<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. __)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SOLAR-MATES, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-------------------
5) Total fee paid:
----------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
--------------------------------------------
2) Form, Schedule or Registration Statement no.:
-----------------------
3) Filing Party:
------------------------------------------------------
4) Date Filed:
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<PAGE>
SOLAR-MATES, INC.
_______________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
__________, 1997
_______________________
A Special Meeting of Shareholders of Solar-Mates, Inc. (the "Company") will
be held at __________________________ at 10:00 A.M. on ________________, 1997,
for the following purposes:
1. To approve the issuance of (i) shares of the Company's common stock,
$.001 par value ("Common Stock"), issuable (a) upon conversion of
7,500 outstanding shares of Series A 6.5% Convertible Preferred Stock,
$.001 par value (the "Series A Shares"), which shares were issued by
the Company pursuant to a private offshore offering in October 1996,
and are convertible, subject to such approval, into shares of Common
Stock at a per share conversion price equal to the stated value per
share of $1,000, divided by the lower of $5.50 and 80% of the average
(the "Discounted Average") market price of the Common Stock for the
ten consecutive trading days ending three days prior to the giving of
a notice of conversion, and (b) upon exercise of an outstanding Series
A Warrant of the Company to purchase up to an aggregate of 150,000
shares of Common Stock at an exercise price of $5.5625 per share and
an outstanding Series D Warrant of the Company to purchase up to an
aggregate of 200,000 shares of Common Stock at an exercise price of
$5.50 per share, which Warrants were issued in connection with the
issuance of the Series A Shares; (ii) 7,500 shares of Series B 6%
Convertible Preferred Stock, $.001 par value (the "Series B Shares"),
and 7,500 shares of Series C 6% Convertible Preferred Stock, $.001 par
value (the "Series C Shares"), which shares are issuable upon
consummation of the "Serengeti Acquisition," as described herein, and
are convertible into shares of Common Stock at a per share conversion
price equal to the stated value per share of $1,000, divided by the
lower of the Discounted Average and, in the case of the Series B
Shares, $6.75 and, in the case of the Series C Shares, $8.25; and
(iii) a Series B Warrant of the Company and a Series C Warrant of the
Company, each of which entitles the holder thereof to purchase up to
an aggregate of 300,000 shares of Common Stock, at an exercise price
of $7.50 per share in the case of the Series B Warrant and $10.00 per
share in the case of the Series C Warrant, which Warrants are issuable
in connection with the issuance of the Series B Shares and the Series
C Shares. The terms of such preferred shares and warrants contain
customary anti-dilution provisions.
2. To approve an amendment to the Company's Certificate of Incorporation
to change the name of the Company from "Solar-Mates, Inc." to
"Serengeti Eyewear, Inc."
3. To approve an amendment to the Solar-Mates, Inc. 1995 Stock Option
Plan to increase the number of shares of Common Stock available for
issuance thereunder from 450,000 shares to 1,500,000 shares.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only holders of record at the close of business on ________________ are
entitled to notice of, and to vote at, the meeting and any adjournment thereof.
By Order of the Board of Directors,
MILTON NEVITT
SECRETARY
________________, 1997
<PAGE>
SOLAR-MATES, INC.
_________________________
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
____________, 1997
_________________________
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of Solar-Mates, Inc. (the "Company") of proxies and
voting instructions in the accompanying form for use at the Special Meeting of
Shareholders to be held at _______________________________ at 10:00 A.M. on
____________, 1997, and at all adjournments thereof.
The shares represented by proxies solicited by the Board of Directors of
the Company will be voted in accordance with the directions given therein. If
no direction is indicated, the proxy will be voted in favor of the proposal set
forth in the notice attached to this proxy statement. Any shareholder may
revoke his proxy at any time prior to the voting thereof by giving notice in
writing to the Secretary of the Company, by granting a proxy bearing a later
date or by voting in person at the meeting.
Shareholders of record at the close of business on ______________ will be
entitled to one vote for each share then held. As of such record date, there
were 2,384,000 shares of the Company's Common Stock ("Common Stock")
outstanding. As of such date, the Company also had outstanding 7,500 of its
Series A Shares (as defined), which are not listed on any national securities
exchange or automated dealer quotation system, and are not, in accordance with
their terms, entitled to vote with respect to any of the proposals set forth in
the notice attached to this proxy statement.
The presence, in person or by proxy, of shareholders entitled to cast at
least a majority of the votes entitled to be cast by all shareholders will
constitute a quorum for the transaction of business at the meeting. Approval of
each matter will require the affirmative vote of a majority of the votes cast
thereon. On all matters to come before the meeting, abstentions and non-votes
will not be considered as votes cast, and will be considered only for purposes
of determining whether a quorum is present at the meeting.
Stephen Nevitt, Milton Nevitt and Michael J. Guccione, each of whom is a
director and executive officer of the Company, and the Nevitt Family Trust and
The Feldman Family Limited Partnership together possess beneficially
approximately 50.1% of the aggregate votes that may be cast at the meeting. See
"Security Ownership of Certain Beneficial Owners and Management." Accordingly,
the affirmative vote of such shareholders alone is sufficient to approve each of
the proposals to be submitted to the shareholders at the meeting. Such
shareholders have agreed to vote all of their shares in favor of the proposals
set forth in the notice attached to this proxy statement.
The existing shareholders of the Company are not entitled to dissenters'
rights of appraisal in connection with any of the proposals. The cost of
soliciting proxies will be borne by the Company.
The principal executive offices of the Company are at 8125 25th Court East,
Sarasota, Florida 34243. This proxy statement and the form of proxy are being
mailed to shareholders on or about _______________, 1997.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 16, 1996
with respect to the beneficial ownership of shares of Common Stock by (i) any
shareholder known by the Company to beneficially own more than five percent of
such Common Stock, (ii) the Company's directors and executive officers and (iii)
the directors and executive officers of the Company as a group. Except as
otherwise indicated, the address of each beneficial owner is the same as the
Company. The table does not include the shares issuable upon conversion of any
of the Preferred Shares, which Preferred Shares generally are not entitled to
vote, as such conversions may not be effected without the shareholder approval
to which this proxy statement relates. The 7,500 outstanding Series A Shares
are held of record by RBB Bank Aktiengesellschaft ("RBB"), whose principal
offices are located at Burgring 16, 8010 Graz, Austria.
NAME AND ADDRESS AMOUNT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNERSHIP PERCENTAGE
Nevitt Family Trust(1) 506,103 21.2%
Milton Nevitt 278,781 11.7%
Stephen Nevitt 1,419,193(2)(3)(4) 46.5%
Michael J. Guccione 175,188(4)(5) 7.2%
David B. Newman
c/o Cooperman Levitt Winikoff
Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022 530,163(2)(4)(6) 22.0%
John R. Clarke 200,000(7) 7.7%
1725 Lazy River Lane
Dunwoody, Georgia 30350
Directors and executive officers
as a group (five persons) 1,897,222 60.9%
_______________________
(1) The indicated trust (the "Trust") was created pursuant to a Trust
Agreement, dated as of September 11, 1992, between Milton Nevitt, as
grantor, and Stephen Nevitt and David B. Newman, as trustees. Such
trustees have the sole power to vote the shares held by the Trust. The
children of Milton Nevitt, including Stephen Nevitt, are the beneficiaries
under the Trust.
(2) Includes 506,103 shares held by the Trust, for which such beneficial
owner acts as trustee.
(3) Includes 665,232 shares issuable upon exercise of options granted pursuant
to the Solar-Mates, Inc. 1995 Stock Option Plan (the "Plan"), 600,000 of
which are exercisable at $8.32 per share, 42,384 of which are exercisable
at $5.20 per share and 22,848 of which are exercisable at $4.72 per share.
475,000 of such options are subject to the approval by the shareholders of
the amendment to the Plan to which this proxy statement relates.
(4) Does not include those shares issuable upon the exercise of options
granted pursuant to the Plan which are not exercisable within 60 days.
(5) Includes 42,384 shares issuable upon exercise of options granted pursuant
to the Plan which are exercisable at $4.72 per share.
(6) Includes 24,060 shares issuable upon exercise of options granted pursuant
to the Plan which are exercisable at $9.15 per share.
(7) Represents shares issuable upon the exercise of the Series D Warrant (as
defined).
2
<PAGE>
FINANCING OF THE SERENGETI ACQUISITION
BACKGROUND
On October 4, 1996, the Company issued 7,500 shares of its Series A 6.5%
Convertible Preferred Stock, $.001 par value (the "Series A Shares"), to RBB, a
banking institution whose principal offices are located in Austria, in a private
offshore offering pursuant to Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"). RBB purchased the Series A Shares for a
purchase price equal to their aggregate stated value of $7.5 million. The
purpose of such investment is to fund, in part, the acquisition (the "Serengeti
Acquisition") by the Company of certain of the assets of the Serengeti Eyeware
division ("Serengeti") of Corning Incorporated used in the design, manufacture
and distribution of Serengeti brand sunglasses.
Pursuant to an Agreement of Purchase and Sale, dated as of October 29,
1996, between the Company and Corning Incorporated, the Company has agreed to
purchase the Serengeti assets for a purchase price of $27.5 million. RBB has
agreed to purchase, concurrently with the closing of the Serengeti Acquisition,
7,500 shares of the Company's Series B 6% Convertible Preferred Stock, $.001 par
value (the "Series B Shares"), and 7,500 of the Company's Series C 6%
Convertible Preferred Stock, $.001 par value (the "Series C Shares"; together
with the Series A Shares and the Series B Shares, the "Preferred Shares"), for a
purchase price equal to their aggregate stated value of $15.0 million. The
proceeds to the Company from the sale of the Preferred Shares are estimated to
be approximately $20.9 million (net of commissions and the estimated expenses of
such sale). The Company intends to apply such net proceeds to the Serengeti
Acquisition purchase price. The Company intends to finance the remainder of
such purchase price and related costs and expenses with borrowings under its
proposed New Credit Facility (as defined). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Concurrently with the issuance of the Series A Shares, the Company also
issued to RBB a Series A Warrant of the Company (the "Series A Warrant") to
purchase up to an aggregate of 150,000 shares of Common Stock at an exercise
price of $5.5625 per share. The Series A Warrant is exercisable at any time
commencing January 1, 1999 and on or prior to December 31, 2002. In addition,
the Company has agreed to issue to RBB, concurrently with the issuance of the
Series B Shares and the Series C Shares, a Series B Warrant of the Company (the
"Series B Warrant") and a Series C Warrant of the Company (the "Series C
Warrant"), each of which will entitle RBB to purchase up to an aggregate of
300,000 shares of Common Stock at a per share exercise price of (i) $7.50 with
respect to the Series B Warrant and (ii) $10.00 with respect to the Series C
Warrant. Each of the Series B Warrant and the Series C Warrant is exercisable
at any time commencing January 1, 1999 and on or prior to December 31, 2002.
The Company has also issued, as part of the commission payable to a third
party in connection with the sale of the Series A Shares, a Series D Warrant of
the Company (the "Series D Warrant"; together with the Series A Warrant, the
Series B Warrant and the Series C Warrant, the "Warrants") to purchase up to an
aggregate of 200,000 shares of Common Stock at an exercise price of $5.50 per
share. The Series D Warrant is immediately exercisable and expires on or prior
to September 30, 2001.
3
<PAGE>
SHAREHOLDER APPROVAL REQUIRED
In accordance with the corporate governance rules of the National
Association of Securities Dealers, Inc. relating to issuers listed on The Nasdaq
National Market, such as the Company, shareholder approval is required for non-
public offerings involving the issuance of shares of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
common stock outstanding before the issuance at a price less than the greater of
book or market value of the stock. If all of the Preferred Shares and Warrants
issued or to be issued were converted (at the maximum Preferred Share conversion
rate) or exercised and the shares of Common Stock issuable pursuant thereto were
outstanding as of December 16, 1996, such shares would represent approximately
181.8% of the shares of Common Stock outstanding on such date. The number of
shares issuable upon conversion of the Preferred Shares will depend upon the
Market Price (as defined below) at the time of conversion. Accordingly, such
number of shares may be greater, and such percentage would be increased, if the
Market Price is below certain levels, as described below. Accordingly, the
shareholders of the Company are being requested to approve the issuance of (i)
shares of Common Stock issuable upon conversion of the Series A Shares and upon
exercise of the Series A Warrant and the Series D Warrant, (ii) the Series B
Shares and the Series C Shares, and (iii) the Series B Warrant and the Series C
Warrant (the "Financing Proposal").
