U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
Commission file number: 0-26022
Serengeti Eyewear, Inc.
(Exact Name of Small Business Issuer as specified in its charter)
New York 65-0665659
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
8125 25th Court East
Sarasota, Florida 34243
(Address of principal executive offices)
(941) 359-3599
(Issuer's telephone number including area code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
YES: X NO:
Number of shares outstanding as of October 31, 1997: 2,384,000 shares of
Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: YES: NO: X
Serengeti Eyewear, Inc.
Index
Part I
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1997 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1997 and
1996 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of
Operation 14
Part II
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
September 30, 1997
(Unaudited)
ASSETS
Current Assets:
Cash................................................ $ 596,907
Accounts receivable -- trade........................ 7,718,557
Other receivables................................... 10,303
Inventories......................................... 14,349,451
Prepaid expenses.................................... 1,149,121
-------------
Total current assets............................... 23,824,339
Fixed assets--net of accumulated depreciation........ 2,283,793
Other assets:
Goodwill............................................ 14,045,736
Prepaid expenses--non-current....................... 150,000
Accounts receivable--stockholders................... 45,215
Patents and trademarks--net......................... 4,466,758
Other assets........................................ 27,183
-------------
$ 44,843,024
-------------
-------------
See accompanying notes to financial statements.
3
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Balance Sheet
September 30, 1997
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable--bank.................................. $ 3,525,000
Note payable--stockholder........................... 30,516
Current portion of long-term debt................... 50,000
Accounts payable--related party..................... 40,812
Income taxes payable................................ 8,400
Accounts payable.................................... 5,499,728
Accrued dividends................................... 1,045,000
Accrued expenses.................................... 1,390,728
------------
Total current liabilities.......................... 11,590,184
------------
Long-term debt....................................... 135,696
Note payable -- bank................................. 7,750,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 shares
authorized 22,500 shares issued and outstanding.... 20,925,000
Common stock, $.001 par value, 10,000,000 shares
authorized, 2,384,000 shares issued and
outstanding......................................... 2,384
Additional paid in capital........................... 10,586,094
Retained earnings.................................... (6,146,334)
------------
Total stockholders' equity......................... 25,367,144
------------
$ 44,843,024
------------
------------
See accompanying notes to financial statements.
4
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Operations
For The Three Months and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
THREE MONTHS NINE MONTHS
-------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ------------- ----------
Net sales.................................... $ 8,376,546 $ 1,865,166 $24,280,638 $7,406,439
Cost of goods sold........................... 3,882,554 1,212,358 11,587,872 4,776,085
------------ ------------ ----------- ----------
Gross profit................................. 4,493,992 652,808 12,692,766 2,630,354
------------ ------------ ----------- ----------
Operating expenses:
Depreciation and amortization............... 588,684 31,496 1,591,653 94,488
Selling expenses............................ 1,273,531 550,221 5,009,826 1,433,645
General and administrative, expenses........ 2,319,685 354,309 5,253,125 940,907
------------ ------------ ----------- ----------
Total operating expenses..................... 4,181,900 936,026 11,854,604 2,469,040
------------ ------------ ----------- ----------
Income (loss) from operations................ 312,092 (283,218) 838,162 161,314
------------ ------------ ----------- ----------
Other (expenses) income:
Other (expense) income...................... 8,198 -- 40,719 --
Interest.................................... (337,551) (57,361) (836,443) (197,789)
------------ ------------ ----------- ----------
(329,353) (57,361) (795,724) (197,789)
------------ ------------ ----------- ----------
Income (loss) before taxes................... (17,261) (340,579) 42,438 (36,475)
Provision for income taxes
Current.................................... 8,300 82,000 (8,400) (12,400)
------------ ------------ ----------- ----------
Net income (loss)............................ (8,961) (258,579) 34,038 (48,875)
Preferred stock dividends *.................. (347,000) -- 4,677,000 --
------------ ------------ ----------- ----------
Net income (loss) available to Common
shareholders............................... $ (355,961) $ (258,579) $(4,642,962) $ (48,875)
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
Per share information:
Net (loss) per share:....................... $ (.15) $ (.11) $ (1.95) $ (.02)
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
Weighted average shares:..................... 2,384,000 2,384,000 2,384,000 2,384,000
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
- ------------------------
* amounts have been restated from those previously reported to reflect a stock
dividend which is convertible at a discount from the market value at the
date of issuance (see Note F).
