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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: March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from: to:
Commission file number: 0-26022
Serengeti Eyewear, Inc.
- ------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as specified in its charter)
New York 65-0665659
- ------------------------------------ ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
8125 25th Court East
Sarasota, Florida 34243
-----------------------
(Address of principal executive offices)
(941) 359-3599
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(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 May 1, 1997.
Transitional Small Business Disclosure Format. YES: NO: X
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Serengeti Eyewear, Inc.
Index
Part I
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1997 3
Consolidated Statements of Operations and for the Three Months
Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Part II
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc,
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
March 31, 1997
(Unaudited)
ASSETS
Current Assets:
Cash $ 428,397
Accounts receivable - trade 7,570,992
Other receivables 66,405
Inventories 13,419,401
Prepaid expenses 1,371,002
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Total current assets 22,856,197
Fixed assets - net of accumulated depreciation 1,822,955
Other assets:
Goodwill 10,494,273
Deferred acquisition costs 1,415,862
Prepaid expenses - non-current 136,618
Accounts receivable - stockholders 45,215
Patents and trademarks - net 4,875,000
Other assets 43,746
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$41,689,866
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------------
See accompanying notes to financial statements.
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Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
March 31, 1997
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 1,375,000
Note payable - stockholder 127,494
Current portion of long-term debt 42,880
Accounts payable - related party 75,406
Income taxes payable 249,081
Deposits 80,534
Accounts payable 3,082,069
Accrued expenses 1 145,888
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Total current liabilities 6,178,352
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Long-term debt 101,718
Note payable - bank 8,625,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000
shares authorized 22,500 shares issued
and outstanding 20,925,000
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 1,578,136
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Total stockholders' equity 26,784,796
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$41,689,866
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See accompanying notes to financial statements.
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Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Operations
For The Three Months Ended March 31, 1997 and 1996
(Unaudited)
1997 1996
------------ ------------
Net sales $ 6,734,727 $ 3,123,909
Cost of goods sold 3,594,639 2,052,379
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Gross profit 3,140,088 1,071,530
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Operating expenses:
Depreciation and amortization 329,995 22,698
Selling expenses 995,683 365,921
General and administrative,
expenses 1,001,679 292,659
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Total operating expenses 2,327,357 681,278
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Income from operations 812,731 390,252
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Other expenses (income):
Other income (39,443) -
Interest 206,632 112,260
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167,189 112,260
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Income before income taxes 645,542 277,992
Provision for income taxes
Current (238,851) (102,800)
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Net income $ 406,691 $ 175,192
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Per share information:
Net income per share:
Primary $ .14 $ .07
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Fully diluted $ .05 $ .07
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See accompanying notes to financial statements.
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Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 1997 and 1996
1997 1996
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Cash flows from operating activities $ 5,179,813 $ 687,120
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Cash flows from investing activities:
Acquisition of business interest (26,621,898) -
Acquisitions of patents and trademarks - (3,500)
Purchase of fixed assets (300,457) (28,966)
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Net cash provided by (used in)
investing activities (26,922,355) (32,466)
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Cash flows from financing activities:
Increase in deferred acquisition costs (861,220) -
Proceeds from the sale of preferred stock 13,950,000 -
S corporation distribution - (92,635)
Proceeds from bank borrowings 10,000,000 -
Repayment of bank loans (1,500,000) -
Principal payments on notes payable - other (50,568) (7,689)
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Net cash provided by (used in)
Financing activities 21,538,212 (100,324)
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Net increase (decrease) in cash (204,330) 554,330
Beginning - cash balance 632,737 479,256
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Ending - cash balance $ 428,397 $1,033,586
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See accompanying notes to financial statements.
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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, 1996 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.
Inventories
Inventories, consisting principally of finished goods and work in process,
are valued at the lower of cost or market on a first in - first out basis.
The cost of sales for the period ended March 31, 1997 has been determined
using the gross profit method.
Income taxes
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%).
Earnings per share
Primary earnings per share amounts are computed based upon the weighted
average number of shares actually outstanding plus the shares that would be
outstanding assuming exercise of dilutive stock options. The number of shares
that would be issued from the
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Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
exercise of stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price of the
Company's common stock. The number of shares used in the computations was
2,806,123. The fully diluted earnings per share amount is based on an
increased number of shares that would be outstanding assuming conversion of
the convertible preferred stock. The number of shares used in the computation
was 8,132,827.
