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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
Commission file number: 0-26022
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SERENGETI EYEWEAR, INC.
(Exact name of registrant as specified in its charter)
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NEW YORK 65-0665659
(State of Incorporation) (I.R.S. Employer Identification No.)
8125 25TH COURT EAST, SARASOTA, FLORIDA 34243
(Address of principal executive offices)
(941)359-3599
(Registrant's telephone number)
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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)
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 15, 2000 was:
Common Stock, $.001 par value: $3,219,606
There were 2,384,000 shares of the Registrant's common stock outstanding as of
March 15, 2000.
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PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
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 (the
"Acquisition") in cash 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 and designed 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 sun rays and glare. The Company also markets to mass
merchandisers other sunglass brands, each of which the Company believes creates
a niche among popular priced sunglasses of various categories. Non-premium
sunglass sales accounted for approximately 19% of the Company's total sales in
1999.
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 watersports
market. H2Optix sales approximated $1.2 million in each of 1996 and 1997 and $2
million and $1.8 million in 1998 and 1999, respectively. The Company has
included H2Optix within the Serengeti (premium) line, thereby tapping into
Serengeti's well-established distribution network. Premium sunglass sales
accounted for approximately 81% of the Company's total sales in 1999.
The Company is a New York corporation formed in 1976. The Company
maintains its principal executive offices at 8125 25th Court East, Sarasota,
Florida 34243, and its telephone number is (941) 359-3599.
INDUSTRY BACKGROUND
The sunglass industry is generally divided into two principal
segments, the under-$30 or "non-premium" market and the over-$30 or "premium"
market. The retail market for sunglasses in recent years has experienced the
emergence of a broader premium market, reflected by increased sales of
higher-priced, quality-oriented sunglass products. This premium sunglass market,
the category in which the Company's Serengeti products compete, showed an
increase in retail sales of 45%, from $825.6 million in 1989 to $1.2 billion, in
1999. Retail sales in the premium sunglass market declined by an estimated
$300.0 million from 1998 to 1999, not as a result of decreased unit sales, but
as a result of a decrease in the average unit selling price of sunglasses within
the premium sunglass market.
Management of the Company believes that consumer willingness to pay
more for premium sunglass products results from increased awareness of the need
for quality eye protection, the continued growth of sunglasses as a fashion
accessory, an increased demand for specialized sunglasses for different sports
and activities and growing brand awareness. The Company seeks to capitalize on
these changes in the sunglass market by emphasizing sales of its premium
products which are designed to appeal to the quality conscious consumer and
which are marketed for use in specifically targeted sporting and recreational
activities in which participants tend to spend a significant amount of
disposable income on equipment and accessories.
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The under-$30 market is primarily served by mass merchandisers such
as Wal-Mart, chain drug stores and discount department stores. These outlets
generally offer sunglasses in the $8 to $25 price range. The Company currently
serves the top of the retail price range in the under-$30 market primarily with
its Solar*X, Sensor-X, Mach 1 and Wal-Mart private-label brands of sunglasses.
BUSINESS STRATEGY
The Company's objective is to become a leading designer and
distributor of premium sunglass products. The Company believes that its success
will depend upon its ability to control, protect and enhance the Serengeti brand
image. Accordingly, the Company has adopted a growth-oriented business strategy
which includes the following key elements:
MAINTAIN BRAND NAME RECOGNITION. The Company believes that a brand
name provides instant appeal for many consumers. The Company intends to continue
developing Serengeti signature styles that incorporate superior lens technology,
quality and performance, factors which the Company believes differentiate its
products from those of its competitors and increase brand recognition among
consumers.
FOCUS ON SELECTIVE DISTRIBUTION. It is the policy of the Company to
maintain strict control over the distribution of its Serengeti products to avoid
overexposure of the brand. The Company sells its Serengeti products through
carefully selected retailers that are routinely assessed to ensure they conform
with the Company's standards. The Company believes this selective distribution
policy will promote a high degree of loyalty from retailers and a stable retail
price environment, while increasing the Company's control over diversion and
counterfeiting of its products.
AGGRESSIVELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS. The Company
will continue to rely on patent, trademark, trade secret, unfair competition and
copyright laws to protect its rights to certain aspects of its products,
including product designs, proprietary manufacturing processes and technologies,
product research and concepts and recognized trademarks and trade dress.
INTRODUCING INNOVATIVE NEW PRODUCTS. The Company has capitalized and
will continue to capitalize on Serengeti's strong brand identity by introducing
new Serengeti signature styles. These new styles incorporate the Serengeti name
and logo into the frame decor with logo plaques and lens decoration. In addition
to the retail space Serengeti accounts have provided for the Company's strong
performing existing products, such accounts have made space available for the
new products introduced by the Company in 1999. These new products accounted for
approximately 28% of premium sales in 1999.
The Company will utilize its existing relationships with European and
Asian designers to design the new styles. The Company has an existing
relationship with a renowned European design team that has worked with the
Company for the past five years and which has developed new products for other
well-known sunglass distributors. The Company believes that this team has
consistently demonstrated the ability to create top selling styles.
FOCUS ON INTERNATIONAL EXPANSION. The Company believes that wider
international distribution also represents a significant opportunity for
expansion of sales. Sales outside North America represented approximately 21% of
total sales of the Serengeti line in 1999. To improve the consistency of its
image and operating strategy worldwide, the Company is establishing closer
working relationships with its international distributors. The Company believes
that concentrating its efforts in existing regions and introducing Serengeti to
new regions abroad provide a significant opportunity for increased growth. The
Company also expects to continue benefiting from the global expansion of its
retail accounts, particularly Sunglass Hut International ("Sunglass Hut"), the
largest customer for the Serengeti line.
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PRODUCT LINES
PREMIUM PRODUCTS
The Serengeti line is presently divided into two distinct lines,
Drivers and Kinetix, each of which is targeted at a different portion of the
premium area of the sunglass market. The Company has also integrated its H2Optix
products into the Serengeti line. The premium product line accounted for
approximately 64%, 69% and 81% of the Company's total sales in 1997, 1998 and
1999, respectively.
DRIVERS
Drivers, which is a general purpose sunglass, is the core Serengeti
product line, accounting for approximately 90% of 1999 premium product sales.
Several popular Drivers models have been marketed since the mid-1980s.
Independent marketing surveys have indicated that Drivers inspire exceptional
customer loyalty. All Drivers lenses are photochromic and incorporate "spectral
control" technology. Photochromic lenses automatically darken to adjust to
bright daylight conditions and lighten to adjust to darker daylight conditions
thereby adjusting the amount of light being transmitted to the user. Proprietary
spectral control filters are then created by "hydrogen firing" a photochromic
lens. The resultant lens filters out 95% of blue light, cutting glare, boosting
contrast and reducing eye fatigue in fog and haze without distorting the colors
seen through the lens. The combination of a special base glass and hydrogen
firing give Drivers lenses a lustrous copper color. Drivers lenses are available
in a single-gradient lens that reduces glare from above and are also available
in a darker, non-gradient version known as Drivers Sienna. The Company has
decreased, from 1998 to 1999, the number of Drivers collections it offers from
10 to seven, and the number of Drivers products it offers from 115 to 97, as it
continues to adjust to market demands.
KINETIX
Kinetix, Serengeti's sports/lifestyle, active line, is equipped with
photochromic, spectral control lenses of specific colors engineered to enhance
their performance in particular sports environments. Distinct Kinetix
collections are designed specifically for boaters, skiers, drivers, golfers,
hunters and target shooters. The Company has increased, from 1998 to 1999, the
number of Kinetex products it offers from nine to 21, as it continues to adjust
to market demands.
H2OPTIX
Although there are a number of sunglasses currently marketed that can
be used by watersports enthusiasts, they are not designed specifically for use
in the water environment. The Company believes that each of the existing
sunglass product lines distributed to the watersports market has significant
drawbacks or technical omissions. The H2Optix line has been designed by the
Company to differentiate it from other competing sunglasses which target the
watersports market. The Company believes that its H2Optix product incorporates a
distinctive combination of elements that work together to provide a total
optical system for all of the needs of the water sports enthusiast. The base
material for the H2Optix lens is polycarbonate, which exhibits both optical
clarity and extraordinary strength. The lamination of polarized film between two
such lenses results in a lens ideally suited for any water sport activity. The
Company has decreased, from 1998 to 1999, the number of H2Optix products it
offers from 26 to 15, as it continues to adjust to market demands.
NON-PREMIUM PRODUCTS
The Company's Solar*X, Sensor-X and Mach 1 lines of sunglasses have
been marketed by the Company as a high quality line of sunglasses with a ground
and polished lens. Although these sunglasses retail at approximately $15-$20,
the Company believes that their quality makes them competitive with higher
priced premium sunglasses in the premium market. They are available in a variety
of popular, classic and contemporary frame styles.
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The non-premium product line accounted for approximately 36%, 31% and 19% of the
Company's total sales in 1997, 1998 and 1999, respectively.
DISTRIBUTION
PREMIUM DISTRIBUTION
The Company's principal customers are regional optical distributors,
sunglass specialty stores and optical chains. The Company also uses independent
direct sales representatives to focus on sporting goods and non-direct optical
accounts. Regional sales managers are responsible for maintaining relationships
with optical distributors in their region, as well as direct accounts with
optical and sunglass chains.
SPECIALTY SUNGLASS RETAILERS
The principal specialty sunglass retailer of the Serengeti product
line is Sunglass Hut, the world's largest sunglass retailer, which has more than
2,000 stores worldwide. Sunglass Hut, which is serviced directly by the
Company's in-house sales staff, accounted for approximately 23% of total sales
of the Serengeti product line in 1999, down from 20% in 1998.
OPTICAL CHAINS
In 1999, approximately 15% of total sales of the Serengeti product
line were to optical chains. Of these optical chains, Wal-Mart Optical, Pearle
Incorporated and Lenscrafters were the most significant customers. The Serengeti
brand also has long-standing relationships with other large chains, including
Eyecare Centers of America, Vista Eyecare and DOC Optics. The Company believes
that optical chains present significant opportunities for increased penetration;
specifically, that the Company may be able to leverage the Serengeti reputation
for high performance lenses with the optical chains in order to help create and
grow a substantial prescription sunglass business.
OPTICAL DISTRIBUTORS
The network of optical distributors for the Serengeti line is
comprised of eight regional optical distributors which distribute to optical
chains, independent optical retailers and specialty sunglass retailers
throughout the United States and Canada. The Company encourages its optical
distributors to distribute exclusively to premium retailers.
In 1999, optical distributors accounted for approximately 6% of total
sales of the Serengeti product line. The Company intends to increase
distribution through independent optical retailers with prescription Serengeti
lenses as it believes that continued opportunities for growth lie in increasing
Serengeti sales to independent optical retailers.
INTERNATIONAL DISTRIBUTION
Sales outside North America accounted for approximately 22% of total
sales of the Serengeti product line in 1999. Sales in each region are conducted
through distributors and, in certain countries, directly to large retail chains
or buying groups. European sales, which includes sales to markets in the
Netherlands, Switzerland, Belgium and Finland accounted for approximately 45% of
1999 foreign sales. Sales to Canada, Australia, and the Pacific Rim region
accounted for the balance of such sales.
OTHER
The Company further sold its premium products to sporting goods
stores and non-direct optical stores, both domestically and internationally, and
excess inventories of its premium products through a variety of outlets,
aggregating approximately 39% of the Company's 1999 premium sales.
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NON-PREMIUM DISTRIBUTION
Sales to Wal-Mart in 1999 of non-premium products were approximately
$4.6 million, or 62% of the Company's total non-premium sales. Wal-Mart has been
a principal customer of the Company for more than ten years.
The Company utilizes independent sales representatives throughout the
United States to generate its non-premium sales. The Company's sales
representatives are each responsible for soliciting, selecting and securing
accounts within a particular regional territory. Such sales representatives are
paid on a commission basis, with commissions depending on the product line and
terms of the sale. The Company provides service and support to its sales
representatives, including advertising and sales literature.
As a result of strategy changes by retailers, including
consolidations and increases in the size of retail locations, retailers have
imposed additional requirements on their merchandisers. The Company has
increased the services provided to its mass merchandise customers, particularly
Wal-Mart, in many areas including the sourcing of products necessary to fill a
specific demand, the tracking of supply inventory by direct computer link-up and
the implementation of specifically tailored systems for the shipment of
inventory.
MARKETING
The Company's marketing and promotion strategies for its Serengeti
products are focused on building and maintaining a high-quality image, and
providing multiple price points to meet the needs of the retailer and consumer.
The Company seeks to maintain high visibility for its Serengeti products through
the efforts of its in-house marketing staff which coordinates the sales efforts
of the Company's distributors and develops programs to help retailers increase
their sales of Serengeti products. The marketing staff also designs, develops
and produces sales materials for use by distributors. These sales materials
include point-of-purchase packaging, photography, advertising layouts, signage,
logo designs and catalogs.
The Company markets its Serengeti products with point-of-purchase
displays and through high quality general publications, as well as through
catalogs, event sponsorships, product promotions, and trade and consumer
publications. The Company assists in the funding and preparation of advertising
campaigns initiated by retailers. The Company also promotes the Serengeti brand
name by utilizing high visibility sports and celebrity figures to provide
product exposure to the consumer. Additionally, the Company attends trade shows
targeting specific activities to increase retailer awareness and enthusiasm for
its products which relate to such activities.
The Company seeks to establish a value purchase for the quality-and
price-conscious consumer by maintaining a premium quality product at a price
more attractive than that of competing brands, providing a significant value to
the consumer. The Company provides counter cards to retailers which compare the
features and benefits of Serengeti sunglasses with those of the competition,
exploiting the price/value advantage of Serengeti. The Company determines prices
with the goal of providing both the Company and the trade with the opportunity
for significant margins.
MANUFACTURING
The Company currently obtains photochromic glass lens blanks for the
existing Serengeti lines pursuant to a three-year supply agreement entered into
with Corning upon the closing of the Acquisition, which agreement was
automatically extended until February 2001. Pursuant to the supply agreement,
the Company is required to purchase such Serengeti lens blanks exclusively from
Corning only to the extent that Corning is able to provide such lenses in the
quantities and within the time periods required by the Company. The lens blanks
are currently manufactured by Corning in the United States, Brazil and France
and then shipped to Italy and other locations overseas for finishing. All lenses
currently mounted in the Drivers and Kinetix lines are then subjected to the
Company's proprietary hydrogen firing
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process at a Corning facility in France or manufacturing facilities in Italy.
Lenses are cut, edged, tempered, coated, drop ball tested and inserted into the
frames by third-party contractors in Japan and Italy. The Company purchases its
polarized polycarbonate lenses from Wintec Corporation, based in Japan. These
lenses are used in the Company's H2Optix product line.
The Company currently sources all of its sunglass frames from
third-party suppliers. The Company intends to retain cost-effective frame
suppliers worldwide for the manufacture of the Serengeti frames. The Company
believes that there are a number of suppliers with the ability to manufacture
such frames.
