<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 January 31, 2000
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, 5,056,889 shares issued and outstanding as of March 13, 2000.
================================================================================
<PAGE>
SIGNATURE EYEWEAR, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of January 31, 2000 (Unaudited)
and October 31, 1999................................................... 3
Consolidated Statement of Operations (Unaudited) for the Three Months
Ended January 31, 2000 and 1999........................................ 4
Consolidated Statement of Cash Flows (Unaudited) for the Three Months
Ended January 31, 2000 and 1999........................................ 5
Notes to Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 19
</TABLE>
2
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SIGNATURE EYEWEAR, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets January 31, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................... $ 238,668 $ 463,023
Accounts receivable, trade (net of allowance for doubtful
accounts).................................................... 8,806,629 6,550,057
Inventories.................................................... 16,682,998 16,636,474
Income taxes refundable........................................ 1,367,991 999,820
Deferred tax asset............................................. 392,000 392,000
Prepaid expenses and other current assets...................... 2,249,740 2,432,915
------------ ------------
29,738,026 27,474,289
------------ ------------
Property and Equipment (net of accumulated depreciation and
amortization)......................................................... 1,562,175 1,711,203
------------ ------------
Other Assets:
Goodwill and other intangibles (net of amortization)........... 5,892,660 6,035,190
Deferred tax asset............................................. 36,000 36,000
Deposits and other assets...................................... 178,834 217,402
------------ ------------
6,107,494 6,288,592
------------ ------------
$ 37,407,695 $ 35,474,084
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade........................................ $ 4,873,161 $ 6,285,490
Note payable, bank............................................. 4,600,000 1,750,000
Current portion of long-term debt.............................. 797,574 873,505
Accrued distributor credits.................................... 672,303 1,727,970
Accrued expenses and other current liabilities................. 734,518 1,696,701
------------ ------------
11,677,556 12,333,666
------------ ------------
Long-term Debt......................................................... 8,057,200 5,137,193
------------ ------------
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,
5,056,889 shares outstanding at January 31, 2000 and
5,082,389 shares outstanding at October 31, 1999)............ 9,188 9,214
Paid-in capital................................................ 14,363,990 14,441,996
Retained earnings.............................................. 3,299,761 3,552,015
------------ ------------
17,672,939 18,003,225
------------ ------------
$ 37,407,695 $ 35,474,084
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
SIGNATURE EYEWEAR, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31,
---------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Net Sales...................................................... $ 12,003,409 $ 8,856,901
Cost of Sales.................................................. 4,807,448 4,216,947
---------------- ---------------
Gross Profit................................................... 7,195,961 4,639,954
---------------- ---------------
Operating Expenses:
Selling................................................... 3,587,438 2,706,270
General and administrative................................ 3,511,306 1,758,669
Depreciation and amortization............................. 333,214 155,272
---------------- ---------------
7,431,958 4,620,211
---------------- ---------------
Income (Loss) from Operations.................................. (235,997) 19,743
---------------- ---------------
Other Income (Expense):
Interest, net............................................. (195,498) 38,024
Sundry income............................................. 11,066 4,092
---------------- ---------------
(184,432) 42,116
---------------- ---------------
Income (Loss) before Income Taxes.............................. (420,429) 61,859
Provision (Benefit) for Income Taxes........................... (168,171) 23,000
---------------- ---------------
Net Income (Loss).............................................. $ (252,258) $ 38,859
================ ===============
Earnings (Loss) Per Share, Basic and Diluted:
Earnings (Loss) per common share.......................... $ (0.05) $ 0.01
================ ===============
Weighted average number of common
shares outstanding...................................... 5,064,927 5,106,619
================ ===============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
SIGNATURE EYEWEAR, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................... $ (252,258) $ 38,859
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 333,214 155,272
Provision for bad debts................................. 90,504 100
Changes in assets -- (increase) decrease:
Accounts receivable, trade........................... (2,347,076) (157,082)
Inventories.......................................... (46,524) 1,460,529
Income taxes refundable.............................. (368,171) 0
Prepaid expenses and other assets.................... 221,743 27,346
Changes in liabilities -- increase (decrease):
Accounts payable, trade.............................. (1,412,329) (1,737,695)
Accrued distributor credits.......................... (1,055,667) 0
Accrued expenses and other current liabilities....... (962,183) (561,322)
--------------- ---------------
Net cash used in operating activities....................... (5,798,747) (773,993)
--------------- ---------------
Cash Flows from Investing Activities:
Purchases of property and equipment......................... (41,655) (142,945)
--------------- ---------------
Cash Flows from Financing Activities:
Borrowings on long-term debt................................ 3,500,000 0
Principal payments on long-term debt........................ (655,921) 0
Borrowings on note payable, bank............................ 2,850,000 500,000
Repurchase of common stock.................................. (78,032) (154,309)
--------------- ---------------
Net cash provided by financing activities................... 5,616,047 345,691
--------------- ---------------
Net Decrease in Cash and Cash Equivalents...................... (224,355) (571,247)
--------------- ---------------
Cash and Cash Equivalents, Beginning of Period................. 463,023 4,256,655
--------------- ---------------
Cash and Cash Equivalents, End of Period....................... $ 238,668 $ 3,685,408
=============== ===============
</TABLE>
5
<PAGE>
SIGNATURE EYEWEAR, INC.
Consolidated Statement of Cash Flows, continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31,
-----------------------------------------
2000 1999
------------------- ---------------
<S> <C> <C>
Supplementary Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest................................................ $202,292 $5,299
=================== ===============
Income taxes............................................ $200,000 $ 0
=================== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1--Unaudited Interim Consolidated Financial Statements:
Interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. Accordingly, certain disclosures
accompanying annual consolidated 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 consolidated
financial statements for those 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.
Certain reclassifications have been made to prior period amounts to conform to
this year's presentation, and have no effect on previous-reported net income.
Note 2--Basis of Presentation:
A summary of significant accounting policies is as follows:
Income Taxes--The Company's effective income tax rate at January 31, 2000 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:
<TABLE>
<CAPTION>
For the Quarter Ended January 31, 2000
----------------------------------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------------- -------------------- -----------------
<S> <C> <C> <C>
Basic and diluted EPS loss
to common stockholders..................... $(252,258) 5,064,927 $(0.05)
================= ==================== =================
</TABLE>
For the quarter ended January 31, 2000, there was no difference between basic
and diluted EPS. Warrants to purchase 180,000 shares and 50,000 shares of
common stock at $12 and $7.50 per share, respectively, and options to purchase
477,000 shares of common stock at $10 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 quarter ended January 31, 2000.
Note 3--Term Loan:
In December 1999, the Company entered into an agreement with its commercial bank
to provide the Company with a secured term loan of $3,500,000, with interest
accruing at a fixed rate of 8.52%
7
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Consolidated Financial Statements
(Unaudited)
per annum until December 31, 2001 and thereafter at the LIBOR Base Rate plus
2.5% per annum. Principal payments are payable in 48 installments commencing on
January 15, 2001 through December 15, 2004, when the loan matures. At January
31, 2000, $3,500,000 was due to the bank under the term loan.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 "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 "Factors That May Affect
Future Results."
Overview
The Company derives revenues primarily through the sale of eyeglass frames
under brand names pursuant to exclusive licenses (including Laura Ashley
Eyewear, Eddie Bauer Eyewear, Hart Schaffner & Marx Eyewear and Nicole Miller
Eyewear) and which the Company owns, including Dakota Smith Eyewear.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 68% and 82% of the Company's net sales in the quarter
ended January 31, 2000 (the "2000 first quarter") and the quarter ended January
31, 1999 (the "1999 first quarter"), respectively. Although the Company expects
the Laura Ashley Eyewear and Eddie Bauer lines to continue to be the Company's
leading sources of revenue for the near future, the Company expects to reduce
its dependence on these two lines through sales of an expanding product line,
including eyewear under brand-name licenses for COACH Eyewear, Eddie Bauer
Performance Sunwear featuring Oakley's patented lens technology, and bebe eyes,
and the Company's house brands.
