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, 1999
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, 5,082,589 shares issued and outstanding as of September 10, 1999.
<PAGE>
SIGNATURE EYEWEAR, INC.
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Balance Sheets as of July 31, 1999 (Unaudited) and
October 31, 1998...................................................3
Statements of Income (Unaudited) for the Three Months and Nine
Months Ended July 31, 1999 and 1998................................4
Statements of Cash Flows (Unaudited) for the Nine Months Ended
July 31, 1999 and 1998.............................................5
Notes to Financial Statements.........................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................................23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................24
Page 2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
<CAPTION>
JULY 31, OCTOBER 31,
ASSETS 1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,383,869 $ 4,256,655
Accounts receivable, trade 8,409,021 5,854,722
Inventories 13,338,267 11,308,589
Deferred tax asset 368,000 368,000
Income taxes refundable 0 186,481
Prepaid expenses and other current assets 1,999,260 1,573,627
----------- -----------
28,498,417 23,548,074
----------- -----------
Property and Equipment (net of accumulated
depreciation and amortization) 1,805,545 1,472,954
----------- -----------
Other Assets:
Goodwill (net of amortization) 5,003,125 0
Covenant not to compete (net of amortization) 568,750 0
Deferred tax asset 7,000 7,000
Deposits and other assets 406,818 123,312
----------- -----------
5,985,693 130,312
----------- -----------
$36,289,655 $25,151,340
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 6,919,229 $ 4,309,026
Current portion of long-term debt 288,206 0
Capitalized lease obligations 42,316 0
Income taxes payable 630,383 0
Accrued expenses and other current liabilities 2,676,756 1,427,369
----------- -----------
10,556,890 5,736,395
----------- -----------
Long-term Debt 5,110,748 0
----------- -----------
Stockholders' Equity:
Preferred stock (authorized 5,000,000 shares,
$.001 par value, none outstanding) 0 0
Common stock (authorized 30,000,000 shares,
$.001 par value, 5,084,689 shares
outstanding at July 31, 1999 and 5,119,337
shares outstanding at October 31, 1998) 9,216 9,251
Paid-in capital 14,390,009 14,544,284
Retained earnings 6,222,792 4,861,410
----------- -----------
20,622,017 19,414,945
----------- -----------
$36,289,655 $25,151,340
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3
<PAGE>
<TABLE>
SIGNATURE EYEWEAR, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
----------------------------------- -----------------------------
1999 1998 1999 1998
--------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 13,227,776 $ 10,704,040 $ 34,689,416 $ 29,599,689
Cost of Sales 5,409,121 4,254,456 14,413,426 11,832,037
--------------- ---------------- ------------- ------------
Gross Profit 7,818,655 6,449,584 20,275,990 17,767,652
--------------- ---------------- ------------- ------------
Operating Expenses:
Selling 3,831,812 3,568,342 10,860,723 9,347,989
General and administrative 2,970,569 1,865,400 7,191,633 5,149,791
Amortization of intangibles 56,921 0 56,921 0
--------------- ---------------- ------------- ------------
6,859,302 5,433,742 18,109,277 14,497,780
--------------- ---------------- ------------- ------------
Income from Operations 959,353 1,015,842 2,166,713 3,269,872
--------------- ---------------- ------------- ------------
Other Income (Expense):
Interest, net 6,072 78,942 72,700 266,856
Sundry income(expense) 11,757 (8,608) 17,969 20,893
--------------- ---------------- ------------- ------------
17,829 70,334 90,669 287,749
--------------- ---------------- ------------- ------------
Income before Income Taxes 977,182 1,086,176 2,257,382 3,557,621
Provision for Income Taxes 401,000 389,313 896,000 1,353,222
--------------- ---------------- ------------- ------------
Net Income $ 576,182 $ 696,863 $ 1,361,382 $ 2,204,399
=============== ================ ============= ============
Earnings Per Share, Basic and Diluted:
Earnings per common share $ 0.11 $ 0.13 $ 0.27 $ 0.42
=============== ================ ============= =============
Weighted average number of
common shares outstanding 5,084,689 5,268,027 5,092,079 $ 5,268,027
=============== ================ ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
Page 4
<PAGE>
<TABLE>
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,361,382 $ 2,204,399
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 531,431 419,027
Provision for bad debts 34,812 7,439
Loss on sale of equipment 5,842 5,280
Deferred income taxes (83,463) (50,000)
Changes in assets -- (increase) decrease:
Accounts receivable, trade (1,912,059) (1,797,597)
Inventories (554,664) (4,344,808)
Prepaid income taxes 186,481 0
Prepaid expenses and other assets (396,616) (1,319,974)
Changes in liabilities--increase (decrease):
Accounts payable, trade 1,384,879 3,212,355
Income taxes payable 630,383 (346,000)
Accrued expenses and other current liabilities 560,702 (214,808)
----------- -----------
Net cash provided by (used in) operating activities 1,749,110 (2,224,687)
----------- -----------
Cash Flows Used in Investing Activities:
Purchases of property and equipment (665,020) (412,025)
Proceeds from sale of equipment 21,700 0
Acquisition related cash payments (1,310,771) 0
----------- -----------
Net cash used in investing activities (1,954,091) (412,025)
----------- -----------
Cash Flows from Financing Activities:
Borrowings on long-term debt 500,000 0
Principal payments on long-term debt (9,750) (10,138)
Principal payments on capital lease obligations (3,745) 0
Repurchase of common stock (154,310) 0
----------- -----------
Net cash provided by (used in) financing activities 332,195 (10,138)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 127,214 (2,646,850)
----------- -----------
Cash and Cash Equivalents, Beginning of Period 4,256,655 8,133,423
----------- -----------
Cash and Cash Equivalents, End of Period $ 4,383,869 $ 5,486,573
=========== ===========
</TABLE>
Page 5
<PAGE>
SIGNATURE EYEWEAR, INC.
