<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
COMMISSION FILE NUMBER:
SERENGETI EYEWEAR, INC.
(Exact Name of Small Business Issuer as specified in its charter)
NEW YORK 65-0665659
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
8125 25TH COURT EAST
SARASOTA, FLORIDA 34243
(Address of principal executive offices)
(941) 359-3599
(Issuer's telephone number including area code)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. YES: /X/ NO:
Number of shares outstanding October 31, 1998
2,384,000 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure YES: / / NO: /X/
<PAGE>
SERENGETI EYEWEAR, INC.
INDEX
PART I
Item 1. Financial Statements
Consolidated Balance Sheet as of
September 30, 1998 3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 14
PART II
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc,
Consolidated Balance Sheet
September 30, 1998
(Unaudited)
ASSETS
Current Assets:
Cash $ 722,551
Accounts receivable - trade 8,529,487
Other receivables 388,257
Inventories 17,520,523
Prepaid expenses 938,516
------------
Total current assets 28,099,334
Fixed assets - net of accumulated
depreciation 2,267,694
Other assets:
Goodwill 6,377,650
Prepaid expenses - non-current 150,000
Debt issue costs 565,491
Patents and trademarks - net 10,413,306
Other assets 18,634
------------
$ 47,892,109
============
See accompanying notes to financial statements.
2
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Serengeti Eyewear, Inc.
Consolidated Balance Sheet
September 30, 1998
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 7,410,000
Current portion of long-term debt 5,662,500
Accounts payable 10,222,722
Accrued dividends 1,107,000
Accrued expenses 419,760
------------
Total current liabilities 24,821,982
------------
Long-term debt 1,044,821
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000
shares authorized 23,908 shares issued
and outstanding 22,333,000
Common stock, $.001 par value, 10,000,000
shares authorized, 2,384,000 shares
issued and outstanding 2,384
Additional paid in capital 10,586,094
Retained deficit (10,896,172)
------------
Total stockholders' equity 22,025,306
------------
$ 47,892,109
============
See accompanying notes to financial statements.
4
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Serengeti Eyewear, Inc.
Consolidated Statements of Operations
For The Three Months and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $10,531,339 $ 8,376,546 $34,132,176 $24,280,638
Cost of goods sold 6,685,436 3,882,554 20,002,183 11,587,872
----------- ----------- ----------- -----------
Gross profit 3,845,903 4,493,992 14,129,993 12,692,766
----------- ----------- ----------- -----------
Operating expenses:
Depreciation and amortization 358,142 588,684 1,107,745 1,591,653
Selling expenses 859,001 1,273,531 4,199,824 5,009,826
General and administrative,
expenses 1,903,075 2,319,685 7,272,134 5,253,125
----------- ----------- ----------- -----------
Total operating expenses 3,120,218 4,181,900 12,579,703 11,854,604
----------- ----------- ----------- -----------
Income (loss) from operations 725,685 312,092 1,550,290 838,162
----------- ----------- ----------- -----------
Other (expenses) income:
Other income - 8,198 - 40,719
Interest Expense (433,370) (337,551) (1,301,358) (836,443)
----------- ----------- ----------- -----------
(433,370) (329,353) (1,301,358) (795,724)
----------- ----------- ----------- -----------
Income (loss) before taxes 292,315 (17,261) 248,932 42,438
Provision for income taxes
Current 92,851 8,300 92,851 (8,400)
----------- ----------- ----------- -----------
Net income (loss) 199,464 (8,961) 156,081 34,038
Preferred stock dividends (369,000) (347,000) (1,107,000) (4,677,000)
----------- ----------- ----------- -----------
Net income (loss) applicable
to Common stock $ (169,536) $ (355,961) $ (950,919) $(4,642,962)
=========== =========== =========== ===========
Basic (loss) per share $ (0.07) $ (0.15) $ (0.40) $ (1.95)
=========== =========== =========== ===========
Weighted average shares: 2,384,000 2,384,000 2,384,000 2,384,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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Serengeti Eyewear, Inc.
