U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
COMMISSION FILE NUMBER: 0-26022
SERENGETI EYEWEAR, INC.
(Exact Name of Small Business Issuer as specified in its Charter)
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
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares outstanding as of October 31, 1999:
2,384,000 shares of Common Stock, $.001 par value.
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc.
Consolidated Balance Sheets
ASSETS
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
Current Assets:
Cash $ 142,379 $ 87,774
Accounts receivable - trade 4,895,798 7,796,963
Income tax refund receivable -- 358,055
Inventories 14,856,068 12,536,224
Prepaid expenses 623,707 958,603
----------- -----------
Total current assets 20,517,952 21,737,619
Fixed assets - net of accumulated depreciation 1,964,562 2,170,582
Other assets:
Goodwill - net 6,028,306 6,290,314
Patents and trademarks - net 9,792,356 10,258,068
Other assets 152,761 157,261
----------- -----------
Total Other Assets 15,973,423 16,705,643
----------- -----------
Total assets $38,455,937 $40,613,844
----------- -----------
----------- -----------
2
Serengeti Eyewear, Inc.
Consolidated Balance Sheets
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
Current Liabilities:
Bank overdraft $ 460,925 $ 288,414
Note payable - bank 8,299,687 7,322,704
Accounts payable 8,926,652 10,952,090
Accrued dividends 1,173,000 1,476,000
Accrued expenses 884,855 519,492
Current portion of long-term debt 1,392,293 5,263,448
------------ ------------
Total current liabilities 21,137,412 25,822,148
------------ ------------
Long-term debt 758,590 91,415
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value,
1,000,000 shares authorized;
25,384 and 23,908 shares
issued and outstanding 23,809,000 22,333,000
Common stock, $.001 par value,
10,000,000 shares authorized;
2,384,000 shares issued and
Outstanding 2,384 2,384
Additional paid in capital 10,586,094 10,586,094
Accumulated deficit (17,837,543) (18,221,197)
------------ ------------
Total stockholders' equity 16,559,935 14,700,281
------------ ------------
Total liabilities and stockholders' equity $ 38,455,937 $ 40,613,844
------------ ------------
------------ ------------
See accompanying notes to financial statements.
3
Serengeti Eyewear, Inc.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------------
SEPT. 30, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1998
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 6,747,430 $ 10,531,339 $ 30,842,422 $ 34,132,176
Cost of goods sold 3,601,319 6,685,436 17,173,199 22,002,183
------------ ------------ ------------ ------------
Gross Profit 3,146,111 3,845,903 13,669,223 12,129,993
Operating expenses:
Depreciation and amortization 365,279 358,142 1,089,734 1,107,745
Selling Expenses 1,024,923 859,001 2,405,785 4,199,824
General and administrative exp. 2,354,577 1,903,075 7,295,884 7,272,134
------------ ------------ ------------ ------------
Total operating expenses 3,744,779 3,120,218 10,791,403 12,579,703
------------ ------------ ------------ ------------
Income (loss) from operations (598,668) 725,685 2,877,820 (449,710)
Interest expense 519,397 433,370 1,321,166 1,301,358
------------ ------------ ------------ ------------
Net income (loss) (1,118,065) 292,315 1,556,654 (1,751,068)
Preferred stock dividends (391,000) (369,000) (1,173,000) (1,107,000)
------------ ------------ ------------ ------------
Net income (loss) applicable to
Common stock $ (1,509,065) $ (76,685) $ 383,654 $ (2,858,068)
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ (0.63) $ (0.03) $ 0.16 $ (1.20)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ (0.63) $ (0.03) $ 0.05 $ (1.20)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares:
Basic 2,384,000 2,384,000 2,384,000 2,384,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 2,384,000 2,384,000 33,838,771 2,384,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to financial statements.