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames to the Company's specifications. The
complete development cycle for a new frame design typically takes approximately
twelve months from the initial design concept to the release. Generally, at
least six months are required to complete the initial manufacturing process.
Before October 1, 1999, the Company distributed its products to independent
optical retailers in the United States primarily through exclusive distributors.
During the nine months ended July 31, 1999, sales through United States
distributors accounted for approximately 37% of the Company's total net sales.
Effective as of October 1, 1999, the Company terminated all but two of its 24
United States distributors and hired its own national direct sales force, which
numbered 88 sales representatives at January 31, 2000 (with a target of 130
sales representatives by the end of fiscal 2000). The Company made this
conversion to stimulate sales growth by enabling the Company to work more
closely with the sales representatives selling its products, who are dedicated
to selling only the Company's products, and to require its sales representatives
to implement the Company's marketing plans.
The Company's conversion to a direct sales force in the United States has
resulted 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. Unit sales prices to
optical retailers are typically 60% to 70% greater than sales prices to
distributors. In addition, selling expense per unit sold is greater primarily
as a result of commissions payable to sales representatives.
9
<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>
<CAPTION>
Three Months Ended
January 31,
------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Net Sales................................................................ 100.0% 100.0%
Cost of sales............................................................ 40.1 47.6
----------- ------------
Gross profit............................................................. 59.9 52.4
----------- ------------
Operating expenses:
Selling................................................................. 29.9 30.6
General and administrative.............................................. 29.2 19.9
Depreciation and amortization........................................... 2.8 1.7
----------- ------------
Total operating expenses............................................ 61.9 52.2
----------- ------------
Income (loss) from operations............................................ (2.0) 0.2
----------- ------------
Other income (expense), net.............................................. (1.5) 0.5
----------- ------------
Income (loss) before provision for income taxes.......................... (3.5) 0.7
----------- ------------
Provision (benefit) for income taxes..................................... (1.4) 0.3
----------- ------------
Net income (loss)........................................................ (2.1)% 0.4%
=========== ============
</TABLE>
Net Sales. 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 1999 first quarter to the 2000 first
quarter:
<TABLE>
<CAPTION>
Three Months Ended January 31,
-------------------------------------------------
2000 1999 Change
---------------------- ---------------------- ----------
<S> <C> <C> <C> <C> <C>
Laura Ashley Eyewear......................... $ 4,501 37.5% $4,498 50.8% 0%
Eddie Bauer Eyewear.......................... 3,660 30.5% 2,764 31.2% 32%
Other Sales (1).............................. 3,842 32.0% 1,595 18.0% 141%
----------- ------- ---------- --------
Total........................................ $12,003 100.0% $8,857 100.0% 36%
=========== ======= ========== ========
</TABLE>
_______________
(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.
Net sales were $3,147,000 greater in the 2000 first quarter compared to the
1999 first quarter primarily as a result of the change in distribution strategy
from distributors to direct sales and to sales of Dakota Smith Eyewear, Nicole
Miller Eyewear and accessories. Direct sales and domestic distributor sales
constituted 42% and 3%, respectively, of net sales in the 2000 first quarter as
compared to 7% and 39%, respectively, in the 1999 first quarter. The Company
added the Dakota Smith Eyewear and Nicole Miller Eyewear lines as a result of
the acquisition of substantially all of the assets of California Design Studio,
Inc. in June 1999 (the "CDS Acquisition"). Net sales of Laura Ashley Eyewear
were relatively even in the first quarters of 1999 and 2000, reflecting an
average higher price per unit (due to direct sales) but decreasing unit sales.
