid by the Corporation under the terms of the Corporation's credit and financing agreements and (B) immediately after such transaction no Person or COC Group is the beneficial owner (as defined herein, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Securities of the surviving or transferee corporation, as applicable; or (iii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Corporation was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. CLOSING DATE means the date of the Closing. COC GROUP means a group within the meaning of Section 13(d)(3) of the Exchange Act. COMMISSION means the Securities and Exchange Commission. COMMON EQUITY means shares of Common Stock, and Convertible Securities (including the Series A Preferred Stock). COMMON STOCK means the Corporation's common stock, par value $0.001 per share. CONVERSION SHARES means the shares of Common Stock issued upon conversion of the Series A Preferred Stock. CONVERTIBLE SECURITIES means any securities convertible into or exchangeable or exercisable for Common Stock. CONVERTIBLE VOTING SECURITIES means securities convertible into or exchangeable or exercisable for Voting Securities. CREDIT FACILITY AGREEMENT means the agreement to be executed by the Buyer and the Corporation on the same date as this Agreement. DECEMBER FINANCIAL STATEMENTS means the draft unaudited consolidated financial statements of the Corporation for the period ended December 31, 2002. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. FINANCE DOCUMENTATION means the Credit Facility Agreement, the Security Agreement, the Subordination Agreement. GAAP means the U.S. generally accepted accounting principles. GROUP means the Corporation and its Subsidiaries. 2 LIEN means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind. MARKET PRICE means, with respect to the Common Stock, on any given day, (i) the price of the last trade, as reported on the Nasdaq National Market, not identified as having been reported late to such system, or (ii) if the Common Stock is so quoted, but not so traded, the average of the last bid and ask prices, as those prices are reported on the Nasdaq National Market, or (iii) if the Common Stock is not listed or authorized for trading on the Nasdaq National Market or any comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose; provided that, in connection with (i) or (ii), the Corporation may from time to time specify in advance the time at which the trade price or bid and ask prices, respectively, shall be determined for purposes of a particular calculation under this Agreement. If the Common Stock is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be the fair value per share of such security as determined in good faith by the Board of Directors. MATERIAL ADVERSE EFFECT means a material adverse effect on: (a) the business or financial condition of any member of the Group or the Group as a whole; (b) the ability of the Corporation to perform its obligations under this Agreement or any of the Finance Documentation; (c) the validity or enforceability of this Agreement or any of the Finance Documentation; or (d) any right or remedy of the Buyer under this Agreement or any of the Finance Documentation. OCTOBER FINANCIAL STATEMENTS means the draft consolidated financial statements of the Corporation for the year ended October 31, 2002. PERSON means an individual, corporation, partnership, limited liability company, association, trust and any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. PREFERRED SHARES means 1,200,000 shares of Series A Preferred Stock issued on the Closing Date. PREFERRED STOCK has the meaning set out in Section 3.5(a). RESTRICTED SECURITIES means (i) Common Equity and (ii) any other Voting Securities or Convertible Voting Securities. SEC REPORTS means all forms, reports and documents that the Corporation is required to file with the Commission. SECURITIES ACT means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. SECURITY AGREEMENT means the security agreement to be executed by the Corporation and Buyer on the same date as this Agreement. 3 SERIES A PREFERRED STOCK means the Series A 2% Convertible Preferred Stock of the Corporation having the rights, preferences and restrictions as set forth in the Certificate of Determination. SUBORDINATION AGREEMENT means the subordination agreement to be executed between the Buyer, the Corporation and Home Loan and Investment Company on the same date as this Agreement. SUBSIDIARY means, with respect to any Person, any corporation or other entity (and any predecessor thereof) of which the securities or other ownership interests having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions are directly or indirectly owned by such Person. VOTING SECURITIES means securities of the Corporation ordinarily having the power to vote for the election of directors of the Corporation other than the Series A Preferred Stock, provided that when the term "Voting Securities" is used with respect to any other Person it means the capital stock or other equity interests of any class or kind ordinarily having the power to vote for the election of directors or other members of the governing body of such Person. (b) The following definitional provisions shall apply to this Agreement: (i) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (ii) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (iii) The terms "Dollars" and "$" shall mean United States Dollars. (iv) References herein to a specific Section, Subsection or paragraph shall refer, respectively, to Sections, Subsections or paragraph of this Agreement, unless the express context otherwise requires. (v) Wherever the word "include," "includes," or "including" is used this Agreement, it shall be deemed to be followed by the words "without limitation". 2. PURCHASE AND SALE 2.1 PURCHASE AND SALE Upon the terms of this Agreement, the Corporation agrees to sell to Buyer, and Buyer agrees to purchase from the Corporation, 1,200,000 Preferred Shares at the Closing. The purchase price (the PURCHASE PRICE) for the Preferred Shares is $800,000 in cash. The Purchase Price shall be paid as provided in Section 2.2. 2.2 CLOSING. The closing (the CLOSING) of the purchase and sale of the 1,200,000 Preferred Shares hereunder shall take place at the offices of Jeffer, Mangels, Butler & Marmaro LLP, 1900 Avenue of the Stars, 7th Floor, Los Angeles, CA 90067, immediately upon execution of this Agreement and the Finance Documentation. At the Closing: (a) The Corporation shall deliver to Buyer: (i) certificates for the Preferred Shares; 4 (ii) confirmation that the Certificate of Determination has been filed in accordance with the laws of California; (iii) certified copies of the Articles of Incorporation and bylaws of the Corporation; (iv) a copy of the resolutions adopted by the Board of Directors, certified by the Secretary of the Corporation, authorizing this Agreement and issuance of the Preferred Shares and the Conversion Shares; and (v) an opinion reasonably acceptable to Buyer from Jeffer, Mangels, Butter & Marmaro, LLP, special counsel to the Corporation, in the form of the attached Exhibit C. (b) Buyer shall deliver to the Corporation the Purchase Price in immediately available funds by wire transfer to the account of the Corporation notified to Buyer. 2.3 CERTIFICATES. (a) Each certificate for Preferred Shares or Restricted Securities issued to Buyer shall bear the following legend: "The securities represented hereby have not been registered under Securities Act of 1933, as amended, and may not be offered, sold, transferred or otherwise disposed of except in compliance such Act and other applicable laws." (b) The Corporation agrees that, at the request of Buyer, it will remove from the certificates representing any Preferred Shares or Restricted Securities the legend contemplated by subsection (a) regarding the restriction under the Securities Act in the event that outside counsel for Buyer delivers to the Corporation a written opinion that the transfer of such Restricted Securities is no longer restricted by the Securities Act. 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION The Corporation represents and warrants to Buyer as of the date hereof (and if different, as at the Closing Date) that: 3.1 CORPORATE EXISTENCE AND POWER. The Corporation is a corporation duly incorporated, validly existing under the laws of the State of California, and the Corporation and each of its Subsidiaries has the powers required to own its assets and to carry on its business as now conducted. 3.2 CORPORATE AUTHORIZATION. (a) The execution, delivery and performance of this Agreement by the Corporation, including the issuance of the Preferred Shares and the Conversion Shares, is within the Corporation's powers and has been duly authorized by all necessary corporate action on the part of the Corporation. (b) This Agreement constitutes a legal and binding agreement of the Corporation, enforceable against the Corporation in accordance with its terms, except (i) as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally and (ii) for limitations imposed by general principles of equity. 5 3.3 AUTHORIZATION. The execution, delivery and performance of this Agreement by the Corporation requires no action by or in respect of, or filing with, any governmental or non-governmental body, agency, official or authority other than (i) compliance with any applicable requirements of the Exchange Act, (ii) with respect to the Corporation's obligations under Section 6.4, compliance with any applicable requirements of the Securities Act, (iii) the filing of the Certificate of Determination and Notice of Transaction under Section 25102(f) of the California Corporations Code in accordance with the laws of California, and (iv) other filings, notifications and consents that are immaterial to the consummation of the transactions contemplated hereby. 3.4 NON-CONTRAVENTION. Assuming compliance with the matters referred to in Section 3.3, the execution, delivery and performance of this Agreement by the Corporation do not and will not conflict with (i) the articles of incorporation or bylaws of the Corporation or any of its Subsidiaries, (ii) any applicable law or regulation or (iii) and except as to matters which would be immaterial to the Corporation or as set forth in Schedule 3.4, (y) constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of the Corporation or to a loss of any benefit to which the Corporation is entitled under any provision of any agreement or other instrument binding upon the Corporation or (z) result in the creation or imposition of any Lien on any asset of the Corporation. 3.5 CAPITALIZATION. (a) As of the date hereof, the authorized capital stock of the Corporation consists of 30,000,000 shares of common stock (COMMON STOCK), par value $.001 per share; and 5,000,000 shares of preferred stock, par value $.001 per share (PREFERRED STOCK), of which 1,360,000 shares are designated as "Series A 2% Convertible Preferred Stock". As of October 31, 2002, there were issued and outstanding the following shares of such stock: 5,556,889 shares of Common Stock, no shares Preferred Stock. The Certificate of Determination has been duly filed with the California Secretary of State and remains unchanged and in effect. (b) All outstanding shares of Common Stock are duly authorized, validly issued and fully paid and nonassessable. There are no preemptive or other similar rights available to the existing holders of the capital stock of the Corporation. Except as contemplated by this Agreement or set forth in Schedule 3.5 hereto, there are no outstanding options, warrants, rights, puts, calls, commitments, or other contracts, arrangements, or understandings issued by or binding upon the Corporation requiring, and there are no outstanding debt or equity securities of the Corporation which upon the conversion, exchange or exercise thereof would require, the issuance, sale or transfer by the Corporation of any new or additional equity interests in the Corporation (or any other securities of the Corporation or any of its Subsidiaries which, whether after notice, lapse of time or payment of monies, are or would be convertible into or exercisable or exchangeable for equity interests in the Corporation). There are no voting trusts or other agreements or understandings to which the Corporation or any of its Subsidiaries is a party with respect to the voting of capital stock of the Corporation. There are no outstanding obligations pursuant to which the Corporation is or may become obligated to purchase or redeem any shares of capital stock. 3.6 AUTHORIZATION OF PREFERRED SHARES AND CONVERSION SHARES. The issuance, sale and delivery of the Preferred Shares has been duly authorized by all requisite corporate and stockholder action of the Corporation, and the Preferred Shares issued to Buyer, when issued and delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable, free and clear of any Liens and not subject to preemptive or other similar rights of the stockholders of the Corporation. The Conversion Shares have 6 been duly and validly reserved for issuance, and when issued upon conversion of the Preferred Shares, will be validly issued, fully paid, and nonassessable, free and clear of any Liens and not subject to preemptive or other similar rights of the shareholders of the Corporation. The issuance of the Preferred Shares and the Conversion Shares to Buyer is and will be in full compliance with all applicable federal, foreign, and state securities laws., provided that by making the representations contained in this section 3.6, the Corporation is not making any representation concerning the ability of the Buyer to subscribe for the Preferred Shares and the Conversion Shares pursuant to this Agreement. 3.7 FINDERS' FEES. There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Corporation who might be entitled to any fee or commission in connection with the sale of the Preferred Shares pursuant to this Agreement. 3.8 FINANCIAL STATEMENTS. (a) The October Financial Statements have been prepared in good faith with due care and diligence and fairly represent its financial condition and results of operations as at the date to which they were drawn up, subject to: (i) normal year end adjustments and completion of the footnotes; and (ii) adjustments required by the Corporation's auditors to be made as follows: (A) increase in inventory reserves as a result of obsolescence or slow movement of inventory; (B) increase in the reserves for returns of goods, inventory and merchandise; (C) and increase in the bad debt reserve, all such adjustments to be notified to the Buyer promptly upon agreement thereof by the Corporation and its auditors. (b) The December Financial Statements have been prepared in good faith with due care and diligence and fairly represent its financial condition and results of operations as at the date to which they were drawn up, subject to: (i) normal year end adjustments; and (ii) adjustments directly resulting from any adjustments made to the October Financial Statements in accordance with paragraph (a)(ii) above. The December Financial Statements contain no footnotes. (c) Its audited consolidated financial statements most recently delivered to the Buyer: (i) have been prepared in accordance with accounting principles and practices generally accepted in its jurisdiction of incorporation, consistently applied; and (ii) fairly represent its consolidated financial condition and results of operations as at the date to which they were drawn up, 7 except, in each case, as disclosed to the contrary in those financial statements. 3.9 NO MATERIAL ADVERSE CHANGE. There has been no material adverse change in the consolidated financial condition and results of operations of the Corporation since December 31, 2002 other than: (a) as set out in Schedule 3.9 (Material Adverse Change); or (b) as otherwise known to the Buyer. 3.10 LITIGATION. No litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which, if adversely determined, are reasonably likely to have a Material Adverse Effect other than: (a) as set out in Schedule 3.10 (Litigation); or (b) threatened claims for an amount not exceeding US$100,000 in aggregate. 3.11 OFFERING OF PREFERRED SHARES. Neither the Corporation nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Corporation under circumstances that would require, under the Securities Act, the integration of such offering with the offering and sale of the Preferred Shares) that might subject the offering, issuance or sale of the Preferred Shares to the registration requirements of Section 5 of the Securities Act. 3.12 SUBSIDIARIES AND OTHER INTERESTS. Except as set forth in Schedule 3.12, the Corporation does not have any Subsidiaries and does not, directly or indirectly, own any capital stock or have any equity interests of or in any other entity. 3.13 COMPLIANCE WITH LAW. Except as disclosed in Schedule 3.13, the business of the Corporation has been and is presently being conducted in compliance with applicable US and foreign federal, state, and local governmental laws, rules, regulations and ordinances, except for any such noncompliance that would not have a Material Adverse Effect on the Corporation. 3.14 TAXES. Except as disclosed in Schedule 3.14, the Corporation has timely filed or caused to be filed all Tax Returns that are required to be filed by or with respect to it, its operations and assets, and as of the time of filing, all such Tax Returns were complete and correct. Except as disclosed in Schedule 3.14, the Corporation has paid or caused to be paid all Taxes as shown on said returns and on all assessments received by them to the extent that such Taxes have become due. The federal income Tax Returns of the Corporation have been examined and reported on by the Internal Revenue Service (or closed by applicable statutes) and all tax liabilities including additional assessments have been satisfied for all fiscal years prior to and including the fiscal year ended 31 October, 2001. The Corporation has paid or caused to be paid, or have established reserves which, in the reasonable judgment of the Corporation, are adequate in all material respects, for all Tax liabilities applicable to the Corporation for all fiscal years which have not been examined and reported on by the taxing authorities (or closed by applicable statutes). The term TAXES shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, premium, sales, use, ad valorem, 8 transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated severance, stamp, occupation, property or other taxes, fees, custom duties, assessments or charges of any kind whatsoever, together with any interest and any penalties (including penalties for failure to file in accordance with applicable information reporting requirements), and additions to tax by any authority (domestic or foreign). The term TAX RETURN shall mean any report, return, form, declaration or other document or information required to be supplied to any authority in connection with Taxes. 