4
Serengeti Eyewear, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows from operating activities:
Net Income (loss) $ 1,556,654 $(1,751,068)
Adjustments to reconcile net income (loss) to
Net cash provided by operating activities:
Depreciation and amortization 1,089,734 1,517,244
(Gain)/loss on disposal of fixed asset (925) --
Cash provided by (used for):
Accounts receivable 2,901,165 2,808,299
Income tax refund receivable 358,055 --
Inventories (2,319,844) 2,918,058
Prepaid expenses and other assets 339,396 109,649
Accounts payable (2,025,435) (2,310,331)
Customer deposits -- (900,122)
Accrued expenses 365,363 (7,681)
----------- -----------
Net cash provided by operating activities 2,264,163 2,384,048
----------- -----------
Cash flows from investing activities:
Acquisition of patents and trademarks - (53,113)
Purchase of fixed assets (113,378) (346,368)
Proceeds from disposal of fixed assets 946 -
----------- -----------
Net cash used in investing activities (112,432) (399,481)
----------- -----------
Cash flows from financing activities:
Increase in bank overdraft 172,511 -
Repayment of related party debt - (44,842)
Net borrowings from line of credit 251,983 -
-
Proceeds from term loan 725,000 910,000
Repayment of term loan (3,200,000) (2,212,500)
Principal payments on long-term debt (46,620) (42,862)
----------- -----------
Net cash (used in) financing activities (2,097,126) (1,390,204)
----------- -----------
Net increase (decrease) in cash 54,605 594,363
Cash - beginning of period 87,774 128,188
----------- -----------
Cash - end of period $ 142,379 $ 722,551
----------- -----------
----------- -----------
See accompanying notes to financial statements.
5
Serengeti Eyewear, Inc.
Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
NINE MONTHS ENDED
----------------------------------------------
SEPTEMBER 30 , 1999 SEPTEMBER 30, 1998
------------------- ------------------
Supplemental cash flow
information - cash paid
for interest $1,091,721 $1,180,373
Non-cash financing activities
including the issuance of
preferred stock for payment
of dividends $1,476,000 $1,290,000
Non-cash financing activity from
trade-in of vehicle $ 42,639 --
6
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note A. Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Pursuant to the rules of the Securities and Exchange Commission,
those financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements of Serengeti Eyewear,
Inc. (the "Company") as of December 31, 1998 and for the two years then ended,
including notes thereto included in the Company's Form 10-KSB.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Solartechnics (HK) Ltd.
Intercompany transactions and balances have been eliminated in consolidation.
INVENTORIES
Inventories are valued at the lower of cost or market on a first
in-first out basis.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes", which
requires use of the liability method. FAS 109 provides that deferred tax assets
and liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets and
liabilities at the end of each period are determined using the currently enacted
tax rates applied to taxable income in the periods in which the deferred tax
assets and liabilities are expected to be settled or realized.
INCOME (LOSS) PER SHARE
Net income (loss) per share amounts are computed based upon the
weighted average number of common shares and potential common shares outstanding
during each period. Potential common shares for the nine months ended September
30, 1999 of 31,454,771 include shares underlying the convertible preferred
stock. Potential common shares are not considered in the computation for the
three months ended September 30, 1999 and the three and nine months ended
September 30, 1998, as their effect would be anti-dilutive.
7
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The reconciliation of the net income and shares for the basic and
diluted earnings per share computation are as follows for the nine months ended
September 30, 1999:
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ---------
Net income applicable to
common stock (Basic) $ 383,654 $ 2,384,000 $ 0.16
Effect of Dilutive Securities:
Series A convertible
preferred stock 421,298 10,708,798
Series B convertible
preferred stock 375,851 10,372,986
Series C convertible
preferred stock 375,851 10,372,986
---------- ------------
Net income applicable
to common stock and
assumed conversions (diluted) $1,556,654 $ 33,838,770 $ 0.05
---------- ------------ ---------
8
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note B. Inventories
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited)
Inventory amounts consist of the following:
Raw Materials $ 2,114,418 $ 4,490,117
Work-in-process 4,001,363 2,768,884
Finished Goods 8,740,287 5,277,223
------------ -------------
Total $14,856,068 $12,536,224
------------ -------------
Note C. Note payable - bank
During September 1999, the Company secured with an asset-based lender a
$12 million revolving credit facility with interest payable at prime plus 1.75%,
replacing all but $2 million of the then existing credit facility. The
prime-lending rate at September 30, 1999 was 8.25%.