Upon completion of the manufacturing process, the finished sunglasses
are shipped to the Company's facility in Sarasota, Florida from where
distribution takes place.
The Company has developed long-standing collaborative relationships
with established manufacturers of sunglasses throughout the Far East for the
manufacture of its non-premium products and component parts. The Company
maintains its relationship with Swank for certain premium and non-premium
products. In addition, the Company purchases non-premium products from Ialin
Optical Manufacturing Company. The Company actively participates in the
development and refining processes relating to the manufacture of its products.
The manufacturers of the Company's products also manufacture
sunglasses for other companies, including competitors of the Company. Although
the Company has never experienced any difficulties in obtaining the necessary
supplies of its products, its manufacturers could choose to prioritize
production for other companies or cease production for the Company's products on
short notice. Although the Company believes it can find other manufacturers of
its products, there can be no assurance that it will be able to locate new
manufacturers for its products in a timely manner or that such new manufacturers
would be able to meet the Company's supply requirements. While the Company
believes it has available to it manufacturers with the capability of fabricating
Serengeti lenses utilizing the hydrogen firing process, there can be no
assurance that an alternative manufacturer with such capability will be
identified. Termination or disruption of supplies from these sources could
result in production delays, reductions in shipments, or increased costs that
could have a material adverse effect on the Company's operations. While the
Company continually explores ways to reduce its dependence on these limited
source suppliers, there can be no assurance that the Company will be successful
in doing so.
Although the Company's policy is to work closely with its
manufacturing sources, there are certain risks associated with the use of
outside manufacturers, including foreign manufacturers. Risks inherent in the
use of such manufacturers include the absence of an adequate guaranteed supply,
unavailability of or delays in obtaining access to transportation of products
from the manufacturer, destruction, damage, loss or theft at the manufacturer's
facility, delay in delivery of orders, bankruptcy and other financial problems
of the manufacturer as well as potential misappropriation of proprietary
intellectual property. Risks arising in connection with the use of a foreign
manufacturer include foreign governmental regulation, economic instability in
the country of manufacture, labor strikes and the implementation of additional
United States legislation and regulations relating to imports, including the
imposition of duties, taxes and other charges or restrictions on imports.
COMPETITION
The Company faces significant competition in the sunglass business.
The Company competes with a number of established manufacturers, importers and
distributors whose brand names enjoy recognition which exceeds that of the
Company's brand names. The Company competes with several manufacturers,
importers and distributors who have significantly greater financial,
distribution, advertising and marketing resources than the Company. The Company
competes primarily on the basis of performance features, quality, brand name
recognition and price.
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The Company believes that its continued success will depend upon its
ability to remain competitive in its product areas. The failure to compete
successfully in the future could result in a material deterioration of customer
loyalty and the Company's image, and could have a material adverse effect on the
Company's business.
INTELLECTUAL PROPERTY
The Company's trademarks include Country Club-Registered Trademark-,
Drivers-Registered Trademark-, Engineered for the Elements-TM-,
Flex-Grip-Registered Trademark-, Flyers-TM-, Get Behind the Lens-TM-,
Grafix-Registered Trademark-, H2Optix-Registered Trademark-, H2Optix Zero
Tolerance-Registered Trademark-, In-B-Teen-Registered Trademark-, KidzFlipz-TM-,
Kinetix-Registered Trademark-, Mach 1-Registered Trademark-, Marine Vision
Systems-TM-, Outa Limitz-Registered Trademark-, Photo-Blues-Registered
Trademark-, Photo Polarized-TM-, Power Plus-Registered Trademark-, Range &
River-Registered Trademark-, Rhythm `n' Blues-TM-, S Design-TM-,
Sensor-X-Registered Trademark-, Serengeti-Registered Trademark-, Serengeti
Rx-TM-, Signia-Registered Trademark-, Solar Barriers-Registered Trademark-,
Solar-Mates-Registered Trademark-, Solar*X-Registered Trademark-, Spectral
Control-Registered Trademark-, Sport Shields-Registered Trademark-,
Strata-Registered Trademark-, Sunglasses for the Waters of the World-Registered
Trademark-, Sunpets-Registered Trademark-, Surf and Cycle-Registered Trademark-,
The Best Sunglass Value Money Can Buy-Registered Trademark-, The Original
Interactive Technology-TM-, Vision Mates-Registered Trademark-, When You Buckle
Up Clip It On-TM- and Wickets-Registered Trademark-.
As of March 15, 2000, the Company had 29 trademark registrations in
the United States and 137 trademark registrations in foreign countries,
including those for Serengeti, Drivers, Kinetix and H2Optix. As of such date,
the Company had 15 trademark applications pending in the United States and 31
trademark applications pending in foreign countries.
The "Serengeti" trademark is currently licensed to two international
distributors which purchase finished Driver lenses from the Company for
insertion into their manufactured sunglass frames. The Company maintains final
approval rights on all such licensed products.
In connection with the Acquisition, the Company granted to Corning a
royalty-free, worldwide license to utilize the hydrogen firing process
technology and other proprietary technology of the Company in connection with
the manufacture and marketing of lenses, lens blanks and other optical materials
or prescription eyeglasses or lenses used to treat or mitigate medical
conditions or symptoms such as light sensitivity, as well as in connection with
other products manufactured or practices engaged in by Corning prior to the
Acquisition unrelated to the Serengeti business and that do not relate to plano
or prescription sunglass lenses.
The following are the principal patents owned by the Company relating
to Serengeti sunglasses:
HYDROGEN FIRING PROCESS. The Company owns a patent
governing the hydrogen firing process, which expired
November 19, 1999 (Patent No. 4,290,794). This patent
covers the process by which Spectral Control filters are
created within a lens. The patent affects all Drivers and
Kinetix lenses.
DRIVER GLASS. The Company owns a patent for colored
photochromic lenses relating to Drivers and certain
Kinetix lenses (Patent No. 4,240,836) which expired
November 19, 1999. This patent covers color spaces that
provide glare control.
Due to the complexity of the lens manufacturing processes as it relates to the
above-listed patents, together with the financial and time investment necessary
in order for another party to duplicate such patents, the Company does not
anticipate any adverse consequences as a result of the expiration of these
patents.
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The Company owns twelve additional patents, which expire at various dates
through July 15, 2017.
While there can be no assurance that the Company's patents or
trademarks protect the Company's proprietary information and technologies, the
Company intends to assert its intellectual property rights against any
infringer. Although the Company's assertion of its rights can result in a
substantial cost to, and diversion of effort by, the Company, management
believes that the protection of the Company's intellectual property rights is a
key component of the Company's operating strategy.
REGULATORY MATTERS
The Company's products, which are imported to the United States, are
subject to United States customs duties, and, in the ordinary course of its
business, the Company may from time to time be subject to claims by the United
States Customs Services for duties and other charges. The United States and
foreign governments may from time to time impose new duties, tariffs or other
restrictions, or adversely adjust prevailing duty or tariff levels, which could
adversely affect the Company's operations and its ability to import products at
specified levels. In general, the Company cannot predict the likelihood or
frequency of any such events occurring or what effect such events could have on
its financial condition and results of operations.
The Company's sunglasses are certified to the United States Food and
Drug Administration ("FDA") impact standards. The FDA requires that sunglasses
sold in the United States pass what is commonly referred to as the "drop ball
test." Pursuant to this test, a ball is dropped down a tube approximately four
feet long and allowed to hit the lens. A percentage of a statistical sampling of
lenses must not break or shatter. For the Company to take shipment of its
products from overseas, the Company must first deliver to the United States
Customs Service a certificate indicating that a statistical sampling of the
lenses being shipped to the Company meet FDA requirements. The Company believes
that all of its products comply with existing FDA requirements. To date, the
Company has not experienced any difficulties with regulatory compliance.
INSURANCE
The Company maintains product liability insurance coverage of $1
million per occurrence and $2 million in the aggregate and $10 million of excess
liability coverage. The adequacy of the Company's insurance coverage and
reserves to cover known and unknown claims is evaluated at the end of each
fiscal year. The Company believes that its current insurance coverage is
adequate.
EMPLOYEES
As of March 15, 2000, the Company employed 69 individuals on a
full-time basis, 46 of whom were employed in executive, sales and administrative
positions and the remainder of whom were warehouse employees. The number of
warehouse employees increases during various time periods in the course of a
year due to the buying patterns of the Company's customers. None of the
Company's employees are covered by collective bargaining agreements, and
management believes that the Company's relations with its employees are good.
ITEM 2. PROPERTIES.
The Company's corporate offices, distribution and warehouse
facilities occupy approximately 15,500 square feet of space in Sarasota, Florida
under a lease expiring in September 2000 at a monthly rental of approximately
$7,250. The lease provides for various escalations based on cost of living and
real estate taxes. The Company does not anticipate any difficulty renewing this
lease beyond its current expiration date. The Company also leases a satellite
sales office in Windsor, England expiring in March 2001 and an off-site
warehouse facility in Sarasota, Florida on a month-to-month basis.
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ITEM 3. LEGAL PROCEEDINGS.
On or about August 18, 1997, Argon, Inc. filed an action against the
Company and Corning in the Superior Court of California, County of Los Angeles.
The complaint alleges, among other claims, 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. As of March 15, 2000, the parties had reached an agreement in principle
to settle the litigation, which agreement requires that The Company pay Argon a
final settlement amount of $100,000.
During January 1998, RBB Bank Aktiengesellschaft ("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 a
complaint in the United States District Court, Southern District of New York. In
the complaint, 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 a) failed to disclose
certain material information and that RBB relied to its detriment on these
omissions in purchasing the Company's convertible preferred stock and b) failed
to convert the preferred stock when requested. There are also common law claims
for fraud and negligent misrepresentation. RBB seeks specific performance of
RBB's right to convert its preferred shares and compensatory damages up to $22.5
million, equal to the purchase price of the preferred stock, plus interest. RBB
also seeks punitive damages and attorney fees. In April 1998, the Company moved
to dismiss the federal securities laws claims against it, as well as the common
law claims for conversion, fraud and negligent misrepresentation. Following the
filing of the motion to dismiss, RBB withdrew its claim against the Company
arising under Section 12 of the Securities Act of 1933. The court granted the
Company's motion to dismiss the remaining securities law claim against it under
Section 10 of the Securities Exchange Act of 1934 and limited the scope of the
fraud and negligent misrepresentation claim. The court denied the motion with
respect to the conversion claim. In January 1999, the Company answered the
complaint by denying all the allegations of wrongdoing and by asserting various
affirmative defenses to RBB's claims. Document and deposition discovery has been
substantially completed. No trial date has been scheduled. The parties have
reached a conditional settlement of this action. Accordingly, by order dated
February 17, 2000, the court dismissed the case without prejudice with the right
to reopen the case on or before August 17, 2000, if the settlement is not
consummated.
On or about March 19, 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 discussed in Item 12, below, and
misstatements in the Company's Proxy Statement relating to the issuance of the
Preferred Shares. In April 1999, a settlement whereby the Company paid Argent
$35,000 was reached and the action was discontinued with prejudice.
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is quoted on the OTC Bulletin Board, an
NASD sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq Stock Market ("Nasdaq"). The trading
symbol of the Company's common stock is SOLR. The following table sets forth for
the periods indicated the range of the high and low sales prices of the common
stock, as reported by Nasdaq.
Quarter Ended(1) High Low
- --------------------------------------------------------------- ---- ---
March 31, 1998................................................. $2.44 $1.50
June 30, 1998.................................................. 1.81 0.63
September 30, 1998............................................. 1.00 0.25
December 31, 1998.............................................. 0.56 0.34
March 31, 1999................................................. 0.97 0.16
June 30, 1999.................................................. 0.88 0.50
September 30, 1999............................................. 0.91 0.56
December 31, 1999.............................................. 0.72 0.34
- ----------
(1) On June 11, 1998, the quotation of the Company's common stock and warrants
was transferred from the Nasdaq National Market to the Nasdaq SmallCap
Market. On October 1, 1998, the Company's securities ceased being listed
on the Nasdaq SmallCap Market.
At March 15, 2000, there were approximately 46 shareholders of record
of the common stock. Such number does not include beneficial owners holding
shares through nominee names.
DIVIDEND POLICY
The Company has never paid any dividends and does not expect to pay
any dividends in the foreseeable future with respect to its common stock. Any
earnings which the Company may realize in the foreseeable future will be
retained to finance the growth of the Company. The Company's bank credit
facility restricts the Company's ability to pay dividends on its common stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company should be read
in conjunction with the Company's consolidated financial statements, including
the accompanying notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operation":
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 38,429,533 $ 43,323,222 $ 32,458,362 $ 13,584,255 $ 10,472,656
Net income (loss) from
continuing operations $ 1,557,650 $ (5,289,033) $ (4,912,792) $ 568,247 $ 615,327
Net income (loss) from
applicable to common stock (6,350) (6,765,033) (9,952,792) $ 568,247 $ 615,327
Basic loss per common share $ 0 $ (2.84) $ (4.17) $ 0.21 $ 0.37
As of December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $ 39,499,315 $ 40,613,844 $ 52,306,621 $ 19,354,587 $ 9,644,347
Long-term debt $ 523,579 $ 91,415 $ 154,865 $ 105,886 $ 35,975
Capital lease obligations
$ 0 $ 0 $ 0 $ 0 $ 0
Redeemable preferred stock $ 23,809,000 $ 22,333,000 $ 21,043,000 $ 6,975,000 $ 0
Cash dividends per common share $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Net sales decreased from approximately $43.3 million in 1998 to
approximately $38.4 million in 1999. Premium sales increased from approximately
$29.9 million in 1998 to approximately $31.0 million in 1999, primarily as a
result of increased sales of approximately $3.3 million, $2.9 million and $1.8
million to Costco, Sunglass Hut and Wal-Mart Optical, respectively, partially
offset by a decrease in low-margin close-out sales of approximately $6.9
million. Sales of the Company's H20ptix product line declined
approximately$200,000 from 1998 to 1999. Non-premium sales decreased from
approximately $13.4 million in 1998 to approximately $7.4 million in 1999,
primarily as a result of inventory reductions made by Wal-Mart, the Company's
largest non-premium customer. Sales of non-premium product to Wal-Mart and other
customers conducted through the Company's Hong Kong subsidiary increased
approximately $600,000. Inventories were greater by $1.7 milion at year-end 1999
when compared with inventories at year-ebd 1998, as the Company acquired
inventory for anticipated fourth-quarter 1999 sales to major customers, which
did come to fruition until the first quarter of 2000.
Gross profit as a percentage of sales increased from 30.9% in 1998 to
44.6% in 1999, primarily due to higher average unit selling prices, discounts
taken on purchases from suppliers not previously taken in 1998, and a reduction
in close-out sales for 1999 as compared to 1998, which sales typically have
lower margins.
