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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
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Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number: 0-26022
December 31, 1996
SERENGETI EYEWEAR, INC.
(Name of Small Business Issuer in its Charter)
New York 65-0665659
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8125 25th Court East
Sarasota, Florida 34243
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (941) 359-3599
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
Redeemable Common Stock Purchase Warrants
(Title of Class)
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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 [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The issuer's revenues for the year ended December 31, 1996 were
$13,584,255.
The aggregate market value of the voting stock of registrant held by
nonaffiliates of the issuer as of March 31, 1997 was approximately $3,969,320.
Number of shares of Common Stock outstanding as of March 31, 1997:
2,384,000
Transitional Small Business Disclosure Format
Yes [_] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB
Document in which incorporated
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Registrant's Proxy Statement relating to Part III
the 1997 Annual Meeting of Shareholders
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SERENGETI EYEWEAR, INC.
FORM 10-KSB/A
Table of Contents
Page
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PART I
Item 1. Description of Business................................. 1
Item 2. Description of Property................................. 13
Item 3. Legal Proceedings....................................... 13
Item 4. Submission of Matters to a Vote
of Security-Holders..................................... 14
PART II
Item 5. Market for Common Equity
and Related Stockholder Matters......................... 14
Item 6. Management's Discussion and Analysis or
Plan of Operation....................................... 16
Item 7. Financial Statements.................................... 21
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................... 41
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act............................... 41
Item 10. Executive Compensation.................................. 43
Item 11. Security Ownership of Certain
Beneficial Owners and Management........................ 44
Item 12. Certain Relationships and Related
Transactions............................................ 46
Item 13. Exhibits, Lists and Reports on
Form 8-K................................................ 47
SIGNATURES ........................................................ 49
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FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT CONCERNING, AMONG
OTHER THINGS, THE COMPANY'S ABILITY TO SUCCESSFULLY IMPLEMENT ITS BUSINESS
STRATEGY, 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 TO PLACE UNDUE RELIANCE ON SUCH
STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
Carbonate DDS(TM), Country Club(TM), Drivers(R), Fashion
Featherweights(R), Femiluna(TM), H2O Optix(R), H2Optix(TM), H2Optix Zero
Tolerance(R), In-B-Teen(R), Kinetix(TM), Mach #1(R), One Design(TM), Outa
Limitz(R), Power Plus(R), Pulse(TM), Pyrofusion(TM), Range & River(TM),
Serengeti(R), Signia(TM), Solar Barriers(R), Solar-Mates(R), Solar*X(R),
Spectral Control(R), Sport Shields(R), Strata(R), Sunpets(R), Surf and Cycle(R),
The Best Sunglass Value Money Can Buy(R), When You're Old Enough to Know
Better(TM), Wickets(R), Your World Your Mark(TM), Sensor-X(TM) and Grafix(TM)
are included among the Company's trademarks.
PART I
Item 1. Description of Business.
Company Overview
Serengeti Eyewear, Inc. (formerly known as Solar-Mates, Inc.) (the
"Company") is engaged in the business of designing, manufacturing through
outside sources, marketing and distributing a wide array of quality sunglasses.
On February 13, 1997, the Company acquired for $27.5 million (the "Acquisition")
the assets of the Serengeti Eyewear division of Corning Incorporated ("Corning")
used in the design, manufacture and distribution of Serengeti brand sunglasses.
In connection with the Acquisition, the Company changed its name from
Solar-Mates, Inc. to Serengeti Eyewear, Inc.
Prior to the Acquisition, the Company primarily designed and marketed
selected non-premium lines of sunglasses targeted for distribution through the
mass merchandise market. See "Industry Background" below. The Company's Solar*X
line of sunglasses is marketed to mass merchandisers as a sunglass with quality
comparable to that of optical sunglasses at popular prices. Solar*X features a
ground and polished lens which provides virtually complete protection from
harmful ultraviolet sun rays and glare. The Company also markets to the mass
merchandise market other sunglass brands, each of which the Company believes
creates a niche among popular priced sunglasses of various categories. Sales of
non-premium sunglasses accounted for approximately 91% of the Company's total
sales in 1996, with Solar*X sunglasses accounting for approximately 69% of total
sales.
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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 of
sunglasses which is designed specifically for use in the water environment.
H2Optix utilizes a combination of characteristics which the Company believes
differentiates it from other competing sunglasses which target the water sports
market. The Company sought to emphasize sales of H2Optix, a premium sunglass
line, and thereby reduce its dependence upon mass merchandisers. The Company
also believes that premium products generate higher gross margins and offer
significant growth potential, as discussed in "Industry Background" below.
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 achieved approximately $1.2 million in H2Optix sales,
representing approximately 9% of the Company's total 1996 sales. The Company in
1996 also broadened the distribution network for its non-premium products and,
as a result, sales to Wal-Mart Stores Inc. ("Wal-Mart") accounted for
approximately 53% of the Company's total 1996 sales, compared to approximately
92% for 1995.
The Serengeti line 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. As
a result, Serengeti brand sunglasses presently rank third in premium sunglass
distribution in terms of market share, following Ray-Ban and Oakley. The
Serengeti Drivers line of sunglasses, which accounted for approximately 91% of
plano (non-prescription lens) 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. The Company intends to
continue the marketing of its non-premium sunglasses to the mass merchandise
market.
The Company is a New York corporation formed in 1976. The Company
maintains its principal executive offices at 8125 25th Court East, Sarasota,
Florida 34243, and its telephone number is (941) 359-3599.
Industry Background
The sunglass industry is generally divided into two principal segments -
the under-$30 or "nonpremium" market and the over-$30 or "premium" market. The
retail market for sunglasses in recent years has experienced the emergence of a
broader premium market, reflected by increased sales of higher-priced,
quality-oriented sunglass products. This premium sunglass market, the category
in which the Company's Serengeti products compete, showed an increase in sales
of 104%, from $825.6 million in 1989 to $1.7 billion in 1996.
Management of the Company believes that consumer willingness to pay more
for premium sunglass products results from increased awareness of the need for
quality eye protection, the continued growth of sunglasses as a fashion
accessory, an increased demand for specialized sunglasses for different sports
and activities, and growing brand awareness. The Company seeks to capitalize on
these changes in the sunglass market by emphasizing sales of its premium
products which are designed to appeal to the quality conscious consumer and
which are marketed for use in specifically targeted sporting and
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recreational activities in which participants tend to spend a significant amount
of disposable income on equipment and accessories.
The under-$30 market is primarily served by mass merchants, chain drug
stores and discount department stores. These outlets generally offer sunglasses
in the $8 to $25 price range. The Company currently serves the top of the retail
price range in the under-$30 market primarily with its Solar*X brand of
sunglasses.
Business Strategy
The Company's objective is to become a leading designer and distributor of
premium sunglass products. The Company believes that its success will depend
upon its ability to control, protect and enhance the Serengeti brand image.
Accordingly, the Company has adopted a growth-oriented business strategy which
includes the following key elements:
Maintain brand name recognition. The Company believes that a brand name
provides instant appeal for many consumers. The Company intends to continue
developing Serengeti signature styles that incorporate superior lens technology,
quality and performance, factors which the Company believes differentiate its
products from those of its competitors and increase brand recognition among
consumers.
Focus on selective distribution. It is the policy of the Company to
maintain strict control over the distribution of its Serengeti products to avoid
overexposure of the brand. The Company sells its Serengeti products through
carefully selected retailers that will be routinely assessed to ensure they
conform with the Company's standards. The Company believes this selective
distribution policy will promote a high degree of loyalty from retailers and a
stable retail price environment, while increasing the Company's control over
diversion and counterfeiting of its products.
Aggressively protect its intellectual property rights. The Company will
rely on patent, trademark, trade secret, unfair competition and copyright law to
protect its rights to certain aspects of its products, including product
designs, proprietary manufacturing processes and technologies, product research
and concepts and recognized trademarks and trade dress.
Introducing innovative new products. The Company intends to capitalize on
Serengeti's strong brand identity by introducing new Serengeti signature styles,
including the introduction of H2Optix as a new addition to the Serengeti line.
The new styles would incorporate the Serengeti name and logo into the frame
decor with logo plaques and lens decoration. The Company anticipates that
existing Serengeti accounts will provide the new Serengeti signature styles with
retail space without replacing strong performing existing products. The Company
will seek to obtain any additional space with price incentives, if required.
The Company will utilize its existing relationships with European
designers to design the new styles. The Company has an existing relationship
with a renowned European design team that has worked with the Company for the
past three years and which has developed new products for well-known sunglass
distributors, including Ray-Ban, Arnet, Fila and the Benneton Group. The Company
believes that this team has demonstrated the ability consistently to create top
selling styles. The Company presently utilizes this team for the design of all
new H2Optix products.
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The Company intends to couple its high-performance lenses with well-known
designer names and styling. Performance features would allow designers to offer
benefits to consumers and to differentiate their products from other designer
glasses. Similarly, the Company believes that opportunities exist for designer
sport sunglasses -- sunglasses that combine performance features for sports
activities with designer names and athlete endorsements that are meaningful to
those sports.
Advances in frame technology have not kept pace with advances in lens
technology. Frame development has focused primarily on approving appearance
rather than performance. As a result, sunglasses do not offer both a high
performance lens and frame. The Company believes that it has an opportunity to
create innovative high-performance sunglasses by combining new frame designs,
materials and other features with the existing and planned Serengeti lenses.
Focus on international expansion. The Company believes that wider
international distribution also represents a significant opportunity for
expansion of sales. Sales outside North America represented approximately 23% of
total sales of the Serengeti Eyewear division in 1996. To improve the
consistency of its image and operating strategy worldwide, the Company is
establishing closer working relationships with its international distributors
and plans to increase its use of direct sales representatives in those locations
where such an approach is advantageous. The Company believes that concentrating
its efforts in existing regions and introduction of Serengeti to new regions
abroad provide a significant opportunity for increased growth. The Company also
expects to continue benefitting from the global expansion of its retail
accounts, particularly Sunglass Hut International ("Sunglass Hut"), the largest
customer for the Serengeti line.
Description of Product Lines
Premium Products
The Serengeti line is presently comprised of two distinct products,
Drivers and Kinetix, each of which is targeted at a different portion of the
premium segment of the sunglass market. The Company intends to integrate its
H2Optix products into the Serengeti line.
Drivers
Drivers, which is a general purpose sunglass, is the core Serengeti
product line, accounting for 91% of 1996 plano sales of the Serengeti Eyewear
division. Several popular Drivers models have been marketed since the mid-1980s.