DESCRIPTION OF THE PREFERRED SHARES
TERMS OF CONVERSION AND REDEMPTION
Each of the Series A Shares may be converted by the holder thereof into
shares of Common Stock at any time after approval by the Company's shareholders
of the issuance of such shares as contemplated by this proxy statement. Each
Series A Share is convertible into such number of shares of Common Stock as is
determined by dividing its stated value of $1,000 by a conversion rate equal to
the lower of (i) $5.50 and (ii) 80% of the average Market Price for the 10
consecutive trading days ending three days prior to the giving by the holder of
such Series A Shares of a notice of conversion.
Each of the Series B Shares may be converted by the holder thereof into
shares of Common Stock at any time after the later to occur of (i) January 1,
1997 and (ii) the approval by the Company's shareholders of the issuance of such
shares as contemplated by this proxy statement. Each Series B Share will be
convertible into such number of shares of Common Stock as is determined by
dividing the stated value of $1,000 by a conversion rate equal to the lower of
(i) $6.75 and (ii) 80% of the average Market Price for the 10 consecutive
trading days ending three days prior to the giving by the holder of such Series
B Shares of a notice of conversion.
Each of the Series C Shares may be converted by the holder thereof into
shares of Common Stock at any time after the later to occur of (i) July 1, 1997
and (ii) the approval by the Company's shareholders of the issuance of such
shares as contemplated by this proxy statement. Each Series C Share will be
convertible into such number of shares of Common Stock as is determined by
dividing the stated value of $1,000 by a conversion rate equal to the lower of
(i) $8.25 and (ii) 80% of the average Market Price for the 10 consecutive
trading days ending three days prior to the giving by the holder of such Series
C Shares of a notice of conversion.
For purposes of the conversion rates for the Preferred Shares, "Market
Price" has the following meaning. As long as the Common Stock is listed on The
Nasdaq National Market, "Market Price" will be equal to the closing high bid
price of the Common Stock, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). If the Common Stock is no longer
listed on The Nasdaq National Market, "Market Price" will be equal to the
closing bid price of the Common Stock, as reported by NASDAQ (assuming that the
Common Stock is listed on The Nasdaq SmallCap Market or is included in the "pink
sheets" or other inter-dealer quotation service or publication) or the closing
price for the Common Stock (assuming that the Common Stock is listed on a
national securities exchange). On December 13, 1996, the closing high bid price
for the Common Stock was $6.625 per share.
4
<PAGE>
If the Company issues Common Stock as a dividend upon Common Stock or in
payment of a dividend thereon, subdivides the number of outstanding shares of
its Common Stock into a greater number of shares, or contracts the number of
such shares into a lesser number of shares, the conversion rate then in effect
with respect to the Preferred Shares will be adjusted to the rate determined by
taking the product obtained by multiplying (i) the conversion rate in effect by
(ii) the number of shares of Common Stock outstanding immediately prior to such
dividend, subdivision, or contraction, and dividing it by (iii) the number of
shares of Common Stock outstanding immediately after such dividend, subdivision
or contraction.
If any capital reorganization or reclassification of the Common Stock, or
consolidation, or merger of the Company with or into another corporation, or the
sale or conveyance of all or substantially all of its assets to another
corporation is effected, then, as a condition of such reorganization or sale,
lawful and adequate provision must be made, whereby the holders of Preferred
Shares shall thereafter have the right to receive, in lieu of the shares of
Common Stock of the Company immediately theretofore receivable with respect to
such Preferred Shares, upon the exercise of their conversion rights, such shares
of stock, securities or assets as would have been issued or payable with respect
to or in exchange for the number of outstanding shares of such Common Stock
immediately theretofore receivable with respect to such Preferred Shares, upon
the exercise of such rights, had such reorganization, reclassification,
consolidation, merger or sale not taken place. In any such case, appropriate
provision must be made with respect to the rights and interests of the holders
of Preferred Shares to the end that such conversion rights (including, without
limitation, provisions for appropriate adjustments) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise thereof.
At any time after September 30, 2000, the Company will have the right, in
its sole and absolute discretion, to force the conversion into Common Stock of
all outstanding Preferred Shares.
DIVIDENDS
Cumulative cash dividends will be payable annually in arrears on the
Preferred Shares, at the rate of 6.5% per annum with respect to the Series A
Shares and 6% per annum with respect to each of the Series B Shares and the
Series C Shares. For purposes of dividends, the Preferred Shares will be valued
at their stated value of $1,000. The Company may, in its sole discretion, pay
any or all dividends in Preferred Shares of the same series rather than in cash.
RANK AND PREFERENCE
The Preferred Shares rank (i) prior to the Common Stock, (ii) PARI PASSU
with each other and any other series of preferred stock of the Company, and
(iii) unless the holders of the Preferred Shares otherwise consent, prior to any
other class or series of capital stock of the Company, both as to payment of
dividends and as to distribution of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary.
In the event of any such liquidation, dissolution or winding up of the
Company, the Preferred Shares are entitled to be paid out of the assets of the
Company, in cash, an amount per share equal to their stated value of $1,000
before any distribution of assets may be made to the holders of Common Stock or
any other stock ranking junior to the Preferred Shares. After the payment of
the full amount of such preference, the holders of Preferred Shares will not be
entitled to participate in any distribution of assets by the Company. If the
assets of the Company available for distribution are insufficient to permit
payment to such holders of the aggregate amount which they are entitled to be
paid, then the assets of the Company available for distribution to such holders
and the holders of any other series of preferred stock then outstanding which is
in parity with the Preferred Shares shall be distributed ratably among the
holders of the Preferred Shares and such other holders based upon the proportion
the total amount distributable on each share bears to the aggregate amount
available for distribution on all Preferred Shares and on such other series of
preferred stock.
5
<PAGE>
The Common Stock to be issued upon any conversion of the Preferred Shares
are not entitled to any such preference.
VOTING RIGHTS
The affirmative vote of the holders of at least a majority of the
outstanding Preferred Shares, voting together as a separate single class, will
be necessary to (i) authorize, adopt or approve an amendment to the Certificate
of Incorporation of the Company that would alter or change the powers,
preferences or special rights of the Preferred Shares so as to affect such
Preferred Shares materially and adversely and (ii) issue any capital stock
senior to the Preferred Shares (either as to dividends or upon liquidation).
With respect to any such vote, each such holder will have the right to cast such
number of votes as may be cast by the holder of the number of shares of Common
Stock into which such holder's Preferred Shares are convertible on the record
date for such vote. The Preferred Shares will not otherwise carry with them the
right to vote on any matter relating to the business or affairs of the Company
as to which shareholders generally have the right to vote under the Business
Corporation Law of the State of New York, or to receive notice of or to be
represented at any meeting of shareholders of the Company called for such
purpose, except as may be required by law.
TRANSFER RESTRICTIONS
Neither the Preferred Shares nor the shares of Common Stock issuable upon
the conversion thereof have been registered under the Securities Act. The
Preferred Shares and such underlying shares may not be offered or sold in the
United States or to any "U.S. Person" (as defined in Rule 902(o) of Regulation S
under the Securities Act) for a period of 40 days following the date on which
the Preferred Shares are issued, and thereafter unless such Preferred Shares or
underlying shares of Common Stock are registered under the Securities Act and
any applicable state security laws or such offer or sale is made pursuant to
exemptions from those registration requirements.
VOTING OF UNDERLYING SHARES AND CHANGE OF CONTROL
Under the terms of the subscription for the Preferred Shares, until
October 4, 2000, RBB is required to vote all of the shares as may be issued upon
conversion of the Preferred Shares, if any, in connection with any vote of
shareholders of the Company relating to the election of directors, for the
election of directors constituting a majority of the directors nominated for
such election in accordance with the directions of Stephen Nevitt, the President
of the Company, or his successor or designee. Any permitted transfer of the
Preferred Shares or such underlying shares during such four-year period will
require, as a condition precedent thereto, the execution and delivery to the
Company of an instrument confirming that the transferee agrees to be bound by
such voting restriction. However, such condition will not apply with respect to
any such transfer effected pursuant to "brokers' transactions" within the
meaning of Section 4(4) of the Securities Act. The expiration of such four-year
period or a number of such permitted sales may result in a change in control of
the Company.
DESCRIPTION OF THE WARRANTS
The Series A Warrant entitles the holder thereof to purchase up to an
aggregate of 150,000 shares of Common Stock, at an exercise price of $5.5625 per
share, at any time commencing January 1, 1999 and on or prior to December 31,
2002. The Series B Warrant entitles the holder thereof to purchase up to an
aggregate of 300,000 shares of Common Stock, at an exercise price of $7.50 per
share, at any time commencing January 1, 1999 and on or prior to December 31,
2002. The Series C Warrant entitles the holder thereof to purchase up to an
aggregate of 300,000 shares of Common Stock, at an exercise price of $10.00 per
share, at any time commencing January 1, 1999 and on or prior to December 31,
2002. The Series D Warrant entitles the holder thereof to purchase up to an
aggregate of 200,000 shares of Common Stock, at an exercise price of $5.50 per
share, at any time until September 30, 2001.
6
<PAGE>
The exercise price of the Warrants and the number and kind of shares of
Common Stock or other securities and property to be obtained upon exercise of
the Warrants are subject to adjustment in certain circumstances including a
stock split of, or stock dividend on, or a subdivision, combination or
reclassification of, the Common Stock. The Warrants also contain other
customary provisions protecting the holders from dilution.
The Warrants do not confer upon the holders of Warrants any voting or
other rights of the shareholders of the Company.
POSSIBLE DILUTIVE EFFECT
The conversion of the Preferred Shares and the exercise of the Warrants
would result in an increase in the number of shares of Common Stock outstanding.
An issuance of Common Stock at a price below the book value per share of the
Company (for example, if the conversion rate for the Preferred Shares or the
exercise price of the Warrants were below the book value per share of the
Company at the time of conversion or exercise) would have a dilutive effect on
the book value of outstanding shares of Common Stock. Such issuances may also
have a dilutive effect on earnings per share and would have such a dilutive
effect on the relative voting power of present shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE FINANCING
PROPOSAL.
7
<PAGE>
Solar-Mates, Inc./Serengeti Eyewear Business of Corning Incorporated
Pro Forma Combined Financial Information
(Unaudited)
The following unaudited Pro Forma Combined Balance Sheet assumes that the
Serengeti Acquisition (and anticipated related borrowings), the issuance of the
Preferred Shares and the conversion thereof into shares of Common Stock took
place on September 30, 1996 and reflects the combination of the Company's
balance sheet with Serengeti's balance sheet as of September 30, 1996. The
following unaudited Pro Forma Combined Statements of Operations reflect the
combination of the Company's and Serengeti's statements of operations for the
year ended December 31, 1995 and the nine months ended September 30, 1996 and
assumes that the Serengeti Acquisition (and anticipated related borrowings)
occurred on January 1, 1995.
The pro forma information is presented for illustrative purposes only and
does not purport to be indicative of the operating results or financial position
that would actually have occurred if the transaction had been in effect on the
dates indicated, nor is it indicative of future operating results or financial
position. The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable in the circumstances.
The pro forma information should be read in conjunction with the Company's
consolidated financial statements and the financial statements of Serengeti, in
each case with the notes thereto, appearing on Appendix A to this proxy
statement.
The Serengeti Acquisition is accounted for under the purchase method of
accounting. The purchase price is allocated to the tangible and intangible
assets purchased, as well as liabilities assumed, based upon their respective
fair values. The allocation of the purchase price included in the pro forma
combined financial information is preliminary. The final values may differ from
those set forth herein. The Company believes, however, that the final
allocation will not be materially different from the pro forma allocation.
