-----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, JGqGhR6Wx4yEvyN/l0kvvcIIhe90qmdDL5kfZopQmGLyHShcreyU4RL0e13Pp7ht lC3R6jIzyjQEoNSbLs1j7Q== 0001005477-97-001080.txt : 19970416 0001005477-97-001080.hdr.sgml : 19970416 ACCESSION NUMBER: 0001005477-97-001080 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLAR MATES 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26022 FILM NUMBER: 97581263 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 10KSB 1 FORM 10KSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-KSB -------------------- Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission file number: 0-26022 December 31, 1996 SERENGETI EYEWEAR, INC. (Name of Small Business Issuer in its Charter) New York 65-0665659 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 8125 25th Court East Sarasota, Florida 34243 (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code: (941) 359-3599 -------------------- Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 Par Value Redeemable Common Stock Purchase Warrants (Title of Class) -------------------- 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 such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_] The issuer's revenues for the year ended December 31, 1996 were $13,584,255. The aggregate market value of the voting stock of registrant held by nonaffiliates of the issuer as of March 31, 1997 was approximately $3,969,320. Number of shares of Common Stock outstanding as of March 31, 1996: 2,384,000 Transitional Small Business Disclosure Format Yes [_] No [X] -------------------- DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-KSB Document in which incorporated -------- --------------------- Registrant's Proxy Statement relating to Part III the 1997 Annual Meeting of Shareholders ================================================================================ SERENGETI EYEWEAR, INC. FORM 10-KSB Table of Contents Page ---- PART I Item 1. Description of Business................................. 1 Item 2. Description of Property................................. 13 Item 3. Legal Proceedings....................................... 13 Item 4. Submission of Matters to a Vote of Security-Holders..................................... 14 PART II Item 5. Market for Common Equity and Related Stockholder Matters......................... 14 Item 6. Management's Discussion and Analysis or Plan of Operation....................................... 16 Item 7. Financial Statements.................................... 21 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 40 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............................... 40 Item 10. Executive Compensation.................................. 40 Item 11. Security Ownership of Certain Beneficial Owners and Management........................ 40 Item 12. Certain Relationships and Related Transactions............................................ 41 Item 13. Exhibits, Lists and Reports on Form 8-K................................................ 41 SIGNATURES ........................................................ 43 -i- FORWARD-LOOKING STATEMENTS THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT CONCERNING, AMONG OTHER THINGS, THE COMPANY'S ABILITY TO SUCCESSFULLY IMPLEMENT ITS BUSINESS STRATEGY, 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 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, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. Carbonate DDS(TM), Country Club(TM), Drivers(R), Fashion Featherweights(R), Femiluna(TM), H2O Optix(R), H2Optix(TM), H2Optix Zero Tolerance(R), In-B-Teen(R), Kinetix(TM), Mach #1(R), One Design(TM), Outa Limitz(R), Power Plus(R), Pulse(TM), Pyrofusion(TM), Range & River(TM), Serengeti(R), Signia(TM), Solar Barriers(R), Solar-Mates(R), Solar*X(R), Spectral Control(R), Sport Shields(R), Strata(R), Sunpets(R), Surf and Cycle(R), The Best Sunglass Value Money Can Buy(R), When You're Old Enough to Know Better(TM), Wickets(R), Your World Your Mark(TM), Sensor-X(TM) and Grafix(TM) are included among the Company's trademarks. PART I Item 1. Description of Business. Company Overview Serengeti Eyewear, Inc. (formerly known as Solar-Mates, Inc.) (the "Company") is engaged in the business of designing, manufacturing through outside sources, marketing and distributing a wide array of quality sunglasses. On February 13, 1997, the Company acquired for $27.5 million (the "Acquisition") the assets of the Serengeti Eyewear division of Corning Incorporated ("Corning") used in the design, manufacture and distribution of Serengeti brand sunglasses. In connection with the Acquisition, the Company changed its name from Solar-Mates, Inc. to Serengeti Eyewear, Inc. Prior to the Acquisition, the Company primarily designed and marketed selected non-premium lines of sunglasses targeted for distribution through the mass merchandise market. See "Industry Background" below. The Company's Solar*X line of sunglasses is marketed to mass merchandisers as a sunglass with quality comparable to that of optical sunglasses at popular prices. Solar*X features a ground and polished lens which provides virtually complete protection from harmful ultraviolet sun rays and glare. The Company also markets to the mass merchandise market other sunglass brands, each of which the Company believes creates a niche among popular priced sunglasses of various categories. Sales of non-premium sunglasses accounted for approximately 91% of the Company's total sales in 1996, with Solar*X sunglasses accounting for approximately 69% of total sales. 1 In the latter part of 1995, with the proceeds of its initial public offering completed in August 1995, the Company launched its H2Optix line of sunglasses which is designed specifically for use in the water environment. H2Optix utilizes a combination of characteristics which the Company believes differentiates it from other competing sunglasses which target the water sports market. The Company sought to emphasize sales of H2Optix, a premium sunglass line, and thereby reduce its dependence upon mass merchandisers. The Company also believes that premium products generate higher gross margins and offer significant growth potential, as discussed in "Industry Background" below. The Company experienced only limited sales of its H2Optix sunglasses in 1995 as it commenced its marketing efforts to establish H2Optix brand name recognition and broaden the distribution network for the H2Optix product line. In 1996, the Company achieved approximately $1.2 million in H2Optix sales, representing approximately 9% of the Company's total 1996 sales. The Company in 1996 also broadened the distribution network for its non-premium products and, as a result, sales to Wal-Mart Stores Inc. ("Wal-Mart") accounted for approximately 53% of the Company's total 1996 sales, compared to approximately 92% for 1995. The Serengeti line 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. As a result, Serengeti brand sunglasses presently rank third in premium sunglass distribution in terms of market share, following Ray-Ban and Oakley. The Serengeti Drivers line of sunglasses, which accounted for approximately 91% of plano (non-prescription lens) 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 line by including it within the Serengeti line, thereby tapping into Serengeti's well-established distribution networks. The Company intends to continue the marketing of its non-premium sunglasses to the mass merchandise market. The Company is a New York corporation formed in 1976. The Company maintains its principal executive offices at 8125 25th Court East, Sarasota, Florida 34243, and its telephone number is (941) 359-3599. Industry Background The sunglass industry is generally divided into two principal segments - the under-$30 or "nonpremium" market and the over-$30 or "premium" market. The retail market for sunglasses in recent years has experienced the emergence of a broader premium market, reflected by increased sales of higher-priced, quality-oriented sunglass products. This premium sunglass market, the category in which the Company's Serengeti products compete, showed an increase in sales of 104%, from $825.6 million in 1989 to $1.7 billion in 1996. Management of the Company believes that consumer willingness to pay more for premium sunglass products results from increased awareness of the need for quality eye protection, the continued growth of sunglasses as a fashion accessory, an increased demand