See accompanying notes to financial statements.
5
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1997 and 1996
1997 1996
------------- ----------
Cash flows from operating activities................................................... $ 4,959,463 $ 132,714
------------- ----------
Cash flows from investing activities:
Acquisition of business interest...................................................... (26,427,926) --
Acquisitions of patents and trademarks................................................ (22,698) (6,159)
Acquisition of other assets........................................................... -- (112,036)
Purchase of fixed assets.............................................................. (898,240) (219,877)
------------- ----------
Net cash provided by (used in) investing activities.................................. (27,348,864) (338,072)
------------- ----------
Cash flows from financing activities:
Increases in stockholder advances..................................................... -- 45,214
Increase in deferred acquisition costs................................................ (1,065,548) (15,000)
Repayments of related party debt...................................................... (182,449) (13,394)
Proceeds from the sale of preferred stock............................................. 13,950,000 --
S corporation distribution............................................................ -- (92,365)
Proceeds from bank borrowings......................................................... 11,900,000 --
Repayment of bank loans............................................................... (2,125,000) --
Proceeds from long term borrowings.................................................... -- 22,318
Principal payments on notes payable--other............................................ (123,422) (106,362)
------------- ----------
Net cash provided by (used in) Financing activities.................................. 22,353,581 (159,589)
------------- ----------
Net increase (decrease) in cash........................................................ (35,820) (364,947)
Beginning--cash balance................................................................ 632,727 479,256
------------- ----------
Ending--cash balance................................................................... $ 596,907 $ 114,309
------------- ----------
------------- ----------
See accompanying notes to financial statements.
6
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
Note A. Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and Item 310(b) of Regulation S-B. They do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results
of operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. For further information, refer to
the financial statements of the Company as of December 31, 1996 and for the
two years then ended, including notes thereto included in the Company's Form
10-KSB.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Solartechnics (HK) Ltd.
Intercompany transactions and balances have been eliminated in consolidation.
Inventories
Inventories, consisting principally of finished goods and work in
process, are valued at the lower of cost or market on a first in - first out
basis.
The cost of sales for the periods presented have been determined using
the gross profit method.
Income taxes
The 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 (34%--adjusted for the surtax exemption) primarily as a
result of state income taxes net of the federal benefit (3%).
7
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
Note B. Note payable--bank
During October, 1994 the Company arranged a line of credit with a bank
whereby the Company was able to borrow up to $1,000,000. During October, 1995
the Company replaced this line of credit with a $1,500,000 line with the same
bank. The line was renewed again in September 1996 with a due date of
September 1997. The line was secured by substantially all of the Company's
assets. The Company was entitled to advances of up to 70% of its accounts
receivable less than 61 days old and 25% of its inventory cost. The line had
an interest rate of prime plus 1.5%. The balance of $1,500,000 at December
31, 1996 was repaid on February 13, 1997 (see below).
Concurrently with the closing of the acquisition described below, the
Company entered into a Revolving Line of Credit and Term Loan Agreement with
SunTrust Bank. Under the agreement the Company has the ability to borrow up
to $17.5 million in the form of (a) a three year revolving credit facility in
the amount of $7.5 million and (b) a five year amortizing term loan facility
in the amount of $10 million.
The Company borrowed the entire $10 million under the term loan to
finance a portion of the acquisition and to repay the $1.5 million of
outstanding indebtedness under the line of credit described above. The
Company is able to borrow up to 85% of eligible accounts receivable less than
91 days past due and 50% of eligible inventory under the revolving credit
facility for working capital. The credit facility is secured by a first
priority lien on all of the assets of the Company and its subsidiaries.
Pursuant to the credit facility interest is payable at the LIBOR rate or Base
Rate plus applicable margins based upon the Company's earnings. In addition,
the Company is subject to certain financial covenants. The Company is
currently discussing with the bank the restructuring of certain of the
financial covenants.
