U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
8125 25th Court East
Sarasota, Florida 34243
(Address of principal executive offices)
(941)359-3599
(Issuer's telephone number including area code)
Indicate by check mark whether the registrant (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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Number of shares outstanding as of April 30, 1999:
2,384,000 shares of Common Stock, $.001 par value.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc.
Consolidated Balance Sheets
ASSETS
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
Current Assets:
Cash $ 152,314 $ 87,774
Accounts receivable - trade 6,389,259 7,796,963
Income tax refund receivable -- 358,055
Inventories (Note B) 13,351,762 12,536,224
Prepaid expenses 832,920 958,603
----------- -----------
Total current assets 20,726,255 21,737,619
Fixed assets - net of accumulated depreciation 2,057,866 2,170,582
Other assets:
Goodwill - net 6,202,978 6,290,314
Patents and trademarks - net 10,102,831 10,258,068
Other assets 192,261 157,261
----------- -----------
Total assets $39,282,191 $40,613,844
=========== ===========
2
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Serengeti Eyewear, Inc.
Consolidated Balance Sheets
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Bank overdraft $ 137,163 $ 288,414
Note payable - bank (Note C) 5,000,000 7,322,704
Accounts payable 10,930,406 10,952,090
Accrued dividends (Note D) 391,000 1,476,000
Accrued expenses 937,534 519,492
Income taxes payable -- --
Current portion of long-term debt 5,263,778 5,263,448
------------ ------------
Total current liabilities 22,659,881 25,822,148
------------ ------------
Long-term debt 75,771 91,415
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value,
1,000,000 shares authorized; 25,384
and 23,908 shares issued and
outstanding 23,809,000 22,333,000
Common stock, $.001 par value,
10,000,000 shares authorized; 2,384,000
Issued and outstanding 2,384 2,384
Additional paid in capital 10,586,094 10,586,094
Accumulated deficit (17,850,939) (18,221,197)
------------ ------------
Total stockholders' equity 16,546,539 14,700,281
------------ ------------
Total liabilities and stockholders' equity $ 39,282,191 $ 40,613,844
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Serengeti Eyewear, Inc.
Consolidated Statements of Operations
Three Months Ended
------------------
March 31, 1999 March 31, 1998
-------------- --------------
(Unaudited) (Unaudited)
Net sales $ 10,532,935 $ 9,766,785
Cost of goods sold 6,289,642 6,920,662
------------ ------------
Gross Profit 4,243,293 2,846,123
------------ ------------
Operating expenses:
Depreciation and amortization 362,012 372,948
Selling Expenses 714,586 1,237,461
General and administrative expenses 1,963,448 2,317,998
------------ ------------
Total operating expenses 3,040,046 3,928,407
------------ ------------
Income (loss) from operations 1,203,247 (1,082,284)
------------ ------------
Other income (expenses):
Other expense (5,658) --
Interest expense (436,331) (393,045)
------------ ------------
(441,989) (393,045)
------------ ------------
Net income (loss) 761,258 (1,475,329)
Preferred stock dividends (391,000) (369,000)
------------ ------------
Net income (loss) applicable to
Common stock $ 370,258 $ (1,844,329)
============ ============
Net income (loss) per share (Note A)
Basic $ 0.16 $ (0.77)
============ ============
Diluted $ 0.02 $ (0.77)
============ ============
Weighted average shares:
Basic 2,384,000 2,384,000
============ ============
Diluted 41,005,530 2,384,000
============ ============
See accompanying notes to consolidated financial statements.