for specialized sunglasses for different sports and activities, and growing brand awareness. The Company seeks to capitalize on these changes in the sunglass market by emphasizing sales of its premium products which are designed to appeal to the quality conscious consumer and which are marketed for use in specifically targeted sporting and 2 recreational activities in which participants tend to spend a significant amount of disposable income on equipment and accessories. The under-$30 market is primarily served by mass merchants, chain drug stores and discount department stores. These outlets generally offer sunglasses in the $8 to $25 price range. The Company currently serves the top of the retail price range in the under-$30 market primarily with its Solar*X brand of sunglasses. Business Strategy The Company's objective is to become a leading designer and distributor of premium sunglass products. The Company believes that its success will depend upon its ability to control, protect and enhance the Serengeti brand image. Accordingly, the Company has adopted a growth-oriented business strategy which includes the following key elements: Maintain brand name recognition. The Company believes that a brand name provides instant appeal for many consumers. The Company intends to continue developing Serengeti signature styles that incorporate superior lens technology, quality and performance, factors which the Company believes differentiate its products from those of its competitors and increase brand recognition among consumers. Focus on selective distribution. It is the policy of the Company to maintain strict control over the distribution of its Serengeti products to avoid overexposure of the brand. The Company sells its Serengeti products through carefully selected retailers that will be routinely assessed to ensure they conform with the Company's standards. The Company believes this selective distribution policy will promote a high degree of loyalty from retailers and a stable retail price environment, while increasing the Company's control over diversion and counterfeiting of its products. Aggressively protect its intellectual property rights. The Company will rely on patent, trademark, trade secret, unfair competition and copyright law to protect its rights to certain aspects of its products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks and trade dress. Introducing innovative new products. The Company intends to capitalize on Serengeti's strong brand identity by introducing new Serengeti signature styles, including the introduction of H2Optix as a new addition to the Serengeti line. The new styles would incorporate the Serengeti name and logo into the frame decor with logo plaques and lens decoration. The Company anticipates that existing Serengeti accounts will provide the new Serengeti signature styles with retail space without replacing strong performing existing products. The Company will seek to obtain any additional space with price incentives, if required. The Company will utilize its existing relationships with European designers to design the new styles. The Company has an existing relationship with a renowned European design team that has worked with the Company for the past three years and which has developed new products for well-known sunglass distributors, including Ray-Ban, Arnet, Fila and the Benneton Group. The Company believes that this team has demonstrated the ability consistently to create top selling styles. The Company presently utilizes this team for the design of all new H2Optix products. 3 The Company intends to couple its high-performance lenses with well-known designer names and styling. Performance features would allow designers to offer benefits to consumers and to differentiate their products from other designer glasses. Similarly, the Company believes that opportunities exist for designer sport sunglasses -- sunglasses that combine performance features for sports activities with designer names and athlete endorsements that are meaningful to those sports. Advances in frame technology have not kept pace with advances in lens technology. Frame development has focused primarily on approving appearance rather than performance. As a result, sunglasses do not offer both a high performance lens and frame. The Company believes that it has an opportunity to create innovative high-performance sunglasses by combining new frame designs, materials and other features with the existing and planned Serengeti lenses. Focus on international expansion. The Company believes that wider international distribution also represents a significant opportunity for expansion of sales. Sales outside North America represented approximately 23% of total sales of the Serengeti Eyewear division in 1996. To improve the consistency of its image and operating strategy worldwide, the Company is establishing closer working relationships with its international distributors and plans to increase its use of direct sales representatives in those locations where such an approach is advantageous. The Company believes that concentrating its efforts in existing regions and introduction of Serengeti to new regions abroad provide a significant opportunity for increased growth. The Company also expects to continue benefitting from the global expansion of its retail accounts, particularly Sunglass Hut International ("Sunglass Hut"), the largest customer for the Serengeti line. Description of Product Lines Premium Products The Serengeti line is presently comprised of two distinct products, Drivers and Kinetix, each of which is targeted at a different portion of the premium segment of the sunglass market. The Company intends to integrate its H2Optix products into the Serengeti line. Drivers Drivers, which is a general purpose sunglass, is the core Serengeti product line, accounting for 91% of 1996 plano sales of the Serengeti Eyewear division. Several popular Drivers models have been marketed since the mid-1980s. Independent marketing surveys have indicated that Drivers inspire exceptional customer loyalty. All Drivers lenses are photochromic and have "Spectral Control" technology. Photochromic lenses automatically darken to adjust to bright daylight conditions and lighten to adjust to darker daylight conditions thereby adjusting the amount of light being transmitted to the user. Proprietary Spectral Control filters are then created by "hydrogen firing" a photochromic lens. The resultant lens filters out 95% of blue light, cutting glare, boosting contrast and reducing eye fatigue in fog and haze without distorting the colors seen through the lens. The combination of a special base glass and hydrogen firing give Drivers lenses a lustrous copper color. Drivers lenses are available as a singlegradient lens that reduces glare from above and are also available as a darker, non-gradient version known as Drivers Sienna. The Company presently offers 12 collections and 143 products within the Drivers line. 4 Kinetix Kinetix, Serengeti's specialty, active line is equipped with photochromic, Spectral Control lenses of specific colors to enhance their performance in particular sports environments. Distinct Kinetix collections are designed specifically for boaters, skiers, drivers, golfers, hunters and target shooters. The Company presently offers 4 collections and 20 products within the Kinetix line. H2Optix Although there are a number of sunglasses currently marketed that can be used by water sports enthusiasts, they are not designed specifically for use in the water environment. The Company believes that each of the existing sunglass product lines distributed to the water sports market has significant drawbacks or technical omissions. The H2Optix line has been designed by the Company to differentiate it from other competing sunglasses which target the water sports market. The Company believes that its H2Optix product incorporates a distinctive combination of elements that work together to provide a total optical system for all of the needs of the water sports enthusiast. The base material for the H2Optix lens is polycarbonate, which exhibits both optical clarity and extraordinary strength. The lamination of polarized film between two such lenses results in a lens ideally suited for any water sport activity. The Company presently offers approximately 50 products within the H2Optix line. Non-Premium Products The Company also markets a variety of non-branded sunglasses to mass