8
<PAGE>
Solar-Mates, Inc./Serengeti Eyewear Business of Corning Incorporated
Pro Forma Combined Balance Sheets
September 30, 1996
('000)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Solar-Mates Serengeti Adjustments Combine
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 114 $ 5 $ 40 (1)
(5) (2) $ 154
Trading securities 926 926
Other marketable securities 285 285
Accounts receivable 2,671 2,514 (2,514) (2) 2,671
Inventories 3,358 8,398 3,050 (3) 14,806
Current deferred tax assets 1,880 (1,880) (2) -
Other current assets 559 189 (39) (3) 709
--------- -------- ---------
--------- -------- ---------
Total current assets 7,913 12,986 19,551
Fixed assets - net of accumulated depreciation 473 675 325 (3) 1,473
Patents, patent rights and trademarks 5,000 (3) 5,000
Goodwill 10,402 (3) 10,402
Loan acquisition cost - - 600 (1) 600
Other assets 360 174 (174) (2) 360
--------- -------- ---------
$ 8,386 $ 13,661 $ 37,386
--------- -------- ---------
--------- -------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 1,500 $ (1,500) (1) $ -
Note payable - shareholder 45 45
Advances from shareholders 84 84
Accounts payable 1,648 $ 964 (964) (2) 1,648
Intercompany payable 623 (623) (2) -
Other current liabilities 508 4,545 (4,545) (2) 508
--------- -------- ---------
Total current liabilities 3,785 6,132 2,285
Notes payable - shareholder 174 174
Long-term debt 58 9,300 (1) 9,358
Other liabilities 140 (140) (2) -
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized - 20,840 (1) 20,840
Common stock, $.001 par value,
10,000,000 shares authorized,
2,384,000 shares issued and outstanding, 2 2
Additional paid in capital 4,265 4,265
Retained earnings 462 462
--------- ---------
Total shareholders' equity 4,729 25,569
--------- ---------
Business equity 7,563 (7,563) (2) -
-------- ---------
$ 8,746 $ 13,835 $ 37,386
--------- -------- ---------
--------- -------- ---------
</TABLE>
See notes to Pro Forma Combined Financial Statements
9
<PAGE>
<TABLE>
<CAPTION>
Solar-Mates, Inc./Serengeti Eyewear Business of Corning Incorporated
Pro Forma Combined Statements of Operations
For The Nine Months Ended September 30, 1996
('000)
(Unaudited)
Pro Forma Pro Forma
Solar-Mates Serengeti Adjustments Combine
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 7,406 $ 27,480 $ 34,886
Cost of sales 4,776 14,475 19,251
----------- ----------- -----------
Gross profit 2,630 13,005 15,635
Operating expenses:
Selling, general and administrative expenses 2,469 11,672 1,230 (4)
- - (1,000) (5) 14,371
----------- ----------- -----------
Income from operations 161 1,333 1,264
Other expense:
Interest expense 198 - 636 (6) 834
----------- ----------- -----------
Income before income taxes (37) 1,333 430
Provision for income taxes 12 520 (412) (7) 120
----------- ----------- -----------
Net income $ (49) $ 813 $ 310
----------- ----------- -----------
----------- ----------- -----------
Per share information:
Weighted average shares outstanding 2,384,000 3,383,838 (1) 5,767,838
----------- ----------- -----------
----------- ----------- -----------
Net income per share $ (0.02) $ 0.05
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to Pro Forma Combined Financial Statements
10
<PAGE>
<TABLE>
<CAPTION>
Solar-Mates, Inc./Serengeti Eyewear Business of Corning Incorporated
Pro Forma Combined Statements of Operations
For The Year Ended December 31, 1995
('000)
(Unaudited)
<S> <C> <C> <C> <C>
Pro Forma Pro Forma
Solar-Mates Serengeti Adjustments Combine
----------- --------- ----------- -------
Net sales $ 10,473 $ 35,334 $ 45,807
Cost of sales 7,054 20,420 27,474
----------- --------- ---------
Gross profit 3,419 14,914 18,333
Operating expenses:
Selling, general and administrative expenses 2,230 13,386 1,640 (4)
- - (1,659) (5) 15,597
----------- --------- ---------
Income from operations 1,189 1,528 2,736
Other expense (income):
Other income (71) (71)
Interest expense 303 - 848 (6) 1,151
----------- --------- ---------
----------- --------- ---------
Income before income taxes 957 1,528 1,656
Provision for income taxes 342 596 (426) (7) 512
----------- --------- ---------
Net income $ 615 $ 932 $ 1,144
----------- --------- ---------
----------- --------- ---------
Per share information:
Weighted average shares outstanding 1,682,000 3,383,838 (1) 5,065,838
----------- --------- ---------
----------- --------- ---------
Net income per share $ 0.37 $ 0.23
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to Pro Forma Combined Financial Statements
11
<PAGE>
<PAGE>
Solar-Mates, Inc./Serengeti Eyewear Business of Corning Incorporated
Notes to Pro Forma Combined Financial Statements
(Unaudited)
Pro forma adjustments to reflect the Serengeti Acquisition and giving effect to
the following:
(1) To record the issuance of $22.5 million aggregate stated value of Preferred
Shares, net of offering cost of $1.66 million and the borrowing of a $9.3
million five year term loan assuming an interest rate of 9.25% per annum
(including the repayment of $1.5 million of notes payable to the Company's
existing senior credit lender) and debt acquisition cost of $600,000.
Pro Forma Combined Statements of Operations assumes the conversion of $7.5
million stated value relating to the Series A Shares into 1,363,636 shares
of Common Stock (assuming a conversion rate of $5.50 per share), $7.5
million stated value relating to the Series B Shares into 1,111,111 shares
of Common Stock (assuming a conversion rate of $6.75 per share) and $7.5
million stated value relating to the Series C Shares into 909,091 shares of
Common Stock (assuming a conversion rate of $8.25 per share).
(2) To eliminate certain asset and liability balances of Serengeti not
transferred to the combined entity.
(3) To adjust for the allocation of the purchase price of approximately $27.5
million and expenses of the Serengeti Acquisition of approximately $500,000
to the estimated fair value of assets and liabilities, and to record
goodwill and other acquisition related adjustments as follows:
Inventory $ 11,450,000
Fixed assets $ 1,000,000
Patents and trademarks $ 5,000,000
Prepaid expenses $ 150,000
Goodwill $ 10,400,000
(4) To adjust for the amortization of the purchased goodwill over a 20 year
period, patents, patent rights and trademarks over a 5 year period and loan
acquisition cost over a 5 year period.
(5) To eliminate certain allocations of corporate expenses made by Corning
Incorporated to the operation of Serengeti which will not have a continuing
impact on the combined entity. The costs allocated include amounts
relating to finance support, information systems, corporate services, human
resources and research and development.
(6) To record interest expense on borrowing, assuming borrowing occurred
January 1, 1995.
(7) To record the aggregate tax effects of the combined entity.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Prior to the 1980's, the Company manufactured its own sunglasses for
sale to the wholesale trade. As manufacturers in the Far East began playing
greater roles in the sunglass industry in the late 1970's, the Company began
importing its products and in 1980 discontinued its manufacturing operations
completely. Since 1978, the Company has focused primarily on the sale of
sunglasses and sunglass products to mass merchandisers such as large retail
chain stores. In the late 1980's, the Company began developing programs for
mass merchants designed to enhance their sale of sunglasses. The Company
continually adds new products and develops new marketing programs for its
product lines. In late 1992, the Company introduced its line of
Solar*X-Registered Trademark-sunglasses, which feature ground and polished
lens, comparable to optical quality sunglasses, at popular prices. This
product is currently the predominant line of the Company and has contributed
significantly to the sales growth of the Company.
The Company continues to introduce new products. The Company has
introduced a higher priced line of sunglasses under the brand name H2Optix-
Registered Trademark-. The Company is not marketing this line to mass merchants
but rather to specialty retailers. This is intended to reduce the Company's
dependence on its current customer base.
On October 29, 1996, the Company entered into an agreement to purchase
from Corning Incorporated certain assets used in the business of designing,
manufacturing and distributing Serengeti brand sunglasses. The assets to be
purchased include inventories, dies and molds, office furniture, plant machinery
and equipment, fixtures, trademarks, including, among others, the brand name
Serengeti, and patents used in the manufacturing of Serengeti brand sunglasses.
The Serengeti Acquisition purchase price is $27.5 million. The Company
anticipates consummating the Serengeti Acquisition after the necessary approval
by its shareholders of the Financing Proposal and the satisfaction of other
conditions.
Until such time as the Serengeti Acquisition is consummated, the Company
expects its Solar*X-Registered Trademark- line of sunglasses to remain its
predominant line.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net sales increased 14%, from $9,169,997 in 1994 to $10,472,656 in 1995,
primarily as a result of increased sales to Wal-Mart, the Company's largest
customer.
Gross profit decreased as a percentage of sales, from 34.8% in 1994 to
32.6% in 1995 primarily as a result of product mix. 1995 included approximately
$2,000,000 in direct sales from Hong Kong. The Company's selling price for
direct sales from Hong Kong are lower, as the customer receives the products
without them being processed in the Company's warehouse and without payment by
letter of credit. Based upon current estimates of the cost of goods relating to
the Solar*X-Registered Trademark-, H2Optix-Registered Trademark- and other lines
of sunglasses, the Company believes, but no assurance can be made, that it will
operate for the near future with a gross profit percentage of at least equal to
that of 1995.
Selling expenses increased by $24,217, or 3%, from $907,337 in 1994 to
$931,554 in 1995. This increase resulted primarily from increased personnel
costs associated with marketing. The Company anticipates a significant increase
in selling expenses related to H2Optix-Registered Trademark- during 1996.
General and administrative expenses increased 19.5%, from $1,019,358 in
1994 to $1,218,588 in 1995
13
<PAGE>
primarily as a result of an increase in executive and administrative
salaries, office expenses, and costs incurred in connection with the
development of the H2Optix-Registered Trademark- line of sunglasses. The
Company anticipates that its general and administrative costs will continue
to increase with the growth of its business and the continued introduction of
its H2Optix-Registered Trademark- line of sunglasses.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales increased 39% from $5,313,195 for the nine months ended
September 30, 1995 to $7,406,439 for the nine months ended September 30, 1996.
This increase was due primarily to the introduction of new products including
the Company's H2Optix-Registered Trademark- line of sunglasses. In 1996 the
Company began aggressively marketing this line. Sales from the H2Optix-
Registered Trademark- line were approximately $903,000 for the nine months ended
September 30, 1996. Additionally, approximately $578,000 of the increase for
the nine months ended September 30, 1996 was due to sales of the Company's Outa
Limitz-Registered Trademark- line of sunglasses which did not exist during the
same period in 1995; $1,698,000 which results from increased activity of
Solar*X-Registered Trademark-, offset by a decrease of approximately $1,187,000
in sales of Bonjour-Registered Trademark-, a brand no longer marketed by the
Company.
Selling expenses increased by $777,223 or 118%, from $656,422 for the nine
months ended September 30, 1995 to $1,433,645 for the nine months ended
September 30, 1996. The increase resulted primarily from increased advertising
and marketing cost associated with the launch of H2Optix-Registered Trademark-.
The Company anticipates continued increases in selling expenses related to
H2Optix-Registered Trademark- during the remainder of 1996.
General and administrative expenses increased by $205,107 or 25%, from
$830,288 for the nine months ended September 30, 1995 to $1,035,395 for the nine
months ended September 30, 1996. The increase resulted primarily from increased
personnel and administrative costs associated with the general growth of the
Company.