3.15 TRADEMARKS, ETC. Schedule 3.15 sets forth a true and complete list of all patents, trademarks, trade names, service marks and copyrights and applications therefor (collectively, INTELLECTUAL PROPERTY) owned by or licensed to the Corporation which constitutes all the Intellectual Property necessary for use in the United States and in such other jurisdictions as is necessary for the conduct of the business of the Corporation as presently conducted. Except as disclosed on Schedule 3.15, the Corporation owns or has the perpetual right to use, without payment to or interference from any other party, all Intellectual Property listed on Schedule 3.15 and has not authorized any person in any jurisdiction to use any such Intellectual Property. All Intellectual Property listed on Schedule 3.15 which may be so registered or filed has been duly registered and filed in or issued by the appropriate governmental agency in the jurisdictions indicated, all necessary affidavits of continuing use have been filed, and all necessary maintenance fees have been paid to continue all such rights in effect. Except as set forth in Schedule 3.15, the Corporation has no notice or knowledge of any objection or claim being asserted by any person with respect to the ownership, validity, enforceability or use of any Intellectual Property listed on Schedule 3.15 or challenging or questioning the validity or effectiveness of any such license. 4. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Corporation as of the date hereof (and, if different, as of the Closing Date) that: 4.1 CORPORATE EXISTENCE AND POWER. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. 4.2 CORPORATE AUTHORIZATION. The execution, delivery and performance of this Agreement by Buyer are within Buyer's corporate powers and have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes a legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except (a) as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally and (b) for limitations imposed by general principles of equity. 4.3 AUTHORIZATION. The execution, delivery and performance of this Agreement by Buyer requires no action by or in respect of, or filing with, any governmental or non-governmental body, agency or official or any other Person other than (i) compliance with any applicable requirements of the Exchange Act, and (ii) other filings or notifications that are immaterial to the consummation of the transactions contemplated hereby. 4.4 NON-CONTRAVENTION. Assuming compliance with the matters referred to in Section 4.3, the execution, delivery and performance of this Agreement by Buyer does not and will not (i) violate the certificate of incorporation or bylaws of Buyer, (ii) violate any applicable law, rule, regulation, judgment, injunction, order or decree, except for any such violations which would not have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby or (iii) constitute a default under any agreement or other instrument binding upon Buyer except as to matters which would not be material to Buyer. 9 4.5 PURCHASE FOR INVESTMENT. (a) Buyer is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act. Buyer is purchasing the Preferred Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof or of any Conversion Shares in violation of the Securities Act. (b) Buyer understands that (i) the offering and sale of the Preferred Shares and the Conversion Shares by the Corporation is intended to be exempt from registration under the Securities Act pursuant to Section 4(2) thereof and (ii) there is no existing public or other market for the Preferred Shares. (c) The Buyer confirms that it (i) has been furnished with or has had access to all of the information that it considers necessary to make an informed investment decision with respect to the Preferred Shares and Conversion Shares, (ii) has had the opportunity to discuss with management of the Corporation the intended business and financial affairs of the Corporation (iii) (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Preferred Shares and the Conversion Shares, (iv) is capable of bearing the economic risks of such investment; and (v) it has not relied upon any oral representations of the Corporation in connection with its decision to invest in the Preferred Shares and the Conversion Shares. (d) Buyer has not received any advertising or general solicitation in connection with the issuance of the Preferred Shares. (e) Buyer understands that the Preferred Shares and the Conversion Shares will be issued in a transaction exempt from the registration or qualification requirements of the Securities Act and applicable state securities laws, and that such securities must be held indefinitely unless a subsequent disposition thereof is registered or qualified under the Securities Act and such state securities laws or is exempt from such registration or qualification. 4.6 FINDER'S FEES There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Buyer who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. 5. COVENANTS OF THE CORPORATION The Corporation agrees that: 5.1 CERTIFICATE OF DETERMINATION. The Corporation has caused the Certificate of Determination set forth as Exhibit A hereto to be filed as required pursuant to the law of California. 10 5.2 RESERVATION OF SHARES. For so long as any of the Preferred Shares is outstanding, the Corporation shall keep reserved for issuance a sufficient number of shares of Common Stock to satisfy its conversion obligations under the Certificate of Determination. 5.3 OTHER TRANSFERS OF RESTRICTED SECURITIES. The Corporation shall take all actions reasonably necessary to enable holders of the Common Stock to sell such stock without registration under the Securities Act pursuant to Rule 144 under the Securities Act or any successor rule or regulation, subject in each case to the provisions of this Agreement and, specifically, the filing on a timely basis of all reports required to be filed under the Exchange Act. 5.4 PRO-RATA PARTICIPATION. (a) If the Corporation shall issue (such issuance, including any Common Equity issued to Buyer pursuant to this Section 5.4, an ISSUANCE) any Common Equity (other than an issuance of Common Equity (i) pursuant to the Corporation's existing or future stock option plans or pursuant to any other existing or future director or employee compensation plan approved by the Board of Directors, (ii) as consideration for the acquisition of a business or of assets, (iii) to the Corporation's joint venture partners in exchange for interests in the relevant joint venture, (iv) upon conversion, exercise or exchange of Convertible Securities, (v) that would cause an adjustment under paragraph 8(g)(iii) of the Certificate of Determination, (vi) pursuant to any shareholders' rights plan or (vii) as dividends on any class of preferred stock of the Corporation), Buyer shall have the right to purchase for cash up to an amount of such Common Equity (PRO-RATA SECURITIES) on the same terms and at the same price as the issue price of such Common Equity (such price to be agreed by the Corporation and Buyer if such Common Equity is to be issued for consideration other than cash, and if the parties cannot agree on such price, the price shall be determined as provided in paragraph (c) of this Section 5.4) so that, after the Issuance, Buyer would own the same proportional interest of Common Stock in the aggregate (assuming conversion, exercise or exchange of all Convertible Securities) as is owned by it prior to the Issuance (assuming conversion, exercise or exchange of all Convertible Securities). The Corporation shall deliver written notice (a PRO-RATA NOTICE) to Buyer with respect to any Issuance subject to the provisions of this Section 5.4 not less than 10 days before the anticipated date of such Issuance. Buyer's right to purchase Pro-Rata Securities with respect to any Issuance of Common Equity shall terminate 10 business days after delivery of the Pro-Rata Notice. If Buyer timely elects to exercise its right to purchase Pro-Rata Securities, such election will constitute a binding offer to purchase and may not be revoked by Buyer; provided, however, that Buyer's obligation to acquire the Pro-Rata Securities will be subject to terms and conditions at least as favorable as those applicable to the Issuance giving rise to Buyer's rights under this Section 5.4 and to receipt of any necessary governmental approvals (and the parties agree to expeditiously seek and cooperate with respect to obtaining such approvals). Notwithstanding anything in this Section 5.4 to the contrary, (x) if Buyer exercises its right to purchase any Pro-Rata Securities pursuant to an Pro-Rata Notice, but the Corporation does not consummate the issuance of Common Equity referred to in such notice (or reduces the size of such issuance), Buyer will not have the right to purchase such Pro-Rata Securities (or, in the event of a reduction in the size of the Issuance, have its right to purchase reduced pro rata), (y) if Buyer exercises its right to purchase any Pro-Rata Securities, the Corporation and Buyer agree that the Issuance giving Buyer such right shall not cause an adjustment under paragraph 8(g)(ii) of the Certificate of Determination, and (z) if the Corporation issues securities (RIGHTS) the issuance of which, except for this paragraph, would cause an adjustment under paragraph 8(g)(iii) of the Certificate of Determination, then (A) Buyer shall, in addition to any Rights it receives in respect of any Common Stock it owns, be entitled to receive Rights in respect of all Preferred Stock (as if such Preferred Stock had been converted into Common Stock immediately prior to the record date for the Issuance of such Rights) 11 owned by Buyer, and (B) the Corporation and Buyer agree that the issuance of Rights shall not cause an adjustment under Section 8(g)(iii) or 8(g)(iv) of the Certificate of Determination. Buyer agrees that it will not, directly or indirectly, sell, pledge, encumber or otherwise transfer or agree to sell, pledge, encumber or otherwise transfer, any Rights it receives pursuant to this Section 5.4 in respect of Preferred Shares. The agreements between the Corporation and Buyer in this paragraph 5.4(a) not to make adjustments under paragraph 8(g) of the Certificate of Determination under the circumstances set forth in this paragraph 5.4(a) shall constitute agreements as referred to in, and for the purposes of, paragraph 8(g)(vii) of the Certificate of Determination. (b) The rights and agreements in paragraph (a) of this Section 5.4 shall terminate in their entirety if all shares of Series A Preferred Stock have been either redeemed by the Corporation or converted into Common Stock. (c) If Buyer and the Corporation fail to agree on the price at which Buyer may purchase securities under paragraph (a) of this Section 5.4 within 30 days following receipt by the Buyer of a Pro-Rata Notice, then the items in dispute shall be referred to a nationally recognized investment banking firm or other third party arbitrator selected jointly by Buyer and the Corporation. The determination of such investment banking firm or other third party arbitrator shall be rendered within 30 days of such referral. The Corporation and Buyer shall share equally in payment of all fees and expenses of such investment banking firm or other third party arbitrator. All determinations made pursuant to this paragraph (c) shall be final and binding on the Buyer and the Corporation. 5.5 CHANGE OF CONTROL. (a) Subject to paragraphs 5.5(c) and (d) below, upon the occurrence of a Change of Control (the date of such occurrence being the CHANGE OF CONTROL DATE), the Corporation shall, to the extent funds are legally available therefor, make an offer (the CHANGE OF CONTROL OFFER) to Buyer to repurchase 100% of Buyer's shares of Series A Preferred Stock at a price per share in cash equal to (A) if the Change of Control Payment Date is prior to the First Call Date (as defined in the Certificate of Determination), 110% of the product of (i) one plus the number (or fraction) of shares of Series A Preferred Stock accrued and unpaid as dividends on such share to the Change of Control Payment Date, times (ii) the Conversion Ratio (as defined in the Certificate of Determination) in effect immediately prior to the Change of Control, times (iii) if the Change of Control is the result of a tender or exchange offer, merger or other form of business combination, the price paid per share of Common Stock in such tender or exchange offer, merger or other form of business combination (with the fair market value of any non-cash consideration being determined in good faith by the Board of Directors of the Corporation), or if the Change of Control is not the result of a tender or exchange offer, merger or other form of business combination, the 10-Day Market Price of the Common Stock on the Change of Control Date and (B) if the Change of Control Payment Date is on or after the First Call Date, the Redemption Price (as defined in the Certificate of Determination); provided, that Buyer shall not be entitled to tender any Series A Preferred Stock under this provision until such time as the Corporation has repurchased such debt securities as are required to be repurchased by the Corporation upon such event pursuant to the Corporation's credit and financing agreements. The Corporation shall promptly take all actions required to make such repurchases of debt securities. (b) The Corporation shall make the Change of Control Offer not later than 30 days following the Change of Control Date by giving notice to Buyer specifying a date, not less than 20 days nor more than 30 days after the date of such notice, on which the Corporation will purchase any shares of Series A Preferred Stock subject to such offer (the CHANGE OF CONTROL PAYMENT DATE). Not less than 2 Business Days prior to the Change of Control Payment Date, Buyer shall notify the Corporation (an ELECTION NOTICE) as to the number of shares of Series A Preferred Stock in respect of which Buyer is accepting the Change of Control 12 Offer. If Buyer does not deliver the Election Notice by such date, its rights under this Section 5.5 will terminate. If Buyer does deliver an Election Notice by such date, then (i) such Election Notice will be a binding commitment of Buyer to sell to the Corporation on the Change of Control Payment Date the number of shares of Preferred Stock specified in such Election Notice, subject to Section 5.5(a) and (ii) on the Change of Control Payment Date, (A) the Corporation will deliver to Buyer an amount of cash equal to the purchase price for the Series A Preferred Stock to be purchased and (B) Buyer will deliver to the Corporation free and clear of any Liens one or more certificates representing the Series A Preferred Stock to be sold duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto. (c) Notwithstanding the foregoing, the Corporation shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the price and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Corporation and purchases all shares of Series A Preferred Stock validly tendered under such Change of Control Offer. (d) The Corporation's obligations under this Section 5.5 are subject to compliance with the California Corporations Code. If the Corporation is limited by the California Corporations Code from fully complying with its obligations hereunder, the Corporation agrees that: (i) it will comply with its obligations hereunder to the extent it is able to do so and (ii) it will use its best efforts to remove any such legal impediment. If, at any time, the Corporation is obligated to make a Change of Control Offer hereunder but is not able to fully perform its obligations hereunder because of a legal impediment, Buyer may elect to have the Corporation defer such Change of Control Offer until the Corporation is legally able to fully perform its obligations hereunder. The Series A Preferred Stock will continue to accrue dividends until repurchased, redeemed or converted. 6. COVENANTS OF BUYER AND THE CORPORATION 6.1 REQUIRED REGULATORY APPROVALS; REASONABLE BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms of this Agreement, Buyer and the Corporation will, and will cause their Affiliates to, use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. The Corporation and Buyer agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 6.2 CERTAIN FILINGS. (a) The Corporation and Buyer will, and will cause their Affiliates to, cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement or the conversion by Buyer of Series A Preferred Stock and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Each of the Corporation and Buyer shall (A) give the other party prompt notice of the commencement of any action, suit, litigation, arbitration, preceding or investigation by or before any governmental body with respect to the transactions contemplated by this Agreement, and (B) keep the other party informed as to the status of any such action, suit, litigation, arbitration, preceding or investigation. 13 (b) The Corporation and Buyer will, and will cause their Affiliates to, take such actions, make such payments or commitments, and agree to such amendments to any of their respective franchises, licenses, contracts or other agreements or authorizations, as shall be required in order to obtain a consent, approval or waiver from any other Person in connection with the transactions contemplated hereby and by the Certificate of Determination (including conversion of the Series A Preferred Stock). 6.3 PUBLIC ANNOUNCEMENTS. Except as may be required by applicable law or any listing agreement with any national securities exchange or quotation system, the parties agree to consult with each other before issuing any press release or making any public statement or completing any public filing with respect to this Agreement or the transactions contemplated hereby and will not issue any such press release or make any such public statement prior to such consultation. 