merchandisers. The Company's Solar*X line of sunglasses has been marketed by the Company as a high quality line of sunglasses with a ground and polished lens. Although these sunglasses retail at approximately $20, the Company believes that their quality makes them competitive with higher priced premium sunglasses in the over-$30 market. They are available in a variety of popular, classic and contemporary frame styles. The following table, derived from the Company's internal sales records, indicates the percentage of gross sales in each of the Company's major product groups during the years ended December 31, 1995 and 1996. Such historical percentages are not indicative of the Company's future product mix, in light of the Company's present focus on its premium Serengeti product lines. Year Ended December 31, ----------------------- 1995 1996 --------- -------- Solar*X 60% 69% Outa Limitz 4 10 H2Optix 1 9 Faded Glory 0 5 Charming Profiles 4 0 Other - Nonbrand 31 7 ---- ---- 100% 100% ==== ==== 5 The following information, derived from the internal sales records obtained from the Serengeti Eyewear division of Corning, indicates the percentage of gross sales for each of the Serengeti brands for the years ended December 31, 1995 and 1996: Year Ended December 31, ----------------------- 1995 1996 --------- -------- Drivers 76.0% 91.0% Kinetix 10.7 6.0 Signia* 13.3 3.0 ----- ---- 100% 100% - ---------- * Discontinued by the Company upon completion of the Acquisition. Distribution The Company's principal customers are national and regional optical distributors, sunglass specialty stores and optical chains. The Company intends to keep this distribution network in place. The Company also intends to target the Serengeti brand to sporting goods stores and quality discount retailers. Regional sales managers are responsible for maintaining relationships with optical distributors in their region, as well as direct accounts with optical and sunglass chains. Optical Distributors The network of optical distributors for the Serengeti line is comprised of eleven regional optical distributors and three national distributors which distribute to optical chains, independent optical retailers and specialty sunglass stores in the United States and Canada. Optical distributors are encouraged to distribute exclusively to premium retailers. Each regional distributor has a specifically defined region, while national distributors sell throughout the nation, so that no optical independent is forced to buy from a sole source. The present structure of this distribution channel arose from fundamental changes implemented by Corning's Serengeti Eyewear division in 1994 to preserve and enhance the Serengeti brand name. In late 1994, Corning reviewed its then 89 distributors and selected the fourteen most appropriate distributors for Serengeti eyewear. Corning ended its relationship with the others and successfully retained every distributor with which it desired to continue its relationship. These remaining distributors have been granted regional exclusivity and are limited to selling Serengeti products to specific retailers. In 1996, the top five distributors for the Serengeti line accounted for 19% of total sales of the Serengeti Eyewear division to optical distributors. The Company believes that significant opportunities for growth lie in increasing Serengeti sales per door in the independent optical channel, in which it has achieved approximately 60% penetration. The Company intends to penetrate optical retailers with prescription Serengeti lenses. In addition, the Company intends to seek out additional quality distributors that operate in regions in which Serengeti sales are under-represented, such as the Southwest. 6 Specialty Sunglass Retailers The principal Serengeti customer in this channel is Sunglass Hut, the world's largest sunglass retailer, which has more than 2,000 stores worldwide and has announced plans to expand to 4,000 stores by the year 2000. The Company believes that the Serengeti-Sunglass Hut relationship improved as a result of the restructuring of the Serengeti distributor network, as described above. Sunglass Hut, which is serviced directly by the Company's in-house sales staff, accounted for approximately 26% of total sales of the Serengeti product lines in 1996. Optical Chains Approximately 8% of Serengeti brand 1996 North American sales were to optical chains. The largest Serengeti customer in this channel is Lens Crafters. The Serengeti brand also has long-standing relationships with other large chains, including Pearle Incorporated, Visionworks Incorporated and DOC Optics Inc. The Company believes that this channel presents significant opportunities for increased penetration; specifically, that the Company may be able to leverage the Serengeti reputation for high performance lenses with the optical chains in order to help create and grow a substantial prescription sunglass business. International Distribution Sales outside North America accounted for approximately 23% of total sales of the Serengeti Eyewear division in 1996. Sales in each region are conducted through distributors and, in certain countries, directly to large retail chains or buying groups. In Europe, which accounted for approximately 16% of the total Serengeti Eyewear division sales in 1996, Serengeti is sold in a number of markets, including The Netherlands, Switzerland, Belgium and Finland, with very limited advertising support. In the United Kingdom, following a media campaign in the London Underground, the Serengeti brand is beginning to achieve significant trade and consumer interest. Significant distributors of Serengeti sunglasses in Europe include Metzler Bonnier BV, OptiSport S.A. and Technop Pvba. Instrumentarium, a Finnish optical retailer, and Codir S.A., a French optical buying group, are particularly important and long-standing Serengeti brand customers. The Asia Pacific region represented approximately 6% of total 1996 sales of the Serengeti Eyewear division. Within this region, the Company believes Serengeti is well-positioned for growth in Australia and New Zealand due to its strong representation through General Optical Pry Ltd. and Vision Holdings, which work closely with Sunglass Hut and independent optical retailers. Similarly, the Company has identified the Latin American region as an opportunity for increased growth. This region represented only approximately 1% of 1996 sales of the Serengeti Eyewear division, and the Serengeti sales force has only recently begun to introduce Serengeti to certain of the major countries in Latin America. Non-Premium Distribution During 1995, the Company had sales of approximately $9.6 million to Wal-Mart, a major national retailer and a principal customer of the Company for over ten years, representing approximately 92% of the Company's total sales. As a result of the Company's strategy to broaden its distribution 7 network for its non-premium products, in 1996, the Company had sales of approximately $7.2 million to Wal-Mart, representing approximately 53% of the Company's total sales. Sales volume to Wal-Mart is generally higher toward the end of the year due to seasonal consumer buying patterns. The Company has not experienced any collection difficulties with its Wal-Mart account. Under its new strategy, the Company intends to sell its premium products through a nationwide network of sales representatives and distributors, but will continue to sell its non-premium products to mass merchandisers such as Wal-Mart. Although the Company does not intend to target the marketing of its premium products lines to the mass merchandise market, the loss of Wal-Mart as a customer would have a material adverse effect on the Company's non-premium business as presently conducted. The Company does not presently have any formal written contract with Wal-Mart, but rather receives individual purchase orders from Wal-Mart for the Company's products. The Company's non-premium sales are generated principally by its President, Stephen Nevitt. The Company also utilizes independent sales representatives throughout the United States. The Company's sales representatives are each responsible for soliciting, selecting and securing accounts within a particular regional territory. Such sales representatives are paid on a commission basis, with commissions depending on the product line and terms of the sale. The Company provides service and support to its sales