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1998 and 1997
1998 1997
----------- -----------
Cash flows from operating activities $ 2,384,048 $ 4,959,463
----------- -----------
Cash flows from investing activities:
Acquisition of business interest - (26,427,926)
Acquisition of patents and trademarks (53,113) (22,698)
Purchase of fixed assets (346,368) (898,240)
----------- -----------
Net cash (used in)
investing activities (399,481) (27,348,864)
----------- -----------
Cash flows from financing activities:
Increase in deferred acquisition costs - (1,065,548)
Repayments of related party debt (44,842) (182,449)
Proceeds from the sale of preferred stock - 13,950,000
Proceeds from bank borrowings 910,000 11,900,000
Repayment of bank loans (2,212,500) (2,125,000)
Principal payments on long-term debt (42,862) (123,422)
----------- -----------
Net cash (used in)/provided by
financing activities (1,390,204) 22,353,581
----------- -----------
Net increase (decrease) in cash 594,363 (35,820)
Beginning - cash balance 128,188 632,727
----------- -----------
Ending - cash balance $ 722,551 $ 596,907
=========== ===========
See accompanying notes to financial statements.
6
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note A. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Item 310(b) of Regulation SB. They do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial statements of the
Company as of December 31, 1997 and for the two years then ended, including
notes thereto included in the Company's Form 10-KSB.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Solartechnics (HK) Ltd. Intercompany
transactions and balances have been eliminated in consolidation.
INVENTORIES
Inventories, consisting principally of finished goods and work in process, are
valued at the lower of cost or market on a first in - first out basis.
The cost of sales for the periods presented have been determined using the gross
profit method.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (FAS 109), "Accounting for Income Taxes", which requires use
of the liability method. FAS 109 provides that deferred tax assets and
liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets and
liabilities at the end of each period are determined using the currently enacted
tax rates applied to taxable income in the periods in which the deferred tax
assets and liabilities are expected to be settled or realized.
The amounts shown for income taxes in the statement of operations in 1998 and
1997 differs from amounts that would be derived from computing income taxes at
federal statutory rates (34% - adjusted
7
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
for the surtax exemption) primarily as a result of state income taxes net of the
federal benefit (3%).
LOSS PER SHARE
Loss per share amounts are computed based upon the weighted average number of
shares outstanding of 2,384,000.
Potential common shares are not considered in the computation as their effect
would be anti-dilutive. Potential common shares include 1,410,000 options,
2,220,000 warrants and approximately 17,000,000 shares underlying the preferred
stock.
Note B. Note payable - bank
Concurrently with the closing of the acquisition described in Note E, the
Company entered into a Revolving Line of Credit and Term Loan Agreement (the
"Agreement") with SunTrust Bank. Under the Agreement, the Company had 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 $1.5 million of outstanding indebtedness.
Effective August 21, 1998, the Company executed a first Amendment to The
Agreement (the "Amended Agreement"). The Company restructured the loan
covenants and the bank waived the Company's compliance defaults for all periods
prior to June 1998. Revolving loans under the Amended Agreement are subject to
a borrowing base limitation which is up to 75% of eligible accounts receivable
and 50% of eligible inventory (subject to an additional limitation on inventory
backed loans), for working capital. The Amended Agreement is secured by a
priority lien on substantially all of the assets of the Company and its
subsidiaries. Pursuant to the Amended Agreement, interest is payable at the
LIBOR rate or Base Rate plus applicable margins. In addition, the Company is
subject to certain financial covenants.
At September 30, 1998 the Company was in compliance with its Amended Agreement.
The unused portions of the revolver facility was $90,000.
8
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note C. Stockholders' equity
Preferred stock
On October 4, 1996 the Company issued 7,500 shares of its 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 E, RBB purchased pursuant to said
Regulation S offering 7,500 shares of the Company's Series B 6% cumulative
convertible non-voting preferred stock and 7,500 shares of the Company's Series
C 6% cumulative convertible non-voting preferred stock for cash aggregating
$15,000,000 less commissions aggregating $1,050,000. The dividends on the
preferred shares are payable in cash or additional shares of preferred stock at
the option of the Company. At September 30, 1998 dividends aggregating 1,107
shares of preferred stock valued at $1,107,000 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 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 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 common stock at an exercise price of $5.50
per share through September 30, 2001.
