10-Q 1 form10-q_16583.htm FORM 10-Q DATED 7-31-09 WWW.EXFILE.COM, INC. -- 888-775-4789 -- SIGNATURE EYEWEAR, INC. -- FORM 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 31, 2009
 
OR

o
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
(State or Other Jurisdiction of
Incorporation or Organization)
95-3876317
(I.R.S. Employer
Identification No.)
 
498 North Oak Street
Inglewood, California 90302
(Address of Principal Executive Offices)
 
(310) 330-2700
(Registrant’s Telephone Number, Including Area Code)
 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by checkmark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.     ý Yes   ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer   o
Accelerated Filer   ¨
Non-accelerated Filer   o
(Do not check if a smaller reporting company)
Smaller reporting company   x

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes   ý No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,955,639 shares issued and outstanding as of September 8, 2009.



 
 
 
SIGNATURE EYEWEAR, INC.
 
INDEX TO FORM 10-Q
 
PART I
FINANCIAL INFORMATION
Page
     
Item 1
Financial Statements
 
     
 
Balance Sheets
3
     
 
Statements of Income
5
     
 
Statements of Cash Flows
6
     
 
Notes to the 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
15
     
Item 4
Controls and Procedures
15
     
PART II
OTHER INFORMATION
16
     
Item 1
Legal Proceedings
16
     
Item 1A
Risk Factors
16
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
16
     
Item 3
Defaults upon Senior Securities
16
     
Item 4
Submission of Matters to a Vote of Security Holders
16
     
Item 5
Other Information
16
     
Item 6
Exhibits
16


 
- 2 -

PART I.
 
FINANCIAL INFORMATION
 

Item 1.   Financial Statements

SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
AT JULY 31, 2009 (UNAUDITED)
AND OCTOBER 31, 2008 (AUDITED)

 
ASSETS
 
   
July 31,
   
October 31,
 
   
2009
   
2008
 
Current assets
           
             
Cash and cash equivalents
  $ 254,924     $ 305,628  
Accounts receivable - trade, net of allowance for
               
doubtful accounts of $42,163
    3,079,037       2,809,135  
Inventory
    4,353,653       5,607,178  
Promotional products and materials
    187,919       133,618  
Prepaid expenses and other current assets
    258,131       394,934  
Deferred income taxes
    376,500       376,500  
                 
Total current assets
    8,510,164       9,626,993  
                 
Property and equipment, net
    338,065       369,935  
Deposits and other assets
    240,154       107,656  
Deferred income taxes
    2,600,700       2,600,700  
                 
Total assets
  $ 11,689,083     $ 12,705,284  
 
 
The accompanying notes are an integral part of these financial statements.
 
 
- 3 -


SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
AT JULY 31, 2009 (UNAUDITED)
AND OCTOBER 31, 2008 (AUDITED)

 
LIABILITIES AND SHAREHOLDERS EQUITY
 
   
July 31,
   
October 31,
 
   
2009
   
2008
 
Current liabilities
           
Accounts payable - trade
  $ 4,158,316     $ 5,053,341  
Accrued expenses and other current liabilities
    1,529,865       1,853,586  
Current portion of long-term debt
    415,000       290,000  
                 
Total current liabilities
    6,103,181       7,196,927  
                 
Long-term debt, net of current portion
    4,127,500       4,620,000  
                 
Total liabilities
    10,230,681       11,816,927  
                 
Commitments and contingencies
               
                 
Shareholders’ equity
               
Preferred stock, $0.001 par value
               
5,000,000 shares authorized
               
Series A 2% convertible preferred stock, $0.001
               
par value; liquidation preference approximately
               
$910,000 at July 31, 2009 and $897,000 at October 31, 2008;
               
1,360,000 shares authorized,
               
1,200,000 shares outstanding at
    1,200       1,200  
July 31, 2009 and October 31, 2008
               
Common stock, $0.001 par value
               
30,000,000 shares authorized,
               
6,955,639 shares outstanding
               
at July 31, 2009 and October 31, 2008
    6,956       6,956  
Additional paid-in capital
    15,656,812       15,656,812  
Accumulated deficit
    (14,206,566 )     (14,776,611 )
                 
Total shareholders’ equity
    1,458,402       888,357  
                 
 Total liabilities and shareholders’ equity
  $ 11,689,083     $ 12,705,284  
 
The accompanying notes are an integral part of these financial statements.