representatives, including advertising and sales literature. As a result of recent strategy changes by retailers, including consolidations and increases in the size of retail locations, retailers have imposed additional requirements on their merchandisers. The Company has increased the services provided to its mass merchandise customers, particularly Wal-Mart, in many areas including the sourcing of products necessary to fill a specific demand, the tracking of supply inventory by direct computer link-up, and the implementation of specifically tailored systems for the shipment of inventory. Information Systems The Company is fully equipped to offer electronic data interchange ("EDI") for customers who prefer to place orders using EDI technology. The Company has a real time inventory system integrated with its accounting system. The system produces shipping labels tailored to the requirements of a specific carrier, and the Company has the ability to track a customer's shipment through the carrier's system. Additionally, the Company has the ability to increase its shipping capacity by adding a second shift in its warehouse. The Company's computer systems presently are directly linked to Wal-Mart's systems, enabling the Company to track the quantities of its products available at the various retail stores and related warehouses. Although quantities of supplies are monitored by computer systems at Wal-Mart and by WalMart personnel to ensure that the target levels of product quantities determined between Wal-Mart and the Company are met, the tracking system works as a safety measure to ensure that deficiencies are not overlooked, by triggering a notice from the Company to place additional orders. 8 Marketing The Company's marketing and promotion strategies for its Serengeti products are focused on building and maintaining a high-quality image, and providing multiple price points to meet the needs of the retailer and consumer. The Company seeks to maintain high visibility for its Serengeti products through the efforts of its in-house marketing staff which coordinate and oversee the sales efforts of the Company's distributors and develop programs to help retailers increase their sales of Serengeti products. The marketing staff also designs, develops and produces sales materials for use by distributors. These sales materials include point-of-purchase materials, packaging, photography, advertising layouts, signage, logo designs and catalogs. The Company intends to continue advertising and marketing Serengeti products with point-of-purchase displays and through high quality general publications and radio promotions, as well as through catalogs, billboards, event sponsorships, product promotions, trade and consumer publications and trade shows. The Company, through its "co-op" advertising program, intends to assist in the funding and preparation of advertising campaigns initiated by retailers. The Company also intends to promote the Serengeti brand name by utilizing high visibility sports and celebrity figures to provide product exposure to the consumer. Trade shows are a retailer's primary source for information about new products and provide retailers with a chance to meet personally with representatives of a company. Accordingly, the Company attends trade shows targeting specific activities to increase retailer awareness and enthusiasm for its products which relate to such activities. The Company also intends to promote Serengeti through the sponsorship of sporting activities on both a national and local level, and by providing decals and posters. The Company seeks to establish a value purchase for the quality-and price-conscious consumer by maintaining a premium quality product at a price more attractive than that of competing brands, providing a significant value to the consumer. The Company provides counter cards to retailers which compare the features and price of Serengeti sunglasses with those of the competition, exploiting the price/value advantage of Serengeti. The Company determines prices with the goal of providing both the Company and the trade with the opportunity for significant margins. Manufacturing The Company currently obtains photochromic glass lens blanks for the existing Serengeti lines pursuant to a three-year supply agreement entered into with Corning upon the closing of the Acquisition. Pursuant to the supply agreement, the Company is required to purchase such Serengeti lens blanks exclusively from Corning only to the extent that Corning is able to provide such lenses in the quantities and within the time periods required by the Company. The lens blanks are currently manufactured by Corning in the United States and France and then shipped to Japan and other locations overseas for finishing. All lenses currently mounted in the Drivers and Kinetix lines are then subjected to the Company's proprietary hydrogen firing process at a dedicated Serengeti manufacturing facility in Fukui, Japan ("Fukui") pursuant to a transitional arrangement with Corning which expires on May 13, 1997. The Company has entered into a letter of intent with Swank International Manufacturing Co. Ltd. ("Swank"), with whom the Company has a long-standing relationship for the manufacture of its nonpremium products, to explore the possibility of Swank conducting the hydrogen firing process in the Peoples Republic of China. The Company has also received indications of interest from other third parties to conduct the hydrogen firing process. Pursuant to its arrangement with Corning, upon the 9 completion of such transitional period, Corning will transfer title to the Company of all equipment, tooling and other assets utilized in connection with the hydrogen firing process. Lenses are cut, edged, tempered, coated, drop ball tested and inserted into the frames by third-party contractors in Japan and the United States. The Company currently sources all of its plastic sunglass frames from third-party suppliers. The bulk of Serengeti sunglass metal frame requirements are presently manufactured at the Fukui facility. In addition, depending upon requirements, a certain quantity of metal frames used in the Serengeti collections are outsourced. The Company intends to retain cost-effective frame suppliers worldwide for the manufacture of the Serengeti frames. The Company believes that there are a number of suppliers with the ability to manufacture such frames. Upon completion of the hydrogen firing process at the Fukui facility, Corning sends the completed sunglasses to a warehouse facility in Horseheads, New York for distribution. The Company intends to utilize its warehouse facility in Sarasota, Florida for the warehousing of all of its finished sunglasses, including the finished Serengeti sunglasses, and to phase out the Horseheads facility during the second quarter of 1997. The Company has developed long-standing collaborative relationships with established manufacturers of sunglasses throughout the Far East for the manufacture of all of its products and component parts. The Company actively participates in the development and refining processes relating to the manufacture of its products. To date, the Company's principal manufacturing relationship has been with Swank, a leading manufacturer of sunglasses worldwide, which produces frames for the Company's sunglasses. The Company has also established a relationship with Wintec Corporation based in Japan for the production of the polarized polycarbonate lenses used for the Company's H2Optix product line. The frames for certain of the H2Optix models are manufactured in Europe by Bensol SRL. The manufacturers of the Company's products also manufacture sunglasses for other companies, including competitors of the Company. Although the Company has never experienced any difficulties in obtaining the necessary supplies of its products, its manufacturers could choose to prioritize production for other companies or cease production for the Company's products on short notice. Although the Company believes it can find other manufacturers of its products, there can be no assurance that it will be able to discover new manufacturers for its products in a timely manner or that such new manufacturers would be able to meet the Company's supply requirements. While the Company believes it has available to it manufacturers, including Swank, with the capability of fabricating Serengeti lenses utilizing the hydrogen firing process, there can be no assurance that an