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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 April 30, 2005
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.
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(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
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(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: 6,301,889 shares issued and
outstanding as of May 31, 2005.
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SIGNATURE EYEWEAR, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION ----
Item 1 Financial Statements .......................................... 3
Balance Sheets ................................................ 3
Statements of Income .......................................... 5
Statements of Cash Flows ...................................... 6
Notes to the Financial Statements ............................. 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk .... 15
Item 4 Controls and Procedures ....................................... 15
PART II OTHER INFORMATION
Item 6 Exhibits ...................................................... 16
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
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ASSETS
APRIL 30, OCTOBER 31,
2005 2004
(unaudited)
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 299,303 $ 522,370
Certificate of Deposit, restricted 250,000 250,000
Accounts receivable - trade, net of allowance for
doubtful accounts of $144,923 and $228,808 3,953,781 2,652,713
Inventories 5,437,005 5,334,120
Promotional products and materials 59,635 40,242
Prepaid expenses and other current assets 128,923 90,694
------------ ------------
Total current assets 10,128,647 8,890,139
PROPERTY AND EQUIPMENT, NET 816,572 927,875
DEPOSITS AND OTHER ASSETS 131,478 130,911
------------ ------------
TOTAL ASSETS $ 11,076,697 $ 9,948,925
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
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LIABILITIES AND SHAREHOLDERS' DEFICIT
APRIL 30, OCTOBER 31,
2005 2004
(unaudited)
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 5,428,143 $ 5,059,198
Accrued expenses and other current liabilities 2,438,468 2,428,060
Reserve for customer returns 302,045 302,045
Current portion of long-term debt 880,096 772,788
------------ ------------
Total current liabilities 9,048,752 8,562,091
LONG-TERM DEBT, NET OF CURRENT PORTION 6,606,083 6,454,257
------------ ------------
Total liabilities 15,654,835 15,016,348
------------ ------------
COMMITMENTS
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value
5,000,000 shares authorized
Series A 2% convertible preferred stock
1,360,000 shares authorized
1,200,000 issued and outstanding 1,200 1,200
Common stock, $0.001 par value
30,000,000 shares authorized
6,301,889 issued and outstanding 6,302 6,227
Additional paid-in capital 15,287,716 15,275,791
Accumulated deficit (19,873,356) (20,350,641)
------------ ------------
Total shareholders' deficit (4,578,138) (5,067,423)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 11,076,697 $ 9,948,925
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
SIGNATURE EYEWEAR, INC.
STATEMENTS OF INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET SALES $ 6,946,265 $ 6,096,578 $ 12,791,183 $ 12,092,746
COST OF SALES 2,341,324 2,215,482 4,411,444 4,557,889
------------ ------------ ------------ ------------
GROSS PROFIT 4,604,941 3,881,096 8,379,739 7,534,857
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling 2,399,245 2,299,095 4,243,274 4,208,755
General and administrative 1,648,708 1,522,940 3,211,400 3,275,436
Depreciation and amortization 91,782 104,341 182,930 208,682
------------ ------------ ------------ ------------
Total operating expenses 4,139,735 3,926,376 7,637,604 7,692,873
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 465,206 (45,280) 742,135 (158,016)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Sundry income 22,223 (3,474) 22,223 3,252
Interest expense (143,920) (136,363) (279,137) (279,016)
------------ ------------ ------------ ------------
Total other (expense) (121,697) (139,837) (256,914) (275,764)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 343,509 (185,117) 485,221 (433,780)
PROVISION FOR INCOME TAXES 7,140 868 7,940 2,750
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCK SHAREHOLDERS $ 336,369 $ (185,985) $ 477,281 $ (436,530)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS
PER SHARE
TOTAL BASIC AND DILUTED
EARNINGS PER SHARE $ 0.05 $ (0.03) $ 0.08 $ (0.07)
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 6,247,956 5,976,889 6,237,248 5,976,889
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
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2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 477,285 $ (436,530)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 182,930 208,682
Provision for bad debts (83,762) (206,525)
Provision for inventory write-down (100,203)
(Increase) decrease in
Accounts receivable - trade (1,217,306) (225,352)
Inventories (102,885) 261,724
Promotional products and materials (19,393) 9,425