4
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Serengeti Eyewear, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 761,258 $(1,475,329)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 362,012 372,948
Cash provided by (used for):
Accounts receivable 1,407,704 3,110,383
Income tax refund receivable 358,055 --
Inventories (815,538) (1,087,307)
Prepaid expenses 90,683 (423,292)
Accounts payable (21,684) 1,334,937
Customer deposits -- (900,122)
Accrued expenses 418,042 (120,229)
----------- -----------
Net cash provided by operating activities 2,560,532 811,989
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (6,723) (168,361)
----------- -----------
Net cash (used in) investing activities (6,723) (168,361)
----------- -----------
Cash flows from financing activities:
Increase in bank overdraft (151,251) --
Repayments of related party debt (15,314) (11,755)
Proceeds (repayments) from bank borrowings (2,322,704) 250,000
Repayments of bank loan -- (437,500)
Principal payments on long-term debt -- (14,266)
----------- -----------
Net cash provided by (used in) financing activities (2,489,269) (213,521)
----------- -----------
Net increase in cash 64,540 430,107
Cash balance - beginning of period 87,774 128,188
----------- -----------
Cash balance - end of period $ 152,314 $ 558,295
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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.
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, 1998 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 are valued at the lower of cost or market on a first in-first out
basis.
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.
Income (Loss) per share
Income (loss) per share amounts are computed based upon the weighted average
number of common shares and potential common shares outstanding during each
period. Potential common shares for 1999 of 38,621,530 include shares underlying
the convertible preferred stock. Potential common shares are not considered in
the computation for 1998 as their effect would be anti-dilutive.
6
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation are as follows for the three months ended March
31, 1999 and March 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
--------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income applicable
to Common Stock $ 370,258 $ 2,384,000 $ 0.16 $(1,844,329) $ 2,384,000 $ (0.77)
Effect of Dilutive Securities:
Series A convertible
preferred stock 140,433 13,148,726 -- --
Series B convertible
preferred stock 125,565 12,736,402 -- --
Series C convertible
preferred stock 125,565 12,736,402 -- --
----------- ----------- ----------- -----------
Net Income Applicable
to Common Stock and
assumed conversions
(Diluted EPS) $ 761,821 $41,005,530 $ 0.02 $(1,844,329) $ 2,384,000 $ (0.77)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
7
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note B. Inventories
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
Inventory amount of the following:
Raw Materials $ 1,864,446 $ 4,490,117
Work-in-process 3,553,424 2,768,884
Finished Goods 7,933,892 5,277,223
----------- -----------
Total $13,351,762 $12,536,224
----------- -----------
Note C. Note payable - bank
During February 1997, the Company secured a $7,500,000 line of credit with a
bank with interest payable at the LIBOR rate or a base rate, plus applicable
margins. As of August 21, 1998, the Company renegotiated this borrowing
facility. The terms of the new agreement allow the Company to borrow up to
$7,500,000 with interest payable at the LIBOR rate plus 325 basis points (8.2%
at March 31, 1999) or the bank's prime lending rate plus 1.75% (9.5% at March
31, 1999), at the borrower's option.
Under the current revolver facility, as amended, the Company is able to borrow
up to 75% of eligible accounts receivable and up to 50% of the value of the
Company's eligible inventory, subject to additional limitations on
inventory-based loans. The unused portion of the facility was $2,500,000 at
March 31, 1999. Interest on the revolver facility is payable at the LIBOR rate
plus 325 basis points or the "Base Rate" plus 1.75%.
The Company is presently not in compliance with the minimum tangible net worth
and other financial covenants set forth in its bank credit facility. The lenders
have not declared the Company in formal default or accelerated payment of the
Company's indebtedness thereunder. There can be no assurance they will not do so
in the future. The Company is engaged in discussing with a prospective
replacement lender. There can be no assurance that the Company will successfully
negotiate a new credit loan facility.
Note D. 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, whereby the Company purchased certain assets of the
Serengeti Eyewear division of Corning, Inc., 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. During 1997,
118 shares of preferred stock valued at $118,000, which represent dividends
8
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
accrued in 1996 were issued. During 1998, dividends aggregating 1,290 shares of
preferred stock, valued at $1,290,000, which represent dividends accrued in
1997, were issued. During the three months ended March 31, 1999, dividends
accrued in 1998 aggregating $1,476,000 were paid to RBB through the issuance of
1,476 shares of preferred stock.