Each of the Series A Preferred Shares may be converted into shares of common
stock at any time. Each Series A share is convertible into such number of common
shares as is determined by dividing its stated value of $1,000 by a conversion
rate equal to the lower of (a) $5.50 or (b) 80% of the average market price for
the common stock for the ten trading days ending three days prior to the giving
by the holder of a notice of conversion.
9
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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.
Each of the Series C Preferred Shares may be converted into shares of common
stock at any time after July 1, 1997. Each Series C share is convertible into
such number of common shares as is determined by dividing its stated value of
$1,000 by a conversion rate equal to the lower of (a) $8.25 or (b) 80% of the
average market price for the common stock for the ten trading days ending three
days prior to the giving by the holder of a notice of conversion.
At any time after September 30, 2000 the Company will have the right to force
conversion of the preferred shares into common stock.
Note D. Commitments and contingencies
Concentration of credit risk/major customers:
During the nine months ended September 30, 1998 and 1997, the Company made net
sales to two significant customers of approximately $10,658,000 and $6,118,000
or 31% and 25% of its total sales.
Approximately $2,334,000 of the gross accounts receivable were due from three
customers at September 30, 1998 and were unsecured. Approximately $4,014,000 of
the gross accounts receivable were due from three customers at September 30,
1997 and were unsecured.
Litigation:
During March, 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 action has since been transferred to the United States District
Court for the Southern District of New York. 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
10
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
issuance of the Preferred Shares. The complaint seeks, among other things,
monetary relief as well as a preliminary injunction enjoining the Company from
permitting the conversion of any Preferred Shares, and requiring that the
Company secure a seat on its Board of Directors for an Argent representative.
The Company has reviewed Argent's claims and believes them to be meritless. The
Company intends to vigorously defend the action and has filed an answer denying
the substantive allegations and asserting counter claims against Argent.
During January, 1998 RBB, the entity which purchased $22.5 million of the
Company's preferred stock, the proceeds of which were utilized by the Company to
purchase the Serengeti business, filed an action in the United States District
Court, Southern District of New York. In the action, RBB alleges various
violations of the securities laws in connection with the purchase by RBB of the
22,500 shares of the Company's convertible preferred stock. RBB contends that
the Company failed to disclose certain material information and that RBB relied
to its detriment on these omissions in purchasing the Company's convertible
preferred stock. There are also common law claims for fraud and negligent
misrepresentation. RBB seeks compensatory damages in the sum of $22.5 million,
equal to the purchase price of the preferred stock, and punitive damages in the
sum of $25 million. The Company has reviewed the claims and denies them. The
Company has filed a motion to dismiss the claims.
In August 1997, Argon, Inc. filed an action against the Company, Corning
Incorporated and Jonathan Paine in the Superior Court of California, County of
Los Angeles. This is a breach of contract action in which plaintiff seeks
approximately $250,000 based upon a non-exclusive distributor agreement and a
service agreement. There are additional claims for fraud, negligent
misrepresentation, unfair competition, and breach of fiduciary duty, which all
arose from the aforementioned agreements. The Company has denied the
substantive allegations of the Complaint and has asserted a Counterclaim for
$118,000 based upon Argon's breach of the aforementioned agreements. Discovery
is in the initial stages.
In August 1998, Ronald T. Rogers filed an action against the Company and two of
its directors, Stephen Nevitt and David Newman, in the Circuit Court of Cook
County in the State of Illinois. Plaintiff seeks damages of approximately
$102,000 based upon the alleged breach of an employment agreement between
plaintiff and the Company. In addition to a claim for breach of contract,
plaintiff also alleges violation of the Illinois Wage Payment and
11
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Collection Act, and intentional infliction of emotional distress, also arising
out of the employment agreement. The defendants have denied the substantive
allegations of the Complaint and intend to vigorously defend this action.
Discovery is in the initial stages.
During February, 1998 Corning Incorporated (Corning), the entity from whom the
Company purchased the Serengeti business, filed an action against the Company in
the Supreme Court, State of New York, County of Steuben. In the action, Corning
alleged that it was due $843,000 from the Company for services rendered during
the period from February 13, 1997 to May 7, 1997. In addition, in conjunction
with the Company's acquisition of the Serengeti business, $1.5 million was
deposited in escrow by the Company as a deposit for the purchase price. These
funds were to be released to Corning on February 13, 1998 if the Company had not
made indemnification claims against it prior to that date. In the action,
Corning demanded that the funds held in escrow be released to it even though the
Company had made indemnification claims against the fund.