Independent marketing surveys have indicated that Drivers inspire exceptional
customer loyalty. All Drivers lenses are photochromic and have "Spectral
Control" technology. Photochromic lenses automatically darken to adjust to
bright daylight conditions and lighten to adjust to darker daylight conditions
thereby adjusting the amount of light being transmitted to the user. Proprietary
Spectral Control filters are then created by "hydrogen firing" a photochromic
lens. The resultant lens filters out 95% of blue light, cutting glare, boosting
contrast and reducing eye fatigue in fog and haze without distorting the colors
seen through the lens. The combination of a special base glass and hydrogen
firing give Drivers lenses a lustrous copper color. Drivers lenses are available
as a singlegradient lens that reduces glare from above and are also available as
a darker, non-gradient version known as Drivers Sienna. The Company presently
offers 12 collections and 143 products within the Drivers line.
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Kinetix
Kinetix, Serengeti's specialty, active line is equipped with photochromic,
Spectral Control lenses of specific colors to enhance their performance in
particular sports environments. Distinct Kinetix collections are designed
specifically for boaters, skiers, drivers, golfers, hunters and target shooters.
The Company presently offers 4 collections and 20 products within the Kinetix
line.
H2Optix
Although there are a number of sunglasses currently marketed that can be
used by water sports enthusiasts, they are not designed specifically for use in
the water environment. The Company believes that each of the existing sunglass
product lines distributed to the water sports market has significant drawbacks
or technical omissions. The H2Optix line has been designed by the Company to
differentiate it from other competing sunglasses which target the water sports
market. The Company believes that its H2Optix product incorporates a distinctive
combination of elements that work together to provide a total optical system for
all of the needs of the water sports enthusiast. The base material for the
H2Optix lens is polycarbonate, which exhibits both optical clarity and
extraordinary strength. The lamination of polarized film between two such lenses
results in a lens ideally suited for any water sport activity. The Company
presently offers approximately 50 products within the H2Optix line.
Non-Premium Products
The Company also markets a variety of non-branded sunglasses to mass
merchandisers. The Company's Solar*X line of sunglasses has been marketed by the
Company as a high quality line of sunglasses with a ground and polished lens.
Although these sunglasses retail at approximately $20, the Company believes that
their quality makes them competitive with higher priced premium sunglasses in
the over-$30 market. They are available in a variety of popular, classic and
contemporary frame styles.
The following table, derived from the Company's internal sales records,
indicates the percentage of gross sales in each of the Company's major product
groups during the years ended December 31, 1995 and 1996. Such historical
percentages are not indicative of the Company's future product mix, in light of
the Company's present focus on its premium Serengeti product lines.
Year Ended December 31,
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1995 1996
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Solar*X 60% 69%
Outa Limitz 4 10
H2Optix 1 9
Faded Glory 0 5
Charming Profiles 4 0
Other - Nonbrand 31 7
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100% 100%
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The following information, derived from the internal sales records
obtained from the Serengeti Eyewear division of Corning, indicates the
percentage of gross sales for each of the Serengeti brands for the years ended
December 31, 1995 and 1996:
Year Ended December 31,
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1995 1996
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Drivers 76.0% 91.0%
Kinetix 10.7 6.0
Signia* 13.3 3.0
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100% 100%
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* Discontinued by the Company upon completion of the Acquisition.
Distribution
The Company's principal customers are national and regional optical
distributors, sunglass specialty stores and optical chains. The Company intends
to keep this distribution network in place. The Company also intends to target
the Serengeti brand to sporting goods stores and quality discount retailers.
Regional sales managers are responsible for maintaining relationships with
optical distributors in their region, as well as direct accounts with optical
and sunglass chains.
Optical Distributors
The network of optical distributors for the Serengeti line is comprised of
eleven regional optical distributors and three national distributors which
distribute to optical chains, independent optical retailers and specialty
sunglass stores in the United States and Canada. Optical distributors are
encouraged to distribute exclusively to premium retailers. Each regional
distributor has a specifically defined region, while national distributors sell
throughout the nation, so that no optical independent is forced to buy from a
sole source.
The present structure of this distribution channel arose from fundamental
changes implemented by Corning's Serengeti Eyewear division in 1994 to preserve
and enhance the Serengeti brand name. In late 1994, Corning reviewed its then 89
distributors and selected the fourteen most appropriate distributors for
Serengeti eyewear. Corning ended its relationship with the others and
successfully retained every distributor with which it desired to continue its
relationship. These remaining distributors have been granted regional
exclusivity and are limited to selling Serengeti products to specific retailers.
In 1996, the top five distributors for the Serengeti line accounted for
19% of total sales of the Serengeti Eyewear division to optical distributors.
The Company believes that significant opportunities for growth lie in increasing
Serengeti sales per door in the independent optical channel, in which it has
achieved approximately 60% penetration. The Company intends to penetrate optical
retailers with prescription Serengeti lenses. In addition, the Company intends
to seek out additional quality distributors that operate in regions in which
Serengeti sales are under-represented, such as the Southwest.
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Specialty Sunglass Retailers
The principal Serengeti customer in this channel is Sunglass Hut, the
world's largest sunglass retailer, which has more than 2,000 stores worldwide
and has announced plans to expand to 4,000 stores by the year 2000. The Company
believes that the Serengeti-Sunglass Hut relationship improved as a result of
the restructuring of the Serengeti distributor network, as described above.
Sunglass Hut, which is serviced directly by the Company's in-house sales staff,
accounted for approximately 26% of total sales of the Serengeti product lines in
1996.
Optical Chains
Approximately 8% of Serengeti brand 1996 North American sales were to
optical chains. The largest Serengeti customer in this channel is Lens Crafters.
The Serengeti brand also has long-standing relationships with other large
chains, including Pearle Incorporated, Visionworks Incorporated and DOC Optics
Inc. The Company believes that this channel presents significant opportunities
for increased penetration; specifically, that the Company may be able to
leverage the Serengeti reputation for high performance lenses with the optical
chains in order to help create and grow a substantial prescription sunglass
business.
International Distribution
Sales outside North America accounted for approximately 23% of total sales
of the Serengeti Eyewear division in 1996. Sales in each region are conducted
through distributors and, in certain countries, directly to large retail chains
or buying groups.
In Europe, which accounted for approximately 16% of the total Serengeti
Eyewear division sales in 1996, Serengeti is sold in a number of markets,
including The Netherlands, Switzerland, Belgium and Finland, with very limited
advertising support. In the United Kingdom, following a media campaign in the
London Underground, the Serengeti brand is beginning to achieve significant
trade and consumer interest. Significant distributors of Serengeti sunglasses in
Europe include Metzler Bonnier BV, OptiSport S.A. and Technop Pvba.
Instrumentarium, a Finnish optical retailer, and Codir S.A., a French optical
buying group, are particularly important and long-standing Serengeti brand
customers.
The Asia Pacific region represented approximately 6% of total 1996 sales
of the Serengeti Eyewear division. Within this region, the Company believes
Serengeti is well-positioned for growth in Australia and New Zealand due to its
strong representation through General Optical Pry Ltd. and Vision Holdings,
which work closely with Sunglass Hut and independent optical retailers.
Similarly, the Company has identified the Latin American region as an
opportunity for increased growth. This region represented only approximately 1%
of 1996 sales of the Serengeti Eyewear division, and the Serengeti sales force
has only recently begun to introduce Serengeti to certain of the major countries
in Latin America.
Non-Premium Distribution
During 1995, the Company had sales of approximately $9.6 million to
Wal-Mart, a major national retailer and a principal customer of the Company for
over ten years, representing approximately 92% of the Company's total sales. As
a result of the Company's strategy to broaden its distribution
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network for its non-premium products, in 1996, the Company had sales of
approximately $7.2 million to Wal-Mart, representing approximately 53% of the
Company's total sales.
Sales volume to Wal-Mart is generally higher toward the end of the year
due to seasonal consumer buying patterns. The Company has not experienced any
collection difficulties with its Wal-Mart account. Under its new strategy, the
Company intends to sell its premium products through a nationwide network of
sales representatives and distributors, but will continue to sell its
non-premium products to mass merchandisers such as Wal-Mart.
Although the Company does not intend to target the marketing of its
premium products lines to the mass merchandise market, the loss of Wal-Mart as a
customer would have a material adverse effect on the Company's non-premium
business as presently conducted. The Company does not presently have any formal
written contract with Wal-Mart, but rather receives individual purchase orders
from Wal-Mart for the Company's products.
The Company's non-premium sales are generated principally by its
President, Stephen Nevitt. The Company also utilizes independent sales
representatives throughout the United States. The Company's sales
representatives are each responsible for soliciting, selecting and securing
accounts within a particular regional territory. Such sales representatives are
paid on a commission basis, with commissions depending on the product line and
terms of the sale. The Company provides service and support to its sales
representatives, including advertising and sales literature.
As a result of recent strategy changes by retailers, including
consolidations and increases in the size of retail locations, retailers have
imposed additional requirements on their merchandisers. The Company has
increased the services provided to its mass merchandise customers, particularly
Wal-Mart, in many areas including the sourcing of products necessary to fill a
specific demand, the tracking of supply inventory by direct computer link-up,
and the implementation of specifically tailored systems for the shipment of
inventory.
Information Systems
The Company is fully equipped to offer electronic data interchange ("EDI")
for customers who prefer to place orders using EDI technology. The Company has a
real time inventory system integrated with its accounting system. The system
produces shipping labels tailored to the requirements of a specific carrier, and
the Company has the ability to track a customer's shipment through the carrier's
system. Additionally, the Company has the ability to increase its shipping
capacity by adding a second shift in its warehouse.
The Company's computer systems presently are directly linked to Wal-Mart's
systems, enabling the Company to track the quantities of its products available
at the various retail stores and related warehouses. Although quantities of
supplies are monitored by computer systems at Wal-Mart and by WalMart personnel
to ensure that the target levels of product quantities determined between
Wal-Mart and the Company are met, the tracking system works as a safety measure
to ensure that deficiencies are not overlooked, by triggering a notice from the
Company to place additional orders.
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Marketing
The Company's marketing and promotion strategies for its Serengeti
products are focused on building and maintaining a high-quality image, and
providing multiple price points to meet the needs of the retailer and consumer.
The Company seeks to maintain high visibility for its Serengeti products through
the efforts of its in-house marketing staff which coordinate and oversee the
sales efforts of the Company's distributors and develop programs to help
retailers increase their sales of Serengeti products. The marketing staff also
designs, develops and produces sales materials for use by distributors. These
sales materials include point-of-purchase materials, packaging, photography,
advertising layouts, signage, logo designs and catalogs.
The Company intends to continue advertising and marketing Serengeti
products with point-of-purchase displays and through high quality general
publications and radio promotions, as well as through catalogs, billboards,
event sponsorships, product promotions, trade and consumer publications and
trade shows. The Company, through its "co-op" advertising program, intends to
assist in the funding and preparation of advertising campaigns initiated by
retailers. The Company also intends to promote the Serengeti brand name by
utilizing high visibility sports and celebrity figures to provide product
exposure to the consumer.
Trade shows are a retailer's primary source for information about new
products and provide retailers with a chance to meet personally with
representatives of a company. Accordingly, the Company attends trade shows
targeting specific activities to increase retailer awareness and enthusiasm for
its products which relate to such activities. The Company also intends to
promote Serengeti through the sponsorship of sporting activities on both a
national and local level, and by providing decals and posters.
