<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended July 31, 1998
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
Incorporation or Organization) Identification No.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
(Address of Principal Executive Offices)
(310) 330-2700
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, par value
$0.001 per share, 5,268,027 shares outstanding as of September 11, 1998.
================================================================================
<PAGE>
SIGNATURE EYEWEAR, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of July 31, 1998 (Unaudited) and October 31, 1997........................ 3
Statement of Income (Unaudited) for the Three Months and Nine Months Ended
July 31, 1998 and 1997................................................................... 4
Statement of Cash Flows (Unaudited) for the Nine Months Ended
July 31, 1998 and 1997................................................................... 5
Notes to Financial Statements.............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 9
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
Item 6. Exhibits and Reports on Form 8-K........................................................... 18
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 5,486,573 $ 8,133,423
Accounts receivable, trade 5,803,676 4,013,518
Inventories 11,172,421 6,827,613
Deferred tax asset 253,000 221,000
Prepaid expenses and other current assets 2,097,762 768,368
----------- -----------
24,813,432 19,963,922
----------- -----------
Property and Equipment (net of accumulated depreciation and
amortization) 1,067,254 1,079,536
----------- -----------
Other Assets:
Deposits and other assets 122,437 131,857
Deferred tax asset 15,000 0
----------- -----------
137,437 131,857
----------- -----------
$26,018,123 $21,175,315
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 5,430,278 $ 2,217,923
Current portion of long-term debt 4,816 13,743
Income taxes payable 0 346,000
Accrued expenses and other current liabilities 1,067,036 1,281,844
----------- -----------
6,502,130 3,859,510
----------- -----------
Long-term Debt 0 1,211
Deferred Tax Liability 0 3,000
----------- -----------
0 4,211
----------- -----------
Stockholders' Equity:
Preferred stock (authorized 5,000,000 shares, $.001 par value, none
issued or outstanding) 0 0
Common stock (authorized 30,000,000 shares, $.001 par value,
5,268,027 shares issued and outstanding) 9,400 9,400
Paid-in capital 15,190,389 15,190,389
Retained earnings 4,316,204 2,111,805
----------- -----------
19,515,993 17,311,594
----------- -----------
$26,018,123 $21,175,315
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement
3
<PAGE>
SIGNATURE EYEWEAR, INC.
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended July 31, Nine Months Ended July 31,
--------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $10,704,040 $8,317,973 $29,599,689 $24,356,027
Cost of Sales 4,254,456 3,370,175 11,832,037 10,002,285
----------- ---------- ----------- -----------
Gross Profit 6,449,584 4,947,798 17,767,652 14,353,742
----------- ---------- ----------- -----------
Operating Expenses:
Selling 3,568,342 2,402,510 9,347,989 7,102,974
General and administrative 1,865,400 1,539,932 5,149,791 4,347,365
----------- ---------- ----------- -----------
5,433,742 3,942,442 14,497,780 11,450,339
----------- ---------- ----------- -----------
Income from Operations 1,015,842 1,005,356 3,269,872 2,903,403
----------- ---------- ----------- -----------
Other Income (Expense):
Interest, net 78,942 (107,666) 266,856 (296,320)
Sundry (8,608) 3,641 20,893 1,153
----------- ---------- ----------- -----------
70,334 (104,025) 287,749 (295,167)
----------- ---------- ----------- -----------
Income before Income Taxes 1,086,176 901,331 3,557,621 2,608,236
Provision for Income Taxes 389,313 0 1,353,222 800
----------- ---------- ----------- -----------
Net Income $ 696,863 $ 901,331 $ 2,204,399 $ 2,607,436
=========== ========== =========== ===========
Earnings Per Share, Basic and Diluted:
Earnings per common share $ 0.13 $ 0.42
=========== ===========
Weighted average number of
common shares outstanding 5,268,027 5,268,027
=========== ===========
Pro Forma Earnings Per Share:
Income before provision for
income taxes $ 901,331 $ 2,608,236
Income tax provision 358,000 1,032,000
---------- -----------
Net income $ 543,331 $ 1,576,236
========== ===========
Basic and diluted earnings
per common share $ 0.15 $ 0.44
========== ===========
Weighted average number of common
shares outstanding 3,600,527 3,600,527
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement
4
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SIGNATURE EYEWEAR, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
-----------------------------
1998 1997
---------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,204,399 $ 2,607,436
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 419,027 326,224
Provision for bad debts 7,439 25,000
Loss on abandonment of property and equipment 5,280 0
Deferred income taxes (50,000) 0
Changes in assets--(increase) decrease:
Accounts receivable, trade (1,797,597) (132,510)
Inventories (4,344,808) (2,223,841)
Prepaid expenses and other assets (1,319,974) 687,176)
Changes in liabilities--increase (decrease):
Accounts payable, trade 3,212,355 1,221,893
Income taxes payable (346,000) 0
Accrued expenses and other current liabilities (214,808) (251,639)
----------- ------------
Net cash provided by (used in) operating activities (2,224,687) 885,387
----------- ------------
Cash Flows Used in Investing Activities:
Purchases of property and equipment (412,025) (450,182)
----------- ------------