The Company's interest expenses decreased $13,211 or 6% from $211,000 for
the nine months ended September 30, 1995 to $197,789 for the nine months ended
September 30, 1996. The decrease resulted primarily from interest earned on
investment of the proceeds of the Company's public offering and the reduction of
debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company is presently financing its operations primarily through the
proceeds of an initial public offering ("IPO") completed in August 1995, its
cash flow and a revolving line of credit. The Company has a revolving line of
credit in the amount of $1,500,000 from Sun Bank/Gulf Coast (the "Existing
Credit Facility"). Interest on outstanding loans under the Existing Credit
Facility accrue at a rate equal to 1.5% above the prime rate. The Existing
Credit Facility is secured by a lien on all of the Company's assets. Pursuant
to the Existing Credit Facility, the Company may borrow up to 70% of accounts
receivable under 61 days old and up to 25% of the Company's inventory to a
maximum of $1,500,000. Advances under the Existing Credit Facility have been
used for general working capital purposes. The Existing Credit Facility is
guaranteed, jointly and severally, by certain shareholders of the Company. As
of September 30, 1996, the Company has borrowed the maximum amount available
under the Existing Credit Facility.
The Company's cash flow requirements are greatest during the fourth
quarter of each year primarily as a result of inventory acquisition and the
introduction of new product lines for the upcoming sunglass season which
traditionally occurs in the later part of the fourth quarter. The Company
believes that cash flow generated from operations, supplier credit and bank
credit facilities will be sufficient to satisfy its requirements. To the extent
that such sources are not sufficient, the Company may be required to obtain
short-term loans as it has done in the past.
The Company's working capital decreased from $4,357,962 at December 31,
1995 to $4,170,607 at September 30, 1996. This resulted primarily from purchase
of assets utilized in the growth of the business, the reduction of debt and an
"S" corporation distribution with respect to earnings prior to the IPO.
14
<PAGE>
The Company purchased capital assets of approximately $338,000 during the
nine month period ended September 30, 1996.
The Company will require approximately $30.0 million to finance the
acquisition of Serengeti and related costs and expenses, which it anticipates
obtaining through the issuance of the Preferred Shares and debt financing.
On September 26, 1996, the Company entered into a subscription agreement
with RBB for the infusion of $22.5 million in equity financing, of which $7.5
million was funded on October 4, 1996. The equity infusion is in the form of
non-voting convertible Preferred Shares of the Company, as described above under
"Financing of the Serengeti Acquisition." The remaining subscriptions for an
additional aggregate amount of $15 million of such Preferred Shares is to be
consummated simultaneously with the closing of the Serengeti Acquisition. The
Company may, at its sole discretion, pay any and all dividends with respect to
the Preferred Shares in additional Preferred Shares of the same series rather
than in cash. The Company paid a cash commission to a third party equal to 7%
of the first equity infusion relating to the issuance of the Series A Shares.
The Company is also obligated to pay such 7% commission in connection with the
second infusion of $15 million relating to the issuance of the Series B Shares
and the Series C Shares.
The Company has entered into a commitment letter with SunTrust Bank,
Central Florida, National Association pursuant to which the Existing Credit
Facility will be refinanced with a new senior credit facility (the "New Credit
Facility") to provide the Company with the ability to borrow up to $17.5 million
in the form of (i) a three year revolving credit facility in the amount of $7.5
million (the "Revolver Facility") and (ii) a five year amortizing term loan
facility in the amount of $10.0 million (the "Term Facility").
The Company intends to use approximately $9.3 million of availability
under the Term Facility and the net proceeds of the sale of the Preferred Shares
(estimated at $20.9 million), $1.5 million of which has been deposited by the
Company in escrow, to finance the Serengeti Acquisition (having an estimated
purchase price of $27.5 million), to repay in full the outstanding principal
indebtedness and accrued interest (approximately $1.5 million), determined as of
December 16, 1996, under the Existing Credit Facility and to pay approximately
$1.2 million of related fees and expenses. The net proceeds from the sale of
the Series A Shares (approximately $6.0 million, net of the $1.5 million
deposited by the Company in escrow) have been placed in an interest-bearing bank
account and interest-bearing investment grade securities pending the
consummation of the Serengeti Acquisition.
The Revolver Facility will have a $2 million sublimit for the issuance of
stand-by letters of credit. Pursuant to the Revolver Facility, the Company will
be able to borrow up to 85% of eligible accounts receivable and up to 50% of the
value of the Company's eligible inventory. Undrawn amounts under the Revolver
Facility will be available for the working capital and general corporate needs
of the Company.
The New Credit Facility will be secured by the pledge of all the stock of
any subsidiaries of the Company and a first priority lien on all of the assets
of the Company and its subsidiaries.
Pursuant to the New Credit Facility, interest will be payable at the LIBOR
rate or the "Base Rate." In addition to applicable margins, the Company will
pay a floating percentage tied to the Company's ratio of funded debt to
"EBITDA"; ranging, in the case of LIBOR rate loans, from 1.50% based upon a
ratio of 1.5:1 or less to 2.75% based upon a ratio of greater than 3:1; and
ranging, in the case of Base Rate loans, from .50% based upon a ratio of 2.25:1
or less to 1.25% based upon a ratio of greater than 3:1.
The New Credit Facility will require the Company to maintain certain
financial ratios. Pursuant to the New Credit Facility, the Company will be
required to apply 75% of its "Excess Cash Flow" for the preceding completed
fiscal year, the net proceeds from any sale of assets other than in the ordinary
course and the net proceeds of equity issuances and permitted debt issuances to
prepay outstanding amounts under the Term Facility. The New Credit Facility
will also contain a number of customary covenants, including, among others,
limitations on liens, affiliate transactions, mergers, acquisitions, asset
sales, dividends and advances.
15
<PAGE>
FOREIGN CURRENCY EXCHANGE
The Company presently transacts business internationally in United States
currency. To date, the Company has not been affected significantly by currency
exchange fluctuations. However, future currency fluctuations in countries in
which the Company does business could adversely affect the Company by resulting
in pricing that is not competitive with prices denominated in local currencies.
SEASONALITY
The seasonality of the Company's business generally follows the selling
activity of its largest customer, Wal-Mart Stores, Inc. The Company's strongest
quarter in terms of sales is the fourth quarter followed by the first, second
and third quarters.
16
<PAGE>
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
PROPOSED AMENDMENT
The Company's Board of Directors recommends an amendment to the Company's
Certificate of Incorporation (the "Certificate") to change the Company's name
from "Solar-Mates, Inc." to "Serengeti Eyewear, Inc." If approved by the
shareholders, Article FIRST of the Certificate would be amended to provide as
follows:
FIRST: The name of the Corporation is
"Serengeti Eyewear, Inc."
In the judgment of the Board of Directors, the change of corporate name is
desirable in view of the fact that, upon consummation of the Serengeti
Acquisition, the Company expects that the Serengeti brand of sunglasses will be
the Company's predominant product line. On ______________, 1997, the Company's
Board of Directors adopted an amendment to the Certificate to change the
Company's name, and recommends that the shareholders approve such amendment. If
this amendment is approved, shareholders will not be required to exchange
outstanding stock certificates for new certificates.
EFFECTIVENESS OF AMENDMENT
If approved by the shareholders, the amendment will become effective upon
the consummation of the Serengeti Acquisition and the filing of a Certificate of
Amendment to the Certificate, setting forth the proposed amendment, with the
Secretary of State of the State of New York.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
17
<PAGE>
APPROVAL OF AMENDMENT TO 1995 STOCK OPTION PLAN
On October 30, 1996, the Board of Directors of the Company adopted,
subject to shareholder approval, an amendment to the Solar-Mates, Inc. 1995
Stock Option Plan (the "Plan") increasing the total number of shares with
respect to which options and stock appreciation rights ("SARs") may be granted
under the Plan from 450,000 to 1,500,000. The purpose of the Plan is to enable
the Company to encourage key employees and directors to contribute to the
success of the Company by granting such employees and directors "incentive stock
options" (as defined in Section 422 of the Code, "ISOs"), as well as
non-qualified stock options ("NQSOs").
The Plan may be administered by the Board of Directors or a committee
appointed by the Board of Directors (the "Committee") which will determine, in
its discretion, among other things, the recipients of grants, whether a grant
will consist of ISOs or NQSOs or a combination thereof, and the number of shares
to be subject to such options.
The Plan provides for the granting of ISOs to purchase Common Stock at an
exercise price to be determined by the Board of Directors or the Committee of
not less than the fair market value of the Common Stock on the date the option
is granted. NQSOs may be granted with an exercise price to be determined by the
Board of Directors or the Committee of not less than 85% of the fair market
value of the Common Stock on the date the option is granted.
ISOs may not be granted to an individual to the extent that in the
calendar year in which such ISOs first become exercisable the shares subject to
such ISOs have a fair market value on the date of grant in excess of $100,000.
No option may be granted under the Plan after December 30, 2004 and no option
may be outstanding for more than ten years after its grant. Additionally, if an
optionee owns 10% or more of the Company's outstanding Common Stock, an ISO may
not have a term of more than five years and the option price per share may not
be less than 110% of the fair market value of the Common Stock on the date the
option is granted.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of
an option sufficient funds to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time
up to three months after termination of the holder's employment.
The Plan may be terminated or amended at any time by the Board of
Directors, except that, without shareholder approval, the Plan may not be
amended to increase the number of shares subject to the Plan, change the class
of persons eligible to receive options under the Plan, or materially increase
the benefits of participants.
To date, 925,000 options have been granted under the Plan. Accordingly
475,000 of such options are subject to shareholder approval of the proposed
increase of the Plan. Other than as set forth in the table below, no
determinations have been made regarding the persons to whom options will be
granted in the future, the number of shares which will be subject to such
options, or the exercise prices to be fixed with respect to any option.
The grant of an option under the Plan will not have any immediate effect
on the federal income tax liability of the Company or the optionee. If the Board
of Directors grants an optionee a NQSO, then the optionee will recognize
ordinary income at the time he exercises the option, equal to the difference
between the fair market value of the Common Stock and the exercise price paid by
the optionee, and the Company will receive a deduction for the same amount.
If the Board of Directors grants an optionee an ISO, then the optionee
generally will not recognize any taxable income at the time he exercises the ISO
but will recognize income only at the time he sells the Common Stock acquired by
exercise of the ISO. The optionee will recognize income equal to the difference
between the exercise price paid by the optionee and the amount received for sale
of the Common Stock, and such income
18
<PAGE>
generally will be eligible for capital gains treatment. The Company generally
is not entitled to an income tax deduction for the grant of an ISO or as a
result of either the optionee's exercise of an ISO or the optionee's sale of
the Common Stock acquired through exercise of an ISO. However, if the
optionee sells the Common Stock within two years of the date of the grant to
him of the ISO or within one year of the date of the transfer to him of the
Common Stock following exercise of the ISO, the option is treated for federal
income tax purposes as if it were a NQSO and the income recognized by the
optionee will not be eligible for capital gains treatment and the Company
will be entitled to a federal income tax deduction equal to the amount of
income recognized by the optionee.
On December 13, 1996, the aggregate market value of the Common Stock
underlying all outstanding stock options, based upon the closing price per share
of the Common Stock on such date, was $6,128,125.
NEW PLAN BENEFITS
SOLAR-MATES, INC. 1995 STOCK OPTION PLAN
The benefits and amounts that may be received or allocated in the future
under the Plan are not determinable. The table below indicates option grants
made to date pursuant to the Plan.
NUMBER OF
NAME AND POSITION OPTIONS
Stephen Nevitt 750,000
President (CEO)
Michael J. Guccione 75,000
Vice President
Executive Group 825,000
Non-Executive 50,000
Director Group
Non-Executive Officer 50,000
Employee Group
Employee Group 875,000
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE SOLAR-MATES, INC. 1995 STOCK OPTION PLAN.
19
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered to
the Company paid in 1994 and 1995 to the Chief Executive Officer and the
Company's other executive officer who received total annual salary and bonus in
excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)
Stephen Nevitt 1994 125,000
President (CEO) 1995 143,702
Michael J. Guccione 1995 108,135
Vice President
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Stephen Nevitt, the
Company's President and chief executive officer, and Michael J. Guccione, a Vice
President of the Company, each of which expire on December 31, 1997.