 

 
- 4 -

SIGNATURE EYEWEAR, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2009 (UNAUDITED)
AND JULY 31, 2008 (UNAUDITED)



 
   
For The Three Months Ended
   
For The Nine Months Ended
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net sales
  $ 5,932,665     $ 6,361,749     $ 18,003,359     $ 18,602,713  
Cost of sales
    2,199,444       2,405,957       6,514,423       6,796,175  
                                 
Gross profit
    3,733,221       3,955,792       11,488,936       11,806,538  
                                 
Operating expenses
                               
Selling
    2,181,179       2,247,790       6,540,116       6,675,117  
General and administrative
    1,287,892       1,432,338       4,091,974       4,291,284  
Depreciation and amortization
    39,180       29,460       110,846       78,096  
Total operating expenses
    3,508,251       3,709,588       10,742,936       11,044,497  
                                 
Income from operations
    224,970       246,204       746,000       762,041  
                                 
Interest expense/other, net
    (50,831 )     (64,256 )     (154,608 )     (215,571 )
                                 
Income before taxes
    174,139       181,948       591,392       546,470  
Income taxes
    19,199       6,409       21,347       8,620  
                                 
Net income
    154,940       175,539       570,045       537,850  
Preferred stock dividend
  $ (4,509 )   $ (4,420 )   $ (13,459 )   $ (13,194 )
Net income available to common shareholders
  $ 150,431     $ 171,119     $ 556,586     $ 524,656  
Basic earnings per share
  $ 0.02     $ 0.02     $ 0.08     $ 0.08  
                                 
Diluted earnings per share
  $ 0.02     $ 0.02     $ 0.07     $ 0.07  
                                 
Weighted-average common shares
                               
outstanding - Basic
    6,955,639       6,955,639       6,955,639       6,892,500  
                                 
Weighted-average common shares
                               
outstanding - Diluted
    8,314,201       8,287,484       8,314,201       8,224,345  
 
The accompanying notes are an integral part of these financial statements.
 

 


 
- 5 -

SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2009 (UNAUDITED)
AND JULY 31, 2008 (UNAUDITED)



   
2009
   
2008
 
Cash flows from operating activities
           
Net income
  $ 570,045     $ 537,850  
Adjustments to reconcile net income
               
to net cash provided by
               
operating activities:
               
Depreciation and amortization
    110,846       78,096  
(Increase) decrease in:
               
Accounts receivable - trade
    (269,903 )     (219,184 )
Inventories
    1,253,524       (544,179 )
Promotional products and materials
    (54,301 )     51,424  
Prepaid expenses and other current assets
    136,803       (26,763 )
Increase (decrease) in:
               
Accounts payable - trade
    (895,025 )     361,062  
Accrued expenses and other current liabilities
    (323,721 )     (156,113 )
              .  
Net cash provided by operating activities
    528,268       82,193  
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (78,974 )     (85,605 )
Deposits and other assets
    (132,498 )     (2,302 )
                 
Net cash used in investing activities
    (211,472 )     (87,907 )
                 
Cash flows from financing activities
               
Payments on short-term debt
    -       (75,100 )
Payments on long-term debt
    (367,500 )     (340,000 )
Proceeds from sale of common stock
    -       67,000  
                 
Net cash used in financing activities
    (367,500 )     (348,100 )
                 
Net decrease in cash and cash equivalents
    (50,704 )     (353,814 )
                 
                 
Cash and cash equivalents, beginning of period
    305,628       461,080  
                 
Cash and cash equivalents, end of period
  $ 254,924     $ 107,266  
                 
                 
Supplemental disclosures of cash
               
flow information
               
                 
Interest paid
  $ 88,831     $ 143,404  
                 
Income taxes paid
  $ 21,346     $ 8,620  
 
The accompanying notes are an integral part of these financial statements.
- 6 -

NOTES TO FINANCIAL STATEMENTS
 
(Information as of July 31, 2009 and for the three and nine months ended July 31, 2009 and 2008 is 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.  The Company conducts its operations primarily from its principal executive offices and warehouse in Inglewood, California, and 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, 2008.  The results of operations for the nine months ended July 31, 2009 are not necessarily indicative of the results that may be expected for the year ending October 31, 2009.
 
Inventory
 
Inventory consists of finished goods, which are valued at the lower of cost or market.  Cost is computed using the weighted-average cost, which approximates actual cost on a first-in, first-out basis.
 
The Company regularly and periodically evaluates its inventory to ensure that it is valued at the lower of cost or market based on current market trends, product history and turnover.
 