alternative source of such material will be identified. Termination or disruption of supplies from these sources could result in production delays, reductions in shipments, or increased costs that could have an adverse effect on the Company's operations. While the Company continually explores ways to reduce its dependence on these limited source suppliers, there can be no assurance that the Company will be successful in doing so. Although the Company's policy is to work closely with its manufacturing sources, there are certain risks associated with the use of outside, foreign manufacturers. Risks inherent in the use of an outside manufacturer include the absence of adequate guaranteed supply and unavailability of or delays in obtaining access to, adequate supplies, transport of products from the manufacturer, destruction, damage, loss or theft at the manufacturer's facility, delay in delivery of orders, bankruptcy and other financial problems of the manufacturer, and potential misappropriation of proprietary intellectual property. Risks arising in connection with the use of a foreign manufacturer include foreign governmental regulation, economic instability in the country of manufacture, labor strikes and the 10 implementation of additional United States legislation and regulations relating to imports, including the imposition of duties, taxes and other charges or restrictions on imports. Competition The Company faces significant competition in the sunglass business. The Company competes with a number of established manufacturers, importers and distributors whose brand names enjoy recognition which exceeds that of the Company's brand names. The Company competes with several manufacturers, importers and distributors who have significantly greater financial, distribution, advertising and marketing resources than the Company. The Company competes primarily on the basis of performance features, quality, brand name recognition and price. The Company believes that its continued success will depend upon its ability to remain competitive in its product areas. The failure to compete successfully in the future could result in a material deterioration of customer loyalty and the Company's image and could have a material adverse effect on the Company's business. Intellectual Property The Company intends to aggressively assert its rights under patent, trade secret, unfair competition, trademark and copyright laws to protect its intellectual property, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in the Company's opinion, infringing these rights. Patents, Trademarks and Licenses The following are the principal patents owned by the Company relating to Serengeti sunglasses: Hydrogen Firing Process. The Company owns a patent governing the hydrogen firing process, which expires November 19, 1999 (Patent No. 4,290,794). This patent covers the process by which Spectral Control filters are created within a lens. The patent affects all Drivers and Kinetix lenses. Driver Glass. The Company owns a patent for colored photochromic lenses relating to Drivers and certain Kinetix lenses (Patent No. 4,240,836) which expires November 19, 1999. This patent covers color spaces that provide glare control. As of March 31, 1997, the Company had 21 trademark registrations in the United States and 134 trademark registrations in foreign countries, including those for Serengeti, Drivers, Kinetix and H2Optix. As of such date, the Company had 13 trademark applications pending in the United States and 22 trademark applications pending in foreign countries. No trademarks are licensed by the Company for use on eyewear products due to the Company's strict quality control standards and the desire to protect its proprietary technology and prevent overexposure of the Company's trademarks. In connection with 11 the Acquisition, the Company granted to Corning a royalty-free, world-wide license to utilize the hydrogen firing process technology and other proprietary technology of the Company in connection with the manufacture and marketing of lenses, lens blanks and other optical materials or prescription eyeglasses or lenses used to treat or mitigate medical conditions or symptoms such as light sensitivity, as well as in connection with other products manufactured or practices engaged in by Corning prior to the Acquisition unrelated to the Serengeti business and that do not relate to plano or prescription sunglass lenses. While there can be no assurance that the Company's patents or trademarks protect the Company's proprietary information and technologies, the Company intends to assert its intellectual property rights against any infringer. Although the Company's assertion of its rights can result in a substantial cost to, and diversion of effort by, the Company, management believes that the protection of the Company's intellectual property rights is a key component of the Company's operating strategy. Trade Secrets The Company also relies upon unpatented trade secrets for the protection of certain intellectual property rights. The Company protects its trade secrets by requiring its employees, consultants and other agents and advisors to execute confidentiality agreements upon the commencement of employment or other relationships with the Company. These agreements provide that all confidential information developed by or made known to the individual or entity during the course of the relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information or adequate remedies in the event of unauthorized use or disclosure of such information. In addition, no assurance can be given that others will not independently develop substantially equivalent proprietary information and technologies, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. Regulatory Matters The Company's products, which are imported to the United States, are subject to United States customs duties, and, in the ordinary course of its business, the Company may from time to time be subject to claims by the United States Customs Services for duties and other charges. The United States and foreign governments may from time to time impose new duties, tariffs or other restrictions, or adversely adjust prevailing duty or tariff levels, which could adversely affect the Company's operations and its ability to import products at specified levels. In general, the Company cannot predict the likelihood or frequency of any such events occurring or what effect such events could have on its financial condition and results of operations. The Company's sunglasses are certified to the United States Food and Drug Administration ("FDA") impact standards. The FDA requires that sunglasses sold in the United States must pass what is commonly referred to as the "drop ball test." Pursuant to this test, a ball is dropped down a tube approximately four feet long and allowed to hit the lens. A percentage of a statistical sampling of lenses must not break or shatter. For the Company to take shipment of its products from overseas, the Company must first deliver to the United States Customs Service a certificate indicating that a statistical sampling of the lenses being shipped to the Company meet FDA requirements. The Company believes that all of its products comply with existing FDA requirements. To date, the Company has not 12 experienced any difficulties with regulatory compliance. The FDA is currently considering proposing new sunglass regulations. Employees As of March 31, 1997, the Company employed 63 individuals on a full-time basis, 38 of whom were employed in executive and administrative positions and the remainder of whom were warehouse employees. The number of warehouse employees increases during various time periods in the course of a year due to the buying patterns of the Company's customers. The Company has regularly experienced a readily available labor pool to satisfy its increased labor demands. None of the Company's employees are covered by collective bargaining agreements, and management believes that the Company's relations with its employees are good. Item 2. Description of Property. The Company's corporate offices, distribution and warehouse facilities occupy approximately 15,500 square feet of space in Sarasota, Florida. Inventory is warehoused in this facility and maintained on a computerized perpetual basis. These facilities are leased by the Company pursuant to a lease agreement expiring in March of 1998, with an option in the Company's favor to renew for an additional two years. Rent payments total approximately $6,700 per month. The lease provides for various escalations including based on cost of living and real estate taxes. As the Company intends to warehouse its Serengeti products as well at its Sarasota facility, the Company will require additional space. The Company believes that additional space at the facility is readily available. The Company also leases satellite sales offices in various locations. Item 3. 