Mr. Nevitt's employment agreement provides for an annual base salary of
$150,000, and Mr. Guccione's agreement provides for an annual base salary of
$125,000. Each of the employment agreements provides for annual increases in
base salary of 4% and annual incentive compensation based upon the financial
performance of the Company. Under the employment agreements, as additional
annual incentive compensation, Mr. Nevitt will be entitled to receive up to 50%
and Mr. Guccione will be entitled to receive up to 25% of any bonus pool adopted
by the Board of Directors for key personnel of the Company. The amount of such
bonus pool may be up to 10% of the Company's pre-tax profit for the relevant
year, but only 5% of such pre-tax profit for 1995. The Board of Directors did
not adopt a bonus pool in 1995. The incentive compensation will be earned if
either of the following performance targets are achieved: (i) the Company's
earnings per share is at least $0.30 for the relevant year, or (ii) the average
closing bid price of the Common Stock for the relevant year equals or exceeds a
target of $8.75 per share. Utilizing the earnings per share component, all
unearned prior incentive compensation will be deemed earned upon the Company
achieving an earnings per share which is cumulative for each of the prior
periods. In addition, if the Common Stock target price component is achieved for
any year, all unearned prior incentive compensation will be deemed earned.
Although the employment agreements will expire on December 31, 1997, the
recapture provisions for unearned incentive compensation during the term will
continue through the year 2001.
Under each of the employment agreements, the Company and the employee each
have the option to terminate the agreement as of the end of the first or second
year by giving 90 days prior notice to the other party. Each of the employment
agreements contains a covenant by the employee not to compete with the Company
until the expiration of a one year period after the expiration or termination of
the agreement.
No directors are compensated for their services as such.
20
<PAGE>
1997 SHAREHOLDER PROPOSALS
As stated in the Company's Proxy Statement for the 1996 Annual Meeting of
Shareholders, in order for shareholder proposals for the 1997 Annual Meeting of
Shareholders to be eligible for inclusion in the Company's proxy statement, they
must have been received by the Secretary of the Company at the Company's
principal executive offices by no later than December 20, 1996.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the
meeting. However, if other matters should come before the meeting, it is the
intention of each person named in the proxy to vote such proxy in accordance
with his judgement on such matters.
A representative of Winter, Scheifley & Associates, P.C., the independent
auditors of the Company, is expected to attend the meeting and will be available
to respond to appropriate questions from shareholders.
By Order of the Board of Directors,
MILTON NEVITT
SECRETARY
______________________, 1997
21
<PAGE>
APPENDIX A
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Solar-Mates, Inc.
We have audited the consolidated balance sheet of Solar-Mates, Inc. as of
December 31, 1995 and the related consolidated statements of operations,
statement of stockholders' equity and cash flows for each of the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Solar-Mates, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for each
of the two years then ended, in conformity with generally accepted accounting
principles.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Boca Raton, Florida
February 26, 1996
<PAGE>
Solar-Mates, Inc.
Consolidated Balance Sheet
December 31, 1995
ASSETS
Current Assets:
Cash $ 479,256
Trading securities (Note 2) 1,062,147
Other marketable securities (Note 2) 284,878
Accounts receivable - less allowance
for doubtful accounts and discounts
of $43,912 (Notes 5 and 9) 4,060,669
Inventories (Note 5) 2,786,113
Prepaid expenses (Note 3) 444,639
----------
Total current assets 9,117,702
Fixed assets - net of accumulated
depreciation (Note 4) 321,374
Other assets:
Prepaid expenses - non-current (Note 3) 328,677
Accounts receivable - stockholders 45,215
Patents and trademarks - net 64,270
Other assets 12,255
----------
$ 9,889,493
----------
----------
See accompanying notes to financial statements.
A-2
<PAGE>
Solar-Mates, Inc.
Consolidated Balance Sheet
December 31, 1995
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - bank (Note 5) $1,500,000
Notes payable - stockholder (Note 6) 126,601
Current portion of long-term debt (Note 7) 12,907
Accounts payable - stockholders and
related parties (Note 6) 97,321
Income taxes payable (Note 10) 342,000
Accounts payable 2,137,269
Accrued S-corporation distribution (Note 10) 96,575
Accrued expenses 447,067
----------
Total current liabilities 4,759,740
Note payable - stockholder long-term (Note 6) 208,920
Long-term debt (Note 7) 35,975
Commitments and contingencies (Note 9)
Stockholders' equity (Note 8)
Preferred stock, $.001 par value, 1,000,000
shares authorized none issued or outstanding -
Common stock, $.001 par value, 10,000,000
shares authorized, 2,384,000 shares
issued and outstanding 2,384
Additional paid in capital 4,279,276
Retained earnings 603,198
----------
Total stockholders' equity 4,884,858
----------
$9,889,493
----------
----------
See accompanying notes to financial statements.
A-3
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Operations
For The Years Ended December 31, 1995 and 1994
1995 1994
----------- ----------
Net sales $10,472,656 $9,169,997
Cost of goods sold 7,053,970 5,976,158
----------- ----------
Gross profit 3,418,686 3,193,839
----------- ----------
Operating expenses:
Depreciation and amortization 79,712 63,294
Selling expenses 931,554 907,337
General and administrative
expenses 1,218,588 1,019,358
----------- ----------
Total operating expenses 2,229,854 1,989,989
----------- ----------
Income from operations 1,188,832 1,203,850
Other expenses (income):
Other income (71,082) (4,785)
Litigation expense (Note 9) - 71,918
Interest 302,587 250,116
----------- ----------
231,505 317,249
Income before income taxes 957,327 886,601
Provision for income taxes
Current (Note 10) (342,000) - .
----------- ----------
Net income $ 615,327 $ 886,601
----------- ----------
Per share information:
Weighted average shares
outstanding 1,682,000 1,188,590
----------- ----------
Net income per share $ .37 $ .75
----------- ----------
Pro forma net income
(Note 10)
Net income $ 886,601
Pro forma provision for
income tax: Current 330,700
----------
Pro forma net income $ 555,901
----------
Pro forma income
per share $ .47
----------
See accompanying notes to financial statements.
A-4
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1995 and 1994
1995 1994 .
----------- ---------
Cash flows from operating activities:
Net income $ 615,327 $ 886,601
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 79,712 63,294
Changes in assets and liabilities:
(Increase) in accounts receivable (2,049,428) (450,304)
(Increase) in inventory (827,682) (87,036)
(Increase) in trading securities (1,062,147) -
(Increase) in prepaid expenses (517,929) (222,319)
Decrease in other assets 7,121 3,600
Increase in accounts payable 68,793 507,372
Increase (decrease) in accrued expenses 14,369 (351,224)
Increase in accrued income taxes 342,000 - .
----------- ---------
Total adjustments (3,945,191) (536,617)
----------- ---------
Net cash provided by (used in) operating
activities (3,329,864) 349,984
Cash flows from investing activities:
Purchase of marketable securities (284,878) -
(Increase) decrease in certificate of deposit 500,000 (500,000)
Acquisitions of patents and trademarks (22,556) (10,377)
Purchase of fixed assets (133,156) (33,807)
----------- ---------
Net cash provided by (used in)
activities 59,410 (544,184)
----------- ---------
Cash flows from financing activities:
(Increase) decrease in offering costs 124,818 (41,373)
Net proceeds from public offering 3,866,091 -
S corporation distribution (122,500) -
Gross proceeds from notes payable - banks 500,676 999,324
Gross proceeds from notes payable -
stockholders - 343,953
Gross proceeds from notes payable - other - 250,000
Principal payments on notes payable - banks (7,114) (495,255)
Principal payments on notes payable - other (225,000) (125,000)
Principal payments on notes payable and
accounts payable related party (405,562) (924,602)
----------- ---------
Net cash provided by financing
activities 3,731,409 7,047
----------- ---------
Net increase (decrease) in cash 460,955 (187,153)
Beginning - cash balance 18,301 205,454
----------- ---------
Ending - cash balance $ 479,256 $ 18,301
----------- ---------
----------- ---------
See accompanying notes to financial statements.
A-5
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1995 and 1994
(Continued)
Supplemental cash flow information:
Cash paid for : Interest $282,010 $229,539
Income taxes $ - $ -
Non-cash investing and financing activities:
Common stock issued for trademarks $ - $ 30,000
Common stock issued for the cancellation
of related party debt $ - $510,000
Shareholder contribution of note payable
to capital $ - $270,128
Acquisition of fixed assets with note $ 55,996 $ -
Accrual of S corporation distribution $ 96,575 $ -
See accompanying notes to financial statements.
A-6
<PAGE>
Solar-Mates, Inc.
Consolidated Statement of Stockholders' Equity
For the Two Years Ended December 31, 1995
Common Stock Paid in Retained
Shares Amount Capital Earnings .
--------- ------ ---------- -----------
Balance January 1, 1994 1,032,742 $1,033 $ 885,494 $(1,960,741)
Common shares issued for
trademarks 147,534 147 29,853 -
Contribution to capital
by shareholder - - 270,128 -
Conversion of note to
common shares 99,724 100 509,900 -
Net income - - - 886,601
--------- ------ ---------- -----------
Balance December 31, 1994 1,280,000 1,280 1,695,375 (1,074,140)
Common shares issued for
cash pursuant to a
public offering 1,104,000 1,104 5,518,896 -
Costs associated with
public offering - - (1,654,869) -
Sale of warrants - - 960 -
S-Corporation distribution - - (219,075) -
Reclassification of
S-corporation losses - - (1,062,011) 1,062,011
Net income for the year - - - 615,327
--------- ------ ---------- -----------
Balance December 31, 1995 2,384,000 $2,384 $4,279,276 $ 603,198
--------- ------ ---------- -----------
--------- ------ ---------- -----------
See accompanying notes to financial statements.
A-7
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
December 31, 1995
NOTE 1 - ACCOUNTING POLICIES
ORGANIZATION
Solar-Mates, Inc. is a distributor of sunglasses incorporated under the laws of
the State of New York. In December, 1994 the Company changed its name from
Nevitt Sales Corp. to Solar-Mates, Inc. The Company maintains its office and
warehouse operations in Sarasota, Florida. Suppliers for the Company are
primarily located in Asia. The Company's customers operate retail stores
located throughout the United States. A major customer (Wal-Mart Stores, Inc.)
accounts for approximately 92% and 87% of the Company's sales during 1995 and
1994. The Company is currently economically dependent on this customer.
CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Solartechnics (HK) Ltd. Intercompany
transactions and balances have been eliminated in consolidation.
INVENTORIES
Inventories, consisting principally of finished goods, are valued at the lower
of cost or market on a first in - first out basis.
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is
calculated under the straight line method, which depreciation is calculated in
accordance with generally accepted accounting principles over the expected
useful lives of the assets of five to seven years.
CASH
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with a maturity of 3 months or less to be cash
equivalents. At December 31, 1995 the Company maintained $475,580 on deposit at
one bank which exceeded the $100,000 deposit insurance limit by $375,580.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment of goods to its
customers.
A-8
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
PATENTS AND TRADEMARKS
Patents and trademarks are amortized using the straight line method over a
period of ten years and are stated net of accumulated amortization of $13,209
and $5,410 at December 31, 1995 and 1994.
ESTIMATES
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first takes
place. Advertising costs charged to operations were $123,140 and $170,328 in
1995 and 1994.
NOTE 2.- MARKETABLE SECURITIES
The Company's securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value as a current asset with the change in fair
value during the period included in earnings. At December 31, 1995 the Company
held an uninsured investment in commercial paper with a cost and fair market
value of $1,062,147. The Company had no sales proceeds from trading securities
during the year ended December 31, 1995.
The Company's investments in debt securities, which mature in less than 1 year,
are held to maturity and valued at amortized cost, which approximates market
value. At December 31, 1995 the Company held investments in U.S. Treasury Bills
of $284,878 maturing in September, 1996. These securities secure the line of
credit described in Note 5.
NOTE 3 - PREPAID EXPENSES
Sunglass displays:
It is the Company's policy to amortize displays shipped to customers over the
two year period of the distribution program. At December 31, 1995 unamortized
costs related to these displays was $606,787.