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
 
Leasehold improvements
Term of the lease or the estimated life of the related improvements, whichever is shorter

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.
 

- 7 -

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-term 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 per Share
 
The Company calculates income per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share.  Basic income per share is computed by dividing the income available to common shareholders by the weighted-average number of common shares outstanding.  Diluted income per share is computed similar to basic income per share 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 following data show the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock:
 
Three months ended July 31, 2009
 
Income
(Numerator)
   
Shares
(Denominator)
   
Per Share
Amount
 
                   
Basic earnings per share
  $ 150,431       6,955,639     $ 0.02  
Conversion of preferred stock
    4,509       1,358,562       0.00  
Diluted earnings per share
  $ 154,940       8,314,201     $ 0.02  
 

Three months ended July 31, 2008
 
Income
(Numerator)
   
Shares
(Denominator)
   
Per Share
Amount
 
                   
Basic earnings per share
  $ 171,119       6,955,639     $ 0.02  
Conversion of preferred stock
    4,420       1,331,845       0.00  
Diluted earnings per share
  $ 175,539       8,287,484     $ 0.02  

- 8 -



Nine months ended July 31, 2009
 
Income
(Numerator)
   
Shares
(Denominator)
   
 
Per Share
Amount
 
                   
Basic earnings per share
  $ 556,586       6,955,639     $ 0.08  
Conversion of preferred stock
    13,459       1,358,562       0.01  
Diluted earnings per share
  $ 570,045       8,314,201     $ 0.07  

Nine months ended July 31, 2008
 
Income
(Numerator)
   
Shares
(Denominator)
   
 
Per Share
Amount
 
                   
Basic earnings per share
  $ 524,656       6,892,500     $ 0.08  
Conversion of preferred stock
    13,194       1,331,845       0.01  
Diluted earnings per share
  $ 537,850       8,224,345     $ 0.07  
 
The following potential common shares have been excluded from the computations of diluted income per share for the nine months ended July 31, 2009 and 2008 because the effect would have been anti-dilutive:
 
   
2009
   
2008
 
             
Stock options
    32,900       34,300  
Warrants
    300,000       300,000  
   Total
    332,900       334,300  

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 were not material for the periods ended July 31, 2009 and 2008.
 
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
 
Significant Recent Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 107-1/APB 28-1 (“FSP 107-1”), Interim Disclosures about Fair Value of Financial Instruments.  This pronouncement amended SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosure of the carrying amount and the fair value of all financial instruments for interim reporting periods and annual financial statements of publicly traded companies (even if the financial instrument is not recognized in the balance sheet), including the methods and significant assumptions used to estimate the fair values and any changes in such methods and assumptions.  FSP 107-1 also amended APB Opinion No. 28,
 
- 9 -

Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods.  FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009 if a company also elects to early adopt FSP SFAS 157-4 (“FSP 157-4”), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, and FSP SFAS 115-2/SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which was also issued by the FASB in April 2009.

FSP 157-4 generally applies to all assets and liabilities within the scope of any accounting pronouncements that require or permit fair value measurements.  This pronouncement, which does not change SFAS No. 157’s guidance regarding Level 1 inputs, requires the entity to (i) evaluate certain factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity, (ii) consider whether the preceding indicates that transactions or quoted prices are not determinative of fair value and, if so, whether a significant adjustment thereof is necessary to estimate fair value in accordance with SFAS No. 157, and (iii) ignore the intent to hold the asset or liability when estimating fair value.  FSP 157-4 also provides guidance to consider in determining whether a transaction is orderly (or not orderly) when there has been a significant decrease in the volume and level of activity for the asset or liability, based on the weight of available evidence.  This pronouncement is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  Early adoption of FSP 157-4 also requires early adoption of the pronouncement described in the following paragraph.  However, early adoption for periods ended before March 15, 2009 is not permitted.