Prepaid expenses and other current assets (38,229) (31,873)
Deposits and other assets (567) (16,014)
Increase (decrease) in
Accounts payable - trade 368,945 471,454
Accrued expenses and other current liabilities 10,408 241,457
Reserve for customer returns -- (297,593)
------------ ------------
Net cash used in operating activities (422,574) (121,348)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (71,627) 3,622
------------ ------------
Net cash used in investing activities (71,627) 3,622
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt 350,000 --
Payments on short-term debt (350,000)
Borrowing on long-term debt 406,000 178,585
Payments on long-term debt (146,866) --
Issuance of common stock 12,000 40,000
------------ ------------
Net cash provided by financing activities 271,134 218,585
------------ ------------
Net increase (decrease) in cash and cash equivalents $ (223,067) $ 100,859
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 522,370 663,251
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
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2005 2004
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 299,303 $ 764,110
============ ============
Supplemental disclosures of cash flow information
INTEREST PAID $ 279,137 $ 279,016
============ ============
INCOME TAXES PAID $ 7,940 $ 2,750
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND LINE OF BUSINESS
Signature Eyewear, Inc. (the "Company") designs, markets and distributes
eyeglass frames throughout the United States and internationally. Primary
operations are conducted from leased premises in Inglewood, California, with a
warehouse and sales office in Belgium.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended October 31, 2004.
The results of operations for the six months ended April 30, 2005 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 2005.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in first-out method) or
market.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the assets as follows:
Office furniture and equipment 7 years
Computer equipment 3 years
Software 3 years
Machinery and equipment 5 years
Machinery and equipment held under capital lease agreements 5 years
Leasehold improvements term of the lease
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable - trade, and line of credit,
the carrying amounts approximate fair value due to their short maturities. The
amounts shown for long-term debt also approximate fair value because current
interest rates offered to the Company for debt of similar maturities are
substantially the same.
Income (Loss) per Share
- -----------------------
The Company calculates income (loss) per share in accordance with SFAS No.
128, "Earnings per Share." Basic income (loss) per share is computed by dividing
the income (loss) available to common shareholders by the weighted-average
number of common shares outstanding. Diluted income (loss) per share is computed
similar to basic income (loss) per share
8
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. The Company
did not have any dilutive shares for the three or six months ended April 30,
2005 and 2004.
The following potential common shares have been excluded from the
computations of diluted income (loss) per share for the three and six months
ended April 30, 2005 and 2004 because the effect would have been anti-dilutive:
2005 2004
--------- ---------
Stock options 295,500 384,500
Warrants 100,000 150,000
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TOTAL 395,500 534,500
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Foreign Currency Translation
- ----------------------------
The Company's Belgium branch's functional currency is the Euro. Assets and
liabilities are translated at exchange rates in effect at the balance sheet
date. Income and expense accounts are translated at average rates. In addition,
some of the Company's liabilities are denominated in foreign currencies. Such
liabilities are converted into U.S. Dollars at the exchange rate prevailing at
the balance sheet date. The resulting gains or losses are reflected in the
income statement.
Estimates
- ---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at the dates indicated consisted of the following:
APRIL 30, OCTOBER 31,
2005 2004
---------- ----------
Office furniture and equipment $ 912,756 $ 912,756
Computer equipment 1,569,130 1,498,392
Software 1,127,804 1,123,340
Machinery and equipment 416,240 419,815
Machinery and equipment held under capital
lease agreements 294,609 294,609
Leasehold improvements 1,195,190 1,195,190
---------- ----------
5,515,729 5,444,102
Less accumulated depreciation and amortization 4,699,157 4,516,227
---------- ----------
TOTAL $ 816,572 $ 927,875
========== ==========
Depreciation and amortization expense was $182,930 and $208,682 for the six
months ended April 30, 2005 and 2004, respectively and $91,782 and $104,341 for
the three months ended April 30, 2005 and 2004, respectively (including
depreciation and amortization expense of $-0- and $13,990 for the six months
ended April 30, 2005 and 2004, respectively, on machinery and equipment held
under capital leases).
