U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT
PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period from April 1 to June 30, 1998
(For the Quarterly Period Ended June 30, 1998)
Commission file number 001-13965
AMBASSADOR EYEWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2807063
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 Marshall Lane, Bensalem, Pennsylvania 19020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-523-4675
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------------
Common Stock, $.01 par value Chicago Stock Exchange
Securities registered pursuant to Section 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has 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 |_|
Number of shares of common stock outstanding as of August 14, 1998: 4,700,000
Transitional Small Business Disclosure Format: Yes |_| No |X|
<PAGE>
AMBASSADOR EYEWEAR GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Pages
Item 1. Condensed Financial Statements
Balance Sheets as of June 30, 1998 (unaudited)
and March 31, 1998 3
Statements of Operations (unaudited) for the three
months ended June 30, 1998 and June 30, 1997 4
Statements of Cash Flows (unaudited) for the three
months ended June 30, 1998 and June 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 13
SIGNATURE PAGE 14
<PAGE>
AMBASSADOR EYEWEAR GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 411,000 $ 47,000
Accounts receivable, less allowance for
returns and doubtful accounts of $1,175,000 10,908,000 12,849,000
Receivable from stockholder/officer 15,000 15,000
Inventories 12,703,000 11,181,000
Prepaid expenses 430,000 382,000
Deferred taxes 400,000 400,000
Other current assets 4,000 47,000
------------ ------------
Total current assets $ 24,871,000 $ 24,921,000
Fixed assets, net 685,000 733,000
Deferred financing cost, net 9,000 11,000
Other assets 35,000 38,000
------------ ------------
Total Assets $ 25,600,000 $ 25,703,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 9,243,000 7,986,000
Notes Payable - stockholder/officer 574,000
Advances from stockholders/officers 52,000 90,000
Current portion of long-term debt 105,000 103,000
Accounts payable 4,078,000 5,913,000
Accrued expenses 1,232,000 1,194,000
Income taxes payable 1,859,000 1,427,000
Current portion of capital leases payable 90,000 100,000
------------ ------------
Total current liabilities $ 16,659,000 $ 17,387,000
Consulting payable 83,000 72,000
Long-term debt, less current portion 189,000 216,000
Convertible note payable - stockholders/officer 1,181,000 1,181,000
Capital leases payable, less current portion 87,000 105,000
Deferred taxes 27,000 27,000
------------ ------------
Total liabilities $ 18,226,000 $ 18,988,000
------------ ------------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and
outstanding 4,700,000 shares 47,000 47,000
Additional paid-in capital 5,696,000 5,699,000
Unearned portion of compensatory stock options (137,000) (146,000)
Retained earnings 1,768,000 1,115,000
------------ ------------
Total stockholders' equity $ 7,374,000 $ 6,715,000
------------ ------------
TOTAL $ 25,600,000 $ 25,703,000
============ ============
</TABLE>
See notes to financial statements
-3-
<PAGE>
AMBASSADOR EYEWEAR GROUP, INC.