Note B. 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 was renewed again in September 1996 with a due date of
September 1997. The line was secured by substantially all of the Company's
assets. The Company was entitled to advances of up to 70% of its accounts
receivable less than 61 days old and 25% of its inventory cost. The line had
an interest rate of prime plus 1.5%. The balance of $1,500,000 at December
31, 1996 was repaid on February 13, 1997 (see below).
Concurrently with the closing of the acquisition described below, the Company
entered into a Revolving Line of Credit and Term Loan Agreement with SunTrust
Bank. Under the agreement the Company has the ability to borrow up to $17.5
million in the form of (a) a three year revolving credit facility in the
amount of $7.5 million and (b) a five year amortizing term loan facility in
the amount of $10 million.
The Company borrowed the entire $10 million under the term loan to finance a
portion of the acquisition and to repay the $1.5 million of outstanding
indebtedness under the line of credit described above. The Company is able to
borrow up to 85% of eligible accounts receivable less than 91 days past due
and 50% of eligible inventory under the revolving credit facility for working
capital. The credit facility is secured by a first priority lien on all of
the assets of the Company and its subsidiaries. Pursuant to the credit
facility interest is payable at the LIBOR rate or Base Rate plus applicable
margins based upon the Company's earnings. In addition, the Company is
subject to certain financial covenants.
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Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note C. 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 1,500,000. A total of 1,410,000 options have been
granted under the plan at March 31, 1997 at prices ranging from $2.94 to
$4.72.
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.
On October 4, 1996 the Company issued 7,500 shares of its $.001 par value
Series A 6.5% cumulative convertible non-voting preferred stock, to RBB Bank
Aktiengesellschaft (RBB) a banking institution located in Austria, in a
private offshore offering
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Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
pursuant to Regulation S for cash aggregating $7,500,000 less commissions
aggregating $525,000. Concurrently with the closing of the acquisition
described in Note E, RBB purchased pursuant to said Regulation S offering
7,500 shares of the Company's $.001 par value Series B 6% cumulative
convertible non-voting preferred stock and 7,500 shares of the Company's
$.001 par value Series C 6% cumulative convertible non-voting preferred stock
for cash aggregating $15,000,000 less commissions aggregating $1,050,000. The
dividends on the preferred shares are payable in cash or additional shares of
preferred stock at the option of the Company. At March 31, 1997 dividends
aggregating 351 shares of preferred stock were due and payable to RBB.
Concurrently with the issuance of the Series A preferred shares, the Company
also issued RBB a Series A warrant to purchase up to 150,000 shares of the
Company's $.001 par value common stock at an exercise price of $5.5625 per
share at any time commencing January 1, 1999 through December 31, 2002. In
addition, concurrently with the issuance of the Series B and C preferred
shares, the Company issued to RBB a Series B and a Series C warrant each of
which entitles RBB to purchase up to an aggregate of 300,000 shares of the
Company's $.001 par value common stock at a per share exercise price of $7.50
with respect to the Series B warrant and $10 with respect to the Series C
warrant at any time commencing January 1, 1999 through December 31, 2002. The
Company also issued as part of the commission in connection with the Series A
preferred shares a Series D warrant to purchase up to an aggregate of 200,000
shares of $.001 par value common stock at an exercise price of $5.50 per
share through September 30, 2001.
Each of the Series A Preferred Shares may be converted into shares of common
stock at any time. Each Series A share is convertible into such number of
common shares as is determined by dividing its stated value of $1,000 by a
conversion rate equal to the lower of (a) $5.50 or (b) 80% of the average
market price for the common stock for the ten trading days ending three days
prior to the giving by the holder of a notice of conversion.
Each of the Series B Preferred Shares may be converted into shares of common
stock at any time. Each Series B share is convertible into such number of
common shares as is determined by dividing its stated value of $1,000 by a
conversion rate equal to the lower of (a) $6.75 or (b) 80% of the average
market price for the common
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Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
stock for the ten trading days ending three days prior to the giving by the
holder of a notice of conversion.