Selling expenses decreased from approximately $5.7 million in 1998 to
approximately $3.9 million in 1999. This decrease resulted primarily from a
reduction in marketing-related expenditures such as retail cooperative
advertising, endorsements, miscellaneous promotions and public relations. During
1998, the Company spent approximately of $1.0 million on a sponsorship promotion
which was not repeated in 1999. These reductions were partially offset by
increased trade ads and media advertising designed to promote the technical
advantages of the Serengeti lens.
General and administrative expenses decreased from approximately $9.8
million in 1998 to approximately $8.7 million in 1999. Employee-related expenses
such as payroll and travel decreased approximately $500,000 from 1998 to 1999.
In June 1998, the Company reduced its headcount to 69 from 90 as it restructured
its sales force, terminating in-house regional sales managers and their
administrative support personnel. In addition, outside labor was reduced by
$800,000. The Company incurred outside labor costs in 1998 in order to liquidate
excess inventory; this was not repeated in 1999. These reductions were partially
offset by foreign exchange costs associated with purchases from a Japanese
supplier, resulting from the devaluation of the U.S. Dollar against the Japanese
Yen.
Interest expense decreased from approximately $1.9 million in 1998 to
approximately $1.5 million in 1999, as a result of a reduction in long-term debt
of $2.8 million.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 and 1998
Net sales increased from approximately $32.5 million in 1997 to
approximately $43.3 million in 1998, primarily as a result of increased sales of
the Serengeti premium eyeglass product line which accounted for approximately
69% of the Company's total sales in 1998. The Company also experienced increased
sales in its H2Optix products, as well as sales from new products introduced
late in 1997 and 1998. In addition, sales increased as a result of the inventory
reduction program that was put into place in the third quarter of 1998.
13
<PAGE>
In the fourth quarter of 1998, the Company made adjustments to its
inventory balance, resulting in a charge to operations of approximately $4.2
million. These adjustments resulted from difficulties encountered by the Company
in connection with its implementation and integration of its new financial
reporting and accounting system, as noted above. Reference is made to Note 12 of
Notes to the Consolidated Financial Statements.
Gross profit as a percentage of sales declined from 37.9% in 1997 to
30.9% in 1998 primarily as a result of lower profit margins from the inventory
reduction program and markdowns and other allowances provided to certain
customers as inducements to acquire new Company product offerings.
Selling expenses decreased from approximately $6.2 million in 1997 to
approximately $5.7 million in 1998. The Company reduced its advertising expenses
in 1998 as a response to cost reduction programs. In 1997 the Company spent in
excess of $1.1 million on a radio advertising campaign which was not repeated in
1998.
General and administrative expenses increased from approximately $8.8
million in 1997 to approximately $9.8 million in 1998, primarily as a result of
an increase in executive and administrative salaries incurred during the first
half of 1998. Outside labor costs increased due to the temporary help required
to pack, ship and administer the Company's inventory reduction programs. Higher
consulting fees were also incurred in 1998, attributable to the costs incurred
upon the implementation of the financial reporting and accounting systems.
Interest expense increased from approximately $1.3 million in 1997 to
approximately $1.9 million in 1998, primarily as a result of the interest
charges incurred on higher outstanding debt and higher interest rates from its
renegotiated bank credit facility, discussed below.
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into a loan agreement for a new senior credit
facility on September 17, 1999 which includes 1) a $12 million revolver facility
with interest calculated at prime plus 1.75%, and 2) a term loan of $725,000
with interest calculated at prime plus 2.00%, payable in 12 equal monthly
installments commencing November 1999.
Under the new credit facility, the Company is able to borrow up to
85% of eligible domestic accounts receivable and 75% of eligible foreign
accounts receivable, and up to 80% and 50% of the value of the Company's
eligible premium and non-premium inventory, respectively, subject to additional
limitations on inventory-based loans. The unused portion of the facility was
approximately $1.9 million at December 31, 1999.
The new facility requires the Company to maintain certain financial
ratios. Pursuant to the credit facility, in the event the Company has "surplus
cash" in any fiscal year, the Company is required to make mandatory prepayments
against the term loan in the amount of 25% of the surplus cash. The facility
also contains a number of customary covenants, including, among others,
limitations on liens, affiliate transactions, mergers, acquisitions, asset
sales, dividends and advances. The facility is secured by a first priority lien
on substantially all of the assets of the Company and its subsidiaries. At
December 31, 1999, the Company was in violation of the leverage ratio and
capital expenditure requirements under the new revolver and obtained a waiver
from the lender for those violations.
The new loan agreement retired all but $2 million of the debt which
existed with the Company's former senior lender. An amendment was signed with
the former senior lender which requires the Company to retire said debt in 18
equal monthly installments commencing November 1999, with interest calculated at
prime plus 4.00%.
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 $1.1 million at December 31, 1999, primarily as a result of a
reduction in the current portion of long-term debt and accounts payable, which
was partially offset by the increase in the line of credit.
14
<PAGE>
The Company incurred capital expenditures of approximately $141,000
during 1999, primarily through purchases of computer equipment and software
necessary to ensure year 2000 compliance. The Company does not expect to make
material capital expenditures during 2000.
The Company anticipates that the net cash available from operations
will be sufficient to satisfy its anticipated cash requirements for the 2000
fiscal year.
CONCENTRATION OF CUSTOMERS
Wal-Mart, Sunglass Hut and Costco accounted for 19%, 19% and 14%,
respectively, of the Company's sales for the year ended December 31, 1999. Such
customers accounted for 19%, 14% and 4% of sales, respectively, for the year
ended December 31, 1998. The loss of any or all of these customers, or a
significant future reduction in their respective purchases of the Company's
products, may be expected to materially adversely affect the Company's
operations and prospects.
DEPENDENCE ON SINGLE SUPPLIER
The Company relies on Corning as its sole source of supply for lens
blanks for its Serengeti product line. Any disruption of this source may result,
at a minimum, in a temporary curtailment of the Company's ability to ship these
products, while a loss of this source may materially adversely affect the
Company's operations and prospects.
SEASONALITY
The Company's sales are seasonal with historical premium product
sales higher in the second quarter of each year. 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.
YEAR 2000 ISSUES
The Year 2000 problem arose 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. Many computer systems were not designed
to recognize calendar dates beginning in 2000, which could have resulted in
miscalculations or system failures, which could have in turn resulted in an
adverse impact on the Company.
In 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 additional costs and expenses of approximately
$140,000 in 1999.
Pursuant to the Company's Year 2000 planning, the Company requested
information regarding the computer systems of its key suppliers, customers,
creditors and financial service organizations.
As of the date of this report, the Company did not experience any
significant disruptions in any of its systems on January 1, 2000, nor has any
supplier or customer of the Company made the Company aware of any significant
disruptions subsequent to January 1, 2000. The Company will continue to monitor
this issue throughout the remainder of the calendar year.
15
<PAGE>
FOREIGN CURRENCY EXCHANGE
The Company presently transacts business internationally in United
States currency and in the local currency of its suppliers. During the year
ended December 31, 1999, the Company incurred foreign exchange losses with
Japanese suppliers of approximately $500,000, primarily as a result of the
devaluation of the U.S. Dollar against the Japanese Yen. In order to ensure that
it purchases product at competitive prices, the Company is negotiating with its
suppliers to put in place concessions in the event either party is materially
adversely affected by future currency fluctuations.
RECENT 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 derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. FAS 133, as amended by FAS 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000.
Historically, the Company periodically entered 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 did not
have any derivative contracts at December 31, 1999, and does not expect to have
any hedging activities in the future. Accordingly, FAS 133 is not expected to
affect the Company's financial statements.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains forward-looking statements, including statements
with respect to proposed financing activities and anticipated business trends,
which are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based largely on
the Company's expectations and are subject to a number of risks and
uncertainties, some of which cannot be predicted or quantified and are beyond
the Company's control. Future events and actual results could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. Statements in this Report, including those set forth above, describe
factors, among others such as (i) the Company's continued ability to develop and
introduce innovative products, (ii) changing consumer preferences, (iii)
manufacturing capacity constraints of its outside sources and the availability
of raw materials, (iv) the effect of economic conditions, (v) dependence on
certain customers and (vi) other risks identified from time to time in the
Company's Securities and Exchange Commission filings, that could contribute to
or cause such differences.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is required to adopt the provisions of the standard during the first quarter of
2000. Because the Company does not use derivatives, the Company does not expect
that the adoption of the new standards will have a material impact on the
results of operations or financial condition.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page No.
- --------------------------------- --------
<S> <C> <C>
Report of Independent Certified Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2 - F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-28
Financial Statement Schedules:
II Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997 18
Schedules Omitted
In accordance with the rules of Regulation S-X, other schedules are not
submitted because (a) they are not applicable to or required by the Company, or
(b) the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
</TABLE>
17
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Serengeti Eyewear, Inc.
We have audited the accompanying consolidated balance sheets of Serengeti
Eyewear, Inc. and subsidiary as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Serengeti Eyewear,
Inc. and subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
March 17, 2000
F-1
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
Assets (Notes 5 and 6)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 306,126 $ 87,774
Accounts receivable, less allowance for doubtful accounts of $818,654
and $752,436 (Note 8) 5,843,863 7,796,963
Income tax refund receivable (Note 10) - 358,055
Inventories (Notes 3 and 8) 15,237,394 12,536,224
Prepaid expenses 289,497 958,603
- ------------------------------------------------------------------------------------------------------------
Total current assets 21,676,880 21,737,619
- ------------------------------------------------------------------------------------------------------------
Property and equipment, less accumulated
depreciation (Note 4) 1,867,267 2,170,582
- ------------------------------------------------------------------------------------------------------------
Other assets:
Patents and trademarks, net of accumulated amortization of $1,808,109
and $1,187,157 (Note 2) 9,637,116 10,258,068
Goodwill, net of accumulated amortization of $1,045,957 and
$696,613 (Note 2) 5,940,970 6,290,314
Other assets 377,082 157,261
- ------------------------------------------------------------------------------------------------------------
Total other assets 15,955,168 16,705,643
- ------------------------------------------------------------------------------------------------------------
$39,499,315 $40,613,844
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft $ - $ 288,414
Accounts payable 8,569,673 10,952,090
Line of credit (Note 5) 10,146,096 7,322,704
Accrued expenses 533,718 519,492
Accrued dividends (Note 7) 1,564,000 1,476,000
Current portion of long-term debt (Note 6) 1,992,318 5,263,448
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 22,805,805 25,822,148
Long-term debt, less current portion (Note 6) 523,579 91,415
- ------------------------------------------------------------------------------------------------------------
Total liabilities 23,329,384 25,913,563
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 8) - -
Stockholders' equity (Note 7):
Convertible 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 shares issued and outstanding 2,384 2,384
Additional paid-in capital 10,586,094 10,586,094
Accumulated deficit (18,227,547) (18,221,197)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,169,931 14,700,281
- ------------------------------------------------------------------------------------------------------------
$ 39,499,315 $ 40,613,844
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $38,429,533 $43,323,222 $32,458,362
Cost of goods sold 21,278,786 29,927,850 20,155,683
- -----------------------------------------------------------------------------------------------------------
Gross profit 17,150,747 13,395,372 12,302,679
- -----------------------------------------------------------------------------------------------------------
Operating expenses:
Depreciation 485,896 490,776 364,753
Amortization 970,296 977,699 906,071
Selling expenses 3,940,988 5,664,785 6,245,338
General and administrative expenses 8,659,675 9,766,906 8,759,208
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 14,056,855 16,900,166 16,275,370
- -----------------------------------------------------------------------------------------------------------
Income (loss) from operations 3,093,892 (3,504,794) (3,972,691)
- -----------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (1,523,596) (1,889,446) (1,334,733)
Other income (expense), net (12,646) 105,207 64,644
- -----------------------------------------------------------------------------------------------------------
Total other income (expense) (1,536,242) (1,784,239) (1,270,089)
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit 1,557,650 (5,289,033) (5,242,780)
Provision for income tax benefit (Note 10) - - (329,988)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) 1,557,650 (5,289,033) (4,912,792)
Preferred stock dividends (Note 7) (1,564,000) (1,476,000) (5,040,000)
- -----------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (6,350) $ (6,765,033) $(9,952,792)
- -----------------------------------------------------------------------------------------------------------
Basic loss per common share $ - $ (2.84) $ (4.17)
- -----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,384,000 2,384,000 2,384,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Statements of Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
----------------------- ----------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 7,500 $ 6,975,000 2,384,000 $2,384 $ 6,836,094 $ (1,503,372)
Preferred stock issued for cash 5,000,000
pursuant to a Regulation S
offering 15,000 15,000,000 - - - -
Costs associated with Regulation S
offering - (1,050,000) - - - -
Issuance of preferred stock as
payment of preferred stock
dividends 118 118,000 - - - -
Preferred stock dividend accrual - - - - - (1,290,000)
Beneficial conversion feature of
preferred stock (Note 7) - - - - 3,750,000 (3,750,000)
Net loss - - - - - (4,912,792)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 22,618 21,043,000 2,384,000 2,384 10,586,094 (11,456,164)
Issuance of preferred stock as
payment of preferred stock
dividend 1,290 1,290,000 - - - -
Preferred stock dividend accrual - - - - - (1,476,000)
Net loss - - - - - (5,289,033)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 23,908 22,333,000 2,384,000 2,384 10,586,094 (18,221,197)
Issuance of preferred stock as
payment of preferred stock
dividend 1,476 1,476,000 - - - -
Preferred stock dividend accrual - - - - - (1,564,000)
Net income - - - - - 1,557,650
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 25,384 $23,809,000 2,384,000 $2,384 $10,586,094 $(18,227,547)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,557,650 $(5,289,033) $ (4,912,792)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,456,192 1,468,475 1,270,824
Deferred loan fees charged to interest 418,931 291,097 105,000
(Gain) loss on sale of assets (925) 35,754 -
Cash provided by (used for), net of effects of acquisition in 1997:
Accounts receivable 1,953,100 3,462,093 (5,178,249)
Other receivables - 78,730 20,462
Income tax refund receivable 358,055 30,202 (388,257)
Inventories (2,701,170) 4,391,446 (4,088,433)
Trading securities - - 4,976,625
Prepaid expenses and other assets 338,427 539,370 (469,057)
Accounts payable (2,382,417) (1,580,963) 8,417,744
Customer deposits - (900,122) 900,122
Accrued expenses 14,226 129,529 (290,213)
Accrued income taxes - - (232,930)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,012,069 2,656,578 130,846
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of Corning division assets - - (26,264,530)
Purchase of patents - (53,113) (23,053)
Proceeds from disposal of property and equipment - - 64,841
Proceeds received from Corning settlement - 405,500 -
Purchase of property and equipment (140,566) (344,061) (1,207,583)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (140,566) 8,326 (27,430,325)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (288,414) 288,414 -
Net proceeds from line of credit 2,823,392 822,704 5,000,000
Proceeds from long-term debt 725,000 - 10,000,000
Principal payments on long-term debt (3,605,056) (3,607,820) (1,345,858)
Principal payments on note payable to related party - (44,575) (209,202)
Net proceeds from preferred stock sales - - 13,950,000
Deferred loan costs (308,073) (164,041) (600,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (653,151) (2,705,318) 26,794,940
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 218,352 (40,414) (504,539)
Cash and cash equivalents, beginning of year 87,774 128,188 632,727
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 306,126 $ 87,774 $ 128,188
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for:
Interest $1,428,083 $1,835,411 $1,053,618
Income taxes - - 233,166
- ---------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Acquisition of property and equipment with debt $ 41,090 $ - $ 164,252
Issuance of preferred stock as payment of preferred stock dividends 1,476,000 1,290,000 118,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
1. Significant Nature of Business
Accounting
Policies Serengeti Eyewear, Inc. and subsidiary (the "Company")
is a distributor of premium and nonpremium sunglasses.
