<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1997
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 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 the filing requirements for the past 90 days. YES: X NO:
--- ---
Number of shares outstanding as of October 31, 1997: 2,384,000 shares of
Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: YES: NO: X
<PAGE>
SERENGETI EYEWEAR, INC.
INDEX
PART I
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1997......................... 3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1997 and 1996........................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1997 and 1996........................................................... 6
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis or Plan of Operation................... 14
Part II
Item 1. Legal Proceedings........................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................ 21
Signatures 22
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash....................................................................... $ 596,907
Accounts receivable -- trade............................................... 7,718,557
Other receivables.......................................................... 10,303
Inventories................................................................ 14,349,451
Prepaid expenses........................................................... 1,149,121
----------
Total current assets....................................................... 23,824,339
Fixed assets--net of accumulated depreciation.................................. 2,283,793
Other assets:
Goodwill................................................................... 12,495,612
Deferred acquisition costs................................................. 1,550,124
Prepaid expenses--non-current.............................................. 150,000
Accounts receivable--stockholders.......................................... 45,215
Patents and trademarks--net................................................ 4,466,758
Other assets............................................................... 27,183
----------
$44,843,024
----------
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Note payable--bank........................................................... $3,525,000
Note payable--stockholder.................................................... 30,516
Current portion of long-term debt............................................ 50,000
Accounts payable--related party.............................................. 40,812
Income taxes payable......................................................... 8,400
Accounts payable............................................................. 5,499,728
Accrued expenses............................................................. 1,390,728
----------
Total current liabilities.................................................. 10,545,184
----------
Long-term debt................................................................. 135,696
Note payable -- bank........................................................... 7,750,000
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.............................................................. 1,205,484
----------
Total stockholders' equity................................................. 26,412,144
----------
$44,843,024
----------
----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales................................................... $ 8,376,546 $ 1,865,166 $ 24,280,638 $ 7,406,439
Cost of goods sold.......................................... 3,882,554 1,212,358 11,587,872 4,776,085
------------ ------------ ------------- ------------
Gross profit................................................ 4,493,992 652,808 12,692,766 2,630,354
------------ ------------ ------------- ------------
Operating expenses:
Depreciation and amortization............................. 588,684 31,496 1,591,653 94,488
Selling expenses.......................................... 1,273,531 550,221 5,009,826 1,433,645
General and administrative, expenses...................... 2,319,685 354,309 5,253,125 940,907
------------ ------------ ------------- ------------
Total operating expenses.................................... 4,181,900 936,026 11,854,604 2,469,040
------------ ------------ ------------- ------------
Income (loss) from operations............................... 312,092 (283,218) 838,162 161,314
------------ ------------ ------------- ------------
Other (expenses) income:
Other (expense) income.................................... 8,198 -- 40,719 --
Interest.................................................. (337,551) (57,361) (836,443) (197,789)
------------ ------------ ------------- ------------
(329,353) (57,361) (795,724) (197,789)
------------ ------------ ------------- ------------
Income (loss) before taxes.................................. (17,261) (340,579) 42,438 (36,475)
Provision for income taxes
Current................................................... 8,300 82,000 (8,400) (12,400)
------------ ------------ ------------- ------------
Net income.................................................. $ (8,961) $ (258,579) $ 34,038 $ (48,875)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Per share information:
Net income per share:
Primary................................................. $ (.00) $ (.11) $ .01 $ (.02)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Fully diluted........................................... $ (.00) $ (.11) $ .00 $ (.02)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average shares:
Primary................................................. 2,384,000 2,384,000 2,632,823 2,384,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Fully diluted........................................... 13,589,179 2,384,000 13,837,854 2,384,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Cash flows from operating activities................................................... $ 4,959,463 $ 132,714
------------- ----------
Cash flows from investing activities:
Acquisition of business interest..................................................... (26,427,926) --