The Company seeks to establish a value purchase for the quality-and
price-conscious consumer by maintaining a premium quality product at a price
more attractive than that of competing brands, providing a significant value to
the consumer. The Company provides counter cards to retailers which compare the
features and price of Serengeti sunglasses with those of the competition,
exploiting the price/value advantage of Serengeti. The Company determines prices
with the goal of providing both the Company and the trade with the opportunity
for significant margins.
Manufacturing
The Company currently obtains photochromic glass lens blanks for the
existing Serengeti lines pursuant to a three-year supply agreement entered into
with Corning upon the closing of the Acquisition. Pursuant to the supply
agreement, the Company is required to purchase such Serengeti lens blanks
exclusively from Corning only to the extent that Corning is able to provide such
lenses in the quantities and within the time periods required by the Company.
The lens blanks are currently manufactured by Corning in the United States and
France and then shipped to Japan and other locations overseas for finishing. All
lenses currently mounted in the Drivers and Kinetix lines are then subjected to
the Company's proprietary hydrogen firing process at a dedicated Serengeti
manufacturing facility in Fukui, Japan ("Fukui") pursuant to a transitional
arrangement with Corning which expires on May 13, 1997. The Company has entered
into a letter of intent with Swank International Manufacturing Co. Ltd.
("Swank"), with whom the Company has a long-standing relationship for the
manufacture of its nonpremium products, to explore the possibility of Swank
conducting the hydrogen firing process in the Peoples Republic of China. The
Company has also received indications of interest from other third parties to
conduct the hydrogen firing process. Pursuant to its arrangement with Corning,
upon the
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completion of such transitional period, Corning will transfer title to the
Company of all equipment, tooling and other assets utilized in connection with
the hydrogen firing process. Lenses are cut, edged, tempered, coated, drop ball
tested and inserted into the frames by third-party contractors in Japan and the
United States.
The Company currently sources all of its plastic sunglass frames from
third-party suppliers. The bulk of Serengeti sunglass metal frame requirements
are presently manufactured at the Fukui facility. In addition, depending upon
requirements, a certain quantity of metal frames used in the Serengeti
collections are outsourced. The Company intends to retain cost-effective frame
suppliers worldwide for the manufacture of the Serengeti frames. The Company
believes that there are a number of suppliers with the ability to manufacture
such frames.
Upon completion of the hydrogen firing process at the Fukui facility,
Corning sends the completed sunglasses to a warehouse facility in Horseheads,
New York for distribution. The Company intends to utilize its warehouse facility
in Sarasota, Florida for the warehousing of all of its finished sunglasses,
including the finished Serengeti sunglasses, and to phase out the Horseheads
facility during the second quarter of 1997.
The Company has developed long-standing collaborative relationships with
established manufacturers of sunglasses throughout the Far East for the
manufacture of all of its products and component parts. The Company actively
participates in the development and refining processes relating to the
manufacture of its products. To date, the Company's principal manufacturing
relationship has been with Swank, a leading manufacturer of sunglasses
worldwide, which produces frames for the Company's sunglasses. The Company has
also established a relationship with Wintec Corporation based in Japan for the
production of the polarized polycarbonate lenses used for the Company's H2Optix
product line. The frames for certain of the H2Optix models are manufactured in
Europe by Bensol SRL.
The manufacturers of the Company's products also manufacture sunglasses
for other companies, including competitors of the Company. Although the Company
has never experienced any difficulties in obtaining the necessary supplies of
its products, its manufacturers could choose to prioritize production for other
companies or cease production for the Company's products on short notice.
Although the Company believes it can find other manufacturers of its products,
there can be no assurance that it will be able to discover new manufacturers for
its products in a timely manner or that such new manufacturers would be able to
meet the Company's supply requirements. While the Company believes it has
available to it manufacturers, including Swank, with the capability of
fabricating Serengeti lenses utilizing the hydrogen firing process, there can be
no assurance that an alternative source of such material will be identified.
Termination or disruption of supplies from these sources could result in
production delays, reductions in shipments, or increased costs that could have
an adverse effect on the Company's operations. While the Company continually
explores ways to reduce its dependence on these limited source suppliers, there
can be no assurance that the Company will be successful in doing so.
Although the Company's policy is to work closely with its manufacturing
sources, there are certain risks associated with the use of outside, foreign
manufacturers. Risks inherent in the use of an outside manufacturer include the
absence of adequate guaranteed supply and unavailability of or delays in
obtaining access to, adequate supplies, transport of products from the
manufacturer, destruction, damage, loss or theft at the manufacturer's facility,
delay in delivery of orders, bankruptcy and other financial problems of the
manufacturer, and potential misappropriation of proprietary intellectual
property. Risks arising in connection with the use of a foreign manufacturer
include foreign governmental regulation, economic instability in the country of
manufacture, labor strikes and the
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implementation of additional United States legislation and regulations relating
to imports, including the imposition of duties, taxes and other charges or
restrictions on imports.
Competition
The Company faces significant competition in the sunglass business. The
Company competes with a number of established manufacturers, importers and
distributors whose brand names enjoy recognition which exceeds that of the
Company's brand names. The Company competes with several manufacturers,
importers and distributors who have significantly greater financial,
distribution, advertising and marketing resources than the Company. The Company
competes primarily on the basis of performance features, quality, brand name
recognition and price.
The Company believes that its continued success will depend upon its
ability to remain competitive in its product areas. The failure to compete
successfully in the future could result in a material deterioration of customer
loyalty and the Company's image and could have a material adverse effect on the
Company's business.
Intellectual Property
The Company intends to aggressively assert its rights under patent, trade
secret, unfair competition, trademark and copyright laws to protect its
intellectual property, including product designs, proprietary manufacturing
processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through the acquisition of patents and
trademark registrations, the maintenance of trade secrets, the development of
trade dress, and, where appropriate, litigation against those who are, in the
Company's opinion, infringing these rights.
Patents, Trademarks and Licenses
The following are the principal patents owned by the Company relating to
Serengeti sunglasses:
Hydrogen Firing Process. The Company owns a patent governing the
hydrogen firing process, which expires November 19, 1999 (Patent No.
4,290,794). This patent covers the process by which Spectral Control
filters are created within a lens. The patent affects all Drivers
and Kinetix lenses.
Driver Glass. The Company owns a patent for colored photochromic
lenses relating to Drivers and certain Kinetix lenses (Patent No.
4,240,836) which expires November 19, 1999. This patent covers color
spaces that provide glare control.
As of March 31, 1997, the Company had 21 trademark registrations in the
United States and 134 trademark registrations in foreign countries, including
those for Serengeti, Drivers, Kinetix and H2Optix. As of such date, the Company
had 13 trademark applications pending in the United States and 22 trademark
applications pending in foreign countries. No trademarks are licensed by the
Company for use on eyewear products due to the Company's strict quality control
standards and the desire to protect its proprietary technology and prevent
overexposure of the Company's trademarks. In connection with
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the Acquisition, the Company granted to Corning a royalty-free, world-wide
license to utilize the hydrogen firing process technology and other proprietary
technology of the Company in connection with the manufacture and marketing of
lenses, lens blanks and other optical materials or prescription eyeglasses or
lenses used to treat or mitigate medical conditions or symptoms such as light
sensitivity, as well as in connection with other products manufactured or
practices engaged in by Corning prior to the Acquisition unrelated to the
Serengeti business and that do not relate to plano or prescription sunglass
lenses.
While there can be no assurance that the Company's patents or trademarks
protect the Company's proprietary information and technologies, the Company
intends to assert its intellectual property rights against any infringer.
Although the Company's assertion of its rights can result in a substantial cost
to, and diversion of effort by, the Company, management believes that the
protection of the Company's intellectual property rights is a key component of
the Company's operating strategy.
Trade Secrets
The Company also relies upon unpatented trade secrets for the protection
of certain intellectual property rights. The Company protects its trade secrets
by requiring its employees, consultants and other agents and advisors to execute
confidentiality agreements upon the commencement of employment or other
relationships with the Company. These agreements provide that all confidential
information developed by or made known to the individual or entity during the
course of the relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's proprietary information or adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and technologies, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets.
Regulatory Matters
The Company's products, which are imported to the United States, are
subject to United States customs duties, and, in the ordinary course of its
business, the Company may from time to time be subject to claims by the United
States Customs Services for duties and other charges. The United States and
foreign governments may from time to time impose new duties, tariffs or other
restrictions, or adversely adjust prevailing duty or tariff levels, which could
adversely affect the Company's operations and its ability to import products at
specified levels. In general, the Company cannot predict the likelihood or
frequency of any such events occurring or what effect such events could have on
its financial condition and results of operations.
The Company's sunglasses are certified to the United States Food and Drug
Administration ("FDA") impact standards. The FDA requires that sunglasses sold
in the United States must pass what is commonly referred to as the "drop ball
test." Pursuant to this test, a ball is dropped down a tube approximately four
feet long and allowed to hit the lens. A percentage of a statistical sampling of
lenses must not break or shatter. For the Company to take shipment of its
products from overseas, the Company must first deliver to the United States
Customs Service a certificate indicating that a statistical sampling of the
lenses being shipped to the Company meet FDA requirements. The Company believes
that all of its products comply with existing FDA requirements. To date, the
Company has not
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experienced any difficulties with regulatory compliance. The FDA is currently
considering proposing new sunglass regulations.
Employees
As of March 31, 1997, the Company employed 63 individuals on a full-time
basis, 38 of whom were employed in executive and administrative positions and
the remainder of whom were warehouse employees. The number of warehouse
employees increases during various time periods in the course of a year due to
the buying patterns of the Company's customers. The Company has regularly
experienced a readily available labor pool to satisfy its increased labor
demands. None of the Company's employees are covered by collective bargaining
agreements, and management believes that the Company's relations with its
employees are good.
Item 2. Description of Property.
The Company's corporate offices, distribution and warehouse facilities
occupy approximately 15,500 square feet of space in Sarasota, Florida. Inventory
is warehoused in this facility and maintained on a computerized perpetual basis.
These facilities are leased by the Company pursuant to a lease agreement
expiring in March of 1998, with an option in the Company's favor to renew for an
additional two years. Rent payments total approximately $6,700 per month. The
lease provides for various escalations including based on cost of living and
real estate taxes. As the Company intends to warehouse its Serengeti products as
well at its Sarasota facility, the Company will require additional space. The
Company believes that additional space at the facility is readily available. The
Company also leases satellite sales offices in various locations.
Item 3. 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 (as defined in Item 5 below),
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
vigorously to defend the action and is presently considering counterclaims.
There are no other legal proceedings pending to which the Company or any of its
property is subject, and to the knowledge of the Company, there are no such
proceedings threatened.
The Company maintains product liability insurance coverage of $1 million
per occurrence and $2 million in the aggregate and $4 million of excess
liability coverage. The adequacy of the Company's insurance coverage and
reserves to cover known and unknown claims is evaluated at the end of each
fiscal year. The Company believes that its current insurance coverage is
adequate.