<TABLE>
STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Supplementary Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 46,963 $ 3,845
=========== ===========
Income taxes $ 91,502 $ 2,027,955
=========== ===========
Supplemental Schedule of Non Cash Operating and
Financing Activity:
Liabilities incurred in connection with
acquisition $ 2,125,000 $ 0
=========== ============
Liabilities assumed in connection with
acquisition $ 4,743,774 $ 0
=========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
Page 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, 1999 varies
from the federal statutory tax rate of 34% principally due to state income
taxes.
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:
FOR THE THREE MONTHS ENDED JULY 31, 1999
NET INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
Basic and diluted EPS income
available to common stockholders $ 576,182 5,084,689 $ 0.11
========= ========= ======
FOR THE NINE MONTHS ENDED JULY 31, 1999
NET INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
Basic and diluted EPS income
available to common stockholders $1,361,382 5,092,079 $ 0.27
========== ========= ======
For the three and nine months ended July 31, 1999, there was no difference
between basic and diluted EPS. Warrants to purchase 180,000 shares of common
stock at $12 per share were outstanding during
Page 7
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
the quarter. Options to purchase 419,000 shares of common stock at $10 per share
and 204,300 shares of common stock at $4 per share 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, 1999.
NOTE 3--ACQUISITION OF BUSINESS
On June 23, 1999, the Company acquired substantially all of the assets (the
"CDS Acquisition") of California Design Studio, Inc. ("CDS"), including its
Dakota Smith proprietary name, and an exclusive license for Nicole Miller
Eyewear. Total consideration was $7,394,000, consisting of $800,000 in cash;
payment in full of the $600,000 existing CDS bank loan; an unsecured promissory
note in the principal amount of $1,250,000; and the assumption of approximately
$4,744,000 of the liabilities of CDS. Additionally the Company recorded
approximately $275,000 of estimated expenses in connection with the CDS
Acquisition.
The CDS Acquisition was accounted for using the purchase method of accounting.
The purchase price has been allocated based upon the following approximate fair
values on the date of the CDS Acquisition as follows:
JULY 31,
1999
-------------
Current assets $2,353,000
Property and equipment 170,000
Intangibles 117,000
Goodwill 5,029,000
-------------
Purchase price $ 7,669,000
=============
The $5,029,000 excess of the purchase price over the fair values of the net
assets acquired has been recorded as goodwill, to be amortized on a
straight-line basis over 20 years, and is included in other assets.
In connection with the CDS Acquisition, the Company entered into a covenant not
to compete agreement with the sole shareholder of CDS, valued at $600,000, which
has been included in other assets and is being amortized on the straight-line
basis over its life of two years.
Page 8
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
The following summary of unaudited pro forma combined results of operations data
for the three months and the nine months ended July 31, 1999 and 1998 reflects
the CDS Acquisition as if it had occurred on November 1, 1997.