8
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
Note C. Stockholders' equity
During December, 1994 the Company adopted a stock option plan to be
administered by the Board of Directors. The plan provides for the granting of
options for specified individuals to purchase common stock at an exercise
price to be determined by the Board of Directors. No option may be granted
after January, 2005 and no option may be granted for a period of greater than
10 years. The total number of shares with respect to which options may be
granted under the plan is 1,500,000. A total of 1,410,000 options have been
granted under the plan at September 30, 1997 at prices ranging from $2.94 to
$3.24.
During August, 1995 the Company completed a public offering of units.
Pursuant to the offering the Company issued 1,174,000 units consisting of
1,104,000 shares of its $.001 par value common stock and 1,174,000 redeemable
common stock purchase warrants for cash aggregating $3,865,131 net of
offering expenses of $1,654,869. Included in the offering were 70,000 common
shares sold by a shareholder. Each warrant entitles the holder to purchase
one share of the Company's $.001 par value common stock at a price of $6.50
per share for a period of four years from September 29, 1996. These warrants
may be redeemed by the Company at any time after August 12, 1996 at a price
of $.10 per warrant if the average bid price for the Company's common stock
exceeds $8.75 per share for the 20 consecutive trading days ending on the
third day prior to the date of the notice of redemption.
In addition the Company sold an option to purchase an aggregate of 96,000
units, with each unit consisting of one share of common stock and one
warrant, for cash aggregating $960 to the underwriter. The options are
exercisable for a period of 4 years from August 11, 1996 at an exercise price
of $7.50 per unit. The terms of the warrants are the same as those issued
pursuant to the public offering except that they are not redeemable by the
Company.
9
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
On October 4, 1996 the Company issued 7,500 shares of its $.001 par value
Series A 6.5% cumulative convertible non-voting preferred stock, to RBB Bank
Aktiengesellschaft (RBB) a banking institution located in Austria, in a
private offshore offering pursuant to Regulation S for cash aggregating
$7,500,000 less commissions aggregating $525,000. Concurrently with the
closing of the acquisition described in Note E, RBB purchased pursuant to
said Regulation S offering 7,500 shares of the Company's $.001 par value
Series B 6% cumulative convertible non-voting preferred stock and 7,500
shares of the Company's $.001 par value Series C 6% cumulative convertible
non-voting preferred stock for cash aggregating $15,000,000 less commissions
aggregating $1,050,000. The dividends on the preferred shares are payable in
cash or additional shares of preferred stock at the option of the Company. At
September 30, 1997 dividends aggregating 1,045 shares of preferred stock
valued at $1,045,000 were due and payable to RBB.
Concurrently with the issuance of the Series A preferred shares, the
Company also issued RBB a Series A warrant to purchase up to 150,000 shares
of the Company's $.001 par value common stock at an exercise price of $5.5625
per share at any time commencing January 1, 1999 through December 31, 2002.
In addition, concurrently with the issuance of the Series B and C preferred
shares, the Company issued to RBB a Series B and a Series C warrant each of
which entitles RBB to purchase up to an aggregate of 300,000 shares of the
Company's $.001 par value common stock at a per share exercise price of $7.50
with respect to the Series B warrant and $10 with respect to the Series C
warrant at any time commencing January 1, 1999 through December 31, 2002. The
Company also issued as part of the commission in connection with the Series A
preferred shares a Series D warrant to purchase up to an aggregate of 200,000
shares of $.001 par value common stock at an exercise price of $5.50 per
share through September 30, 2001.
Each of the Series A Preferred Shares may be converted into shares of
common stock at any time. Each Series A share is convertible into such number
of common shares as is determined by dividing its stated value of $1,000 by a
conversion rate equal to the lower of
10
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
(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 D. Commitments and contingencies
Concentration of credit risk/major customers:
During the nine months ended September 30, 1997, the Company made net
sales to significant customers of approximately $6,118,000 and $3,496,000 or
24% and 14% of its total sales.
Approximately $2,327,000, $926,654 and $760,000 of the gross accounts
receivable are due from three customers at September 30, 1997 and are
unsecured.
