<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: JUNE 30, 1998
COMMISSION FILE NUMBER: 0-26022
SERENGETI EYEWEAR, INC.
(Exact Name of Small Business Issuer as specified in its charter)
NEW YORK 65-0665659
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
8125 25TH COURT EAST
SARASOTA, FLORIDA 34243
(Address of principal executive offices)
(941) 359-3599
(Issuer's telephone number including area code)
Check whether the Issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to the filing requirements for the past
90 days. YES: /X/ NO: / /
Number of shares outstanding as of July 31, 1998:
2,384,000 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: YES: / / NO: /X/
<PAGE>
SERENGETI EYEWEAR, INC.
INDEX
PART I
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1998 3
Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Six Months Ended June 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 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc.
Consolidated Balance Sheet
June 30, 1998
(Unaudited)
ASSETS
Current Assets:
Cash $ 731,296
Accounts receivable - trade 10,439,582
Other receivables 388,257
Inventories 19,144,615
Prepaid expenses 1,220,844
-----------
Total current assets 31,924,594
Fixed assets - net of accumulated
depreciation 2,327,984
Other assets:
Goodwill 6,464,987
Prepaid expenses - non-current 275,000
Debt issue costs 446,452
Patents and trademarks - net 10,543,226
Other assets 21,653
-----------
$52,003,896
===========
See accompanying notes to financial statements.
3
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Balance Sheet
June 30, 1998
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 6,750,000
Current portion of long-term debt 7,924,442
Accounts payable - related party 4,092
Accounts payable 12,105,243
Accrued dividends 738,000
Accrued expenses 2,152,277
-----------
Total current liabilities 29,674,054
Long-term debt 135,000
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 (10,726,636)
-----------
Total stockholders' equity 22,194,842
-----------
$52,003,896
===========
See accompanying notes to financial statements.
4
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Statements of Operations
For The Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $13,834,052 $ 9,169,365 $23,600,837 $15,904,092
Cost of goods sold 7,596,085 4,110,679 13,316,747 7,705,318
----------- ----------- ----------- -----------
Gross profit 6,237,967 5,058,686 10,284,090 8,198,774
----------- ----------- ----------- -----------
Operating expenses:
Depreciation and amortization 376,655 672,974 749,603 1,002,969
Selling expenses 2,103,362 2,740,612 3,340,823 3,736,295
General and administrative,
expenses 3,051,061 1,931,761 5,369,059 2,933,440
----------- ----------- ----------- -----------
Total operating expenses 5,531,078 5,345,347 9,459,485 7,672,704
----------- ----------- ----------- -----------
Income (loss) from operations 706,889 (286,661) 824,605 526,070
----------- ----------- ----------- -----------
Other (expenses) income:
Other (expense) income - (6,922) - 32,521
Interest (474,943) (292,260) (867,988) (498,892)
----------- ----------- ----------- -----------
(474,943) (299,182) (867,988) (466,371)
----------- ----------- ----------- -----------
Income (loss) before taxes 231,946 (585,843) (43,383) 59,699
Provision for income taxes
Current - 222,151 - (16,700)
----------- ----------- ----------- -----------
Net income (loss) 231,946 (363,692) (43,383) 42,999
Preferred stock dividends (369,000) (347,000) (738,000) (4,330,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to
Common stock $ (137,054) $ (710,692) $ (781,383) $(4,287,001)
=========== =========== =========== ===========
Basic (loss) per share $ (0.06) $ (0.30) $ (0.33) $ (1.80)
=========== =========== =========== ===========
Weighted average shares: 2,384,000 2,384,000 2,384,000 2,384,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 1998 and 1997
1998 1997
----------- -----------
Cash flows from operating activities $ 1,548,237 $ 4,806,955
----------- -----------
Cash flows from investing activities:
Acquisition of business interest - (26,627,209)
Acquisition of patents and trademarks (28,113) (22,373)
Purchase of fixed assets (231,668) (661,921)
Net cash (used in)
investing activities (259,781) (27,311,503)
----------- -----------
Cash flows from financing activities:
Increase in deferred acquisition costs - (861,220)
Repayments of related party debt (40,483) (124,493)
Proceeds from the sale of preferred stock - 13,950,000
Proceeds from bank borrowings 250,000 10,750,000
Repayment of bank loans (875,000) (1,812,500)
Principal payments on long-term debt (19,865) (25,404)
----------- -----------
Net cash (used in)/provided by
financing activities (685,348) 21,876,383
----------- -----------
Net increase (decrease) in cash 603,108 (628,165)
Beginning - cash balance 128,188 632,727
----------- -----------
Ending - cash balance $ 731,296 $ 4,562
=========== ===========
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 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
7
<PAGE>
SERENGETI EYEWEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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. When the Company was in compliance with all financial covenants in
the loan agreement (which it currently is not), the Company was able to borrow
up to 85% of eligible accounts receivable less than 91 days past due and 50% of
eligible inventory, 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.