In April 2009, the FASB issued FSP FAS 115-2 and 124-2 (“FSP 115-2/124-2”), which amends the other-than-temporary impairment (“OTTI”) recognition guidance in certain existing U.S. GAAP (including SFAS No. 115 and 130, FSP FAS 115-1/FAS 124-1, and EITF Issue 99-20) for debt securities classified as available-for-sale and held-to-maturity.  FSP 115-2/124-2 requires the entity to consider (i) whether the entire amortized cost basis of the security will be recovered (based on the present value of expected cash flows), and (ii) its intent to sell the security.  Based on the factors described in the preceding sentence, this pronouncement also explains the process for determining the OTTI to be recognized in “other comprehensive income” (generally, the impairment charge for other than a credit loss) and in earnings.  FSP 115-2/124-2 does not change existing recognition or measurement guidance related to OTTI of equity securities.  This pronouncement is effective as described in the preceding paragraph.  Certain transition rules apply to debt securities held at the beginning of the interim period of adoption when an OTTI was previously recognized.  If an entity early adopts either FSP 107-1 or FSP 157-4, the entity is also required to early adopt this pronouncement.  In addition, if an entity early adopts FSP 115-2/124-2, it is also required to early adopt FSP 157-4.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events.  The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance
 
- 10 -

sheet date.  SFAS No. 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009.  SFAS No. 165 did not have any impact on the Company’s financial statements for the periods ended July 31, 2009.  The Company evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q on September 8, 2009.
 
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which replaced SFAS No. 162.  The Codification will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  SFAS No. 168 is not expected to have a material impact on the Company’s 2009 financial statements.

In June 2008, the FASB ratified the consensus reached on the Emerging Issues Task Force (“EITF”) Issue No. 07-5 Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”).  EITF 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock.  EITF 07-5 applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under paragraph 6-9 of SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception under paragraph 11(a) of SFAS No. 133 and for purposes of determining whether that instrument is within the scope of EITF Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”), which provides accounting guidance for instruments that are indexed to, and potentially settled in, the issuer’s own stock.  EITF 07-5 is effective for fiscal years beginning after December 15, 2008, which for the Company is fiscal year 2010, and early adoption is not permitted.  The Company is currently evaluating the impact of this pronouncement on its financial statements.

The recent accounting pronouncements discussed in the notes to the Company’s audited financial statements for the year ended October 31, 2008 included in the Company’s Annual Report on Form 10-K that were required to be adopted during the fiscal year ended October 31, 2008 did not have and are not expected to have a significant impact on the Company’s 2009 financial statements.

Note 3.  
Long-Term Debt
 
Long-term debt (excluding accrued and unpaid interest) consisted of the following at the dates indicated:
 
   
July 31,
2009
   
October 31,
2008
 
Revolving line of credit from Comerica Bank
  $ 2,750,000     $ 2,900,000  
Revolving line of credit from Bluebird Finance Limited
    1,667,500       1,885,000  
Term note payable to Ashford Capital, LLC.
    125,000       125,000  
      4,542,500       4,910,000  
                 
Less current portion
    (415,000 )     (290,000 )
Long-term portion
  $ 4,127,500     $ 4,620,000  

- 11 -

 
Note 4.  
Income Taxes
 
As of October 31, 2008, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $15,156,000 and $4,271,000, respectively, which expire at various times from 2021 through 2027.
 
The Company has recorded a partial benefit for income taxes based on these net operating loss carryforwards.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not a portion of deferred tax assets will not be realized.
 
Realization of this deferred tax asset is dependent on the Company’s ability to generate future taxable income.  Management believes that it is more likely than not that the Company will generate taxable income to utilize some of the tax carry-forwards before their expiration.  However, there can be no assurance that the Company will meet its expectation of future income.  As a result, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced.  Such occurrence could materially adversely affect the Company’s results of operations and financial condition.
 
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 our financial statements and accompanying footnotes, contains forward-looking statements that involve risks and uncertainties.  Important factors that could cause actual results to differ materially from our expectations are set forth in Item 1 – Business – Factors That May Affect Our Future Operating Results, in our Form 10-K for the year ended October 31, 2008 as well as those discussed elsewhere in this Form 10-Q.  Those forward-looking statements may relate to, among other things, our plans and strategies, new product lines, and relationships with licensors, distributors and customers, distribution strategies and the business environment in which we operate.
 
References to we or us refers to Signature Eyewear, Inc.
 
Overview
 
We generate revenues through the sale of prescription eyeglass frames and sunwear under licensed brand names, including bebe, Carmen Marc Valvo, Cutter & Buck, Dakota Smith, Hart Schaffner Marx, Hummer, Laura Ashley, Michael Stars and Nicole Miller, and under our proprietary Signature brand.  Our cost of sales consists primarily of purchases from foreign contract manufacturers that produce frames and cases to our specifications.
 
