SIGNATURE EYEWEAR
October 28, 2005
Ms. Michele Gohlke, Branch Chief Securities and Exchange Commission 450 Fifth
Street, N.W.
Washington, D.C. 20549
Re: Your Letter of August 5, 2005 - File No. 000-23001
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Dear Ms. Gohlke:
We have received your letter dated August 5, 2005 regarding our
response letter of July 20, 2005 concerning the remaining comments on our Form
10-K for the year ended October 31, 2004 and on our Form 10-Q for the quarter
ended January 31, 2005. We submit the following response to your comments:
1. Note 6 - Commitments and Contingencies
--------------------------------------
We refer to our prior correspondence as to how the Company accounted
for the sale/lease-back of the Dakota Smith trademark. The following discussion
and the financial information provided in the attached exhibit are intended to
provide you with a comprehensive qualitative and quantitative analysis of the
materiality of the trademark amortization error based on the guidance in SAB 99.
Because we believe the error was immaterial, we believe the financial statements
were in accordance with GAAP.
We are providing analysis of the materiality for each of fiscal
years 2003 and 2004 and the first six months of fiscal 2005, assuming the
transaction had been recorded correctly. The quantitative analysis addresses not
only operating income (loss), but also net income (loss), earnings (loss) per
share and other measures we consider relevant.
OCTOBER 31, 2003 ANALYSIS
The effect of the Company's accounting treatment on the current
liabilities was 4.2% and on shareholders' deficit was 7.4%. Although there was
no effect on loss from operations, there was a large percentage effect on the
loss before extraordinary item, a 10.1% effect on income, and income per share
was overstated by $0.06.
The shareholders' deficit at October 31, 2002 was $8,996,445
compared to the reported deficit at October 31, 2003 of $4,736,250 and the
correct deficit of $5,088,077. Operating loss for FYE 2002 was ($3,438,655)
compared to the reported operating loss of ($862,001) for FYE 2003. Net loss for
FYE 2002 was ($4,115,609) compared to the reported loss before extraordinary
item of ($635,532) for FYE 2003 and the correct loss
Ms. Michele Gohlke
October 28, 2005
Page 2
before extraordinary item of ($987,359) for FYE 2003. Loss per share for FYE
2002 was ($0.75) compared to reported loss per share before extraordinary item
of ($0.11) and the correct loss per share before extraordinary item of ($0.17).
In addition, the gain on the trademark was recorded as "other income" and did
not affect operating income (loss).
SAB 99 states "Materiality concerns the significance of an item to
users of a registrant's financial statements. A matter is material if there is a
substantial likelihood that a reasonable person would consider it important. In
its Statement of Financial Accounting Concepts No. 2, the FASB stated the
essence of the concept of materiality as follows: The omission or misstatement
of an item in a financial report is material if, in the light of surrounding
circumstances, the magnitude of the item is such that it is probable that the
judgment of a reasonable person relying upon the report would have been changed
or influenced by the inclusion or correction of the item."
The net loss in FYE 2003 was substantially less than the net loss in
FYE 2002. Shareholders' deficit was substantially reduced at October 31, 2003
from October 31, 2002. We believe the financial statement trends at October 31,
2003 have not been materially affected by recording the entire gain in other
income in FYE 2003 instead of amortizing it over the license-back period of
three years. We believe that as it is stated in SAB 99 there is not a
substantial likelihood that a reasonable person would consider the difference
between the financial statements as reported and as corrected important. In
addition, as it is stated in SAB 99, it is not probable that the judgment of a
reasonable person relying upon the report would have been changed or influenced
by the correction of the item. For example, we do not believe that a bank,
investor or other person considering doing business with the Company would have
acted any differently whether the stockholders' deficit of the Company was ($4.7
million) versus ($5.1 million).
We also note that the accounting used by the Company did not hide a
failure to meet analysts' expectations, did not change a loss into income or
vice versa, did not affect a segment of the business, did not affect compliance
with regulatory requirements, did not affect compliance with loan covenants, did
not affect managements' compensation and did not involve concealment of an
unlawful transaction.
OCTOBER 31, 2004 ANALYSIS
The effect of the Company's accounting treatment on the current
liabilities was 2.3% and on shareholders' deficit was 3.8%. Although there was
no effect on income from operations, amortizing the trademark gain would have
resulted in a large percentage increase in net income and a reduction in loss
per share of $0.02.
