<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-KSB/A2
----------------
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-26022
SERENGETI EYEWEAR, INC.
(Name of Small Business Issuer in its Charter)
NEW YORK 65-0665659
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8125 25TH COURT EAST
SARASOTA, FLORIDA 34243
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (941) 359-3599
____________________
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)
____________________
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
----- -----
____________________
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-KSB
DOCUMENT IN WHICH INCORPORATED
-------- -------------------------
Registrant's Proxy Statement relating to Part III
the 1997 Annual Meeting of Shareholders
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<PAGE>
EXPLANATORY NOTE
This Annual Report on Form 10-KSB/A2 for the fiscal year ended December 31,
1996 contains only Item 7 of Part II thereof. This filing is being made solely
for the purpose of amending such Item.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Reports 1
Consolidated Balance Sheet as of December 31, 1996 3
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1996 5
Consolidated Statement of Stockholders' Equity for the Two Years
Ended December 31, 1996 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996 7
Notes to Consolidated Financial Statements 9
<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, 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
<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 and
Note 16 as to which the date is
January 26, 1998)
2
<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.
3
<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 dividends 118,000
Accrued expenses 680,177
-----------
Total current liabilities 6,938,596
-----------
Long-term debt (Note 7) 105,886
-----------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 8 and 16)
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 6,836,094
Accumulated deficit (1,503,373)
-----------
Total stockholders' equity 12,310,105
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,354,587
- ------------------------------------------ -----------
-----------
See accompanying notes to financial statements.
4
<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
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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
Preferred dividends * - 2,674,818
------------ ------------
Net income (loss) available to
Common shareholders $ 615,327 $ (2,106,571)
------------ ------------
------------ ------------
Per share information:
Net income (loss) per share $ .37 $ (.88)
------------ ------------
------------ ------------
* Amounts have been restated from those previously reported to reflect a stock
dividend on preferred stock which is convertible at a discount from market value
at the date of issuance (see Note 16).
See accompanying notes to financial statements.
5
<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 ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------------------ ---------------- ------- -------
Balance January 1, 1995 1,280,000 $ 1,280 $ $1,695,375 $(1,074,140)
<S> <C> <C> <C> <C> <C> <C>
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)
Preferred stock dividend -
Accrual * (118,000)
Preferred stock dividend -
Assumed conversion * 2,556,818 (2,556,818)
Net income for the year 568,247
--------- ----- ------ --------- ---------- ----------
Balance December 31, 1996 2,384,000 $ 2,384 7,500 $6,975,000 $6,836,094 $(1,503,373)
--------- ----- ------ --------- ---------- ----------
</TABLE>
* Amounts have been restated from those previously reported reflect a stock
dividend on preferred stock which is convertible at a discount from market
on the date of issuance (see Note 16)
See accompanying notes to financial statements.
6
<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.
7
<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.
8
<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.
9
<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.
10
<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).
11
<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
12
<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.
13
<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.
14
<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
15
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Directors. The Board did not effect this incentive compensation for 1995 or
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
16
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
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.
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
Earnings per share amounts are computed based upon the weighted average number
of shares actually outstanding of 1,682,000 in 1995 and 2,384,000 in 1996.
Common stock equivalents are not considered in the computation as their effect
would be anti-dilutive.
17
<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.
18
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of the
Company's initial public offering, filed an action against the Company in the
United States District Court for the Northern District of Georgia, Atlanta
Division. The civil complaint alleges, among other things, breaches by the
Company of its underwriting agreement with Argent, breach of corporate duties
relating to the issuance of the Preferred Shares, and misstatements in the
Company's Proxy Statement relating to the issuance of the Preferred Shares. The
complaint seeks, among other things, monetary relief as well as a preliminary
injunction enjoining the Company from permitting the conversion of any Preferred
Shares, and requiring that the Company secure a seat on its Board of Directors
for an Argent representative. The Company has reviewed Argent's claims and
believes them to be meritless. The Company intends 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
19
<PAGE>
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
Note 16. Restatement of Stockholders' Equity
In March, 1997 the Securities and Exchange Commission (SEC) announced its
position on accounting for preferred stock which is convertible into common
stock at a discount from the market price at the date of issuance. The SEC's
position is that a dividend should be recorded for the difference between the
conversion price and the quoted market price of the common stock on the date of
issuance. To comply with this position, the Company restated its financial
statements to reflect a dividend of $2,556,818 at December 31, 1996, related to
the sale of the convertible preferred stock discussed in Note 8.
20
<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: February 9, 1998 By /s/ Stephen Nevitt
----------------------------------
Stephen Nevitt
President
By /s/ Neil Winter
----------------------------------
Neil Winter
Chief Financial Officer
(principal financial and
accounting officer)