A-9
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
No amortization has been taken on the displays shipped by the Company in
December, 1995 as these displays were not put in service at the customers
locations until January, 1996. Amortization charged to cost of sales was
$169,319 and $159,911 during 1995 and 1994.
Other prepaid expenses were $166,529 at December 31, 1995.
NOTE 4 - FIXED ASSETS
Fixed assets consist of the following at December 31:
1995
---------
Furniture and equipment $ 263,920
Leasehold improvements 95,344
Transportation equipment 157,426
---------
516,690
Less: accumulated depreciation 195,316
---------
$ 321,374
=========
Depreciation expense was $72,740 and $57,884 for the years ended December 31,
1995 and 1994.
NOTE 5 - NOTE PAYABLE - BANK
During October, 1994 the Company arranged a line of credit with a bank whereby
the Company was able to borrow up to $1,000,000. During October, 1995 the
Company replaced this line of credit with a $1,500,000 line with the same bank.
The line provides that the Company maintain with the bank a U.S. Treasury note
in the principal amount of $300,000 with a maturity date of September 19, 1996
as partial collateral (see Note 2). The line is also secured by substantially
all of the Company's assets. The Company is entitled to advances of up to 70%
of its accounts receivable less than 61 days old, 25% of its inventory cost, and
100% of the value of the treasury note described above. The line has an interest
rate of prime plus 1.5% (10% at December 31, 1995) and the balance ($1,500,000
at December 31, 1995) is due on August 30, 1996.
NOTE 6 - NOTES AND ACCOUNTS PAYABLE - AFFILIATES
Long-term:
STOCKHOLDERS
The Company at January 1, 1994, had an unsecured 9% interest-bearing note
payable to a stockholder due on April 30, 1995, in the amount of $880,522.
During December, 1994 $510,000 of this
A-10
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
note was converted to equity (See Note 8) with the balance of $370,522
converted into a term note with interest at 9% per annum
payable interest only of $2,779 per month for 12 months and principal and
interest of $16,927 for 24 months thereafter.
Maturity of this debt is as follows:
1996: $126,601 1997: $192,120 1998: $16,800
Short-term
SHAREHOLDERS
The Company borrowed $285,000 from a shareholder during November, 1993, for
working capital purposes. During 1994 $157,180 was repaid and during 1995
$30,499 was repaid. This advance, which is due on demand is included in Accounts
payable - stockholders and related party at December 31, 1995.
During December, 1993, the Company borrowed $743,188 from a shareholder for
working capital purposes. This advance which was due on or before February 20,
1994, was repaid during January, 1994. This shareholder also advanced the
Company $343,952 during December, 1994. This advance was repaid in full with
interest of $20,414 on February 3, 1995.
Approximate interest expense related to loans from related parties aggregated
$54,000 and $94,000 in 1995 and 1994.
NOTE 7 LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
Note payable due in monthly installments of
$1,373 including interest at 8.3% per annum
due in May, 1999 (secured by equipment) $ 48,882
Less current portion 12,907
--------
$ 35,975
========
Maturity of long-term debt is as follows:
1996: $12,907 1997: $14,019 1998: $15,229 1999: $6,727
A-11
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY
During December, 1994 the Company adopted a stock option plan to be administered
by the Board of Directors. The plan provides for the granting of options for
specified individuals to purchase common stock at an exercise price to be
determined by the Board of Directors. No option may be granted after January,
2005 and no option may be granted for a period of greater than 10 years. The
total number of shares with respect to which options may be granted under the
plan is 450,000. During November, 1995 the Company granted an aggregate of
20,000 options to 2 employees at the fair market value of the stock on the date
of the grant ($4.19 per share). These options expire during November, 2000.
During January, 1994 the Company issued 147,534 shares of its $.001 par value
common stock to an officer in exchange for certain rights and patents (see Note
9). These rights and patents were valued at this individual's historical cost
of $30,000.
During December, 1994 an individual related to shareholders of the Company
agreed to convert $510,000 of his $880,522 note due from the Company into 99,724
shares of the Company's $.001 par value common stock (See Note 6).
During December, 1994 a shareholder of the Company agreed to contribute his
$278,128 note due to him to paid in capital.
During August, 1995 the Company completed a public offering of units. Pursuant
to the offering the Company issued 1,174,000 units consisting of 1,104,000
shares of its $.001 par value common stock and 1,174,000 redeemable common stock
purchase warrants for cash aggregating $3,865,131 net of offering expenses of
$1,654,869. Included in the offering were 70,000 common shares sold by a
shareholder. Each warrant entitles the holder to purchase one share of the
Company's $.001 par value common stock at a price of $6.50 per share for a
period of four years from September 29, 1996. These warrants may be redeemed by
the Company at any time after August 12, 1996 at a price of $.10 per warrant if
the average bid price for the Company's common stock exceeds $8.75 per share for
the 20 consecutive trading days ending on the third day prior to the date of the
notice of redemption.
In addition the Company sold an option to purchase an aggregate of 96,000 units,
with each unit consisting of one share of common stock and one warrant, for cash
aggregating $960 to the underwriter. The options are exercisable for a period of
4 years from August 11, 1996 at an exercise price of $7.50 per unit. The terms
of the warrants are the same as those issued pursuant to the public offering
except that they are not redeemable by the Company.
A-12
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENT
In November 1994, the Company entered into a one year renewal of its domestic
license agreement with Bon Jour International, Ltd. Under this agreement, the
Company was granted an exclusive right and license to use the trademarks for
sales to Wal-Mart Stores, Inc., within the United States and its territories and
possessions, Mexico, and Canada in the design, manufacture and sale of
sunglasses and reading glasses. The Company agreed to pay an annual royalty of
8% of sales of the licensed products with a minimum of $280,000 for the contract
year. The Company charged $339,000 to operations related to this agreement
during 1994. This agreement was not renewed after its expiration.
OPERATING LEASES
In conjunction with its relocation from New York to Florida, during March, 1993,
the Company entered into a lease in Sarasota, Florida. The lease commenced March
8, 1993 and terminates March 7, 1998. The lease is payable in monthly
installments of approximately $6,125. This lease provides for various
escalation's based on cost of living, real estate taxes, etc.
Rent expense was $88,922 and $79,745 for 1995. and 1994.
Future minimum rentals are as follows:
1996: $73,500 1997: $73,500 1998: $12,250
CONCENTRATION OF CREDIT RISK/MAJOR CUSTOMER
During the years ended December 31, 1995 and 1994, the Company made net sales to
the Customer described in Note 1 of approximately $9,607,000 and $8,007,000 or
92% and 87% of its total sales.
Approximately $3,973,000 (98%) of the gross accounts receivable are due from the
significant customer described in Note 1 at December 31, 1995 and are unsecured.
This customer is a major national retailer and the Company has not experienced
collection problems with this customer.
H2OPTIX PRODUCT LINE
During October, 1992, the Company entered into an agreement with an employee
whereby it obtained the rights to market a new line of sunglasses (H2OPTIX). In
exchange for these rights the Company agreed to pay this employee $10,000 in
cash and to pay certain royalties. During January, 1994 this individual agreed
to transfer all rights to the H2OPTIX product line to the Company in
A-13
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
exchange for 147,534 shares of the Company's common stock (see Note 8).
EMPLOYMENT AGREEMENTS
The Company entered into three year employment agreements with its president and
a vice president effective on August 11, 1995. The president's agreement
provides for an annual salary of $150,000 and the vice president's agreement
provides for a salary of $125,000. The agreements provide for annual increases
of 4% and may be terminated as of the end of the first and second years by
giving 90 days notice to the other party. The employment agreements also contain
non-compete covenants which expire one year after termination of employment.
LITIGATION
During February, 1994, the Company settled certain litigation with Bausch &
Lomb, Inc. whereby the parties agreed that the Company would abandon the trade
name Rayex on or before October 1, 1994 and that each party would be responsible
for its own costs related to the litigation. In conjunction with the recall of
the Rayex sunglasses and the litigation the Company incurred costs aggregating
$71,918 during 1994. These costs have been charged to operations during the
year.
NOTE 10. - INCOME TAXES
Prior to the completion of its public offering the Company had elected to be
treated as an "S" Corporation under the provisions of the Internal Revenue Code
and state statutes. Under these provisions no income taxes are incurred on a
corporate level. Instead, shareholders of the Company include their pro-rata
share of income or loss on their individual income tax returns. The pro forma
provision for income taxes for 1994 has been computed in accordance with
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. There are no material differences between financial statement income and
taxable income.
During August, 1995 the Company completed a public offering of its common stock
and the "S" Corporation status was thereby terminated and the Company became
subject to corporate income taxes. Effective September 1, 1995 the Company
adopted Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes. Of the income for the year ended December 31, 1995 $12,129 will be
allocated to the shareholders and $945,198 will be subject to corporate income
taxes. The accumulated deficit through the termination of the "S" election of
$1,062,011 has been reclassified to paid in capital.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial
A-14
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
accounting and tax purposes in different periods. Deferred taxes are classified
as current or non-current, depending on the classification of assets and
liabilities to which they relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are classified as
current or non-current depending on the periods in which the temporary
differences are expected to reverse.
The amounts shown for income taxes and pro forma income taxes in the statements
of operations differ from amounts that would be derived from computing income
taxes and pro forma income taxes at federal statutory rates. The following is a
reconciliation of those differences.
(Pro Forma)
1995 1994
-------- ---------
Tax at federal statutory rate 34% 34%
Tax on S corporation earnings (1)% -
State income tax net of federal
tax benefit 3% 3%
-------- ---------
36% 37%
======== =========
Income taxes consisted of $294,300 of domestic and $47,700 of foreign income
taxes in 1995.
After the closing of its public offering the Company had agreed to make a
distribution to its existing shareholders in an amount not to exceed $300,000.
The total amount of the distribution is $219,075 of which $122,500 has been
paid and $96,575 has been accrued.
NOTE 11. - FOREIGN OPERATIONS
During 1995 the Company operated in 2 geographic areas: The United States and
Hong Kong. Following is a summary of information by area for 1995:
Net sales to unaffiliated customers:
United States $ 8,417,838
Hong Kong 2,054,818
-----------
$10,472,656
===========
Income from operations:
United States $ 918,280
Hong Kong 270,552
-----------
1,188,832
Other income 71,082
Other expenses 302,587
-----------
Income before income taxes $ 957,327
===========
Identifiable assets:
United States $ 9,642,347
Hong Kong 247,146
-----------
$ 9,889,493
===========
A-15
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Continued)
Income before income tax represents net sales, less operating expenses for each
geographic area and other income and expenses of a general corporate nature.
Identifiable assets are those that are identifiable with operations in each
geographic area. All sales made by the foreign subsidiary were made to the
significant customer described in note 1.
A-16
<PAGE>
Solar-Mates, Inc.