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 (as defined in Item 5 below), 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 meritless. The Company intends vigorously to defend the action and is presently considering counterclaims. There are no other legal proceedings pending to which the Company or any of its property is subject, and to the knowledge of the Company, there are no such proceedings threatened. The Company maintains product liability insurance coverage of $1 million per occurrence and $2 million in the aggregate and $4 million of excess liability coverage. The adequacy of the Company's insurance coverage and reserves to cover known and unknown claims is evaluated at the end of each fiscal year. The Company believes that its current insurance coverage is adequate. 13 Item 4. Submission of Matters to a Vote of Security-Holders. None. Item 5. Market for Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol SOLR. The following table sets forth for the periods indicated the range of the high and low sales prices of such Common Stock, as reported by Nasdaq. High Low ---- --- Separation Date (September 29, 1995) through September 30, 1995 5.38 4.38 Quarter Ended December 31, 1995 4.63 3.19 Quarter Ended March 31, 1996 5.75 3.06 Quarter Ended June 30, 1996 8.13 4.25 Quarter Ended September 30, 1996 7.13 5.25 Quarter Ended December 31, 1996 8.75 6.00 At March 31, 1997, there were approximately 19 shareholders of record of the Company's Common Stock. Such number does not include beneficial owners holding shares through nominee names. Recent Sales of Unregistered Securities On October 4, 1996, the Company issued 7,500 shares of the Company's Series A 6.5% Convertible Preferred Stock, $.001 par value (the "Series A Shares"), to RBB Bank Aktiengesellschaft ("RBB"), a banking institution whose principal offices are located in Austria, in a private offshore offering pursuant to Regulation S under the Securities Act of 1933, as amended. RBB purchased the Series A Shares for a purchase price equal to their aggregate stated value of $7.5 million. Concurrently with the closing of the Acquisition, RBB purchased, pursuant to said Regulation S, 7,500 shares of the Company's Series B 6% Convertible Preferred Stock, $.001 par value (the "Series B Shares"), and 7,500 shares of the Company's Series C 6% Convertible Preferred Stock, $.001 par value (the "Series C Shares"; together with the Series A Shares and the Series B Shares, the "Preferred Shares"), for a purchase price equal to their aggregate stated value of $15.0 million. The proceeds to the Company from the sale of the Preferred Shares was an aggregate amount of approximately $20.9 million (net of approximately $1.6 million paid in respect of commissions and expenses related to such sale). Concurrently with the issuance of the Series A Shares, the Company also issued to RBB a Series A Warrant of the Company (the "Series A Warrant") to purchase up to 150,000 shares of Common Stock at an exercise price of $5.5625 per share. The Series A Warrant is exercisable at any time commencing January 1, 1999 and on or prior to December 31, 2002. In addition, concurrently with the issuance of the Series B Shares and Series C Shares, the Company issued to RBB a Series B Warrant of the Company (the "Series B Warrant") and a Series C Warrant of the Company (the "Series C Warrant"), each of which entitles RBB to purchase up to 300,000 shares of the Company's Common Stock, $.001 par value ("Common Stock"), at a per share exercise price of (i) $7.50 with respect to the Series B Warrant and (ii) $10.00 with respect to the Series C Warrant. Each of the Series B Warrant and the Series C Warrant is exercisable at any time commencing January 1, 1999 and on or prior to December 31, 2002. 14 The Company has also issued, as part of the commission payable to a third party in connection with the sale of the Series A Shares, a Series D Warrant of the Company (the "Series D Warrant"; together with the Series A Warrant, the Series B Warrant and the Series C Warrant, the "Warrants") to purchase up to an aggregate of 200,000 shares of Common Stock at an exercise price of $5.50 per share. The Series D Warrant is exercisable at any time prior to September 30, 2001. In accordance with the corporate governance rules of the National Association of Securities Dealers, Inc. relating to issuers listed on the Nasdaq National Market, such as the Company, the Company obtained shareholder approval for the issuance of (i) shares of Common Stock issuable upon conversion of the Series A Shares and upon exercise of the Series A Warrant and the Series D Warrant, (ii) the Series B Shares and the Series C Shares, and (iii) the Series B Warrant and the Series C Warrant. Each of the Series A Shares may be converted by the holder thereof into shares of Common Stock at any time. Each Series A Share is convertible into such number shares of Common Stock as is determined by dividing its stated value of $1,000 by a conversion rate equal to the lower of (i) $5.50 and (ii) 80% of the average Market Price for the 10 consecutive trading days ending three days prior to the giving by the holder of such Series A Shares of a notice of conversion. Each of the Series B Shares may be converted by the holder thereof into shares of Common Stock at any time. Each Series B Share is convertible into such number of shares of Common Stock as is determined by dividing the stated value of $1,000 by a conversion rate equal to the lower of (i) $6.75 and (ii) 80% of the average Market Price for the 10 consecutive trading days ending three days prior to the giving by the holder of such Series B Shares of a notice of conversion. Each of the series C Shares may be converted by the holder thereof into shares of Common Stock at any time after July 1, 1997. Each Series C Share is convertible into such number of shares of Common Stock as is determined by dividing the stated value of $1,000 by a conversion rate equal to the lower of (i) $8.25 and (ii) 80% of the average Market Price for the 10 consecutive trading days ending three days prior to the giving by the holder of such Series C Shares of a notice of conversion. For purposes of the conversion rates for the Preferred Shares, "Market Price" has the following meaning. As long as the Common Stock is listed on the Nasdaq National Market, "Market Price" will be equal to the closing high bid price of the Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). If the Common Stock is no longer listed on the Nasdaq National Market, "Market Price" will be equal to the closing bid price of the Common Stock, as reported by NASDAQ (assuming that the Common Stock is listed on the Nasdaq SmallCap Market or is included in the "pink sheets" or other inter-dealer quotation service or publication) or the closing price for the Common Stock (assuming that the Common Stock is listed on a national securities exchange). On March 27, 1997, the closing high bid price for the Common Stock was $3.00 per share. The terms of the Preferred Shares and Warrants include customary anti-dilution protections. At any time after September 20, 2000, the Company will have the right, in its sole and absolute discretion, to force the conversion into Common Stock of all outstanding Preferred Shares. 15 Dividend Policy The Company has never paid cash or other dividends and does not expect to pay any cash or other dividends in the foreseeable future with respect to its Common Stock. Any earnings which the Company may realize in the foreseeable future will be retained to finance the growth of the Company. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Company's Board of Directors. The New Credit Facility (as hereinafter defined) will restrict the Company's ability to pay dividends on its Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 6. 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. 