6.4 REGISTRATION RIGHTS AGREEMENT. The terms set forth in Exhibit B hereto are hereby incorporated by reference. The registration rights set forth in Exhibit B may be assigned by a Holder (as defined therein) to a transferee or assignee of the Preferred Shares or the Registrable Securities, provided that such transferee or assignee agrees to be bound to the terms of Exhibit B. The Corporation shall not, without the prior written consent of the Holder owning a majority-in-interest of the Preferred Shares or Registrable Securities, enter into an agreement which grants a Person registration rights superior to those granted in Exhibit B. 6.5 SEC REPORTS The Corporation hereby agrees that (a) the Corporation shall, within 90 days after the Closing Date, have filed all required SEC Reports through such date and delivered or made available to Buyer copies thereof, and as of the filing date of such SEC Reports (b) the SEC Reports shall comply in all material respects with all applicable requirements of the Exchange Act or the Securities Act, as the case may be and (c) none of the SEC Reports shall contain any untrue statement of a material fact or omit to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they will be made, not misleading. 7. SURVIVAL; INDEMNIFICATION 7.1 SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations and warranties contained in this Agreement and all claims with respect thereto shall terminate upon the expiration of 24 months after the date of this Agreement, except that the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.6, 4.1, 4.2, and 4.3 shall survive indefinitely. Notwithstanding the preceding sentence, any representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given in reasonable detail to the party against whom such indemnity may be sought prior to such time. 7.2 INDEMNIFICATION. (a) The Corporation hereby indemnifies Buyer against and agrees to hold Buyer harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) (DAMAGES) incurred or suffered by Buyer arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by the Corporation pursuant to this Agreement; provided that the Corporation's maximum liability under this Section 7.2(a) shall not exceed US$800,000. (b) Buyer hereby indemnifies the Corporation against and agrees to hold the Corporation harmless from any and all Damages incurred or suffered by the Corporation arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Buyer pursuant to this Agreement. 7.3 PROCEDURES. The party seeking indemnification under Section 7.2 (the INDEMNIFIED PARTY) agrees to give prompt notice to the party against whom indemnity is sought (the INDEMNIFYING PARTY) of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under such Section. The Indemnifying Party may at its election participate in and control the defense of any such suit, action or proceeding at its own expense. The Indemnifying Party shall not be liable under Section 7.2 for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder. 8. MISCELLANEOUS 8.1 NOTICES. All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed duly given, effective (i) two Business Days later, if sent by international overnight courier, return receipt requested (ii) when sent if sent by fax, provided that the receipt of the fax is promptly confirmed by telephone confirmation thereof, and (iii) when served, if delivered personally to the intended recipient, and in each case, addressed, if to Buyer, to: BlueBird Finance Limited P.O. Box 957 Road Town Tortola British Virgin Islands Attention: The Directors if to the Corporation, to: Signature Eyewear, Inc. 498 North Oak Street Inglewood, CA 90302 Attention: Michael Prince Chief Financial Officer Fax: (310) 330-2770 with a copy (not constituting notice) to: Jeffer, Mangels, Butler & Marmaro LLP 1900 Avenue of the Stars 7th Floor Los Angeles, CA 90067 Attention: Joseph A. Eisenberg, PC Fax: (310) 785-5357 15 Any party may change the address to which notices or other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 8.2 AMENDMENTS AND WAIVERS. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative. 8.3 EXPENSES. All costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. 8.4 ASSIGNMENT. The rights and obligations of the parties hereunder cannot be assigned or delegated without the prior written consent of the other party, except that (i) Buyer may assign all of its rights and obligations under this Agreement to an Affiliate (provided that (A) any such Affiliate continues to be a Affiliate of Buyer and (B) Buyer shall be responsible for any breach by such Affiliate) and (ii) Buyer may assign its rights and obligations under Section 6.4 and Exhibit B of this Agreement to the assignee of Series A Preferred Stock, provided such assignee agrees to be bound to the terms of such provisions and Exhibit. 8.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of California (excluding conflicts of law principles). 8.6 JURISDICTION. Except as otherwise expressly provided in this Agreement, the parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in a state or federal court of competent jurisdiction sitting in Los Angeles County, California and each of the parties hereby consents to the non-exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 8.1 shall be deemed effective service of process on such party. 8.7 COUNTERPARTS; THIRD PARTY BENEFICIARIES. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. No provision if this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies. 16 8.8 ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto) and the Certificate of Determination constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement. 8.9 HEADINGS. The headings herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. 8.10 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or entity or any circumstance, is held by a court of competent jurisdiction to be invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 8.11 SPECIFIC PERFORMANCE. The parties hereto agree that the remedy at law for any breach of this Agreement will be inadequate and that any party by whom this Agreement is enforceable shall be entitled to specific performance in addition to any other appropriate relief or remedy. Such party may, in its sole discretion, apply to any court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief. 8.12 NO RECOURSE. Notwithstanding any of the terms or provisions of this Agreement, (a) the Corporation agrees that neither it nor any Person acting on its behalf may assert any claims or cause of action against any officer, director, partner, member or stockholder of the Buyer or any of its Affiliates in connection with or arising out of this Agreement or the transactions contemplated hereby and (b) the Buyer agrees that neither it nor any Person acting on its behalf may assert any claims or cause of action against any officer, director, partner, member or stockholder of the Corporation or any of its Affiliates in connection with or arising out of this Agreement or the transactions contemplated hereby. 8.13 CALIFORNIA COMMISSIONER OF CORPORATIONS THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. SIGNATURE EYEWEAR, INC. BY: ______________________________ NAME: MICHAEL PRINCE TITLE: CHIEF FINANCIAL OFFICER BLUEBIRD FINANCE LIMITED BY: ______________________________ NAME: TITLE: 18 EXHIBIT A CERTIFICATE OF DETERMINATION OF SERIES A 2% CONVERTIBLE PREFERRED STOCK OF SIGNATURE EYEWEAR, INC. The undersigned hereby certify that: 1. They are the President and Secretary, respectively, of Signature Eyewear, Inc., a California corporation (CORPORATION). 2. The authorized number of shares of this Corporation's Preferred Stock is 5,000,000, and the number of shares of the Series A Preferred Stock (which is the series created by this Certificate of Determination) is 1,360,000. None of the shares of the Series A Preferred Stock has been issued. 3. Pursuant to authority granted by Article IV of this Corporation's Restated Articles of Incorporation, the following resolutions have been duly adopted and approved by this Corporation's Board of Directors: "WHEREAS, the Restated Articles of Incorporation of this Corporation provide for a class of shares known as Preferred Stock, issuable from time to time in one or more series; and WHEREAS, the Board of Directors of this Corporation is authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on any wholly unissued series of Preferred Stock, to fix a number of shares constituting any such series, and to determine the designation of that series, or any of them; and WHEREAS, the Board of Directors of this Corporation has determined it to be in the best interests of this Corporation and its shareholders to issue a Series A Preferred Stock and to fix the rights, preferences, privileges, and restrictions relating to that Series A Preferred Stock and the number of shares constituting that series; NOW, THEREFORE, BE IT HEREBY RESOLVED, THAT pursuant to Article IV of the Articles of Incorporation which authorizes 5,000,000 shares of preferred stock, $0.001 par value (PREFERRED STOCK), the Board of Directors hereby fixes the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of a series of Preferred Stock. RESOLVED FURTHER, that each share of such series of Preferred Stock shall rank equally in all respects and shall be subject to the following provisions: 1. NUMBER AND DESIGNATION. 1,360,000 shares of the Preferred Stock of the Corporation shall be designated as Series A 2% Convertible Preferred Stock (the SERIES A PREFERRED STOCK) (including 160,000 shares of Series A Preferred Stock reserved exclusively for the payment of dividends pursuant to paragraph 4 and referred to therein as "Additional Shares"). After the initial issuance of 1,200,000 shares of Series A Preferred Stock, the Corporation may not issue additional shares of Series A Preferred Stock except as Additional Shares issued in lieu of payment of dividends on outstanding shares of Series A Preferred Stock or upon the transfer, exchange or replacement of existing shares of Preferred Stock. 19 2. DEFINITIONS. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated. 10 DAY MARKET PRICE means the average of the daily Market Prices of the Common Stock for the 10 consecutive trading days ending the day prior to the date for which such value is to be computed 30 DAY MARKET PRICE means the average of the daily Market Prices of the Common Stock for the 30 consecutive trading days ending the day prior to the date for which such value is to be computed. AFFILIATE means, with respect to any specified Person, any other Person that, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling," and "controlled" have meanings correlative to the foregoing. BOARD OF DIRECTORS means the Board of Directors of the Corporation. BUSINESS DAY means any day except Saturday, Sunday and any day that is a legal holiday or a day on which banking institutions in Los Angeles, California generally are authorized or required by law or other governmental actions to close. CAPITAL STOCK means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of such Person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of indebtedness), warrants or options exchangeable for or convertible into such capital stock. CHANGE OF CONTROL means the occurrence of any of the following events: (a) any Person or Group is or becomes the beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the Corporation; or (b) the Corporation consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into the Corporation, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Corporation is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Corporation is converted into or exchanged for Voting Stock of the surviving or transferee corporation or its parent corporation and/or cash, securities or other property in an amount which could be paid by the Corporation under the terms of the Corporation's credit and financing agreements and (ii) immediately after such transaction no Person or Group is the beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation, as applicable; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Corporation was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. COMMON STOCK means the Corporation's common stock, par value $0.001 per share. 20 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder. FIRST CALL DATE means April 21, 2005. GROUP means a group within the meaning of Section 13(d)(3) of the Exchange Act. ISSUE DATE means the first date of issuance of shares of Series A Preferred Stock. HOLDER means a person who owns Series A Preferred Stock. LIQUIDATION PREFERENCE is an amount equal to US$0.67 per share plus accrued but unpaid dividends per share of Series A Preferred Stock. MARKET PRICE means, with respect to the Common Stock, on any given day, (i) the price of the last trade, as reported on the Nasdaq National Market, not identified as having been reported late to such system, or (ii) if the Common Stock is so quoted, but not so traded, the average of the last bid and ask prices, as those prices are reported on the Nasdaq National Market, or (iii) if the Common Stock is not listed or authorized for trading on the Nasdaq National Market or any comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose; provided that, in connection with (i) or (ii), the Corporation may from time to time specify in advance the time at which the trade price or bid and ask prices, respectively, shall be determined for purposes of a particular calculation . If the Common Stock is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be the fair value per share of such security as determined in good faith by the Board of Directors. OUTSTANDING, when used with reference to shares of stock, means issued shares, excluding shares held by the Corporation or a subsidiary. PERSON means an individual, corporation, partnership, limited liability company, association, trust and any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. REDEMPTION PREMIUM means US$450,000. VOTING STOCK means, with respect to any Person, the Capital Stock of any class or kind (other than the Series A Preferred Stock) ordinarily having the power to vote for the election of directors or other members of the governing body of such Person. 3. RANK. (a) Any class or series of stock of the Corporation shall be deemed to rank: (i) prior to the Series A Preferred Stock, either as to the payment of dividends or as to distribution of assets upon liquidation, dissolution or winding up, or both, if the holders of such class or series shall be entitled by the terms thereof to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up, in preference or priority to the holders of Series A Preferred Stock (SENIOR SECURITIES); (ii) on a parity with the Series A Preferred Stock, either as to the payment of dividends or as to distribution of assets upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Stock if the holders of the Series 21 A Preferred Stock and of such class of stock or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, or both, in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences (including, but not limited to preferences as to payment of dividends or other amounts distributable upon liquidation), without preference or priority one over the other and such class of stock or series is not a class of Senior Securities (PARITY SECURITIES); and (iii) junior to the Series A Preferred Stock, either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, or both, if such stock or series shall be Common Stock or if the holders of the Series A Preferred Stock shall be entitled by the terms thereof to receipt of dividends, and of amounts distributable upon liquidation, dissolution or winding up, in preference or priority to the holders of shares of such stock or series (including, but not limited to preferences as to payment of dividends or other amounts distributable upon liquidation) (JUNIOR SECURITIES). (b) The respective definitions of Senior Securities, Junior Securities and Parity Securities shall also include any rights or options exercisable or exchangeable for or convertible into any of the Senior Securities, Junior Securities and Parity Securities, as the case may be. (c) The Series A Preferred Stock shall be subject to the creation of Junior Securities and Parity Securities. 4. DIVIDENDS. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive with respect to each share of Series A Preferred Stock, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative dividends at a rate per annum equal to two percent (2%) of the then effective Liquidation Preference per share, payable in (A) cash, (B) additional shares of Series A Preferred Stock (ADDITIONAL SHARES) or (C) any combination of the foregoing in accordance with the terms of this paragraph 4; provided, however, that dividends must be payable solely in cash unless, with respect to each Dividend Payment Date (as hereinafter defined) on which the Corporation elects to pay all or a portion of the applicable dividend in Additional Shares, the Corporation delivers to the holders a certified resolution of the Board of Directors of the Corporation finding that payment of the dividend solely in cash would materially adversely affect the financial condition of the Corporation; and provided, further, however that the Corporation may not issue Additional Shares in lieu of cash dividends unless sufficient shares of Series A Preferred Stock remain authorized and available for issuance. Such dividends shall be cumulative from the Issue Date regardless of when actually issued (except that dividends on Additional Shares shall accrue from the date such Additional Shares are issued), whether or not in any Dividend Period or Dividend Periods there shall be funds of the Corporation legally available for the payment of such dividends and whether or not dividends are declared, and shall be payable on April 21 of each year (unless such day is not a Business Day, in which event such dividends shall be payable on the next succeeding Business Day) (each such date being a DIVIDEND PAYMENT DATE and each such annual period being a DIVIDEND PERIOD). Each such dividend shall be payable to the holders of record of shares of the Series A Preferred Stock as they appear on the share register of the Corporation on the corresponding Record Date. As used herein, the term RECORD DATE means, with respect to the dividend payable on April 21 of each year, the date 45 days preceding April 21. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such record date, not more than 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. Dividends shall accumulate to the extent that they are not paid on the Dividend Payment Date for the Dividend Period to which they relate. 