Cash Flows from Financing Activities:
Net borrowings on note payable, bank 0 7,925,000
Borrowings on long-term debt 0 500,000
Principal payments on long-term debt (10,138) (405,912)
Repayment on notes payable, bank 0 (6,000,000)
Dividends paid 0 (2,635,242)
----------- ------------
Net cash used in financing activities (10,138) (616,154)
----------- ------------
Net Decrease in Cash and Cash Equivalents (2,646,850) (180,949)
Cash and Cash Equivalents, Beginning of Period 8,133,423 214,399
----------- ------------
Cash and Cash Equivalents, End of Period $ 5,486,573 $ 33,450
=========== ============
</TABLE>
The accompanying notes are an integral part of this statement
5
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SIGNATURE EYEWEAR, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
----------------------------
1998 1997
---------- --------
<S> <C> <C>
Supplementary Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,845 $285,825
========== ========
Income taxes $2,027,955 $ 800
========== ========
</TABLE>
The accompanying notes are an integral part of this statement
6
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
(Unaudited)
NOTE 1--UNAUDITED INTERIM FINANCIAL STATEMENTS
- ----------------------------------------------
Interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. Accordingly, certain disclosures accompanying annual
financial statements prepared in accordance with generally accepted accounting
principles are omitted.
In the opinion of the management of the Company, all adjustments, consisting
solely of normal recurring adjustments, necessary for the fair presentation of
the financial statements for these interim periods have been included. The
current period's results of operations are not necessarily indicative of results
which ultimately may be achieved for the year.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2--BASIS OF PRESENTATION
- -----------------------------
A summary of significant accounting policies is as follows:
INCOME TAXES--The Company's effective income tax rate at July 31, 1998 varies
from the federal statutory tax rate of 34% principally due to state income
taxes.
PRO FORMA NET INCOME--The pro forma net income for 1997 represents the
results of operations adjusted to reflect a provision for income tax on
historical income before provision for income taxes, which gives effect to
the change in the Company's income tax status to a C corporation subsequent
to the public sale of its common stock. The difference between the pro forma
income tax rates utilized and federal statutory rate of 34% relates primarily
to state income taxes (approximately 6%, net of federal tax benefit).
PRO FORMA EARNINGS PER SHARE--Pro forma basic and diluted earnings per common
share for 1997 has been computed by dividing pro forma net income by the
weighted average number of shares of common stock outstanding during the
period. No warrants or options were outstanding at July 31, 1997.
7
<PAGE>
NOTE 2--BASIS OF PRESENTATION, CONTINUED
- ----------------------------------------
EARNINGS PER SHARE--The Company has adopted Statement of Financial Accounting
Standards No. 128 which establishes standards for computing and presenting
earnings per share by replacing the presentation of primary earnings per
share with a presentation of basic earnings per share. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement. Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
For the Three Months Ended July 31, 1998
----------------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted EPS income
available to common stockholders $ 696,863 5,268,027 $ 0.13
========== ============ =========
<CAPTION>
For the Nine Months Ended July 31, 1998
----------------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted EPS income
available to common stockholders $2,204,399 5,268,027 $ 0.42
========== ============ =========
</TABLE>
For the three and nine months ended July 31, 1998, there was no difference
between basic and diluted EPS. Warrants and options to purchase 180,000
shares and 461,500 shares, respectively, of common stock at $12 and $10 per
share, respectively, were outstanding during the quarter. They were not
included in the computation of diluted EPS because the warrants' and options'
exercise prices were greater than the average market price of the common
stock during the three and nine months ended July 31, 1998.
NOTE 3--STOCKHOLDER'S EQUITY
- ----------------------------
In September 1998, the Company's Board of Directors authorized the purchase
of up to $1,000,000 of the Company's common stock. The shares may be
purchased from time to time on the open market at prevailing prices, subject
to market conditions.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Signature Eyewear, Inc. ("Signature" or the "Company") designs, markets and
distributes prescription eyeglass frames primarily under exclusive licenses for
Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart Schaffner & Marx Eyewear and
Jean Nate Eyewear, as well as its own Camelot label. The Laura Ashley Eyewear
collection is one of the leading women's brand-name collections in the United
States.
The following discussion and analysis, which should be read in connection
with the Company's 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 the Company's
expectations are set forth in "Year 2000" and "Factors That May Affect Future
Results" below as well as those discussed elsewhere in this Form 10-Q. All
subsequent written or oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the "Factors That May Affect Future Results." Those forward-looking
statements relate to, among other things, the Company's cash flows and working
capital requirements.