Under the current revolver facility, as amended, the Company is able to
borrow up to 1) 85% of eligible domestic accounts receivable, 2) 75% of eligible
foreign accounts receivable, and 3) 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
$1,096,039 at September 30, 1999. The revolver facility is collateralized by
substantially all the Company's assets and is automatically renewable on its
anniversary date in September 2001.
Note D. Stockholders' equity - Preferred stock
On October 4, 1996, the Company issued 7,500 shares of its $.001 par
value Series A 6.5% cumulative convertible non-voting preferred stock to RBB
Bank Aktiengesellschaft ("RBB"), a banking institution located in Austria, in a
private offshore offering pursuant to Regulation S for cash aggregating
$7,500,000 less commissions aggregating $525,000. Concurrently with the closing
of the acquisition, whereby the Company purchased certain assets of the
Serengeti Eyewear division of Corning, Inc. ("Corning"), 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. Dividends on the preferred stock are payable in cash or additional
shares of preferred stock at the option of the Company. During 1998, dividends
aggregating 1,290 shares of preferred stock, valued
9
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
at $1,290,000, which represent dividends accrued in 1997, were issued. During
the nine months ended September 30, 1999, dividends accrued in 1998 aggregating
$1,476,000 were paid to RBB through the issuance of 1,476 shares of preferred
stock. At September 30, 1999, dividends aggregating $1,173,000 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.
Each of the Series C Preferred Shares may be converted into shares of
common stock at any time after July 1, 1997. Each Series C share is convertible
into such number of common shares as is determined by dividing its stated value
of $1,000 by a conversion rate equal to the lower of (a) $8.25 or (b) 80% of the
average market price for the common stock for the ten trading days ending three
days prior to the giving by the holder of a notice of conversion.
At any time after September 30, 2000 the Company will have the right to
force conversion of the preferred shares into common stock.
Note E. Concentration of credit risk/major customers
During the nine months ended September 30, 1999 and 1998, the Company
made net sales to three customers of approximately $14,100,000 and $11,900,000,
or 45.8% and 34.8% of its total net sales, respectively.
Approximately $1,800,000, or 31.5%, of the gross accounts receivable
were due from three customers at September 30, 1999 and were unsecured.
Approximately $4,100,000, or 47.7%, of the gross accounts receivable were due
from two customers at December 31, 1998 and were unsecured.
Note F: Litigation
During January, 1998 RBB, the entity which purchased $22.5 million of
the Company's preferred stock, the proceeds of which were utilized by the
Company to purchase the Serengeti
10
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
business, filed an action in the United States District Court, Southern District
of New York. In the action, RBB alleges various violations of the securities
laws in connection with the purchase by RBB of the 22,500 shares of the
Company's convertible preferred stock. RBB contends that the Company failed to
disclose certain material information and that RBB relied to its detriment on
these omissions in purchasing the Company's convertible preferred stock. There
are also common law claims for fraud and negligent misrepresentation.
RBB seeks compensatory damages in the sum of $22.5 million, equal to
the purchase price of the preferred stock, and punitive damages in the sum of
$25 million. The Company has reviewed the claims and intends to vigorously
defend itself against this action. Although the risk of loss for this action is
deemed reasonably possible, the amount of loss is not estimable, and therefore,
no accrual for such is reflected in these financial statements.