Gross Profit. Gross profit increased from $4,640,000 in the 1999 first
quarter to $7,196,000 for the 2000 first quarter. This increase was due
principally to the increase in net sales. The Company's gross profit margin
increased from 52.4% in the 1999 first quarter to 59.9% in the 2000 first
quarter. This increase was primarily due to a shift in the sales mix from
distributor sales to direct sales.
10
<PAGE>
Operating Expenses. Operating expenses increased from $4,621,000 in the
1999 first quarter to $7,432,000 in the 2000 first quarter due to an increase of
$881,000 in selling expenses, and an increase of $1,753,000 in general and
administrative expenses and $178,000 in depreciation and amortization expenses.
Selling expenses increased due to commissions paid in connection with direct
sales. General and administrative expenses for the 2000 first quarter increased
primarily as a result of $928,000 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 and $363,000 due to the upgrade
of the Company's warehouse and operating systems. The increase in depreciation
and amortization was due primarily to amortization of goodwill and the covenant
not to compete recorded in the CDS Acquisition.
Net Other Income (Loss). Net other loss in the 2000 first quarter of
$184,000 was due principally to interest expense. Net other income in the 1999
first quarter of $42,000 relates primarily to interest income.
Provision (Benefit) for Income Taxes. The Company's income tax benefit was
$168,000 for the 2000 first quarter, compared with a tax provision for $23,000
for the 1999 first quarter. The changes in income taxes reflect the changes in
income before income taxes.
Net Income (Loss). Net income was $39,000 in the 1999 first quarter and
net loss was $252,000 in the 2000 first quarter.
Liquidity and Capital Resources
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 a secured 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 January
31, 2000, $4,600,000 was due to the bank under the Credit Agreement, as compared
to $1,500,000 at October 31, 1999. In December 1999, the Company entered into
an agreement with its commercial bank to provide the Company with a secured term
loan of $3,500,000, with interest accruing at a fixed rate of 8.52% per annum
until December 31, 2001 and thereafter at the LIBOR Base Rate plus 2.5% per
annum. Principal payments are payable in 48 installments commencing on January
15, 2001 through December 15, 2004, when the loan matures. At January 31,
2000, $3,500,000 was due to the bank under the term loan.
Of the Company's accounts payable at January 31, 2000, $1,322,000 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 $1,438,000 in foreign currency forward commitments at January 31, 2000.
The Company believes that cash generated from operations, borrowings from
its commercial bank, credit from its suppliers, income tax refunds (anticipated
to be approximately $1.2 million) and credit under the operating leases will be
sufficient to fund its working capital requirements for the next twelve months.
11
<PAGE>
Year 2000
The Company has not experienced any difficulties resulting from the Year
2000 problem, which is 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, which could result in computer
programs recognizing a date using "00" as the year 1900 rather than 2000,
thereby causing miscalculations or system failures. The Company does not
currently anticipate any future Year 2000 problems.
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.
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 domestic 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 replaced all but
two of its 24 domestic distributors with its own direct national sales force of
approximately 88 sales representatives. The Company's conversion to a direct
sales force results 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. Unit sales prices to
optical retailers are 60% to 70% greater than sales prices to distributors. In
addition, based on the same number of unit sales as in prior periods, the
Company anticipates that its selling expenses will increase as a percentage of
net sales, primarily as a result of commissions payable to sales
representatives. The Company believes it must expand its domestic direct sales
force to approximately 130 sales representatives to generate unit sales volumes
commensurate with unit sales volumes through its prior distributor network and
the increased volume due to the introduction of new product lines in fiscal
2000. While the Company is aggressively seeking qualified sales
representatives, no assurance can be given as to when, if ever, the Company will
be able to employ those additional representatives or that that number of
representatives will generate the unit sales volumes which could have been
generated through its distributor network.