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Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol SOLR. The following table sets forth for the periods
indicated the range of the high and low sales prices of such Common Stock, as
reported by Nasdaq.
High Low
---- ---
Separation Date (September 29, 1995) through September 30, 1995 5.38 4.38
Quarter Ended December 31, 1995 4.63 3.19
Quarter Ended March 31, 1996 5.75 3.06
Quarter Ended June 30, 1996 8.13 4.25
Quarter Ended September 30, 1996 7.13 5.25
Quarter Ended December 31, 1996 8.75 6.00
At March 31, 1997, there were approximately 19 shareholders of record of
the Company's Common Stock. Such number does not include beneficial owners
holding shares through nominee names.
Recent Sales of Unregistered Securities
On October 4, 1996, the Company issued 7,500 shares of the Company's
Series A 6.5% Convertible Preferred Stock, $.001 par value (the "Series A
Shares"), to RBB Bank Aktiengesellschaft ("RBB"), a banking institution whose
principal offices are located in Austria, in a private offshore offering
pursuant to Regulation S under the Securities Act of 1933, as amended. RBB
purchased the Series A Shares for a purchase price equal to their aggregate
stated value of $7.5 million. Concurrently with the closing of the Acquisition,
RBB purchased, pursuant to said Regulation S, 7,500 shares of the Company's
Series B 6% Convertible Preferred Stock, $.001 par value (the "Series B
Shares"), and 7,500 shares of the Company's Series C 6% Convertible Preferred
Stock, $.001 par value (the "Series C Shares"; together with the Series A Shares
and the Series B Shares, the "Preferred Shares"), for a purchase price equal to
their aggregate stated value of $15.0 million. The proceeds to the Company from
the sale of the Preferred Shares was an aggregate amount of approximately $20.9
million (net of approximately $1.6 million paid in respect of commissions and
expenses related to such sale).
Concurrently with the issuance of the Series A Shares, the Company also
issued to RBB a Series A Warrant of the Company (the "Series A Warrant") to
purchase up to 150,000 shares of Common Stock at an exercise price of $5.5625
per share. The Series A Warrant is exercisable at any time commencing January 1,
1999 and on or prior to December 31, 2002. In addition, concurrently with the
issuance of the Series B Shares and Series C Shares, the Company issued to RBB a
Series B Warrant of the Company (the "Series B Warrant") and a Series C Warrant
of the Company (the "Series C Warrant"), each of which entitles RBB to purchase
up to 300,000 shares of the Company's Common Stock, $.001 par value ("Common
Stock"), at a per share exercise price of (i) $7.50 with respect to the Series B
Warrant and (ii) $10.00 with respect to the Series C Warrant. Each of the Series
B Warrant and the Series C Warrant is exercisable at any time commencing January
1, 1999 and on or prior to December 31, 2002.
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The Company has also issued, as part of the commission payable to a third
party in connection with the sale of the Series A Shares, a Series D Warrant of
the Company (the "Series D Warrant"; together with the Series A Warrant, the
Series B Warrant and the Series C Warrant, the "Warrants") to purchase up to an
aggregate of 200,000 shares of Common Stock at an exercise price of $5.50 per
share. The Series D Warrant is exercisable at any time prior to September 30,
2001.
In accordance with the corporate governance rules of the National
Association of Securities Dealers, Inc. relating to issuers listed on the Nasdaq
National Market, such as the Company, the Company obtained shareholder approval
for the issuance of (i) shares of Common Stock issuable upon conversion of the
Series A Shares and upon exercise of the Series A Warrant and the Series D
Warrant, (ii) the Series B Shares and the Series C Shares, and (iii) the Series
B Warrant and the Series C Warrant.
Each of the Series A Shares may be converted by the holder thereof into
shares of Common Stock at any time. Each Series A Share is convertible into such
number shares of Common Stock as is determined by dividing its stated value of
$1,000 by a conversion rate equal to the lower of (i) $5.50 and (ii) 80% of the
average Market Price for the 10 consecutive trading days ending three days prior
to the giving by the holder of such Series A Shares of a notice of conversion.
Each of the Series B Shares may be converted by the holder thereof into
shares of Common Stock at any time. Each Series B Share is convertible into such
number of shares of Common Stock as is determined by dividing the stated value
of $1,000 by a conversion rate equal to the lower of (i) $6.75 and (ii) 80% of
the average Market Price for the 10 consecutive trading days ending three days
prior to the giving by the holder of such Series B Shares of a notice of
conversion.
Each of the series C Shares may be converted by the holder thereof into
shares of Common Stock at any time after July 1, 1997. Each Series C Share is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value of $1,000 by a conversion rate equal to the lower of
(i) $8.25 and (ii) 80% of the average Market Price for the 10 consecutive
trading days ending three days prior to the giving by the holder of such Series
C Shares of a notice of conversion.
For purposes of the conversion rates for the Preferred Shares, "Market
Price" has the following meaning. As long as the Common Stock is listed on the
Nasdaq National Market, "Market Price" will be equal to the closing high bid
price of the Common Stock, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). If the Common Stock is no longer
listed on the Nasdaq National Market, "Market Price" will be equal to the
closing bid price of the Common Stock, as reported by NASDAQ (assuming that the
Common Stock is listed on the Nasdaq SmallCap Market or is included in the "pink
sheets" or other inter-dealer quotation service or publication) or the closing
price for the Common Stock (assuming that the Common Stock is listed on a
national securities exchange). On March 27, 1997, the closing high bid price for
the Common Stock was $3.00 per share.
The terms of the Preferred Shares and Warrants include customary
anti-dilution protections. At any time after September 20, 2000, the Company
will have the right, in its sole and absolute discretion, to force the
conversion into Common Stock of all outstanding Preferred Shares.
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Dividend Policy
The Company has never paid cash or other dividends and does not expect to
pay any cash or other dividends in the foreseeable future with respect to its
Common Stock. Any earnings which the Company may realize in the foreseeable
future will be retained to finance the growth of the Company. Future dividend
policy will depend upon the Company's earnings, capital requirements, financial
condition and other factors considered relevant by the Company's Board of
Directors. The New Credit Facility (as hereinafter defined) will restrict the
Company's ability to pay dividends on its Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 6. 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.
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.
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
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into Serengeti's well-established distribution networks. The Company intends to
continue the marketing of its non-premium sunglasses to the mass merchandise
market. See "Business."
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.
S Corporation Status and Pro Forma Adjustments
From its inception until the 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 of 1986, as amended, 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. After the closing of the
offering, the Company made S Corporation distributions to its pre-Termination
Date shareholders in the amount of $219,075. Such amount was determined on the
basis of the Company's taxable income as reported on its federal income tax
returns for the period from January 1, 1994 through the day before the
Termination Date. See Note 10 to Notes to Consolidated Financial Statements.
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 throughout the relevant periods discussed.
Results of Operations
Comparison of Years Ended December 31, 1995 and 1996
Net sales increased 30%, from approximately $10.5 million in 1995 to
approximately $13.6 million in 1996, primarily as a result of increased sales of
H2Optix and increased sales of the Company's non-premium products to a wide
range of new customers. The Company in 1996 broadened the distribution network
for its non-premium products and, as a result, in 1996, Wal-Mart accounted for
approximately 53% of the Company's total sales, compared to approximately 92% in
1995.
Gross profit increased as a percentage of sales, from 33% in 1995 to 36%
in 1996, primarily as a result of product mix. 1995 and 1996 included
approximately $2.0 million and approximately $1.0 million, respectively, in
direct sales made in Hong Kong. The Company's selling prices for direct sales to
Hong Kong are lower, as the customer receives the products without the necessity
of processing in the Company's warehouse.
Selling expenses increased by approximately $1.1 million, or 110%, from
approximately $1.0 million in 1995 to approximately $2.1 million in 1996. This
increase resulted primarily from increased costs associated with marketing and
selling expenses related to the H2Optix product line during 1996.
General and administrative expenses increased 43%, from approximately $1.2
million in 1995 to approximately $1.7 million in 1996 primarily as a result of
an increase in executive and administrative salaries, office expenses, and costs
incurred in connection with the development of the H2Optix line of
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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.
Pro Forma Financial Data
The following unaudited pro forma financial data reflects the combination
of the Company's and Corning's Serengeti Eyewear division statement of
operations for the year ended December 31, 1996 and gives effect to the
Acquisition (including related borrowings) as if it had been effected on January
1, 1996. The pro forma financial data does not purport to represent what the
Company's results of operations would have been if such transaction had been
effected at such date and does not purport to project results of operations of
the Company in any future period.
Year Ended
December 31, 1996
Pro Forma
(in thousands)
Net sales $ 46,238
Cost of sales 26,177
--------
Gross profit 20,061
Operating expenses:
Selling, general and
administrative expenses(1) 17,486
--------
Income from operations 2,575
Other expense (income):
Other income (189)
Interest expense(2) 1,343
--------
Income before income taxes 1,421
Provision for income 554
--------
taxes(3) $ 867
========
Net income
- ----------
(1) Includes a reduction of $1,322,000 in Corning administrative and research
costs allocated to the Serengeti division and $1,688,000 to adjust for the
amortization of the purchased goodwill over a 20-year period, patents,
patent rights and trademarks over a 5-year period and loan acquisition
costs over a 5-year period.
(2) Includes $950,000 to record interest expense on borrowings.
(3) Reflects a reduction of $434,000 to record the aggregate tax effects of
the combined entity.
Liquidity and Capital Resources
Prior to the Acquisition, 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 Sun
Bank/Gulf Coast (the "Old Credit Facility"). As of December 31, 1996, the
Company has 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
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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 the 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 lest 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 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
$4.4 million at December 31, 1995 to working capital of approximately $9.7
million at December 31, 1996. This resulted primarily from increases of
approximately $2.1 million in receivables resulting from the Company's increased
sales volume in 1996, approximately $3.6 million of the net proceeds of the
Series A Preferred placed in short term investments, and approximately $1.2
million in inventory related to additional anticipated increases in future sales
volume, combined with an increase of approximately $2.0 million in accounts
payable related principally to the increased inventory levels.
The Company incurred approximately $376,000 in capital expenditures during
1996 primarily relating to the expansion of its facility and the acquisition of
furniture, fixtures and transportation equipment. 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.
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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,
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 activity 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.
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Item 7. Financial Statements.
Index to Consolidated Financial Statements
Page
----
Independent Auditor's Reports 22
Consolidated Balance Sheet as of December 31, 1996 24
Consolidated Statements of Operations for the Years Ended December
31, 1995 and 1996 26
Consolidated Statement of Stockholders' Equity for the Two Years
Ended December 31, 1996 27
Consolidated Statements of Cash Flows for the Years Ended December
31, 1995 and 1996 28
Notes to Consolidated Financial Statements 30
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
We have audited the consolidated balance sheet of Serengeti Eyewear, Inc. as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Serengeti Eyewear, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
February 26, 1996
22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
We have audited the consolidated balance sheet of Serengeti Eyewear, Inc. as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Serengeti Eyewear, Inc. as
of December 31, 1995 were audited by other auditors whose report dated February
26, 1996 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Serengeti Eyewear, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Bartnick, P.A.