11
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
Litigation:
On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of
the Company's initial public offering, filed an action against the Company in
the United States District Court for the Northern District of Georgia,
Atlanta Division. The civil complaint alleges, among other things, breaches
by the Company of its underwriting agreement with Argent, breach of corporate
duties relating to the issuance of the Preferred Shares, and misstatements in
the Company's Proxy Statement relating to the issuance of the Preferred
Shares. The complaint seeks, among other things, monetary relief as well as a
preliminary injunction enjoining the Company from permitting the conversion
of any Preferred Shares, and requiring that the Company secure a seat on its
Board of Directors for an Argent representative. The Company has reviewed
Argent's claims and believes them to be without merit. The Company has filed
a motion to dismiss on jurisdictional and substantive grounds and intends to
continue to vigorously defend the action, and is presently considering
counterclaims. The Company is unable to estimate the range of loss (if any).
Commitments:
During January and February, 1997, the Company entered into employment
agreements with certain officers and sales personnel. These agreements call
for aggregate salaries of $822,000 in 1997, $936,000 in 1998, $1,029,000 in
1999 and $69,000 in 2000 and auto allowances aggregating $36,000 per year.
Also included in the contracts is certain bonus compensation and options to
purchase up to 485,000 shares of common stock at a price of $2.94 per share
through August, 1999 based on sales and profit targets set by the Company.
Note E. Acquisition of business interest
On February 13, 1997, the Company changed its name to Serengeti Eyewear,
Inc. in conjunction with the acquisition of certain assets of the Serengeti
Eyewear division of Corning Incorporated
12
Serengeti Eyewear, Inc.
(Formerly Solar-Mates, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
used in the design, manufacture and distribution of Serengeti brand
sunglasses. The Company acquired the Serengeti assets for cash aggregating
$27.5 million. The Company financed the purchase and related transaction
expenses with the net proceeds from the sale of shares of preferred stock and
the borrowings under the credit facility described above.
On July 16, 1997, the Company received a statement from Corning detailing
costs aggregating approximately $1,700,000 incurred by Corning which it
claims were on behalf of the Company for the operation of Corning facilities
during the period from February 13, 1997 to May 18, 1997. Corning is asking
that the Company reimburse these costs which relate to operational expenses
of approximately $800,000 and inventory items of approximately $900,000. The
Company has requested that Corning provide documentation for these costs as
they are in excess of what the Company anticipated the charges should be. To
date the Company has charged approximately $427,000 to operations and
adjusted its inventory carrying value by $500,000 related to these charges.
Should Corning be able to document the balance of the charges to the
satisfaction of the Company the Company will accrue the additional amounts at
such time.
Note F. Restatement of Stockholders' Equity
In March, 1997 the Securities and Exchange Commission (SEC) announced its
position on accounting for preferred stock which is convertible at a discount
from the market price at the date of issuance. The SEC's position is that a
dividend should be recorded for the difference between the conversion price
and the quoted price of the common stock on the date of issuance. To comply
with this position, the Company restated its financial statements to reflect
a dividend of $3,750,000 at March 31, 1997, related to the sale of the
convertible preferred stock discussed in note C.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
The following should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE NEWLY ACQUIRED
SERENGETI BUSINESS, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE
INNOVATIVE PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY COMPETITORS,
MANUFACTURING CAPACITY CONSTRAINTS AND THE AVAILABILITY OF RAW MATERIAL, THE
EFFECT OF ECONOMIC CONDITIONS, DEPENDENCE ON CERTAIN CUSTOMERS AND OTHER
RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO
UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
General
Prior to the 1980's, the Company manufactured its own sunglasses for sale
to the wholesale trade. As manufacturers in the Far East began playing
greater roles in the sunglass industry in the late 1970's, the Company began
importing its products and in 1980 discontinued its manufacturing operations
completely. Since 1978, the Company has focused primarily on the sale of
sunglasses and sunglass products to mass merchandisers such as large retail
chain stores. In the late 1980's, the Company began developing programs for
mass merchants designed to enhance its sale of sunglasses. The Company
continually adds new products and develops new marketing programs for its
product lines. In late 1992, the Company introduced its line of
Solar*X-Registered Trademark-sunglasses, which feature a ground and polished
lens, comparable to optical quality sunglasses, at popular prices. This
product was the predominant line of the Company from 1994 until the Company
acquired Serengeti in February 1997, and has contributed significantly to the
sales growth of the Company. The Company
14
expects its Solar*X-Registered Trademark- line of sunglasses to remain its
predominant line in the non-premium segment of its business.