22 (b) Holders of shares of Series A Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series A Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Stock that may be in arrears; provided that if dividends are not paid in full on any Dividend Payment Date, the amount so payable, to the extent not paid, shall be added to the then effective Liquidation Preference on such Dividend Payment Date. (c) So long as any shares of the Series A Preferred Stock are outstanding, no dividend, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any Parity Securities, nor shall any Parity Securities be redeemed, purchased or otherwise acquired for any consideration (or moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly, (except by conversion into or exchange for Junior Securities) unless in each case full cumulative dividends have been or contemporaneously are declared and paid or declared and consideration sufficient for the payment thereof set apart for such payment on the Series A Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Securities or the redemption, purchase or other acquisition thereof. When dividends are not paid in full or consideration sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Series A Preferred Stock and all dividends declared upon any other class or series of Parity Securities shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series A Preferred Stock and accumulated and unpaid on such Parity Securities. (d) So long as any shares of the Series A Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or to effectuate a stock split on, or options, warrants or rights to subscribe for or purchase shares of, Junior Securities) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan of the Corporation or any subsidiary) (any such dividend, distribution, redemption or purchase being hereinafter referred to as a JUNIOR SECURITIES DISTRIBUTION) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Securities), unless in each case (i) the full cumulative dividends on all outstanding shares of the Series A Preferred Stock and accrued and unpaid dividends on any other Parity Securities shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series A Preferred Stock and all past dividend periods with respect to such Parity Securities and (ii) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and the current dividend period with respect to such Parity Securities. (e) The number of Additional Shares to be issued as dividends in lieu of cash will equal the quotient of (X) the cash amount of the dividend that otherwise would have been payable in cash and (Y) the then effective Liquidation Preference per share. 5. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of Junior Securities, the holders of the shares of Series A Preferred Stock shall be entitled to receive with respect to each share of Series A Preferred Stock an amount in cash equal to the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid thereon to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on the Series A Preferred Stock and all Parity Securities, then such assets, or the proceeds thereof, shall 23 be distributed among the holders of shares of Series A Preferred Stock and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of Series A Preferred Stock and any such other Parity Securities if all amounts payable thereon were paid in full. (b) Subject to the rights of the holders of any Parity Securities, after payment shall have been made in full to the holders of the Series A Preferred Stock, as provided in this paragraph 5, any other series or class or classes of Junior Securities shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Preferred Stock and any Parity Securities shall not be entitled to share therein. 6. REDEMPTION. (a) The Series A Preferred Stock shall not be redeemable by the Corporation prior to the First Call Date. On and after the First Call Date, to the extent the Corporation shall have funds legally available for such payment, the Corporation may redeem at its option all the shares of Series A Preferred Stock, at any time in whole only at a redemption price per share equal to the Liquidation Preference (which for the avoidance of doubt shall be deemed to include all accrued and unpaid dividends thereon) plus the Redemption Premium thereon to the date fixed for redemption (the REDEMPTION PRICE). (b) (i) Subject to paragraphs (iii) and (iv) below, upon the occurrence of a Change of Control (the date of such occurrence being the CHANGE OF CONTROL DATE), the Corporation shall, to the extent funds are legally available therefor, make an offer (the CHANGE OF CONTROL OFFER) to Holders to repurchase 100% of each Holder's share of Series A Preferred Stock at a price per share in cash equal to (A) if the Change of Control Payment Date is prior to the First Call Date, 110% of the product of (x) one plus the number (or fraction) of shares of Series A Preferred Stock accrued and unpaid as dividends on such share to the Change of Control Payment Date, times (y) the Conversion Ratio (as defined in paragraph 8) in effect immediately prior to the Change of Control, times (z) if the Change of Control is the result of a tender or exchange offer, merger or other form of business combination, the price paid per share of Common Stock in such tender or exchange offer, merger or other form of business combination (with the fair market value of any non-cash consideration being determined in good faith by the Board of Directors of the Corporation), or if the Change of Control is not the result of a tender or exchange offer, merger or other form of business combination, the 10-Day Market Price of the Common Stock on the Change of Control Date and (B) if the Change of Control Payment Date is on or after the First Call Date, the Redemption Price; provided, that a Holder shall not be entitled to tender any Series A Preferred Stock under this provision until such time as the Corporation has repurchased such debt securities as are required to be repurchased by the Corporation upon such event pursuant to the Corporation's credit and financing agreements. The Corporation shall promptly take all actions required to make such repurchases of debt securities. (ii) The Corporation shall make the Change of Control Offer not later than 30 days following the Change of Control Date by giving notice to each Holder specifying a date, not less than 20 days nor more than 30 days after the date of such notice, on which the Corporation will purchase any shares of Series A Preferred Stock subject to such offer (the CHANGE OF CONTROL PAYMENT DATE). Not less than 2 Business Days prior to the Change of Control Payment Date, each Holder shall notify the Corporation (an ELECTION NOTICE) as to the number of shares of Series A Preferred Stock in respect of which it is accepting the Change of Control Offer. If a Holder does not deliver the Election Notice by such date, its rights under this paragraph 6(b) will terminate. If a Holder does deliver an Election Notice by such date, then (A) such Election Notice will be a binding commitment of such Holder to sell to the Corporation on the Change of Control Payment Date the number of shares of Preferred Stock specified in such Election Notice, subject to paragraph 6(b)(i) and (B) on the Change of Control Payment Date, (x) the Corporation will deliver to such Holder an amount of cash equal to the purchase price for the Series A Preferred 24 Stock to be purchased and (y) such Holder will deliver to the Corporation free and clear of any Liens one or more certificates representing the Series A Preferred Stock to be sold duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto. (iii) Notwithstanding the foregoing, the Corporation shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the price and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Corporation and purchases all shares of Series A Preferred Stock validly tendered under such Change of Control Offer. (iv) The Corporation's obligations under this paragraph 6(b) are subject to compliance with the California Corporations Code. If the Corporation is limited by the California Corporations Code from fully complying with its obligations hereunder, the Corporation agrees that: (A) it will comply with its obligations hereunder to the extent it is able to do so and (B) it will use its best efforts to remove any such legal impediment. If, at any time, the Corporation is obligated to make a Change of Control Offer hereunder but is not able to fully perform its obligations hereunder because of a legal impediment, each Holder may elect to have the Corporation defer such Change of Control Offer until the Corporation is legally able to fully perform its obligations hereunder. The Series A Preferred Stock will continue to accrue dividends until repurchased, redeemed or converted. (c) If the Shares of Series A Preferred Stock are purchased or redeemed, then they shall (upon compliance with any applicable provisions of the laws of the State of California) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock; provided that no such issued and reacquired shares of Series A Preferred Stock shall be reissued or sold as Series A Preferred Stock. 7. PROCEDURE FOR REDEMPTION. (a) In the event the Corporation shall elect to redeem shares of Series A Preferred Stock, notice of such redemption (the REDEMPTION NOTICE) shall be given by international overnight courier or first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date (the REDEMPTION DATE), to each Holder of record of the shares to be redeemed at such Holder's address as the same appears on the stock register of the Corporation. Each Redemption Notice shall state: (i) the Redemption Date (which shall be a date on or after the First Call Date); (ii) the number of shares of Series A Preferred Stock to be redeemed, which shall be all the shares held by such holder; (iii) the Redemption Price; (iv) that on the Redemption Date, the Redemption Price, will become due and payable upon each such share of Series A Preferred Stock to be redeemed and that dividends thereon will cease to accrue on and after said date; (v) (if the Redemption Date is stated to be at any time after 30 days following the First Call Date) the Conversion Ratio, the date on which the right to convert shares of Series A Preferred Stock to be redeemed will terminate and the place or places where such shares of Series A Preferred Stock may be surrendered for conversion; and (vi) the place or places where certificates for such shares are to be surrendered for payment of the redemption price. (b) Prior to such Redemption Date, the Corporation, in its capacity acting as its own paying agent, shall segregate and hold in trust an amount of consideration sufficient to pay the Redemption Price of all the shares of Series A Preferred Stock that are to be redeemed on the Redemption Date. If the Redemption Date is stated to be at any time after 30 days following the First Call Date and any share of Series A Preferred Stock called for redemption is converted, any consideration so segregated and held in trust for the redemption of such share of Series A Preferred Stock shall be discharged from such trust. (c) Redemption Notice having been mailed as aforesaid, from and after the Redemption Date, dividends on the shares of Series A Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as 25 stockholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such share shall be redeemed by the Corporation at the Redemption Price aforesaid. 8. CONVERSION. (a)(i) Subject to the provisions of this paragraph 8, (A) a holder of shares of Series A Preferred Stock shall have the right, on or after the date which is 30 days after the First Call Date (or, in the event that a Change of Control has occurred, at any time), at such holder's option, to convert any or all outstanding shares (and fractional shares) of Series A Preferred Stock held by such holder, in whole or in part, into fully paid and non-assessable shares of Common Stock. (ii) The number of shares of Common Stock deliverable upon conversion of a share of Series A Preferred Stock (including the Additional Shares), subject to adjustment as hereinafter provided, shall be 1.0 (the CONVERSION RATIO). In the event that at the time of conversion of a share of Series A Preferred Stock there are accrued and unpaid dividends on such share with respect to which Additional Shares have not been issued (including, with respect to any interim period since the last Dividend Payment Date, the product of the full dividend payable for the current Dividend Period ending on the next Dividend Payment Date, multiplied by a fraction, the numerator of which is the number of days that have elapsed since the last Dividend Payment Date and the denominator of which is 360), then, upon such conversion, the holder thereof shall be entitled to receive such number of shares of Common Stock (in addition to the shares of Common Stock otherwise issuable upon the conversion of any such shares of Series A Preferred Stock and Additional Shares converted therewith) as would have been issued in accordance with the preceding sentence if Additional Shares had been issued in respect of such accrued and unpaid dividends and had been converted simultaneously therewith. (b)(i) In connection with any Conversion pursuant to this paragraph 8, the holder of the shares of Series A Preferred Stock to be converted shall surrender the certificates representing such shares at the office of the Corporation with a written notice (a CONVERSION NOTICE) of election to convert completed and signed, specifying the number of shares to be converted. Unless the shares issuable on conversion are to be issued in the same name as the name in which such shares of Series A Preferred Stock are registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or the holder's duly authorized attorney, and an amount sufficient to pay any transfer or similar tax. (ii) As promptly as practicable after the surrender by a holder of certificates for shares of Series A Preferred Stock under paragraph 8(b)(i), the Corporation shall issue and shall deliver to such holder, or on the holder's written order to the holder's transferee, (w) a certificate or certificates for the whole number of shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this paragraph 8, (x) any cash adjustment required pursuant to paragraph 8(f) and (y) in the event of a conversion in part, a certificate or certificates for the whole number of Series A Preferred Stock not being so converted. (iii) Each conversion shall be deemed to have been effected (the EFFECTIVE TIME) immediately prior to the close of business on the date of delivery of the Conversion Notice. At the Effective Time, the Person in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby at such time on such date and such conversion shall be into a number of whole shares of Common Stock in the aggregate equal to the product of the number of shares of Series A Preferred Stock surrendered and the Conversion Ratio in effect at such time on such date. All shares of Common Stock delivered upon conversion of the Series A Preferred Stock 26 will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. At the Effective Time, the shares to be so converted shall no longer be deemed to be outstanding and all rights of a holder with respect to such shares surrendered for conversion shall immediately terminate except the right to receive the Common Stock and other amounts payable pursuant to this paragraph 8 and a certificate or certificates representing the shares of Series A Preferred Stock not converted. (c)(i) Upon delivery to the Corporation of a Conversion Notice by a holder of shares of Series A Preferred Stock, the right of the Corporation to redeem such shares of Series A Preferred Stock shall terminate, regardless of whether a notice of redemption has been mailed pursuant to paragraph 7. (ii) Except as provided above and in paragraph 8(g), the Corporation shall make no payment or adjustment for accrued and unpaid dividends on shares of Series A Preferred Stock, whether or not in arrears, on conversion of such shares or for dividends in cash on the shares of Common Stock issued upon such conversion. (d)(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Series A Preferred Stock. (ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Series A Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation. (e) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Series A Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Series A Preferred Stock to be converted and no such issue or delivery shall be made unless and until the Person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (f) In connection with the conversion by a holder of any shares of Series A Preferred Stock, no fractions of shares of Common Stock shall be required to be issued to such holder, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest on the business day on which such shares of Series A Preferred Stock are deemed to have been converted. (g)(i) In case the Corporation shall at any time after the date of issue of the Series A Preferred Stock (A) declare a dividend or make a distribution on Common Stock payable in Common Stock, (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a smaller number of shares, (D) issue any shares of its Capital Stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) or, (E) consolidate with, or merge with or into, any other Person, or engage in any reorganization, recapitalization, sale of all or substantially all of the Corporation's assets to any entity or any other transaction which, in the case of any of the transactions referred in this subclause (E), is effected in such a manner that the holders of Common Stock are entitled to receive stock, securities or assets with respect to or in exchange for Common Stock (any such transaction described in this subclause (E), an ORGANIC CHANGE), the Conversion Ratio in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, split, combination, consolidation, merger, reclassification or Organic Change shall be proportionately adjusted, or other provision shall be made, so that the conversion of the Series A Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock, or other securities of the Corporation (or shares of any security or cash or other property into which such shares of Common Stock have 27 been combined, consolidated, merged, reclassified or changed, or which were otherwise receivable with respect to or in exchange for shares of Common Stock, pursuant to paragraph 8(g)(i)(C), 8(g)(i)(D) or 8(g)(i)(E) above) which, if the Series A Preferred Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger, reclassification or Organic Change, assuming such holder of Common Stock of the Corporation (x) is not a Person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or in connection with which such reclassification or Organic Change was made, as the case may be (CONSTITUENT PERSON), or an affiliate of a Constituent Person and (y) failed to exercise any rights of election as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change (provided, that if the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change, is not the same for each share of Common Stock of the Corporation held immediately prior to such reclassification, change, consolidation, merger or Organic Change by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised (NON-ELECTING share), then for the purpose of this paragraph 8(g) the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger or Organic Change by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such adjustment shall be made successively whenever any event listed above shall occur. (ii) In case the Corporation shall issue or sell any Common Stock (other than Common Stock issued (A) pursuant to the Corporation's existing or future stock option plans or pursuant to any other existing or future Common Stock-related director or employee compensation plan of the Corporation approved by the Board of Directors, (B) as consideration for the acquisition of a business or of assets, (C) in a firmly committed underwritten public offering, (D) to the Corporation's joint venture partners in exchange for interests in the relevant joint venture, (E) upon conversion of shares of any series of Preferred Stock or (F) upon exercise or conversion of any security the issuance of which caused an adjustment under paragraph 8(g)(i), 8(g)(iii) or 8(g)(iv) hereof or the issuance of which did not require adjustment hereunder) without consideration or for a consideration per share less than the 30 Day Market Price on the date of such issuance, or shall issue securities convertible into Common Stock (other than such securities paid as dividends on any class of Preferred Stock) having a conversion price per share less than the 30 Day Market Price at the date of issuance of such convertible security, the Conversion Ratio to be in effect after such issuance or sale shall be determined by multiplying the Conversion Ratio in effect immediately prior to such issuance or sale by a fraction, (1) the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance or sale and the number of additional shares of Common Stock to be issued or sold (or, in the case of convertible securities, issued on conversion), and (2) the denominator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issuance or sale and (y) the number of shares of Common Stock which the aggregate consideration receivable by the Corporation for the total number of additional shares of Common Stock so issued or sold (or issuable on conversion) would purchase at the 30 Day Market Price in effect on the date of such issuance or sale. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such noncash consideration shall be utilized in the foregoing computation. Such fair market value shall be determined in good faith by the Board of Directors. (iii) In case the Corporation shall fix a record date for the issuance of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into shares of Common Stock) at a price per share of Common Stock (or having a conversion price per share of Common Stock, if a security convertible into shares of Common Stock) less than the 30 Day Market Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Conversion Ratio shall be adjusted pursuant to paragraph 8(g)(ii) hereof, as though such maximum number of shares of Common Stock had been so issued for an 28 aggregate consideration payable by the holders of such rights, options, warrants or convertible securities prior to their receipt of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value of such noncash consideration shall be determined as set forth in paragraph 8(g)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed. In the event that after fixing a record date such rights, options or warrants are not so issued, the Conversion Ratio shall be readjusted to the Conversion Ratio that would then be in effect if such record date had not been fixed. In the event that such rights, options or warrants expire in whole or in part unexercised or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this paragraph 8(g)), the Conversion Ratio shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Conversion Ratio shall be the Conversion Ratio that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Conversion Ratio shall be adjusted pursuant to paragraph 8(g)(ii) to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled, the Conversion Ratio shall be adjusted to reflect the Conversion Ratio which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Conversion Ratio shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Conversion Ratio was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this clause 8(g)(iii). (iv) In case the Corporation shall fix a record date for the making of a distribution to holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of evidences of indebtedness, assets or other property (other than dividends or distributions for which an adjustment is made pursuant to paragraph 8(g)(i) or 8(g)(iii) hereof), the Conversion Ratio to be in effect after such record date shall be determined by multiplying the Conversion Ratio in effect immediately prior to such record date by a fraction, (A) the numerator of which shall be the 30 Day Market Price on such record date, and (B) the denominator of which shall be the 30 Day Market Price on such record date, less the fair market value (determined as set forth in paragraph 8(g)(ii) hereof) of the portion of the assets, other property or evidence of indebtedness so to be distributed which is applicable to one share of Common Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Conversion Ratio shall again be adjusted to be the Conversion Ratio which would then be in effect if such record date had not been fixed. (v) No adjustment to the Conversion Ratio pursuant to paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Ratio; provided however, that any adjustments which by reason of this paragraph 8(g)(v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 8(g) shall be made to the nearest four decimal points. (vi) In the event that, at any time as a result of the provisions of this paragraph 8(g), a holder of Series A Preferred Stock upon subsequent conversion shall become entitled to receive any shares of Capital Stock of the Corporation other than Common Stock, the number of such other shares so receivable upon conversion of Series A Preferred Stock shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained herein. (h) All adjustments pursuant to this paragraph 8 shall be notified to the holders of the Series A Preferred Stock and such notice shall be accompanied by a schedule of computations of the adjustments. 29 (i) In the event that any adjustment is made to the Conversion Ratio, a corresponding adjustment shall be made to the number of shares of Common Stock issuable upon conversion in respect of accrued and unpaid dividends, pursuant to the second sentence of paragraph 8(a)(ii). 9. VOTING RIGHTS. (a) The holders of Series A Preferred Stock shall not be entitled to vote with the holders of Common Stock except with respect to shares of the Series A Preferred Stock that have been converted into Common Stock. (b) If and whenever two dividends payable on the Series A Preferred Stock have not been paid in full, the number of directors then constituting the Board of Directors shall be increased by two and the holders of shares of Series A Preferred Stock, voting as a single class, shall be entitled to elect the additional directors to serve on the Board of Directors at any annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the holders of the Series A Preferred Stock called as hereinafter provided. Whenever all arrears in dividends on the Series A Preferred Stock then outstanding shall have been paid and dividends thereon for the current dividend period shall have been paid or declared and set apart for payment, then the right of the holders of the Series A Preferred Stock to elect such additional directors shall cease (but subject always to the same provisions for the vesting of such voting rights in the case of any similar future arrearage in two dividends), and the term of office of any person elected as director by the holders of the Series A Preferred Stock shall forthwith terminate and the number of the Board of Directors shall be reduced accordingly. At any time after voting power to elect a director shall have become vested and be continuing in the holders of Series A Preferred Stock pursuant to this paragraph, or if a vacancy shall exist in the office of a director elected by the holders of Series A Preferred Stock, a proper officer of the Corporation may, and upon the written request of the holders of record of at least ten percent (10%) of the shares of Series A Preferred Stock then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the holders of Series A Preferred Stock for the purpose of electing the director which such holders are entitled to elect. If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of at least ten percent (10%) of the outstanding shares of Series A Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders. Any holder of Series A Preferred Stock so designated shall have, and the Corporation shall provide, access to the lists of stockholders to be called pursuant to the provisions hereof. (c) Without either (i) the written consent of holders of a majority of the outstanding shares of Series A Preferred Stock or (ii) the vote of holders of a majority of the outstanding shares of Series A Preferred Stock which vote is taken at a meeting of the holders of Series A Preferred Stock called for such purpose, the Corporation will not amend, alter or repeal any provision of the Articles of Incorporation or this Certificate of Determination (including by way of merger), so as to adversely affect the preferences, rights or powers of the Series A Preferred Stock; provided that any such amendment that changes the dividend payable on or the Liquidation Preference of the Series A Preferred Stock shall require either (i) the written consent of holders of two-thirds of the outstanding shares of Series A Preferred Stock (ii) or the vote of holders of two-thirds of the outstanding shares of Series A Preferred Stock which vote is taken at a meeting of the holders of Series A Preferred Stock called for such purpose. (d) Without either (i) the written consent of holders of a majority of the outstanding shares of Series A Preferred Stock or (ii) the vote of holders of a majority of the outstanding shares of Series A Preferred Stock which vote is 30 taken at a meeting of such holders called for such purpose, the Corporation will not create, authorize or issue any Senior Securities nor split or combine the Preferred Stock. (e) The Corporation shall not, in a single transaction or series of related transactions, consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person or adopt a plan of liquidation unless: either (1) the Corporation is the surviving or continuing Person and the Series A Preferred Stock shall remain outstanding without any amendment that would adversely affect the preferences, rights or powers of the Series A Preferred Stock or (2) (i) the Person (if other than the Corporation) formed by such consolidation or into which the Corporation is merged or the Person which acquires by conveyance, transfer or lease the properties and assets of the Corporation substantially as an entirety or in the case of a plan of liquidation, the Person to which assets of the Corporation have been transferred, shall be a corporation, partnership or trust organized and existing under the laws of the United States or any State thereof or the District of Columbia and (ii) the Series A Preferred Stock shall be converted into or exchanged for and shall become shares of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person, the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Preferred Stock had immediately prior to such transaction except as provided in paragraph 8(g)(i). (f) In exercising the voting rights set forth in Clauses (b), (c) and (d) of this paragraph 9, each shares of Series A Preferred Stock shall have one vote per share. (g) The consent or votes required above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's articles of incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation or as otherwise required by applicable law or the Corporation's Articles of Incorporation or bylaws. 10. REPORTS. So long as any of the Series A Preferred Stock is outstanding, in the event the Corporation is not required to file quarterly and annual financial reports with the Securities and Exchange Commission pursuant to Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish the holders of the Series A Preferred Stock with reports containing the same information as would be required in such reports at the same time such reports would be required to be filed if the Corporation were required to file reports with the Securities and Exchange Commission. 11. GENERAL PROVISIONS. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Determination are for convenience of reference only and shall not define, limit or affect any of the provisions hereof." 31 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: ______________, 2003 _____________________________ __________________, President _____________________________ __________________, Secretary 32 EXHIBIT B REGISTRATION RIGHTS This constitutes Exhibit B to the Stock Purchase Agreement (as it may be amended from time to time, the STOCK PURCHASE AGREEMENT) dated as of April 21, 2003 between Signature Eyewear, Inc., a California corporation (the CORPORATION), and Bluebird Finance Limited, a British Virgin Islands corporation (BUYER). ARTICLE 1 DEFINITIONS Definitions. Terms defined in the Stock Purchase Agreement are used herein as therein defined. In addition, the following terms, as used herein, have the following meanings: COMMISSION means the Securities and Exchange Commission. CONVERSION SHARES means shares of Common Stock issued upon conversion of the Series A Preferred Stock. HOLDER means a person who owns Registrable Securities and is either Buyer or a transferee of the Buyer who has agreed in writing to be bound by the terms of Sections 2.3 and 6.4 of the Stock Purchase Agreement and this Exhibit B. PIGGYBACK REGISTRATION means a piggyback registration as defined in Section 2.02 of this Exhibit B. REGISTRABLE SECURITIES means (i) shares of Common Stock constituting Conversion Shares, (ii) shares of Common Stock acquired under Section 5.4 of the Stock Purchase Agreement, and (iii) any additional shares of Common Stock issued in respect of the shares referred to in (i) and (ii) in connection with a stock split, stock dividend or similar event with respect to the Common Stock. As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities as soon as they (i) have been sold or otherwise disposed of pursuant to a registration statement that was filed with the Commission and declared effective under the Securities Act, (ii) are eligible for sale pursuant to Rule 144 without being subject to applicable volume limitations thereunder, (iii) have been otherwise sold, transferred or disposed of by a Holder to any Person that is not a Holder, or (iv) have ceased to be outstanding. RULE 144 means Rule 144 (or any successor rule of similar effect) promulgated under the Securities Act. SELLING HOLDER means any Holder who is selling Registrable Securities pursuant to a public offering registered hereunder. UNDERWRITER means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer's market-making activities. SECTION 1.02. Internal References. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Exhibit B, and references to the parties shall mean the parties to the Stock Purchase Agreement. ARTICLE 2 REGISTRATION RIGHTS SECTION 2.01. Demand Registration. (a) Buyer, on its own behalf and on behalf of the other Holders, may make up to two written requests for registration under the Securities Act of all or any part of the Registrable Securities held by the 33 Holders (each, a DEMAND REGISTRATION). Such request will specify the aggregate number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. A registration will not count as a Demand Registration until it has become effective. Should a Demand Registration not become effective due to the failure of a Holder to perform its obligations under this Exhibit B or the inability of the requesting Holders to reach agreement with the Underwriters for the proposed sale on price or other customary terms for such transaction, or in the event the requesting Holders withdraw or do not pursue the request for the Demand Registration (in each of the foregoing cases, provided that at such time the Corporation is in compliance in all material respects with its obligations under this Exhibit B), then such Demand Registration shall be deemed to have been effected (provided that if the Demand Registration does not become effective because of a material adverse change in the condition (financial or otherwise), business, assets or results of operations of the Corporation and its subsidiaries taken as a whole that occurs subsequent to the date of the written request made by the requesting Holders, then the Demand Registration shall not be deemed to have been effected). (b) In the event that the requesting Holders withdraw or do not pursue a request for a Demand Registration and, pursuant to Section 2.01(a) hereof, such Demand Registration is deemed to have been effected, the Holders may reacquire such Demand Registration (such that the withdrawal or failure to pursue a request will not count as a Demand Registration hereunder) if the Holders reimburse the Corporation for any and all Registration Expenses incurred by the Corporation in connection with such request for a Demand Registration; provided that the right to reacquire a Demand Registration may be exercised a maximum of two times. (c) If the Selling Holders so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. A majority in interest of the Selling Holders shall have the right to select the managing Underwriters and any additional investment bankers and managers to be used in connection with such offering, subject to the Corporation's approval, which approval shall not be unreasonably withheld. (d) The Selling Holders will inform the Corporation of the time and manner of any disposition of Registrable Securities, and agree to reasonably cooperate with the Corporation in effecting the disposition of the Registrable Securities in a manner that does not unreasonably disrupt the public trading market for the Common Stock. (e) The Corporation will have the right to preempt any Demand Registration with a primary registration by delivering written notice (within five business days after the Corporation has received a request for such Demand Registration) of such intention to the Selling Holders indicating that the Corporation has