<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: March 31, 1998
Commission file number: 0-26022
Serengeti Eyewear, Inc.
(Exact Name of Small Business Issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
New York 65-0665659
- --------------------------------- ---------------------
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
</TABLE>
8125 25th Court East
Sarasota, Florida 34243
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(941) 359-3599
- -------------------------------------------------------------------------------
(Issuer's telephone number including area code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to the filing requirements for the past 90 days.
YES: X NO:
--- ---
Number of shares outstanding as of April 30, 1998:
2,384,000 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: YES: NO: X
--- ---
<PAGE>
Serengeti Eyewear, Inc.
Index
<TABLE>
<CAPTION>
<S> <C> <C>
Part I
Item 1. Financial Statements
Consolidated Balance Sheet as of
March 31, 1998............................................................................. 3
Consolidated Statements of Operations for the Three Months Ended March 31,
1998 and 1997............................................................................ 5
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
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............................................................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................................. 20
Signatures............................................................................................ 21
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc.
Consolidated Balance Sheet
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash..................................... $ 558,295
Accounts receivable - trade.............. 8,188,573
Other receivables........................ 426,575
Inventories.............................. 20,725,888
Prepaid expenses......................... 1,387,429
-----------
Total current assets.................... 31,286,760
Fixed assets - net of accumulated
depreciation............................. 2,395,667
Other assets:
Goodwill................................. 6,961,203
Prepaid expenses - non-current........... 300,000
Debt issue costs......................... 476,452
Patents and trademarks - net............. 10,689,122
Other assets............................. 23,153
-----------
$52,132,357
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Balance Sheet
March 31, 1998
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Current liabilities:
Note payable - bank........................ $ 6,750,000
Current portion of long-term debt.......... 8,362,496
Accounts payable - related party........... 32,820
Accounts payable........................... 13,867,990
Accrued dividends.......................... 369,000
Accrued expenses........................... 269,734
-----------
Total current liabilities................ 29,652,040
-----------
Long-term debt................................ 148,421
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 earnings............................. (10,589,582)
-----------
Total stockholders' equity............. 22,331,896
-----------
$52,132,357
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Statements of Operations
For The Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales................................................ $9,766,785 $ 6,734,727
Cost of goods sold....................................... 5,720,662 3,594,639
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Gross profit............................................. 4,046,123 3,140,088
------------- -----------
Operating expenses:
Depreciation and amortization.......................... 372,948 329,995
Selling expenses....................................... 1,237,461 995,683
General and administrative,
expenses............................................. 2,317,998 1,001,679
------------- -----------
Total operating expenses................................. 3,928,407 2,327,357
------------- -----------
Income (loss) from operations............................ 117,716 812,731
------------- -----------
Other (expenses) income:
Other (expense) income................................ -- 39,443
Interest.............................................. (393,045) (206,632)
------------- -----------
(393,045) 167,189
------------- -----------
Income (loss) before taxes............................... (275,329) 645,542
Provision for income taxes
Current................................................. -- (238,851)
------------- -----------
Net income (loss)....................................... (275,329) 406,691
Preferred stock dividends.................................. 369,000 3,983,000
------------- -----------
Net income (loss) applicable to
Common stock.............................................. $ (644,329) $(3,576,309)
------------- -----------
------------- -----------
Basic (loss) per share..................................... $ (.27) $ (1.50)
------------- -----------
------------- -----------
Weighted average shares:................................... 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 Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities......... $ 811,989 $ 5,179,813
---------- ----------
Cash flows from investing activities:
Acquisition of business interest........... -- (26,621,898)
Purchase of fixed assets................... (168,361) (300,457)
---------- ----------
Net cash provided by (used in)
investing activities.............. (168,361) (26,922,355)
---------- ----------
Cash flows from financing activities:
Increase in deferred acquisition costs..... -- (861,220)
Repayments of related party debt........... (11,755) --
Proceeds from the sale of preferred stock.. -- 13,950,000
Proceeds from bank borrowings.............. 250,000 10,000,000
Repayment of bank loans.................... (437,500) (1,500,000)
Principal payments on long-term debt....... (14,266) (50,568)
---------- ----------
Net cash provided by (used in)
Financing activities................... (213,521) 21,538,212
---------- ----------
Net increase (decrease) in cash.............. 430,107 (204,330)
Beginning - cash balance..................... 128,188 632,727
---------- ----------
Ending - cash balance........................ $ 558,295 $ 428,397
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
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 S-B. They do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial statements of the
Company as of December 31, 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
7
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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 1997
differs from amounts that would be derived from computing income taxes at
federal statutory rates (34% - adjusted for the surtax exemption) primarily as a
result of state income taxes net of the federal benefit (3%).