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 and Eddie Bauer Licenses
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for
77%, 75% and 68% of the Company's net sales in fiscal 1998, fiscal 1999 and the
2000 first quarter, respectively. While the Company intends to continue
reducing its dependence on the Laura Ashley Eyewear and Eddie Bauer Eyewear
lines through the development and promotion of COACH Eyewear, Nicole Miller
Eyewear, Dakota Smith Eyewear and bebe eyes, as well as its own house brands,
the Company expects the Laura Ashley and Eddie Bauer Eyewear lines to continue
to be the Company's leading sources of revenue for the near future. The Company
markets Laura Ashley Eyewear through an exclusive license which 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. The Company markets Eddie Bauer Eyewear through an
12
<PAGE>
exclusive license which terminates in December 2002, but may be renewed by the
Company at least through 2008 so long as the Company is not in material default
and meets certain minimum net sales and royalty requirements. Each of Laura
Ashley and Eddie Bauer may terminate its respective license before its term
expires under certain circumstances, including a material default by the Company
or certain defined changes in control of the Company.
Management of Growth
The Company has grown rapidly in recent years, with net sales increasing
from $20 million in fiscal 1994 to $44 million in fiscal 1999, and the number of
employees increasing from approximately 50 at October 31, 1994 to 239 at October
31, 1999. During fiscal 1999, the Company entered into licence agreements for
COACH Eyewear, Eddie Bauer Performance Sunwear (with Oakley's patented XYZ lens
technology), and bebe eyes, and acquired the license for Nicole Miller Eyewear
and the brand name Dakota Smith, thereby making possible growth in the Company's
net sales. Further, in fiscal 1999 the Company added a new national direct
sales force, which it continues to expand, and upgraded its management
information systems, as well as its warehouse and other operations. 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.
Approval Requirements of Brand-Name Licensors
The Company's business is predominantly based on its brand-name licensing
relationships. Each of the Company's licenses requires mutual agreement of the
parties for significant matters. Each of these licensors has final approval over
all eyeglass frames and other products bearing the licensor's proprietary marks,
and the frames must meet the licensor's general design specifications and
quality standards. Consequently, each licensor may, in the exercise of its
approval rights, delay the distribution of eyeglass frames bearing its
proprietary marks. The Company expects that each future license it obtains will
contain similar approval provisions. Accordingly, there can be no assurance that
the Company will be able to continue to maintain good relationships with each
licensor, or that the Company will not be subject to delays resulting from
disagreements with, or an inability to obtain approvals from, its licensors.
These delays could materially and adversely affect the Company's business,
operating results and financial condition.
Limitations on Ability to Distribute other Brand-Name Eyeglass Frames
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and any of style, market position and market segment.
The Eddie Bauer license, the COACH license and the bebe license prohibit the
Company from entering into license agreements with companies which Eddie Bauer,
COACH and bebe, respectively, believe 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 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
13
<PAGE>
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 Hong
Kong/China, Japan, Italy and France. 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 1999, Signature used manufacturers principally in Japan, Hong Kong/China,
Italy and France, which accounted for 37.3%, 35.2%, 11.8% and 3.5%,
respectively, (in cost) of the frames purchased by the Company.
International Sales
International sales accounted for approximately 8.4%, 8.7% and 10.0% of the
Company's net sales in fiscal 1998, fiscal 1999 and the 2000 first quarter,
respectively. These sales were primarily in England, Canada, Australia, New
Zealand, Holland and Belgium. 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.
14
<PAGE>
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. The
Company's product returns for fiscal 1998, fiscal 1999 and the 2000 first
quarter amounted to 14%, 19% and 17% of gross sales (sales before returns),
excluding distributor returns of $4.4 million in fiscal 1999 in connection with
the Company's decision to terminate its relationship with domestic distributors,
respectively. The Company anticipates that it will likely experience returns at
a rate significantly exceeding its historical levels, due to the Company's
decision to sell directly to United States independent optical retailers, rather
than through distributors. The Company maintains reserves for product returns
which it considers adequate; however, an increase in returns that significantly
exceeds the amount of those reserves 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, including a procedure named LASIK. While the Company does not believe
that contact lenses, refractive surgery or other vision correction alternatives
materially and adversely impact its business at present, there can be no
assurance that technological advances in, or reductions in the cost of, vision
correction alternatives will not occur in the future, resulting in their more
widespread use. Increased use of vision correction alternatives could result in
decreased use of the Company's eyewear products, which would have a material
adverse impact on the Company's business, operating results and financial
condition.