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 E. Concentration of credit risk/major customers
During the three months ended March 31, 1999 and 1998, the Company made net
sales to two significant customers of approximately $4,100,000 and $3,300,000 or
39% and 34% of its total sales.
Approximately $2,500,000 of the gross accounts receivable were due from three
customers at March 31, 1999 and were unsecured. Approximately $2,600,000 of the
gross accounts receivable were due from three customers at March 31, 1998 and
were unsecured.
Note F: Litigation
During August 1997, Argon Inc. filed an action against the Company and Corning,
Inc. in the Superior Court of California, County of Los Angeles, which alleged
breach of contract in which the plaintiff seeks approximately $250,000 based
upon a non-exclusive distributor agreement and a service agreement. The Company
has denied the substantive allegations and has asserted a counterclaim for
$118,000 based upon Argon's breach of the above mentioned agreements and
non-payment of amounts due to the Company.
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
9
<PAGE>
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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 intends to vigorously defend itself against this action. Although the
risk of loss for this action is deemed reasonably possible, the amount of loss
is not estimable, and therefore, no accrual for such is reflected in these
financial statements.
During March 1997, Argent Securities, Inc. ("Argent"), the underwriter of the
Company's initial public offering, filed an action against the Company which
alleged, 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, more fully described in Note D, and misstatements in the
Company's Proxy Statement relating to the issuance of the Preferred Shares. In
April 1999, the Company and Argent entered into a settlement agreement releasing
all claims. In connection therewith, Argent received $35,000.
In addition to the above matters and in the normal course of conducting its
business, the Company is involved in various other legal matters. The Company is
not a party to any legal matter which management believes could result in a
judgment that would have a material adverse affect on the Company's financial
position, liquidity or results of operations.
Note G. Foreign operations
The Company operates in two geographic areas: The United States and Hong Kong.
Following is a summary of information by area for the three months ended:
March 31
--------
1999 1998
---- ----
Net sales to unaffiliated customers:
United States $ 8,605,816 $ 8,935,089
Hong Kong 1,927,119 831,696
------------ ------------
$ 10,532,935 $ 9,766,785
------------ ------------
Income from operations:
United States $ 1,047,121 $ (1,186,701)
Hong Kong 156,126 104,417
------------ ------------
1,203,247 (1,082,284)
Other income (5,658) --
Interest (436,331) (393,045)
------------ ------------
Income (loss) before income taxes $ 761,258 $ 1,475,329)
------------ ------------
Identifiable assets:
United States $ 38,708,870 $ 51,549,723
Hong Kong 573,321 582,634
------------ ------------
$ 39,282,191 $ 52,132,357
------------ ------------
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following should be read in conjunction with the Condensed
Consolidated Financial statements and the Notes thereto appearing elsewhere in
this report.
Forward-Looking Statements
The forward-looking statements contained herein involve risks and
uncertainties, and are subject to change based on various important factors
including, but not limited to, the company's continued ability to develop and
introduce innovative products, changing consumer preferences, actions by
competitors, manufacturing capacity constraints of its outside sources and the
availability of raw materials, the effect of economic conditions, dependence on
certain customers and other risks identified from time to time in the company's
securities and exchange commission filings. Given these uncertainties, undue
reliance should not be given to such statements. The company also undertakes no
obligation to update these forward-looking statements.
General
Serengeti Eyewear, Inc. (the "Company") is engaged in the business of
designing, manufacturing through outside sources, marketing and distributing a
wide array of quality sunglasses.
On February 13, 1997, the company acquired for $27.5 million in cash (the
"Acquisition") the assets of the Serengeti Eyewear division of Corning
Incorporated ("Corning") used in the design, manufacture and distribution of
Serengeti brand sunglasses. Drivers sunglasses, first introduced by Corning in
1985, constitute the core of the Serengeti product line. Over the years,
Serengeti sunglasses have developed a brand identity which provides appeal to
consumers in the market for premium sunglasses. The Serengeti brand identity is
based upon superior lens technology, quality and performance.