EFFECT OF CHANGE IN FORM FROM AN S CORPORATION TO A C CORPORATION
In September 1997, the Company completed its initial public offering (the
"Offering"). As part of the Offering, the Company was required to change in
form from an S corporation to a C corporation, which has increased the level of
federal and state income taxes. As such, the change in form has affected the
net income and the cash flows of the Company.
As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state income tax purposes. In
addition, for California franchise tax purposes, S corporations were taxed at
2.5% of taxable income through 1993 and 1.5% of taxable income in 1994, 1995,
1996, and 1997, less income tax credits under the Los Angeles Revitalization
Zone Act. Currently, the highest tax rates applicable to Signature are 34% for
federal and 8.84% for California. The pro forma provision for income taxes in
the statement of income shows results as if the Company had always been a C
corporation and had adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes."
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, selected statement
of income data shown as a percentage of net sales. Pro forma operating results
for the three months ended July 31, 1997 (the "1997 third quarter") and the
nine months ended July 31, 1997 (the "1997 period") reflect adjustments to the
historical operating results for federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation.
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
--------------------- ---------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 40.5 39.7 41.1 40.0
----- ----- ----- -----
Gross profit............................ 59.5 60.3 58.9 60.0
----- ----- ----- -----
Operating expenses:
Selling................................ 28.9 33.3 29.2 31.6
General and administrative............. 18.5 17.5 17.8 17.4
----- ----- ----- -----
Total operating expenses.............. 47.4 50.8 47.0 49.0
----- ----- ----- -----
Income from operations.................. 12.1 9.5 11.9 11.0
----- ----- ----- -----
Other income (expense), net............. (1.3) .6 (1.2) 1.0
----- ----- ----- -----
Income before provision for income taxes 10.8 10.1 10.7 12.0
----- ----- ----- -----
Provision for income taxes*............. 4.3 3.6 4.2 4.6
----- ----- ----- -----
Net income*............................. 6.5% 6.5% 6.5% 7.4%
----- ----- ----- -----
</TABLE>
_______________________________
*Pro forma for the three months and nine months ended July 31, 1997.
Net Sales. Net sales were $10,704,000 for the quarter ended July 31, 1998
(the "1998 third quarter"), an increase of 28.7% compared to net sales of
$8,318,000 for the 1997 third quarter. Net sales for the nine months ended July
31, 1998 (the "1998 period") were $29,600,000, an increase of 21.5% compared to
net sales of $24,356,000 for the 1997 period. The increases in net sales for
the 1998 third quarter and the 1998 period were due principally to net sales of
$2,673,000 and $5,443,000, respectively, of Eddie Bauer Eyewear, which the
Company launched in March 1998. In February 1998, the Company began signing up
optical retailers for the 1998 Eddie Bauer Eyewear Loyal Partners program, under
which participants agreed to purchase a specified number of each new Eddie Bauer
Eyewear style released during 1998. As of July 31, 1998, the Company had over
3,900 Eddie Bauer Eyewear Loyal Partners.
Sales of Laura Ashley Eyewear decreased by 0.8% from $5,812,000 for the 1997
third quarter to $5,764,000 for the 1998 third quarter, and by 1.6% from
$17,956,000 for the 1997 period to $17,306,000 for the 1998 period. Combined net
sales of Hart Schaffner & Marx Eyewear, Jean Nate Eyewear, USA Optical and
Optical Surplus decreased by 8.8% to $2,068,000 for the 1998 quarter from
$2,347,000 for the 1997 quarter, and decreased by 0.6% to $5,953,000 for the
1998 period from $5,989,000 for the 1997 period. The Company has decided not to
renew its license agreement with Revlon for Jean Nate Eyewear. Accordingly,
that license will terminate on September 30, 1998. Under the the terms of the
license, the Company will be permitted to sell its remaining inventory bearing
the Jean Nate trademark through March 31, 1999.
Gross Profit. Gross profit increased from $4,948,000 in the 1997 third
quarter to $6,450,000 for the 1998 third quarter, and from $14,354,000 in the
1997 period to $17,768,000 for the 1998 period. This increase was due
principally to the increase in net sales, and also to the improvement in the
gross profit margin from 59.5% in the 1997 third quarter to 60.3% for the 1998
third quarter, and from 58.9% in the 1997 period to 60.0% for the 1998 period.
The improvement in the gross profit margin was due to higher average selling
prices for frames, lower average frame costs due to favorable currency
fluctuations and
10
<PAGE>
vendor cash discounts, and reductions in import duties and tariffs.