Statement of Operations
For the three months ended
June 30,
--------
1998 1997
----------- -----------
Net sales $ 7,239,000 $ 6,466,000
Cost of sales 3,293,000 3,133,000
----------- -----------
Gross profit 3,946,000 3,333,000
Selling, general and
administrative expenses 2,612,000 2,786,000
----------- -----------
Income from operations 1,334,000 547,000
Interest expense (250,000) (334,000)
----------- -----------
Income before provision for income taxes 1,084,000 213,000
Income tax provision 433,000 85,000
----------- -----------
NET INCOME $ 651,000 $ 128,000
=========== ===========
Net income per share - basic $ 0.14 $ 0.04
=========== ===========
Net income per share - diluted $ 0.13 $ 0.03
=========== ===========
Weighted average number of common shares
outstanding - basic income per share 4,700,000 3,500,000
=========== ===========
Weighted average number of common shares
outstanding - diluted income per share 5,280,000 3,836,000
=========== ===========
See notes to financial statements
-4-
<PAGE>
AMBASSADOR EYEWEAR GROUP, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 651,000 $ 128,000
Adjustments to reconcile net income to net
cash (uses in) operating activities:
Depreciation 59,000 48,000
Amortization of deferred financing costs 3,000 3,000
Amortization of deferred credit -- (23,000)
Deferred taxes -- 47,000
Compensatory stock option 9,000 9,000
Changes in operating assets and liabilities:
Accounts receivable 1,941,000 (44,000)
Inventories (1,522,000) 213,000
Other current assets 29,000 --
Prepaid expenses (48,000) (62,000)
Other assets 2,000 --
Accounts payable (1,835,000) 56,000
Consulting payable 11,000 11,000
Accrued expenses 64,000 (107,000)
Income taxes payable 432,000 31,000
----------- -----------
Net cash (used in) provided by operating activities (204,000) 310,000
----------- -----------
Cash flows from investing activities:
Fixed asset acquisitions (11,000) (41,000)
----------- -----------
Net cash (used in) investing activities (11,000) (41,000)
----------- -----------
Cash flows from financing activities:
Net borrowings from bank - line of credit 1,257,000 33,000
Payments of financing costs (3,000) (45,000)
Payment of advances (48,000) --
Payments of notes payable - stockholders/officer (574,000) --
Payments of notes payable - Windsor (25,000) (23,000)
Payments on capital leases (28,000) (17,000)
----------- -----------
Net cash provided by (used in) financing activities 579,000 (52,000)
----------- -----------
Net increase (decrease) in cash 364,000 217,000
Cash - beginning of year 47,000 75,000
----------- -----------
Cash - end of year $ 411,000 $ 292,000
=========== ===========
Supplementary cash flow information:
Interest paid 281,000 308,000
</TABLE>
See notes to financial statements
-5-
<PAGE>
AMBASSADOR EYEWEAR GROUP, INC
NOTES TO FINANCIAL STATEMENTS
Note A - THE COMPANY AND BASIS OF PRESENTATION
Ambassador Eyewear Group, Inc. (the "Company"), formerly Diplomat Ambassador,
Inc., designs, markets and distributes prescription eyeglass frames and
nonprescription sunglasses to department and specialty stores, optical chains
and eyewear boutiques worldwide. The company was organized on May 3, 1995 and on
May 10, 1995, acquired substantially all of the assets and assumed certain of
the liabilities of Chanuk Inc. ("Chanuk"), an eyewear distributor and
predecessor entity. On June 26, 1996, the Company acquired from a bank
substantially all of the assets and assumed certain of the liabilities of
Windsor Optical, Inc. ("Windsor"). On February 26, 1997, the Company acquired
from a bank substantially all of the assets and assumed the bank debt of
Renaissance Eyewear Inc. ("Renaissance") and incurred certain other obligations.
The Company imports substantially all of its frames and nonprescription
sunglasses from a limited number of international suppliers, principally in the
Far East.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited, consolidated, condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normally recurring accruals) considered for fair presentation have been
included. Operating results for the three month period ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended March 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB.
NOTE C - EARNINGS PER SHARE
Basic income per share is computed by dividing the net income by the weighted
average number of shares of common stock outstanding during each period. Diluted
income per share includes the effect, if any, from the potential exercise or
conversion of securities, such as stock options, warrants and convertible notes,
which would result in the issuance of incremental shares of common stock.
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
of Operations
Statements in this report that are not descriptions of historical facts may be
forward looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those anticipated.
Overview. The Company designs, markets, sources and distributes high quality
prescription eyeglass frames and non-prescription sunglasses to department and
specialty stores, optical chains and eyewear boutiques throughout the United
States and the world. On May 3, 1995 (inception), the Company was organized and
on May 10, 1995, the Company acquired substantially all of the assets and
assumed certain of the liabilities of Chanuk, Inc. ("Chanuk"). Chanuk was
engaged in substantially the same business as the Company and a majority
stockholder of Chanuk is the mother-in-law of the President of the Company. The
Company has expanded through the acquisition of other companies in related and
complementary businesses and through the increase of its sales base. On June 26,
1996 the Company acquired substantially all of the assets and assumed certain of
the liabilities of Windsor Optical, Inc. ("Windsor") and on February 26, 1997,
the Company acquired from a bank substantially all of the assets of Renaissance
Eyewear Group ("Renaissance"). The bank had foreclosed on Renaissance upon
default of its loan agreement. In connection with the acquisition, the Company
paid the bank $3,446,000. The Company also entered into a consulting agreement
with the former owner of Renaissance which provided for annual aggregate
payments of $200,000 per year for five years. In addition, under a consulting
agreement, the Company granted the former owner of Renaissance options to
purchase 180,833 shares of Common Stock of the Company for $3.00 per share.