The Company maintains its office and warehouse
operations in Sarasota, Florida. Suppliers for the
Company are primarily located in the United States,
Asia and Europe. The Company's customers operate retail
stores located principally throughout North America,
Europe and the Pacific Rim.
Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its
wholly-owned subsidiary, Solartechnics (HK) Ltd.
Intercompany transactions and balances were eliminated
upon consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
Inventories
Inventories are valued at the lower of cost or market
on a first in-first out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation
is calculated using the straight-line method over the
expected useful lives of the assets.
F-8
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
Intangible Assets
Patents and trademarks are amortized using the
straight-line method over periods of 10 to 13 years for
patents and 20 years for trademarks, which are based
upon their estimated useful lives.
Goodwill resulting from the acquisition of the
Serengeti business is amortized using the straight line
method over a period of 20 years.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets
in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (FAS 121). FAS 121 requires impairment
losses to be recorded on long-lived assets used in
operations and intangible assets when indications of
impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than
the assets' carrying amount.
Revenue Recognition
The Company recognizes revenue upon the shipment of
goods to its customers.
Advertising Costs
Advertising costs are charged to operations when
incurred. Advertising costs charged to operations were
approximately $2,486,000, $3,522,600 and $3,471,800
during 1999, 1998 and 1997, respectively.
Warranty Costs
The Company offers a one-year warranty on its premium
sunglasses. The Company accrued $150,000 for future
F-9
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
estimated warranty costs at December 31, 1999 and 1998.
Warranty costs were approximately $461,000, $378,000
and $357,000 during 1999, 1998 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information
available to management as of December 31, 1999 and
1998. The respective carrying value of certain
on-balance-sheet financial instruments approximated
their fair values. These financial instruments include
cash and cash equivalents, trade receivables, accounts
payable and accrued expenses. Fair values were assumed
to approximate carrying values for these financial
instruments because they are short term in nature and
their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of
the Company's long-term debt approximates its carrying
value based on quoted market prices for the same or
similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
Loss per Share
Basic loss per share amounts have been computed based
upon the weighted average number of shares outstanding
of 2,384,000 in 1999, 1998 and 1997. Potential common
shares and the computation of diluted earnings per
F-10
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
share are not considered as their effect would be
anti-dilutive. As of December 31, 1999, potential
common shares consist of 905,000 options, 975,000
warrants and approximately 87,700,000 shares underlying
the convertible preferred stock.
Segment Information
The Company does not identify separate operating
segments for management reporting purposes. The
consolidated results of operations are the basis on
which management evaluates operations and makes
business decisions.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). FAS 133 requires companies to
recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at
fair value. FAS 133, as amended by FAS 137, is
effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company periodically entered into
derivative contracts for the purpose of hedging risks
attributable to interest rate fluctuations and, in
general, such hedges had been fully effective in
offsetting the changes in fair value of the underlying
risk. The Company did not have any derivative contracts
at December 31, 1999 and does not expect to have any
hedging activities in the future. Accordingly, FAS 133
is not expected to affect the Company's financial
statements.
Reclassifications
Certain amounts in the 1998 and 1997 financial
statements have been reclassified to conform to the
1999 presentation.
F-11
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Business On February 13, 1997, the Company changed its name to
Acquisition Serengeti Eyewear, Inc. in conjunction with the
acquisition of certain assets ("Serengeti Acquisition")
of the Serengeti Eyewear division of Corning
Incorporated ("Corning") used in the design,
manufacture and distribution of Serengeti premium 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 (see Note 7) and
borrowings under a credit facility. In addition, the
Company incurred other costs related to the acquisition
aggregating $855,561, which have been included in
goodwill. In 1998, the Company received $405,500 under
a settlement agreement with Corning which was recorded
as a reduction of goodwill.
The purchase price of the Serengeti division, including
the additional costs and settlement described above,
was allocated as follows:
-------------------------------------------------------
(In thousands)
Inventory $ 8,831
Furniture and equipment 832
Trademarks 9,500
Patents 1,800
Goodwill 6,987
-------------------------------------------------------
$27,950
-------------------------------------------------------
F-12
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
The following unaudited pro forma summary presents the
consolidated results of operations as if the
acquisition had occurred at the beginning of 1997 and
does not purport to be indicative of what would have
occurred had the acquisition been made as of that date
or the results which may occur in the future.
1997
-------------------------------------------------------
(In thousands,
except per share amount)
Pro forma net sales $35,097
Pro forma net loss applicable to common stock $(9,971)
Pro forma basic loss per common share $ (4.18)
-------------------------------------------------------
3. Inventories Inventories consist of the following:
1999 1998
-------------------------------------------------------
Raw materials $ 2,298,906 $ 4,490,117
Work-in-process 3,375,602 2,768,884
Finished goods 9,562,886 5,277,223
-------------------------------------------------------
$15,237,394 $12,536,224
-------------------------------------------------------
4. Property, Plant Property, plant and equipment consist of the following:
and Equipment
<TABLE>
<CAPTION>
Useful
December 31, Life 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment 3-10 years $ 2,521,853 $ 2,386,535
Leasehold improvements 3-7 years 519,191 519,192
Transportation equipment 5 years 200,851 178,084
-------------------------------------------------------------------------
3,241,895 3,083,811
Less accumulated depreciation 1,374,628 913,229
-------------------------------------------------------------------------
$ 1,867,267 $ 2,170,582
-------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
5. Line of Credit 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. In
July 1998, the Company renegotiated this borrowing
facility. The terms of the new agreement allowed the
Company to borrow up to $7,500,000 with interest
payable at the LIBOR rate plus 325 basis points or the
bank's prime lending rate plus 1.75% at the borrower's
option. Under the renegotiated borrowing facility, the
Company was able to borrow up to 75% of eligible
accounts receivable and 50% of eligible inventory with
certain limitations. The credit facility was
collateralized by substantially all the Company's
assets and was guaranteed by the Company's wholly-owned
subsidiary.
During September 1999, the Company replaced the line of
credit originally secured during February 1997 and
amended in July 1998 with a new line of credit ("new
revolver") from a different bank. The maximum available
borrowing base under the new revolver is $12,000,000
with interest payable at the bank's prime lending rate
plus 1.75% (10.25% at December 31, 1999). Under the new
revolver, the Company is able to borrow up to 85% of
eligible accounts receivable with certain limitations,
80% of eligible premium inventory, and 50% of eligible
non-premium inventory. The new revolver is
collateralized by substantially all of the Company's
assets and is guaranteed by the Company's wholly-owned
subsidiary. The new revolver is scheduled to mature on
August 31, 2001. Certain information related to the
lines of credit during 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding at December 31 $10,146,096 $7,322,704
Maximum amount outstanding during the year $10,146,096 $7,500,000
Average month-end balance $ 6,898,700 $6,924,000
Weighted average interest rate 9.68% 8.82%
Unused balance at December 31 $ 1,853,904 $177,296
------------------------------------------------------------------------
</TABLE>
As more fully described in Note 6, the Company was in
violation of certain of the financial loan covenants
under the new revolver, and as a result, has
classified the line of credit as a current liability.
F-14
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
6. Long-Term Debt Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
$725,000 note payable to bank; principal
payments of $60,417 due monthly plus
interest at the bank's prime lending rate
plus 1.75% (10.25% at December 31, 1999);
matures November 2000; collateralized by
substantially all the Company's assets and a
$2,000,000 key man life insurance policy on
the Company's CEO; guaranteed by the
Company's wholly-owned subsidiary. $ 604,167 $ -
$5,575,000 note payable to bank. Note was
refinanced during 1999. See note below. 1,778,000 4,075,000
$2,000,000 note payable to bank. Note was paid
off during 1999. See note below. - 1,125,000
Various equipment notes payable in aggregate
monthly installments totaling approximately
$6,700 principal and interest at rates ranging
from 5% to 13%; maturing at various dates
between March 2000 to September 2003;
collateralized by equipment and vehicles. 133,730 154,863
--------------------------------------------------------------------------------
2,515,897 5,354,863
Less current portion 1,992,318 5,263,448
================================================================================
$ 523,579 $ 91,415
--------------------------------------------------------------------------------
</TABLE>
Long-term debt maturities as of December 31, 1999 are
as follows:
-------------------------------------------------------
2000 $1,992,318
2001 479,221
2002 27,512
2003 16,846
-------------------------------------------------------
$2,515,897
-------------------------------------------------------
F-15
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The $5,575,000 and $2,000,000 notes payable
to bank were renegotiated in July 1998 when
the principal balance under the original term
loan was $7,575,000. The original term loan
was restructured into two separate notes, and
the maturity date was changed from December
2001 to December 31, 1999 for the $5,575,000
note and June 30, 1999 for the $2,000,000
note. In September 1999, with proceeds from
the new revolver (see Note 5), the $5,575,000
note was refinanced and paid down to
$2,000,000 and the $2,000,000 note was paid
off. The $2,000,000 note remaining
("subordinated note") is subordinated to the
new revolver and $725,000 note payable and is
collateralized by substantially all the
Company's assets. This subordinated note is
due in monthly principal payments of $111,000
through April 2001 with interest payable at
prime plus 4% (12.75% at December 31, 1999).
Loan Covenants
The Company is subject to various loan
covenants with respect to its line of credit
and long-term debt borrowings with the
banks. As of December 31, 1999, the Company
was in violation of the leverage ratio and
capital expenditure requirements under
the new revolver (see Note 5). The Company
ontained a waiver from the bank for these
violations. However, the Company does not
believe it will be able to meet the leverage
ratio requirement for the quarter ended
March 31, 2000, and the Company did not
obtain a waiver for this period.
Accordingly, the line of credit was
classified as a current liability.
7. Stockholders' Stock Options
Equity
The Company sponsors the Serengeti Eyewear
1995 Stock Option Plan (the "Plan"). Under
the Plan, the Company's Board of Directors
has reserved 1,500,000 shares which may be
granted at the Board of Directors'
discretion. No options may be granted after
January, 2005 and the maximum term of the
options granted under the Plan is ten years.
F-16
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company applies APB 25, "Accounting for
Stock Issued to Employees," and related
interpretations in accounting for options
issued. Under APB Opinion 25, compensation
expense is recorded for the difference
between the grant price and the fair market
value only if options are granted or extended
at exercise prices less than fair market
value.
Statement of Financial Accounting Standards
No. 123 (FAS 123) "Accounting for Stock Based
Compensation," requires the Company to
provide pro forma information regarding net
income and earnings per share as if
compensation cost for the Company's stock
options had been determined in accordance
with the fair value based method prescribed
in FAS 123. No options were granted during
1999 and 1998. For grants during 1997, the
Company estimated the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model with the
following weighted-average assumptions:
o No dividend yield
o Volatility of 50%
o Risk-free interest rates of 6.1% and
o Expected lives of three years
Under the accounting provisions of FAS 123,
the Company's net loss applicable to common
stock and basic loss per common share for
1997 would be as follows:
--------------------------------------------
Pro forma net loss $ (11,443,977)
Pro forma basic net loss
per common share $ (4.80)
--------------------------------------------
Changes in options outstanding under the Plan
are summarized as follows:
F-17
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Fair Value
Exercise of Options
Shares Price Granted
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 925,000 $8.08 $ -
Granted above market 220,065 3.24 1.25
Granted at market 914,935 2.94 1.33
Forfeited (925,000) 8.08 -
---------------------------------------------------------------------------------
Balance, December 31, 1997 1,135,000 3.00 -
Forfeited (210,000) 2.94 -
---------------------------------------------------------------------------------
Balance, December 31, 1998 925,000 3.02 -
Expired (20,000) 2.94 -
---------------------------------------------------------------------------------
Balance, December 31, 1999 905,000 $3.02 $ -
---------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, a total of 836,974
of the outstanding Plan options were
exercisable with a weighted-average exercise
price of $3.00 per share and a
weighted-average remaining contractual life
of 2.7 years.
Stock Warrants
The following details the common stock
warrants outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Underlying Exercise
Warrant series Shares Price Expiration
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A preferred stock 150,000 $5.56 12/31/02
Class B preferred stock 300,000 7.50 12/31/02
Class C preferred stock 300,000 10.00 12/31/02
Class D (commission on Class A
preferred stock) 200,000 5.50 9/30/01
Class F 25,000 3.50 8/31/03
------------
975,000
------------
</TABLE>
F-18
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 2, 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
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 1999, dividends aggregating
1,476 shares of preferred stock valued at
$1,476,000, which represent dividends accrued
in 1998, were issued. At December 31, 1999,
dividends aggregating $1,564,000 were due and
payable to RBB.
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.
F-19
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
The Company recorded dividends of $1,564,000
($61.61 per share), $1,476,000 ($61.74 per
share) and $5,040,000 ($222.83 per share),
including $3,750,000 of dividends recorded as
an issuance of the beneficial conversion
features of the preferred stock, during 1999,
1998 and 1997, respectively.
At any time after September 30, 2000, the
Company will have the right to force
conversion of the preferred shares into
common stock.
8. Commitments Employment Contracts
and
Contingencies At December 31, 1999, the Company is a party
to employment agreements with one officer and
one sales person. These agreements call for
aggregate salaries of approximately $385,000
in 2000 and $130,000 in 2001. Also included
in the contracts are certain bonus
compensation and options to purchase up to
100,000 shares of common stock at $2.94 per
share through June 2001 based on sales and
profit targets set by the Company. The sales
and profit targets were not met in 1999, 1998
or 1997.
F-20
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Operating Leases
The Company leases its warehouse and office
facilities pursuant to a lease expiring
September 2000. This lease provides for
various escalations based on cost of living,
real estate taxes, and other provisions. In
addition, the Company leases sales offices on
a month-to-month basis and certain computer
and transportation equipment pursuant to
leases classified as operating leases. Total
monthly lease payments for the warehouse and
office facility aggregate approximately
$7,250 per month.
Rent expense was approximately $188,100,
$198,500 and $278,800 for 1999, 1998 and
1997, respectively.