9
NOTE 4. SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt at the dates indicated consisted of the following:
APRIL 30, 2005 OCTOBER 31, 2004
-------------- ----------------
Term note payable to Home Loan Investment Corporation ("HLIC") in the original
amount of $3,000,000, bearing interest at 10% per annum, secured by the
assets of the Company, a letter of credit in the amount of $1,250,000 and a
$250,000 certificate of deposit issued by HLIC; payments of interest only
through March 2004 and thereafter monthly installments of principal and
interest ($39,777) with a payment of $2,044,206 in April 2008 $2,844,192 $2,936,867
Revolving line of credit from HLIC in the amount of $500,000, secured by the
collateral securing the HLIC term note, bearing interest at 12% per annum
on the outstanding balance, due in April 2008 500,000 500,000
Term note payable to Home Loan Industrial Bank ("HLIB") in the original amount
of $406,000, secured by the collateral securing the HLIC term note, bearing
interest at 12% per annum and due and payable on June 6, 2006 406,000 --
Term note payable to Bluebird Finance Limited in the original amount of
$2,900,000, secured by the assets of the Company (subordinated to the HLIC
credit facility), bearing interest at 5% per annum, and payable in
quarterly installments of $72,500, commencing in July 2005 2,900,000 2,900,000
Note payable to a commercial bank in the original amount of $750,000, secured by
certain property and equipment, bearing interest at 4% per annum, payable
in 39 monthly installments of $13,812, commencing March 31, 2003, with the
remaining principal and accrued interest due and payable in full on
February 28, 2008 478,155 536,567
Term note payable to Eagle Star Finance in the original amount of $350,000,
unsecured, bearing interest at 3% per annum payable in monthly installments
of $50,000 commencing in May, 2005, with the remaining principal and
interest due on November 27, 2005 350,000 --
Note payable to lessor of the Company's principal offices and warehouse in the
original amount of $240,000, unsecured, payable in monthly installments of
$4,134, including interest at 10% per annum, maturing on May 1, 2005 4,100 28,001
Note payable to lessor of the Company's principal offices and warehouse in the
original amount of $89,405, unsecured, payable in monthly installments of
$3,757, including interest at 8% per annum, maturing on May 1, 2005 3,732 25,610
Term note payable to HLIC in the original amount of $200,000, secured by the
collateral securing the HLIC term note, bearing interest at 12% per annum
and due and payable on June 29, 2005. Refinanced in February 2005 with term
note payable to HLIB in amount of $406,000. -- 200,000
10
APRIL 30, 2005 OCTOBER 31, 2004
-------------- ----------------
Term note payable to Pearltime Investments Limited in the original amount of
$350,000, unsecured, bearing interest at 3% per annum payable in monthly
installments of $50,000 commencing on April 30, 2004 and due on December
29, 2004 -- 100,000
---------- ----------
7,486,179 7,227,045
Less current portion 880,096 772,788
---------- ----------
LONG-TERM PORTION $6,606,083 $6,454,257
========== ==========
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values, beginning with the first
interim or annual period after June 15, 2005. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The Company is required to adopt SFAS 123R in
its three months ending October 31, 2005. Under SFAS 123R, The Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive options,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The Company is
evaluating the requirements of SFAS 123, and it expects that the adoption of
SFAS 123R will have not have a material effect on its financial statements.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that the exchange of nonmonetary assets should be measured using the estimated
fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow
exception for nonmonetary exchanges of similar productive assets, and replaces
it with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly as a result
of the transaction. This pronouncement is effective for monetary exchanges in
fiscal periods beginning after June 15, 2005. The Company believes the adoption
of this pronouncement will not have a material effect on its financial
statements.
