-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CMYz7uRMhlfFifDKbDGkJDKekvlnAD2ulmZL67mxT9BuWEIy6UMDnLedALUasunX aZ7JCwua47UzgaH/ESlANw== 0000950116-00-001186.txt : 20000515 0000950116-00-001186.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950116-00-001186 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERENGETI EYEWEAR INC CENTRAL INDEX KEY: 0000940183 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 112396918 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26022 FILM NUMBER: 629774 BUSINESS ADDRESS: STREET 1: 8125 25TH COURT E CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9413593599 MAIL ADDRESS: STREET 1: 800 THIRD AVENUE CITY: NNEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: SOLAR MATES INC DATE OF NAME CHANGE: 19960530 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 Commission file number: 0-26022 SERENGETI EYEWEAR, INC. (Exact Name of Registrant 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 (Registrant's telephone number) 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 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 ----- ----- The number of shares of Registrant's common stock, $.001 par value, that were outstanding as of April 30, 2000, was 2,384,000. PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. Serengeti Eyewear, Inc. Consolidated Balance Sheets ASSETS Balance Sheets:
March 31, 2000 December 31, 1999 -------------- ----------------- (Unaudited) Current Assets: Cash $ 72,710 $ 306,126 Accounts receivable - trade 6,495,502 5,843,863 Inventories 14,654,286 15,237,394 Prepaid expenses and other current assets 524,208 289,497 ----------- ----------- Total current assets 21,746,706 21,676,880 Fixed assets - net of accumulated depreciation 1,818,385 1,867,267 Other assets: Goodwill - net 5,853,635 5,940,970 Patents and trademarks - net 9,481,878 9,637,116 Other assets 119,996 377,082 ----------- ----------- Total other assets 15,455,509 15,955,168 ----------- ----------- Total assets $39,020,600 $39,499,315 =========== ===========
See accompanying notes to financial statements. 2 Serengeti Eyewear, Inc. Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2000 December 31, 1999 -------------- ----------------- (Unaudited) Current Liabilities: Note payable-bank/line of credit $ 10,316,712 $ 10,146,096 Accounts payable 7,139,815 8,569,673 Accrued dividends 1,955,000 1,564,000 Accrued expenses 705,860 533,718 Income taxes payable 35,400 -- Current portion of long-term debt 1,379,961 1,992,318 ------------ ------------ Total current liabilities 21,532,748 22,805,805 ------------ ------------ Long-term debt, less current portion 180,671 523,579 ------------ ------------ Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized; 25,384 shares issued and outstanding 23,809,000 23,809,000 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 (17,090,297) (18,227,547) ------------ ------------ Total stockholders' equity 17,307,181 16,169,931 ------------ ------------ Total liabilities and stockholders' equity $ 39,020,600 $ 39,499,315 ============ ============
See accompanying notes to financial statements 3 Serengeti Eyewear, Inc. Consolidated Statements of Operations Income Statements:
Three Months Ended --------------------------------------- March 31, 2000 March 31, 1999 -------------- -------------- (Unaudited) (Unaudited) Net sales $ 11,230,979 $ 10,532,935 Cost of goods sold 6,080,622 6,289,642 ------------ ------------ Gross profit 5,150,357 4,243,293 Operating expenses: Depreciation and amortization 370,374 362,012 Selling expenses 598,967 714,586 General and administrative expenses 2,233,952 1,963,448 ------------ ------------ Total operating expenses 3,203,293 3,040,046 ------------ ------------ Income from operations 1,947,064 1,203,247 Other expenses: Interest expense (383,414) (436,331) Other expense -- (5,658) ------------ ------------ (383,414) (441,989) ------------ ------------ Net income before income taxes 1,563,650 761,258 Income Tax (35,400) -- ------------ ------------ Net income 1,528,250 761,258 Preferred stock dividends (391,000) (391,000) ------------ ------------ Net income applicable to common stock $ 1,137,250 $ 370,258 ------------ ------------ Earnings per share Basic $ 0.48 $ 0.16 ------------ ------------ Diluted $ 0.02 $ 0.02 ------------ ------------ Weighted average shares: Basic 2,384,000 2,384,000 ------------ ------------ Diluted 90,096,509 41,005,530 ------------ ------------
See accompanying notes to financial statements. 4 Serengeti Eyewear, Inc. Consolidated Statements of Cash Flows Cash flow:
Three Months Ended March 31, 2000 March 31, 1999 -------------- -------------- (Unaudited) (Unaudited) Cash flows from operating activities: Net Income $ 1,528,250 $ 761,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 370,374 362,012 Cash provided by (used for): Accounts receivable (651,639) 1,407,704 Income tax refund receivable - 358,055 Inventories 583,108 (815,538) Prepaid expenses and other assets 22,375 90,683 Accounts payable (1,429,858) (21,684) Accrued expenses 172,142 418,042 Income tax payable 35,400 - ----------- ----------- Net cash provided by operating activities 630,152 2,560,532 ----------- ----------- Cash flows from investing activities: Purchase of fixed assets (78,919) (6,723) ----------- ----------- Net cash used in investing activities (78,919) (6,723) ----------- ----------- Cash flows from financing activities: Increase in bank overdraft - (151,251) Repayment of related party debt - (15,314) Net borrowings (repayments) from line of credit 170,616 (2,322,704) Principal payments on long-term debt (955,265) - ----------- ----------- Net cash (used in) financing activities (784,649) (2,489,269) ----------- ----------- Net increase (decrease) in cash (233,416) 64,540 Cash - beginning of period 306,126 87,774 ----------- ----------- Cash - end of period $ 72,710 $ 152,314 =========== ===========