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 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 expects its Solar*X 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 line, a premium sunglass line. The Company sought to emphasize sales of H2Optix and thereby reduce its dependence upon mass merchandisers. The Company experienced only limited sales of its H2Optix sunglasses in 1995 as it commenced its marketing efforts to establish H2Optix brand name recognition and broaden the distribution network for the H2Optix product line. In 1996, the Company experienced $1.2 million in H2Optix sales, representing approximately 9% of the Company's total sales. On February 13, 1997, the Company acquired the Serengeti assets. 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 line by including it within the Serengeti line, thereby tapping 16 into Serengeti's well-established distribution networks. The Company intends to continue the marketing of its non-premium sunglasses to the mass merchandise market. See "Business." 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. S Corporation Status and Pro Forma Adjustments From its inception until the closing of its initial public offering in August 1995 (the "Termination Date"), the Company had been treated for federal and certain state tax purposes as an S Corporation under the Internal Revenue Code of 1986, as amended, and comparable state tax laws As a result, the Company's earnings through the day preceding the Termination Date have been taxed, with certain exceptions, for federal and certain state income tax purposes directly to the Company's shareholders. After the closing of the offering, the Company made S Corporation distributions to its pre-Termination Date shareholders in the amount of $219,075. Such amount was determined on the basis of the Company's taxable income as reported on its federal income tax returns for the period from January 1, 1994 through the day before the Termination Date. See Note 10 to Notes to Consolidated Financial Statements. Since the Termination Date, the Company is no longer treated as an S Corporation and, accordingly, is fully taxable pursuant to federal and state income tax laws. The following discussion gives pro forma retroactive effect to the termination of the Company's S Corporation status as if the Company had been taxed as a C Corporation throughout the relevant periods discussed. Results of Operations Comparison of Years Ended December 31, 1995 and 1996 Net sales increased 30%, from approximately $10.5 million in 1995 to approximately $13.6 million in 1996, primarily as a result of increased sales of H2Optix and increased sales of the Company's non-premium products to a wide range of new customers. The Company in 1996 broadened the distribution network for its non-premium products and, as a result, in 1996, Wal-Mart accounted for approximately 53% of the Company's total sales, compared to approximately 92% in 1995. Gross profit increased as a percentage of sales, from 33% in 1995 to 36% in 1996, primarily as a result of product mix. 1995 and 1996 included approximately $2.0 million and approximately $1.0 million, respectively, in direct sales made in Hong Kong. The Company's selling prices for direct sales to Hong Kong are lower, as the customer receives the products without the necessity of processing in the Company's warehouse. Selling expenses increased by approximately $1.1 million, or 110%, from approximately $1.0 million in 1995 to approximately $2.1 million in 1996. This increase resulted primarily from increased costs associated with marketing and selling expenses related to the H2Optix product line during 1996. General and administrative expenses increased 43%, from approximately $1.2 million in 1995 to approximately $1.7 million in 1996 primarily as a result of an increase in executive and administrative salaries, office expenses, and costs incurred in connection with the development of the H2Optix line of 17 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. Pro Forma Financial Data The following unaudited pro forma financial data reflects the combination of the Company's and Corning's Serengeti Eyewear division statement of operations for the year ended December 31, 1996 and gives effect to the Acquisition (including related borrowings) as if it had been effected on January 1, 1996. The pro forma financial data does not purport to represent what the Company's results of operations would have been if such transaction had been effected at such date and does not purport to project results of operations of the Company in any future period. Year Ended December 31, 1996 Pro Forma (in thousands) Net sales $ 46,238 Cost of sales 26,177 -------- Gross profit 20,061 Operating expenses: Selling, general and administrative expenses(1) 17,486 -------- Income from operations 2,575 Other expense (income): Other income (189) Interest expense(2) 1,343 -------- Income before income taxes 1,421 Provision for income 554 -------- taxes(3) $ 867 ======== Net income - ---------- (1) Includes a reduction of $1,322,000 in Corning administrative and research costs allocated to the Serengeti division and $1,688,000 to adjust for the amortization of the purchased goodwill over a 20-year period, patents, patent rights and trademarks over a 5-year period and loan acquisition costs over a 5-year period. (2) Includes $950,000 to record interest expense on borrowings. (3) Reflects a reduction of $434,000 to record the aggregate tax effects of the combined entity. Liquidity and Capital Resources Prior to the Acquisition, 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 Sun Bank/Gulf Coast (the "Old Credit Facility"). As of December 31, 1996, the Company has 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 18 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"). 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 the 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 lest 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 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 first priority lien on all of the assets of the Company and its subsidiaries. The Company's liquidity improved from working capital of approximately $4.4 million at December 31, 1995 to working capital of approximately $9.7 million at December 31, 1996. This resulted primarily from increases of approximately $2.1 million in receivables resulting from the Company's increased sales volume in 1996, approximately $3.6 million of the net proceeds of the Series A Preferred placed in short term investments, and approximately $1.2 million in inventory related to additional anticipated increases in future sales volume, combined with an increase of approximately $2.0 million in accounts payable related principally to the increased inventory levels. The Company incurred approximately $376,000 in capital expenditures during 1996 primarily relating to the expansion of its facility and the acquisition of furniture, fixtures and transportation equipment. The Company anticipates that it will incur additional capital expenditures of approximately $200,000 related to the expansion of its warehouse facility as a result of the Acquisition. 19 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, 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. 20 Item 7. Financial Statements. Index to Consolidated Financial Statements Page ---- Independent Auditor's Reports 22 Consolidated Balance Sheet as of December 31, 1996 24 Consolidated Statements of Operations for the Years Ended December 31, 1995 and 1996 26 Consolidated Statement of Stockholders' Equity for the Two Years Ended December 31, 1996 27 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 28 Notes to Consolidated Financial Statements 30 21 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) We have audited the consolidated balance sheet of Serengeti Eyewear, Inc. as of December 31, 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Serengeti Eyewear, Inc. as of December 31, 1995 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Winter, Scheifley & Associates, P.C. Certified Public Accountants Englewood, Colorado February 26, 1996 22 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) We have audited the consolidated balance sheet of Serengeti Eyewear, Inc. as of December 31, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Serengeti Eyewear, Inc. as of December 31, 1995 were audited by other auditors whose report dated February 26, 1996 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Serengeti Eyewear, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Bartnick, P.A. Certified Public Accountants Boca Raton, Florida February 14, 1997 (Except for Note 14 as to which the date is April 9, 1997) 23 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Balance Sheet December 31, 1996 ASSETS Current Assets: Cash $ 632,727 Trading securities (Note 2) 4,976,625 Accounts receivable - less allowance for doubtful accounts and discounts of $123,516 (Notes 5, 9 and 13) 6,034,592 Other receivables 100,192 Inventories (Notes 5 and 13) 4,008,381 Prepaid expenses (Note 3) 718,808 ----------- Total current assets 16,471,325 Fixed assets - net of accumulated depreciation (Note 4) 578,532 Other assets: Investment in acquisition (Notes 8 and 13) 1,500,000 Deferred acquisition costs (Note 13) 591,031 Prepaid expenses - non-current (Note 3) 83,554 Accounts receivable - stockholders 45,215 Patents and trademarks - net 69,059 Other assets 15,871 ----------- Total Assets $19,354,587 =========== See accompanying notes to financial statements. 