Certified Public Accountants
Boca Raton, Florida
February 14, 1997
(Except for Note 14 as to
which the date is April 9, 1997)
23
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
December 31, 1996
ASSETS
Current Assets:
Cash $ 632,727
Trading securities (Note 2) 4,976,625
Accounts receivable - less allowance
for doubtful accounts and discounts
of $123,516 (Notes 5, 9 and 13) 6,034,592
Other receivables 100,192
Inventories (Notes 5 and 13) 4,008,381
Prepaid expenses (Note 3) 718,808
-----------
Total current assets 16,471,325
Fixed assets - net of accumulated
depreciation (Note 4) 578,532
Other assets:
Investment in acquisition (Notes 8 and 13) 1,500,000
Deferred acquisition costs (Note 13) 591,031
Prepaid expenses - non-current (Note 3) 83,554
Accounts receivable - stockholders 45,215
Patents and trademarks - net 69,059
Other assets 15,871
-----------
Total Assets $19,354,587
===========
See accompanying notes to financial statements.
24
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
December 31, 1996
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank (Note 5) $ 1,500,000
Note payable - stockholder (Note 6) 173,921
Current portion of long-term debt (Note 7) 38,403
Accounts payable - stockholders and
related parties (Note 6) 79,856
Income taxes payable (Note 10) 232,930
Accounts payable 4,115,309
Accrued expenses 680,177
-----------
Total current liabilities 6,820,596
-----------
Long-term debt (Note 7) 105,886
-----------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 8)
Preferred stock, $.001 par value, 1,000,000
shares authorized 7,500 shares issued
and outstanding 6,975,000
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 1,171,445
-----------
Total stockholders' equity 12,428,105
-----------
Total Liabilities and Stockholders' Equity $19,354,587
===========
See accompanying notes to financial statements.
25
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Operations
For The Years Ended December 31, 1995 and 1996
1995 1996
------------ ------------
Net sales $ 10,472,656 $ 13,584,255
Cost of goods sold 7,053,970 8,704,447
------------ ------------
Gross profit 3,418,686 4,879,808
------------ ------------
Operating expenses:
Selling expenses 1,011,266 2,125,757
General and administrative,
expenses 1,218,588 1,749,394
------------ ------------
Total operating expenses 2,229,854 3,875,151
------------ ------------
Income from operations 1,188,832 1,004,657
------------ ------------
Other expenses (income):
Other income (71,082) (189,632)
Interest 302,587 393,112
------------ ------------
231,505 203,480
------------ ------------
Income before income taxes 957,327 801,177
Provision for income taxes
Current (Note 10) (342,000) (232,930)
------------ ------------
Net income $ 615,327 $ 568,247
============ ============
Per share information:
Net income per share:
Primary $ .37 $ .21
============ ============
Fully diluted $ .37 $ .18
============ ============
See accompanying notes to financial statements.
26
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statement of Stockholders' Equity
For the Two Years Ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock Paid in Retained
Shares Amount Shares Amount Capital Earnings
------------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 1,280,000 $ 1,280 -- $ -- $ 1,695,375 $(1,074,140)
Common shares issued for
cash pursuant to a
public offering 1,104,000 1,104 -- -- 5,518,896 --
Costs associated with
public offering -- -- -- -- (1,654,869) --
Sale of warrants -- -- -- -- 960 --
S-Corporation distribution -- -- -- -- (219,075) --
Reclassification of
S-corporation losses -- -- -- -- (1,062,011) 1,062,011
Net income for the year -- -- -- -- -- 615,327
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 2,384,000 2,384 -- -- 4,279,276 603,198
Preferred shares issued
For cash pursuant to a
Regulation S offering -- -- 7,500 7,500,000 -- --
Costs associated with
Regulation S offering -- -- -- (525,000) -- --
Net income for the year -- -- -- -- -- 568,247
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 2,384,000 $ 2,384 7,500 $ 6,975,000 $ 4,279,276 $ 1,171,445
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1995 and 1996
1995 1996
------------ ------------
Cash flows from operating activities:
Net income $ 615,327 $ 568,247
------------ ------------
Adjustments to reconcile net income
to net cash (used in) operating
activities:
Depreciation and amortization 79,712 126,285
Changes in assets and liabilities:
(Increase) in accounts receivable (2,049,428) (2,074,115)
(Increase) in inventory (827,682) (1,222,268)
(Increase) in trading securities (1,062,147) (3,629,600)
(Increase) in prepaid expenses (517,929) (29,046)
Decrease (increase) in other assets 7,121 (3,616)
Increase in accounts payable 68,793 1,978,040
Increase in accrued expenses 14,369 233,110
Increase (decrease) in accrued income taxes 342,000 (109,070)
------------ ------------
Total adjustments (3,945,191) (4,730,280)
------------ ------------
Net cash (used in) operating
activities (3,329,864) (4,162,033)
------------ ------------
Cash flows from investing activities:
Investment in acquisition -- (1,500,000)
Purchase of marketable securities (284,878) --
Decrease in certificate of deposit 500,000 --
Acquisitions of patents and trademarks (22,556) (12,462)
Purchase of fixed assets (133,156) (262,501)
------------ ------------
Net cash provided by (used in)
investing activities 59,410 (1,774,963)
------------ ------------
Cash flows from financing activities:
Offering/acquisition costs 124,818 (591,031)
Net proceeds from stock sales 3,866,091 6,975,000
S corporation distribution (122,500) (96,575)
Gross proceeds from notes payable - banks 500,676 --
Principal payments on notes payable - banks (7,114) --
Principal payments on notes payable - other (225,000) (17,862)
Principal payments on notes payable and
accounts payable related parties (405,562) (179,065)
------------ ------------
Net cash provided by financing
activities 3,731,409 6,090,467
------------ ------------
Net increase in cash 460,955 153,471
Beginning - cash balance 18,301 479,256
------------ ------------
Ending - cash balance $ 479,256 $ 632,727
============ ============
See accompanying notes to financial statements.
28
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1995 and 1996
(Continued)
Supplemental cash flow information:
Cash paid for : Interest $ 282,010 $ 388,578
Income taxes $ - $ 238,972
Non-cash investing and financing activities:
Acquisition of fixed assets with note $ 55,996 $ 113,269
Accrual of S corporation distribution $ 96,575 $ -
Commission paid with warrants $ - $ 462,000
See accompanying notes to financial statements.
29
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 1 - Accounting policies
Organization
Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc. See Note 13) is a
distributor of sunglasses incorporated under the laws of the State of New York.
The Company maintains its office and warehouse operations in Sarasota, Florida.
Suppliers for the Company are primarily located in Asia. The Company's customers
operate retail stores located principally throughout the United States. A major
customer (Wal-Mart Stores, Inc.) accounts for approximately 92% and 53% of the
Company's sales during 1995 and 1996 (See Note 9).
Consolidation policy
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Solartechnics (HK) Ltd. Intercompany
transactions and balances have been eliminated in consolidation.
Inventories
Inventories, consisting principally of finished goods, are valued at the lower
of cost or market on a first in - first out basis.
Fixed assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is
calculated under the straight line method, which depreciation is calculated in
accordance with generally accepted accounting principles over the expected
useful lives of the assets of five to seven years.
Cash
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with a maturity of 3 months or less to be cash
equivalents. At December 31, 1996 the Company maintained $511,015 on deposit at
one bank which exceeded the $100,000 deposit insurance limit by $411,015 and
also maintained investments at this bank in the amount of $4,976,625.
Revenue recognition
The Company generally recognizes revenue upon shipment of goods to its
customers.
Patents and trademarks
Patents and trademarks are amortized using the straight line method over a
period of ten years and are stated net of accumulated amortization of $13,209
and $20,882 at December 31, 1995 and 1996.
30
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Estimates
The preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.
Advertising costs
Advertising costs are charged to operations when the advertising first takes
place. Advertising costs charged to operations were $123,140 and $658,461 in
1995 and 1996.
Stock based compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock Based Compensation beginning in 1996. Upon adoption
of FAS 123, the Company continued to measure compensation expense for its stock
based compensation using the intrinsic value method prescribed by APB No. 25,
Accounting for Stock issued to Employees, and has provided in Note 15 proforma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Fair value of financial instruments
The Company's short-term financial instruments consist of cash and cash
equivalents, accounts and loans receivable, and payables and accruals. The
carrying amounts of these financial instruments approximates fair value because
of their short-term maturities.
Recent pronouncement
In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities was issued.
FAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a
material effect on the Company's consolidated financial position or operating
results.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
31
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 2 - Marketable securities
The Company's securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value as a current asset with the change in fair
value during the period included in earnings. At December 31, 1996 the Company
held an uninsured investment in commercial paper with a cost and fair market
value of $4,976,625. The Company had no sales proceeds from trading securities
during the years ended December 31, 1995 and 1996.
Note 3 - Prepaid expenses
Sunglass displays:
It is the Company's policy to amortize displays shipped to customers over the
two year period of the distribution program. At December 31, 1996 unamortized
costs related to these displays was $624,749 of which $541,195 is classified as
a current asset. Amortization charged to cost of sales was $169,319 and $396,456
during 1995 and 1996.
Other prepaid expenses were $177,613 at December 31, 1996.
Note 4 - Fixed assets
Fixed assets consist of the following at December 31, 1996:
Furniture and equipment $ 406,483
Leasehold improvements 201,842
Transportation equipment 284,135
---------
892,460
Less: accumulated depreciation 313,928
---------
$ 578,532
=========
Depreciation expense was $72,740 and $118,612 for the years ended December 31,
1995 and 1996.
Note 5 - Note payable - bank
During October, 1994 the Company arranged a line of credit with a bank whereby
the Company was able to borrow up to $1,000,000. During October, 1995 the
Company replaced this line of credit with a $1,500,000 line with the same bank.
The line was renewed again in September 1996 with a due date of September 1997.
The line is secured by substantially all of the Company's assets. The Company is
entitled to advances of up to 70% of its accounts receivable less than 61 days
old and 25% of its inventory cost. The line has an interest rate of prime plus
1.5% (9.75% at December 31, 1996). The balance of $1,500,000 at December 31,
1996 was repaid on February 13, 1997 (see Note 13).
32
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 6 - Notes and accounts payable - related parties
The Company at January 1, 1994, had an unsecured 9% interest-bearing note
payable to a stockholder due on April 30, 1995, in the amount of $880,522.
During December, 1994 $510,000 of this note was converted to equity with the
balance of $370,522 converted into a term note with interest at 9% per annum
payable interest only of $2,779 per month for 12 months and principal and
interest of $16,927 for 24 months thereafter. The balance of $173,921 at
December 31, 1996 is due and payable during 1997.