The Company had disputed Corning's claim for the $843,000 as it was the
Company's contention that it had requested from Corning, on several occasions,
documentation for the alleged charges and Corning had not provided the requested
documentation. The Company was also disputing the release of the escrow funds
to Corning as it had filed an indemnification claim against Corning in the
amount of $3,054,000.
On May 20, 1998, the Company and Corning entered into a settlement agreement
releasing all claims. In connection therewith the Company received $405,500,
including interest from the escrow account and Corning received the balance
which was held in escrow. In addition, the Company may defer payment for up to
250,000 lens blanks purchased during the next 12 months from Corning until
December, 1999 and the suit has been dismissed.
Note E. Acquisition of business interest
On February 13, 1997 the Company changed its name to Serengeti Eyewear, Inc. in
conjunction with the acquisition of certain assets of the Serengeti Eyewear
division of Corning Incorporated used in the design, manufacture and
distribution of Serengeti brand sunglasses. The Company used the purchase method
of accounting to record this transaction and has included these operations in
its statement of operations since the acquisition date. Accordingly, the
purchase price was allocated to the net
12
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
assets acquired based upon their estimated fair market values. The Company
acquired the Serengeti assets for cash aggregating $27.5 million. The Company
financed the purchase and related transaction expenses with the net proceeds
from the sale of shares of preferred stock and the borrowings under the credit
facility described in Notes B and C. In addition, the Company incurred other
costs related to the acquisition aggregating $855,561 which are being amortized
as goodwill over a period of 20 years and closing costs related to the bank
financing aggregating $600,000 which are being amortized as interest expense
over a period of 5 years.
The purchase price, including the additional costs described above, was
allocated as follows:
Inventory $ 8,830,856
Furniture and equipment 832,278
Trademarks 9,500,000
Patents 1,800,000
Goodwill 7,392,427
-----------
$28,355,561
===========
Note F. Foreign operations
The Company operates in 2 geographic areas: The United States and Hong Kong.
Following is a summary of information by area for the nine months ended:
1998 1997
----------- -----------
Net sales to unaffiliated customers:
United States $32,953,781 $24,280,638
Hong Kong 1,178,395 -
----------- -----------
$34,132,176 $24,280,638
=========== ===========
Income from operations:
United States $ 1,042,984 $ 838,162
Hong Kong 507,306 -
----------- -----------
1,550,290 838,162
Other income - 40,719
Interest (1,301,358) (836,443)
----------- -----------
Loss income before income taxes $ 248,932 $ 42,438
=========== ===========
Identifiable assets:
United States $47,116,581 $44,251,175
Hong Kong 775,528 591,849
----------- -----------
$47,892,109 $44,843,024
=========== ===========
13
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND
INTRODUCE INNOVATIVE PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY
COMPETITORS, MANUFACTURING CAPACITY CONSTRAINTS OF ITS OUTSIDE SOURCES AND THE
AVAILABILITY OF RAW MATERIAL, THE EFFECT OF ECONOMIC CONDITIONS, DEPENDENCE ON
CERTAIN CUSTOMERS AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS. GIVEN THESE UNCERTAINTIES, UNDUE
RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES
NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
GENERAL
Prior to the 1980's, the Company manufactured its own sunglasses for sale to the
wholesale trade. As manufacturers in the Far East began playing greater roles in
the sunglass industry in the late 1970's, the Company began importing its
products and in 1980 discontinued its manufacturing operations completely. From
1978 until the acquisition, the Company 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
merchandisers designed to enhance its sale of sunglasses. The Company
continually adds new products and develops new marketing programs for its
product lines. In late 1992, the Company introduced its line of
Solar*X-Registered Trademark- sunglasses, which feature a ground and polished
lens, comparable to optical quality sunglasses, at non-premium 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
14
<PAGE>
expects its Solar*X-Registered Trademark- 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-Registered
Trademark- line, a premium sunglass line. The Company sought to emphasize sales
of H2Optix-Registered Trademark- and thereby reduce its dependence upon mass
merchandisers. The Company experienced only limited sales of its
H2Optix-Registered Trademark- sunglasses in 1995 as it commenced its marketing
efforts to establish H2Optix-Registered Trademark- brand name recognition and
broaden the distribution network for the H2Optix-Registered Trademark- product
line. In 1997 and 1998, the Company experienced more substantial sales of the
H2Optix-Registered Trademark- product line.