In the latter part of 1995, with the proceeds of its initial public
offering completed in August 1995, the Company launched its
H2Optix-Registered Trademark-line, a premium sunglass line. The Company
sought to emphasize sales of H2Optix-Registered Trademark- and thereby reduce
its dependence upon mass merchandisers. The Company experienced only limited
sales of its H2Optix-Registered Trademark- sunglasses in 1995 as it commenced
its marketing efforts to establish H2Optix-Registered Trademark- brand name
recognition and broaden the distribution network for the H2Optix-Registered
Trademark- product line. In 1996, the Company experienced $1.2 million in
H2Optix-Registered Trademark- sales, representing approximately 9% of the
Company's total sales.
On February 13, 1997, the Company acquired (the "Acquisition") the assets
of the Serengeti Eyewear division of Corning Incorporated ("Serengeti").
Corning's Serengeti Eyewear division entered the premium sunglass market in
1985 with the introduction of Drivers sunglasses, which remain the core of
the Serengeti product line. Over the years, Serengeti sunglasses have
developed a brand identity which provides appeal to consumers in the premium
market. The Serengeti brand image is based upon superior lens technology,
quality and performance. The Serengeti Drivers line of sunglasses, which
accounted for approximately 91% of plano sales of the Serengeti Eyewear
division in 1996, is principally responsible for this image. The Company
intends to increase Serengeti's market share by introducing new Serengeti
signature styles that exploit the Serengeti brand image. In addition, the
Company intends to benefit its H2Optix-Registered Trademark- line by
including it within the Serengeti line, thereby tapping into Serengeti's
well-established distribution networks.
Historically, the Serengeti line has suffered delays in new product
launches, resulting in depressed orders for those products. In response,
Corning's Serengeti Eyewear division focused on timing the product
development cycle to ensure that new products are introduced in October,
which is the optimal time for selling to the largest Serengeti customers for
the spring and summer seasons.
15
Results of Operations
Comparison of the three months ended September 30, 1997 to the three
months ended September 30, 1996
Net sales increased 342%, from approximately $1.9 million for the three
months ended September 30, 1996 to approximately $8.4 million for the same
period in 1997, primarily as a result of the sales of Serengeti products
subsequent to the Acquisition of the Serengeti business on February 13, 1997
(which accounted for $6.1 million of such net sales) and increased sales of
the Company's non-premium products to a significant customer.
Gross profit increased as a percentage of sales, from approximately 35%
for the three months ended September 30, 1996 to approximately 54% for the
same period in 1997, primarily as a result of product mix. Approximately 73%
of the 1997 sales consisted of premium Serengeti products which carry gross
margins significantly higher than the Company's non-premium products which
comprised substantially all of the Company's sales in 1996.
Depreciation and amortization increased by approximately $558,000 during
the three months ended September 30, 1997 as a result of the amortization of
the intangible assets related to the Acquisition.
Selling expenses increased from approximately $550,000 during the three
months ended September 30, 1996 to approximately $1.3 million for the same
period in 1997. This increase resulted primarily from increased costs
associated with marketing and selling expenses related to the Company's
premium products in 1997.
General and administrative expenses increased from approximately $354,000
for the three months ended September 30, 1996 to approximately $2.3 million
for the same period in 1997, primarily as a result of an increase in
executive and administrative salaries, office expenses, and costs incurred in
connection with the development of the premium line of sunglasses. The
Company anticipates that its general and administrative cost will continue to
increase with the growth of its business, and particularly in light of the
Acquisition of the Serengeti business.
16
Interest expense increased by approximately $281,000 during the three
months ended September 30, 1997 as a result of the interest expense related
to the Company's term loan which was used to finance the Acquisition and the
interest incurred on the Company's revolving credit facility.