The shareholders' deficit at October 31, 2004 as reported was
$5,067,423 and as corrected would have been $5,262,882. Operating income for FYE
2004 as reported was $290,367 compared to an operating loss of ($862,001) for
FYE 2003. The operating loss trend had stopped. Net loss for FYE 2004 was
($317,173) and as corrected would have
Ms. Michele Gohlke
October 28, 2005
Page 3
been a net loss of ($214,805) compared to the prior year's loss before
extraordinary item of ($635,532) and as corrected, a loss of ($987,359). Loss
per share as reported was ($0.06) in FYE 2004 and as corrected would have been a
loss of ($0.04) compared to the prior year loss per share before extraordinary
item as reported of ($0.11) and as corrected a loss of ($0.17).
We are of the opinion that the financial statement trends at and for
the year ended October 31, 2004 have not been materially affected by recording
the entire gain in other income in FYE 2003 instead of amortizing it over the
license-back period of three years. Please see the discussion regarding
materiality above under FYE 2003 analysis.
APRIL 30, 2005 (6 MONTHS) ANALYSIS
The effect of the Company's accounting treatment on the current
liabilities was 1.3% and on shareholders' deficit was 2.6%. Although there was
no effect on income from operations, there was a large percentage effect on net
income and income per share was understated by $0.01. The effect on net income
percentage was large because reported net income of $477,281 was relatively
small (and thus the adjustment would have had a large percentage impact).
It is the Company's opinion that the financial statement trends at
April 30, 2005 have not been materially affected by recording the entire gain in
other income in FYE October 31, 2003 instead of amortizing it over the leaseback
period of three years. Please see the discussion regarding materiality above
under October 31, 2003 Analysis.
2. Note 13 - Fourth Quarter Adjustments
------------------------------------
As stated in our response letter dated July 20, 2005, the Company
continues to believe that its accounting treatment regarding inventory was
appropriate.
We misunderstood your comment regarding its inventory reserve, and
in our response letter dated July 20, 2005, we stated that inventory reserves
could be eliminated in accordance with APB Opinion 20 (Accounting Changes).
We have made an extensive analysis and study of our October 31, 2002
inventory and the write-down for slow-moving items, including tracing inventory
write-downs through our inventory system and gross profit analysis. That review
supported our position that we did not write up the October 31, 2002 inventory
during FYE 2003. We understand, based on ARB 43 Statement 5 in chapter 4 and SAB
Topic 5BB, that once inventory has been written down, a new cost basis has been
created and that inventory cannot be marked up again.
Ms. Michele Gohlke
October 28, 2005
Page 4
In re-reading Note 13 (Fourth Quarter Adjustments) to our October
31, 2003 financial statements in light of your comments, we realize that it was
poorly written and confusing. Note 13 should have stated that there was a
decrease in our inventory reserve of $731,329, of which $487,278 was sold or
disposed of in the first three quarters and $244,051 was sold or disposed of in
the fourth quarter.
In your August 5, 2005 letter that responded to our July 20, 2005
letter, you made the statement, "Subsequently, due to a change in facts and
circumstances relating to the reserve, you marked the inventory back up to $3
per frame." We understand how you reached that conclusion based on our poorly
written Note 13 (Fourth Quarter Adjustments) and our response to your letter in
which we stated incorrectly that one could write up inventory relying on APB 20
(Accounting Changes).
We again confirm that we did not write up inventory to $3 per frame.
Inventory reserves of $731,329 were reduced due to sales or disposition of
$487,278 in the first three quarters and $244,051 in the fourth quarter of FYE
2003.
We apologize for our misunderstanding of your comment letters and
our incorrect understanding of the application of APB 20 (Accounting Changes) to
elimination of inventory reserves.
* * *
Please contact the undersigned with any questions regarding this
response.
Very truly yours,
SIGNATURE EYEWEAR, INC.
Michael Prince
Chief Executive Officer
and Chief Financial Officer
cc. Tara Harkins
Kevin Vaughn
SIGNATURE EYEWEAR EXHIBIT ONE
DOLLARS IN THOUSANDS Oct. 31, 2003 Oct. 31, 2004 Jan. 31, 2005 3 months April 30, 05 6 months
As Filed Corrected As Filed Corrected As Filed Corrected As Filed Corrected
$ $ $ $ $ $ $ $
Current Liabilities 8261 8612 8562 8758 9123 9279 9049 9166
Shareholds' Deficit -4736 -5088 -5067 -5263 -4927 -5083 -4578 -4695
Income (loss) From
Operations -862 -862 290 290 277 277 742 742
Income (loss) before
Extraordinary Item -636 -987 -371 -215 141 180 477 555
Net Income (loss) 3463 3111 -371 -215 141 180 477 555
Income (loss) Per
Share Before
Extraordinary Item -0.11 -0.17 -0.06 -0.04 0.02 0.03 0.08 0.09
Income (loss) Per
Share 0.60 0.54 -0.06 -0.04 0.02 0.03 0.08 0.09