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 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 $1.5 million of outstanding
indebtedness. The Company is able to borrow up to 85% of eligible accounts
receivable less than 91 days past due and 50% of eligible inventory under the
revolving credit facility for working capital. The credit facility is secured by
a first priority lien on all of the assets of the Company and its subsidiaries.
Pursuant to the credit facility interest is payable at the LIBOR rate or Base
Rate plus applicable margins based upon the Company's earnings. In addition, the
Company is subject to certain financial covenants.
8
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
At March 31, 1998, although the Company was current with its principal and
interest payments to the bank it was not in compliance with certain of the loan
covenants of the revolving loan and the term loan. The Company is currently
attempting to restructure its loan covenants with the bank. As of the date
hereof these covenants have not yet been restructured and the entire amounts due
under the revolving loan and term loan have been classified as current
liabilities.
Note C. Stockholders' equity
Preferred stock
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 E, RBB purchased pursuant to said Regulation S
offering 7,500 shares of the Company's $.001 par value Series B 6% cumulative
convertible non-voting preferred stock and 7,500 shares of the Company's $.001
par value Series C 6% cumulative convertible non-voting preferred stock for cash
aggregating $15,000,000 less commissions aggregating $1,050,000. The dividends
on the preferred shares are payable in cash or additional shares of preferred
stock at the option of the Company. At March 31, 1998 dividends aggregating 369
shares of preferred stock valued at $369,000 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 $.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
9
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
the commission in connection with the Series A preferred shares a Series D
warrant to purchase up to an aggregate of 200,000 shares of $.001 par value
common stock at an exercise price of $5.50 per share through September 30, 2001.
Each of the Series A Preferred Shares may be converted into shares of common
stock at any time. Each Series A share is convertible into such number of common
shares as is determined by dividing its stated value of $1,000 by a conversion
rate equal to the lower of (a) $5.50 or (b) 80% of the average market price for
the common stock for the ten trading days ending three days prior to the giving
by the holder of a notice of conversion.
Each of the Series B Preferred Shares may be converted into shares of common
stock at any time. Each Series B share is convertible into such number of common
shares as is determined by dividing its stated value of $1,000 by a conversion
rate equal to the lower of (a) $6.75 or (b) 80% of the average market price for
the common stock for the ten trading days ending three days prior to the giving
by the holder of a notice of conversion.
Each of the Series C Preferred Shares may be converted into shares of common
stock at any time after July 1, 1997. Each Series C share is convertible into
such number of common shares as is determined by dividing its stated value of
$1,000 by a conversion rate equal to the lower of (a) $8.25 or (b) 80% of the
average market price for the common stock for the ten trading days ending three
days prior to the giving by the holder of a notice of conversion.
At any time after September 30, 2000 the Company will have the right to force
conversion of the preferred shares into common stock.
Note D. Commitments and contingencies
Concentration of credit risk/major customers:
During the three months ended March 31, 1998 and 1997, the Company made net
sales to two significant customers of approximately $3,300,000 and $2,400,000 or
34% and 36% of its total sales.