Three Months Ended July 31,
---------------------------
1999 1998
------------ -------------
Net sales $ 14,444,000 $ 13,122,000
============ ============
Net income $ 741,000 $ 498,000
============ ============
Earnings per common share $ 0.15 $ 0.09
============ ============
Nine Months Ended July 31,
--------------------------
1999 1998
----------- -------------
Net sales $39,366,000 $ 37,822,000
=========== ============
Net income $ 1,135,000 $ 1,975,000
=========== ============
Earnings per common share $ 0.22 $ 0.37
=========== ============
These unaudited pro forma results of operations have been prepared for
comparative purposes only and include certain adjustments, such as increased
interest expense from the acquisition debt, increased amortization expense from
goodwill and other intangible assets, and reduced operating and occupancy
expenses resulting from consolidating the operations. The unaudited pro forma
combined results of operations are not necessarily indicative of the actual
results that would have occurred had the CDS Acquisition been consummated on
November 1, 1997 or of the future operations of the combined companies under the
ownership and management of the Company.
NOTE 4--LONG-TERM DEBT
In December 1998, the Company entered into an agreement with its commercial bank
to provide the Company with an unsecured term loan of $500,000, with interest
accruing at a fixed rate of 6.75% per year, and interest and principal payments
scheduled throughout the life of the term loan. The term loan matures in
November 2001. At July 31, 1999, $500,000 was due to the bank under the term
loan, of which $166,667 was current.
In connection with the CDS Acquisition, the Company issued a note payable to CDS
in the amount of $1,250,000 bearing interest at 7% per annum. The note requires
monthly payments of $17,042, and the unpaid principal and accrued interest is
due on June 23, 2002.
Also in connection with the CDS Acquisition, the Company assumed a liability to
the principal supplier of CDS in the face amount of $4,845,847, requiring
monthly payments of $50,000, with no stated
Page 9
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
interest rate, until June 23, 2002, when the remaining balance is due. The
liability has been discounted using a 7.37% rate of interest, thereby
decreasing the liability and the corresponding goodwill by $705,604.
NOTE 5--CAPITAL LEASE OBLIGATIONS
In connection with the CDS Acquisition, the Company acquired certain equipment
and assumed the corresponding obligations under agreements classified as capital
lease obligations. The property is included in property and equipment at their
fair values at the date of the CDS Acquisition. The capitalized cost and
accumulated amortization at July 31, 1999 related to such equipment were as
follows:
Capitalized cost $ 59,855
Less accumulated amortization (2,077)
----------
Capitalized cost, net $ 57,778
==========
Future minimum payments under capital leases as of July 31, 1999 are as follows:
July 31, 2000 $ 51,524
July 31, 2001 41,678
July 31, 2002 25,718
----------
Total future minimum lease payments 118,920
Less amount representing interest (14,992)
----------
Present value of net minimum capital lease payments 103,928
Less current portion 42,316
----------
Long-term portion $ 61,612
==========
NOTE 6--OPERATING LEASES
In February 1999, the Company entered into an agreement permitting the
acquisition of an aggregate of $3,500,000 of computer equipment and software
under a series of operating leases. At July 31, 1999, the Company had acquired
approximately $2,262,000 of equipment and software under the leases. Payments
for each lease will be made in monthly installments over a 42-month period.
Payments began in June 1999.
NOTE 7--LICENSE AGREEMENTS
In March 1999, the Company entered into a license agreement with COACH, a
division of Sara Lee Corporation, which grants the Company exclusive rights to
use the "COACH" trademarks in connection with the distribution, marketing and
sale of eyewear products. The license period extends for ten years
Page 10
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
from the date sales of COACH Eyewear begin, provided that specified minimum
sales are achieved and the Company is not in material default under the
agreement.
In March 1999, the Company amended its license agreement with Eddie Bauer to
authorize the Company to design, manufacture and market Eddie Bauer Performance
Sunwear using patented technology lenses provided by Oakley, Inc. The Company
also entered into an agreement with Oakley, Inc. pursuant to which Oakley agreed
to supply the lenses through December 2002.
In connection with the CDS Acquisition, the Company acquired CDS's license with
Kobra International, which grants the Company rights to use the "Nicole Miller"
trademark in connection with the distribution, marketing and sale of eyewear
products. The license period extends until March 31, 2003, provided that
specified minimum sales are achieved and the Company is not in material default
under the agreement.
NOTE 8--SUBSEQUENT EVENT
As of August 1, 1999, the Company acquired 100% of the capital stock of Great
Western Optical ("GWO"), a privately held corporation. GWO's principal business
was the distribution of the Company's products. The purchase price for the
capital stock consisted of a note payable and Signature stock.