The Company borrowed $285,000 from a shareholder during November, 1993, for
working capital purposes. During 1994 $157,180 was repaid, during 1995 $30,499
was repaid and during 1996 $17,465 was repaid. This advance, aggregating $79,856
is due on demand and is included in Accounts payable - stockholders and related
parties at December 31, 1996.
During December, 1994, the Company borrowed $343,952 from a shareholder for
working capital. This advance was repaid in full with interest of $20,414 on
February 3, 1995.
Approximate interest expense related to loans from related parties aggregated
$54,000 and $29,000 in 1995 and 1996.
Note 7 - Long-term debt
Long-term debt consists of the following at December 31, 1996:
Note payable due in monthly installments of $1,373 including interest
at 8.3% per annum, due in May, 1999 (secured by transportation
equipment) $ 35,975
Note payable due in monthly installments of $1,168 including interest
at 7.2% per annum, due in Nov., 2000 (secured by transportation
equipment) 47,690
Note payable due in monthly installments of $479 including interest at
4.9% per annum, due in Aug., 2000 (secured by transportation
equipment) 19,268
Note payable due in monthly installments of $510 including interest at
9.3% per annum, due in June, 2001 (secured by transportation
equipment) 22,445
Note payable due in monthly installments of $488 including interest at
9.0% per annum, due in Oct., 2000 (secured by transportation
equipment) 18,911
--------
144,289
Less current portion 38,403
--------
$105,886
========
Maturity of long-term debt is as follows:
1997: $38,403 1998:$41,490 1999:$35,013 2000:$26,405 2001:$2,978
33
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 8 - Stockholders' equity
During December, 1994 the Company adopted a stock option plan to be administered
by the Board of Directors. The plan provides for the granting of options for
specified individuals to purchase common stock at an exercise price to be
determined by the Board of Directors. No option may be granted after January,
2005 and no option may be granted for a period of greater than 10 years. The
total number of shares with respect to which options may be granted under the
plan is 1,500,000. The following is a summary of transactions:
Weighted
Shares Under Option Average
------------------- Exercise
1995 1996 Price
------ ------- --------
Outstanding, beginning of year - 10,000 $ 4.19
Granted/vested during the year 10,000 691,262 $ 7.93
Cancelled during the year - -
Exercised during the year - -
------ -------
Outstanding, end of year (prices
from $4.19 to $9.15 per share) 10,000 701,262 $ 7.88
====== =======
Exercisable, end of year (prices
from $4.19 to $9.15 per share) 10,000 701,262 $ 7.88
====== =======
An additional 223,738 options have been granted to employees and affiliates
which are not vested or exercisable as of December 31, 1996.
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.
34
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
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 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 13 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 December 31, 1996 dividends aggregating
118 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.
The Company valued these warrants at $462,000 which represents the difference
between the exercise price of the warrants and the bid price of the common stock
on the date of issue.
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 stock for the ten trading days ending three days prior to the giving
by the holder of a notice of conversion.
35
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
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 9 - Commitments and contingencies
Operating Leases
The Company leases its warehouse and office facilities pursuant to a lease
expiring March 1998, with an option to renew for an additional two years. This
lease provides for various escalations based on cost of living, real estate
taxes, etc. In addition, the Company leases certain transportation equipment
pursuant to leases classified as operating leases. Total monthly lease payments
aggregate approximately $12,900.
Rent expense was $88,922 and $108,775 for 1995 and 1996.
Future minimum rentals are as follows:
1997: $147,436 1998: $32,241 1999 $3,495
Concentration of credit risk/major customer
During the years ended December 31, 1995 and 1996, the Company made net sales to
the Customer described in Note 1 of approximately $9,607,000 and $7,206,000 or
92% and 53% of its total sales. In addition, during 1996 the Company made net
sales to a Canadian distributor aggregating $2,810,000 or 21% of total sales.
Approximately $1,992,000 (33%) and $2,322,825 (38%) of the gross accounts
receivable are due from the significant customer described in Note 1 and the
Canadian distributor, respectively, at December 31, 1996 and are unsecured.
Employment agreements
The Company entered into three year employment agreements with its president and
a vice president effective on August 11, 1995. The president's agreement
provides for an annual salary of $150,000 and the vice president's agreement
provides for a salary of $125,000. The agreements provide for annual increases
of 4% and certain incentive compensation as declared by the Board of Directors.
The Board did not effect this incentive compensation for 1995 or 1996.
36
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
The agreements may be terminated as of the end of the first and second years by
giving 90 days notice to the other party. The employment agreements also contain
non-compete covenants which expire one year after termination of employment.
Note 10 - Income taxes
Prior to the completion of its public offering the Company had elected to be
treated as an "S" Corporation under the provisions of the Internal Revenue Code
and state statutes. Under these provisions no income taxes are incurred on a
corporate level. Instead, shareholders of the Company include their pro-rata
share of income or loss on their individual income tax returns.
During August, 1995 the Company completed a public offering of its common stock
and the "S" Corporation status was thereby terminated and the Company became
subject to corporate income taxes. Effective September 1, 1995 the Company
adopted Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes. Of the income for the year ended December 31, 1995 $12,129 was
allocated to the shareholders and $945,198 was subject to corporate income
taxes. The accumulated deficit through the termination of the "S" election of
$1,062,011 has been reclassified to paid in capital.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse.
The amounts shown for income taxes in the statements of operations differ from
amounts that would be derived from computing income taxes at federal statutory
rates. The following is a reconciliation of those differences.
1995 1996
---- ----
Tax at federal statutory rate 34 % 34 %
Foreign tax benefit (6)% (8)%
Other 3 % -
State income tax net of federal
tax benefit 5 % 3 %
---------- ----------
36 % 29 %
========== ==========
Income taxes consisted of $294,300 of domestic and $47,700 of foreign income
taxes in 1995 and $188,595 of domestic and $44,335 of foreign income taxes in
1996.
After the closing of its public offering the Company had agreed to make a
distribution to its existing shareholders in an amount not to exceed $300,000.
The total amount of the distribution was $219,075.
37
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 11 - Foreign operations
During 1995 and 1996 the Company operated in 2 geographic areas: The
United States and Hong Kong. Following is a summary of information
by area:
1995 1996
------------ ------------
Net sales to unaffiliated customers:
United States $ 8,417,838 $ 12,634,908
Hong Kong 2,054,818 949,347
------------ ------------
$ 10,472,656 $ 13,584,255
============ ============
Income from operations:
United States $ 918,280 734,899
Hong Kong 270,552 269,758
------------ ------------
1,188,832 1,004,657
Other income 71,082 189,632
Other expenses (302,587) (393,112)
------------ ------------
Income before income taxes $ 957,327 $ 801,177
============ ============
Identifiable assets:
United States $ 9,642,347 $ 18,762,738
Hong Kong 247,146 591,849
------------ ------------
$ 9,889,493 $ 19,354,587
============ ============
Income before income taxes represents net sales, less operating expenses for
each geographic area and other income and expenses of a general corporate
nature. Identifiable assets are those that are identifiable with operations in
each geographic area. All sales made by the foreign subsidiary were made to the
significant customer described in note 1 in 1995 and approximately 87% of the
sales made by the foreign subsidiary were made to the significant customer
described in note 1 in 1996.
Note 12 - 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 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 were 1,682,000 in 1995 and 2,770,143 in 1996. The fully diluted
earnings per share amount in 1996 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 3,111,052.
38
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 13 - Subsequent events
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 (see Note 8) and the borrowings under the credit facility
described below. At December 31, 1996 the Company carried a deposit of
$1,500,000 on its books for the down payment and $591,031 of deferred
acquisition costs related to this acquisition.
Concurrently with the closing of the above acquisition, 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 in Note 5. The Company is able
to borrow up to 85% of eligible accounts receivable under 91 days old 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.
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 prices ranging from $5.00 to $7.50 per share through
August, 1999 based on sales and profit targets set by the Company.
Note 14 - Subsequent events
During April 1997, the option price of the 701,262 options described in Note 8
and the 485,000 options described above was reduced to $3.00 per share.
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
39
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
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 vigorously to defend the action and is presently considering
counterclaims.
Note 15 - Stock based compensation
The weighted average fair value at date of grant for options granted during 1996
was $7.90 per option. The fair value of options at date of grant was estimated
using the Black-Scholes model with the following weighted average assumptions:
Expected Life 3 years
Risk free interest rate 5.25%
Expected volatility 22.00%
Dividend yield 0.00%
Stock based compensation costs would have increased 1996 pre-tax income by
$11,911 and $7,861 after tax if the fair value based method prescribed by FAS
123 had been applied in measuring compensation expense.
The following is a summary of the status of fixed options outstanding at
December 31, 1996:
Weighted
Average Weighted
Remaining Average
Exercise Number of Contractual Exercise
Price Range Options Life Price
------------- --------- ----------- ---------
$4.19 - $5.20 89232 2.7 years $4.74
$8.32 - $9.15 612030 2.8 years $8.34
40
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
On February 11, 1997, Winter, Scheifley & Associates, P.C. declined to
stand for re-election as the Company's independent auditors, and on the same
date the Company appointed Bartnick, P.A. as its new independent auditors
commencing with the audit of the Company's consolidated financial statements for
the year ended December 31, 1996. The Company's financial statements for the
past two fiscal years and any interim period through February 11, 1997 did not
contain an adverse opinion or disclaimer of opinion, nor were they modified as
to uncertainty, audit scope or accounting principles. The decision to change
auditors was approved by the Company's Board of Directors at a meeting duly held
on February 6, 1997. There were no disagreements with such former auditors on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure during the past two fiscal years or
any interim period through February 11, 1997. The Company did not consult with
its new independent auditors regarding any matters relating to periods prior to
their engagement. The Company has received from its former auditors a letter
addressed to the Securities and Exchange Commission stating their agreement with
the foregoing statements by the Company.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The names and ages of the directors, executive officers and significant
employees of the Company are set forth below.
Name Age Positions
- ---- --- ---------
Stephen Nevitt 49 President, Treasurer and Director
Milton Nevitt 76 Vice President, Secretary and Director
Michael J. Guccione 49 Vice President and Director
David B. Newman 42 Director
William Keener 52 Director
Michael Burke 48 Vice President-Marketing
Lloyd J. Fuller 51 Vice President-Worldwide Sales Manager/
Premium Division
Lucia Almquist 43 Vice President-Corporate Development
Edward Borix 47 Vice President of Operations, Worldwide
Neil Winter 45 Chief Financial Officer
Stephen Nevitt became the President of the Company in 1993. Prior to such
time, he served as Vice President and a director of the Company since its
founding in 1976 by his father, Milton Nevitt. As Vice President, he was
involved in all phases of operations including management and sales. He became
the Company's President in 1993, and has since been given primary responsibility
for management and sales and has also been responsible for design and
development of the Company's products as well as product procurement. Mr. Nevitt
is primarily responsible for the Company's account with Wal-Mart.