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-Registered Trademark- 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-Registered Trademark- line of
sunglasses is principally responsible for this image. The Company has introduced
new Serengeti signature styles that exploit the Serengeti brand image.
15
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997.:
Net sales increased 26%, from approximately $8.4 million in for the three
months ended September 30, 1997 to approximately $10.5 million for the same
period in 1998. The net sales increase was primarily related to the sale of
excess inventory which was completed at the end of the third quarter of 1998.
This sale was consistent with the Company's plan to reduce its inventory level
and improve its working capital by reducing its debt and trade payables. Sales
for the three months ended September 30, 1997 were higher than normal. Due to
the timing of the acquisition, some products were received later in the selling
season and shipped on the third quarter of 1997.
Gross profit decreased as a percentage of sales, from approximately 54%
for the three months ended September 30, 1997 to approximately 37% for the
same period in 1998, primarily as a result of the inventory reduction plan.
The Company sold excess inventory for cash at cost; sacrificing margin to
help raise cash and improve working capital.
Selling expenses decreased from approximately $1.3 million during the
three months ended September 30, 1997 to approximately $0.9 million for the
same period in 1998. This decrease resulted primarily from the reduction of
media and cooperative advertising costs. The Company has added independent
sales representatives whose objectives are to broaden product coverage and
add more retail space for sales of the Company's products. These costs are
variable as a percentage of cash collections.
General and administrative expenses decreased from approximately $2.3
million for the three months ended September 30, 1997 to approximately $1.9
million for the same period in 1998, primarily due to the staff level reductions
implemented in the second quarter of 1998 and the related lower costs for
travel, health insurance and payroll costs.
Interest expense increased from approximately $338,000 for the three
months ended September 30, 1997 to approximately
16
<PAGE>
$433,000 for the same period in 1998, as a result of the interest expense
related to the Company's term loan which was used to partially finance the
Serengeti aSerengeti acquisition and the interest incurred on the Company's
revolving credit facility.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales increased 40%, from approximately $24.3 million for the nine
months ended September 30, 1997 to approximately $34.1 million for the same
period in 1998, primarily as a result of increases in sales in the H2Optix line,
increased sales of premium products from new styles introduced in 1998, sales
from the Company's inventory reduction plan and increased sales of the Company's
non-premium products to a significant customer.
Gross profit decreased as a percentage of sales, from approximately 52%
for the nine months ended September 30, 1997 to approximately 41% for the
same period in 1998, primarily as a result of price reductions in the
Serengeti product line and the Company's inventory reduction plan.
Selling expenses decreased from approximately $5.0 million during the nine
months ended September 30, 1997 to approximately $4.2 million for the same
period in 1998. This decrease resulted primarily from the one time "Eye in the
Sky" radio advertising campaign during May and June, 1997, costing approximately
$1.1 million, partially offset by decreased costs associated with marketing and
selling expenses related to the Company's premium products in 1998.
General and administrative expenses increased from approximately $5.3
million for the nine months ended September 30, 1997 to approximately $7.3
million for the same period in 1998, primarily as a result of an increase in
executive and administrative salaries, office expenses, and costs incurred in
connection with the development of the premium line of sunglasses. In addition,
expenses in 1998 include a non-recurring restructuring charge of $150,000
primarily attributed to staff reduction implemented in June, 1998.
Interest expense increased from approximately $836,000 for the nine months
ended September 30, 1997 to approximately $1,301,000 for the same period in
1998, as a result of the
17
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interest expense related to the Company's term loan which was used to partially
finance the Serengeti acquisition and the interest incurred on the Company's
revolving credit facility.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Concurrently with the closing of the Serengeti acquisition, the Company
entered into a Revolving Line of Credit and Term Loan Agreement with SunTrust
Bank, Central Florida, National Association, individually and as agent, and
Creditanstalt-Bankverein pursuant to which the Company refinanced its prior
credit facility with a new senior credit facility (the "Current Credit
Facility") which provided 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 existing credit facility and to pay
related fees and expenses. The Company financed the remaining portion of the
Acquisition purchase price with the net proceeds of the sale of Preferred
Shares.