Following the acquisition, the Company paid an aggregate of approximately
$400,000 to various creditors of Renaissance deemed to be necessary to preserve
the value of the acquired assets.
The Company has, from time to time, experienced cash flow shortfalls and has
been required to borrow substantial amounts from banks. The Company had total
liabilities of approximately $18.2 million at June 30, 1998, approximately $16.7
million of which are current which amounts have increased to date. Of such debt,
approximately $9.2 million is payable to CoreStates Bank (the "Bank") pursuant
to the Company's revolving line of credit. During the three months ended June
30, 1998 and 1997, the Company incurred $250,000 and $334,000, respectively, in
net interest expenses. The revolving line of credit is secured by substantially
all of the assets of the Company. The credit facility is represented by demand
notes payable to the Bank under which the Bank may demand repayment at any time.
If the Bank were to demand repayment of the entire outstanding borrowings under
the facility, the Company would be required to identify alternative financing to
satisfy its repayment obligation and to continue its operations. There can be no
assurance that any such alternative funding sources will be available on a
commercially reasonable basis if at all. If it is unsuccessful in so identifying
such financing the Company may be required to cease operations. The loan
agreement with the Bank also contains provisions which restrict certain
activities of the Company, including the declarations of dividends and also
provides for various other restrictive covenants, including the continuing
participation of Rudy A. Slucker, the Chairman of the Board of Directors and
Barry Budilov, the president and Chief Executive Officer, in their current
management positions.
RESULTS OF OPERATIONS:
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company had net sales of approximately $7.2 million for the three months
ended June 30, 1998 compared with net sales of $6.4 million for the three months
ended June 30, 1997, an increase of approximately $800,000. The increase in
sales resulted from the introduction of new products and increased sales of
existing products.
Cost of sales for the three months ended June 30, 1998 were approximately $3.3
million (approximately 45.5% of net sales) compared to $3.1 million
(approximately 48.4% of net sales)for the three months ended June 30, 1997.Cost
of sales includes the purchase price for eyeglass frames, in addition to the
costs to the Company of importing such frames. Cost of sales decreased from the
three months ended June 30, 1998 compared to the three months ended June 30,
1997 as a percentage of net sales because the Company was able to identify lower
cost sources of manufacturing as its sales volume increased.
Selling, general and administrative expenses, consisting principally of
advertising, marketing, accounting and salaries of officers, decreased from
approximately $2.8 million (approximately 43.1% of net sales) for the three
months ended June 30, 1997 to approximately $2.6 million (approximately 36.1% of
net sales) for the three month period ended June 30, 1998. Selling, general and
administrative expenses decreased as a result of eliminating redundant costs of
operating Renaissance in a separate facility through July 1997, consisting of
primarily duplicated overhead and personnel incurred prior to the consolidation
of the Company's operations into one location.
Income from operations increased from approximately $547,000(approximately 8.5%
of net sales) for the three months ended June 30, 1997 to approximately $1.3
million (approximately 18.4% of net sales) for the three months ended June 30,
1998, reflecting the increased sales by the Company from its pre-existing base
of customers as well as the introduction of new product lines and a decrease in
operating expenses due to the elimination of the redundant costs of operating
Renaissance in a separate facility.
Interest expense decreased from approximately $334,000 for the three months
ended June 30, 1997 to approximately $250,000 for the three months ended June
30, 1998 due to the paydown of the Company's bank facility from the proceeds of
the initial public offering in March 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and Capital Resources. At June 30, 1998, the Company had working
capital of approximately $8.2 million. The Company's total current assets at
June 30, 1998 of approximately $24.9 million includes accounts receivable of
approximately $10.9 million and inventories of approximately $12.7 million. The
Company's accounts receivable reflects an allowance for doubtful accounts of
approximately $1.2 million. The Company's inventories consist principally of
eyeglass frames and sunglasses held at its warehouse for distribution. the
market for eyewear and accessories is subject to the risk of changing consumer
trends. In order to be able to promptly fill orders from distributors, the
Company maintains a significant level of inventory. In the event that a
significant number of particular models or accessories does not achieve
widespread consumer acceptance, the Company may be required to take significant
price markdowns, which could have a material adverse effect on the business,
results of operations and financial condition of the Company.