Operating Expenses. Operating expenses increased from $3,942,000 in the 1997
third quarter to $5,434,000 in the 1998 third quarter, and from $11,450,000 in
the 1997 period to $14,498,000 in the 1998 period. Operating expenses for the
1998 third quarter and the 1998 period included an increase of $1,166,000 and
$2,245,000, respectively, in selling expenses and an increase of $325,000 and
$802,000, respectively, in general and administrative expenses. General and
administrative expenses decreased from 18.5% and 17.8% of net sales for the 1997
third quarter and 1997 period, respectively, to 17.5% and 17.4% of net sales for
the 1998 third quarter and 1998 period, respectively. Selling expenses increased
from 28.9% and 29.2% of net sales for the 1997 third quarter and 1997 period,
respectively, to 33.3% and 31.6% of net sales for the 1998 third quarter and
1998 period, respectively. Those increases were due primarily to marketing
costs of $716,000 and $1,246,000 for the 1998 third quarter and 1998 period,
respectively, associated with the launch of Eddie Bauer Eyewear in March 1998;
to the increase in royalty payments due to increased sales, and to increased
Laura Ashley Eyewear merchandising costs.
Net Other Income. Net other income in the 1998 third quarter and the 1998
period were $70,000 and $288,000, respectively, as compared to net other expense
in the 1997 third quarter and the 1997 period of $104,000 and $295,000,
respectively. These differences were a result of the Company repaying its bank
financing in the fourth quarter of fiscal 1997 with the net proceeds of the
Offering, and of the interest income resulting from the Company investing a
portion of those proceeds.
Pro Forma Provision for Income Taxes; Provision for Income Taxes. On a pro
forma basis, income taxes would have been $358,000 for the 1997 third quarter
and $1,032,000 for the 1997 third period. For the 1998 third quarter and the
1998 period, the Company's income tax provisions were $389,000 and $1,353,000,
respectively.
Pro Forma Net Income; Net Income. Pro forma net income was $543,000 and
$1,576,000 in the 1997 third quarter and the 1997 period, respectively, and net
income was $697,000 and $2,204,000 in the 1998 third quarter and the 1998
period, respectively, due to the factors set forth above.
LIQUIDITY AND CAPITAL RESOURCES.
At July 31, 1998, the Company had $5,486,573 in cash and cash equivalents
which was invested in money market funds bearing interest at 4.8% and in
commercial paper bearing interest from 5.1% to 5.6%.
The Company entered into a credit agreement with its commercial bank (the
"Credit Agreement") in October 1997. Under the Credit Agreement, the bank has
agreed to provide to the Company an unsecured revolving line of credit up to an
aggregate of $5,000,000. At the Company's option, interest may be based on the
London Interbank Offered Rate plus 2%, or at the bank's prime rate. At July 31,
1998, no amounts were due to the bank under the Credit Agreement.
As a result of the Company's treatment as an S corporation for federal and
state income tax purposes, the Company historically provided its shareholders,
through dividends, with funds for the payment of income taxes on the earnings of
the Company which were included in the taxable income of the shareholders. In
addition, the Company paid dividends to shareholders to provide them with a
return on their investment. The Company paid dividends of $635,242 and
$2,635,242 for the 1997 third quarter and the 1997 period, respectively, and
paid no dividends in either the 1998 third quarter or the 1998 period. The
Company does not currently intend to pay dividends on its Common Stock and plans
to follow a policy of retaining earnings to finance the growth of its business.
11
<PAGE>
Of the Company's accounts payable at July 31, 1998, $1,553,000 were payable
in foreign currency. To monitor risks associated with currency fluctuations,
the Company on a weekly basis assesses the volatility of certain foreign
currencies and reviews the amounts and expected payment dates of its orders and
accounts payable in those currencies. Based on those factors, the Company may
from time to time mitigate some portion of that risk by purchasing forward
commitments to deliver foreign currency to the Company. The Company held no
forward foreign currency commitments at July 31, 1998.
On September 9, 1998, the Company announced that its Board of Directors had
approved a Stock Buyback Program, pursuant to which the Board authorized the
purchase of a number of shares of the Company's Common Stock with a value of no
more than $1,000,000. These repurchases are to be made by brokerage firms acting
on behalf of the Company, under the "safe harbor" provisions of Rule 10b-18
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. That rule requires, among other things, that
shares be purchased on the open market at prevailing prices.
YEAR 2000
Commencing 1996, the Company began a project to address the potential impact
of the Year 2000 problem on the processing of date-sensitive information by the
Company's information technology systems and the information technology systems
used by the Company's significant customers and vendors. The Year 2000 problem
is the result of computer programs being written using two digits to define the
applicable year. As a result, certain computer programs may recognize a date
using "00" as the year 1900 rather than 2000, wich could cause miscalculations
or system failures. The objectives of the Company's Year 2000 project are to
determine and assess the risks of the Year 2000 problem and to plan and
institute mitigating actions to minimize those risks to acceptable levels.