We reported net income of $155,000 on net sales of $5.9 million for the three months ended July 31, 2009 (the “2009 Quarter”) compared to net income of $176,000 on net sales of $6.4 million for the three months ended July 31, 2008 (the “2008 Quarter”).  We reported net income of $570,000
 
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on net sales of $18.0 million for the nine months ended July 31, 2009 (the “2009 Nine Months”) compared to net income of $538,000 on net sales of $18.6 million for the nine months ended July 31, 2008 (the “2008 Nine Months”).
 
We have been able to maintain net income at close to 2008 levels despite declining net sales through continued cost-cutting measures and lower interest expense.  Net sales have declined due to the deepening global recession, which has materially impacted our international sales.  Domestic sales have remained relatively level primarily through the growing popularity of our largest line, bebe eyewear, and our Dakota Smith Eyewear line, and the addition of Carmen Marc Valvo Eyewear and Michael Stars Eyewear.
 
We have continued our efforts to improve our balance sheet during this recessionary period.  We have reduced inventory from $5.6 million at October 31, 2008 to $4.4 million at July 31, 2009 while reducing our accounts payable and accrued expenses by $1.2 million.  We have been able to reduce our total debt by $367,000 in fiscal 2009, from $4.9 million at October 31, 2008 to $4.5 million at July 31, 2009.
 
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
   
Nine Months Ended
 
   
July 31,
   
July 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    37.1       37.8       36.2       36.5  
Gross profit
    62.9       62.2       63.8       63.5  
Operating expenses:
                               
Selling
    36.7       35.3       36.3       35.9  
General and administrative
    21.7       22.5       22.7       23.1  
Depreciation and amortization
    0.7       0.5       0.6       0.4  
Total operating expenses
    59.1       58.3       59.6       59.4  
Income from operations
    3.8       3.9       4.2       4.1  
Interest expense/other, net
    (0.9 )     (1.0 )     (0.9 )     (1.2 )
Income before taxes
    2.9       2.9       3.3       2.9  
Income taxes
    0.3       0.1       0.1       0.0  
Net income
    2.6 %     2.8 %     3.2 %     2.9 %
 
Net Sales.  Net sales decreased by 6.7% or $429,000 from the 2008 Quarter to the 2009 Quarter and by 3.2% or $599,000 from the 2008 Nine Months to the 2009 Nine Months.  Unit frame sales decreased in the fiscal 2009 periods, as the global recession continues to affect the optical frame industry.  However, the average sales price of our frames increased due to fewer close out sales and fewer international sales, which are generally sold at lower prices.  Sales of our largest line, bebe eyewear, and Dakota Smith, increased in both the 2009 Quarter and the 2009 Nine months.  Net sales in the fiscal 2009 periods were also positively impacted by the introduction of Michael Stars Eyewear in the winter of 2009 and in the 2009 Nine Months by the introduction of Carmen Marc Valvo
 
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in 2008.  In addition, net sales increased in the Signature Collection with the introduction of the Caligraphy Collection in 2009.
 
Direct sales to independent optical retailers and distributors decreased $340,000 in the 2009 Quarter and decreased $180,000 in the 2009 Nine Months.  Sales to optical and retail chains increased $263,000 in the 2009 Quarter and increased $409,000 in the 2009 Nine Months.
 
Domestic sales decreased $91,000 in the 2009 Quarter and $151,000 in the 2009 Nine Months.  International sales decreased $338,000 in the 2009 Quarter and decreased $750,000 in the 2009 Nine Months due primarily to the weak global optical market and our scheduled closing of the Belgium office in September 2009.
 
Net sales reflect gross sales less a reserve for product returns established by us based on products that we are aware will be returned as of the end of the period.  These reserves were $476,000 and $443,000 at July 31, 2009 and October 31, 2008, respectively.
 
We had $875,000 and $990,000 in product returns for the 2009 Quarter and 2008 Quarter, respectively, resulting in a product returns percentage of 14.7% and 15.6%, respectively.  We had $2.6 million in product returns for the 2009 Nine Months and 2008 Nine Months, resulting in a product returns percentage of 14.7% and 13.8%, respectively.
 
Gross Profit and Gross Margin.  Gross profit decreased $223,000 from the 2008 Quarter to the 2009 Quarter and $318,000 from the 2008 Nine Months to the 2009 Nine Months due to decreased sales.  Gross margin increased to 62.9% in the 2009 Quarter from 62.2% in the 2008 Quarter, and increased to 63.8% in the 2009 Nine Months from 63.5% in the 2008 Nine Months.
 