Consolidated Balance Sheets
September 30, 1996
(Unaudited)
ASSETS
- ------
Current Assets:
Cash $ 114,309
Trading securities 926,086
Other marketable securities 284,640
Accounts receivable - less allowance for
doubtful accounts of $100,000 2,671,260
Inventories 3,358,353
Prepaid expenses 558,464
-----------
Total current assets 7,913,112
Fixed assets - net of accumulated depreciation 473,157
Other assets 359,720
-----------
$ 8,745,989
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Note payable - bank $ 1,500,000
Note payable - stockholder 45,398
Advances from stockholders 83,927
Accounts payable 1,647,784
Other current liabilities 508,048
-----------
Total current liabilities 3,785,157
Notes payable - stockholder 173,921
Long-term debt 58,293
Commitments and contingencies -
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized -
Common stock, $.001 par value,
10,000,000 shares authorized,
2,384,000 shares issued and outstanding 2,384
Additional paid in capital 4,264,276
Retained earnings 461,958
-----------
Total stockholders' equity 4,728,618
-----------
$ 8,745,989
-----------
-----------
See accompanying notes to financial statements
A-17
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Operations and Retained Earnings
For The Nine Months Ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Net sales $ 7,406,439 $ 5,313,195
Cost of sales 4,776,085 3,559,841
------------- -------------
Gross profit 2,630,354 1,753,354
------------- -------------
Operating expenses:
Selling expenses 1,433,645 656,422
General and administrative expenses 1,035,395 830,288
------------- -------------
2,469,040 1,486,710
------------- -------------
Income from operations 161,314 266,644
Other (expense):
Interest expense (197,789) (211,000)
------------- -------------
Income before income taxes (36,475) 55,644
Provision for income taxes
Current 12,400
------------- -------------
Net income (48,875) 55,644
Retained earnings (deficit) - beginning of period 603,198 (1,074,140)
S-corporation distribution (92,365)
------------- -------------
Retained earnings (deficit) - end of period $ 461,958 $ (1,018,496)
------------- -------------
------------- -------------
Per share information:
Weighted average shares outstanding 2,384,000 1,486,100
------------- -------------
------------- -------------
Net income per share $ (0.02) $ 0.04
------------- -------------
------------- -------------
See accompanying notes to financial statements
A-18
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Cash flows from operating activities $ (3,585) $1,235,655
Cash flows from investing activities:
Sale of trading securities 136,299
Acquisition of patents and trademarks (6,159) (8,867)
(Acquisition) disposition of other assets (112,036) 700
Purchase of fixed assets (219,877) (35,482)
----------- -----------
Net cash used by investing activities (201,773) (43,649)
----------- -----------
Cash flows from financing activities:
Decrease in accounts receivable stockholders 45,215 8,190
Long term borrowing 22,318 -
Principal payments on notes payable (106,363) (606,237)
S corporation distribution (92,365) -
Repayments on advances from stockholders (13,394) -
Offering cost (15,000) (127,820)
(Increase) in deferred offering cost - (348,107)
----------- -----------
Net cash used by financing activities (159,589) (1,073,974)
----------- -----------
Net increase (decrease) in cash (364,947) 118,032
Beginning - cash balance 479,256 18,301
----------- -----------
Ending - cash balance $ 114,309 $ 136,333
----------- -----------
----------- -----------
See accompanying notes to financial statements
A-19
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note A. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Item 310(b) of Regulation SB. 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
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial statements of the
Company as of December 31, 1995 and for the two years then ended, including
notes thereto included in the Company's Form 10-KSB.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Solartechnics (HK) Ltd. Intercompany
transactions and balances have been eliminated in consolidation.
Note B. Inventory
Inventory consisted principally of finished goods.
Note C. Commitments and Contingencies
Concentration of credit risk/major customer
- -------------------------------------------
During the nine month periods ended September 30, 1996 and 1995 the Company made
sales to Wal-Mart Stores, Inc. of approximately $4,800,000 and $4,700,000,
respectively. During the three month periods ended September 30, 1996 and 1995
the Company made sales to Wal-Mart Stores, Inc. of approximately $1,100,000 and
$680,000, respectively
Approximately $1,256,000 (47%) of the accounts receivable at September 30, 1996
are due from Wal-Mart Stores, Inc. and are unsecured. This customer is a major
national retailer and the Company has not experienced collection problems with
this customer.
A-20
<PAGE>
Note D. Subscription Receivable
On September 26, 1996 Solar-Mates, Inc.(the "Company") entered into a
subscription agreement with an Austrian based bank for the infusion of $22.5
million in equity financing of which $7.5 million was funded on October 4, 1996.
The purpose of the funding is to pursue a specific acquisition targeted by the
Company in the sunglass industry. See Note E.
The equity infusion is in the form of non-voting convertible preferred shares of
the Company. The conversion price for the preferred shares in the initial
infusion is the lower of 80% of the market price of the Company's publicly trade
Common Stock, $.001 par value ("Common Stock") or $5.50 per share, and the
shares bear dividends at an annual rate of 6.5%. The remaining subscriptions
for an additional aggregate amount of $15 million of non-voting convertible
preferred shares is to be consummated simultaneously with the closing of the
targeted acquisition. The conversion price for the preferred shares to be
issued in the subsequent $15 million infusion is the lower of 80% of market
price for the Common Stock or, with respect to $7.5 million of such amount,
$6.75 per share, and with respect to the other $7.5 million, $8.25 per share.
Such shares are to bear dividends at an annual rate of 6%. The Company may, at
its sole discretion, pay any and all dividends in preferred shares of the same
series rather than in cash.
The convertibility of any preferred shares into Common Stock is subject to
shareholder approval. The agreement provides that the purchaser of the shares
shall vote all of the underlying shares (if and when converted), in connection
with any vote of the shareholders of the Company relating to the election of
directors, for a majority of directors, in accordance with the directions of
Stephen Nevitt, the Company's President and Principal Executive Officer, or his
successor or designee.
The subscription is being effected pursuant to an off-shore exemption in
reliance upon Regulation S under the Securities Act of 1933.
At the closing of the initial $7.5 million infusion, the Company also issued to
the investor three year warrants to purchase 150,000 shares of Common Stock at a
price of $5.5625 per share exercisable commencing on January 1, 1999. In
connection with the closing of the second infusion of $15 million, the Company
is required to issue an additional 600,000 identical warrants, with an exercise
price of $7.50 per share for 300,000 of the warrants and $10 per share for the
remaining warrants. The Company also paid a commission to a third party equal
to 7% of the investment and an immediately exercisable five year warrant to
purchase
A-21
<PAGE>
200,000 shares of Common Stock at a price of $5.50 per share. The Company is
also obligated to pay such 7% commission in connection with the second infusion
of $15 million.
Note E. Subsequent Event
On October 29,1996, the Company entered into an agreement to purchase from
Corning Incorporated, certain assets used in the business of designing,
manufacturing and distributing Serengeti sunglasses. The assets include
inventories, dies and molds, office furniture, plant machinery and equipment,
fixtures, trademarks, including, among others, the brand name Serengeti, and
patents used in the manufacturing of Serengeti brand sunglasses. The purchase
price will be $27.5 million. The Company anticipates closing the transaction
after the approval of its shareholders of the issuance of shares underlying the
convertible preferred shares and warrants is obtained.
A-22
<PAGE>
[PRICE WATERHOUSE LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
November 25, 1996
To the Board of Directors
of Corning Incorporated
In our opinion, the accompanying balance sheet and the related statements of
income and of cash flows present fairly, in all material respects, the financial
position of the Serengeti Eyewear Business of Corning Incorporated (the
"Business") at December 31, 1995, and the results of its operations and its cash
flows for the two years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Business's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
New York, New York
November 25, 1996
A-23
<PAGE>
STATEMENTS OF INCOME SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 and January 1, 1995
(In thousands) 1995 1994
---- ----
REVENUES
Net sales $35,334 $36,561
DEDUCTIONS
Cost of sales 20,420 20,858
Selling, general and administrative expenses 13,042 13,977
Research and development expenses 344 109
------ ------
Income before taxes on income 1,528 1,617
Taxes on income 596 631
------ ------
NET INCOME $ 932 $ 986
------ ------
------ ------
The accompanying notes are an integral part of these financial statements.
A-24
<PAGE>
BALANCE SHEET SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
(In thousands) DECEMBER 31, 1995
-----------------
ASSETS
CURRENT ASSETS
Cash $ 5
Accounts receivable, net of $173 doubtful
accounts reserves and allowances 4,096
Inventories
Finished goods 3,973
Work in progress 6,389
-------
Inventories valued at current cost net
of allowance for obsolescence 10,362
Reduction to LIFO valuation (3,050)
-------
Inventories 7,312
Current deferred tax asset 1,796
Other current assets 263
-------
Total current assets 13,472
PLANT AND EQUIPMENT
Leasehold improvements 198
Equipment 1,526
Accumulated depreciation (1,059)
-------
Plant and equipment, net 665
-------
OTHER ASSETS 151
-------
TOTAL ASSETS $14,288
-------
-------
LIABILITIES AND BUSINESS EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,245
Intercompany payable 1,379
Other accrued liabilities including
reserves for sales returns 4,326
-------
Total current liabilities 6,950
OTHER LIABILITIES 130
BUSINESS EQUITY 7,208
-------
TOTAL LIABILITIES AND BUSINESS EQUITY $14,288
-------
-------
The accompanying notes are an integral part of these financial statements.
A-25
<PAGE>
STATEMENTS OF CASH FLOWS SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 and January 1, 1995
(In thousands)
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 932 $ 986
Adjustments to reconcile income to net cash
provided by operations:
Depreciation 213 166
Deferred tax benefit (95) (362)
Other 26 15
Changes in operating assets and liabilities:
Accounts receivable 1,246 599
Inventories (502) 173
Other current assets (243) 180
Accounts payable and other current
liabilities (125) 2,080
----- ------
Net cash provided by operating activities 1,452 3,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (12) (487)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash flow retained by Corning Incorporated (1,440) (3,350)
----- ------
Net change in cash and cash equivalents 0 0
Cash and cash equivalents at beginning of year 5 5
----- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5 $ 5
----- ------
----- ------
The accompanying notes are an integral part of these financial statements.
A-26
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(Dollars in thousands)
1. BASIS OF PRESENTATION
These financial statements present the financial position of the Serengeti
Eyewear business (the "Business" or "Serengeti") of Corning Incorporated
("Corning") as of December 31, 1995 and the results of its operations and its
cash flows for the years ended December 31, 1995 and January 1, 1995. Serengeti
is engaged in the business of the design, manufacture and distribution of
sunglasses. The Business operates as an integral part of Corning and not as a
separate legal or reporting entity.
The financial information in these financial statements is not necessarily
indicative of results that would have occurred if the Business had been a
separate stand-alone entity during the periods presented or of future results of
the Business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEARS
Serengeti operates on a fiscal year ending on the Sunday nearest December 31.
The two most recent fiscal years ended on December 31, 1995 and January 1, 1995,
and included 52 weeks.
REVENUE RECOGNITION
The Business recognizes revenues as product is shipped.
INCOME TAXES
Serengeti uses the asset and liability approach to accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period when the change is enacted.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories are valued
using the last-in, first-out (LIFO) method. Serengeti generally does not
maintain inventories of raw materials.
ADVERTISING
Advertising costs are expensed as incurred.
WARRANTIES
The Business generally offers a one year warranty on its products. The accrual
for warranty claims is included in other accrued liabilities.
PLANT AND EQUIPMENT
Leasehold improvements and equipment are recorded at cost. Depreciation is
based on estimated useful lives, which range from 3 to 20 years, of the relevant
assets, using the straight-line method. Depreciation expense was $213 and $166
in 1995 and 1994, respectively.
A-27
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
During the periods covered by the financial statements, the Business's
operations were conducted as an integral part of Corning's operations. The
financial statements include purchases of materials to and from other Corning
business units at pre-established prices. Lens purchases from Corning
affiliates occurred at pre-established prices and amounted to $487 and $783 in
1995 and 1994, respectively. These amounts are not necessarily indicative of
the prices and costs that would have prevailed had the Business operated as a
separate company as contemplated by the transaction described in the Agreement
of Purchase and Sale (see Note 11). Serengeti reimburses Corning affiliates for
costs incurred in foreign operations of its Business. The financial statements
also include various allocated costs and expenses (see Note 4) which are not
necessarily indicative of the costs and expenses which would have resulted had
the Business been operated as a separate company.
Research and development expenses are for services provided to Serengeti by
Corning at rates which are substantially in accordance with those Corning would
charge its own subsidiaries or jointly held companies for like or similar
services.
Serengeti participates in Corning's centralized treasury and cash management
processes. Cash received from operations is collected by Corning and credited
to the Business. Cash disbursements for operations and investments are made by
Corning on behalf of the Business.
Business equity represents accumulated operating results of the Business and the
net cash flows remitted to or financed by Corning. Serengeti does not receive
or pay interest on the balances with Corning.
The Business is included within the consolidated federal and state tax returns
of Corning. Corning does not allocate the consolidated tax provision to its
businesses. The provision for income taxes presented in these financial
statements is computed on a stand-alone basis and is based upon an effective
rate which management believes is reasonable due to the nature of operations of
the Business.