The Company is not heavily dependent upon internally developed information
technology systems. The Company's core operations systems are largely standard
package systems for business management and inventory control, which have been
developed by vendors whose products are widely used in the industry. The
Company has already contacted many of its information technology vendors and
suppliers, and has determined that they are Year 2000 compliant. Between now and
its 1998 fiscal year end, the Company will contact its remaining information
technology vendors and suppliers as to their Year 2000 compliance to determine
what changes, if any, must be made to the information technology systems used
by the Company in its operations. The Company does not presently anticipate any
material Year 2000 issues or significant expenses from the conversion of its own
information systems, databases or programs. However, if the Company's current
estimates of the resources required to address and resolve Year 2000 issues
prove to be understated, the additional costs and resources required to address
the Year 2000 problem could result in material financial risk.
The Company intends to communicate with its significant customers and vendors
to understand their Year 2000 issues and how they may affect the Company, and to
determine what steps these customers and vendors have taken to prepare to manage
their Year 2000 issues as they relate to the Company. These customers and
vendors include manufacturers of the Company's eyeglass frames and significant
retailers of the Company's products. At this time, the Company does not know
what measures its customers and vendors have take to address the Year 2000
problem or how that problem's effect on its customers and vendors will impact
the Company. The failure by any of these third parties to adequately address the
Year 2000 problem could result in disruptions in the supply or sale of the
Company's products, either of which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Substantial Dependence Upon Laura Ashley License. Net sales of Laura Ashley
Eyewear accounted for 77.8%, 74.6%, 72.5% and 58.5% of the Company's net sales
in fiscal 1995, fiscal 1996, fiscal 1997, and the 1998 period, respectively.
The Company manufactures Laura Ashley Eyewear through an exclusive license with
Laura Ashley entered into in 1991. The Laura Ashley license terminates in 2001,
but may be renewed by the Company at least through January 2006 so long as the
Company is not in breach of the license agreement and meets certain minimum net
sales requirements. Laura Ashley may terminate the license before its term
expires if (i) the Company commits a material breach of the license agreement
and fails to cure that breach within 30 days after notice is given, (ii) the
management or control of the Company passes from Bernard Weiss and Julie Heldman
to other parties whom Laura Ashley may reasonably regard as unsuitable, (iii)
the Company fails to propose a selection of styles of eyewear which Laura Ashley
in exercising good faith is willing to approve for manufacture and distribution,
(iv) the Company fails to have net sales of Laura Ashley Eyewear sufficient to
generate minimum royalties in each of any two years, (v) the Company is unable
to pay its debts in the ordinary course of business or enters into liquidation,
becomes bankrupt or insolvent, or is placed in the control of a receiver or
trustee, or (vi) the Company in any year fails to spend a specified percentage
of net sales of Laura Ashley Eyewear on advertising and promotion. For purposes
of renewal and early termination of the license agreement, the Company must
generate total Laura Ashley Eyewear minimum net sales of $10,000,000 and
$11,000,000 for the contract years ending January 31, 1999 and 2000,
respectively. The Company has substantially exceeded its minimum net sales
requirements each year under the license agreement. The termination of the
Laura Ashley Eyewear license would have a material adverse effect on the
Company's business, operating results and financial condition.
Approval Requirements of Brand-Name Licensors. The Company's business is
predominantly based on its brand-name licensing relationships. In addition to
its licensing relationship with Laura Ashley, the Company licenses the right to
use proprietary marks from Hart Schaffner & Marx, Revlon for its Jean Nate brand
name, and Eddie Bauer. Each of the Laura Ashley, Hart Schaffner & Marx, and
Eddie Bauer licenses requires mutual agreement of the parties for significant
matters. Each of these licensors has final approval over all eyeglass frames and
other products bearing the licensor's proprietary marks, and the frames must
meet the licensor's general design specifications and quality standards.
Consequently, each licensor may, in the exercise of its approval rights, delay
the distribution of eyeglass frames bearing its proprietary marks. The Company
expects that each future license it obtains will contain similar approval
provisions. Accordingly, there can be no assurance that the Company will be able
to continue to maintain
12
<PAGE>
good relationships with each licensor, or that the Company will not be subject
to delays resulting from disagreements with, or an inability to obtain approvals
from, its licensors. These delays could materially and adversely affect the
Company's business, operating results and financial condition.
Limitations on Ability to Distribute Other Brand-Name Eyeglass Frames. Each
of the Company's licenses limits the Company's right to market and sell products
with competing brand names. The Laura Ashley license prohibits the Company from
selling any range of designer eyewear that is similar to Laura Ashley Eyewear in
price and any of style, market position and market segment. The Hart Schaffner
& Marx license prohibits the Company from marketing and selling another men's
brand of eyeglass frames under a well-known fashion name with a wholesale price
in excess of $40. The Eddie Bauer license prohibits the Company from entering
into license agreements with companies which Eddie Bauer believes are its direct
competitors. The Company expects that each future license it obtains will
contain some limitations on competition within market segments. The Company's
growth, therefore, will be limited to capitalizing on its existing licenses in
the prescription eyeglass market, introducing eyeglass frames in other segments
of the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent the
Company from introducing new eyewear products in market segments the Company
believes are not being served by its existing products.