The Company's current liabilities as of June 30, 1998 include approximately $9.2
million relating to its revolving line of credit with CoreStates Bank. The
Company has used its line of credit to fund its continuing operations and to
fund its increased inventory. The revolving line of credit expires annually on
June 1st and is automatically renewed for one year periods and provides for a
maximum borrowing amount of $13 million. Indebtedness under the line accrues
interest at the prime rate (8.5% at June 30, 1998) and, is collateralized by
substantially all of the assets of the Company. Rudy A. Slucker, the Chairman of
the Board of Directors of the Company, and Barry Budilov, the President of the
Company, have each provided personal guarantees for the line of credit for up to
$500,000 of such debt. The revolving line of credit restricts the payment of
dividends to stockholders and provides for various restrictive covenants,
including the continuing participation of Rudy A. Slucker and Barry Budilov in
their current management positions. The Company had also borrowed an aggregate
of $576,000 from Mr. Slucker to assist the Company in financing its costs
relating to the acquisition of substantially all of the assets of Renaissance
and the integration of the business of Renaissance into that of the Company and
for working capital. The loan was repaid from the proceeds of the initial public
offering in April 1998.
At June 30, 1998, the Company's current liabilities also include approximately
$4.1 million of accounts payable and $1.2 million of accrued expenses, payable
in the ordinary course of its business. The Company's long-term debt includes
approximately $189,000 (which does not include current portion of $105,000) of
indebtedness in connection with the acquisition of Windsor.
The Company's indebtedness includes approximately $1.18 million, payable to Mr.
Slucker and Mr. Budilov under the 8% Convertible Notes. The Convertible Notes
are repayable subject to restrictions contained in the Company's loan agreement
with CoreStates Bank on March 31, 2000. Interest shall accrue and be payable
quarterly at the rate of 8% per annum. If the Company has earnings equal to or
in excess of $.60 per share for the year ending March 31, 1999, the Convertible
Notes may be prepaid at the option of the holder commencing on March 31, 1999.
The Convertible Notes may be converted at any time into shares of Common Stock
at a rate equal to the initial public offering price per share.
Sales of eyewear under license agreements represented approximately 47% and 35%
of the sales of the Company for the three months ended June 30, 1998 and June
30, 1997, respectively. The Company's license agreements generally require the
Company to satisfy minimum purchase requirements or to make annual royalty
payments and advertising expenditures and maintain quality control and retail
distribution commensurate with the licensor's image. Accordingly, certain
licensors are entitled to receive payment from the Company whether or not
specified minimum levels of annual sales for licensed products are met. For the
year ending March 31, 1999, the annual aggregate commission obligations of the
Company under current license agreements will be no less than approximately
$1,095,000, even if the Company were to generate no sales under the agreements.
As of June 30, 1998, the Company's obligations under employment agreements and
consulting agreements with members of management and its Board of Directors
aggregate approximately $470,000 over the next 12 months. In addition, payments
under notes, non-competition and other agreements relating to the acquisition of
substantially all of the assets of Chanuk, Windsor and Renaissance, will
aggregate approximately an additional $375,000 for the year ending March 31,
1999.
The Company currently leases office, warehouse and showroom facilities and
equipment under operating leases, which expire at various times through the year
2002. Future minimum lease payments under non-cancelable leases at June 30, 1998
aggregate approximately $2.0 million through the year 2002.
The Company leases its principal offices in Bensalem, Pennsylvania for its
management, inventory and distribution operations for which it pays a base
annual rent of approximately $300,000 per year. The principals of the Company
acquired the facility in August 1998. The terms and condition of such lease have
remained the same.