At June 30, 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 agreement have been classified as
current liabilities. The unused portion of the revolver facility is $750,000,
but the bank has not permitted the Company the use of this additional amount.
8
<PAGE>
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 $.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 June 30, 1998 dividends aggregating 738
shares of preferred stock valued at $738,000 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 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.
9
<PAGE>
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 six months ended June 30, 1998 and 1997, the Company made net
sales to two significant customers of approximately $8,500,000 and
$4,600,000 or 36% and 28% of its total sales.
Approximately $4,300,000 of the gross accounts receivable were due from
three customers at June 30, 1998 and were unsecured. Approximately
$4,160,000 of the gross accounts receivable were due from two customers at
June 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 issuance of the
Preferred Shares. The complaint seeks, among other things, monetary relief as
well as a preliminary injunction
10
<PAGE>
SERENGETI EYEWEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 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.
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.
11
<PAGE>
SERENGETI EYEWEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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
===========
12
<PAGE>
SERENGETI EYEWEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 six months ended:
1998 1997
Net sales to unaffiliated customers:
United States $22,684,023 $15,904,092
Hong Kong 916,814 -
----------- -----------
$23,600,837 $15,904,092
=========== ===========
Income from operations:
United States $ 455,208 $ 526,070
Hong Kong 369,397 -
----------- -----------
824,605 526,070
Other income - 32,521
Interest (867,988) (498,892)
----------- -----------
Loss income before income taxes $ (43,383) $ 59,699
============ ===========
Identifiable assets:
United States $51,391,775 $43,031,950
Hong Kong 612,121 591,849
----------- -----------
$52,003,896 $43,623,799
=========== ===========
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
The following should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE RECENTLY ACQUIRED
SERENGETI BUSINESS, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE
INNOVATIVE PRODUCTS, THE COMPANY'S ABILITY TO SATISFACTORILY RESTRUCTURE ITS
CREDIT FACILITY, 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(R)
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 expects its Solar*X(R) line of sunglasses to remain its predominant line
in the non-premium segment of its business.
14
<PAGE>
In the latter part of 1995, with the proceeds of its initial public
offering completed in August 1995, the Company launched its H2Optix(R) line, a
premium sunglass line. The Company sought to emphasize sales of H2Optix(R) and
thereby reduce its dependence upon mass merchandisers. The Company experienced
only limited sales of its H2Optix(R) sunglasses in 1995 as it commenced its
marketing efforts to establish H2Optix(R) brand name recognition and broaden the
distribution network for the H2Optix(R) product line. In 1996 and 1997, the
Company experienced more substantial sales of the H2Optix(R) 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(R) 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(R) 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 JUNE 30, 1998 TO THE THREE MONTHS ENDED
JUNE 30, 1997.
Net sales increased 51%, from approximately $9.2 million for the three
months ended June 30, 1997 to approximately $13.8 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 and increased
sales of the Company's non-premium products to a significant customer.
Gross profit decreased as a percentage of sales, from
approximately 55% for the three months ended June 30, 1997 to approximately
45% for the same period in 1998, primarily as a result of price reductions
in the Serengeti product line.
Selling expenses decreased from approximately $2.7 million during the
three months ended June 30, 1997 to approximately $2.1 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 increased costs associated with marketing and
selling expenses related to the Company's premium products in 1998.
General and administrative expenses increased from approximately $1.9
million for the three months ended June 30, 1997 to approximately $3.1 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 level reductions implemented in the quarter.
Interest expense increased from approximately $292,000 for the three
months ended June 30, 1997 to approximately $475,000 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>
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED
JUNE 30, 1997
Net sales increased 48%, from approximately $15.9 million for the six
months ended June 30, 1997 to approximately $23.6 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 and increased
sales of the Company's non-premium products to a significant customer.
Gross profit decreased as a percentage of sales, from approximately
51% for the six months ended June 30, 1997 to approximately 44% for the same
period in 1998, primarily as a result of price reductions in the Serengeti
product line.
Selling expenses decreased from approximately $3.7 million during the
six months ended June 30, 1997 to approximately $3.3 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 $2.9
million for the six months ended June 30, 1997 to approximately $5.4 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 $498,000 for the six
months ended June 30, 1997 to approximately $868,000 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.
17
<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. Pursuant to the Revolver Facility, if the Company
were in compliance with all financial covenants (which it is not), the Company
could 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 June 30, 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 Current Credit Facility is payable at the LIBOR rate
or the "Base Rate." In addition to applicable margins, the Company pays a
floating percentage tied to the Company's ratio of funded debt to "EBITDA";
ranging, in the case of LIBOR rate loans, from 1.50% based upon a ratio of 1.5:1
or less to 2.75% based upon a ratio of greater than 3:1; and ranging, in the
case of Base Rate loans, from .50% based upon a ratio of 2.25:1 or less to 1.25%
based upon a ratio of greater than 3:1. Pursuant to the Current 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.