Selling Expenses.  Selling expenses decreased $67,000 from the 2008 Quarter to the 2009 Quarter primarily due to decreases of $93,000 in compensation expense and $74,000 in convention expense partially offset by an increase of $89,000 in royalty expense.  Selling expenses decreased $135,000 from the 2008 Nine Months to the 2009 Nine Months primarily due to decreases of $139,000 in convention expense and $60,000 Belgium selling expense partially offset by $84,000 increase in royalty expense.
 
General and Administrative Expenses.  General and administrative expenses for the 2009 Quarter and 2009 Nine Months decreased $144,000 and $199,000, respectively, from the 2008 Quarter and 2009 Nine Months primarily due to a reduction in staff and overhead in our Belgium office.
 
Interest Expense/Other, Net. Interest expense, net, consists of interest expense offset by other income.  Interest expense, net, decreased $13,000 in the 2009 Quarter and $61,000 in the 2009 Nine Months primarily due to lower outstanding borrowings and reductions in the interest rate on our revolving line of credit.
 
Income Taxes.  As a result of our net loss carry-forward, we recorded no income tax expense other than franchise taxes in various states in the 2009 Quarter or the 2008 Quarter.
 
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Financial Condition, Liquidity and Capital Resources
 
Our accounts receivable (net of allowance for doubtful accounts) were $3.1 million at July 31, 2009 compared to $2.8 million at October 31, 2008 due primarily to extended payment terms offered to customers and slower payments due to the economy.
 
Our inventories (at lower of cost or market) were $4.4 million at July 31, 2009 compared to $5.6 million at October 31, 2008.  The decrease was due to our continuing efforts to reduce our inventory levels taking into account current economic conditions.
 
Our accounts payable decreased $895,000 from $5.1 million at October 31, 2008 to $4.2 million at July 31, 2009 due primarily to our reduced inventory purchases.
 
Our long-term debt (including current portion) decreased $367,000 in fiscal 2009, from $4.9 million at October 31, 2008 to $4.5 million at July 31, 2009.  See Note 3 of Notes to Financial Statements for further information regarding our long-term debt.  At July 31, 2009, the interest rate on our Comerica Bank revolving line of credit was 3.55% for our Libor portion of the revolving line of credit and 3.75% per annum for our prime rate portion of our line of credit.  We had approximately $1.5 million of additional borrowing capacity under this line of credit as of July 31, 2009.
 
Of our accounts payable at July 31, 2009, approximately $190,000 were payable in foreign currency.  To monitor risks associated with currency fluctuations, we periodically assess the volatility of certain foreign currencies and review the amounts and expected payment dates of our purchase orders and accounts payable in those currencies.
 
We believe that, at least for the next four fiscal quarters, assuming that there are no unanticipated material adverse developments, we continue to be in compliance with our credit facilities and we maintain current sales levels, our cash flows from operations and through credit facilities will be sufficient to enable us to pay our debts and obligations as they mature.
 
Inflation
 
We do not believe our business and operations have been materially affected by inflation.
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.
 
Item 4. 
Controls and Procedures
 
We maintain 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 our 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
 
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assurance only of achieving the desired control objectives, and management necessarily is required to apply its judgment in weighing 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 our Chief Executive Officer and Chief Financial Officer (the same person has both titles), evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of that date.
 
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.
 
OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
Nothing to report.
 
Item 1A.  Risk Factors
 
Not applicable.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Nothing to report.
 
Item 3.  Defaults upon Senior Securities
 
Nothing to report.
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
We held our 2009 Annual Meeting of Shareholders on May 6, 2009.  The only matter submitted to the shareholders at the Annual Meeting was the election of directors.  All of the nominees of the Board of Directors were re-elected, as follows:
 
Name of Director
Votes For
Votes Withheld
Edward Meltzer
6,332,235
53,031
Drew Miller
6,332,235
53,031
Ted Pasternack
6,332,235
53,031
Michael Prince
6,331,145
54,121
Richard M. Torre
6,332,235
53,031

 
Item 5.  Other Information
 
Nothing to report.
 
Item 6.  Exhibits
 
See Exhibit Index Attached
 
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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 9, 2009
SIGNATURE EYEWEAR, INC.
 
 
By: /s/ Michael Prince

Michael Prince
Chief Executive Officer
Chief Financial Officer


 
 
 
 

 
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EXHIBIT INDEX
 
Exhibit
Number
Exhibit Description
   
31.1
Certification Pursuant to SEC Rule 13a-14(a)/15d-14(a)
32.1
Certification Pursuant to 18 U.S.C. § 1350


 
 
 
 
 
 
 
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