In connection with the acquisitions of substantially all of the assets of
Renaissance in 1997, the Company satisfied certain obligations of that business
to particular creditors, the cooperation of which was deemed to be necessary to
continue conducting business. In connection with the acquisition of
substantially all of the assets of Renaissance, no liabilities of Renaissance
were contractually assumed by the Company. The Company has been provided with
estimates indicating that the net liabilities of Renaissance exceeded $3.0
million at the time the Company acquired the assets. A number of creditors of
Renaissance have instituted collection actions in court against Renaissance for
amounts due to them from Renaissance. The Company is not a party to any material
actions relating to these matters. To the extent that any creditors of
Renaissance seek recourse against the Company as the purchaser of substantially
all of the assets of Renaissance, the Company may incur substantial expenses in
connection with defending any such actions. Furthermore, to the extent that
creditors are successful in asserting any claims against the Company as a
successor to Renaissance or challenge the acquisition from the secured creditor,
the Company could be responsible for substantial liabilities and its financial
position could be adversely affected.
<PAGE>
YEAR 2000 MODIFICATIONS
The Company recognizes the potential business impacts related to the Year 2000
computer system issue. The issue is one where computer systems may recognize the
designation "00" as 1900 when it means 2000, resulting in system failure or
miscalculations. The Company began to address the Year 2000 issue in 1998 and
continues to implement measures to ensure its business operations are not
disrupted. The Company estimates that it will spend an additional $15,000 above
normal operating costs in order to comply with Year 2000 issues.
SEASONALITY
The Company believes that its business is subject to seasonal trends, resulting
in lower sales of prescription eyewear during its third quarter ( the three
months ended December 31) and higher sales of sunglass products during the
spring. Accordingly, sales and results of operations may fluctuate from month to
month throughout the year and quarterly results may not always be indicative of
the entire year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 2, 1998, the Company was served with a Complaint and Demand for Jury
Trial by Marchon Eyewear Group, Inc. ("Marchon") and Rothenburg, Inc.
("Rothenburg") in eastern District of New York. In the Complaint, the plaintiffs
assert claims that the Company has been and now is infringing one or more claims
of two U.S. Patents that were allegedly assigned to Marchon and licensed
exclusively by Marchon to Rothenburg. The plaintiff allege in the Complaint,
among other things, that one patent relates to eyeglass frames fabricated from
nickel-titanium based shape-memory alloy components having, inter alia, greater
than 3% elasticity over a usage temperature range of -20 C to +40 C. The
plaintiff further allege that the other patent relates to eyeglass frames having
inter alia, deformed receiving sleeve connections to secure eyeglass frame
components, such as temple and bridge pieces, to the lens frame. The Complaint
relates to the Company's flexible eyeglass frame line of products that the
Company including lost profits, pre judgment interest and treble damages,
attorneys' fees and costs and expenses. Since March, the Company has sold a
significant amount of flexible eyeglass frames. The Company believes that its
flexible eyeglass frames do not infringe any claims of valid patents and intends
to vigorously defend the lawsuit. Nevertheless, if the dispute is resolved
against the Company, in addition to incurring potential damages and costs
relating to the defense of the claim, which could be significant, the Company
may be required to modify certain of its flexible eyeglass products or be unable
to sell such products in the future.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 1998 AMBASSADOR EYEWEAR GROUP, INC.
/s/ Barry Budilov
-------------------------------------
Barry Budilov
President and Chief Executive Officer
Dated: August 14, 1998 /s/ Raymond Green
-------------------------------------
Raymond Green
Treasurer and Principal Financial
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 411,000
<SECURITIES> 0
<RECEIVABLES> 12,083,000
<ALLOWANCES> 1,175,000
<INVENTORY> 12,703,000
<CURRENT-ASSETS> 24,871,000
<PP&E> 1,238,000
<DEPRECIATION> 553,000
<TOTAL-ASSETS> 25,600,000
<CURRENT-LIABILITIES> 16,600,000
<BONDS> 0
0
0
<COMMON> 47,000
<OTHER-SE> 7,327,000
<TOTAL-LIABILITY-AND-EQUITY> 25,600,000
<SALES> 7,239,000
<TOTAL-REVENUES> 7,239,000
<CGS> 3,293,000
<TOTAL-COSTS> 2,597,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 250,000
<INCOME-PRETAX> 1,084,000
<INCOME-TAX> 433,000
<INCOME-CONTINUING> 651,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 651,000
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