Prior to the Acquisition, the Company primarily designed and marketed
selected non-premium lines of sunglasses such as Solar*X sunglasses, which were
targeted for distribution through mass merchandisers as a sunglass with quality
comparable to that of premium sunglasses at popular prices. Solar*X features a
ground and polished lens which provides virtually complete protection from
harmful ultraviolet sunrays and glare. The Company also markets to the mass
merchandise market other sunglass brands, each of which the Company believes
creates a niche among popular-priced sunglasses of various categories.
In the latter part of 1995, with the proceeds of its initial public
offering completed in August 1995, the Company launched its H2Optix line of
sunglasses which is designed specifically for use in the water environment.
H2Optix utilizes a combination of characteristics which the Company believes
differentiates it from other competing sunglasses which target the water sports
market. H2Optix sales approximated $1.2 million in each of 1996 and 1997 and $2
million in 1998. The Company has included H2Optix within the Serengeti premium
line, thereby tapping into
11
<PAGE>
Serengeti's well-established distribution networks.
Results of Operations
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998.
Net sales increased 7.8%, from approximately $9.8 million for the three
months ended March 31, 1998 to approximately $10.5 million for the same period
in 1999. Sales to optical chains and specialty retailers increased $0.8 million.
These increases were partially offset by lower distributor sales and lower
international premium sales. Sales of non-premium product to Wal-Mart through
the Company's Hong Kong subsidiary increased approximately $1.1 million.
Gross profit as a percentage of sales increased to 40.3% for the three
months ended March 31, 1999 compared to 29.1% for the same period for 1998,
primarily due to price increases to customers and limited close-out sales.
Selling expenses decreased from approximately $1.2 million during the
three months ended March 31, 1998 to approximately $0.7 million for the same
period in 1999. This decrease resulted primarily from a reduction in
marketing-related expenditures such as retail cooperative advertising,
endorsements, miscellaneous promotions and public relations.
General and administrative expenses decreased from approximately $2.3
million for the three months ended March 31, 1998 to approximately $2.0 million
for the same period in 1999, primarily due to 1) the staff level reductions
implemented in the second quarter of 1998 and the related lower costs for
travel, health insurance and payroll costs, and 2) reduced warehousing costs
related to the increase in sales in the Company's Hong Kong subsidiary, which
utilizes direct shipments to the customer and does not require additional
handling costs by the Company.
Interest expense increased from approximately $393,000 for the three
months ended March 31, 1998 to approximately $436,000 for the same period in
1999, 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 and higher interest rates
from its renegotiated bank credit facility discussed herein.
Liquidity and Capital Resources
The Company is presently not in compliance with the minimum tangible net
worth and other financial covenants set forth in its bank credit facility. The
Lenders have not declared the Company in formal default or accelerated payment
of the Company's indebtedness thereunder. There can be no assurance they will
not do so in the future. The Company is engaged in discussions with a
prospective replacement lender. There can be no assurance that the Company will
successfully negotiate a new credit loan facility.
The Company's current credit facility, last amended August 21, 1998,
includes two term loans with principal balances of $2,000,000 and $5,575,000,
respectively, and a $7,500,000 revolver facility. The first term loan is to be
paid in installments of $437,500 on each of September 30, 1998 and December 31,
1998 and $538,333 on March 31, 1999, with the balance payable on
12
<PAGE>
June 30, 1999. The second term loan is payable in monthly installments of
$300,000 with the balance due on December 31, 1999. The banks have permitted the
Company to delay its 1999 payments of principal, pending negotiations with a
potential new lender. Interest on the first term loan is payable at the LIBOR
rates plus 325 basis points or the "Base Rate" plus 1.75%. Interest on the
second term loan is payable at the LIBOR rate plus 500 basis points or the "Base
Rate" plus 3.50%.
