U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 or 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from: to:
Commission file number: 0-26022
Solar-Mates, Inc.
(Exact Name of Small Business Issuer as specified in its charter)
New York 11-2396918
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
8125 25th Court East
Sarasota, Florida 34243
(Address of principal executive offices)
(941) 359-3599
(Issuer's telephone number, including area code)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES: X NO:
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. YES: NO:
APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: 2,384,000 shares of Common Stock, $.001 par value, as of August 12, 1996.
Transitional Small Business Disclosure Format. YES: NO: X
<PAGE>
Solar-Mates, Inc.
Index
Part I
------
Item 1. Financial Statements
Consolidated Balance Sheet
as of June 30, 1996 3
Consolidated Statements of Operations and
Retained Earnings (Deficit) for the Six
Months and Three Months Ended June 30,
1996 and 1995 4
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996 and 5
1995
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 11
Part II
-------
Item 4 Submission of Matters to a Vote of Security
Holders 12 - 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Solar-Mates, Inc.
Consolidated Balance Sheets
June 30, 1996
(Unaudited)
ASSETS
Current Assets:
Cash ..................................................... $ 514,760
Trading securities ....................................... 1,070,521
Other marketable securities .............................. 284,878
Accounts receivable - less allowance for
doubtful accounts of $100,000 ........................... 2,755,159
Inventories .............................................. 3,073,833
Prepaid expenses ......................................... 433,522
----------
Total current assets .................................. 8,132,673
Fixed assets - net of accumulated depreciation .............. 441,641
Other assets ................................................ 493,713
----------
$9,068,027
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank ...................................... $1,500,000
Note payable - stockholder ............................... 183,697
Advances from stockholders ............................... 88,372
Accounts payable ......................................... 1,560,536
Other current liabilities ................................ 620,461
----------
Total current liabilities ............................. 3,953,066
Notes payable - stockholder ................................. 80,014
Long-term debt .............................................. 47,751
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 ........................................... 720,536
----------
Total stockholders' equity ............................ 4,987,196
----------
$9,068,027
==========
See accompanying notes to financial statements
3
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Operations and Retained Earnings (Deficit)
For The Six Months and Three Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 5,541,273 $ 4,572,405 $ 2,417,364 $ 2,177,308
Cost of sales .............................................. 3,563,727 3,055,151 1,511,348 1,448,295
----------- ----------- ----------- -----------
Gross profit ............................................... 1,977,546 1,517,254 906,016 729,013
----------- ----------- ----------- -----------
Operating expenses:
Selling expenses .......................................... 883,424 376,110 517,503 198,931
General and administrative expenses ....................... 649,590 543,682 334,233 263,286
----------- ----------- ----------- -----------
1,533,014 919,792 851,736 462,217
----------- ----------- ----------- -----------
Income from operations ..................................... 444,532 597,462 54,280 266,796
Other (expense):
Interest expense .......................................... (140,428) (155,956) (28,168) (66,823)
----------- ----------- ----------- -----------
Income before income taxes ................................. 304,104 441,506 26,112 199,973
Provision for income taxes
Current ................................................... 94,400 (8,400)
----------- ----------- ----------- -----------
Net income ................................................. 209,704 441,506 34,512 199,973
Retained earnings (deficit) - beginning of period .......... 603,198 (1,074,140) 686,025 (832,607)
S-corporation distribution ................................. (92,365)
----------- ----------- ----------- -----------
Retained earnings (deficit) - end of period ............... $ 720,537 $ (632,634) $ 720,537 $ (632,634)
=========== =========== =========== ===========
Per share information:
Weighted average shares outstanding ....................... 2,384,000 1,280,000 2,384,000 1,280,000
=========== =========== =========== ===========
Net income per share ...................................... $ 0.09 $ 0.34 $ 0.01 $ 0.16
=========== =========== =========== ===========
Pro forma net income
Net income ................................................ $ 441,506 $ 199,973
Pro forma provision for income taxes:
Long-term debt ............................................. 163,000 73,600
----------- -----------
Pro forma net income ...................................... $ 278,506 $ 126,373
=========== ===========
Pro forma income per share ................................ $ 0.22 $ 0.10
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
Solar-Mates, Inc.
Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities ......................................... $ 351,895 $ 1,235,655
Cash flows from investing activities:
Purchase of trading securities ............................................. (8,374)
Acquisition of patents and trademarks ...................................... (4,644) (8,867)
(Acquisition) disposition of other assets ................................. (13,183) 700
Purchase of fixed assets ................................................... (163,663) (35,482)
----------- -----------
Net cash used by investing activities .................................. (189,864) (43,649)
----------- -----------
Cash flows from financing activities:
Decrease in accounts receivable stockholders ............................... 45,215 8,190
Long term borrowing ........................................................ 24,324
Principal payments on notes payable ........................................ (79,752) (606,237)
S corporation distribution ................................................. (92,365) --
Repayments on advances from stockholders ................................... (8,949) --
Offering cost .............................................................. (15,000) (127,820)
(Increase) in deferred offering cost ....................................... -- (348,107)
----------- -----------
Net cash used by financing activities .................................. (126,527) (1,073,974)
----------- -----------
Net increase (decrease) in cash .............................................. 35,504 118,032
Beginning - cash balance ..................................................... 479,256 18,301
----------- -----------
Ending - cash balance ........................................................ $ 514,760 $ 136,333
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<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 1994 and for the two years then ended,
including notes thereto.