In addition to the above matter and in the normal course of conducting
its business, the Company is involved in various other legal matters. Other than
with respect to the RBB litigation, the Company is not a party to any legal
matter which management believes could result in a judgment that would have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
11
Serengeti Eyewear, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note G. Foreign operations
The Company distributes its products from two geographic areas: The
United States and Hong Kong. Following is a summary of information by area for
the three and nine months ended:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ---------------------------------
SEPT. 30 SEPT. 30 SEPT. 30 SEPT. 30
1999 1998 1999 1998
---------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales to unaffiliated customers:
United States $ 6,532,683 $10,269,758 $27,939,283 $32,953,781
Hong Kong $ 214,747 $ 261,581 2,903,139 1,178,395
---------- ----------- ----------- -----------
$ 6,747,430 $10,531,339 $30,842,422 $34,132,176
---------- ----------- ----------- -----------
Income (loss) from
operations:
United States $ (593,381) $ 363,686 $ 2,642,015 $ (957,016)
Hong Kong $ (5,287) $ 361,999 235,805 507,306
---------- ----------- ----------- -----------
$ (598,668) $ 725,685 $ 2,877,820 $ (449,710)
Interest expense $ (519,397) $ (433,370) (1,321,166) (1,301,358)
---------- ----------- ----------- -----------
Net income (loss) $(1,118,065) $ 292,315 $ 1,556,654 $(1,751,068)
---------- ----------- ----------- -----------
Identifiable assets:
United States $38,446,129 $47,116,581 $38,446,129 $47,116,581
Hong Kong 9,808 775,528 9,808 775,528
---------- ----------- ----------- -----------
$38,455,937 $47,892,109 $38,455,937 $47,892,109
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained herein involve risks and
uncertainties, and are subject to change based on various important factors
including, but not limited to, the Company's continuing ability to develop and
introduce innovative products, changing consumer preferences, actions by
competitors, manufacturing capacity constraints of its suppliers and the
availability of raw materials, the effect of economic conditions, dependence on
certain customers and other risks identified from time to time in the Company's
Securities and Exchange Commission filings. Given these uncertainties, undue
reliance should not be given to such statements. The Company also undertakes no
obligation to update these forward-looking statements.
GENERAL
The Company is engaged in the business of designing, manufacturing
through outside sources, marketing and distributing a wide array of quality
sunglasses.
On February 13, 1997, the Company acquired for $27.5 million in cash
(the "Acquisition") the assets of the Serengeti Eyewear division of Corning used
in the design, manufacture and distribution of Serengeti brand sunglasses.
Drivers sunglasses, first introduced by Corning in 1985, constitute the core of
the Serengeti product line. Over the years, Serengeti sunglasses have developed
a brand identity which provides appeal to consumers in the market for premium
sunglasses. The Serengeti brand identity is based upon superior lens technology,
quality and performance.
Prior to the Acquisition, the Company primarily designed and marketed
selected non-premium lines of sunglasses such as Solar*X sunglasses, which were
targeted for distribution through mass merchandisers as a sunglass with quality
comparable to that of premium sunglasses at popular prices. Solar*X features a
ground and polished lens which provides virtually complete protection from
harmful ultraviolet sunrays and glare. The Company also markets to the mass
merchandise market other sunglass brands, each of which the Company believes
creates a niche among popular-priced sunglasses of various categories.
In the latter part of 1995, with the proceeds of its initial public
offering completed in August 1995, the Company launched its H(2)Optix line of
sunglasses which is designed specifically for use in the water environment.
H(2)Optix utilizes a combination of characteristics which the
13
Company believes differentiates it from other competing sunglasses which target
the water sports market. H(2)Optix sales approximated $1.2 million in each of
1996 and 1997 and $2 million in 1998. H(2)Optix sales remained virtually
unchanged for the nine months ended September 30, 1998 as compared to the same
period in 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998.
Net sales decreased 35.9%, from approximately $10.5 million for the
three months ended September 30, 1998 to approximately $6.7 million for the
same period in 1999. During the third quarter of 1998, the Company closed-out
approximately $2.2 million of excess inventory. This close-out sale was not
repeated in 1999. In addition, the Company's sales to Wal-Mart decreased
approximately $800,000 in the third quarter of 1999 when compared to the
third quarter of 1998. Wal-Mart established a corporate goal to reduce its
inventory by the end of September 1999 and reduced its third quarter
purchases from the Company accordingly. The Company maintained its sales
volumes with its key accounts, including Sunglass Hut and its International
business, for the third quarter of 1999 compared to 1998, but had declines in
its sales through its distributors of approximately $100,000.