Future minimum rentals for operating leases
with remaining terms in excess of one year
are approximated as follows as of December
31, 1999:
----------------------------------------------
2000 $ 125,500
2001 18,200
2002 9,900
----------------------------------------------
$ 153,600
----------------------------------------------
Concentration of Credit Risk
During the years ended December 31, 1999,
1998 and 1997, the Company made net sales to
customers for amounts exceeding 10% of total
net sales as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Wal-Mart $7,300 19% $8,200 19% $9,200 28%
Sunglass Hut 7,100 19% 4,200 10% 3,600 11%
Costco 5,300 14% - - - -
-----------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Approximately $3,719,000 and $4,082,000 of
the gross accounts receivable are due from
the above customers at December 31, 1999 and
1998, respectively, and are unsecured.
The Company relies on a single source for the
supply of lens blanks for its Serengeti line
of products. The loss of the source for lens
blanks or a disruption of the supply from
this source could cause, at a minimum,
temporary shortages in needed materials and
could have a material adverse effect on the
Company's business operations.
During 1999, the Company had one supplier
which accounted for approximately 26% of
total purchases. During 1998, the Company had
four suppliers which accounted for
approximately 10%, 15%, 19% and 20% of total
purchases, respectively. During 1997, the
Company had one supplier which accounted for
approximately 17% of total purchases.
Legal Proceedings
On or about August 18, 1997, Argon, Inc.
Filed an action against the Company
and Corning in the Superior Court of
Califirnia, County of Los Angeles. The
complaint alleges, among other claims, 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
nonpayment of amounts due to the Company. As
of March 15, 2000, the parties had reached an
agreement in principle to settle the
litigation, which requires that the Company
pay Argom a final settlement of $100,000.
This amount was included in accrued expenses
at December 31, 1999.
During January 1998, RBB Bank ("RBB"), the
entity which purchased $22.5 million of the
Company's preferred stock, the proceeds of
which were utilized by the Company to
purchase the Serengeti business, filed a
complaint in the United States District
Court, Southern District of New York. In the
complaint, 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 a) failed to
disclose certain material information and
that RBB relied to its detriment on these
omissions in purchasing the Company's
convertible preferred stock and b) failed to
convert the preferred stock when requested.
There are also common law claims for fraud
and negligent misrepresentation. RBB seeks
specific performance of RBB's right to
convert its preferred shares and compensatory
damages up to $22.5 million, equal to the
purchase price of the preferred stock, plus
interest. RBB also seeks punitive damages and
attorney's fees.
F-22
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In April 1998, the Company moved to dismiss
the federal securities laws claims against
it, as well as the common law claims for
conversion, fraud and negligent
misrepresentation. Following the filing of
the motion to dismiss, RBB withdrew its claim
against the Company arising under Section 12
of the Securities Act. The court granted the
Company's motion to dismiss the remaining
securities law claim against it under Section
10 of the Exchange Act and limited the scope
of the fraud and negligent misrepresentation
claim. The court denied the motion with
respect to the conversion claim.
In January 1999, the Company answered the
complaint by denying all the allegations of
wrongdoing and by asserting various
affirmative defenses to RBB's claims.
Document and deposition discovery has been
substantially completed. No trial date has
been scheduled. The parties have reached a
conditional settlement of this action.
Accordingly, by order dated February 17,
2000, the court dismissed the case without
prejudice with the right to reopen the case
on or before August 17, 2000, if the
settlement is not consummated.
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.
9. Related Party
Transactions Certain of the Company's legal services are
rendered by a law firm in which a member of
the Company's Board of Directors is a
partner. All of these services have been
accounted for as an arm's-length transaction.
Legal expenses for these services of
approximately $410,000, $370,000 and $565,000
were incurred during 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Income Taxes The Company accounts for income taxes on the
liability method. Under this method, deferred
tax assets and liabilities are determined
based on differences between financial
reporting and tax bases of assets and
liabilities. Measurement of deferred income
tax is based on enacted tax rates and laws
that will be in effect when the differences
are expected to reverse, with the measurement
of deferred income tax assets being reduced
by available tax benefits not expected to be
realized.
The components of deferred tax assets and
liabilities consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 56,000 $ 56,000
Allowance for doubtful accounts 308,000 256,000
Net operating loss carryforward 2,439,000 3,013,000
Inventory 46,000 37,000
Accrued expenses 38,000 -
Valuation allowance (2,689,000) (3,243,000)
--------------------------------------------------------------------------------
Deferred tax assets 198,000 119,000
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization (198,000) (119,000)
--------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
--------------------------------------------------------------------------------
</TABLE>
The Company's valuation allowance decreased
by $554,000 and increased by $2,627,000
during 1999 and 1998, respectively. The
Company has recorded a valuation allowance to
state its deferred tax assets at estimated
net realizable value due to the uncertainty
related to realization of these assets
through future taxable income.
F-24
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate 34% (34)% (34)%
Net operating loss carryforward and
valuation allowance (34) 34 28
--------------------------------------------------------------------------------
-% - % (6)%
--------------------------------------------------------------------------------
</TABLE>
Due to the net operating loss, the Company
was able to file a claim for federal income
tax refunds from 1995 and 1996 aggregating
$358,055, which was received in January 1999.
The unused amount of operating loss
carryforwards will expire as follows:
---------------------------------------------
2012 $ 1,218,915
2018 5,232,130
---------------------------------------------
$ 6,451,045
---------------------------------------------
F-25
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Foreign Operations During 1999, 1998 and 1997, the Company
operated in two geographic areas: the United
States and Hong Kong. Following is a summary
of information by area:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to unaffiliated
customers:
United States $ 35,509,205 $ 41,010,380 $ 31,341,200
Hong Kong 2,920,328 2,312,842 1,117,162
--------------------------------------------------------------------------------
$ 38,429,533 $ 43,323,222 $ 32,458,362
--------------------------------------------------------------------------------
Income (loss) from operations:
United States $ 2,911,471 $ (3,558,690) $ (3,466,468)
Hong Kong 182,421 53,896 (506,223)
--------------------------------------------------------------------------------
3,093,892 (3,504,794) (3,972,691)
Interest expense (1,523,596) (1,889,446) (1,334,733)
Other income (expense), net (12,646) 105,207 64,644
--------------------------------------------------------------------------------
Income (loss) before income
tax benefit $ 1,557,650 $ (5,289,033) $ (5,242,780)
--------------------------------------------------------------------------------
Identifiable assets:
United States $ 37,641,607 $ 39,732,702 $ 49,399,014
Hong Kong 1,857,708 881,142 1,396,696
--------------------------------------------------------------------------------
$ 39,499,315 $ 40,613,844 $ 50,795,710
--------------------------------------------------------------------------------
</TABLE>
Loss 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. The
majority of sales made by the foreign
subsidiary in 1999, 1998 and 1997 were made
to a significant customer described in
Note 8.
F-26
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Export sales for the years ended December 31,
1999, 1998 and 1997 are summarized by the
following geographic regions:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Canada $2,930 $1,630 $2,000
Europe 3,060 2,850 5,000
Pacific Rim and Latin America 270 2,100 2,500
Australia 920 - -
-----------------------------------------------------------------------------------
$7,180 $6,580 $9,500
-----------------------------------------------------------------------------------
</TABLE>
12. Significant Accounts Receivable
Fourth Quarter
Adjustments During the fourth quarter of 1999, 1998 and
1997, the Company issued credits and
markdowns to several customers which resulted
in a charge to operations aggregating
approximately $1,400,000, $1,100,000 and
$2,100,000, respectively. These credits and
markdowns were issued by the Company at the
request of certain significant customers to
allow them to increase the rate of sale of
the Company's products and to allow these
customers to adjust their mix of the
Company's products at the retail level.
Inventory
During the fourth quarter of 1998, the
Company made adjustments to its inventory
balance, resulting in a charge to operations
of approximately $4.2 million. These
adjustments were the result of difficulties
encountered by the Company in implementing
the inventory system installed in late 1997
and integrating this system with their
financial reporting and accounting system. Of
the $4.2 million, approximately $2.0 million
relates to the following fiscal quarters:
F-27
<PAGE>
Serengeti Eyewear, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
----------------------------------------------
First quarter 1998 $ 1,200,000
Second quarter 1998 800,000
----------------------------------------------
Total $ 2,000,000
----------------------------------------------
F-28
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Serengeti Eyewear, Inc.
The audits referred to in our report dated March 17, 2000 relating to the
consolidated financial statements of Serengeti Eyewear, Inc., which is
contained in Item 8of this Form 10-K, included the audit of the financial
statement schedule listed in the accompanying index. This financial schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Orlando, Florida
March 17, 2000
F-29
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Balance at Charged Write-Offs
Beginning of to Costs Retirements Balance at
Year and Expenses and Collections End of Year
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowance for doubtful
accounts receivable $102,000 $160,787 $ 24,342 $ 238,445
Year ended December 31, 1998:
Allowance for doubtful
accounts receivable $238,445 $513,991 -- $ 752,436
Year ended December 31, 1999:
Allowance for doubtful
accounts receivable $752,436 $562,879 $ 496,661 $ 818,654
</TABLE>
18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names and ages of the directors and executive officers of the
Company are set forth below.
NAME AGE POSITIONS
Stephen Nevitt 52 President, Treasurer and Director
Milton Nevitt 78 Vice President, Secretary and Director
Michael J. Guccione 52 Vice President and Director
Lucia Almquist 46 Vice President-Corporate Development
Douglas Hinton 44 Vice President - Premium Sales
William McMahon 47 Chief Financial Officer and Director
David B. Newman 45 Director
William Keener 54 Director
Dr. Jeffrey Sack 38 Director
John Kopinski 47 Director
Stephen Nevitt became the President of the Company in 1993. Prior to
such time, he served as Vice President and a director of the Company since its
founding in 1976 by his father, Milton Nevitt. As Vice President, he was
involved in all phases of operations including management and sales. As
President he has been given primary responsibility for management and sales and
has also been responsible for design and development of the Company's products
as well as product procurement.
Milton Nevitt founded the Company in 1976 and served as its President
and a director until 1993, and has since served the Company as a Vice President
and a director. As President, Mr. Nevitt was primarily responsible for sales and
administration. Mr. Nevitt's career in the sunglass industry began in 1950 as a
manufacturer's representative for Rayex Corporation, a major domestic supplier
of popular priced sunglasses. Mr. Nevitt worked in that capacity until Rayex
ceased its business operations in 1976. Mr. Nevitt founded the Company shortly
thereafter.
Michael J. Guccione became a Vice President and director of the
Company in December 1994. Since joining the Company in 1992, Mr. Guccione's
primary responsibilities have been marketing and product development of the
Company's H2Optix and other product lines. Mr. Guccione became employed by
Wal-Mart in 1976 and started and headed its fine jewelry division. Mr. Guccione
was also in charge of the development of the sunglass business at Wal-Mart and
traveled extensively throughout the Far East and Pacific Rim for the purpose of
developing resources for the purchase of sunglasses. After leaving Wal-Mart in
1990, Mr. Guccione ran a management consulting firm until joining the Company.
Lucia Almquist became Vice President-Corporate Development of the
Company in January 1997. Ms. Almquist was a director of the Company from May
1997 to May 1998. From 1991 through 1997, Ms. Almquist served as Vice President
- - Licensing and Merchandising for the Bon Jour Group, Ltd., a designer and
manufacturer of various fashion products.
Douglas Hinton became Vice-President-Premium Sales of the Company in
1998. From 1997 until joining the Company, Mr. Hinton was National Sales Manager
20
<PAGE>
for Bucci, Inc. From 1996 to 1997, Mr. Hinton was Senior Vice President/Sales
and Marketing for Optic Video USA. From 1990 to 1996, Mr. Hinton was Senior Vice
President/Optical & Golf Divisions for Bolle USA.
William McMahon became the Chief Financial Officer of the Company and
a director in June 1998. From 1992 until joining the Company, Mr. McMahon was
Director of Financial Reporting and Corporate Development for Uniroyal
Technology Corporation, a plastics manufacturing company. From 1984 until 1992,
Mr. McMahon was a vice president of Buccino and Associates, Inc. a national
turnaround consulting firm.
David B. Newman, a director of the Company since December 1994, has
for over the last ten years been a partner of Cooperman Levitt Winikoff Lester &
Newman, P.C., which has acted as outside counsel to the Company since 1987.
William Keener, a director of the Company since July 1996, has served
as Senior Vice President and Regional Credit Officer for Regions Bank in Aiken,
South Carolina since September 1998. Prior to this, he served as an Executive
Vice President and Chief Credit Officer of SouthTrust Bank of the Suncoast, a
commercial bank, since May 1994 to September 1997. From March 1990 to May 1994,
Mr. Keener served as a Senior Vice President and Group President for Commercial
Lending and, thereafter, as First Vice-President for Commercial Real Estate for
Sunbank, N.A., a commercial bank.
Jeffrey B. Sack, M.D. became a director of the Company in 1998. He is
board certified in internal medicine and cardiovascular disease and currently
practices in Sarasota, Florida. Dr. Sack has a degree in economics and over
twenty years of business experience in the management of small growth companies.
John Kopinski became a director of the Company in 1998. He has been
serving as President of Rikart South, Inc. in Bradenton, Florida for the past
ten years. Rikart South, Inc. is a leader in the manufacturing of polyethylene
bags.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who beneficially own more
than 10% of the common stock to file reports of ownership and changes in
ownership of such common stock with the Securities and Exchange Commission, and
to file copies of such reports with the Company. Based solely on its review of
the copies of such forms received by it, or written representations from certain
reporting persons that no such forms were required for those persons, the
Company believes that during the fiscal year ended December 31, 1999, all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the aggregate compensation for
services rendered in all capacities to the Company paid in 1997, 1998 and 1999
to the Chief Executive Officer and the Company's four most highly paid executive
officers whose compensation exceeded $100,000 (collectively, the "Named
Executives"):
21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) (1) BONUS COMPENSATION (3) COMPENSATION (4)
--------------------------- ---- --------------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Stephen Nevitt 1999 $ 250,000 $ - $ 52,487 $ -
President (CEO) 1998 $ 232,761 $ - $ 49,909 $ -
1997 $ 167,363 $ - $ 11,590 $ -
Lucia Almquist 1999 $ 175,000 $ - $ 6,000 $ -
Vice President 1998 $ 156,173 $ - $ 8,505 $ -
1997 $ 141,346 $ - $ 2,980 $ -
Ed Borix (2) 1999 $ 140,000 $ - $ 6,000 $ -
Vice President 1998 $ 137,404 $ - $ 8,505 $ -
1997 $ 103,366 $ - $ 1,650 $ -
Michael Burke (2) 1999 $ 86,154 $ - $ 2,769 $ 100,000
Vice President 1998 $ 166,173 $ - $ 10,276 $ -
1997 $ 156,923 $ - $ 1,777 $ -
Doug Hinton 1999 $ 129,423 $ - $ 16,377 $ 4,108
Vice President 1998 - $ - $ - $ -
1997 - $ - $ - $ -
William McMahon 1999 $ 139,769 $ 10,000 $ 6,000 $ 0
Chief Financial Officer 1998 $ 67,500 $ - $ 4,308 $ -
1997 $ - $ - $ - $ -
</TABLE>
- ----------
(1) Messrs. Burke and Borix and Ms.Almquist received their respective salaries
for the year ended December 31, 1998 at their respective 1997 salary rates.