5 See accompanying notes to financial statements. 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. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 1999 Annual Report on Form 10-K for the fiscal year ended December 31, 1999 of Serengeti Eyewear, Inc. (the "Company"). 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. The Company had net operating loss carryforwards of approximately $6.5 million as of December 31, 1999. The Company has recorded a valuation allowance to state its deferred tax assets at estimated realizable value due to uncertainty related to realization of these assets through future taxable income. For the three months ended March 31, 2000, the recorded income taxes payable of $35,400 related to alternative minimum federal and foreign taxes. Earnings per share Earnings 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 related to options and warrants are calculated using the treasury stock method. The dilutive effect of convertible preferred stock is reflected in diluted earnings per share using the if-converted method and assumes conversion at the beginning of the period. 6 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 three months ended March 31, 2000 and March 31, 1999: Earnings Per Share:
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999 --------------------------------- --------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- ------ Net income applicable to common stock (Basic) $1,137,250 $ 2,384,000 $0.48 $370,258 $ 2,384,000 $0.16 Effect of Dilutive Securities: Series A convertible preferred stock 139,870 29,861,783 140,433 13,148,726 Series B convertible preferred stock 125,565 28,925,363 125,565 12,736,402 Series C convertible preferred stock 125,565 28,925,363 125,565 12,736,402 ---------- ----------- -------- ----------- Net income applicable to common stock and assumed conversions (diluted) $1,528,250 $90,096,509 $0.02 $761,821 $41,005,530 $0.02 ========== =========== ======== ===========
7 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) Note B. Inventories
March 31, 2000 December 31, 1999 -------------- ----------------- (Unaudited) Inventory amounts consist of the following: Raw Materials $ 2,495,307 $ 2,298,906 Work-in-process 3,304,011 3,375,602 Finished Goods 8,854,968 9,562,886 ----------- ----------- Total $14,654,286 $15,237,394 ----------- -----------
Note C. Line of Credit 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 March 31, 2000 was 8.75%. 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 $2,106,205 at March 31, 2000. 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 an 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. 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 March 31, 2000, dividends aggregating $1,955,000 were due and payable RBB. 8 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) 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. 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. Note E. Concentration of credit risk/major customers During the three months ended March 31, 2000, the Company made net sales to three customers of approximately $2,000,000, $1,300,000 and $1,100,000, or 17.8%, 11.6% and 10.2% of its total net sales, respectively. During the same three-month period of the prior year, the Company made net sales to the same three customers of approximately $2,400,000, $1,400,000 and $200,000, or 22.8%, 12.9% and 2.3% of its total net sales, respectively. Approximately $3,300,000, or 44.6%, of the gross accounts receivable, were due from three customers at March 31, 2000 and were unsecured. Approximately $2,500,000, or 36.1%, of the gross accounts receivable were due from three customers at March 31, 1999 and were unsecured. Note F: Litigation 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 (i) failed to disclose certain material information and that RBB relied to its detriment on these omissions in purchasing the Company's convertible preferred 9 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) stock and (ii) 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 attorneys' 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. 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 effect on the Company's financial position, liquidity or results of operations. 10 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 months ended March 31, 2000 and 1999: Foreign Operations: Three Months Ended March 31 ------------------------------ 2000 1999 ---- ---- (Unaudited) (Unaudited) Net sales to unaffiliated customers: United States $11,074,158 $ 8,605,816 Hong Kong $ 156,821 $ 1,927,119 ----------- ----------- $11,230,979 $10,532,935 Income from operations: United States $ 1,888,592 $ 1,047,121 Hong Kong $ 58,472 $ 156,126 ----------- ----------- $ 1,947,064 $ 1,203,247 Other Income $ - $ (5,658) Interest expense $ (383,414) $ (436,331) Income taxes $ (35,400) $ - ----------- ----------- Net income $ 1,528,250 $ 761,258 ----------- ----------- Identifiable assets: United States $37,104,420 $38,708,870 Hong Kong 1,916,180 573,321 ----------- ----------- $39,020,600 $39,282,191 =========== =========== 11 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. Results of Operations Comparison of the three months ended March 31, 2000 to the three months ended March 31, 1999. Net sales increased 6.6%, from approximately $10.5 million for the three months ended March 31, 1999 to approximately $11.2 million for the same period in 2000, primarily as a result of increased sales to Costco Canada, a major customer of the Company. Gross profit as a percentage of sales increased from 40.3% for the three months ended March 31, 1999 to 45.9% for the same period in 2000, primarily due to cost reductions with suppliers realized during the current period. Selling expenses decreased from approximately $715,000 