18
<PAGE>
The Current Credit Facility requires the Company to maintain certain
financial ratios. Pursuant to the Current Credit Facility, the Company is
required to apply 75% of its "Excess
19
<PAGE>
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 Current 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 Current Credit Facility is secured by a first priority lien on all
of the assets of the Company and its subsidiaries.
As of June 30, 1998, the Company was not in compliance with certain
financial covenants with respect to the Current Credit Facility. Although the
lenders have not declared a default or accelerated payment of the Current Credit
Facility, there can be no assurance that they will not do so in the future. As a
result all balances due under the Current Credit Facility have been classified
as current debt. The Company is currently in negotiation with its lenders to
restructure the Current Credit Facility including modification of the financial
covenants and obtaining waivers of past non-compliance. There can be no
assurance that such restructuring will take place.
The Company's liquidity improved from working capital of approximately
$753,000 at December 31, 1997 to working capital of approximately $2.3 million
at June 30, 1998, primarily as a result of increased earnings from operations,
debt reduction, and a reduction in accounts payable.
The Company incurred approximately $232,000 in capital expenditures
during the six months ended June 30, 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, in addition to the staff reduction
implemented in the second quarter of 1998, attempt to (a) restructure the
Current Credit Facility as described above, (b) negotiate with additional
lenders to replace its existing senior debt, and (c) reduce its current
inventory levels by expanding its distribution.
20
<PAGE>
FOREIGN CURRENCY EXCHANGE
The Company presently transacts business internationally in United
States currency. To date, the Company has not been affected significantly by
currency exchange fluctuations. However, future currency fluctuations in
countries in which the Company does business could adversely affect the Company
by resulting in pricing that is not competitive with prices denominated in local
currencies.
SEASONALITY
The Company anticipates that the seasonality of its premium sunglass
business generally will follow the selling activity of its largest customer for
such products, Sunglass Hut. Historically, the strongest quarter in terms of
Serengeti sales is the second quarter, followed by the first, fourth and third
quarters. The seasonality of the Company's non-premium sunglass business
generally follows the selling of its largest customer for such products,
Wal-Mart. Historically, the Company's strongest quarter in terms of sales is the
fourth quarter, followed by the first, second and third quarters.
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 $10,726,636 at December 31, 1997 and June 30, 1998 respectively.
For the year ended December 31, 1997 and the six months ended June 30, 1998 the
Company reported losses before preferred dividends of $3,401,881 and $43,383
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.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February, 1998 Corning Incorporated (Corning), the entity from whom the
Company purchased the Serengeti business filed an action against the Company.
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.
Reference is made to the Company's annual report on Form 10-KSB for a discussion
of certain other litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 29, 1998, the Company held its Annual Meeting of Stockholders to (1)
elect three directors to Class I of the Board of Directors to serve for a three
year term and one director to Class II of the Board of Directors to serve for a
two year term; and (2) to ratify and approve the selection of independent
auditors of the Company to serve until the next Annual Meeting of Shareholders.
The following individuals were elected to serve as Class I directors:
VOTE FOR: VOTE WITHHELD:
Edward Borix 2,069,109 27,100
William L. McMahon 2,069,109 27,100
Dr. Jeffrey B. Sack 2,069,109 27,100
The following individual was elected to serve as Class II director:
VOTE FOR: VOTE WITHHELD:
John Kopinski 2,068,109 28,100
22
<PAGE>
The shareholders ratified and approved the selection of BDO Seidman, LLP as
independent auditors of the Company to serve until the 1999 Annual Meeting
of Shareholders. The result of the vote was as follows:
2,076,239 votes were for the selection;
18,670 votes were against the selection; and
1,300 abstained.
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.
Dated: August 10, 1998 By: /s/ Stephen Nevitt
--------------------------------
Stephen Nevitt
President
(Principal Executive Officer)
By: /s/ William McMahon
--------------------------------
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of June 30, 1998 and the Consolidated Statements
of Operations for the six month period ended June 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000940183
<NAME> SERENGETI EYEWEAR, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 731,296
<SECURITIES> 0
<RECEIVABLES> 10,924,853
<ALLOWANCES> 485,271
<INVENTORY> 19,144,615
<CURRENT-ASSETS> 31,924,594
<PP&E> 3,173,498
<DEPRECIATION> 845,514
<TOTAL-ASSETS> 52,003,895
<CURRENT-LIABILITIES> 29,674,054
<BONDS> 135,000
0
22,333,000
<COMMON> 2,384
<OTHER-SE> (138,158)
<TOTAL-LIABILITY-AND-EQUITY> 52,003,895
<SALES> 23,600,837
<TOTAL-REVENUES> 23,600,837
<CGS> 13,316,747
<TOTAL-COSTS> 13,316,747
<OTHER-EXPENSES> 9,459,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 867,988
<INCOME-PRETAX> (43,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,383)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,383)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