Page 11
<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 and Hart Schaffner & Marx Eyewear,
as well as its own private labels. In March 1999, the Company entered into a
license agreement with COACH, a leading American brand of quality leather goods
and accessories, under which Signature will have the exclusive license to
design, market and distribute COACH Eyewear. The Company also entered into an
amendment to its license agreement with Eddie Bauer, under which Signature
received the right to design, manufacture and distribute Eddie Bauer Performance
Sunwear using lenses from Oakley, Inc. Signature concurrently entered into an
agreement with Oakley providing that Oakley will supply its patented technology
lenses for Eddie Bauer Performance Sunwear. In June 1999, the Company purchased
substantially all the assets of California Design Studio, Inc. ("CDS"), a
privately held corporation that designed and marketed prescription eyeglass
frames and ready-to-wear sunglasses under its own proprietary trademarks,
including Dakota Smith, and under a license for Nicole Miller Eyewear.
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 "Year 2000" and "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's cash
flows and working capital requirements and the Company's estimates of revenues
and expenses following its conversion to a direct sales force in October 1999.
ACQUISITION OF CALIFORNIA DESIGN STUDIO
On June 23, 1999, Signature acquired substantially all of the assets of
CDS for consideration of $7.4 million, consisting of $800,000 in cash, payment
in full of the $600,000 existing CDS bank loan, an unsecured promissory note in
the principal amount of $1,250,000 and the assumption of approximately
$4,744,000 of the liabilities of CDS. The assumed liabilities consist primarily
of obligations to the principal manufacturer of the eyeglass frames of CDS and
of other trade payables. The acquisition of CDS has been accounted for using the
purchase method of accounting. The Company has recorded as goodwill the $5.0
million excess of the purchase price over the fair values of the net assets
acquired, which will be amortized on a straight-line basis over 20 years. The
Company's revenues for the three months ended July 31, 1999 include sales of
Nicole Miller Eyewear and Dakota Smith Eyewear that occurred following the
closing of the acquisition on June 23, 1999. The Company also entered into a
covenant not to compete agreement with the shareholder of CDS, valued at
$600,000, which is being amortized on the straight-line basis over its life of
two years, and incurred acquisition related costs of approximately $275,000.
Page 12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, selected
statement of income data shown as a percentage of net sales.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------ ------------------
<CAPTION>
1998 1999 1998 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 39.7 40.9 40.0 41.5
----- ----- ----- -----
Gross profit................... 60.3 59.1 60.0 58.5
----- ----- ----- -----
Operating expenses:
Selling..................... 33.3 29.0 31.6 31.3
General and administrative.. 17.5 22.5 17.4 20.8
Amortization of Intangibles. 0 .4 0 .2
----- ----- ----- -----
Total operating expenses. 50.8 51.9 49.0 52.3
----- ----- ----- -----
Income from operations......... 9.5 7.2 11.0 6.2
----- ----- ----- -----
Other income (expense), net.... .6 .1 1.0 .3
----- ----- ----- -----
Income before provision for
income taxes................... 10.1 7.3 12.0 6.5
----- ----- ----- -----
Provision for income taxes..... 3.6 3.0 4.6 2.6
----- ----- ----- -----
Net income..................... 6.5% 4.3% 7.4% 3.9%
===== ===== ===== =====
</TABLE>
NET SALES. Net sales were $13,228,000 for the quarter ended July 31, 1999
(the "1999 third quarter"), an increase of 23.6% compared to net sales of
$10,704,000 for the quarter ended July 31, 1998 (the "1998 third quarter"). Net
sales for the nine months ended July 31, 1999 (the "1999 period") were
$34,689,000, an increase of 17.2% compared to net sales of $29,600,000 for the
nine months ended July 31, 1998 (the "1998 period").
The increases in net sales for the 1999 third quarter and the 1999 period
were due principally to increases of net sales of $1,539,000 and $5,494,000,
respectively, of Eddie Bauer Eyewear, which the Company launched in March 1998,
and to increases in net sales of $857,000 resulting from the addition of Nicole
Miller Eyewear and Dakota Smith Eyewear as a result of the CDS Acquisition on
June 23, 1999.
The following table sets forth, for the indicated periods, selected net
sales data in thousands, as a percentage of net sales and as a percentage change
in net sales from the 1998 to the 1999 periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
--------------------------------------------------- ----------------------------------------------------
1999 1998 CHANGE 1999 1998 CHANGE
------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Laura Ashley Eyewear $5,569 42.1% $5,683 53.1% (2.1)% $16,081 46.4% $17,306 58.5% (7.1)%
Eddie Bauer Eyewear 4,212 31.8% 2,673 25.0% 57.6 % 10,937 31.5% 5,443 18.4% 101.0 %
Other Sales (1) 3,447 26.1% 2,348 21.9% 46.9 % 7,671 22.1% 6,851 23.1% 12.0 %
------- ----- ------- ----- ------- ----- ------- -----
Total $13,228 100.0% $10,704 100.0% 23.6 % $34,689 100.0% $29,600 100.0% 17.2 %
======= ===== ======= ===== ======= ===== ======= =====
<FN>
- ---------------
(1)Includes net sales of other designer eyewear (Hart Schaffner & Marx, Jean
Nate, Dakota Smith and Nicole Miller), private label frames, USA Optical and
Optical Surplus, and other miscellaneous products.