NOTE 6. EXERCISE OF STOCK OPTIONS
In April 2005, three directors of the Company exercised options to purchase
an aggregate of 75,000 shares under the Company's 1997 Stock Plan. The exercise
price was $0.16 per share, or an aggregate exercise price of $12,000.
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 Consolidated 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"
in this Item 2 of this Form 10-Q, as well as those discussed elsewhere in this
Form 10-Q. All subsequent written and 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." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, and relationships with licensors,
distributors and customers, distribution strategies and the business environment
in which the Company operates.
11
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and related notes and other
financial information included elsewhere in this Form 10-Q.
OVERVIEW
The Company derives revenues through the sale of eyeglass frames under
licensed brand names, including Laura Ashley Eyewear, Eddie Bauer Eyewear, bebe
eyes, Nicole Miller Eyewear, Hart Schaffner & Marx Eyewear, Hummer Eyegear and
Dakota Smith Eyewear, and under its proprietary Signature brand. The Company's
cost of sales consists primarily of purchases from foreign contract
manufacturers that produce frames and cases to the Company's specifications.
The Company reported net income of $336,000 and $477,000 for the three and
six months ended April 30, 2005 (the "2005 Quarter" and the "2005 Six Months,"
respectively) compared to net losses of $186,000 and $437,000 for the three and
six months ended April 30, 2004 (the "2004 Quarter" and "2004 Six Months,"
respectively). This improvement in net income was due primarily to an increase
in net sales, higher gross margin and declines in product returns as a
percentage of gross sales.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................. 33.7 36.3 34.5 37.7
------ ------ ------ ------
Gross profit .................................. 66.3 63.7 65.5 62.3
------ ------ ------ ------
Operating expenses:
Selling ................................... 34.5 37.7 33.2 34.8
General and administrative ................ 23.7 25.0 25.1 27.1
Depreciation and amortization ............. 1.3 1.7 1.4 1.7
------ ------ ------ ------
Total operating expenses .......... 59.6 64.4 59.7 63.6
------ ------ ------ ------
Income (loss) from operations ................. 6.7 (0.7) 5.8 (1.3)
------ ------ ------ ------
Other expense, net ............................ (1.8) (2.3) (2.0) (2.3)
------ ------ ------ ------
Income (loss) before provision for income taxes 4.9 (3.0) 3.8 (3.6)
------ ------ ------ ------
Provision (benefit) for income taxes .......... 0.1 0.0 0.1 0.0
------ ------ ------ ------
Net income (loss) ............................. 4.8% (3.0)% 3.7% (3.6)%
====== ====== ====== ======
NET SALES. Net sales increased by 13.9% or $850,000 from 2004 Quarter to
the 2005 Quarter and by 5.8% or $698,000 from the 2004 Six Months to the 2005
Six Months. The following table contains information regarding net sales for the
periods indicated:
12
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
----------------------------------- -----------------------------------
Dollars in thousands 2005 2004 CHANGE 2005 2004 CHANGE
---------------- ---------------- ------ ---------------- ---------------- --------
Laura Ashley Eyewear...... $ 1,604 23.1% $ 1,367 22.4% 17.3% $ 2,988 23.4% $ 2,901 24.0% 3.0%
bebe eyes................. 1,547 22.3 1,062 17.4 45.7% 2,805 21.9 1,957 16.2 43.3%
Nicole Miller Eyewear..... 1,345 19.4 1,467 24.1 (8.3)% 2,351 18.4 2,421 20.0 (2.9)%
Eddie Bauer Eyewear....... 1,188 17.1 1,111 18.2 6.9% 2,260 17.7 2,565 21.2 (11.9)%
Other (1)................. 1,262 18.1 1,090 17.9 15.8% 2,387 18.6 2,249 18.6 6.1%
------- ------- ------- ------- ------- ------- ------- -------
Total..................... $ 6,946 100.0% $ 6,097 100.0% 13.9% $12,791 100.0% $12,093 100.0% 5.8%
======= ======= ======= ======= ======= ======= ======= =======
- -------------------
(1) Includes primarily sales of frames from other product lines and all freight
billed to customers.