The Revolver Facility has a $2 million sublimit for the issuance of
stand-by letters of credit. Effective August 21, 1998, the Company executed a
first Amendment to The Agreement (the "Amended Agreement"). The Company
restructured the loan covenants and the bank waived the Company's compliance
defaults for all periods prior to June 1998. Revolving credit loans under the
Revolver Facility are subject to a borrowing base limitation which is up to 75%
of eligible accounts receivable and 50% of eligible inventory (subject to an
additional limitation on inventory backed loans), for working capital. The
Amended Agreement is secured by a priority lien on substantially all of the
assets of the Company and its subsidiaries. Pursuant to the Amended Agreement,
interest is payable at the LIBOR rate or Base Rate plus applicable margins. In
addition, the Company is subject to certain financial covenants.
At September 30, 1998 the Company was in compliance with its Amended
Agreement. The unused portion of the revolver facility was $90,000.
The Amended Agreement separates the Term Facility into two Term Loans:
Term Loan B-1 for $2,000,000 and Term Loan B-2 for $5,575,000. Term Loan B-1 is
to be paid in quarterly installments on September 30, 1998 and December 31, 1998
in the amount of $437,500 each and a payment of $538,333 on March 31, 1999 with
the balance payable in full on June 30, 1999. Term Loan B-2 is payable on
monthly installments of $300,000 with the balance due on December 31, 1999.
Interest on Term Loan B-1 is payable at the LIBOR rate plus 325 basis
points or the "Base Rate" plus 1.75%. Term Loan B-2 is payable at the LIBOR
rate plus 500 basis points or the "Base Rate" plus 3.50%.
19
<PAGE>
Interest on the Revolver Facility is payable at the LIBOR rate plus 325
basis points or the "Base Rate" plus 1.75% all at the option of the Company.
The Company was required to enter into an interest rate swap agreement for
the purpose of interest rate protection which covers at least 75% of the
borrowings under the Term Facility through February 13, 2000.
The Amended Agreement requires the Company to maintain certain financial
ratios. Pursuant to the Current Credit Facility, the Company is required to
apply 75% of its "Excess Cash Flow" for the preceding completed fiscal year, the
net proceeds from any sale of assets other than in the ordinary course of
business and the net proceeds of equity issuances and permitted debt issuances
to prepay outstanding amounts under the Term Facility. The Amended Agreement
also contains a number of customary covenants, including, among others,
limitations on liens, affiliate transactions, mergers, acquisitions, asset
sales, dividends and advances.
The Company improved its working capital from approximately $753,000 at
December 31, 1997 to working capital of approximately $3.3 million at September
30, 1998, primarily as a result of a reduction in accounts payable, increased
earnings from operations, debt reduction, the sale of excess inventory, and
changes in the indebtedness affected by the Amended Agreement.
The Company incurred approximately $346,000 in capital expenditures during
the nine months ended September 30, 1998.
The Company anticipates, although there can be no assurance, that based on
its currently proposed plans, the net cash available from operations will be
sufficient to satisfy its anticipated cash requirements for the 1998 fiscal
year.
YEAR 2000
Many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the Year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the Year 2000 could result in miscalculations or system failure
which could result in an adverse impact on the Company's operations.
The Company believes that the majority of its major systems are Year 2000
compliant, and costs to transition the remaining systems and hardware to Year
2000 compliance are not anticipated to have a material effect on the Company's
financial position or results of operations.
The Company is in the process of contacting critical suppliers of products
and services and customers to determine the extent to which the Company may be
vulnerable to such party's failure to resolve their own Year 2000 issues. Where
practicable, the Company will assess and
20
<PAGE>
attempt to mitigate its risks with respect to the failure of these entities to
be Year 2000 ready. The effect, if any, on the Company's results of operations
from the failure of such party's to be Year 2000 ready is not reasonably
estimable.
FOREIGN CURRENCY EXCHANGE
The Company presently transacts most business internationally in United
States currency. To date, the Company has not been affected significantly by
currency exchange fluctuations. However, future currency fluctuations in
countries in which the Company does business could adversely affect the Company
by resulting in pricing that is not competitive with prices denominated in local
currencies.