10
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Approximately $2,600,000 of the gross accounts receivable are due from three
customers at March 31, 1998 and are 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 issuance of the
Preferred Shares. The complaint seeks, among other things, monetary relief as
well as a preliminary injunction enjoining the Company from permitting the
conversion of any Preferred Shares, and requiring that the Company secure a seat
on its Board of Directors for an Argent representative. The Company has reviewed
Argent's claims and believes them to be meritless. The Company intends to
vigorously defend the action and is presently considering counterclaims.
During January, 1998 RBB Bank (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.
11
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
During February, 1998 Corning Incorporated (Corning), the entity from whom the
Company purchased the Serengeti business filed an action 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 is being 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 assets acquired based upon their
estimated fair market values. The
12
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Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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:
<TABLE>
<CAPTION>
<S> <C>
Inventory................. $ 8,830,856
Furniture and equipment... 832,278
Trademarks................ 9,500,000
Patents................... 1,800,000
Goodwill.................. 7,392,427
-----------
$28,355,561
-----------
-----------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales to unaffiliated customers:
United States.................... $ 8,935,089 $ 6,734,727
Hong Kong........................ 831,696 --
----------- -----------
$ 9,766,785 $ 6,734,727
----------- -----------
----------- -----------
Income (loss) from operations:
United States.................... $ (210,791) 812,731
Hong Kong........................ 328,507 --
----------- -----------
117,716 812,731
Other income....................... -- 39,443
Other expenses..................... (393,045) (206,632)
----------- -----------
Income (loss) before income taxes.. $ (275,329) $ 645,542
----------- -----------
----------- -----------
Identifiable assets:
United States.................... $51,549,723 $41,108,017
Hong Kong........................ 582,634 581,849
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$52,132,357 $41,689,866
----------- -----------
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</TABLE>
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
The following should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE NEWLY ACQUIRED
SERENGETI BUSINESS, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE
INNOVATIVE PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY COMPETITORS,
MANUFACTURING CAPACITY CONSTRAINTS 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 1996 and 1997, the Company
experienced more substantial sales of the H2Optix[Registered-Trademark]
product line.
On February 13, 1997, the Company acquired (the "Acquisition") the
assets of the Serengeti Eyewear division of Corning Incorporated
("Serengeti"). Corning's Serengeti Eyewear division entered the premium
sunglass market in 1985 with the introduction of Drivers sunglasses, which
remain the core of the Serengeti product line. Over the years, Serengeti
sunglasses have developed a brand identity which provides appeal to consumers
in the premium market. The Serengeti brand image is based upon superior lens
technology, quality and performance. The Serengeti Drivers line of sunglasses
is principally responsible for this image. The Company intends to increase
Serengeti's market share by introducing new Serengeti signature styles that
exploit the Serengeti brand image. In addition, the Company intends to
benefit its H2Optix[Registered-Trademark] line by including it within the
Serengeti line, thereby tapping into Serengeti's well-established
distribution networks.
Historically, the Serengeti line has suffered delays in new product
launches, resulting in depressed orders for those products. In response,
Corning's Serengeti Eyewear division focused on timing the product development
cycle to ensure that new products are introduced in October, which is the
optimal time for selling to the largest Serengeti customers for the spring and
summer seasons.
15
<PAGE>
Results of Operations
Comparison of the three months ended March 31, 1998 to the
three months ended March 31, 1997
Net sales increased 45%, from approximately $6.7 million for the three
months ended March 31, 1997 to approximately $9.8 million for the same period in
1998, primarily as a result of the availability of Serengeti inventory and sales
of this product line and increased sales of the Company's non-premium products
to a significant customer.
Gross profit decreased as a percentage of sales, from approximately 47% for
the three months ended March 31, 1997 to approximately 41% for the same period
in 1998, primarily as a result of product mix and a price reduction of the
Serengeti product line.
Selling expenses increased from approximately $996,000 during the three
months ended March 31, 1997 to approximately $1,237,000 million for the same
period in 1998. This increase resulted primarily from increased costs associated
with marketing and selling expenses related to the Company's premium products in
1998.
General and administrative expenses increased from approximately $1,001,000
for the three months ended March 31, 1997 to approximately $2,318,000 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. The Company is currently
implementing plans to reduce its general and administrative expenses.