identified a specific business need and use for the proceeds of the sale of such securities and the Corporation shall use commercially reasonable efforts to effect a primary registration within 60 days of such notice. In the ensuing primary registration, the Holders will have such piggyback registration rights as are set forth in Section 2.02 hereof. Upon the Corporation's preemption of a requested Demand Registration, such requested registration will not count as a Demand Registration; provided that a Demand Registration will not be deemed preempted if the Holders are permitted to sell all requested securities in connection with the ensuing primary offering by exercising their piggyback registration rights as set forth in Section 2.02 hereof. The Corporation may exercise the right to preempt only twice in any 360-day period; provided, that during any 360 day period there shall be a period of at least 120 consecutive days during which the Selling Holders may effect a Demand Registration. (f) Subject to Section 2.03 hereof, the Corporation will be entitled to include in a Demand Registration shares of Common Stock for its own account or for the account of other Persons. (g) Notwithstanding anything to the contrary contained herein, the Corporation shall be entitled to (i) postpone the filing of the Registration Statement required to be prepared and filed by it hereunder or (ii) withdraw the Registration Statement after its filing but before it has been declared effective, if, in either case, the Corporation in its good faith discretion determines that there has occurred or is occurring a material non-public event which such registration would interfere with or which cannot at such time be disclosed in the registration statement or if such registration statement would interfere in any material respect with any proposal or plan by the Corporation to engage in any financing or any material 34 acquisition or disposition by the Corporation or any subsidiary thereof of the capital stock or substantially all of the assets of any other Person (other than in the ordinary course of business), any tender offer or any offering, merger, consolidation, corporate reorganization or restructuring (MATERIAL EVENT). In the event the filing of the Registration Statement is postponed or withdrawn in accordance with this section 2.01(g), the Corporation shall file or refile the Registration Statement within ten (10) Business Days after the Corporation, in its good faith discretion, determines that the Material Event has been completed or terminated. (h) The Corporation shall disclose to the Selling Holders the nature of any Material Event for which it has delayed or withdrawn the Registration Statement or suspended the use of the Prospectus, provided the Selling Holders agree in writing to keep any information so disclosed confidential and not complete any trades of Common Stock until the Corporation informs the Selling Holders the information is considered public information or is no longer material, such notification to the Selling Holders to be given promptly after the information is considered public or is no longer material. SECTION 2.02. Piggyback Registration. If the Corporation proposes to file a registration statement under the Securities Act with respect to an offering of Common Stock for its own account or for the account of another Person (other than a registration statement on Form S-4 or S-8 or pursuant to Rule 415 (or any substitute form or rule, respectively, that may be adopted by the Commission)), the Corporation shall give written notice of such proposed filing to the Holders at the address set forth in the share register of the Corporation as soon as reasonably practicable (but in no event less than 10 days before the anticipated filing date), and such notice shall offer each Holder the opportunity to register on the same terms and conditions such number of shares of Registrable Securities as such Holder may request (A PIGGYBACK REGISTRATION). Each Holder will have five business days after receipt of any such notice to notify the Corporation as to whether it wishes to participate in a Piggyback Registration; provided that should a Holder fail to provide timely notice to the Corporation, such Holder will forfeit any rights to participate in the Piggyback Registration with respect to such proposed offering. In the event that the registration statement is filed on behalf of a Person other than the Corporation, the Corporation will use its best efforts to have the shares of Registrable Securities that the Holders wish to sell included in the registration statement. If the Corporation shall determine in its sole discretion not to register or to delay the proposed offering, the Corporation may, at its election, provide written notice of such determination to the Holders and (i) in the case of a determination not to effect the proposed offering, shall thereupon be relieved of the obligation to register such Registrable Securities in connection therewith, and (ii) in the case of a determination to delay a proposed offering, shall thereupon be permitted to delay registering such Registrable Securities for the same period as the delay in respect of the proposed offering. As between the Corporation and the Selling Holders, the Corporation shall be entitled to select the Underwriters in connection with any Piggyback Registration. SECTION 2.03. Reduction of Offering. Notwithstanding anything contained herein, if the managing Underwriter of an offering described in Section 2.01 or 2.02 hereof states in writing that the size of the offering that Holders, the Corporation and any other Persons intend to make is such that the inclusion of the Registrable Securities would be likely to materially and adversely affect the price, timing or distribution of the offering, then the amount of Registrable Securities to be offered for the account of Holders shall be reduced to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing Underwriter; provided that in the case of a Piggyback Registration, if securities are being offered for the account of Persons other than the Corporation, then the proportion by which the amount of Registrable Securities intended to be offered for the account of Holders is reduced shall not exceed the proportion by which the amount of securities intended to be offered for the account of such other Persons (other than any Person exercising a demand registration right) is reduced; provided further that in the case of a Demand Registration, the amount of Registrable Securities to be offered for the account of the Holders making the Demand Registration shall be reduced only after the amount of securities to be offered for the account of the Corporation and any other Persons has been reduced to zero. In the event of a reduction pursuant to this Section 2.03 of Registrable Securities to be offered for the account of Holders, such reduction shall be pro rata among such Holders based on the number of Registrable Securities each Holder had proposed to sell. 35 SECTION 2.04. Preservation of Rights. The Corporation will not grant any registration rights to third parties that contravene or are inconsistent with the rights granted hereunder. ARTICLE 3 REGISTRATION PROCEDURES SECTION 3.01. Filings; Information. In connection with a Demand Registration pursuant to Section 2.01 hereof, the Corporation will use its reasonable best efforts to effect the registration of such Registrable Securities as promptly as is reasonably practicable, and in connection with any such request: (a) The Corporation will expeditiously prepare and file with the Commission a registration statement on any form for which the Corporation then qualifies and which counsel for the Corporation shall deem appropriate and available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its reasonable best efforts to cause such filed registration statement to become and remain effective for such period, not to exceed 60 days, as may be reasonably necessary to effect the sale of such securities; and provided that if (i) the effective date of any registration statement filed pursuant to a Demand Registration would otherwise be at least 45 calendar days, but fewer than 90 calendar days, after the end of the Corporation's fiscal year, and (ii) the Securities Act requires the Corporation to include audited financials as of the end of such fiscal year, the Corporation may delay the effectiveness of such registration statement for such period as is reasonably necessary to include therein its audited financial statements for such fiscal year. (b) The Corporation will, if requested, prior to filing such registration statement or any amendment or supplement thereto, furnish to the Selling Holders, and each applicable managing Underwriter, if any, copies thereof, and thereafter furnish to the Selling Holders and each such Underwriter, if any, such number of copies of such registration statement, amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and the prospectus included in such registration statement (including each preliminary prospectus) as the Selling Holders or each such Underwriter may reasonably request in order to facilitate the sale of the Registrable Securities by the Selling Holders. (c) After the filing of the registration statement, the Corporation will promptly notify the Selling Holders of any stop order issued or, to the Corporation's knowledge, threatened to be issued by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (d) The Corporation will use its reasonable best efforts to qualify the Registrable Securities for offer and sale under such other securities or blue sky laws of such jurisdictions in the United States as the Selling Holders reasonably request; provided that the Corporation will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph 3.01(d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction. (e) The Corporation will as promptly as is practicable notify the Selling Holders, at any time when a prospectus relating to the sale of the Registrable Securities is required by law to be delivered in connection with sales by an Underwriter or dealer, of the occurrence of any event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an 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 the light of the circumstances under which they were made, not misleading and promptly make available to the Selling Holders and to the Underwriters any such supplement or amendment. Upon receipt of any notice from the Corporation of the occurrence of any event of the kind described in the preceding sentence, the Selling Holders will forthwith discontinue the offer and sale of Registrable Securities pursuant to the registration statement covering such Registrable Securities until receipt by the Selling Holders and the Underwriters of the copies of such supplemented or 36 amended prospectus and, if so directed by the Corporation, the Selling Holders will deliver to the Corporation all copies, other than permanent file and then in the possession of Selling Holders, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Corporation shall give such notice, the Corporation shall extend the period during which such registration statement shall be maintained effective as provided in Section 3.01(a) hereof by the number of days during the period from and including the date of the giving of such notice to the date when the Corporation shall make available to the Selling Holders such supplemented or amended prospectus. (f) The Corporation will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the sale of such Registrable Securities. (g) At the request of any Underwriter in connection with an underwritten offering, the Corporation will furnish (i) an opinion of counsel, addressed to the Underwriters, covering such customary matters as the managing Underwriter may reasonably request and (ii) a comfort letter or comfort letters from the Corporation's independent public accountants covering such customary matters as the managing Underwriter may reasonably request. (h) The Corporation will make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (i) The Corporation will use commercially reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange or quoted on each inter-dealer quotation system on which the Common Stock is then listed or quoted. SECTION 3.02. Selling Holder Information. The Corporation may require Selling Holders promptly to furnish in writing to the Corporation such information regarding such Selling Holders, the plan of distribution of the Registrable Securities and other information as the Corporation may from time to time reasonably request or as may be legally required in connection with any Demand Registration or Piggyback Registration. SECTION 3.03. Registration Expenses. In connection with any Demand Registration, the Corporation shall pay the following expenses incurred in connection with such registration (the REGISTRATION EXPENSES): (i) registration and filing fees with the Commission and the National Association of Securities Dealers, Inc., (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) fees and expenses incurred in connection with the listing or quotation of the Registrable Securities, (v) fees and expenses of counsel to the Corporation and the reasonable fees and expenses of independent certified public accountants for the Corporation (including fees and expenses associated with the special audits or the delivery of comfort letters) and (vi) the reasonable fees and expenses of any additional experts retained by the Corporation in connection with such registration. In connection with any Piggyback Registration, the Corporation shall pay the Registration Expenses set forth in clauses (ii) through (vi) of the preceding sentence. The Selling Holders shall pay (A) any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities, (B) fees and expenses of counsel for the Selling Holders and (C) any out-of-pocket expenses of the Selling Holders. In connection with any Piggyback Registration, the Selling Holders shall pay, in addition to items (A) through (C) of the preceding sentence, registration and filing fees with the Commission and National Association of Securities Dealers Inc., in proportion to the ratio that the number of shares of Registrable Securities being registered for the account of the Selling Holders bears to the aggregate number of shares of Common Stock being included in the applicable registration statement. 37 ARTICLE 4 INDEMNIFICATION AND CONTRIBUTION SECTION 4.01. Indemnification by the Corporation. The Corporation agrees to indemnify and hold harmless each Selling Holder and its Affiliates and their respective officers, directors, partners, stockholders, members, employees, agents and representatives and each Person (if any) which controls a Selling Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities, costs and expenses (including reasonable attorneys' fees) caused by, arising out of, resulting from or related to any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Corporation shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by or contained in or based upon any information furnished in writing to the Corporation by or on behalf of such Selling Holder or any Underwriter expressly for use therein or by the Selling Holder or Underwriter's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Corporation has furnished the Selling Holders or Underwriter with copies of the same. The Corporation also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Selling Holders provided in this Section 4.01. SECTION 4.02. Indemnification by a Selling Holder. Each Selling Holder agrees to indemnify and hold harmless the Corporation, its officers and directors, and each Person, if any, which controls the Corporation within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Corporation to each Selling Holder, but only (a) with reference to information furnished in writing by or on behalf of such Selling Holder expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus or (b) as a result of the Selling Holder's failure to deliver any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus. Each Selling Holder also agrees to indemnify and hold harmless any Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Corporation provided in this Section 4.02. SECTION 4.03. Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to Section 4.01 or Section 4.02 hereof, such Person (the INDEMNIFIED PARTY) shall promptly notify the Person against whom such indemnity may be sought (the INDEMNIFYING PARTY) in writing and the Indemnifying Party, upon the request of the Indemnified Party, shall retain counsel reasonably satisfactory to such Indemnified Party to represent such Indemnified Party and any others the Indemnifying Party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and, in the written opinion of counsel for the Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent (not to be unreasonably withheld), or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. 