Each of the Series C Preferred Shares may be converted into shares of common
stock at any time after July 1, 1997. Each Series C share is convertible into
such number of common shares as is determined by dividing its stated value of
$1,000 by a conversion rate equal to the lower of (a) $8.25 or (b) 80% of the
average market price for the common stock for the ten trading days ending
three days prior to the giving by the holder of a notice of conversion.
At any time after September 30, 2000 the Company will have the right to force
conversion of the preferred shares into common stock.
Note D. Commitments and contingencies
Concentration of credit risk/major customers:
During the three months ended March 31, 1997 and 1996, the Company made net
sales to a significant customer of approximately $2,444,000 and $2,474,000 or
36% and 79% of its total sales.
Approximately $990,000 (13%) and $2,745,000 (36%) of the gross accounts
receivable are due from two significant customers at March 31, 1997 and are
unsecured.
Litigation:
On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of the
Company's initial public offering, filed an action against the Company in the
United States District Court for the Northern District of Georgia, Atlanta
Division. The civil complaint alleges, among other things, breaches by the
Company of its underwriting agreement with Argent, breach of corporate duties
relating to the issuance of the Preferred Shares, and misstatements in the
Company's Proxy Statement relating to the issuance of the Preferred Shares.
The complaint seeks, among other things, monetary relief as well as a
preliminary injunction enjoining the Company from permitting the conversion
of any Preferred Shares, and requiring that the Company secure a seat on its
Board of Directors for an Argent representative. The Company has reviewed
Argent's claims and believes them to be meritless.
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Solar-Mates, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The Company intends to vigorously defend the action and is presently
considering counterclaims.
Commitments:
During January and February, 1997 the Company entered into employment
agreements with certain officers and sales personnel. These agreements call
for aggregate salaries of $822,000 in 1997, $936,000 in 1998, $1,029,000 in
1999 and $69,000 in 2000 and auto allowances aggregating $36,000 per year.
Also included in the contracts is certain bonus compensation and options to
purchase up to 485,000 shares of common stock at a price of $2.94 per share
through August, 1999 based on sales and profit targets set by the Company.
Note E. Acquisition of business interest
On February 13, 1997 the Company changed its name to Serengeti Eyewear, Inc.
in conjunction with the acquisition of certain assets of the Serengeti
Eyewear division of Corning Incorporated used in the design, manufacture and
distribution of Serengeti brand sunglasses. The Company acquired the
Serengeti assets for cash aggregating $27.5 million. The Company financed the
purchase and related transaction expenses with the net proceeds from the sale
of shares of preferred stock and the borrowings under the credit facility
described above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE NEWLY ACQUIRED
SERENGETI BUSINESS, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE
INNOVATIVE PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY COMPETITORS,
MANUFACTURING CAPACITY CONSTRAINTS AND THE AVAILABILITY OF RAW MATERIALS, THE
EFFECT OF ECONOMIC CONDITIONS, DEPENDENCE ON CERTAIN CUSTOMERS AND OTHER
RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE
CAUTIONED NOT PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO
UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
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 its 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
sunglasses, which feature a ground and polished lens, comparable to optical
quality sunglasses, at popular prices. This product was the predominant line
of the Company from 1994 until the Company acquired Serengeti in February
1997, and has contributed significantly to the sales growth of the Company.
The Company expects its Solar*X line of sunglasses to remain its predominant
line in the non-premium segment of its business.
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In the latter part of 1995, with the proceeds of its initial public offering
completed in August 1995, the Company launched its H2Optix line, a premium
sunglass line. The Company sought to emphasize sales of H2optix and thereby
reduce its dependence upon mass merchandisers. The Company experienced only
limited sales of its H2Optix sunglasses in 1995 as it commenced its marketing
efforts to establish H2Optix brand name recognition and broaden the
distribution network for the H2optix product line. In 1996, the Company
experienced $1.2 million in H2Optix sales, representing approximately 9% of
the Company's total sales.
On February 13, 1997, the Company acquired the Serengeti assets. Corning's
Serengeti Eyewear division entered the premium sunglass market in 1985 with
the introduction of Drivers sunglasses, which remain the core of the
Serengeti product line. Over the years, Serengeti sunglasses have developed a
brand identity which provides appeal to consumers in the premium market. The
Serengeti brand image is based upon superior lens technology, quality and
performance. The Serengeti Drivers line of sunglasses, which accounted for
approximately 91% of plano sales of the Serengeti Eyewear division in 1996,
is principally responsible for this image. The Company intends to increase
Serengeti's market share by introducing new Serengeti signature styles that
exploit the Serengeti brand image. In addition, the Company intends to
benefit its H2Optix line by including it within the Serengeti line, thereby
tapping into Serengeti's well-established distribution networks.