during the three months ended March 31, 1999 to approximately $600,000 for the same period in 2000. Sales commissions decreased because a greater percentage of the Company's sales were made to "house" accounts which do not earn a commission. Advertising print production and printing costs decreased, as the Company deferred certain media advertising to coincide with new products to be introduced during the second quarter of 2000. The Company was also able to continue utilizing promotional brochures and point-of-sale materials printed during 1999, rather than incurring the expense of developing new such materials in the first quarter of 2000. General and administrative expenses increased from approximately $2.0 million for the three months ended March 31, 1999 to approximately $2.2 million for the same period in 2000, primarily due to increases in payroll resulting from customary annual pay increases, and increases in bad debt reserves and warranty expenses coinciding with increased sales during the first quarter of 2000 over the first quarter of 1999, partially offset by a decrease in consulting fees and gains on foreign exchange. Interest expense decreased from approximately $436,000 for the three months ended March 31, 1999 to approximately $383,000 for the same period in 2000, primarily as a result of a reduction in long-term debt. 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 12 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 $2.1 million at March 31, 2000. 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 March 31, 2000, the Company was in violation of the leverage ratio requirement 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 $1.1 million at December 31, 1999 to working capital of approximately $200,000 at March 31, 2000, primarily as a result of a reduction in the current portion of long-term debt and accounts payable. The Company incurred capital expenditures of approximately $79,000 for the three months ended March 31, 2000, primarily through the purchase of new sunglass molds. The Company does not expect to make material capital expenditures during the 2000 fiscal year. The Company anticipates that the net cash available from operations will be sufficient to satisfy its anticipated cash requirements for the remainder of the 2000 fiscal year. Concentration of Customers Wal-Mart, Sunglass Hut and Costco accounted for 17.8%, 11.6% and 10.2%, respectively, of the Company's net sales for the three months ended March 31, 2000. Such customers accounted for 22.8%, 12.9% and 2.3% of net sales, respectively, for the three months ended March 31, 1999. 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. 13 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. Foreign Currency Exchange The Company presently transacts business internationally in United States currency and in the local currency of its suppliers. During the three months ended March 31, 2000, the Company realized foreign exchange gains of approximately $71,000, primarily as a result of the gains of the U. S. Dollar against the Japanese Yen and Italian Lira. 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 changes in fair value of the underlying risk. The Company did not have any derivative contracts at March 31, 2000, 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. 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. 14 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. The Company did not experience any significant disruptions in any of its systems on January 1, 2000. As of the date of this report, no supplier or customer of the Company has 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. 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 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. 15 ITEM 3: 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" ("SFAS 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 third 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. The Company presently transacts business internationally in United States currency and in the local currency of its suppliers. During the three months ended March 31, 2000, the Company realized foreign exchange gains of approximately $71,000, primarily as a result of the gains of the U. S. Dollar against the Japanese Yen and Italian Lira. 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. 16 PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Reference is made to Note F of the financial statements included herein and to the Company's annual report on Form 10-K for the year ended December 31, 1999 for a discussion of certain litigation. 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 (i) 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 (ii) 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 attorneys' 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. 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-K, 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. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None 17 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: May 12, 2000 By: /s/ Stephen Nevitt ------------------- ---------------------------------- Stephen Nevitt President (Principal Executive Officer) By: /s/ William McMahon ------------------------------ William McMahon Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of March 31, 2000 and the Consolidated Statements of Operations for the three-month period ended March 31, 2000 and is qualified in its entirety byh reference to such financial statements. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 72,710 0 7,470,240 974,738 14,654,286 21,746,706 3,320,814 1,502,429 39,020,600 21,532,748 0 0 23,809,000 2,384 (6,504,203) 39,020,600 11,230,979 11,230,979 6,080,622 6,080,622 3,203,293 0 383,414 1,563,650 35,400 1,528,250 0 0 0 1,528,250 .48 .02
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