38 SECTION 4.04. Contribution. If the indemnification provided for in this Article 4 is unavailable to an Indemnified Party in respect of any losses, claims, damages or liabilities in respect of which indemnity is to be provided hereunder, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall to the fullest extent permitted by law contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of such party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Corporation, a Selling Holder and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Corporation and each Selling Holder agrees that it would not be just and equitable if contribution pursuant to this Section 4.04 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Article 4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and each Selling Holder shall not be required to contribute any amount in excess of the amount by which the net proceeds of the offering (before deducting expenses) received by such Selling Holder exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE 5 MISCELLANEOUS SECTION 5.01. Participation in Underwritten Registrations. No Person may participate in any underwritten registered offering contemplated hereunder unless such Person (a) agrees to sell its securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, (b) completes and executes all questionnaires, powers of attorney, custody arrangements, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and this Exhibit B and (c) furnishes in writing to the Corporation such information regarding such Person, the plan of distribution of the Registrable Securities and other information as the Corporation may from time to time request or as may be legally required in connection with such registration. SECTION 5.02. Rule 144. Subject to Section 6.5 of the Stock Purchase Agreement, the Corporation covenants that it will file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as the Holders may reasonably request to the extent required from time to time to enable the Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such Rule 144 may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. Upon the request of Buyer, the Corporation will deliver to Buyer a written statement as to whether it has complied with such reporting requirements. SECTION 5.03. Holdback Agreements. Each Holder agrees, in the event of an underwritten offering for the Corporation (whether for the account of the Corporation or otherwise) not to offer, sell, contract to sell or otherwise dispose of any 39 Registrable Securities or other Common Stock or Class B Stock, or any securities convertible into or exchangeable or exercisable for any of the foregoing, including any sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten offering), during the 14 days prior to, and during the 180-day period (or such lesser period as the lead or managing Underwriter may agree) beginning on, the effective date of the registration statement for such underwritten offering (or, in the case of an offering pursuant to an effective shelf registration statement pursuant to Rule 415, the pricing date for such underwritten offering). SECTION 5.04. Termination. The registration rights granted under this Exhibit B will terminate on the tenth anniversary of the Closing Date. SECTION 5.05. Holder Determinations. In the event any determination is to be made by the Holders or the Selling Holders as a group, such determination shall be made by Holders or Selling Holders holding a majority in interest of the Registrable Securities or the Registrable Securities being sold, respectively. 40 EXHIBIT C LEGAL OPINION OF SPECIAL COUNSEL TO THE CORPORATION APRIL ___, 2003 Bluebird Finance Limited P.O. Box 957 Road Town, Tortola British Virgin Islands Re: Bluebird Finance Limited - Sale of Series A Preferred Stock Ladies and Gentlemen: We have acted as special counsel to Signature Eyewear, Inc., a California corporation (the "Company"), in connection with the issuance and sale of up to 1,200,000 shares of the Company's Series A 2% Convertible Preferred Stock (the "Shares"), pursuant to the Stock Purchase Agreement (the "Purchase Agreement"), of even date, between the Company and Bluebird Finance Limited (the "Buyer"). We do not represent the Company in all of its legal matters, and the Company has retained other legal counsel to represent it in connection with certain other legal matters. We do not assume any responsibility for any transaction or matter where the Company has been represented by other counsel. Capitalized terms, which are used herein but not defined herein, shall have the meanings ascribed to them in the Purchase Agreement. In connection with this opinion, we have examined and relied upon (i) the representations and warranties as to factual matters contained in and made pursuant to the Purchase Agreement by various parties, and (ii) originals or copies, certified or otherwise identified to our satisfaction as being true copies, of the following documents (collectively, the "Documents"): (1) The Purchase Agreement; (2) The Certificate of Determination (the "Certificate") (3) Articles of Incorporation of the Company, as amended, as certified by the office of the Secretary of State of the State of California as of March 26, 2003 (the "Articles"); (4) Amended and Restated Bylaws of the Company, dated June 6, 1997 (the "Bylaws"); (5) Certificate of Status Domestic Company for the Company issued by the California Secretary of State and dated March 26, 2003 (the "Domestic Status Certificate"); (6) The Credit Facility Agreement between Buyer and the Company dated of even date with the Purchase Agreement, and related documents and agreements (collectively, the "Bluebird Loan Agreement") and (7) the Representation Letter from Bernard Weiss and Michael Prince (the "Representation Letter"). 41 Except as set forth above, the documents listed in clauses (1) and (2) are each dated as of April ___, 2003 and are referred to herein collectively as the "Transaction Documents." We have rendered these opinions based solely upon our review of the Documents, and upon our examination of such statutes, decisions and matters of law as we deem necessary to express the opinions set forth below. In particular, our opinion that the Company is "in good standing under the laws of the State of California" set forth in opinion number 1, below, is based solely on the Domestic Status Certificate. We have made no examination of public records (including, without limitation, the plaintiff or defendant indices of state and federal courts), nor have we undertaken any independent investigation to determine the existence or nonexistence of facts contained or asserted in the Documents or the assumptions set forth herein and you acknowledge we have no duty to perform any such independent investigation. In addition, in rendering this opinion, we have not taken into consideration the effect, if any, that certain other transactions that will be occurring on or about the time of the Closing, may have upon the Company or the opinions set forth herein, including, without limitation, transactions between (i) the Company and Home Loan Investment Company (referred to collectively with the Bluebird Loan Documents as the "Senior Loan Documents"), (ii) the Company, Moulin Optical Manufactory Limited, Allied Industrial Limited and Dartmouth Commerce of Manhattan, Inc. ("Dartmouth"), (iii) the Company and Dartmouth, and (iv) the Weiss Family Trust and Dartmouth. In rendering this opinion, we have assumed (i) the genuineness and authenticity of all signatures on original documents, (ii) the authenticity of all documents submitted to us as originals and the conformity to originals of documents submitted to us as certified or photostatic copies, (iii) the accuracy, completeness and authenticity of certificates of public officials, (iv) each person signing a document is a competent adult person not operating under any legal disability, duress or having been defrauded in the execution of documents, and (v) the due authorization, execution and delivery of all documents (except the due authorization, execution and delivery by the Company of the Transaction Documents), and (vi) that the parties to the Transaction Documents will act in good faith in connection with their obligations under the Transaction Documents. For purposes of this opinion, we have made the following additional assumptions: (a) Other than the Documents, there are no documents, understandings or agreements between or among the parties which would expand or otherwise modify the obligations of the respective parties to the Documents regarding the transactions contemplated thereby and which would have an effect on this opinion; (b) To the extent that the obligations of the Company may be dependent upon such matters, we have assumed for purposes of this opinion, that: (i) each party to the Transaction Documents other than the Company ("Other Party") is duly organized, validly existing and in good standing under the laws of its jurisdiction of formation and qualified to do business in other jurisdictions, to the extent necessary; (ii) each Other Party has the requisite organizational or other power and authority to execute and deliver, and to perform its obligations under, the Transaction Documents to which it is a party; and (iii) the Transaction Documents to which each Other Party is a party have been duly authorized, executed and delivered by it, and each of such Transaction Document constitutes the legally valid and binding obligation of such Other Party, enforceable against such party in accordance with its terms. (c) The representations and warranties of the Company and the Buyer in the Transaction Documents are true and correct; (d) The choice of California law in the Purchase Agreement will be enforced; and (e) Value has been given by the Buyer. 42 Whenever used in this opinion, the phrase "to the best of our actual knowledge" or words of similar import mean to the actual conscious knowledge of those attorneys in this Firm who have given substantive attention to the transaction contemplated by the Transaction Documents. We are licensed to practice law only in the State of California. The opinions set forth below apply only insofar as the substantive laws of the State of California (without application of the principle of conflicts of laws) and the United States' federal laws may be concerned, and we express no opinion with respect to the laws of any other state or jurisdiction. Specifically and without limiting the foregoing, we express no opinion as to any law of the British Virgin Islands. Based on the foregoing and subject to the assumptions, qualifications and limitations set forth herein, it is our opinion that: 1. The Company has been duly incorporated, is validly existing and in good standing under the laws of the State of California, with the requisite corporate power and corporate authority to own its properties and assets, to conduct its business as presently conducted, to enter into and deliver the Transaction Documents and to perform its obligations under the Transaction Documents. 2. The execution, delivery and performance of the Transaction Documents have been duly authorized by all necessary corporate action on the part of the Company, and the Transaction Documents have been duly executed and delivered by the Company. 3. Each of the Transaction Documents constitutes the legally valid and binding obligation of the Company, and except as otherwise provided in the Senior Loan Documents, enforceable against the Company in accordance with its terms. 4. The Company's execution, delivery and performance of the Transaction Documents do not violate the Articles or Bylaws of the Company. 5. To the best of our actual knowledge, the execution, delivery and performance by the Company of the Transaction Documents and the consummation of the transactions contemplated therein, do not and will not violate any law or regulation applicable to the Company. 6. Except as set forth in the schedules to the Purchase Agreement, to the best of our actual knowledge, no consent of, authorization from or registration or filing with any governmental authority, agency or body is required in connection with the execution, delivery and performance by the Company of the Transaction Documents. 7. The Preferred Shares issued in connection with the Stock Purchase Agreement and the Conversion Shares issuable upon conversion of the Preferred Shares have been duly authorized by all necessary corporate action on the part of the Company and, upon payment for and delivery of the Preferred Shares in accordance with the Stock Purchase Agreement and the countersigning of the certificate or certificates representing the Preferred Shares by a duly authorized officer of the Company, the Preferred Shares will be validly issued, fully paid and nonassessable. 8. Assuming the Company has sufficient authorized and unissued shares of common stock available at such time, the Conversion Shares, when issued and delivered upon conversion of the Securities in accordance with the terms thereof as such terms exist on the date hereof and the countersigning of the certificate or certificates representing the Conversion Shares by a duly authorized officer of the Company, will be duly and validly issued, fully paid and nonassessable. 9. Except for (i) any actions, suits or proceedings before any court, arbitrator or governmental agency which may result in damages against the Company in excess of $100,000 ("Legal Proceedings") which are described in the schedules to the Stock Purchase Agreement, and (ii) those Legal Proceeding that have been represented 43 to us will settle within thirty (30) days of the Closing and are set forth on Exhibit E to the Representation Letter, we are not and have not represented the Company in connection with any currently pending Legal Proceedings. 10. Assuming the accuracy of the representations made in Section 4.5 of the Purchase Agreement by the Buyer, the sale of the Securities to Buyer is exempt from the registration and qualification requirements of the Securities Act of 1933, as amended, and the securities laws of the State of California. We express no opinion with respect to: (i) The applicability of Sections 547 and 548 of the Bankruptcy Code, 11 U.S.C. Sections 547 and 548, Sections 500 et seq. of the California Corporations Code, or any other federal or state laws regarding fraudulent conveyances or preferences; (ii) Compliance by any party with any anti-fraud, disclosure or similar law, rule or regulations relating to securities or the issuance and sale thereof; (iii) Compliance by any party with (A) antitrust laws including, but not limited to, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or (B) the Employee Retirement Income Security Act of 1974, as amended; (iv) Compliance by any party, or any of the Transaction Documents, with any federal, state or local land use, subdivision, zoning, planning, tax, labor or communications law, ordinance or regulation; (v) The fairness of any consideration given or received in connection with any of the Transaction Documents or any transaction contemplated thereby, including, without limitation, the fair value of consideration for issuance of the Preferred Shares and the Conversion Shares; (vi) The impact of local, state, federal or foreign tax laws on the transactions contemplated by any of the Transaction Documents, including, without limitation, the effect of any failure of the Company to pay any employment, withholding, sales or other taxes when due; (vii) Any provisions of the Transaction Documents which permit the enforcement of the remaining provisions of the Transaction Documents where some provision has been declared unenforceable, unless the unenforceable portion is not an essential part of the agreement therein contained; (viii) Any covenant not to compete, non-solicitation, confidentiality or similar provisions contained in any of the Transaction Documents; or (ix) Any Legal Proceeding in which we are not counsel of record. This opinion is subject to, and limited by, the following qualifications, exceptions and reservations: (a) The enforceability of the Transaction Documents may be limited or affected by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws), (ii) general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and (iii) judicial discretion and the valid exercise of sovereign power of the State of California and the constitutional powers of the United States of America; 44 (b) Limitations imposed by equitable principles of California or federal law upon the specific enforceability of any of the remedies, covenants, or other provisions of the Transaction Documents and upon the availability of injunctive relief or other equitable remedies; (c) The unenforceability under certain circumstances, under any state or federal law or court decision, of (i) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, defenses to obligations or rights created by law, (ii) provisions indemnifying a party against liability for its own negligent or wrongful acts, where such waivers or indemnifications are against public policy or prohibited by law, and (iii) provisions which impose late charges, default rates of interest or other similar penalty terms, or restrict or condition prepayment; (d) The effect of California court decisions invoking statutes or principles of equity, which have held that certain covenants and provisions of agreements are unenforceable where (i) the breach of such covenants or provisions imposes restrictions or burdens upon an obligor, including the acceleration of indebtedness due under such instruments, and it cannot be demonstrated that the enforcement of such restrictions or burdens is reasonably necessary for the protection of the creditor, or (ii) the creditor's enforcement of such covenants or provisions under the circumstances would violate the creditor's implied covenant of good faith and fair dealing. (e) The effect of Section 1670.5 of the California Civil Code, which provides, in substance, that if a court as a matter of law finds a contract or any clause of a contract to have been "unconscionable" at the time it was made, the court may refuse to enforce the contract, or the court may enforce the remainder of the contract without the "unconscionable" clause or so as to avoid an "unconscionable" result. That Section also permits parties to present evidence as to the commercial setting, purpose and effect of any contract or clause thereof claimed to be "unconscionable," to aid the court in making its determination; (f) The unenforceability under certain circumstances of provisions to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, that election of a particular remedy or remedies does not preclude recourse to one or more other remedies or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy; (g) The unenforceability under certain circumstances of contractual provisions which allow the exercise of self-help or summary remedies without requiring notice or opportunity for hearing or correction; and (h) The effect of California law providing that, where a contract permits one party to the contract to recover attorneys' fees, the prevailing party in any action to enforce any provision of the contract shall be entitled to recover its reasonable attorneys' fees. (i) We express no opinion as to the provisions of the Transaction Documents which (1) purport to waive, limit, or restrict various rights of the Company except to the extent permitted by law, (2) permit a party to act as the agent and attorney-in-fact of the Company after a default, (3) select the forum for the resolution of any disputes or consent to the jurisdiction of any jurisdiction (both as to personal jurisdiction and subject matter jurisdiction), (4) attempt to change or waive rules of evidence or fix the method or quantum of proof to be applied in litigation or similar proceedings, (5) provide for the confession of judgment, (6) provide that time is of the essence, or (7) permit the enforcement of the remaining provisions of a Transaction Document where some provision has been declared unenforceable, unless the unenforceable portion is not an essential part of the agreement therein contained. This opinion is rendered only with respect to the laws, and the rules, regulations and orders under those laws, that are in effect as of the date hereof, and we disclaim any obligation to update this opinion for events occurring after the date hereof. We assume no responsibility to advise you or any other person or entity of changes which may hereafter be brought to our attention. 