Dependence Upon Contract Manufacturers; Foreign Trade Regulation. The
Company's frames are manufactured to its specifications by a number of contract
manufacturers located outside the United States, principally in Japan, Hong
Kong/China, France and Italy. The manufacture of high quality metal frames is a
labor-intensive process which can require over 200 production steps (including a
large number of quality-control procedures) and from 90 to 180 days of
production time. These long lead times increase the risk of overstocking, if
the Company overestimates the demand for a new style, or understocking, which
can result in lost sales if the Company underestimates demand for a new style.
While a number of contract manufacturers exist throughout the world, there can
be no assurance that an interruption in the manufacture of the Company's
eyeglass frames will not occur. An interruption occurring at one manufacturing
site that requires the Company to change to a different manufacturer could cause
significant delays in the distribution of the styles affected. This could cause
the Company to miss delivery schedules for these styles, which could materially
and adversely affect the Company's business, operating results and financial
condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin and results of operations.
In fiscal 1996, fiscal 1997, and the 1998 period, approximately 39.9%, 45.8%,
and 27.5%, respectively, of the Company's eyeglass frames were manufactured by
companies in Japan, and approximately 40.0%, 36.6%, and 29.1%, respectively, of
the Company's eyeglass frames were manufactured by companies headquartered in
Hong Kong that have manufacturing facilities in China. Recent economic
developments have resulted in a stronger U.S. dollar and instability in the
Asian-Pacific
13
<PAGE>
economies and financial markets. These economic developments have resulted in
improved profit margins for the Company, as its cost of goods has decreased for
frames purchased in foreign currencies. There can be no assurance, however, that
the Asian-Pacific economic instability will not result in an adverse future
impact on the business operations of some of the Company's contract
manufacturers, which could force the Company to move the manufacture of some
styles to other factories. The resulting disruption to the Company's business
could have a material adverse effect on the Company's business, operating
results and financial condition.
Effective July 1, 1997, the exercise of sovereignty over the British Crown
Colony of Hong Kong was transferred from the United Kingdom to China pursuant to
a treaty between the two countries, and Hong Kong became a part of China. Any
political or economic disruptions in Hong Kong or China may force the Company to
manufacture its eyeglass frames in other countries which could increase frame
costs. The Company is uncertain as to the impact that the new government will
have on the Company's business operations in Hong Kong. Further, China currently
enjoys Most Favored Nation trading status with the United States. Under the
Trade Act of 1974, the President of the United States is authorized, upon making
specific findings, to waive certain restrictions that would render China
ineligible for Most Favored Nation treatment. The President has waived these
provisions every year since 1979. No assurance can be given that China will
continue to enjoy Most Favored Nation status in the future. Any legislation or
administrative action by the United States government that revokes or places
further conditions on China's Most Favored Nation status, or otherwise limits
imports of Chinese eyeglass frames into the United States, could, if enacted,
have a material adverse effect on the Company's business, operating results and
financial condition.
Relationships With Domestic Distributors. The Company distributes its
eyeglass frames to independent optical retailers in the United States (other
than California and Arizona) largely through distributors who sell competing
lines of eyeglass frames. Although the Company believes that its distributors
currently devote a great deal of time and resources to promoting the Company's
products, there can be no assurance that these distributors will continue to do
so. The Company does not have written agreements with its domestic distributors
except for written understandings not to resell or divert Laura Ashley Eyewear
through unauthorized channels of distribution, and not to expand the territories
in which they sell the Company's products without the Company's prior consent.
Accordingly, the Company's domestic distributors may spend an increased amount
of effort and resources marketing competing products, and may terminate their
relationships with the Company at any time without penalty. There can be no
assurance that the informal nature of the Company's relationships with its
domestic distributors will not lead to disagreements between the Company and its
distributors or between the distributors themselves, which could have a material
adverse impact on the Company's business, operating results and financial
condition.
International Sales. International sales accounted for approximately 9.0%,
8.8%, 7.7% and 8.3% of the Company's net sales in fiscal 1995, fiscal 1996,
fiscal 1997, and the 1998 period, respectively. These sales were primarily in
England, Canada, Australia, New Zealand, France and the Netherlands. The
Company's international business is subject to numerous risks, including the
need to comply with export and import laws, changes in export or import
controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade restrictions,
the greater difficulty of administering business overseas and general economic
conditions. Although the Company's international sales are principally in United
States dollars, sales to international customers may also be affected by changes
in demand resulting from fluctuations in interest and currency exchange rates.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, operating results and financial condition.