Under the current facility, as amended, the Company was able to borrow up
to 75% of eligible accounts receivable and up to 50% of the value of the
Company's eligible inventory, subject to additional limitations on
inventory-based loans. The unused portion of the facility was $2,500,000 at
March 31, 1999. Interest on the revolver facility is payable at the LIBOR rate
plus 325 basis points or the "Base Rate" plus 1.75%.
Pursuant to the 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 Facilities through March 31, 2000.
The credit facility requires the Company to maintain certain financial
ratios. Pursuant to the credit facility, the Company is required to apply 75% of
its "excess cash flow" for the preceding completed fiscal year, the net proceeds
from any sale of assets other than in the ordinary course and the net proceeds
of equity issuances and permitted debt issuances to prepay outstanding amounts
under the Term Facility. The 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
credit facility is secured by a first priority lien on all of the assets of the
Company and its subsidiaries.
The Company's liquidity improved from a working capital deficit of
approximately $4.1 million at December 31, 1998 to a working capital deficit of
approximately $1.9 million at March 31, 1999, primarily as a result of payments
on the credit facility.
The Company incurred capital expenditures of $6,723 during the three
months ended March 31, 1999.
The Company anticipates, based on its currently proposed plans, including
(i) replacement of its current senior bank lenders with a new lender, of which
there can be no assurance, (ii) the introduction of procedures designed to
strengthen management and increase sales effectively; and (iii) the development
and introduction of new products, that the net cash available from operations
will be sufficient to satisfy its anticipated cash requirements for the 1999
fiscal year.
Year 2000 Issues
The Year 2000 problem arises because many computer systems were designed
to identify a year using two digits, instead of four digits, in order to
conserve memory and other resources. For instance, "1997" would be held in the
memory of a computer as "97".
When the year changes from 1999 to 2000, a two digit system would read the
year as changing from "99" to "00." For a variety of reason, many computer
systems are not designed to make such a date change or are not designed to
"understand" or react appropriately to such a date
13
<PAGE>
change. Therefore, as the date changes to the year 2000, many computer systems
could completely stop working or could perform in an improper and unpredictable
manner.
During November, 1997 the Company began converting its information system
to be year 2000 compliant. At December 31, 1997, the Company had completed the
installation of the new software and completed the process of updating
application by mid-1998. The Company incurred charges aggregating approximately
$50,000 in 1998 and estimates that additional costs will aggregate approximately
$50,000 in 1999.
Pursuant to the Company's year 2000 planning, the Company is in the
process of requesting information regarding the computer systems of its key
suppliers, customers, creditors and financial service organizations. Where
practicable, the Company will attempt to mitigate its risks with respect to the
failure of any of these institutions to be year 2000 compliant. The effect, if
any, on the Company's results of operations from the failure of each party to be
year 2000 compliant is not readily determinable.
Seasonality
The Company anticipates that the seasonality of its premium sunglass
business generally will follow the selling activity of its largest customer,
Sunglass Hut. Historically, the strongest quarter in terms of Serengeti sales is
the second quarter, followed by the first, fourth and third quarters.
The seasonality of the Company's non-premium sunglass business generally
follows the selling activity of its largest customer for such products,
Wal-Mart. Historically, the Company's strongest quarter in terms of sales is the
fourth quarter, followed by the first, second and third quarters.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge of the: (i) exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
("fair value hedges"), (ii) exposure to variable cash flows of a forecasted
transaction ("cash flow hedges"), or (iii) foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency- denominated forecasted
transaction ("foreign currency hedges"). The objective of hedge accounting is to
match the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument (e.g., derivative contracts entered into for speculative
purposes), the gain or loss is recognized as income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently plans to adopt SFAS 133 on July 1,
1999. On that date, hedging
14
<PAGE>
relationships will be designated anew and documented. The Company periodically
enters into derivative contracts for the purpose of hedging risks attributable
to interest rate fluctuations and, in general, such hedges have been fully
effective in offsetting the changed in fair value of the underlying risk. The
Company expects to continue its hedging activities in the future. However, it
has not yet evaluated the financial statement impact of adopting SFAS 133.