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 six month periods ended June 30, 1996 and 1995 the Company made sales
to Wal-Mart Stores, Inc. in the amounts of $3,557,000 and $3,444,000
respectively. During the three month ended June 30, 1996 and 1995 the Company
made sales to Wal-Mart Stores, Inc. in the amounts of $1,283,000 and $1,327,000
respectively
Approximately $1,146,000 (42%) of the accounts receivable at June
30, 1996 are due from Wal-Mart Stores, Inc. and are unsecured. This
6
<PAGE>
Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
customer is a major national retailer and the Company has not experienced
collection problems with this customer.
Note E. 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 provision
for income taxes for 1996 and the pro forma provision for income taxes for 1995
have 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.
The amounts shown for income taxes in the statements of operations differ from
amounts that would be derived from computing income taxes at federal statutory
rates (34%) primarily as a result of state income taxes net of the federal
benefit (3%). Subsequent to the completion of the public offering of the
Company's common stock in August 1995, the Company became subject to corporate
income taxes.
7
<PAGE>
ITEM 2. 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(R) sunglasses, which feature a
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. Recently the Company
introduced a higher priced line of sunglasses under the brand name H2Optix(R).
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. The Company expects its Solar*X(R) line of sunglasses to remain
its predominant line during the introduction of H2Optix(R) and other new product
lines which may be developed.
S Corporation Status and Pro Forma Adjustments
From its inception until closing of its initial public offering in August
1995 (the "Termination Date"), the Company had been treated for federal and
certain state tax purposes as an S Corporation under the Internal Revenue Code
and comparable state tax laws. As a result, the Company's earnings through the
day preceding the Termination Date have been taxed, with certain exceptions, for
federal and certain state income tax purposes directly to the Company's
shareholders. Since the Termination Date, the Company is no longer treated as an
S Corporation and accordingly, is fully taxable pursuant to federal and state
income tax laws. The following discussion gives pro forma retroactive effect to
the termination of the Company's S Corporation status as if the Company had been
taxed as a C Corporation for the relevant periods discussed.
Results of Operations
Net sales increased 21% from $4,572,405 for the six months ended June 30,
1995 to $5,541,273 for the six months ended June 30,
8
<PAGE>
1996, and increased 11% from $2,177,308 for the three months ended June 30, 1995
to $2,417,364 for the three months ended June 30, 1996. These increases were due
primarily to the introduction of new products including the Company's H2Optix(R)
line of sunglasses. In 1996 the Company began aggressively marketing this line.
Sales from the H2Optix(R) line were approximately $450,000 and $318,000 for the
six months and three months ended June 30, 1996, respectively. Additionally,
approximately $578,000 of the increase for the six months ended June 30, 1996
was due to sales of the Company's Outa Limitz(TM) line of sunglasses which did
not exist during the same period in 1995; $976,000 of the increase resulted from
increased activity of Solar*X(TM). However, the increase in revenues for such
period was offset by a decrease of approximately $1,086,000 in sales of
Bonjour(R), a brand no longer marketed by the Company. Approximately $318,000 of
the increase for the three months ended June 30, 1996 was due to sales from
H2Optix(R); $325,000 of the increase resulted from sales of the Company's Outa
Limitz(TM) line of sunglasses; revenues were offset by and a decrease of
approximately $487,000 in sales of Bonjour(R).
Selling expenses increased by $507,314 or 135%, from $376,110 for the six
months ended June 30, 1995 to $883,424 for the six months ended June 30, 1996
and increased by $318,572 or 160% from $198,931 for the three months ended June
30, 1995 to $517,503 for the three months ended June 30, 1996. The increase in
both the six month and three month periods resulted primarily from increased
advertising and marketing cost associated with the launch of H2Optix(R). The
Company anticipates continued increases in selling expenses related to
H2Optix(R) during the remainder of 1996.
General and administrative expenses increased by $105,908 or 19%, from
$543,682 for the six months ended June 30, 1995 to $649,590 for the six months
ended June 30, 1996 and increased by $70,947 or 27% from $263,286 for the three
months ended June 30, 1995 to $334,233 for the three months ended June 30, 1996.
The increase in both the six month and three month periods resulted primarily
from increased personnel cost associated with the general growth of the Company.