Gross profit as a percentage of sales increased to 46.6% for the three
months ended September 30, 1999 compared to 36.5% for the same period for 1998,
primarily due to higher average unit selling prices in 1999 and the effect of
its limited close-out sales in 1998, which typically had substantially lower
profit margins.
Selling expenses increased from approximately $859,000 during the three
months ended September 30, 1998 to approximately $1.0 million for the same
period in 1999. This increase resulted primarily from an increase in media print
advertising expenditures during the period.
General and administrative expenses increased from approximately $1.9
million for the three months ended September 30, 1998 to approximately $2.4
million for the same period in 1999, primarily due to increases in payroll and
bad debt expense, and foreign exchange costs associated with purchases from
Japanese suppliers, resulting from the devaluation of the U.S. Dollar against
the Japanese Yen.
Interest expense increased from approximately $433,000 for the three
months ended June 30, 1998 to approximately $519,000 for the same period in
1999, primarily as a result of the write-off of deferred loan costs associated
with the Company's former credit facility, which was replaced with a new credit
facility in September 1999, as discussed later in this section under the heading
"Liquidity and Capital Resources".
14
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
Net sales decreased 9.6%, from approximately $34.1 million for the nine
months ended September 30, 1998 to approximately $30.8 million for the same
period in 1999, as the Company did not repeat certain close-out sales promotions
which had taken place in 1998. Sales to major customers increased approximately
$2.2 million, or 18.9%. Sales of non-premium product to Wal-Mart through the
Company's Hong Kong subsidiary increased approximately $1.9 million.
Gross profit as a percentage of sales increased to 44.3% for the nine
months ended September 30, 1999 compared to 35.5% for the same period for 1998,
primarily due to higher average unit selling prices and limited close-out sales
for 1999 as compared to 1998, which typically have lower profit margins.
Selling expenses decreased from approximately $4.2 million during the
nine months ended September 30, 1998 to approximately $2.4 million for the same
period in 1999. This decrease resulted primarily from a reduction in
marketing-related expenditures such as retail cooperative advertising,
endorsements, miscellaneous promotions and public relations.
General and administrative expenses remained virtually unchanged for
the nine months ended September 30, 1998 as compared to the same period in 1999.
Interest expense remained virtually unchanged for the nine months ended
September 30, 1998 as compared to the same period in 1999.
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 $1.1
million at September 30, 1999.
The new agreement 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
15
surplus cash. The agreement also contains a number of customary covenants,
including, among others, limitations on liens, affiliate transactions, mergers,
acquisitions, asset sales, dividends and advances. The agreement is secured by a
first priority lien on substantially all of the assets of the Company and its
subsidiaries. At September 30, 1999, the company was in compliance with its loan
agreement.
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 $600,000 at September 30, 1999, primarily as a result of payments
on the credit facility.
The Company incurred capital expenditures of $113,378 during the nine
months ended September 30, 1999.
The Company anticipates, based on its currently proposed plans,
including (i) the introduction of procedures designed to strengthen management
and increase sales efficiency; and (ii) the development and introduction of new
products, that the net cash available from operations will be sufficient to
satisfy its anticipated cash requirements for the 1999 fiscal year.
YEAR 2000 ISSUES
The Year 2000 problem arises because many computer systems were
designed to identify a year using two digits, instead of four digits, in order
to conserve memory and other resources. For instance, "1997" would be held in
the memory of a computer as "97".
When the year changes from 1999 to 2000, a two digit system would read
the year as changing from "99" to "00." For a variety of reason, many computer
systems are not designed to make such a date change or are not designed to
"understand" or react appropriately to such a date change. Therefore, as the
date changes to the year 2000, many computer systems could completely stop
working or could perform in an improper and unpredictable manner.