Going Concern Consideration
The Company has experienced significant operating losses which have
resulted in an accumulated deficit of $17,850,939 at March 31, 1999, and was not
in compliance with certain financial covenants under its bank credit facility.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
The Company believes that the following actions and plans will allow it to
continue operations for a reasonable period of time:
o The Company is negotiating with a new lender to replace its current
senior debt and to provide additional working capital.
o The Company has introduced procedures to strengthen management and
increase sales efficiency.
o The Company has developed and introduced new product styles for its
1999 catalog which management believes will become widely accepted
by its customers.
o The Company has added to its non-premium line customer base in 1999.
15
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
The Company is exposed to various market risks, including changes in
interest rates. In February 1997, the Company entered into an interest rate swap
agreement for the line of credit and long-term debt. The fair value of the
interest rate swap was approximately $77,000 at March 31, 1999 and is included
in other assets.
In connection with this agreement, the counterparty will pay the Company
interest at a variable rate base on LIBOR. In the event the counterparty to the
agreements defaults in all its provisions, the accounting loss suffered by the
Company will be limited to the interest rate differential between the fixed rate
and the LIBOR rate if the LIBOR rate is in excess of the fixed rate. In the
event the agreements are terminated, the Company may be required to pay a
termination fee to the counterparty based on the difference between the LIBOR
rate and the fixed rate.
Foreign Currency Exchange
The Company presently transacts most business internationally in United
States currency. To date, the Company has not been affected significantly by
currency exchange fluctuations. However, future currency fluctuations in
countries in which the Company does business could adversely affect the Company
by resulting in pricing that is not competitive with prices denominated in local
currencies.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Reference is made to the Company's annual report on form 10-KSB for the
year ended December 31, 1998 for a discussion of certain other litigation.
In the normal course of conducting its business, the Company is involved
in various legal matters. The Company is not a party to any other legal matter
which management believes could result in a judgment that would have a material
adverse affect on the Company's financial position, liquidity or results of
operations.
ITEM 2: CHANGES IN SECURITIES
ITEM 3: DEFAULT UPON SENIOR SECURITIES
Reference is hereby made to Part I, Item 2, Management's Discussion and
Analysis or Plan of Operation, for a discussion of any defaults upon the
Company's senior securities.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERENGETI EYEWEAR, INC.
Dated: June 1, 1999 By: /s/ Stephen Nevitt
------------------------------------
Stephen Nevitt
President
(Principal Executive Officer)
By: /s/ William McMahon
------------------------------------
William McMahon
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 1999 and the Consolidated Statements
of Operations for the three month period ended March 31, 1999 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 152,314
<SECURITIES> 0
<RECEIVABLES> 6,921,855
<ALLOWANCES> 532,596
<INVENTORY> 13,351,762
<CURRENT-ASSETS> 20,726,255
<PP&E> 3,089,828
<DEPRECIATION> 1,031,962
<TOTAL-ASSETS> 39,282,191
<CURRENT-LIABILITIES> 22,659,881
<BONDS> 75,771
0
23,809,000
<COMMON> 2,384
<OTHER-SE> (7,264,845)
<TOTAL-LIABILITY-AND-EQUITY> 39,282,191
<SALES> 10,532,935
<TOTAL-REVENUES> 10,532,935
<CGS> 6,289,642
<TOTAL-COSTS> 6,289,642
<OTHER-EXPENSES> 3,040,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,331
<INCOME-PRETAX> 761,258
<INCOME-TAX> 0
<INCOME-CONTINUING> 761,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 761,258
<EPS-BASIC> .16
<EPS-DILUTED> .02
</TABLE>