Historically, the Serengeti line has suffered delays in new product launches,
resulting in depressed orders for those products. In response, Corning's
Serengeti Eyewear division focused on timing the product development cycle to
ensure that new products are introduced in October, which is the optimal time
for selling to the largest Serengeti customers for the spring and summer
seasons.
Results of Operations
Comparison of the three months ended March 31, 1997 to the three months ended
March 31, 1996:
Net sales increased 116%, from approximately $3.1 million in 1996 to
approximately $6.7 million in 1997, primarily as a result of the sales of
Serengeti products subsequent to the acquisition of the Serengeti Business on
February 13, 1997 ($3.1 million) and increased sales of the Company's
non-premium products to a wide range of new customers. The Company has
continued to broaden the distribution network for its non-premium products
and, as a
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result, in 1997, Wal-Mart accounted for approximately 36% of the Company's
total sales, compared to approximately 79% in 1996.
Gross profit increased as a percentage of sales, from approximately 34% in
1996 to approximately 47% in 1997, primarily as a result of product mix.
Approximately 46% of the 1997 sales ($3.1 million) consisted of premium
Serengeti products which carry gross margins significantly higher than the
Company's non-premium products which made up substantially all of the
Company's sales in 1996.
Depreciation and amortization increased by approximately $.3 million as a
result of the amortization of the intangible assets related to the Serengeti
acquisition. Selling expenses increased by approximately $.6 million, or
150%, from approximately $.4 million in 1996 to approximately $1.0 million in
1997. This increase resulted primarily from increased costs associated with
marketing and selling expenses related to the Company's premium products in
1997.
General and administrative expenses increased 233%, from approximately $.3
million in 1996 to approximately $1.0 million in 1997 primarily as a result
of an increase in executive and administrative salaries, office expenses, and
costs incurred in connection with the development of the premium line of
sunglasses. The Company anticipates that its general and administrative cost
will continue to increase with the growth of its business, and particularly
in light of the acquisition of Serengeti.
Interest expense increased by approximately $.1 million or 84% as a result of
the interest expense related to the Company's term loan which was used to
finance the Serengeti acquisition.
Liquidity and Capital Resources
Prior to the Acquisition of the Serengeti business, the Company financed its
operations primarily through the proceeds of an initial public offering
completed in August 1995, its cash flow and a revolving line of credit in the
amount of $1,500,000 from SunBank/Gulf Coast (the "Old Credit Facility"). As
of December 31, 1996, the Company had borrowed the maximum amount available
under the Old Credit Facility. Concurrently with the closing of the
Acquisition, the Company entered into a Revolving Line of Credit and Term
Loan Agreement with SunTrust Bank, Central Florida, National Association,
individually and as agent, and Creditanstalt-Bankverein pursuant to which the
Company refinanced the Old Credit Facility with a new senior credit facility
(the
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"New Credit Facility") which provides 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 borrowed the entire $10.0 million of availability under the Term
Facility to finance a portion of the Acquisition purchase price, to repay in
full the outstanding principal indebtedness and accrued interest
(approximately $1.5 million) under the Old Credit Facility and to pay related
fees and expenses. The Company financed the remaining portion of the
Acquisition purchase price with the net proceeds of the sale of Preferred
Shares.
The Revolver Facility has a $2 million sublimit for the issuance of stand-by
letters of credit. Pursuant to the Revolver Facility, the Company is 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 are available for the working capital and general corporate needs of
the Company.
Interest under the New Credit Facility is payable at the LIBOR rate or the
"Base Rate." In addition to applicable margins, the Company pays 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. Pursuant to the New Credit
Facility, the Company is required to enter into exchange agreements and/or
other appropriate interest rate hedging transactions for the purpose of
interest rate protection covering at least 75% of the borrowings under the
Term Facility through February 13, 2000.