Milton Nevitt founded the Company in 1976 and served as its President and a
director until 1993, and has since served the Company as a Vice President and a
director. As President, Mr. Nevitt was primarily responsible for sales and
administration. As Vice President, Mr. Nevitt focuses on sales and also oversees
the account responsibilities of the Company's independent sales representatives
and coordinates the Company's overall sales with the Company's National Sales
Manager. Mr. Nevitt's career in the sunglass industry began in 1950 as a
manufacturer's representative for Rayex Corporation, a major domestic supplier
of popular priced sunglasses. Mr. Nevitt worked in that capacity until Rayex
ceased its business operations in 1976. Mr. Nevitt founded the Company shortly
thereafter.
Michael J. Guccione became a Vice President and director of the Company in
December 1994. Since joining the Company in 1992, Mr. Guccione's primary
responsibilities have been marketing and product development of the Company's
H2Optix(R) and other product lines. Mr. Guccione became employed by Wal-Mart
Stores, Inc. ("Wal-Mart") in 1976 and started and headed its fine jewelry
division. Mr. Guccione was also in charge of the development of the sunglass
business at Wal-Mart and travelled extensively throughout the Far East and
Pacific Rim for the purpose of developing resources for the purchase of
sunglasses. After leaving Wal-Mart in 1990, Mr. Guccione independently ran a
management consulting firm until joining the Company.
41
<PAGE>
David B. Newman, a director of the Company since December 1994, has for
over the last five years been a partner of the law firm Cooperman Levitt
Winikoff Lester & Newman, P.C., which has acted as outside counsel to the
Company since 1987.
William Keener has served as an Executive Vice President and Chief Credit
Officer of SouthTrust Bank of the Suncoast, a commercial bank, since May 1994.
From March 1990 to May 1994, Mr. Keener served as a Senior Vice President and
Group President for Commercial Lending and Commercial Real Estate for Sunbank,
N.A., a commercial bank. Mr. Keener was appointed to the Board of Directors in
July 1996 to fill a vacancy created by the removal of a director.
Michael Burke is and since January 1997 has been the Vice
President-Marketing of the Company. From November 1995 until joining the
Company, Mr. Burke served as a marketing consultant to the Company. From
November 1992 through June 1994, he was Vice President and general manager of
the sunglass division of Smith Sport Optics, a sunglass distributor. From June
1985 until November 1992, Mr. Burke served as Vice President-Marketing of Bausch
& Lomb, Inc.'s Ray-Ban sunglasses division.
Lloyd J. Fuller is and since February 1997 has been the Company's Vice
President-Worldwide Sales Manager/Premium Division. From 1992 until joining
the Company, Mr. Fuller was a sales manager for the Serengeti Eyewear division
of Corning, which was acquired by the Company in February 1997. He was
responsible for North America sales until December 1995, when he became
responsible for Latin America and Asia Pacific sales as well. During the 29
years prior to joining the Serengeti Eyewear division, Mr. Fuller was a sales
and merchandising manager for Corning's Consumer Products Company.
Lucia Almquist is and since January 1997 has been the Vice
President-Corporate Development of the Company. From 1991 through 1997, Ms.
Alquist served as Vice President-Licensing and Merchandising for the Bon Jour
Group, Ltd., a designer and manufacturer of various fashion products.
Edward Borix is and since March 1997 has been the Vice President of
Operations, Worldwide of the Company. From January 1995 until joining the
Company, Mr. Borix was a Vice President of Fidelity Investments, an investment
company. From 1979 to 1995, he was a general manager and director of
distribution for various manufacturing plants of Bausch & Lomb, Inc., a
manufacturer of diverse eyeglass, eyewear and other optical products.
Neil Winter is and has since January 1997 been the Chief Financial Officer
of the Company. From 1985 until joining the Company, Mr. Winter was a principal
of Winter, Scheifley & Associates, P.C., a firm of certified public accountants
principally engaged in the auditing of financial statements for companies
required to file reports with the Securities and Exchange Commission. Such firm
served as the Company's independent auditors from January 1994 until December
1996. The Company's 1996 financial statements have been audited by Bartnick,
P.A., an unrelated firm of certified public accountants.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own beneficially more than 10%
of the Common Stock to file reports of ownership and changes in ownership of
such Common Stock with the Securities and Exchange Commission, and to file
copies of such reports with the Company. Based solely upon a review of the
copies of such reports filed with the Company, the Company believes that, other
than the late filing in April 1997 of a Form 3 by William Keener relating to his
becoming a director in August 1996, during 1996 such reporting persons complied
with the filing requirements of said Section 16(a).
42
<PAGE>
Item 10. Executive Compensation.
The following table summarizes the compensation for services rendered to
the Company paid in 1994, 1995 and 1996 to the Chief Executive Officer and the
Company's other executive officer who received total annual salary and bonus in
excess of $100,000.
Summary Compensation Table
Long Term Compensation
Annual Compensation ----------------------
----------------------- Securities Underlying
Name and Principal Position Year Salary($) Options(#)
- --------------------------- ---- --------- ----------------------
Stephen Nevitt 1996 166,730 750,000
President (CEO) 1995 143,702
1994 125,000
75,000
Michael J. Guccione 1996 132,212
Vice President 1995 108,135
Set forth below is information with respect to grants of stock options
during the year ended December 31, 1996 to the named executive officers in the
Summary Compensation Table.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options
Underlying Options Granted To Employees Exercise or Expiration
Name Granted(#) In Fiscal Year Base Price ($/Sh) Date
- ---- ---------- -------------- ----------------- ----
<S> <C> <C> <C> <C>
Stephen Nevitt 600,000 70.2% 8.32 10/30/06
22,848 2.7 4.72 5/16/06
127,152 14.9 5.20 5/16/01
Michael J. Guccione 75,000 8.8 4.72 5/16/06
</TABLE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Options Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End(#) at Fiscal Year End($)
------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Nevitt 644,040 105,960 106,754 230,463
Michael J. Guccione 21,192 53,808 56,265 142,860
</TABLE>
Employment Agreements
The Company has employment agreements with each of Stephen Nevitt, the
Company's President and chief executive officer, and Michael J. Guccione, a Vice
President of the Company, each of which expire on December 31, 1997. Mr.
Nevitt's employment agreement provides for an annual base salary of $150,000,
and Mr. Guccione's agreement provides for an annual base salary of $125,000.
Each of the employment agreements provides for annual increases in base salary
of 4% and annual incentive compensation based upon the financial performance of
the Company. Under the employment agreements, as additional annual incentive
compensation, Mr. Nevitt will be entitled to receive up to 50% and Mr. Guccione
will be entitled to receive up to 25% of any bonus pool adopted by the Board of
43
<PAGE>
directors for key personnel of the Company. The amount of such bonus pool may be
up to 10% of the Company's pre-tax profit for the relevant year, but only 5% of
such pre-tax profit for 1995. The Board of Directors did not adopt a bonus pool
in 1995 or 1996. The incentive compensation will be earned if either of the
following performance targets are achieved: (i) the Company's earnings per share
is at least $0.30 for the relevant year, or (ii) the average closing bid price
of the Common Stock for the relevant year equals or exceeds a target of $8.75
per share. Utilizing the earnings per share component, all unearned prior
incentive compensation will be deemed earned upon the Company achieving an
earnings per share which is cumulative for each of the prior periods. In
addition, if the Common Stock target price component is achieved for any year,
all unearned prior incentive compensation will be deemed earned. Although the
employment agreements will expire on December 31, 1997, the recapture provisions
for unearned incentive compensation during the term will continue through the
year 2001.
Each of the employment agreements contains a covenant by the employee not
to compete with the Company until the expiration of a one year period after the
expiration or termination of the agreement.
L. Phillips Reames, a non-employee director of the Company in 1996,
received a fee of $1,000 in connection with each Board meeting attended. No
other directors were compensated for their services as such.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of April 28, 1997
with respect to the beneficial ownership of the outstanding shares of Common
Stock by (i) any shareholder known by the Company to beneficially own more than
five percent of such outstanding shares, (ii) the Company's directors and
executive officers and (iii) the directors and executive officers of the Company
as a group. Except as otherwise indicated, the address of each beneficial owner
of five percent or more of such Common Stock is the same as the Company.
Amount
Name and Address Beneficially Ownership
of Beneficial Owner Owned(1) Percentage(1)
------------------- -------- -------------
Nevitt Family Trust(2) 506,103 21.2%
Milton Nevitt 278,781 11.7%
Stephen Nevitt 7,624,409(3)(4)(5) 82.4%
Michael J. Guccione 166,817(5)(6) 6.9%
David B. Newman
c/o Cooperman Levitt Winikoff
Lester & Newman, P.C
800 Third Avenue
New York, New York 10022 544,116(3)(5)(7) 22.3%
William Keener 750 *
Neil Winter 2,000 *
Michael Burke 2,000 *
Lloyd J. Fuller -- --
Lucia Almquist -- --
Edward Borix 3,000 *
John R. Clark
1725 Lazy River Lane
Dunwoody, Georgia 30350 200,000(8) 7.7%
RBB Bank Aktiengesellschaft
Burging 16
8010 Graz
Austria 6,250,000(9) 72.4%
Directors and executive officers
as a group (10 persons) 8,115,770 86.9%
- ----------
* Less than 1%.
(1) Computation based on the term beneficial ownership as used in the
regulations of the Securities and Exchange Commission which, for purposes
of the computation of ownership by the named holder, deems outstanding
shares of Common Stock issuable upon exercise of options and convertible
44
<PAGE>
securities exercisable or convertible on the date, and within sixty (60)
days following the date, of determination of beneficial ownership. As of
April 28, 1997, 2,384,000 shares of Common Stock were actually issued and
outstanding.
(2) The indicated trust (the "Trust") was created pursuant to a Trust
Agreement, dated as of September 11, 1992, between Milton Nevitt, as
grantor, and Stephen Nevitt and David B. Newman, as trustees. Such trustees
have the sole power to vote the shares held by the Trust. The children of
Milton Nevitt, including Stephen Nevitt, are the beneficiaries under the
Trust.
(3) Includes 506,103 shares held by the Trust, for which such beneficial owner
acts as trustee.
(4) Includes 613,948 shares issuable upon exercise of options granted pursuant
to the Company's 1995 Stock Option Plan (the "Plan"), 579,935 of which are
exercisable at $2.94 per share and 34,013 of which are exercisable at $3.24
per share. Stephen Nevitt, pursuant to exercise of a power granted in the
subscription agreement covering the issuance of the Company's Preferred
Stock (as described in Footnote (9) below), has the power to direct the
voting of shares of Common Stock issuable upon conversion thereof for the
election of a majority of the directors of the Company through October
2000. Accordingly, the table includes 6,250,000 shares of Common Stock
issuable upon conversion of the Series A Stock and the Series B Stock
referred to in Footnote (9) below. The table does not include shares of
Common Stock issuable upon conversion of the Series C Stock, as such Series
C Stock does not become convertible within 60 days.