</FN>
</TABLE>
Page 13
<PAGE>
GROSS PROFIT. Gross profit increased from $6,450,000 in the 1998 third
quarter to $7,819,000 for the 1999 third quarter, and from $17,768,000 in the
1998 period to $20,276,000 for the 1999 period. This increase was due
principally to the increase in net sales. The Company's gross profit margin
declined from 60.3% in the 1998 third quarter to 59.1% in the 1999 third
quarter. The gross profit margin decreased from 60.0% in the 1998 period to
58.5% in the 1999 period. These decreases were primarily due to the sales of
certain styles at lower margins and, in the 1999 third quarter, to a shift in
the sales mix from distributors to national chains, which are at lower margins.
OPERATING EXPENSES. Operating expenses increased from $5,434,000 in the
1998 third quarter to $6,859,000 in the 1999 third quarter, and from $14,498,000
in the 1998 period to $18,109,000 in the 1999 period. Operating expenses for the
1999 third quarter and the 1999 period included an increase of $264,000 and
$1,513,000, respectively, in selling expenses, and an increase of $1,106,000 and
$2,042,000, respectively, in general and administrative expenses. General and
administrative expenses for the 1999 third quarter and 1999 period increased as
a result of $437,000 and $1,006,000, respectively, in additional compensation
and other expenses related to the Company hiring additional mid-level managers
and other personnel to prepare for the Company's planned expansion; an increase
of $145,000 and $388,000, respectively, in employee benefits; $257,000 due to
the upgrade of the Company's warehouse and operating systems; and, amortization
of $57,000 of goodwill and the covenant not to compete related to the CDS
Acquisition. Selling expenses as a percentage of net sales decreased from 33.3%
of net sales for the 1998 third quarter to 29.0% of net sales for the 1999
third quarter, but declined slightly from 31.6% of net sales for the 1998
period to 31.3% for the 1999 period.
NET OTHER INCOME. Net other income in the 1999 third quarter and the 1999
period were $18,000 and $91,000, respectively, as compared to net other income
in the 1998 third quarter and the 1998 period of $70,000 and $288,000,
respectively. These decreases in other income were primarily due to a decrease
in interest income.
PROVISION FOR INCOME TAXES. The Company's income tax provisions were
$401,000 and $896,000 for the 1999 third quarter and the 1999 period,
respectively, and $389,000 and $1,353,000 for the 1998 third quarter and the
1998 period, respectively. The changes in income taxes reflect the changes in
income before income taxes.
NET INCOME. Net income was $697,000 and $2,204,000 in the 1998 third
quarter and 1998 period, respectively, and $576,000 and $1,361,000 in the 1999
third quarter and 1999 period, respectively. These decreases in net income were
due to the factors set forth above.
FUTURE IMPACT OF CONVERSION TO DIRECT SALES FORCE. Historically, the
Company has distributed its eyeglass frames to independent optical retailers in
the United States (other than California and Arizona) through distributors.
Sales through United States distributors accounted for approximately 37% of the
Company's total net sales during the nine months ended July 31, 1999. Effective
October 1, 1999, the Company will replace its domestic network of 25
distributors with its own direct national sales force of up to 130 sales
representatives. As of September 14, 1999, the Company had employed 70 direct
sales representatives. The Company's conversion to a direct sales force will
result in both an increase in the sales price the Company receives for products
previously sold through distributors and an increase in the selling expenses
associated with the sale of these products. The Company anticipates that
initially unit sales prices to optical retailers will be 60% to 70% greater
than sales prices to distributors.
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In addition, based on the same number of unit sales as in prior periods,
the Company anticipates that its selling expenses will increase to approximately
45% to 50% of net sales, primarily as a result of commissions to be paid to
sales representatives. Lastly, the Company anticipates that, during the 1999
fiscal fourth quarter and 2000 fiscal first quarter, it will have approximately
$1.0 million in credits for inventory returned by distributors. The Company also
must make significant expenditures in connection with the conversion, many of
which must be made before the Company begins to realize the benefits of selling
its products directly to optical retailers. These expenditures are related to,
among other factors, the employment of additional sales executives, sales
representatives, customer service personnel and other support personnel, and
investments in computer hardware and software, telephone and warehouse
distribution infrastructure. The Company expects that these expenditures will
adversely affect its operating results in the short term. See "Factors That May
Affect Future Results -- Replacement of Distributor Network with Direct Sales
Force."