45 This opinion is rendered only to the Buyer and is solely for its benefit in connection with the above transaction. Except as provided above, this opinion may not be quoted or used in whole or in part for any purpose, nor may copies be provided to any person, without our prior written consent Very truly yours, 46 SCHEDULE 3.4 NON-CONTRAVENTION (z) Liens ----- 1. Both the Buyer and Home Loan and Investment Company ("Home") will have Liens on the assets of the Corporation pursuant to their respective loan agreements. 2. The Security Interest granted by the Corporation to Wells Fargo Equipment Finance, Inc. and US Bancorp Oliver-Allen Technology Leasing with respect to certain equipment pursuant to a security agreement dated March 26, 2003 to secure the Corporation's obligations under the promissory note dated on or about March 26, 2003. 3. The Security Interest granted by the Corporation to Axwood Investments Limited with respect to certain inventory pursuant to a security agreement dated February 4, 2003 to secure the Corporation's obligations under the promissory note dated February 4, 2003. 4. The Security Interests granted by the Corporation to the lessors of certain office equipment (including, a telephone system, postage meter, photocopier, certain computer equipment and a warehouse storage racking system referred to as the "Carousel") utilized by the Corporation in its business. 47 SCHEDULE 3.5 CAPITALIZATION 1. As of March 31, 2003, the Corporation has the following options outstanding: (a) options to purchase 191,500 shares of Common Stock at $10,00 per share; and (b) options to purchase 84,700 shares of Common Stock at $4.00 per share. 2. In addition, in connection with its loan transaction with Home, the Corporation has granted Home warrants to purchase up to 100,000 shares of Common Stock at an exercise price of $0.67 per share. 48 SCHEDULE 3.9 MATERIAL ADVERSE CHANGE The Corporation has continued to suffer operating losses in the ordinary course of its business since December 31, 2002. In addition, given the Corporation's current financial condition and cash flow, the Corporation is in actual or technical default with many of the companies and entities with which the Corporation has, or currently does, transact its business. 49 SCHEDULE 3.10 LITIGATION 1. The Chapter 7 trustee in bankruptcy of an optical company which holds a disputed claim against the Corporation of approximately $58,000 contacted the Corporation with respect to such claim approximately nine months ago. When advised of the dispute, the trustee advised that it would enquire into the matter. The Corporation has had no further contact from either the trustee or any other party with respect to this disputed claim. 2. Walker v. Signature Eyewear - case pending in Washington State Court arising out of an employment dispute. The amount claimed does not exceed $25,000. 3. Gary Raymond v. Signature Eyewear - Mr. Raymond, a former employee of the Corporation, has made a written demand in the amount of approximately $138,000 to the Corporation for certain vacation pay and commissions he claims he is owed. The Corporation disputes the claims made by Mr. Raymond. 4. Amplicon Financial has threatened in writing to bring a claim against the Corporation in an amount of approximately $30,000. 5. The Corporation intends to use the proceeds from the transactions contemplated by the Finance Documents and the Senior Credit Agreement, in part, to settle certain outstanding claims against the Corporation and thereby curing certain outstanding defaults. The Corporation has previously delivered to the Lender a schedule of the pending or threatened claims that the Corporation intends to settle using the proceeds from these transactions. The Corporation intends to settle these matters within thirty days of the date of this Agreement or such later date as has been agreed with certain claimants. 6. As a result of the Corporation's current financial condition and cash flow, the Corporation is in actual or technical default with most of the companies and entities with which the Corporation has, or currently does, transact its business. Some of these parties have asserted, or may assert, claims against the Corporation and some of these claims will be in excess of $100,000 in the aggregate. 50 SCHEDULE 3.12 SUBSIDIARIES In June 1999, the Corporation acquired all of the outstanding shares of a Canadian corporation in connection with its acquisition of California Design Studio. The Corporation liquidated that subsidiary by the end of 1999 and since 2000, the subsidiary has not had any assets, liabilities or operations. 51 SCHEDULE 3.14 COMPLIANCE WITH LAWS The Corporation is delinquent in its SEC filings for fiscal years 2002 and 2003. 52 SCHEDULE 3.14 TAXES The Corporation received notice from the California Franchise Tax Board ("FTB") that the FTB intends to assess a deficiency for the 1998 and 1999 tax years. The proposed assessments from the FTB for 1998 and 1999 are $2,918.38 and $64,797.70, respectively. The Corporation intends to contest both of these proposed assessments. The Corporation filed for an extension for its federal and state tax returns for the fiscal year ended October 31, 2002. 53 SCHEDULE 3.15 TRADEMARKS LICENSES The Corporation is party to the following License Agreements: 1. License Agreement dated June 24, 1997 between the Corporation and Eddie Bauer, Inc., as amended, for use of the "Eddie Bauer" mark and related logos. 2. License Agreement dated January 12, 1996 between the Corporation and Hart Schaffner & Marx, as amended, for use of the "Hart Schaffner & Marx" mark and related logos. 3. License Agreement dated May 28, 1991 between the Corporation (as successor in interest to USA Optical Distributors, Inc.) and Laura Ashley Limited, as amended, for use of the "Laura Ashley" mark and related logos. 4. License Agreement dated September 23, 1999 between the Corporation and bebe stores, inc., as amended, for use of the "bebe" mark and related logos. 5. License Agreement dated April 1, 1993 between the Corporation (as successor in interest to California Design Studio, Inc.) and Kobra International, Ltd., T/A Nicole Miller, as amended, for use of the "Nicole Miller" mark and related logos. 6. License Agreement dated February 4, 2003 between the Corporation and Axwood Investments Limited for the use of the "Dakota Smith" mark and related logos. As a result of the Corporation's current financial condition, the Corporation is in contravention of certain of the financial covenants contained in the above license agreements and is accordingly in technical or actual default under such licenses. The Corporation has not received any written notices of default from any of the licensors under such license agreements. TRADEMARKS 1. Intuition 2. Bravado 3. Latitudes 4. Lifescape 5. Search 6. Small Print 7. Kensington & James Riding Club and Design 54 EX-10.8 7 ex10-8_16269.txt CONSULTING AGREEMENT EXHIBIT 10.8 ------------ CONSULTING AGREEMENT -------------------- This Consulting Agreement (the "Agreement") is made and entered into as of the 21st day of April, 2003, by and between Signature Eyewear, Inc., a California corporation (the "Company"), and Dartmouth Commerce of Manhattan, Inc., a California corporation ("Consultant"), with reference to the following facts and objectives: (i) In connection with the acquisition by Consultant of a principal minority ownership interest in the Company, and the restructuring of the management and debt of the Company, the Company desires to obtain the services of Consultant described herein, and Consultant desires to provide such services, on the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. Engagement. The Company hereby engages Consultant, and Consultant hereby accepts such engagement, to perform the consulting services described herein. 2. Term. The term of this Agreement shall be a period of three (3) years, commencing on the date hereof and continuing until March 31, 2005. 3. Consulting Services. Consultant shall provide the Company with general business advice and assistance in connection with the reorganization of its management and debt, together with assistance in connection with the Company's continuing restructuring and growth opportunities. Consultant shall use its commercially reasonable best efforts to provide the personal services of Richard Torre to provide the consulting services required hereby. If Consultant is unable to provide the services of Richard Torre, the Company shall have the right to accept or reject any individual substituted by Consultant to provide its services hereunder, in the Company's sole and absolute discretion. 4. Time and Place of Consulting Services. Consultant shall make the services of Mr. Torre available from time to time during regular business hours or otherwise, as and when reasonably requested by the Company. Consultant shall not be required to devote a minimum number of hours to the affairs of the Company; provided, however, that Consultant shall devote such productive energies, abilities, and time as reasonably are required to perform its duties hereunder. The Company shall use its reasonable best effort to appoint Mr. Torre as Chairman of its Board of Directors for the three year term of this Agreement. Consultant shall assist in facilitating the acceptance of such appointment. 5. Compensation. In consideration of the consulting services to be provided hereunder, the Company will pay Consultant an aggregate consulting fee of $165,000 for the services to be provided hereunder, payable in equal monthly installments over the term hereof, or otherwise as the Company and Consultant shall agree. The parties acknowledge and agree that, due to the nature of the services to be provided hereunder, the bulk of Consultant's services will be required in the early portion of the term, with the Company's need for Consultant's assistance diminishing as the Company adjusts to its reorganization and restructuring. Accordingly, the parties agree that the full amount of the consulting fee shall be earned in full by Consultant upon Consultant's completion of one full year of services hereunder, notwithstanding the payment of the consulting fee over the entire term hereof. Other than the compensation specifically described herein, neither Consultant nor any of its employees shall be entitled to any other compensation, employee related benefits, group plans, bonuses, or any other benefits generally applicable to employees of the Company. 6. Expenses. The Company shall pay directly or reimburse Consultant for all reasonable business related expenses incurred by Consultant in connection with the services to be provided by Consultant hereunder. 7. Independent Contractor. In performing the services required hereunder, Consultant is, and at all times shall remain, an independent contractor. Consultant shall not have, and no agent of Consultant shall represent himself as having, the authority to sign any documents, enter into any agreements, or assume any liabilities on behalf of the Company. Consultant shall be solely responsible, and the Company shall assume no responsibility for: (i) the payment of all business taxes of Consultant, including, but not limited to, federal and state income, franchise, and payroll taxes; and (ii) all business licenses and insurance required of or desired by Consultant. 8. Termination. 8.1 Either party may terminate this Agreement prior to the expiration of the term hereof, on written notice to the other party of any of the events or circumstances set forth below, and the failure of the other party to remedy the event or circumstance within thirty (30) days after the date of such written notice: 8.1.1 The breach by either party of any material covenant or obligation of this Agreement; or 8.1.2 If Consultant is unable to provide the personal services of Richard Torre, the failure of Consultant to provide the services of a substitute individual who is acceptable to the Company, in its sole and absolute discretion; or 8.1.3 Conduct by Consultant, including Mr. Torre or any other agent appointed by Consultant to provide the services required hereunder, which conduct results in the conviction of a felony or other crime against the Company, or the plea of nolo contendere in connection with the allegation of any such crime, or other conduct that is a violation of law or public or written company policy and that could reasonable be expected to have a material adverse effect on the Company, its business or reputation. 8.2 Either party may terminate this Agreement without cause on sixty (60) days written notice to the other party. 8.3 If this Agreement is terminated by the Company for cause, or by Consultant without cause, the Company shall have no obligation to pay Consultant the balance of the consulting fees provided for hereunder for the unexpired term hereof. If this Agreement is terminated by the Company without cause, or by Consultant for cause, the Company shall continue to pay to Consultant the consulting fees provided for hereunder, as and when such fees otherwise would otherwise have been due. 9. Notices. All notices, demands and other communications required, desired, or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given immediately if personally delivered or sent by telecopier, cable, telex or other electronic transmitting device; twenty-four hours after being delivered to overnight delivery couriers; or five days after mailing by registered or certified mail, postage prepaid, return receipt requested, addressed in accordance with the addresses set forth below, or to such other addresses of which notice is given pursuant to this Section. To Consultant: Dartmouth Commerce of Manhattan, Inc. 4621 Teller Avenue Suite 200 Newport Beach, California 92660 Telephone: (949) 851-5900 To the Company: Signature Eyewear, Inc. 498 North Oak Street Inglewood, California 90302 Attention: Mr. Michael Prince Telephone: (310) 330-2700 Facsimile: (310) 330-2770 10. Miscellaneous. This Agreement contains the entire agreement and understanding between the parties hereto and supersedes all prior oral or written negotiations and understandings of any kind with respect to the subject matter hereof. If any action is brought to enforce or interpret this Agreement, the prevailing party will be entitled to recover all attorneys fees actually incurred in the action and in enforcing any judgment or award granted therein. This Agreement shall be governed by and construed in accordance with the laws of the State of California. No supplement, amendment, or modification hereof shall be valid unless it shall be in writing and signed by all parties hereto. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and Consultant have executed this Consulting Agreement as of the day and year first written above. SIGNATURE EYEWEAR, INC. a DARTMOUTH COMMERCE OF California corporation MANHATTAN, INC., a California corporation By: _________________________ By: _______________________ Michael Prince Richard Torre Its: _________________________ Its: _______________________ EX-23.1 8 ex23-1_16269.txt CONSENT OF CROWE HORWATH LLP EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 33-48109 on Form S-8 of Signature Eyewear, Inc. of our report dated February 11, 2009 appearing in this Annual Report on Form 10-K of Signature Eyewear, Inc. for the year ended October 31, 2008. /s/ Crowe Horwath LLP Sherman Oaks, California February 12, 2009 EX-23.2 9 ex23-2_16269.txt CONSENT OF GROBSTEIN HORWATH & COMPANY LLP EXHIBIT 23.2 ------------ CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in Registration Statement No. 33-48109 on Form S-8 of Signature Eyewear, Inc. of our report dated January 18, 2008 appearing in this Annual Report on Form 10-K of Signature Eyewear, Inc. for the year ended October 31, 2008. /s/ Grobstein, Horwath & Company LLP Sherman Oaks, California February 12, 2009 EX-31.1 10 ex31-1_16269.txt 302 CERTIFICATION OF THE C.E.O. AND C.F.O. EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO SEC RULE 13A-14(A)/15D-14(A) I, Michael Prince, certify that: 1. I have reviewed this Form 10-K of Signature Eyewear, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2009 /s/ Michael Prince -------------------------------- Name: Michael Prince Title: Chief Executive Officer and Chief Financial Officer EX-32.1 11 ex32-1_16269.txt 906 CERTIFICATION OF THE C.E.O. AND C.F.O. EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Signature Eyewear, Inc. (the "Company") on Form 10-K for the year ended October 31, 2008, as filed with the Securities and Exchange Commission (the "Report"), I, Michael Prince, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael Prince - ------------------------- Chief Executive Officer and Chief Financial Officer February 12, 2009 EX-99.1 12 ex99-1_16269.txt SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS EXHIBIT 99.1 ------------ REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders Signature Eyewear, Inc. Our Audit of the financial statements of Sugnature Eyewear, Inc. referred to in our report dated February 11, 2009 appearing in Item 8 in this Annual Report on Form 10-K also included an audit of the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. Sherman Oaks, California February 11, 2009
SIGNATURE EYEWEAR, INC VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II For the Years Ended October 31, - -------------------------------------------------------------------------------------------------------- Additions Additions Balance, (Deductions) (Deductions) Balance, Beginning Charge to from End of Year Operations Reserve of Year ------------ ------------ ------------ ------------ ALLOWANCE FOR DOUBTFUL ACCOUNTS OCTOBER 31, 2008 $ 52,836 $ -- $ (10,700) $ 42,136 ============ ============ ============ ============ OCTOBER 31, 2007 $ 57,373 $ 115,090 $ (119,627) $ 52,836 ============ ============ ============ ============ RESERVES FOR SLOW MOVING INVENTORIES OCTOBER 31, 2008 $ -- $ -- $ -- $ - ============ ============ ============ ============ OCTOBER 31, 2007 $ -- $ -- $ -- $ - ============ ============ ============ ============ VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS OCTOBER 31, 2008 $ 5,105,800 $ (8,320) $ (39,680) $ 5,057,800 ============ ============ ============ ============ OCTOBER 31, 2007 $ 7,381,800 $ 2,090,634 $ (4,366,634) $ 5,105,800 ============ ============ ============ ============ RESERVES FOR CUSTOMER RETURNS OCTOBER 31, 2008 $ 300,309 $ -- $ (9,631) $ 290,678 ============ ============ ============ ============ OCTOBER 31, 2007 $ 300,309 $ -- $ -- $ 300,309 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. -----END PRIVACY-ENHANCED MESSAGE-----