Quarterly and Seasonal Fluctuations. The Company's results of operations
have fluctuated from
14
<PAGE>
quarter to quarter and the Company expects these fluctuations to continue in the
future. Historically, the Company's net sales in the quarter ending January 31
(its first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and year-
end inventory adjustments by distributors and independent optical retailers. A
factor which may significantly influence results of operations in a particular
quarter is the introduction of a brand-name collection, which results in
disproportionate levels of selling expenses due to additional advertising,
promotions, catalogs and in-store displays. Introduction of a new brand may also
generate a temporary increase in sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations include
customer demand, the mix of distribution channels through which the eyeglass
frames are sold, the mix of eyeglass frames sold, product returns, delays in
shipment and general economic conditions.
Product Returns. The Company has a product return policy which it believes
is standard in the optical industry. Under that policy, the Company generally
accepts returns of non-discontinued product for credit, upon presentment and
without charge. According to the 1996 U.S. Optical Industry Handbook, the
existence of this policy in the optical business has led to some companies
having return rates as high as 20%. While the Company's product returns for
fiscal 1995, fiscal 1996, fiscal 1997, and the 1998 period amounted to 11.6%,
12.1%, 12.5%, and 12.2% of gross sales (sales before returns), respectively, and
the Company maintains reserves for product returns which it considers adequate,
the possibility nonetheless exists that the Company could experience returns at
a rate significantly exceeding its historical levels, which could have a
material adverse impact on the Company's business, operating results and
financial condition.
Availability of Vision Correction Alternatives. The Company's future success
could depend to a significant extent on the availability and acceptance by the
market of vision correction alternatives to prescription eyeglasses, such as
contact lenses and refractive (optical) surgery. While the Company does not
believe that contact lenses, refractive surgery or other vision correction
alternatives materially and adversely impact its business at present, there can
be no assurance that technological advances in, or reductions in the cost of,
vision correction alternatives will not occur in the future, resulting in their
more widespread use. Increased use of vision correction alternatives could
result in decreased use of the Company's eyewear products, which would have a
material adverse impact on the Company's business, operating results and
financial condition.
Acceptance of Eyeglass Frames; Unpredictability of Discretionary Consumer
Spending. The Company's success will depend to a significant extent on the
market's acceptance of the Company's brand-name eyeglass frames. If the Company
is unable to develop new, commercially successful styles to replace revenues
from older styles in the later stages of their life cycles, the Company's
business, operating results and financial condition could be materially and
adversely affected. The Company's future growth will depend in part upon the
effectiveness of the Company's marketing and sales efforts as well as the
availability and acceptance of other competing eyeglass frames released into the
market place at or near the same time, the availability of vision correction
alternatives, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted.
The Company's success also will depend to a significant extent upon a number
of factors relating to discretionary consumer spending, including the trend in
managed health care to allocate fewer dollars to the purchase of eyeglass
frames, and general economic conditions affecting disposable consumer income,
such as employment business conditions, interest rates and taxation. Any
significant adverse change in general economic conditions or uncertainties
regarding future economic prospects that adversely affect discretionary consumer
spending generally, and purchasers of prescription eyeglass frames specifically,
could have a material adverse effect on the Company's business, operating
results and financial condition.
15
<PAGE>
Competition. The markets for prescription eyewear are intensely competitive.
There are thousands of styles, including hundreds with brand names. At retail,
the Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A.
(operating in the United States through a number of its subsidiaries), Safilo
Group S.p.A. (operating in the United States through a number of its
subsidiaries) and Marchon Eyewear, Inc. Signature's largest competitors have
significantly greater financial, technical, sales, manufacturing and other
resources than the Company. They also employ direct sales forces that are
significantly larger than the Company's, and are thus able to realize a higher
gross profit margin. At the distributor level, sales representatives often carry
many lines of eyewear, and the Company must vie for their attention. At the
major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in their own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated in
that it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Dependence on Key Personnel. The Company's success has and will continue to
depend to a significant extent upon its executive officers, including Bernard
Weiss (Chief Executive Officer), Julie Heldman (President), Michael Prince
(Chief Financial Officer), Robert Fried (Senior Vice President of Marketing) and
Robert Zeichick (Vice President of Advertising and Sales Promotion). The loss
of the services of one or more of these key employees could have a material
adverse effect on the Company. The Company has entered into employment
agreements with each of Ms. Heldman and Messrs. Weiss, Prince, Fried and
Zeichick pursuant to which they have agreed to render services to the Company
until October 31, 2000. The Company maintains and is the sole beneficiary of
"key person" life insurance on Ms. Heldman and Messrs. Weiss, Prince, Fried and
Zeichick in the amount of $1,500,000 each. In the event of the death of an
executive officer, a portion of the proceeds of the applicable policy would be
used to pay the Company's obligation under the officer's employment agreement.