Acceptance of Eyeglass Frames; Unpredictability of Discretionary Consumer
Spending
The Company's success will depend to a significant extent on the market's
acceptance of the Company's brand-name eyeglass frames. If the Company is unable
to develop new, commercially successful styles to replace revenues from older
styles in the later stages of their life cycles, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company's future growth will depend in part upon the effectiveness
of the Company's marketing and sales efforts as well as the availability and
acceptance of other competing eyeglass frames released into the market place at
or near the same time, the availability of vision correction alternatives,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted.
The Company's success also will depend to a significant extent upon a
number of factors relating to discretionary consumer spending, including the
trend in managed health care to allocate fewer dollars to the purchase of
eyeglass frames, and general economic conditions affecting disposable consumer
income, such as employment business conditions, interest rates and taxation. Any
significant adverse change in general economic conditions or uncertainties
regarding future economic prospects that adversely affect discretionary consumer
spending generally, and purchasers of prescription eyeglass frames specifically,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
15
<PAGE>
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., as well as Signature's former
distributors. 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.
Control by Directors and Executive Officers
The directors and executive officers of the Company own approximately 56.8%
of the Company's outstanding shares. 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.
16
<PAGE>
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and year-
end inventory adjustments by distributors and independent optical retailers. A
factor which may significantly influence results of operations in a particular
quarter is the introduction of a brand-name collection, which results in
disproportionate levels of selling expenses due to additional advertising,
promotions, catalogs and in-store displays. Introduction of a new brand may also
generate a temporary increase in sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations include
customer demand, the mix of distribution channels through which the eyeglass
frames are sold, the mix of eyeglass frames sold, product returns, delays in
shipment and general economic conditions.
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. The Company has no present intention to issue any shares of
Preferred Stock. However, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, which may depress the market value of the Common Stock. In
addition, each of the Laura Ashley, Hart Schaffner & Marx, Eddie Bauer, COACH
and bebe 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. 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 1999, a maximum of $2,700,000 and a
minimum of $469,000 of the Company's accounts payable were payable in foreign
currency. During the 2000 first quarter, a maximum of $1,521,000 and a minimum
of $754,000 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
17
<PAGE>
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 $56,000 at October 31, 1999
and $1,438,000 at January 31, 2000. International sales accounted for
approximately 8.7% and 10% of the Company's net sales in fiscal 1999 and the
2000 first 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 January 31, 2000, $4,600,000 was 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.
18
<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.
None.
19
<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: March 15, 2000 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)
20
<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 THREE MONTHS
ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 238,668
<SECURITIES> 0
<RECEIVABLES> 9,095,496
<ALLOWANCES> 288,867
<INVENTORY> 16,682,998
<CURRENT-ASSETS> 29,738,027
<PP&E> 3,919,164
<DEPRECIATION> 2,356,990
<TOTAL-ASSETS> 37,407,695
<CURRENT-LIABILITIES> 11,677,556
<BONDS> 0
0
0
<COMMON> 9,188
<OTHER-SE> 17,663,751
<TOTAL-LIABILITY-AND-EQUITY> 37,407,695
<SALES> 12,003,409
<TOTAL-REVENUES> 12,003,409
<CGS> 4,807,448
<TOTAL-COSTS> 7,431,958
<OTHER-EXPENSES> 11,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,498
<INCOME-PRETAX> (420,429)
<INCOME-TAX> (168,171)
<INCOME-CONTINUING> (252,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (252,258)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