The Company's net interest expenses decreased $15,528 or 10% from $155,956
for the six months ended June 30, 1995 to $140,428 for the six months ended June
30, 1996 and decreased $38,655 or 58% from $66,823 for the three months ended
June 30, 1995 to $28,168 for the three months ended June 30, 1996. The decreases
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 financing its operations primarily through the proceeds of
an initial public offering completed in August 1995,
9
<PAGE>
its cash flow and revolving line of credit. The Company has a revolving line of
credit in the amount of $1,500,000 from SunTrust Bank (the "Credit Facility").
Interest on outstanding loans under the Credit Facility accrue at a rate equal
to 1.5% above the prime rate. The Credit Facility is secured by a lien on all of
the Company's assets. Pursuant to the 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 facility have been used
for general working capital purposes. The Credit Facility is guaranteed, jointly
and severally, by certain shareholders of the Company.
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 the Credit Facility 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 June 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 in respect of the 1995 earnings and profits.
The Company purchased capital assets of approximately $164,000 during the
six month period ended June 30, 1996 and does not anticipate that it will incur
any significant capital expenditures during the remainder of 1996.
The Company anticipates, based on its current plans, that the net proceeds
of the public offering completed in August, 1995 will be sufficient to satisfy
its anticipated cash requirements for the marketing of the H2Optix(R) line for
approximately 24 months from that date.
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.
10
<PAGE>
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.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 16, 1996, the Company held its annual meeting of shareholders to
vote on the election of directors, to ratify and approve the selection of
independent auditors and to approve an amendment to the Company's Certificate of
Incorporation which would waive an anti-takeover of the New York Business
Corporation Law.
(b) The following individuals were elected to serve as directors until the
next annual meeting:
Votes Votes
for against
election election
-------- --------
Stephen Nevitt 2,126,219 3,100
Milton Nevitt 2,126,219 3,100
Michael J. Guccione 2,126,219 3,100
David B. Newman 2,126,219 3,100
L. Philips Reames 2,126,219 3,100
These individuals constituted the entire Board of Directors and all served as
directors as of December 31, 1995.
(C) In addition the shareholders approved the appointment of Winter,
Scheifley & Associates, P.C. as its independent auditors for 1996. The results
of the vote on the appointment was as follows: 2,120,269 shares of common stock
voted for the appointment and 0 shares of common stock voted against the
appointment.
In addition, the shareholders approved an amendment to the Company's
Certificate of Incorporation which waives the provisions of Section 505 of the
New York Business Corporation Law. Section 505 allows a public corporation to
treat options or rights granted to "interested shareholders" differently than
those granted to other shareholders. As an exception to the general rule of
parity among securities of a same series, Section 505 would permit a corporation
to include in the terms of options restrictions prohibiting the exercise of, or
even voiding, those options held by an interested shareholder. An "interested
shareholder" is defined as any person that (a) is the beneficial owner of twenty
percent or more of the outstanding voting stock of the corporation or (b) is an
affiliate or associate of the
12
<PAGE>
corporation that at any time during the five years prior was the beneficial
owner, directly or indirectly, of twenty percent or more of the then outstanding
voting stock.
Section 505 enables target companies to ward off unwanted suitors by
allowing shareholders to purchase additional shares at a discount by means of
exercising options while disallowing a would-be acquirer the same. Not only
would a takeover become more expensive because of the additional outstanding
shares the acquirer must purchase, but the shares already purchased by the
acquirer would be diluted.
The results of the vote on the amendment was as follows: 1,264,424 shares
of common stock voted for the amendment and 8,905 shares of common stock voted
against the amendment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Solar-Mates, Inc.
(Registrant)
Dated: August 13, 1996 By: /s/ Stephen Nevitt
------------------------- -----------------------------------
Stephen Nevitt
President
(Principal Executive Officer)
Dated: August 13, 1996 By: /s/ Jeffrey Rubin
------------------------- -----------------------------------
Jeffrey Rubin
Controller
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 514,760
<SECURITIES> 1,355,399
<RECEIVABLES> 2,755,159
<ALLOWANCES> 0
<INVENTORY> 3,073,833
<CURRENT-ASSETS> 8,132,673
<PP&E> 659,655
<DEPRECIATION> 218,014
<TOTAL-ASSETS> 9,068,027
<CURRENT-LIABILITIES> 3,953,066
<BONDS> 0
0
0
<COMMON> 2,384
<OTHER-SE> 4,984,812
<TOTAL-LIABILITY-AND-EQUITY> 9,068,027
<SALES> 5,541,273
<TOTAL-REVENUES> 5,541,273
<CGS> 3,563,727
<TOTAL-COSTS> 1,533,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,428
<INCOME-PRETAX> 304,104
<INCOME-TAX> 94,400
<INCOME-CONTINUING> 209,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209,704
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0
</TABLE>