There can be no assurance that the remaining proceeds of these policies will be
sufficient to offset the loss to the Company due to the death of that executive
officer. In addition, the Company's future success will depend in large part
upon its ability to attract, retain and motivate personnel with a variety of
creative, technical and managerial skills. There can be no assurance that the
Company will be able to retain and motivate its personnel or attract additional
qualified members to its management staff. The inability to attract and retain
the necessary managerial personnel could have a material adverse effect on the
Company's business, operating results and financial condition.
Management of Growth. The Company has grown rapidly in recent years, with
net sales increasing from $9.2 million in fiscal 1992 to $33.2 million in fiscal
1997, and to $29.6 million for the 1998 period, which is a 21.5% increase over
the 1997 period. Additionally, the number of employees increased from 41 at
November 1, 1992 to 116 at July 31, 1998. The Company's growth has placed
substantial burdens on its management resources, and as a result of its growth,
the Company has made additions to its management team. Additionally, the
Company plans to continue to expand its operations as a result of the
introduction of Eddie Bauer Eyewear. The Company's ability to manage its growth
effectively will require it to continue to improve its operational, financial
and management information systems and
16
<PAGE>
controls and to train, motivate and manage a larger number of employees. There
can be no assurance that the Company will be able to sustain its historic rate
of revenue growth, continue its profitable operations or manage future growth
successfully.
Control by Directors and Executive Officers. The directors and executive
officers of the Company owned approximately 54.8% of the Company's outstanding
shares at July 31, 1998. As a result, the directors and executive officers
control the Company and its operations, including the approval of significant
corporate transactions and the election of at least a majority of the Company's
Board of Directors and thus the policies of the Company. The voting power of
the directors and executive officers could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase of
the Common Stock, which might depress the price of the Common Stock.
No Dividends Anticipated. The Company does not currently intend to declare
or pay any cash dividends and intends to retain earnings, if any, for the future
operation and expansion of the Company's business.
Possible Anti-Takeover Effects. The Company's Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. No shares of Preferred Stock of
the Company were outstanding at July 31, 1998, and the Company has no present
intention to issue any shares of Preferred Stock. However, the rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, which could depress the
market value of the Common Stock. In addition, each of the Laura Ashley, Hart
Schaffner & Marx and Eddie Bauer licenses allows the licensor to terminate its
license upon certain events which under the license are deemed to result in a
change in control of the Company. See "--Substantial Dependence Upon Laura
Ashley License." The licensors' rights to terminate their licenses upon a change
in control of the Company could have the effect of discouraging a third party
from acquiring or attempting to acquire a controlling portion of the outstanding
voting stock of the Company and could thereby depress the market value of the
Common Stock.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1998 Annual Meeting of Shareholders held on May 15, 1998
(the "Annual Meeting"), the Company's shareholders (a) elected Bernard Weiss,
Julie Heldman, Michael Prince, Daniel Warren, Maurice Buchsbaum and Joel Johnson
to serve as Directors of the Company until the next annual meeting and until
their respective successors have been elected, and (b) approved an amendment to
the Company's 1997 Stock Plan to increase from 600,000 shares to 800,000 shares
the maximum number of shares of Common Stock that may be issued pursuant to
awards granted under the plan. Each Director was elected by a vote of 5,154,879
shares in favor of, and 5,500 shares against, that Director. At the Annual
Meeting, 5,098,449 shares were voted in favor of, 58,360 shares were voted
against, and 3,570 shares were withheld from voting on the amendment to the
Company's 1997 Stock Plan. There were no broker non-votes at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 14, 1998 SIGNATURE EYEWEAR, INC.
By: /s/ Michael Prince
----------------------------
Michael Prince
Chief Financial Officer
/s/ Michael Prince
----------------------------
Michael Prince
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS OF SIGNATURE EYEWEAR, INC. AS OF AND FOR THE NINE MONTHS
ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 5,486,573
<SECURITIES> 0
<RECEIVABLES> 5,871,431
<ALLOWANCES> 67,755
<INVENTORY> 11,172,421
<CURRENT-ASSETS> 24,813,432
<PP&E> 2,392,383
<DEPRECIATION> 1,325,129
<TOTAL-ASSETS> 26,018,123
<CURRENT-LIABILITIES> 6,502,130
<BONDS> 0
0
0
<COMMON> 9,400
<OTHER-SE> 19,506,593
<TOTAL-LIABILITY-AND-EQUITY> 26,018,123
<SALES> 29,599,689
<TOTAL-REVENUES> 29,892,868
<CGS> 11,832,037
<TOTAL-COSTS> 26,329,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,430
<INCOME-PRETAX> 3,557,621
<INCOME-TAX> 1,353,222
<INCOME-CONTINUING> 2,204,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,204,399
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