Comparison of the nine months ended September 30, 1997 to the nine months
ended September 30, 1996
Net sales increased 228%, from approximately $7.4 million in 1996 to
approximately $24.3 million in 1997, primarily as a result of the sales of
Serengeti products subsequent to the Acquisition (which accounted for $15.9
million of such sales) and increased sales of the Company's non-premium
products to a significant customer. The Company has continued to broaden the
distribution network for its non-premium products and, as a result, during
the nine month period in 1997, sales to Wal-Mart Stores Inc. accounted for
approximately 24% of the Company's total sales, compared to approximately 65%
in 1996.
Net sales for the nine month period ended September 30, 1997 were lower
than expected due to reduced sales to one of the Company's significant
customers which was in the process of reducing its own inventory levels, less
than favorable spring weather conditions in what has historically been one of
the Company's strong distribution markets, and backorder situations related
to some of the components used in the Company's manufacturing process. These
situations improved during the third quarter and the Company anticipates that
they should continue to improve during the balance of the year.
Gross profit increased as a percentage of sales, from approximately 36%
in 1996 to approximately 52% in 1997, primarily as a result of product mix.
Approximately 65% of the 1997 sales consisted of premium Serengeti products
which carry gross margins significantly higher than the Company's non-premium
products which comprised substantially all of the Company's sales in 1996.
Depreciation and amortization increased by approximately $1.5 million
during 1997 as a result of the amortization of the intangible assets related
to the Acquisition.
17
Selling expenses increased from approximately $1.4 million in 1996 to
approximately $5.0 million in 1997. This increase resulted primarily from
increased costs associated with marketing and selling expenses related to the
Company's premium products in 1997 which included an "Eye in the Sky" radio
advertising campaign incurred during May and June 1997 for Serengeti products
costing approximately $1.1 million.
General and administrative expenses increased from approximately $941,000
in 1996 to approximately $5.3 million in 1997 primarily as a result of an
increase in executive and administrative salaries, office expenses, and costs
incurred in connection with the development of the premium line of
sunglasses. The Company anticipates that its general and administrative cost
will continue to increase with the growth of its business, and particularly
in light of the Acquisition.
Interest expense increased by approximately $638,000 in 1997 as a result
of the interest expense related to the Company's term loan which was used to
finance the Acquisition and the interest incurred on the Company's revolving
credit facility.
Liquidity and Capital Resources
Prior to the Acquisition of the Serengeti business, the Company financed
its operations primarily through the proceeds of an initial public offering
completed in August 1995, its cash flow and a revolving line of credit in the
amount of $1,500,000 from SunBank/Gulf Coast (the "Old Credit Facility"). As
of December 31, 1996, the Company had borrowed the maximum amount available
under the Old Credit Facility. Concurrently with the closing of the
Acquisition, the Company entered into a Revolving Line of Credit and Term
Loan Agreement with SunTrust Bank, Central Florida, National Association,
individually and as agent, and Creditanstalt-Bankverein pursuant to which the
Company refinanced the Old Credit Facility with a new senior credit facility
(the "New Credit Facility") which provides the Company with the ability to
borrow up to $17.5 million in the form of (i) a three year revolving credit
facility in the amount of $7.5 million (the "Revolver Facility") and (ii) a
five year amortizing term loan facility in the amount of $10.0 million (the
"Term Facility").
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The Company borrowed the entire $10.0 million of availability under the
Term Facility to finance a portion of the Acquisition purchase price, to
repay in full the outstanding principal indebtedness and accrued interest
(approximately $1.5 million) under the Old Credit Facility and to pay related
fees and expenses. The Company financed the remaining portion of the
Acquisition purchase price with the net proceeds of the sale of Preferred
Shares.
The Revolver Facility has a $2 million sublimit for the issuance of
stand-by letters of credit. Pursuant to the Revolver Facility, the Company is
able to borrow up to 85% of eligible accounts receivable and up to 50% of the
value of the Company's eligible inventory. Undrawn amounts under the Revolver
Facility are available for the working capital and general corporate needs of
the Company.