Net sales were higher in the 2005 periods due primarily the Company's
increased penetration of the direct sales market. Sales of Laura Ashley Eyewear
and bebe eyes have continued to increase. Net sales in the 2005 Quarter were
also positively affected by the introduction of Hummer Eyegear, which began
shipping in late March 2005. While net sales of Eddie Bauer Eyewear increased
$77,000 from the 2004 Quarter to the 2005 Quarter, they decreased $305,000 for
the six months. The bankruptcy of the Eddie Bauer group of companies is believed
to have adversely affected customers' perception of the brand. International
sales decreased $92,000 in the 2005 Quarter. Direct sales to independent optical
retailers and sales to national optical retail chains each increased in the 2005
Quarter and 2005 Six Months.
Commencing with the year ended October 31, 2004, the Company includes
freight billed to customers in net sales based on EITF 00-10 "Accounting for
Shipping and Handling Costs." Net sales for the 2004 periods have been revised
from previously reported amounts to reflect this change
Net sales reflect gross sales less a reserve for product returns
established by the Company based on products that the Company is aware will be
returned as of that date. The Company's reserve was $801,169 at April 30, 2005.
The Company had a $0.2 million decrease in product returns in the 2005 Quarter
compared to the 2004 Quarter. Product returns decreased from 19% of net sales in
the 2004 Quarter to 14% of net sales in the 2005 Quarter. The Company believes
this decrease in product returns was due principally to better sell-through due
to improved frame styles and more rigid return policies implemented by the
Company.
The Company also maintains an allowance for product returns. Changes in the
allowance in any period will have a corresponding impact on net sales during the
period. The Company's allowance for product returns did not change in the 2005
Quarter.
GROSS PROFIT AND GROSS MARGIN. Gross profit increased $0.7 million or 18.7%
from the 2004 Quarter to the 2005 Quarter and $0.8 million or 11.2% from the
2004 Six Months to the 2005 Six Months. The gross margin was 66.3% and 65.5% in
the 2005 Quarter and 2005 Six Months compared to 63.7% and 62.3% in the 2004
Quarter and 2004 Six Months. The gross margin increased because of sales of
higher margin frames, fewer close out sales and price increases on selected
frame styles.
SELLING EXPENSES. Selling expenses increased $0.1 million or 4.3% from the
2004 Quarter to the 2005 Quarter due primarily to a $0.1 million increase in
sales commissions, $0.1 million increase in royalties, $0.1 million increase in
freight expense offset by a $0.2 million decrease in advertising expense.
Selling expenses increased $35,000 or 0.1% from the 2004 Six Months to the 2005
Six Months due primarily to a $0.3 million increase in sales commissions and
salaries and $0.1 million increase in freight expense, while advertising and
promotion expenses decreased $0.3 million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.1 million or 8.3% from the 2004 Quarter to the 2005 Quarter. The
principal difference between quarters was that in the 2005 Quarter the Company
reduced its bad debt reserve by $0.2 million (compared to a small increase in
the reserve in the 2004 period) and its salary expenses were $0.1 million lower.
General and administrative expenses decreased $64,000 or 2.0% from the 2004 Six
Months to the 2005 Six Months. The principal difference in the 2005 six month
periods was the $0.2 million reduction in bad debt reserve in the 2005 Six
Months and a decrease of $0.2 million in salary expenses in the 2005 Six Months.
13
In March 2005 the Company entered into a new lease for its principal
offices and warehouse in Inglewood, California that commenced upon termination
of its existing lease May 2005. The new lease expires June 30, 2007, and the
Company has the option to renew the lease for two-years. The new lease covers
64,000 square feet of the facility, compared to 109,000 square feet under the
existing lease. The Company estimates the new lease will result in a reduction
in rental expense of approximately $100,000 in fiscal 2005 and $190,000 in
fiscal 2006 compared to rental expense for these offices in fiscal 2004
(exclusive of savings from reduced common area charges).
OTHER (EXPENSE), NET. Other expenses included primarily interest expense.