SEASONALITY
The Company anticipates that the seasonality of its premium sunglass
business generally will follow the selling activity of its largest customer for
such products, SunGlass Hut. Historically, the strongest quarter in terms of
Serengeti sales is the second quarter, followed by the. first, fourth and third
quarters. The seasonality of the Company's non-premium sunglass business
generally follows the selling of its largest customer for such products,
Wal-Mart. Historically, the Company's strongest quarter in terms of sales is the
fourth quarter, followed by the first, second and third quarters.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133). SFAS
133 requires companies to recognize ALL derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge of the: (i) exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment ("fair value hedges"), (ii)
exposure to variable cash flows of a forecasted transaction ("cash flow
hedges"), or (iii) foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction ("foreign currency hedges").
The objective of hedge accounting is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative NOT designated as a hedging instrument (e.g., derivative
contracts entered into for speculative purposes), the gain or loss is recognized
in income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently plans to adopt
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<PAGE>
SFAS 133 on January 1, 2000. On that date, hedging relationships will be
designated anew and documented.
Under the Agreement, the Company was required to enter into an interest
rate hedging agreement for the purpose of interest rate protection covering at
least 75% of the borrowings under the Term Facility, and, in general, such
hedges have not had a material effect in offsetting the changes in fair value of
the underlying risk. The Company expects to continue its hedging activities in
the future. However, it has not yet evaluated the financial statement impact of
adopting SFAS 133.
GOING CONCERN CONSIDERATION
As the independent certified public accountants have indicated in their
report on the financial statements for the year ended December 31, 1997, and as
shown in the financial statements, the Company has experienced significant
operating losses which have resulted in an accumulated deficits of $9,945,253
and $10,896,172 at December 31, 1997 and September 30, 1998 respectively. For
the year ended December 31, 1997 the Company reported a loss before preferred
dividends of $3,401,881. These conditions raised substantial doubt about the
Company's ability to continue as a going concern. For the nine months ended
September 30, 1998 the Company reported net income before preferred dividends of
$156,081 and re-negotiated its Term Facility.
22
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1998, Ronald T. Rogers filed an action against the Company and two of
its directors, Stephen Nevitt and David Newman, in the Circuit Court of Cook
County in the State of Illinois. Plaintiff seeks damages of approximately
$102,000 based upon the alleged breach of an employment agreement between
plaintiff and the Company. In addition to a claim for breach of contract,
plaintiff also alleges violation of the Illinois Wage Payment and Collection
Act, and intentional infliction of emotional distress, also arising out of the
employment agreement. The defendants have denied the substantive allegations of
the Complaint and intend to vigorously defend this action. Discovery is in the
initial stages.
Reference is made to the Company's annual report on Form 10-KSB for a
discussion of certain other information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. EXHIBIT 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K. None
23
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Serengeti Eyewear, Inc.
(Registrant)
Dated: November , 1998 By: /s/ Stephen Nevitt
---------------------------
Stephen Nevitt
President
(Principal Executive Officer)
By: /s/ William McMahon
---------------------------
Chief Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1998 and the Consolidated
Statements of Operations for the nine month period ended September 30, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 722,551
<SECURITIES> 0
<RECEIVABLES> 9,079,234
<ALLOWANCES> 549,747
<INVENTORY> 17,520,523
<CURRENT-ASSETS> 28,099,334
<PP&E> 3,155,932
<DEPRECIATION> 888,238
<TOTAL-ASSETS> 47,892,109
<CURRENT-LIABILITIES> 24,821,982
<BONDS> 1,044,821
0
22,333,000
<COMMON> 2,384
<OTHER-SE> (310,078)
<TOTAL-LIABILITY-AND-EQUITY> 47,892,109
<SALES> 34,132,176
<TOTAL-REVENUES> 34,132,176
<CGS> 20,002,183
<TOTAL-COSTS> 20,002,183
<OTHER-EXPENSES> 12,579,703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,301,358
<INCOME-PRETAX> 248,932
<INCOME-TAX> 92,851
<INCOME-CONTINUING> 156,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,081
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> 0
</TABLE>