Interest under the New Credit Facility is payable at the LIBOR rate or
the "Base Rate." In addition to applicable margins, the Company pays a
floating percentage tied to the Company's ratio of funded debt to "EBITDA";
ranging, in the case of LIBOR rate loans, from 1.50% based upon a ratio of
1.5:1 or less to 2.75% based upon a ratio of greater than 3:1; and ranging,
in the case of Base Rate loans, from .50% based upon a ratio of 2.25:1 or
less to 1.25% based upon a ratio of greater than 3:1. Pursuant to the New
Credit Facility, the Company is required to enter into exchange agreements
and/or other appropriate interest rate hedging transactions for the purpose
of interest rate protection covering at least 75% of the borrowings under the
Term Facility through February 13, 2000.
The New Credit Facility requires the Company to maintain certain
financial ratios. Pursuant to the New Credit Facility, the Company is
required to apply 75% of its "Excess Cash Flow" for the preceding completed
fiscal year, the net proceeds from any sale of assets other than in the
ordinary course of business and the net proceeds of equity issuances and
permitted debt issuances to prepay outstanding amounts under the Term
Facility. The New Credit Facility also contains a number of customary
covenants, including, among others, limitations on liens, affiliate
transactions, mergers, acquisitions, asset sales, dividends and advances. The
New Credit Facility is secured by a
19
first priority lien on all of the assets of the Company and its subsidiaries.
The Company's liquidity improved from working capital of approximately
$9.7 million at December 31, 1996 to working capital of approximately $13.3
million at September 30, 1997. The Company increased its inventory position
at September 30 in anticipation of forth quarter 1997 and first quarter 1998
requirements.
The Company incurred approximately $898,000 in capital expenditures
during the nine months ended September 30, 1997 primarily relating to the
expansion of its facility and the acquisition of furniture and fixtures. The
Company anticipates that it will incur additional capital expenditures of
approximately $100,000 for the remainder of 1997.
The Company anticipates, based on its currently proposed plans, that the
net cash available from operations combined with the New Credit Facility will
be sufficient to satisfy its anticipated cash requirements for the 1997
fiscal year.
Foreign Currency Exchange
The Company presently transacts business internationally in United States
currency. To date, the Company has not been affected significantly by
currency exchange fluctuations. However, future currency fluctuations in
countries in which the Company does business could adversely affect the
Company by resulting in pricing that is not competitive with prices
denominated in local currencies.
Seasonality
The Company anticipates that the seasonality of its premium sunglass
business generally will follow the selling activity of its largest customer
for such products, Sunglass Hut. Historically, the strongest quarter in terms
of Serengeti sales is the second quarter, followed by the first, fourth and
third quarters. The seasonality of the Company's non-premium sunglass
business generally follows the selling of its largest customer for such
products, Wal-Mart. Historically, the Company's strongest quarter in terms of
sales is the fourth quarter, followed by the first, second and third quarters.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of
the Company's initial public offering, filed an action against the Company in
the United States District Court for the Northern District of Georgia,
Atlanta Division. The civil complaint alleges, among other things, breaches
by the Company of its underwriting agreement with Argent, breach of corporate
duties relating to the issuance of the Preferred Shares, and misstatements in
the Company's Proxy Statement relating to the issuance of Preferred Shares.
The complaint seeks, among other things, monetary relief as well as a
preliminary injunction enjoining the Company from permitting the conversion
of any Preferred Shares, and requiring that the Company secure a seat on its
Board of Directors for an Argent representative. The Company has reviewed
Argent's claims and believes them to be meritless. The Company has filed a
motion to dismiss on jurisdictional and substantive grounds and intends to
vigorously defend the action, and is presently considering counterclaims.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. Exhibit 27--Financial Data Schedule (previously filed)
(b) Reports on Form 8-K. None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SERENGETI EYEWEAR, INC.
Dated: January 27, 1998 BY: /S/ STEPHEN NEVITT
--------------------------
Stephen Nevitt
President
(Principal Executive Officer)
Dated: January 27, 1998 BY: /S/ NEIL R. WINTER
-------------------------
Neil R. Winter
Chief Financial Officer
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