(2) Messrs. Borix and Burke left the employ of the Company on February 21, 2000
and July 9, 1999, respectively.
(3) Includes automobile allowances and vacation paid in lieu of time taken.
(4) Michael Burke received severance of $100,000 in 1999.
OPTION GRANTS IN 1999
No options were granted to any of the Company's directors or
executive officers during the year ended December 31, 1999.
OPTION EXERCISES IN 1999 AND YEAR END OPTION VALUES
No options were exercised by any of the Company's directors or
executive officers during the year ended December 31, 1999. Set forth below is
certain information with respect to exercisable and non-exercisable options to
acquire shares of the Company's common stock held by the Company's Named
Executives:
22
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End*
------------------------------ -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Nevitt..... 681,974 68,026 -- --
</TABLE>
- ----------
* The last sales price of the common stock was approximately $0.34 per share
on December 31, 1999, which is lower than the exercise price of these
options.
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into a three year employment
agreement with Lucia Almquist, whereby Ms. Almquist became employed as Vice
President-Corporate Development of the Company, which provides for a current
annual base salary of $172,500. Ms. Almquist agreed to receive her 1997 annual
salary of $144,193 for the year ended December 31, 1998, notwithstanding her
current annual base salary pursuant to her employment agreement. The Company
will not accrue any portion of Ms Almquist's unpaid salary.
In June 1998, the Company entered into a three-year employment
agreement with William McMahon, whereby Mr. McMahon became employed as Chief
Financial Officer of the Company, which provided for an annual base salary of
$130,000 in 1998. The agreement was amended in November 1999, providing for a
base salary of $150,000 in the second half of 1999 and $170,000 during 2000. The
agreement also provides that if the Company achieves revenue and EBITDA
projections as determined in consultation with the optionee, Mr. McMahon will
receive 45,000 stock options for the year ended December 31, 2000.
In January 1999, the Company entered into a three-year employment
agreement with Douglas Hinton whereby Mr. Hinton became employed as Vice
President - Premium Sales of the Company which provides for a current annual
base salary of $130,000 and annual increases each January 1 by an amount equal
to the increase, if any, in the Consumer Price Index.
Each of the employment agreements contains a covenant by the employee
not to compete with the Company until the expiration of a one year period after
the expiration or termination of employment.
DIRECTORS' COMPENSATION
William Keener, a non-employee director of the Company, receives a
fee of $500 per month for his service as a director. No other non-employee
director receives any compensation for his services as such.
23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information as of March 15,
2000 with respect to the beneficial ownership of the outstanding shares of
common stock by (i) any shareholder known by the Company to beneficially own
more than 5% of such outstanding shares, (ii) each of the Company's directors
and Named Executives, and (iii) the directors and executive officers of the
Company as a group. Except as otherwise indicated, the address of each
beneficial owner of five percent or more of such common stock is the same as the
Company.
<TABLE>
<CAPTION>
Amount Ownership
Name and Address of Beneficial Owner Beneficial Ownership (1) Percentage(1)
------------------------------------ ------------------------ -------------
<S> <C> <C>
Nevitt Family Trust(2)....................... 506,103 21.2%
Milton Nevitt................................ 278,781 11.7%
Stephen Nevitt............................... 1,442,435 (3)(4) 45.9%
Michael J. Guccione.......................... 200,830 (5) 8.2%
David B. Newman.............................. 556,103 (3)(6) 23.0%
c/o Cooperman Levitt
Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
William Keener............................... 2,000 *
Dr. Jeffrey Sack............................. 3,500 *
John Kopinski................................ 0 --
Douglas Hinton............................... 0 --
Lucia Almquist............................... 0 --
William McMahon.............................. 0 --
John R. Clarke............................... 200,000 (7) 7.7%
1725 Lazy River Lane
Dunwoody, Georgia 30350
RBB Bank Aktiengesellschaft.................. 750,000 (8) 23.9% (9)
Burging 16
8010 Graz, Austria
Jerome B. Fox................................ 122,700 (9) 5.1%
7821 Wilton Crescent Circle
University Park, Florida 34201
Directors and executive officers as a
group (10 persons)........................ 1,977,546 (10) 62.1%
</TABLE>
- ----------------
* Less than 1%.
(1) Computation based on the term beneficial ownership as used in the
regulations of the Securities and Exchange Commission which, for purposes
of the computation of ownership by the named holder, deems outstanding
shares of common stock issuable upon exercise of options and convertible
securities exercisable or convertible on the date, and within sixty days
following the date, of determination of beneficial ownership. As of March
15, 2000, 2,384,000 shares of common stock were actually issued and
outstanding.
(2) The indicated trust (the "Trust") was created pursuant to a Trust
Agreement, dated as of September 11, 1992, between Milton Nevitt, as
grantor, and Stephen Nevitt and David B. Newman, as trustees. Such trustees
have the sole power to vote the shares held by the Trust. The children of
Milton Nevitt, including Stephen Nevitt, are the beneficiaries under the
Trust.
(3) Includes 506,103 shares held by the Trust, for which such beneficial owner
acts as trustee.
(4) Includes 681,974 shares issuable upon exercise of options granted pursuant
to the Plan. Stephen Nevitt, pursuant to exercise of a power granted in the
subscription agreement covering the issuance of the Company's Preferred
Shares (as described in Footnote (8) below), has the power to direct the
voting of shares of Common Stock issuable upon conversion thereof for the
election of a majority of the directors of the Company through October
2000. The table does not include shares of Common Stock issuable upon
conversion of such Preferred Shares.
(5) Includes 68,026 shares issuable upon exercise of options granted pursuant
to the Plan.
24
<PAGE>
(6) Includes 50,000 shares issuable upon exercise of options granted pursuant
to the Plan.
(7) Represents shares issuable upon exercise of the Series D Warrant which
entitles the holder to purchase such number of shares at an exercise price
of $5.50 per share at any time prior to September 30, 2001.
(8) Represents 750,000 shares issuable upon exercise of warrants granted to
RBB. RBB is also the registered owner of 7,500 shares of Series A 6.5%
Convertible Preferred Stock ("Series A Stock"), 7,500 shares of Series B 6%
Convertible Preferred Stock ("Series B Stock") and 7,500 shares of Series C
6% Convertible Preferred Stock ("Series C Stock"; collectively with the
Series A Stock and the Series B Stock, the "Preferred Shares") of the
Company. Such Preferred Shares are presently convertible into shares of
Common Stock of the Company at a price determined by dividing the stated
value of the series ($7,500,000 for each) by a price equal to the lower of
(i) $5.50 in the case of the Series A Stock, $6.75 in the case of the
Series B Stock and $8.25 in the case of the Series C Stock, and (ii) 80% of
the average market price (as defined) for the ten consecutive trading days
ending three days prior to the notice of conversion. As of March 15, 2000,
the average market price for the ten previous consecutive trading days was
approximately $0.34 per share. The computation of beneficial ownership in
the table excludes shares of Common Stock issuable upon conversion of the
Preferred Shares. See "Legal Proceedings" and "Certain Relationships and
Related Transactions".
(9) Such information was set forth in a Schedule 13D, dated October 24, 1997.
Such Schedule 13D also stated that the spouse of Mr. Fox owns an additional
600 shares of Common Stock and that Mr. Fox disclaims beneficial ownership
with respect to those shares.
(10) Includes 800,000 shares issuable upon exercise of options granted pursuant
to the Plan and 506,103 shares of the Company's Common Stock held by the
Trust, with Stephen Nevitt and David B. Newman as trustees.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On October 4, 1996, the Company issued 7,500 shares of its Series A
6.5% Convertible Preferred Stock, $.001 par value (the "Series A Shares"), to
RBB, a banking institution whose principal offices are located in Austria, in a
private offshore offering pursuant to Regulation S under the Securities Act of
1933, as amended (the "Securities Act"). RBB purchased the Series A Shares for a
purchase price equal to their aggregate stated value of $7.5 million as set
forth in a Regulation S Offshore Subscription Agreement dated September 29,
1996, which also contemplated the purchase of the Series B Shares and Series C
Shares referred to below. The purpose of such investment was to fund, in part,
the Acquisition.
Pursuant to an Agreement of Purchase and Sale, dated as of October
29, 1996, between the Company and Corning, the Company agreed to purchase the
Serengeti assets for a purchase price of $27.5 million, which was effected on
February 13, 1997. RBB purchased, concurrently with the closing of the
Acquisition, 7,500 shares of the Company's Series B 6% Convertible Preferred
Stock, $.001 par value (the "Series B Shares"), and 7,500 shares of the
Company's Series C 6% Convertible Preferred Stock, $.001 par value (the "Series
C Shares"; together with the Series A Shares and the Series B Shares, the
"Preferred Shares"), for a purchase price equal to their aggregate stated value
of $15.0 million. The proceeds to the Company from the sale of the Preferred
Shares were approximately $20.9 million (net of commissions and the estimated
expenses of such sale). The Company applied such net proceeds to the Acquisition
purchase price. The Company financed the remainder of such purchase price and
related costs and expenses with borrowings under its then credit facility.
25
<PAGE>
Concurrent with the issuance of the Series A Shares, the Company also
issued to RBB a Series A Warrant of the Company (the "Series A Warrant") to
purchase up to an aggregate of 150,000 shares of Common Stock at an exercise
price of $5.5625 per share. The Series A Warrant is exercisable at any time
commencing January 1, 1999 and on or prior to December 31, 2002. In addition,
the Company issued to RBB, concurrent with the issuance of the Series B Shares
and the Series C Shares, a Series B Warrant of the Company (the "Series B
Warrant") and a Series C Warrant of the Company (the "Series C Warrant"), each
of which entitles RBB to purchase up to an aggregate of 300,000 shares of Common
Stock at a per share exercise price of (i) $7.50 with respect to the Series B
Warrant and (ii) $10.00 with respect to the Series C Warrant. Each of the Series
B Warrant and the Series C Warrant is exercisable at any time commencing January
1, 1999 and on or prior to December 31, 2002.
The Company has also issued, as part of the commission payable to a
third party in connection with the sale of the Series A Shares, a Series D
Warrant of the Company (the "Series D Warrant") to purchase up to an aggregate
of 200,000 shares of Common Stock at an exercise price of $5.50 per share. The
Series D Warrant is immediately exercisable and expires on or prior to September
30, 2001.
Certain of the Company's legal services are rendered by a law firm in
which David Newman, a member of the Company's Board of Directors, is a partner.
All of these services have been accounted for as an arm's-length transaction.
Legal expenses for these services of approximately $410,000, $370,000 and
$565,000 were incurred during 1999, 1998 and 1997, respectively.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements.
The Company's financial statements as set forth in the Index to
Conslolidated Financial Statements under part II, Item 8 of this
Form 10-K are hereby incorporated by reference.
(b) Exhibits.
--------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1(i) Restated Certificate of Incorporation of the
Company(1)
3.1(ii) Certificate of Amendment of the Certificate of
Incorporation of the Company relating to the
designation of the Preferred Shares(2)
3.2(i) Amended and Restated By-laws of the Company
("By-laws")(1)
3.2(ii) Amendment No. 1 to By-laws(1)
10.1 Agreement dated December 30, 1994 between the
Company and Joseph Feldman(1)
10.2 Agreement dated January 17, 1994 between the
Company and Michael J. Guccione, Inc.(1)
10.3 Agreement dated December 7, 1994 between the
Company and Michael J. Guccione(1)
10.4(i) Revolving Line of Credit and Term Loan
Agreement dated as of February 13, 1997 by and
among the Company, SunTrust Bank, Central
Florida, National Association, individually and
as agent, and Creditanstalt-Bankverein(3)
10.4(ii) Second Amendment dated September 16, 1999 to
Revolving Line of Credit and Term Loan Agreement
dated as of February 13, 1997 (8)
26
<PAGE>
10.5 Revolving Line of Credit and Term Loan
Agreement dated as of September 17, 1999 by and
among the Company and The CIT Group/Business
Credit, Inc.(8)
10.6 Lease Agreement dated March 3, 1993 between DRI
II Partnership and the Company(1)
10.7 1995 Stock Option Plan of the Company(1)
10.9* Employment Agreement between the Company and
Lucia Almquist(7)
10.10(i)* Employment Agreement between the Company and
William McMahon (9)
10.10(ii)* First Amendment to Employment Agreement between
the Company and William McMahon (9)
10.11* Employment Agreement between the Company and
Douglas Hinton (9)
10.12 Form of Consulting Agreement between the
Company and Argent Securities, Inc.(1)
10.13 Agreement of Purchase and Sale, dated as of
October 29, 1996, between the Company and
Corning(4)
10.14 Subscription Agreement, dated September 26,
1996, between the Company and RBB(4)
10.15 Lens Blank Supply Agreement, dated as of
February 13, 1997, between the Company and
Corning (confidential treatment has been
granted with respect to certain information
contained in this Agreement)(2)
10.16 License Agreement, dated as of February 13,
1997, between the Company and Corning(2)
16.1 Letter on change in certifying accountant(3)
16.2 Letter on change in certifying accountant(5)
21 Subsidiaries of the Company(6)
27 Financial Data Schedule
- ----------
*Management contract or compensatory plan or arrangement
(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Registration No. 33-89752-A, under the Securities Act of 1933 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996.
(3) Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
February 11, 1997.
27
<PAGE>
(4) Filed as an Exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended September 30, 1996.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
December 10, 1997.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.
(9) Filed herein.
(c) The Company did not file any report on Form 8-K during the fourth
quarter of the year ended December 31, 1999.
28
<PAGE>
SIGNATURES
Pursuant to 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: March 30, 2000 By /s/ Stephen Nevitt
--------------------------------
Stephen Nevitt
President
Pursuant to the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Stephen Nevitt President, Treasurer and March 30, 2000
Director
- ------------------------------ (principal executive officer)
Stephen Nevitt
/s/ Milton Nevitt Vice President, Secretary March 30, 2000
- ------------------------------ and Director
Milton Nevitt
/s/ Michael J. Guccione Vice President and March 30, 2000
- ------------------------------ Director
Michael J. Guccione
/s/ William L. McMahon Chief Financial Officer March 30, 2000
- ------------------------------ (principal financial and
William L. McMahon accounting officer) and Director
/s/ David B. Newman Director March 30, 2000
- ------------------------------
David B. Newman
/s/ William Keener Director March 30, 2000
- ------------------------------
William Keener
/s/ Jeffrey Sach Director March 30, 2000
- ------------------------------
Dr. Jeffrey Sach
/s/ John Kopinski Director March 30, 2000
- ------------------------------
John Kopinski
</TABLE>
29
<PAGE>
EXHIBIT 10.10 (i)
SERENGETI EYEWEAR, INC.
8125 25th COURT STREET EAST
SARASOTA, FLORIDA 34243
June 1, 1998
Mr. William L. McMahon
4739 Spinnaker Drive
Bradentown, Florida 34208
Dear Mr. McMahon:
Upon the terms and subject to the conditions set forth below, this letter shall
constitute the agreement pursuant to which Serengeti Eyewear, Inc. ("Serengeti')
agrees to employ you as Chief Financial Officer.