The New Credit Facility requires the Company to maintain certain financial
ratios. Pursuant to the New Credit Facility, the Company is 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 of
business and the net proceeds of equity issuances and permitted debt
issuances to prepay outstanding amounts under the Term Facility. The New
Credit Facility also contains a number of customary covenants, including,
among others, limitations on liens, affiliate transactions, mergers,
acquisitions, asset sales, dividends and
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advances. The New Credit Facility is secured by a first priority lien on all
of the assets of the Company and its subsidiaries.
The Company's liquidity improved from working capital of approximately $9.7
million at December 31, 1996 to working capital of approximately $16.7
million at March 31, 1997. This resulted primarily from increases of
approximately $1.5 million in receivables resulting from the Company's
increased sales volume in 1997, and approximately $9.4 million in inventory
related to the Serengeti acquisition, and a decrease of approximately $5.0
million in short term investments, combined with an increase of approximately
$1.0 million in accounts payable.
The Company incurred approximately $300,000 in capital expenditures during
the three months ended March 31, 1997 primarily relating to the expansion of
its facility and the acquisition of furniture and fixtures. The Company
anticipates that it will incur additional capital expenditures of
approximately $200,000 related to the expansion of its warehouse facility as
a result of the Acquisition.
The Company anticipates, based on its currently proposed plans, that the net
cash available from operations combined with the New Credit Facility will be
sufficient to satisfy its anticipated cash requirements for the 1997 fiscal
year.
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 Company anticipates that the seasonality of its premium sunglass business
generally will follow the selling activity of its largest customer for such
products, SunGlass Hut. Historically, the strongest quarter in terms of
Serengeti sales is the second quarter, followed by the. first, fourth and
third quarters.
The seasonality of the Company's non-premium sunglass business generally
follows the selling of its largest customer for such
17
<PAGE>
products, Wal-Mart. Historically, the Company's strongest quarter in terms of
sales is the fourth quarter, followed by the first, second and third quarters.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of
the Company's initial public offering, filed an action against the Company in
the United States District Court for the Northern District of Georgia,
Atlanta Division. The civil complaint alleges, among other things, breaches
by the Company of its underwriting agreement with Argent, breach of corporate
duties relating to the issuance of the Preferred Shares, and misstatements in
the Company's Proxy Statement relating to the issuance of the Preferred
Shares. The complaint seeks, among other things, monetary relief as well as
a preliminary injunction enjoining the Company from permitting the conversion
of any Preferred Shares, and requiring that the Company secure a seat on its
Board of Directors for an Argent representative. The Company has reviewed
Argent's claims and believes them to be meritless. The Company intends to
vigorously defend the action and is presently considering counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
(a) On February 6, 1997, the Company held a special meeting of
shareholders to vote on the issuance of Preferred Shares and shares of Common
Stock underlying Preferred Stock and Warrants, to amend the Company's
Certificate of Incorporation to change the Company's name to Serengeti
Eyewear, Inc., and to amend the Company's 1995 Stock Option Plan the "Plan")
to increase the number of shares available for issuance thereunder from
450,000 to 1,500,000.
(b) The shareholders approved the issuance of the Preferred Shares and
shares of Common Stock underlying Preferred Stock and Warrants.
The result of the vote was as follows: 1,518,584 shares of
Common Stock voted for, and 15,150 shares of Common Stock voted
against.
(c) The shareholders approved the amendment to the Certificate of
Incorporation. The result of the vote was as follows: 2,310,720
shares of Common Stock voted for, and 3,350 shares of Common
Stock voted against.
18
<PAGE>
(d) The shareholders approved the amendment to the Plan. The result of
the vote was as follows: 1,478,026 shares of Common Stock voted
for, and 46,680 shares of Common Stock voted against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(e) Reports on Form 8-K.
On February 19, 1997 the Company filed a form 8-K describing the closing of
the acquisition of the Serengeti Eyewear business of Corning Incorporated,
its name change from Solar-Mates, Inc. to Serengeti Eyewear, Inc., the change
in its certifying accountant, and its new term loan and line of credit
agreement.
19
<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.
Serengeti Eyewear, Inc.
(Registrant)
Dated: May 14, 1997 By: /s/ Stephen Nevitt
--------------------- ----------------------------------
Stephen Nevitt
President
(Principal Executive Officer)
Dated: May 14, 1997 By: /s/ Neil R. Winter
--------------------- ----------------------------------
Neil R. Winter
Chief Financial Officer
20
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