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had $4,384,000 in cash and cash equivalents,
of which $3,250,000 was invested in commercial paper and certificates of deposit
with interest rates ranging from 4.45% to 5.10%, and $907,000 was invested in
money market funds bearing interest at 4.14%.
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 April 30,
1999, no amounts were due to the bank under the Credit Agreement. In December
1998, the Company entered into an agreement with its commercial bank to provide
the Company with an unsecured term loan of $500,000 (the "Term Loan"), with
interest accruing at a fixed rate of 6.75% per year, and interest and principal
payments scheduled throughout the life of the Term Loan. The Term Loan matures
in November 2001. At July 31, 1999, $500,000 was due to the bank under the Term
Loan.
Long-term debt at July 31, 1999 also included a promissory note payable to
CDS in the amount of $1,250,000 and the obligation of CDS to its principal
supplier that the Company assumed in the CDS Acquisition. See Notes 3 and 4 of
Notes to Financial Statements.
Of the Company's accounts payable at July 31, 1999, $2,710,000 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
$83,000 in foreign currency forward commitments at July 31, 1999.
In anticipation of its planned future growth, the Company in its fiscal
1999 second quarter began a project to upgrade its warehouse and operating
systems, including computer software and hardware. A significant portion of the
project is being funded by a series of operating leases with an aggregate
maximum line of credit for $3,500,000. Each lease has a 42-month term and even
monthly payments throughout the term. The Company anticipates that for this
project in fiscal 1999, approximately $450,000 will be capitalized and about
$750,000 will be charged to general and administrative expenses (including
$400,000 in payments under the operating leases).
In connection with the CDS Acquisition, the Company recorded other assets
consisting of goodwill and a covenant not to compete. See "Acquisition of
California Design Studio."
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The Company believes that cash generated from operations, borrowings under
its commercial bank, credit from its suppliers, and credit under the operating
lease will be sufficient to fund its working capital requirements for the next
twelve months.
YEAR 2000
Commencing in 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 information technology systems used by the Company and its key 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, which 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 industry. The Company has
already contacted the major information technology vendors and suppliers of its
current systems, and has obtained assurances that the technology is Year 2000
compliant. In the 1999 second quarter, the Company began a project to upgrade
its warehouse and operating systems, including computer software and hardware.
The Company anticipates that the portion of the project relating to computer
software and hardware will be installed during the fourth quarter of the
Company's 1999 fiscal year. The Company has contacted all the vendors and
suppliers of the new computer software and hardware, and has been assured that
all the technology is Year 2000 compliant. The Company does not presently
anticipate any material Year 2000 issues or significant expenses arising from
any conversion of its own information systems, databases or programs to be Year
2000 compliant. 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 a material financial risk. There can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the Year 2000 issues, and the Company's
inability to implement such systems and changes in a timely manner could have a
material adverse effect on future results of operations.
Because third party failures could have a material impact on the Company's
ability to conduct business, the Company has sent questionnaires to
substantially all of the Company's key vendors and business partners, including
manufacturers of the Company's eyeglass frames and significant retailers of the
Company's products. The purposes of these questionnaires are to obtain
reasonable assurances about the Year 2000 readiness status of these key vendors
and business partners, and their plans to become Year 2000 compliant. The
returned questionnaires have been assessed by the Company, categorized based
upon readiness for the Year 2000, and prioritized in order of significance to
the business of the Company. To the extent that key vendors and business
partners do not provide the Company with satisfactory evidence of their
readiness to handle Year 2000 issues, contingency plans are being developed. The
Company cannot yet determine how the Year 2000 problem or that problem's effect
on its customers and vendors will impact the Company. Based on the Company's
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current assessment, the costs of addressing potential problems are not currently
expected to have a material adverse impact on the Company's financial position,
results of operations or cash flows in future periods. However, the failure by
any of these key vendors or business partners 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. Accordingly, 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.