(5) Does not include those shares issuable upon the exercise of options granted
pursuant to the Plan which are not exercisable within 60 days.
(6) Includes 34,013 shares issuable upon exercise of options granted pursuant
to the Plan which are exercisable at $2.94 per share.
(7) Includes 34,013 shares issuable upon exercise of options granted pursuant
to the Plan which are exercisable at $3.24 per share.
(8) Represents shares issuable upon exercise of the Series D Warrant which
entitles the holder to purchase such number of shares at an exercise price
of $5.50 per share at any time prior to September 30, 2001.
(9) RBB Bank Aktiengesellschaft ("RBB") is the registered owner of all 7,500
shares of Series A 6.5% Convertible Preferred Stock ("Series A Stock"),
7,500 shares of Series B 6% Convertible Preferred Stock ("Series B Stock")
and 7,500 shares of Series C 6% Convertible Preferred Stock ("Series C
Stock") of the Company. The Series A Stock and the Series B Stock are
presently convertible into shares of Common Stock of the Company at a price
determined by dividing the stated value of the series ($7,500,000 for each)
by a price equal to the lower of (i) $5.50 in the case of the Series A
Stock and $6.75 in the case of the Series B Stock and (ii) 80% of the
average market price (as defined) for the ten (10) consecutive trading days
ending three (3) days prior to the notice of conversion. The Series C Stock
is not convertible until July 1, 1997. As of April 28, 1997, the average
market price was $3.00 and, assuming notice of conversion being given on
such date for all outstanding shares of Series A and Series B Stock, RBB
would have owned 6,250,000 shares of Common Stock on such date. The above
computation of beneficial ownership excludes shares of Common Stock
issuable upon conversion of the Series C Stock, as well as shares of Common
Stock issuable upon exercise of the Series A Warrant, the Series B Warrant
and the Series C Warrant of the Company issued to RBB, respectively, at the
time of the issue of the Series A Stock, the Series B Stock and the Series
C Stock. The Series A Warrant of the Company (the "Series A Warrant")
entitles RBB to purchase up to an aggregate of 150,000 shares of Common
Stock at an exercise price of $5.5625 per share. The Series A Warrant is
exercisable at any time commencing January 1, 1999 and on or prior to
December 31, 2002. The Series B Warrant of the Company (the "Series B
Warrant") and the Series C Warrant of the Company (the "Series C Warrant")
each entitles RBB to purchase up to an aggregate of 300,000 shares of
Common Stock at a per share exercise price of (i) $7.50 with respect to the
Series B Warrant and (ii) $10.00 with respect to the Series C Warrant. Each
of the Series B Warrant and the Series C Warrant is exercisable at any time
commencing January 1, 1999 and on or prior to December 31, 2002.
45
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Prior to the Serengeti Acquisition
On November 1, 1991, Joseph Feldman, the brother-in-law of Milton Nevitt, a
Vice President of the Company, made a loan in the principal amount of $880,522
to the Company. The loan was to become due in April 1995 with interest at the
rate of 9% per annum. On December 30, 1994, Mr. Feldman converted a portion of
such loan in the principal amount of $510,000 into equity of the Company in
exchange for the issuance by the Company of 99,724 shares of Common Stock. The
then remaining outstanding principal amount of the loan ($370,522) became
payable, with interest of 9% per annum, over a three-year period ending January
31, 1998, with monthly payments of interest in the amount of $2,779 during the
first year and monthly payments of principal and interest in the amount of
$16,927 during the remaining two years.
Mr. Guccione made a working capital loan to the Company of $343,952 in
December 1994. Such loan, together with interest, has been repaid in full.
Between January and October 1993, Milton Nevitt loaned an aggregate amount
of $281,450 to the Company. The loans were to become due in April 1995 with
interest at the rate of 9% per annum. On December 30, 1994, the remaining
principal balance of such loans, in the amount of $270,128, was contributed by
Mr. Nevitt to the capital of the Company without the issuance of any additional
shares of capital stock. During November 1993, Milton Nevitt loaned an
additional amount of $285,000 to the Company. The remaining balance of such loan
at December 31, 1996 in the amount of $79,856 is payable upon demand.
The Company's former credit facility (which was repaid on February 13,
1997) was guaranteed, jointly and severally, by each of Stephen and Milton
Nevitt and their wives, by Michael Guccione, and by the Nevitt Family Trust.
46
<PAGE>
See "Executive Compensation - Employment Agreements" for a discussion of
the employment agreements which the Company has with each of Stephen Nevitt and
Michael Guccione.
To Finance the Serengeti Acquisition
On October 4, 1996, the Company issued 7,500 shares of its Series A 6.5%
Convertible Preferred Stock, $.001 par value (the "Series A Shares"), to RBB, a
banking institution whose principal offices are located in Austria, in a private
offshore offering pursuant to Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"). RBB purchased the Series A Shares for a purchase
price equal to their aggregate stated value of $7.5 million as set forth in a
Regulation S Offshore Subscription Agreement dated September 29, 1996, which
also contemplated the purchase of the Series B Shares and Series C Shares
referred to below. The purpose of such investment was to fund, in part, the
acquisition (the "Serengeti Acquisition") by the Company of certain of the
assets of the Serengeti Eyewear division ("Serengeti") of Corning Incorporated
used in the design, manufacture and distribution of Serengeti brand sunglasses.
Pursuant to an Agreement of Purchase and Sale, dated as of October 29,
1996, between the Company and Corning Incorporated, the Company agreed to
purchase the Serengeti assets for a purchase price of $27.5 million, which was
effected on February 13, 1997. RBB purchased, concurrently with the closing of
the Serengeti Acquisition, 7,500 shares of the Company's Series B 6% Convertible
Preferred Stock, $.001 par value (the "Series B Shares"), and 7,500 shares of
the Company's Series C 6% Convertible Preferred Stock, $.001 par value (the
"Series C Shares"; together with the Series A Shares and the Series B Shares,
the "Preferred Shares"), for a purchase price equal to their aggregate stated
value of $15.0 million. The proceeds to the Company from the sale of the
Preferred Shares were approximately $20.9 million (net of commissions and the
estimated expenses of such sale). The Company applied such net proceeds to the
Serengeti Acquisition purchase price. The Company financed the remainder of such
purchase price and related costs and expenses with borrowings under its new
Revolving Line of Credit and Term Loan Agreement dated as of February 13, 1997
with SunTrust Bank, Central Florida, National Association as lead lender and
agent, and with Creditanstalt Bankverin.
Concurrently with the issuance of the Series A Shares, the Company also
issued to RBB a Series A Warrant of the Company (the "Series A Warrant") to
purchase up to an aggregate of 150,000 shares of Common Stock at an exercise
price of $5.5625 per share. The Series A Warrant is exercisable at any time
commencing January 1, 1999 and on or prior to December 31, 2002. In addition,
the Company issued to RBB, concurrently with the issuance of the Series B Shares
and the Series C Shares, a Series B Warrant of the Company (the "Series B
Warrant") and a Series C Warrant of the Company (the "Series C Warrant"), each
of which will entitle RBB to purchase up to an aggregate of 300,000 shares of
Common Stock at a per share exercise price of (i) $7.50 with respect to the
Series B Warrant and (ii) $10.00 with respect to the Series C Warrant. Each of
the Series B Warrant and the Series C Warrant is exercisable at any time
commencing January 1, 1999 and on or prior to December 31, 2002.
The Company has also issued, as part of the commission payable to a third
party in connection with the sale of the Series A Shares, a Series D Warrant of
the Company (the "Series D Warrant") to purchase up to an aggregate of 200,000
shares of Common Stock at an exercise price of $5.50 per share. The Series D
Warrant is immediately exercisable and expires on or prior to September 30,
2001.
Item 13. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Exhibit Description
- ------- -------------------
3(i).1 Restated Certificate of Incorporation of the Company*
3(i).2 Certificate of Amendment of the Certificate of Incorporation of the
Company relating to the designation of the Preferred Shares*****
3(ii).1 Amended and Restated By-laws of the Company ("By-laws")*
3(ii).2 Amendment No. 1 to By-laws*
10.1 Agreement dated December 30, 1994 between the Company and Joseph
Feldman*
10.2 Agreement dated January 17, 1994 between the Company and Michael J.
Guccione, Inc.*
10.3 Agreement dated December 7, 1994 between the Company and Michael J.
Guccione*
10.4 Revolving Line of Credit and Term Loan Agreement dated as of February
13, 1997 by and among the Company, SunTrust Bank, Central Florida,
National Association, individually and as agent, and
Creditanstalt-Bankverein (Exhibits omitted; the Company agrees to
furnish supplementally a copy of any exhibits to the Commission upon
request)**
10.5 Lease Agreement dated March 3, 1993 between DRI II Partnership and the
Company*
10.6 1995 Stock Option Plan of the Company*
10.7 Employment Agreement between the Company and Stephen Nevitt*
10.8 Employment Agreement between the Company and Michael Guccione*
10.9 Form of Consulting Agreement between the Company and Argent
Securities, Inc.*
10.10 Agreement of Purchase and Sale, dated as of October 29, 1996, between
the Company and Corning***
10.11 Subscription Agreement, dated September 26, 1996, between the Company
and RBB***
10.12 Lens Blank Supply Agreement, dated as of February 13, 1997, between
the Company and Corning (confidential treatment has been requested
with respect to certain information contained in this Agreement)*****
10.13 License Agreement, dated as of February 13, 1997, between the Company
and Corning*****
16 Letter on change in certifying accountant**
21 Subsidiaries of the Company****
27 Financial Data Schedule*****
- ----------
* Filed as an Exhibit to the Company's Registration Statement on Form
SB-2, Registration No. 33-89752-A, under the Securities Act of 1933
and incorporated herein by reference.
** Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
February 11, 1997.
*** Filed as an Exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended September 30, 1996.
**** Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995.
***** Previously Filed
47
<PAGE>
(b) The Company filed the following report on Form 8-K during the fourth
quarter of the year ended December 31, 1996:
Current Report on Form 8-K dated October 4, 1996 reporting the Preferred
Shares financing.
48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERENGETI EYEWEAR, INC.
Date: April 11, 1997 By /s/ Stephen Nevitt
------------------------
Stephen Nevitt
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
/s/ Stephen Nevitt
- --------------------------
Stephen Nevitt President, Treasurer and Director April 11, 1997
(principal executive officer)
/s/ Milton Nevitt
- --------------------------
Milton Nevitt Vice President, Secretary April 11, 1997
and Director
/s/ Michael J. Guccione
- --------------------------
Michael J. Guccione Vice President and April 11, 1997
Director
/s/ Neil Winter
- --------------------------
Neil Winter Chief Financial Officer April 11, 1997
(principal financial and
accounting officer)
/s/ David B. Newman
- --------------------------
David B. Newman Director April 11, 1997
/s/ William Keener
- --------------------------
William Keener Director April 11, 1997
49