Acquisitions of patents and trademarks............................................... (22,698) (6,159)
Acquisition of other assets.......................................................... -- (112,036)
Purchase of fixed assets............................................................. (898,240) (219,877)
------------- ----------
Net cash provided by (used in) investing activities................................ (27,348,864) (338,072)
------------- ----------
Cash flows from financing activities:
Increases in stockholder advances.................................................... -- 45,214
Increase in deferred acquisition costs............................................... (1,065,548) (15,000)
Repayments of related party debt..................................................... (182,449) (13,394)
Proceeds from the sale of preferred stock............................................ 13,950,000 --
S corporation distribution........................................................... -- (92,365)
Proceeds from bank borrowings........................................................ 11,900,000 --
Repayment of bank loans.............................................................. (2,125,000) --
Proceeds from long term borrowings................................................... -- 22,318
Principal payments on notes payable--other........................................... (123,422) (106,362)
------------- ----------
Net cash provided by (used in)
Financing activities............................................................... 22,353,581 (159,589)
------------- ----------
Net increase (decrease) in cash........................................................ (35,820) (364,947)
Beginning--cash balance................................................................ 632,727 479,256
------------- ----------
Ending--cash balance................................................................... $ 596,907 $ 114,309
------------- ----------
------------- ----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY 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 S-B. 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 periods presented have 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%--adjusted for the surtax exemption) 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
7
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shares that would be outstanding assuming exercise of dilutive stock options.
The number of shares that would be issued from the 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
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. During periods in which a loss was incurred common stock
equivalents are not considered in the computation as their effect would be
anti-dilutive.
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.
8
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is currently discussing with the bank the restructuring of
certain of the financial covenants.
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 September 30, 1997 at prices ranging from $2.94 to $3.24.
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
9
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
institution located in Austria, in a private offshore offering 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 September 30, 1997 dividends aggregating
1,045 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
10
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 nine months ended September 30, 1997, the Company made net sales to
significant customers of approximately $6,118,000 and $3,496,000 or 24% and 14%
of its total sales.
Approximately $2,327,000, $926,654 and $760,000 of the gross accounts receivable
are due from three customers at September 30, 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
11
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 without merit. The Company has filed a motion
to dismiss on jurisdictional and substantive grounds and intends to continue
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.
On July 16, 1997, the Company received a statement from Corning detailing costs
aggregating approximately $1,700,000 incurred by Corning which it claims were on
behalf of the Company for the operation of Corning facilities during the period
from February 13, 1997 to May 18, 1997. Corning is asking that the Company
reimburse these costs which relate to operational expenses of approximately
$800,000 and inventory items of approximately $900,000. The Company has
requested that Corning provide documentation for these costs as they are in
excess of what the Company anticipated the charges should be. To date the
Company has charged approximately $427,000 to operations and adjusted its
inventory carrying value by $500,000 related to these charges.
12
<PAGE>
SERENGETI EYEWEAR, INC.
(FORMERLY SOLAR-MATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Should Corning be able to document the balance of the charges to the
satisfaction of the Company the Company will accrue the additional amounts at
such time.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
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 MATERIAL, 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 TO
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-Registered Trademark-
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-Registered Trademark- line of sunglasses to remain its
predominant line in the non-premium segment of its business.
14
<PAGE>
In the latter part of 1995, with the proceeds of its initial public
offering completed in August 1995, the Company launched its
H2Optix-Registered Trademark-line, a premium sunglass line. The Company
sought to emphasize sales of H2Optix-Registered Trademark- and thereby reduce
its dependence upon mass merchandisers. The Company experienced only limited
sales of its H2Optix-Registered Trademark- sunglasses in 1995 as it commenced
its marketing efforts to establish H2Optix-Registered Trademark- brand name
recognition and broaden the distribution network for the H2Optix-Registered
Trademark- product line. In 1996, the Company experienced $1.2 million in
H2Optix-Registered Trademark-sales, representing approximately 9% of the
Company's total sales.