REPLACEMENT OF DISTRIBUTOR NETWORK WITH DIRECT SALES FORCE
Historically the Company has distributed its eyeglass frames to
independent optical retailers in the United States (other than California and
Arizona) through distributors. Sales through United States distributors
accounted for approximately 37% of the Company's total net sales during the nine
months ended July 31, 1999. Effective October 1, 1999, the Company will replace
its domestic network of 25 distributors with its own direct national sales force
of up to 130 sales representatives. While the Company has successfully developed
and managed a direct sales force of nine sales representatives in California and
Arizona, has hired an experienced national sales manager, and had employed 70
direct sales representatives as of September 14, 1999, it has no experience in
developing and managing a direct sales force on a national level. A successful
national direct sales force requires sales managers and sales representatives
who are experienced in the optical business; an ongoing system for training the
sales staff about Signature's products, programs and systems; revised sales
programs developed exclusively for the direct sales force; and highly
sophisticated internal systems necessary to support the expanded sales
structure. During the Company's 1999 fiscal fourth quarter, before the
completion of the direct sales force development, the Company anticipates that
its business, operating results and financial condition will be adversely
impacted by several aspects of the termination of its distributor relationships,
specifically the crediting of inventory returned by the distributors, and the
disruption in the marketplace caused by the changeover in sales representation
and by distributors' attempts to replace sales of Signature products with
products of other companies. In addition, in connection with the conversion to a
direct sales force, the Company must make significant expenditures, many before
the Company begins to realize the benefits of the conversion. These expenditures
are related to, among other factors, the employment of additional sales
executives, sales representatives, customer service personnel and other support
personnel; and investments in computer hardware and software, telephone,
information systems and warehouse distribution infrastructure.
There can be no assurance that the Company will be successful in making
the transition to a national direct sales force. Failure to do so could have a
material adverse impact on the Company's business, operating results and
financial condition.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY LICENSE
Net sales of Laura Ashley Eyewear accounted for 74.6%, 72.5%, 56.4%, and
42.1% of the Company's net sales in fiscal 1996, fiscal 1997, fiscal 1998, and
the 1999 third quarter, respectively. In March 1998, the Company launched the
Eddie Bauer Eyewear collection, which accounted for 20.9% of the Company's 1998
fiscal year net sales (although it was on the market for eight months of that
fiscal year) and 31.9% of the Company's net sales in the 1999 third quarter.
While the Company
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intends to continue reducing its dependence on the Laura Ashley Eyewear line
through the development of Eddie Bauer Eyewear and other brand names and product
offerings, the Company expects the Laura Ashley Eyewear line to continue to be
one of the Company's leading sources of revenue for the foreseeable future. The
Company designs, markets and distributes 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 $11,000,000, $12,000,000, and $13,000,000 for the contract years
ending January 31, 2000, 2001 and 2002, 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. Each of the licenses requires mutual agreement of the parties for
significant matters. Each of the licensors has final approval over all eyeglass
frames and other products bearing the licensor's proprietary marks, and the
frames must meet the licensor's general design specifications and quality
standards. Consequently, each licensor may, in the exercise of its approval
rights, delay the distribution of eyeglass frames bearing its proprietary marks.
The Company expects that each future license it obtains will contain similar
approval provisions. Accordingly, there can be no assurance that the Company
will be able to continue to maintain good relationships with each licensor, or
that the Company will not be subject to delays resulting from disagreements
with, or an inability to obtain approvals from, its licensors. These delays
could materially and adversely affect the Company's business, operating results
and financial condition.
LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS FRAMES
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and any of style, market position and market segment.
The Eddie Bauer license prohibits the Company from entering into license
agreements with companies which Eddie Bauer believes are its direct competitors.
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 COACH license prohibits the Company
from marketing and selling eyewear under the brand names COACH considers to be
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
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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 may adversely affect sales of the
Company's existing eyeglass frames or prevent the Company from introducing new
eyewear products in market segments the Company believes are not being served by
its existing products.
DEPENDENCE UPON CONTRACT MANUFACTURERS; FOREIGN TRADE REGULATION
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in Japan,
Hong Kong/China, France and Italy. The manufacture of high quality metal frames
is a labor-intensive process which can require over 200 production steps
(including a large number of quality-control procedures) and from 90 to 180 days
of production time. These long lead times increase the risk of overstocking, if
the Company overestimates the demand for a new style, or understocking, which
can result in lost sales if the Company underestimates demand for a new style.
While a number of contract manufacturers exist throughout the world, there can
be no assurance that an interruption in the manufacture of the Company's
eyeglass frames will not occur. An interruption occurring at one manufacturing
site that requires the Company to change to a different manufacturer could cause
significant delays in the distribution of the styles affected. This could cause
the Company to miss delivery schedules for these styles, which could materially
and adversely affect the Company's business, operating results and financial
condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin and results of operations.
INTERNATIONAL SALES
International sales accounted for approximately 8.8%, 7.7%, 8.4%, and 5.8%
of the Company's net sales in fiscal 1996, fiscal 1997, fiscal 1998, and the
1999 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.