PROVISION (BENEFIT) FOR INCOME TAXES. As a result of the Company's net loss
carry-forward, the Company had no income tax expense other than franchise taxes
in various states. The Company has a 100% valuation allowance of the deferred
tax asset, based on operating losses in recent years.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful accounts)
increased from $2.7 million at October 31, 2004 to $4.0 million at April 30,
2005 due primarily to higher net sales for the quarter ended April 30, 2005 as
compared to the quarter ended October 31, 2004. In addition, the allowance for
doubtful accounts decreased $0.1 million from October 31, 2004 to April 30,
2005, due primarily to collection of reserved accounts and write-offs of certain
accounts.
The Company's inventories increased $0.1 million to $.5.4 million at April
30, 2005 from $5.3 million at October 31, 2004, due primarily to the launch of
Hummer Eyegear.
In February 2005, the Company borrowed $406,000 from Home Loan Industrial
Bank ("HLIB"). The loan is secured by all the assets of the Company, bears
interest at a rate of 12% per annum and is due and payable in June 2006. The
Company used a portion of the proceeds of the loan from HLIB to pay off existing
indebtedness to Home Loan and Investment Company, the parent of HLIB, in the
principal amount of $202,000.
In addition to this loan, the Company's long-term debt at April 30, 2005
included principally: (i) $3,344,000 under another two credit facilities with
HLIC; (ii) $2,900,000 under a credit facility with Bluebird Finance Limited; and
(iii) $478,000 under a commercial bank loan the proceeds of which were used to
purchase its computer system and related equipment. The Company also has an
unsecured short-term loan in the amount of $350,000 from Eagle Star Finance that
requires payments of $50,000 per month commencing May 2005 with the final
installment due in November 2005. At April 30, 2005, the Company had fully
utilized its borrowing capacity under its existing credit facilities. See Note 4
of Notes to Financial Statements.
Of the Company's accounts payable at April 30, 2005, $0.6 million 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
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 no forward commitments for foreign currencies at April 30, 2005.
The Company's business plan for 2005 provides for positive cash flow from
operations. The Company believes that at least through fiscal 2005, assuming
there are no unanticipated material adverse developments, no material decrease
in revenues and continued compliance with its credit facilities, its cash flows
from operations and through credit facilities will be sufficient to enable the
Company to pay its debts and obligations as they mature. To support growth in
excess of the plan, the Company may be required to obtain the working capital
through additional debt or equity financing.
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
14
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. At any month-end during the quarter ended April 30,
2005, a maximum of $0.6 million were payable in foreign currency. These foreign
currencies included Japanese yen. 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 no forward commitments for foreign currencies at April 30, 2005.
International sales accounted for approximately 11% of the Company's net
sales in the three months ended April 30, 2005. 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 generally 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. The Company's credit facilities existing at April 30,
2005 had fixed interest rates. Accordingly, the Company does not believe it is
subject to material interest rate risk.
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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined
in Exchange Act Rule 13a-15(e)) that are designed to assure that information
required to be disclosed in its Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide reasonable assurance only of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in weighting the costs and benefits of possible new or different
controls and procedures. Limitations are inherent in all control systems, so no
evaluation of controls can provide absolute assurance that all control issues
and any fraud within the company have been detected.
As required by Exchange Act Rule 13a-15(b), as of the end of the period
covered by this report, management, under the supervision and with the
participation of its Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Company's disclosure controls and procedures.
Based on this evaluation, management concluded that the Company's disclosure
controls and procedures were effective as of that date.
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
15
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS.
See Exhibit Index Attached
16
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: June 10, 2005 SIGNATURE EYEWEAR, INC.
By: /s/ Michael Prince
-------------------------
Michael Prince
Chief Executive Officer
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------ -------------------
10.1 Lease Agreement, dated March 7, 2005, between Signature Eyewear, Inc.
and Roxbury Property Management
10.2 Business Loan Agreement dated February 4, 2005 with Home Loan
Investment Bank and related Commercial Promissory Note and Commercial
Security Agreement
31.1 Certification Pursuant to SEC Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. ss. 1350
18