On February 13, 1997, the Company acquired (the "Acquisition") the assets of
the Serengeti Eyewear division of Corning Incorporated ("Serengeti"). 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-Registered Trademark- 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 SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
Net sales increased 342%, from approximately $1.9 million for the three
months ended September 30, 1996 to approximately $8.4 million for the same
period in 1997, primarily as a result
15
<PAGE>
of the sales of Serengeti products subsequent to the Acquisition of the
Serengeti business on February 13, 1997 (which accounted for $6.1 million of
such net sales) and increased sales of the Company's non-premium products to
a significant customer.
Gross profit increased as a percentage of sales, from approximately 35% for
the three months ended September 30, 1996 to approximately 54% for the same
period in 1997, primarily as a result of product mix. Approximately 73% of the
1997 sales consisted of premium Serengeti products which carry gross margins
significantly higher than the Company's non-premium products which comprised
substantially all of the Company's sales in 1996.
Depreciation and amortization increased by approximately $558,000 during the
three months ended September 30, 1997 as a result of the amortization of the
intangible assets related to the Acquisition.
Selling expenses increased from approximately $550,000 during the three
months ended September 30, 1996 to approximately $1.3 million for the same
period 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 from approximately $354,000
for the three months ended September 30, 1996 to approximately $2.3 million
for the same period 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 the Serengeti business.
Interest expense increased by approximately $281,000 during the three months
ended September 30, 1997 as a result of the interest expense related to the
Company's term loan which was used to finance the Acquisition and the interest
incurred on the Company's revolving credit facility.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales increased 228%, from approximately $7.4 million in 1996 to
approximately $24.3 million in 1997, primarily as a result of the sales of
Serengeti products subsequent to the
16
<PAGE>
Acquisition (which accounted for $15.9 million of such sales) and increased
sales of the Company's non-premium products to a significant customer. The
Company has continued to broaden the distribution network for its non-premium
products and, as a result, during the nine month period in 1997, sales to
Wal-Mart Stores Inc. accounted for approximately 24% of the Company's total
sales, compared to approximately 65% in 1996.
Net sales for the nine month period ended September 30, 1997 were lower than
expected due to reduced sales to one of the Company's significant customers
which was in the process of reducing its own inventory levels, less than
favorable spring weather conditions in what has historically been one of the
Company's strong distribution markets, and backorder situations related to some
of the components used in the Company's manufacturing process. These situations
improved during the third quarter and the Company anticipates that they should
continue to improve during the balance of the year.
Gross profit increased as a percentage of sales, from approximately 36% in
1996 to approximately 52% in 1997, primarily as a result of product mix.
Approximately 65% of the 1997 sales consisted of premium Serengeti products
which carry gross margins significantly higher than the Company's non-premium
products which comprised substantially all of the Company's sales in 1996.
Depreciation and amortization increased by approximately $1.5 million during
1997 as a result of the amortization of the intangible assets related to the
Acquisition.
Selling expenses increased from approximately $1.4 million in 1996 to
approximately $5.0 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 which included an "Eye in the Sky" radio
advertising campaign incurred during May and June 1997 for Serengeti products
costing approximately $1.1 million.
General and administrative expenses increased from approximately $941,000 in
1996 to approximately $5.3 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.
17
<PAGE>
Interest expense increased by approximately $638,000 in 1997 as a result of
the interest expense related to the Company's term loan which was used to
finance the Acquisition and the interest incurred on the Company's revolving
credit facility.
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 "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
18
<PAGE>
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 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 $13.3 million
at September 30, 1997.
The Company incurred approximately $898,000 in capital expenditures during
the nine months ended September 30, 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
$100,000 for the remainder of 1997.
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.
19
<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 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 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 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 has filed a motion to dismiss on
jurisdictional and substantive grounds and intends to vigorously defend the
action, and is presently considering counterclaims.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K. None.
21
<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.
<TABLE>
<S> <C>
SERENGETI EYEWEAR, INC.
Dated: October 31, 1997 By: /s/ STEPHEN NEVITT
---------------------
Stephen Nevitt
President
(Principal Executive Officer)
Dated: October 31, 1997 By: /s/ NEIL R. WINTER
--------------------
Neil R. Winter
Chief Financial Officer
</TABLE>
22
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<PAGE>
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