1. Term of Employment.
1.1 Term. Serengeti hereby employs you, and you hereby accept employment
with Serengeti, for a period to commence on June 22, 1998 and to
terminate on the third anniversary of such date unless sooner
terminated in accordance with the provisions of Section 7 hereof
("Initial Term").
1.2 Definition. As used herein, "Employment Term" means the entire period
of your employment by Serengeti hereunder, whether for the period
provided above, or whether extended, or sooner terminated in accordance
with the provisions of Section 7 hereof.
2. Duties
2.1 Description of Duties. In your capacity as Chief Financial Officer, you
shall perform such customary duties and exercise such authority,
consistent with your position, as may from time to time be given to you
by the President and Chief Executive Officer. You shall have the
responsibility for the financial affairs of Serengeti including, but
not limited to, the functions set forth on Schedule A annexed hereto,
the terms of which are incorporated herein and made part hereof.
2.2 Devotion of Entire Time. During the Employment Term, you agree that you
will loyally and conscientiously devote your entire productive time,
efforts, ability and attention to the duties of your office and to
promotion of the interests of Serengeti, and that you will not engage
in any other business duties or pursuing whatsoever. Notwithstanding
any of the foregoing, you
<PAGE>
will not be prohibited from making passive personal investments or
being involved in the private business affairs or your immediate family
to the extent that such activities do not interfere with the
performance of your duties hereunder and are not in any way competitive
with the business of Serengeti.
3. Compensation
3.1 Annual Salary. During the Initial Term, you will be compensated at the
rate of $130,000 per annum, on an annualized basis, for the period June
1, 1998 through December 31, 1998, ("Base Salary"). Base salary shall
be payable in accordance with the customary payroll policies of
Serengeti provided, however, that if, pursuant to Section 7 hereof,
your employment is terminated, you will receive the appropriate pro
rata portion of your annual Base Salary for the period during which you
were actually employed by Serengeti.
The Base Salary shall be increased annually commencing January 1, 1999
during the Initial Term and any renewal terms, effective on January 1
of each year, by an amount equal to the increase, if any, in the index
currently known as the "Consumer Price Index, All Items, South, All
Urban Consumer," published by the Bureau of Labor Statistics of the
United States Department of Labor, or any successor index thereto,
appropriately adjusted (the "CPI"). In the event that the CPI is
converted to a different standard reference base or otherwise revised,
the determination of the CPI Adjustment shall be made with the use of
such conversion factor, formula or table for converting CPI as may be
published by the Bureau of Labor Statistics or, if said Bureau shall
not publish the same, then with the use of such conversion factor,
formula or table as may be published by Commerce Clearing House, Inc.,
or any other nationally recognized publisher of similar statistical
information. If the CPI ceases to be published on a monthly basis, then
the shortest period for which the CPI is published shall be used in
determining the numerator of the fraction. If the CPI ceases to be
published, and there is no successor thereto, such other index as
Serengeti may reasonably determine to be appropriate shall be used. The
amount of the increase shall be determined by multiplying the Base
Salary in effect by a fraction, the numerator of which shall be (a) the
CPI for the month immediately preceding the first day of the Year with
respect to which such annual adjustment is to be made (the "Base CPI")
minus (b) the CPI for the same month in the immediately preceding Year,
and the denominator of which shall be the Base CPI (the "CPI
Adjustment").
3.2 Incentive Compensation. For the year ending December 31, 1998, you
shall be entitled to a bonus of $10,000, payable in accordance with
Serengeti's customary practice. In the event the Company achieves
revenue and EBITDA projections for the year ending December 31, 1998,
as jointly agreed to between you and the Chief Executive Officer, you
will be entitled to an additional bonus of $15,000 after the revenue
and EBITDA numbers are confirmed by the audit as of December 31, 1998.
Bonuses for the balance of the Initial Term and any renewals, if any,
shall be jointly agreed upon between you and the Chief Executive
Officer based on formulas which take into consideration operating
income, cash flow, EBITDA and return on assets. Such bonuses shall only
be available upon your completion of each full year's employment
hereunder.
<PAGE>
3.3 Stock Options. You will be granted, stock options to purchase up to
100,000 shares of Serengeti's common stock in accordance with the Stock
Option Agreement annexed hereto.
3.4 Reimbursement for Business Expenses. Serengeti will reimburse you, upon
presentation of proper expense statements or such other supporting
information as Serengeti may reasonably require, for your reasonable
and necessary business expenses including, without limitation,
telephone, travel and entertainment expenses) incurred or paid by you
in connection with the performance of your duties hereunder. Serengeti
will provide you with a notebook computer and cellular telephone which
will remain the property of Serengeti and be used solely for the
business of Serengeti.
3.5 Miscellaneous. You will also be provided with a total car allowance of
$400 per month payable monthly. You will work at Serengeti's offices in
Sarasota, Florida.
4. Fringe Benefits. You shall be entitled to participate on the same basis
and subject to the same qualifications as all other regular full time
employees of Serengeti in any fringe benefit plans Serengeti makes
available from time to time for all its employees, including those
benefits available, if any, under any vacation, retirement, disability,
medical insurance and life insurance plans as the same may be placed
into effect from time to time. In addition, you shall be entitled to
participate in such other benefit plans, if any, as Serengeti makes
generally available from time to time to members of its executive
staff. You shall be entitled to three (3) weeks paid vacation for each
twelve (12) month period during which you are employed by Serengeti.
5. Confidentiality.
5.1 Trade Secrets. You and Serengeti acknowledge and agree that during the
Employment Term and in the course of the discharge of your duties
hereunder, you will have access to and become acquainted with
information concerning the operation of Serengeti, including, without
limitation, the names and addresses of and other information pertaining
to Serengeti's customers, clients, suppliers and employees and other
business associates and other valuable information regularly used in
Serengeti's business and not generally known to other, giving
Serengeti's competitive advantage in the sunglass business. You
acknowledge and agree that it is Serengeti's policy to maintain such
information as secret and confidential, whether relating to Serengeti's
business as heretofore or hereafter conducted, or relating to
Serengeti's customers, clients, suppliers, employees and other business
associates (all such information being referred to hereinafter as
"Confidential Information"). You acknowledge and agree that all
Confidential Information is owned by Serengeti and constitutes
Serengeti's trade secrets.
5.2 Non-Disclosure. You specifically agree that you shall not use, publish,
disseminate, misappropriate or otherwise disclose any Confidential
Information, whether directly or indirectly, either during the term of
this Agreement or at any other time thereafter, except as is required
by law or in the course of your employment hereunder. This provision
shall not apply to Confidential Information which becomes generally
known to the public by means other than your breach of this Section.
<PAGE>
5.3 Unfair Competition. You acknowledge and agree that the sale,
unauthorized use or disclosure of any Confidential Information obtained
by you during the course of your employment under this Agreement,
including but not limited to (a) information concerning Serengeti's
current, future or proposed work, services, or products, (b) the facts
that any such work, services or products are planned, under
consideration, or in production, as well as, (c) any descriptions
thereof, constitute unfair competition. You promise and agree not to
engage in any unfair competition with Serengeti, either during the term
of this Agreement or at any other time thereafter.
5.4 Precautions; Return of Materials. You agree to take all reasonable
precautions to protect the integrity of all Confidential Information,
including all documents and other material entrusted to you containing
or embodying Confidential Information. You further agree that all
files, records, documents, drawings, lists, specifications, products
and similar items relating to Serengeti's business, whether prepared by
you or by others, are and shall remain exclusively the property of
Serengeti, and that upon the expiration or termination of your
employment hereunder you shall return to Serengeti all such material
and all copies thereof in your possession or control.
5.5 Copyrightable and Patentable Materials. You agree that during the
Employment Term you will take any and all business developments,
opportunities and potentially profitable situations relating to
Serengeti's business to the Directors for exploitation by Serengeti.
You agree promptly to disclose to Serengeti (and only to Serengeti) any
and all knowledge possessed or acquired by you by any means whatsoever
during the Employment Term which relates in any way to any materials,
inventions, discoveries, developments, concepts, ideas or innovations,
whether copyrightable or patentable or not, relating to the business of
Serengeti. For the compensation and benefits received hereunder, you
hereby assign and agree to assign to Serengeti your entire right, title
and interest in and to any of the aforedescribed materials, inventions,
discoveries, developments, concepts, ideas or innovations. All such
materials, inventions, discoveries, developments, concepts, ideas and
innovations shall be the property of Serengeti, and you shall, without
further compensation, do all things necessary to enable Serengeti to
perfect title in such materials, inventions, discoveries, concepts,
ideas and innovations and to obtain and maintain effective patent or
copyright protection in the Unites States and foreign countries
thereon, including, without limitation, rendering assistance and
executing necessary documents.
6. Competitive Activities.
6.1 Non-Competition. During the Employment Term and for a period of one (1)
year after the expiration of earlier termination thereof for whatever
reason, you shall not within the United States:
<PAGE>
a. Consult with, be employed by, render services to, or engage in any
business activity with (whether as owner, controller, employee,
employer, consultant, partner, officer, director, agent or otherwise)
any business or business entity competing in any way with the business
of Serengeti;
b. Without the prior written consent of the President and Chief Executive
Officer personally solicit or cause to be solicited or authorize,
directly or indirectly, for or on behalf of yourself or any third
party, any business competitive with Serengeti, which employs you
hereunder, from others who are or were at any time within 12 months
prior to the expiration or termination of your employment hereunder
customers, clients, or other business associates of Serengeti.
6.2 Solicitation of Employees and Others. You acknowledge and agree that
Serengeti's directors, officers and employees possess special knowledge
of Serengeti's operation and are vitally important to the continued
success of Serengeti's business. You shall not, without the prior
written consent of the President and Chief Executive Officer, directly
or indirectly seek to persuade any director, officer or employee of
Serengeti either to discontinue his or her position with Serengeti or
to become employed or engaged in any activity competitive with the
activities of Serengeti to which your services under this Agreement are
related.
6.3 Injunctive Relief. You acknowledge and agreed that your services to be
provided hereunder are special and unique and that were you to breach
any provision of Sections 5 or 6 of this Agreement, the damages to
Serengeti would be irreparable and any other rights or remedies which
Serengeti may possess or to which it may be entitled, Serengeti shall
be entitled to enjoin any such breach in any court of competent
jurisdiction.
6.4 Scope. If any court determines that any of the covenants set forth
herein, or any part or parts thereof, is unenforceable because of the
duration of geographic scope of such provision, such court shall have
the power to reduce the duration or scope of such provision, as the
case may be, and, in its reduced form, such provision shall then be
enforceable and shall be enforced.
7. Termination
7.1 By Agreement or Death. Prior to the end of the Initial Term and during
the Employment Term, your employment hereunder may be terminated: (a)
by written agreement between you and Serengeti; and (b) in the event of
your death.
7.2 Termination for Cause. Serengeti reserves the right to terminate this
Agreement for "cause" as defined below. As used in this Agreement, the
term "cause" shall mean (i) the commission by you of any act which
would constitute a felony under state or federal law, or the equivalent
under foreign law, if prosecuted; (ii) the commission by you of any act
of moral turpitude which, in the sole reasonable opinion of Serengeti,
negatively impacts on your ability to perform your duties hereunder;
(iii) the material breach by you of the provisions of this Agreement;
(iv) your failure or refusal to perform material obligations under this
Agreement, or other acts or omissions constituting neglect or
dereliction of duties hereunder; (v) fraud, dishonesty or other acts or
omissions by you that amount to a willful breach of your fiduciary duty
to Serengeti; or (vi) the happening of any other event which,
<PAGE>
under the provisions of any laws applicable to Serengeti or its
activities, disqualifies you form acting in any or all capacities
provided for herein. Serengeti may, at its option, terminate this
Agreement for the reasons states in this Section 7 by giving written
notice of termination to you without prejudice to any other remedy to
which Serengeti may be entitled either by law, in equity, or under this
Agreement.
7.3 Upon such termination under this Agreement under this Section 7, you
shall resign from all positions you may then hold with Serengeti of any
of its affiliates and deliver to Serengeti all documents or copies
thereof in your possession relating to Serengeti and its business.
7.4. Severance Pay. Whether and to which extent you are entitled to
severance pay upon termination of your employment with Serengeti will
be determined according to Serengeti's severance policies, if any, at
the time of such termination. The foregoing notwithstanding, in the
event your employment terminates during the Initial Term only, by
reason of a change of control of Serengeti, you will be entitled to an
amount equal to one year's salary at the then current Base Salary. For
purposes hereof, the term "change of control" shall mean any merger,
consolidation or reorganization of Serengeti with or into another
person or entity, any sale of the assets of Serengeti or any
acquisition of Serengeti's voting securities, with the result, in each
instance, that less than 51% of the combined voting power of the then
outstanding voting securities of Serengeti or the surviving entity
immediately after each such transaction is held in the aggregate by
persons or entities who were holders of voting securities of Serengeti
immediately prior to any such transactions.
8. Miscellaneous
8.1 Notices. Notices hereunder shall be in writing and shall be delivered
by hand or sent by registered to certified mail, return receipt
requested, if to you, at the address set forth above, and if to
Serengeti Eyewear, Inc., 8125 25th Court Street East, Sarasota, Florida
34243, or at such other address as to which notice has been given in
the manner herein provided.
8.2 Entire Agreement. This Agreement sets forth your and Serengeti's
complete understanding with respect to the matters set forth herein.
This Agreement may be modified or amended only by an agreement in
writing signed by the parties hereto and may be assigned by Serengeti
only in connection with the transfer of all or substantially all of the
business and assets of Serengeti.
8.3 Severability. If any term, provision, covenant, or condition of this
Agreement, or the application thereof to any person, place or
circumstance, shall be held by a court of competent jurisdiction to be
invalid, unenforceable, or void, the remainder of this Agreement and
such term, provision, covenant, or condition as applied to other
persons, places and circumstances shall remain in full force and
effect.
8.4 Heading. The headings and captions of this Agreement are provided for
convenience only and are intended to have no effect in construing or
interpreting this Agreement.
<PAGE>
8.5 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect
to the conflict of laws principles thereunder.
If the foregoing accurately reflects your understandings of our agreement and is
acceptable to you, please sign the enclosed copy of this letter and return it to
the undersigned.
Very truly yours,
SERENGETI EYEWEAR, INC.
By: /s/ Stephen Mevitt
----------------------------
Stephen Mevitt, President
Accepted and Agreed:
By: /s/ William L. McMahon
-------------------------
William L. McMahon
<PAGE>
SERENGETI EYEWEAR
November 9, 1999
Mr. William L. McMahon
6142 Turnbury Park Drive
#5101
Sarasota, Florida 34243
Dear Mr. McMahon:
This letter is to serve as the first amendment to your contract dated June 1,
1998 with Serengeti Eyewear, Inc. The terms and conditions are as follows:
Term of Employment
1.3 Term. Serengeti hereby employs you, and you hereby accept employment
with Serengeti for a period to commence on June 22, 1998 and to
terminate on December 31, 2000 unless sooner terminated in accordance
with the provisions of Section 7.