During November, 1997 the Company began converting its information
system to be Year 2000 compliant. At December 31, 1997, the Company had
completed the installation of the new software and completed the process of
updating applications by mid-1998. The Company incurred charges aggregating
approximately $50,000 in 1998 and has incurred charges aggregating approximately
$65,000 through September 30, 1999. The Company does not anticipate incurring
further material charges in this regard.
16
Pursuant to the Company's Year 2000 planning, the Company has requested
information regarding the computer systems of its key suppliers, customers,
creditors and financial service organizations. Where practicable, the Company
will attempt to mitigate its risks with respect to the failure of any of these
institutions to be year 2000 compliant. The effect, if any, on the Company's
results of operations from the failure of each party to be Year 2000 compliant
is not readily determinable. Those parties which have responded to the Company's
requests have indicated that their Year 2000 compliance issues have been, or
will be, resolved such that they do not anticipate an interruption of their
normal business practices.
SEASONALITY
The Company anticipates that the seasonality of its premium sunglass
business generally will follow the selling activity of its largest customer,
Sunglass Hut. Historically, the strongest quarter in terms of premium sales is
the second quarter, followed by the first, fourth and third quarters.
The seasonality of the Company's non-premium sunglass business
generally follows the selling activity of its largest customer for such
products, Wal-Mart. Historically, the Company's strongest quarter in terms of
sales is the fourth quarter, followed by the first, second and third quarters.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to
recognize all derivatives contracts as either assets or liabilities on the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge of the: (i) exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (ii) exposure to variable cash flows of a forecasted
transaction, or (iii) foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency- denominated forecasted transaction. The objective of hedge
accounting is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of the: (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument (e.g., derivative contracts entered into for
speculative purposes), the gain or loss is recognized as income in the period of
change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has adopted SFAS 133 effective July 1, 1999. On
that date, hedging relationships
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will be designated anew and documented. The Company periodically enters into
derivative contracts for the purpose of hedging risks attributable to interest
rate fluctuations and, in general, such hedges have been fully effective in
offsetting the changed in fair value of the underlying risk. The Company expects
to continue its hedging activities in the future. However, it has not yet
evaluated the financial statement impact of adopting SFAS 133.
GOING CONCERN CONSIDERATION
The Company has experienced significant operating losses which have
resulted in an accumulated deficit of $17,837,543 at September 30, 1999. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. However, the Company has realized an operating profit of
$2,877,820 for the nine months ended September 30, 1999.
The Company believes that the following actions and plans will allow it
to continue operations for a reasonable period of time:
o The Company has introduced procedures to strengthen management
and increase sales efficiency.
o The Company has secured a new revolving credit facility which
management anticipates will better enable the Company to
satisfy financial commitments with its suppliers, thus helping
to ensure timely inventory procurement consistent with the
Company's needs.
o The Company has developed and will continue to introduce new
product styles for its 2000 catalog which management believes
will become widely accepted by its customers.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to various market risks, including changes in
interest rates.
FOREIGN CURRENCY EXCHANGE
The Company presently transacts most business internationally in United
States currency. To date, the Company has not been affected significantly by
currency exchange fluctuations. However, future currency fluctuations in
countries in which the Company does business could adversely affect the Company
by resulting in pricing that is not competitive with prices denominated in local
currencies.
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PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Reference is made to the Company's annual report on Form 10-KSB for the
year ended December 31, 1998 for a discussion of certain litigation.
In the normal course of conducting its business, the Company is
involved in various legal matters. The Company is not a party to any other legal
matter, other than discussed in its most recent Form 10-KSB, which management
believes could result in a judgment that would have a material adverse affect on
the Company's financial position, liquidity or results of operations.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SERENGETI EYEWEAR, INC.
Dated: November 15, 1999 By: /s/ Stephen Nevitt
------------------- --------------------------------
Stephen Nevitt
President
(Principal Executive Officer)
By: /s/ William McMahon
--------------------------------
William McMahon
Chief Financial Officer
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