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PRODUCT RETURNS
The Company has a product return policy that 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
over 20%. The Company's product returns for fiscal 1996, fiscal 1997, and fiscal
1998 amounted to 12.1%, 12.5%, and 13.8% of gross sales (sales before returns),
respectively. The Company anticipates returns that are significantly higher than
normal in its 1999 fiscal fourth quarter, due to its decision to replace its
distributor network with its own direct sales force on October 1, 1999. See "--
Replacement of Distributor Network with Direct Sales Force." The Company has
traditionally maintained reserves for product returns which it has considered
adequate, and intends to increase its reserve for returns in the future in
connection with its conversion to a national direct sales force. The possibility
nonetheless exists that the Company could experience returns at a rate
significantly greater than it has reserved for, 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 (including lasik)
optical surgery. While the Company does not believe that contact lenses, 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.
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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 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 $20.1 million in fiscal 1994 to $40.9 million in fiscal 1998, and the
number of employees increasing from
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approximately 50 at October 31, 1994 to 233 at July 31, 1999. In fiscal 1999,
the Company has had a significant increase in its product lines. The Company's
growth has placed substantial burdens on its management resources, and as a
result, the Company has made additions to its management team. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational, financial and management information systems and controls and
to train, motivate and manage a larger number of employees. There can be no
assurance that the Company will be able to sustain its historic rate of revenue
growth, continue its profitable operations or manage future growth successfully.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company owned approximately
56.5% of the Company's outstanding shares at July 31, 1999. 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.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to
quarter and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first fiscal quarter) have been lower than net sales in other fiscal quarters.
The Company attributes lower net sales in the first quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by independent optical retailers and,
historically, distributors. 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.
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 are outstanding, and the Company has no present intention to issue any
shares of Preferred Stock. However, the rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have
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the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, which may depress the market
value of the Common Stock. In addition, each of the Laura Ashley, Hart Schaffner
& Marx 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
FOREIGN CURRENCY RISKS. During fiscal 1998, a maximum of $2,174,000 and a
minimum of $667,000 of the Company's accounts payable were payable in foreign
currency. During the 1999 third quarter, a maximum of $2,710,000 and a minimum
of $860,000 of the Company's accounts payable were payable in foreign currency.
These foreign currencies included Japanese Yen, Italian Lire and French Francs.
Any significant change in foreign currency exchange rates could therefore
materially affect the Company's business, operating results and financial
condition. To monitor risks associated with currency fluctuations, the Company
on a weekly basis assesses the volatility of certain foreign currencies and
reviews the amounts and expected payment dates of its purchase orders and
accounts payable in those currencies. Based on those factors, the Company may
from time to time mitigate some portion of that risk by purchasing forward
commitments to deliver foreign currency to the Company. The Company held forward
commitments for foreign currencies in the amount of $59,000 at October 31, 1998
and $83,000 at July 31, 1999. International sales accounted for approximately
8.4% and 5.8% of the Company's net sales in fiscal 1998 and the 1999 third
quarter, respectively. 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. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuation can impact the Company's gross margin.
INTEREST RATE RISK. Under the Company's Credit Agreement, its bank has
agreed to provide the Company an unsecured revolving line of credit up to an
aggregate of $5,000,000. At the Company's option, interest may be based on the
London Interbank Offered Rate ("LIBOR") plus 2%, or at the bank's prime rate. At
July 31, 1999, no amounts were due to the bank under the Credit Agreement. Any
interest which may in the future become payable on the Company's bank line of
credit will be based on variable interest rates and will therefore be affected
by changes in market interest rates. In addition, the Company has fixed income
investments consisting of cash equivalents, which are also affected by changes
in market interest rates. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its cash equivalents
with high-quality financial institutions, limits the amount of credit exposure
to any one institution and has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
Page 23
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K filed on June 11, 1999, reporting under
Item 5 the Company's press release dated June 11, 1999.
Current Report on Form 8-K filed on July 1, 1999, reporting under
Item 2 the Company's acquisition of substantially all of the assets
of California Design Studio, Inc. on June 23, 1999.
Page 24
<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, 1999 SIGNATURE EYEWEAR, INC.
By: /S/ MICHAEL PRINCE
--------------------
Michael Prince
Chief Financial Officer
/S/ MICHAEL PRINCE
---------------------
Michael Prince
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 25
<TABLE> <S> <C>
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<CURRENCY> U.S. DOLLARS
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,383,869
<SECURITIES> 0
<RECEIVABLES> 8,409,021
<ALLOWANCES> 71,568
<INVENTORY> 13,338,267
<CURRENT-ASSETS> 28,498,417
<PP&E> 3,636,430
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0
0
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<TOTAL-REVENUES> 34,689,416
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<TOTAL-COSTS> 32,522,703
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<INCOME-PRETAX> 2,257,382
<INCOME-TAX> 896,000
<INCOME-CONTINUING> 1,361,382
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