Compensation
3.1 Annual Salary. You will be compensated at the rate of $150,000 per
annum, on an annualized basis with an effective date of July 1, 1999
through December 31, 1999. You will be compensated at the rate of
$170,000 per annum, on an annualized basis with the effective date of
January 1, 2000 through December 31, 2000.
All other terms and conditions remain the same.
If the foregoing accurately reflects your understanding of our agreement and is
acceptable to you, please sign the enclosed copy of this letter and return it to
the undersigned.
Very Truly Yours,
Serengeti Eyewear, Inc.
By: /s/ Stephen Nevitt
---------------------------
Stephen Nevitt, President
Accepted and Agreed:
By: /s/ William L. McMahon
--------------------------
William L. McMahon
<PAGE>
EXHIBIT 10.11
SERENGETI EYEWEAR, INC.
8125 25th COURT STREET EAST
SARASOTA, FLORIDA 34243
January 1, 1999
Mr. Douglas Hinton
13409 Williams Street
Thorton, CO 80241
Dear Mr. Hinton:
Upon the terms and subject to the conditions set forth below, this letter shall
constitute the agreement pursuant to which Serengeti Eyewear, Inc. ("Serengeti')
agrees to employ you as Vice President of National (U.S.) Sales/Premium
Division.
1. Term of Employment.
1.1 Term. Serengeti hereby employs you, and you hereby accept employment
with Serengeti, for a period to commence on January 1, 1999 and to
terminate on the third anniversary of such date unless sooner
terminated in accordance with the provisions of Section 7 hereof
("Initial Term").
1.2 Definition. As used herein, "Employment Term" means the entire period
of your employment by Serengeti hereunder, whether for the period
provided above, or whether extended, or sooner terminated in accordance
with the provisions of Section 7 hereof.
2. Duties
2.1 Description of Duties. In your capacity as Vice President of National
(U.S.) Sales/Premium Division, you shall perform such customary duties
and exercise such authority, consistent with your position, as may from
time to time be given to you by the President and Chief Executive
Officer. You shall have the responsibility for national sales of
premium brand sunglasses.
2.2 Devotion of Entire Time. During the Employment Term, you agree that you
will loyally and conscientiously devote your entire productive time,
efforts, ability and attention to the duties of your office and to
promotion of the interests of Serengeti, and that you will not engage
in any other business duties or pursuing whatsoever. Notwithstanding
any of the foregoing, you will not be prohibited from making passive
personal investments or being involved in the private business affairs
or your immediate family to the extent that such activities do not
interfere with the performance of your duties hereunder and are not in
any way competitive with the business of Serengeti.
<PAGE>
3. Compensation
3.1 Annual Salary. During the Initial Term, you will be compensated at the
rate of $130,000 per annum, on an annualized basis, for the period
January 1, 1999 through December 31, 1999, ("Base Salary"). Base salary
shall be payable in accordance with the customary payroll policies of
Serengeti provided, however, that if, pursuant to Section 7 hereof,
your employment is terminated, you will receive the appropriate pro
rata portion of your annual Base Salary for the period during which you
were actually employed by Serengeti.
The Base Salary shall be increased annually commencing January 1, 2000
during the Initial Term and any renewal terms, effective on January 1
of each year, by an amount equal to the increase, if any, in the index
currently known as the "Consumer Price Index, All Items, South, All
Urban Consumer," published by the Bureau of Labor Statistics of the
United States Department of Labor, or any successor index thereto,
appropriately adjusted (the "CPI"). In the event that the CPI is
converted to a different standard reference base or otherwise revised,
the determination of the CPI Adjustment shall be made with the use of
such conversion factor, formula or table for converting CPI as may be
published by the Bureau of Labor Statistics or, if said Bureau shall
not publish the same, then with the use of such conversion factor,
formula or table as may be published by Commerce Clearing House, Inc.,
or any other nationally recognized publisher of similar statistical
information. If the CPI ceases to be published on a monthly basis, then
the shortest period for which the CPI is published shall be used in
determining the numerator of the fraction. If the CPI ceases to be
published, and there is no successor thereto, such other index as
Serengeti may reasonably determine to be appropriate shall be used. The
amount of the increase shall be determined by multiplying the Base
Salary in effect by a fraction, the numerator of which shall be (a) the
CPI for the month immediately preceding the first day of the Year with
respect to which such annual adjustment is to be made (the "Base CPI")
minus (b) the CPI for the same month in the immediately preceding Year,
and the denominator of which shall be the Base CPI (the "CPI
Adjustment").
3.2 Reimbursement for Business Expenses. Serengeti will reimburse you, upon
presentation of proper expense statements or such other supporting
information as Serengeti may reasonably require, for your reasonable
and necessary business expenses including, without limitation,
telephone, travel and entertainment expenses) incurred or paid by you
in connection with the performance of your duties hereunder. Serengeti
will provide you with a notebook computer and cellular telephone which
will remain the property of Serengeti and be used solely for the
business of Serengeti.
3.3 Miscellaneous. You will also be provided with a total car allowance of
$500 per month payable monthly thorough payroll. You will work at
Serengeti's offices in Sarasota, Florida.
<PAGE>
3.4 Incentive Compensation. Bonuses for the Initial Term and any renewal
will be based on the Management Incentive Plan then in effect.
4. Fringe Benefits. You shall be entitled to participate on the same basis
and subject to the same qualifications as all other regular full time
employees of Serengeti in any fringe benefit plans Serengeti makes
available from time to time for all its employees, including those
benefits available, if any, under any vacation, retirement, disability,
medical insurance and life insurance plans as the same may be placed
into effect from time to time. In addition, you shall be entitled to
participate in such other benefit plans, if any, as Serengeti makes
generally available from time to time to members of its executive
staff.
5. Confidentiality.
5.1 Trade Secrets. You and Serengeti acknowledge and agree that during the
Employment Term and in the course of the discharge of your duties
hereunder, you will have access to and become acquainted with
information concerning the operation of Serengeti, including, without
limitation, the names and addresses of and other information pertaining
to Serengeti's customers, clients, suppliers and employees and other
business associates and other valuable information regularly used in
Serengeti's business and not generally known to other, giving
Serengeti's competitive advantage in the sunglass business. You
acknowledge and agree that it is Serengeti's policy to maintain such
information as secret and confidential, whether relating to Serengeti's
business as heretofore or hereafter conducted, or relating to
Serengeti's customers, clients, suppliers, employees and other business
associates (all such information being referred to hereinafter as
"Confidential Information"). You acknowledge and agree that all
Confidential Information is owned by Serengeti and constitutes
Serengeti's trade secrets.
5.2 Non-Disclosure. You specifically agree that you shall not use, publish,
disseminate, misappropriate or otherwise disclose any Confidential
Information, whether directly or indirectly, either during the term of
this Agreement or at any other time thereafter, except as is required
by law or in the course of your employment hereunder. This provision
shall not apply to Confidential Information which becomes generally
known to the public by means other than your breach of this Section.
5.3 Unfair Competition. You acknowledge and agree that the sale,
unauthorized use or disclosure of any Confidential Information obtained
by you during the course of your employment under this Agreement,
including but not limited to (a) information concerning Serengeti's
current, future or proposed work, services, or products, (b) the facts
that any such work, services or products are planned, under
consideration, or in production, as well as, (c) any descriptions
thereof, constitute unfair competition. You promise and agree not to
engage in any unfair competition with Serengeti, either during the term
of this Agreement or at any other time thereafter.
<PAGE>
5.4 Precautions; Return of Materials. You agree to take all reasonable
precautions to protect the integrity of all Confidential Information,
including all documents and other material entrusted to you containing
or embodying Confidential Information. You further agree that all
files, records, documents, drawings, lists, specifications, products
and similar items relating to Serengeti's business, whether prepared by
you or by others, are and shall remain exclusively the property of
Serengeti, and that upon the expiration or termination of your
employment hereunder you shall return to Serengeti all such material
and all copies thereof in your possession or control.
5.5 Copyrightable and Patentable Materials. You agree that during the
Employment Term you will take any and all business developments,
opportunities and potentially profitable situations relating to
Serengeti's business to the Directors for exploitation by Serengeti.
You agree promptly to disclose to Serengeti (and only to Serengeti) any
and all knowledge possessed or acquired by you by any means whatsoever
during the Employment Term which relates in any way to any materials,
inventions, discoveries, developments, concepts, ideas or innovations,
whether copyrightable or patentable or not, relating to the business of
Serengeti. For the compensation and benefits received hereunder, you
hereby assign and agree to assign to Serengeti your entire right, title
and interest in and to any of the aforedescribed materials, inventions,
discoveries, developments, concepts, ideas or innovations. All such
materials, inventions, discoveries, developments, concepts, ideas and
innovations shall be the property of Serengeti, and you shall, without
further compensation, do all things necessary to enable Serengeti to
perfect title in such materials, inventions, discoveries, concepts,
ideas and innovations and to obtain and maintain effective patent or
copyright protection in the Unites States and foreign countries
thereon, including, without limitation, rendering assistance and
executing necessary documents.
6. Competitive Activities.
6.1 Non-Competition. During the Employment Term and for a period of one (1)
year after the expiration of earlier termination thereof for whatever
reason, you shall not within the United States:
a. Consult with, be employed by, render services to, or engage in any
business activity with (whether as owner, controller, employee,
employer, consultant, partner, officer, director, agent or otherwise)
any business or business entity competing in any way with the business
of Serengeti;
b. Without the prior written consent of the President and Chief Executive
Officer personally solicit or cause to be solicited or authorize,
directly or indirectly, for or on behalf of yourself or any third
party, any business competitive with Serengeti, which employs you
hereunder, from others who are or were at any time within 12 months
prior to the expiration or termination of your employment hereunder
customers, clients, or other business associates of Serengeti.
6.2 Solicitation of Employees and Others. You acknowledge and agree that
Serengeti's directors, officers and employees possess special knowledge
of Serengeti's operation and are vitally important to the continued
success of Serengeti's business. You shall not, without the prior
written consent of the President and Chief Executive Officer, directly
or indirectly seek to persuade any director, officer or employee of
Serengeti either to discontinue his or her position with Serengeti or
to become employed or engaged in any activity competitive with the
activities of Serengeti to which your services under this Agreement are
related.
6.3 Injunctive Relief. You acknowledge and agreed that your services to be
provided hereunder are special and unique and that were you to breach
any provision of Sections 5 or 6 of this Agreement, the damages to
Serengeti would be irreparable and any other rights or remedies which
Serengeti may possess or to which it may be entitled, Serengeti shall
be entitled to enjoin any such breach in any court of competent
jurisdiction.
<PAGE>
6.4 Scope. If any court determines that any of the covenants set forth
herein, or any part or parts thereof, is unenforceable because of the
duration of geographic scope of such provision, such court shall have
the power to reduce the duration or scope of such provision, as the
case may be, and, in its reduced form, such provision shall then be
enforceable and shall be enforced.
7. Termination
7.1 By Agreement or Death. Prior to the end of the Initial Term and during
the Employment Term, your employment hereunder may be terminated: (a)
by written agreement between you and Serengeti; and (b) in the event of
your death.
7.2 Termination for Cause. Serengeti reserves the right to terminate this
Agreement for "cause" as defined below. As used in this Agreement, the
term "cause" shall mean (i) the commission by you of any act which
would constitute a felony under state or federal law, or the equivalent
under foreign law, if prosecuted; (ii) the commission by you of any act
of moral turpitude which, in the sole reasonable opinion of Serengeti,
negatively impacts on your ability to perform your duties hereunder;
(iii) the material breach by you of the provisions of this Agreement;
(iv) your failure or refusal to perform material obligations under this
Agreement, or other acts or omissions constituting neglect or
dereliction of duties hereunder; (v) fraud, dishonesty or other acts or
omissions by you that amount to a willful breach of your fiduciary duty
to Serengeti; or (vi) the happening of any other event which, under the
provisions of any laws applicable to Serengeti or its activities,
disqualifies you form acting in any or all capacities provided for
herein. Serengeti may, at its option, terminate this Agreement for the
reasons states in this Section 7 by giving written notice of
termination to you without prejudice to any other remedy to which
Serengeti may be entitled either by law, in equity, or under this
Agreement.
7.3 Upon such termination under this Agreement under this Section 7, you
shall resign from all positions you may then hold with Serengeti of any
of its affiliates and deliver to Serengeti all documents or copies
thereof in your possession relating to Serengeti and its business.
7.4. Severance Pay. Whether and to which extent you are entitled to
severance pay upon termination of your employment with Serengeti will
be determined according to Serengeti's severance policies, if any, at
the time of such termination. The foregoing notwithstanding, in the
event your employment terminates during the Initial Term only, by
reason of a change of control of Serengeti, you will be entitled to an
amount equal to one year's salary at the then current Base Salary. For
purposes hereof, the term "change of control" shall mean any merger,
consolidation or reorganization of Serengeti with or into another
person or entity, any sale of the assets of Serengeti or any
acquisition of Serengeti's voting securities, with the result, in each
instance, that less than 51% of the combined voting power of the then
outstanding voting securities of Serengeti or the surviving entity
immediately after each such transaction is held in the aggregate by
persons or entities who were holders of voting securities of Serengeti
immediately prior to any such transactions.
<PAGE>
8. Miscellaneous
8.1 Notices. Notices hereunder shall be in writing and shall be delivered
by hand or sent by registered to certified mail, return receipt
requested, if to you, at the address set forth above, and if to
Serengeti Eyewear, Inc., 8125 25th Court Street East, Sarasota, Florida
34243, or at such other address as to which notice has been given in
the manner herein provided.
8.2 Entire Agreement. This Agreement sets forth your and Serengeti's
complete understanding with respect to the matters set forth herein.
This Agreement may be modified or amended only by an agreement in
writing signed by the parties hereto and may be assigned by Serengeti
only in connection with the transfer of all or substantially all of the
business and assets of Serengeti.
8.3 Severability. If any term, provision, covenant, or condition of this
Agreement, or the application thereof to any person, place or
circumstance, shall be held by a court of competent jurisdiction to be
invalid, unenforceable, or void, the remainder of this Agreement and
such term, provision, covenant, or condition as applied to other
persons, places and circumstances shall remain in full force and
effect.
8.4 Heading. The headings and captions of this Agreement are provided for
convenience only and are intended to have no effect in construing or
interpreting this Agreement.
8.5 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect
to the conflict of laws principles thereunder.
If the foregoing accurately reflects your understandings of our agreement and is
acceptable to you, please sign the enclosed copy of this letter and return it to
the undersigned.
Very truly yours,
SERENGETI EYEWEAR, INC.
By: /s/ Stephen Mevitt
----------------------------
Stephen Mevitt, President
Accepted and Agreed:
By: /s/ Douglas Hinton
--------------------------
Douglas Hinton
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