4. ALLOCATIONS
Corporate costs and charges for Corning centralized functions have been
allocated to the Business using methods deemed appropriate for the nature of the
expenses involved. The methods utilized various allocation bases such as number
of employees and related payroll costs, and direct effort expended. The costs
allocated to the Business include amounts in respect of finance support,
information systems, corporate services and human resources. The charge for
these allocations was $1,659 and $1,150 for 1995 and 1994, respectively and is
included in research and development and selling, general and administrative
expenses. Management believes the allocations are reasonable, but they are not
necessarily indicative of the costs that would have been incurred had the
Business been operated as a separate company.
A-28
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS EQUITY
1995 1994
---- ----
Balance at beginning of the year $ 7,716 $10,080
Net income 932 986
Net cash flow retained by Corning (1,440) (3,350)
------ -------
Balance at year end $ 7,208 $ 7,716
------ -------
------ -------
6. COMMITMENTS AND CONTINGENCIES
The Business has entered into operating leases for certain facilities and
equipment used in operations. Payments under these obligations are expensed as
incurred. The following table includes future annual minimum commitments under
operating leases entered into by the Business as of December 31, 1995. These
commitments are primarily denominated in Japanese Yen and have been converted to
United States Dollars (USD) at a rate of 106 Japanese Yen per USD.
1996 $ 577
1997 396
1998 330
1999 191
2000 and beyond 69
Rental expense under operating leases was $606 and $647 in 1995 and 1994,
respectively.
In the ordinary course of business, Serengeti has entered into letter of credit
agreements and other arrangements with financial institutions. Unused letters
of credit at December 31, 1995 approximated $200.
7. INTERNATIONAL ACTIVITIES
The Business sources primarily all of its sales from within the United States.
United States sales to unaffiliated customers in 1995 and 1994 include $9,470
and $7,515, respectively, of export sales; of which $3,936 and $3,622,
respectively, were to Europe, and $5,534 and $3,893, respectively, were to Latin
America, Asia-Pacific and Canada.
8. MAJOR CUSTOMERS
The Business's customers are primarily in the specialty sunglass retail and
optical industries. Sales to one customer represented 29 percent and 22 percent
of total sales for 1995 and 1994, respectively. The accounts receivable balance
at December 31, 1995 related to this customer was $762.
9. EMPLOYEE RETIREMENT PLANS
PENSION BENEFITS
Serengeti's work force participates in Corning's employee benefit plans,
primarily Corning's North American defined-benefit pension plan. The Business
contributes to Corning amounts ranging from 3.9% to 4.6% of gross salaries for
its participation in this plan. Pension expense charged to Serengeti from
Corning during 1995 and 1994, was $62 and $83, respectively. The obligation for
pension liabilities incurred prior to the consummation of the transaction will
remain with Corning. (See Note 11)
A-29
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE RETIREMENT PLANS (CONTINUED)
POSTRETIREMENT BENEFITS
Serengeti's workforce participates in Corning's postretirement medical and life
insurance plans. The Business contributes to Corning amounts based on the
number of employees in the plan to compensate for these and other fringe
benefits. Postretirement benefit expense charged to Serengeti from Corning
during 1995 and 1994, was $119 and $198, respectively. The obligation incurred
for these benefits prior to the consummation of the transaction will remain with
Corning. (see Note 11)
10. TAXES ON INCOME
The Business is included within the consolidated federal and state tax returns
of Corning. Corning does not allocate the consolidated tax provision to its
businesses. The provision for income taxes presented in these financial
statements is computed on a stand-alone basis and is based upon an effective
rate which management believes is reasonable due to the nature of operations of
the Business.
1995 1994
---- ----
Income before taxes on income $ 1,528 $ 1,617
----------- ----------
----------- ----------
Taxes on income $ 596 $ 631
----------- ----------
----------- ----------
Effective tax rate reconciliation:
Statutory U.S. tax rate 35.0% 35.0%
State taxes, net of federal benefit 4.0 4.0
---- ----
Effective tax rate 39.0% 39.0%
---- ----
---- ----
Current and deferred tax expense (benefit):
Current:
U.S. $ 583 $ 837
State and municipal 109 157
Deferred:
U.S. (81) (306)
State and municipal (15) (57)
----------- ----------
Net tax expense $ 596 $ 631
----------- ----------
----------- ----------
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities as of year end
are comprised of the following (in thousands):
1995
----
Other employee benefits $ 113
Accounts receivable reserves 71
Inventory 252
Other 1,373
------
Deferred tax assets 1,809
------
Fixed assets (13)
------
Deferred tax liabilities (13)
------
Net deferred tax assets $ 1,796
-------
-------
A-30
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. TAXES ON INCOME (CONTINUED)
Taxes are paid by Corning on behalf of the Business and taxes payable are netted
through the Corning cash management program. The Business made no payments
directly to taxing authorities for income taxes in the periods presented.
11. SUBSEQUENT EVENT
Pursuant to the Agreement of Purchase and Sale between Corning and Solar-Mates,
Inc. ("Solar-Mates") dated as of October 29, 1996, Corning has agreed to sell,
assign and transfer to Solar-Mates all inventories, fixed assets, prepaid
assets, leases and contract rights of the Business.
A-31
<PAGE>
STATEMENTS OF INCOME SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 and Forty Weeks Ended October 8, 1995
(In thousands)
UNAUDITED
-------------------
1996 1995
---- ----
REVENUES
Net sales $ 27,480 $ 28,843
DEDUCTIONS
Cost of sales 14,475 16,748
Selling, general and administrative expenses 11,563 10,909
Research and development expenses 109 312
------- -------
Income before taxes on income 1,333 874
Taxes on income 520 341
------- -------
NET INCOME $ 813 $ 533
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
A-32
<PAGE>
BALANCE SHEET SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
September 30, 1996 UNAUDITED
(In thousands) ---------
1996
----
ASSETS
CURRENT ASSETS
Cash $ 5
Accounts receivable, net of $173 doubtful
accounts reserves and allowances 2,514
Inventories
Finished goods 6,696
Work in progress 4,752
-------
Inventories valued at current cost net
of allowance for obsolescence 11,448
Reduction to LIFO valuation (3,050)
-------
Inventories 8,398
Current deferred tax asset 1,880
Other current assets 189
-------
Total current assets 12,986
PLANT AND EQUIPMENT
Leasehold improvements 198
Equipment 1,627
Accumulated depreciation (1,150)
-------
Plant and equipment, net 675
-------
OTHER ASSETS 174
-------
TOTAL ASSETS $ 13,835
-------
-------
LIABILITIES AND BUSINESS EQUITY
CURRENT LIABILITIES
Accounts payable $ 964
Intercompany payable 623
Other accrued liabilities including
reserves for sales returns 4,545
-------
Total current liabilities 6,132
OTHER LIABILITIES 140
BUSINESS EQUITY 7,563
-------
TOTAL LIABILITIES AND BUSINESS EQUITY $ 13,835
-------
-------
The accompanying notes are an integral part of these financial statements.
A-33
<PAGE>
STATEMENTS OF CASH FLOWS SERENGETI EYEWEAR BUSINESS OF CORNING INCORPORATED
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 and Forty Weeks Ended October 8, 1995
(In thousands)
UNAUDITED
----------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 813 $ 533
Adjustments to reconcile income to net cash
provided by operations:
Depreciation 184 153
Deferred tax benefit (84) (189)
Other (9) 16
Changes in operating assets and liabilities:
Accounts receivable 1,582 (582)
Inventories (1,086) (257)
Other current assets 74 (22)
Accounts payable and other current liabilities (818) 1,303
------ -----
Net cash provided by operating activities 656 955
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (209) 21)
Net proceeds from disposition of properties 11
------ -----
Net cash used in investing activities (198) (21)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash flow retained by Corning Incorporated (458) (934)
------ -----
Net change in cash and cash equivalents 0 0
Cash and cash equivalents at beginning of year 5 5
------ -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5 $ 5
------ -----
------ -----
The accompanying notes are an integral part of these financial statements.
A-34
<PAGE>
SERENGETI EYEWEAR BUSINESS
OF CORNING INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. BASIS OF PREPARATION
The condensed financial statements presented herein are unaudited. Certain
information and footnote disclosures normally prepared in accordance with
generally accepted accounting principles have either been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Business believes that all adjustments necessary for a fair
presentation have been made, interim period results are not necessarily
indicative of the results of operations for a full year.
Effective January 1, 1996, the Business adopted an annual reporting calendar.
Previously, the Business operated on a fiscal year ending on the Sunday nearest
December 31. This change will not affect the comparability of the Business's
1995 and 1996 annual results. Corning did not restate its historical financial
statements for the calendar change because financial information as of calendar
quarter ends was not readily available.
2. RELATED PARTY TRANSACTIONS
During the periods covered by the financial statements, the Business's
operations were conducted as an integral part of Corning's operations. The
financial statements include purchases of materials to and from other Corning
business units at pre-established prices. Lens purchases from Corning
affiliates occurred at pre-established prices and amounted to $517 and $426 for
the nine months ended September 30, 1996 and the forty weeks ended October 8,
1995, respectively. These amounts are not necessarily indicative of the prices
and costs that would have prevailed had the Business operated as a separate
company as contemplated by the transaction described in the Agreement of
Purchase and Sale (see Note 4). Serengeti reimburses Corning affiliates for
costs incurred in foreign operations of its Business. The financial statements
also include various allocated costs and expenses (see Note 3) which are not
necessarily indicative of the costs and expenses which would have resulted had
the Business been operated as a separate company.
The Business is included within the consolidated federal and state tax returns
of Corning. Corning does not allocate the consolidated tax provision to its
businesses. The provision for income taxes presented in these financial
statements is computed on a stand-alone basis and is based upon an effective
rate which management believes is reasonable due to the nature of operations of
the Business.
3. ALLOCATIONS
Corporate costs and charges for Corning centralized functions have been
allocated to the Business using methods deemed appropriate for the nature of the
expenses involved. The methods utilized various allocation bases such as number
of employees and related payroll costs, and direct effort expended. The costs
allocated to the Business include amounts in respect of finance support,
information systems, corporate services and human resources. The charge for
these allocations was $1,000 and $1,200 for the nine months ended September 30,
1996 and the forty weeks ended October 8, 1995, respectively, and is included in
research and development and selling, general and administrative expenses.
Management believes the allocations are reasonable, but they are not necessarily
indicative of the costs that would have been incurred had the Business been a
stand-alone company.
4. SUBSEQUENT EVENT
Pursuant to the Agreement of Purchase and Sale between Corning and Solar-Mates,
Inc. (Solar-Mates) dated as of October 29, 1996, Corning has agreed to sell,
assign and transfer to Solar-Mates all inventories, fixed assets, prepaid
assets, leases and contract rights of the Business.
A-35
<PAGE>
SOLAR-MATES, INC.
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Stephen Nevitt and Milton Nevitt as
proxies, each with the power of substitution, and hereby authorizes them to vote
all shares of Common Stock of the undersigned at the Special Meeting of
Shareholders of the Company, to be held at ____________________________, on
________________, 1997, and at any adjournments or postponements thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED "FOR" THE PROPOSALS SET FORTH ON THE REVERSE SIDE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE) SEE REVERSE
SIDE
<PAGE>
/X/ Please mark your
votes as in this
example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3
For Against Abstain
1. Approval of the issuance of (a) Common / / / / / /
Stock upon conversion of Series A
Preferred Stock and upon exercise of
Series A Warrant and Series D Warrant,
(b) Series B and Series C Preferred Stock,
and (c) Series B Warrant and Series C
Warrant.
2. Approval of amendment to the Company's / / / / / /
Certificate of Incorporation.
3. Approval of amendment to the Solar-Mates, / / / / / /
Inc., 1995 Stock Option Plan.
MARK HERE / /
FOR ADDRESS
CHANGE AND
NOTE AT LEFT
Signature__________________ Date______ Signature_________________Date__________
NOTE Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