Interest expense increased from approximately $207,000 for the three months
ended March 31, 1997 to approximately $393,000 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 acquisition and the interest incurred on the
Company's revolving credit facility.
16
<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 an existing
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 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. 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. The unused portion of the Revolver
Facility is $750,000 at March 31, 1998. To date the bank has not allowed the
Company the use of this additional amount due to the non-compliance with
financial covenants described below.
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
17
<PAGE>
or less to 1.25% based upon a ratio of greater than 3:1. Pursuant to the New
Credit Facility, the Company is required to enter into exchange agreements
and/or other appropriate interest rate hedging transactions for the purpose of
interest rate protection covering at least 75% of the borrowings under the Term
Facility through February 13, 2000.
The New Credit Facility requires the Company to maintain certain financial
ratios. Pursuant to the New Credit Facility, the Company is required to apply
75% of its "Excess Cash Flow" for the preceding completed fiscal year, the net
proceeds from any sale of assets other than in the ordinary course of business
and the net proceeds of equity issuances and permitted debt issuances to prepay
outstanding amounts under the Term Facility. The New Credit Facility also
contains a number of customary covenants, including, among others, limitations
on liens, affiliate transactions, mergers, acquisitions, asset sales, dividends
and advances. The New Credit Facility is secured by a first priority lien on all
of the assets of the Company and its subsidiaries.
As of March 31, 1998, the Company was not in compliance with certain
financial covenants with respect to its New Credit Facility. Although the
lenders have not declared a default or accelerated payment of the New Credit
Facility, there can be no assurance that they will not do so in the future. As a
result all balances due under the New Credit Facility have been classified as
current debt. The Company is currently in negotiation with its lenders to
restructure the New Credit Facility including modification of the financial
covenants and obtaining waivers of past non-compliance.
The Company's liquidity improved from working capital of approximately
$753,000 at December 31, 1997 to working capital of approximately $1.6 million
at March 31, 1998
The Company incurred approximately $168,000 in capital expenditures during
the three months ended March 31, 1998.
The Company anticipates, although there can be no assurance, that based on
its currently proposed plans, that the net cash available from operations will
be sufficient to satisfy its anticipated cash requirements for the 1998 fiscal
year. In this regard the Company will attempt to (a) restructure the New Credit
Facility as described above, (b) negotiate with additional
18
<PAGE>
lenders to replace its existing senior debt, (c) reduce its current inventory
levels by expanding its distribution and (d) restructure its organization to
reduce its operating costs.
Foreign Currency Exchange
The Company presently transacts business internationally in United States
currency. To date, the Company has not been affected significantly by currency
exchange fluctuations. However, future currency fluctuations in countries in
which the Company does business could adversely affect the Company by resulting
in pricing that is not competitive with prices denominated in local currencies.
Seasonality
The Company anticipates that the seasonality of its premium sunglass business
generally will follow the selling activity of its largest customer for such
products, Sunglass Hut. Historically, the strongest quarter in terms of
Serengeti sales is the second quarter, followed by the first, fourth and third
quarters. The seasonality of the Company's non-premium sunglass business
generally follows the selling of its largest customer for such products,
Wal-Mart. Historically, the Company's strongest quarter in terms of sales is the
fourth quarter, followed by the first, second and third quarters.
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 $10,589,582 at December 31, 1997 and March 31, 1998 respectively. For the
year ended December 31, 1997 and the quarter ended March 31, 1998 the Company
reported losses before preferred dividends of $3,401,881 and $275,329
respectively and was not in compliance with certain financial covenants under
its senior debt agreement. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
19
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to the Company's annual report on Form 10-KSB for a
discussion of certain litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. None.
20
<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.
Dated: May 22, 1998 By:/s/ Stephen Nevitt
-----------------------------
Stephen Nevitt
President
(Principal Executive Officer)
By:/s/ Neil R. Winter
-----------------------------
Chief Financial Officer
21
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