24 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Balance Sheet December 31, 1996 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable - bank (Note 5) $ 1,500,000 Note payable - stockholder (Note 6) 173,921 Current portion of long-term debt (Note 7) 38,403 Accounts payable - stockholders and related parties (Note 6) 79,856 Income taxes payable (Note 10) 232,930 Accounts payable 4,115,309 Accrued expenses 680,177 ----------- Total current liabilities 6,820,596 ----------- Long-term debt (Note 7) 105,886 ----------- Commitments and contingencies (Note 9) Stockholders' equity (Note 8) Preferred stock, $.001 par value, 1,000,000 shares authorized 7,500 shares issued and outstanding 6,975,000 Common stock, $.001 par value, 10,000,000 shares authorized, 2,384,000 shares issued and outstanding 2,384 Additional paid in capital 4,279,276 Retained earnings 1,171,445 ----------- Total stockholders' equity 12,428,105 ----------- Total Liabilities and Stockholders' Equity $19,354,587 =========== See accompanying notes to financial statements. 25 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statements of Operations For The Years Ended December 31, 1995 and 1996 1995 1996 ------------ ------------ Net sales $ 10,472,656 $ 13,584,255 Cost of goods sold 7,053,970 8,704,447 ------------ ------------ Gross profit 3,418,686 4,879,808 ------------ ------------ Operating expenses: Selling expenses 1,011,266 2,125,757 General and administrative, expenses 1,218,588 1,749,394 ------------ ------------ Total operating expenses 2,229,854 3,875,151 ------------ ------------ Income from operations 1,188,832 1,004,657 ------------ ------------ Other expenses (income): Other income (71,082) (189,632) Interest 302,587 393,112 ------------ ------------ 231,505 203,480 ------------ ------------ Income before income taxes 957,327 801,177 Provision for income taxes Current (Note 10) (342,000) (232,930) ------------ ------------ Net income $ 615,327 $ 568,247 ============ ============ Per share information: Net income per share: Primary $ .37 $ .21 ============ ============ Fully diluted $ .37 $ .18 ============ ============ See accompanying notes to financial statements. 26 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statement of Stockholders' Equity For the Two Years Ended December 31, 1996
Common Stock Preferred Stock Paid in Retained Shares Amount Shares Amount Capital Earnings ------------------------ ------------------------- ------------------------- Balance January 1, 1995 1,280,000 $ 1,280 -- $ -- $ 1,695,375 $(1,074,140) Common shares issued for cash pursuant to a public offering 1,104,000 1,104 -- -- 5,518,896 -- Costs associated with public offering -- -- -- -- (1,654,869) -- Sale of warrants -- -- -- -- 960 -- S-Corporation distribution -- -- -- -- (219,075) -- Reclassification of S-corporation losses -- -- -- -- (1,062,011) 1,062,011 Net income for the year -- -- -- -- -- 615,327 ----------- ----------- ----------- ----------- ----------- ----------- Balance December 31, 1995 2,384,000 2,384 -- -- 4,279,276 603,198 Preferred shares issued For cash pursuant to a Regulation S offering -- -- 7,500 7,500,000 -- -- Costs associated with Regulation S offering -- -- -- (525,000) -- -- Net income for the year -- -- -- -- -- 568,247 ----------- ----------- ----------- ----------- ----------- ----------- Balance December 31, 1996 2,384,000 $ 2,384 7,500 $ 6,975,000 $ 4,279,276 $ 1,171,445 =========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements. 27 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statements of Cash Flows For The Years Ended December 31, 1995 and 1996 1995 1996 ------------ ------------ Cash flows from operating activities: Net income $ 615,327 $ 568,247 ------------ ------------ Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 79,712 126,285 Changes in assets and liabilities: (Increase) in accounts receivable (2,049,428) (2,074,115) (Increase) in inventory (827,682) (1,222,268) (Increase) in trading securities (1,062,147) (3,629,600) (Increase) in prepaid expenses (517,929) (29,046) Decrease (increase) in other assets 7,121 (3,616) Increase in accounts payable 68,793 1,978,040 Increase in accrued expenses 14,369 233,110 Increase (decrease) in accrued income taxes 342,000 (109,070) ------------ ------------ Total adjustments (3,945,191) (4,730,280) ------------ ------------ Net cash (used in) operating activities (3,329,864) (4,162,033) ------------ ------------ Cash flows from investing activities: Investment in acquisition -- (1,500,000) Purchase of marketable securities (284,878) -- Decrease in certificate of deposit 500,000 -- Acquisitions of patents and trademarks (22,556) (12,462) Purchase of fixed assets (133,156) (262,501) ------------ ------------ Net cash provided by (used in) investing activities 59,410 (1,774,963) ------------ ------------ Cash flows from financing activities: Offering/acquisition costs 124,818 (591,031) Net proceeds from stock sales 3,866,091 6,975,000 S corporation distribution (122,500) (96,575) Gross proceeds from notes payable - banks 500,676 -- Principal payments on notes payable - banks (7,114) -- Principal payments on notes payable - other (225,000) (17,862) Principal payments on notes payable and accounts payable related parties (405,562) (179,065) ------------ ------------ Net cash provided by financing activities 3,731,409 6,090,467 ------------ ------------ Net increase in cash 460,955 153,471 Beginning - cash balance 18,301 479,256 ------------ ------------ Ending - cash balance $ 479,256 $ 632,727 ============ ============ See accompanying notes to financial statements. 28 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statements of Cash Flows For The Years Ended December 31, 1995 and 1996 (Continued) Supplemental cash flow information: Cash paid for : Interest $ 282,010 $ 388,578 Income taxes $ - $ 238,972 Non-cash investing and financing activities: Acquisition of fixed assets with note $ 55,996 $ 113,269 Accrual of S corporation distribution $ 96,575 $ - Commission paid with warrants $ - $ 462,000 See accompanying notes to financial statements. 29 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 1 - Accounting policies Organization Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc. See Note 13) is a distributor of sunglasses incorporated under the laws of the State of New York. The Company maintains its office and warehouse operations in Sarasota, Florida. Suppliers for the Company are primarily located in Asia. The Company's customers operate retail stores located principally throughout the United States. A major customer (Wal-Mart Stores, Inc.) accounts for approximately 92% and 53% of the Company's sales during 1995 and 1996 (See Note 9). Consolidation policy 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, are valued at the lower of cost or market on a first in - first out basis. Fixed assets Fixed assets are stated at cost, less accumulated depreciation. Depreciation is calculated under the straight line method, which depreciation is calculated in accordance with generally accepted accounting principles over the expected useful lives of the assets of five to seven years. Cash For purposes of the statement of cash flows the Company considers all highly liquid debt instruments purchased with a maturity of 3 months or less to be cash equivalents. At December 31, 1996 the Company maintained $511,015 on deposit at one bank which exceeded the $100,000 deposit insurance limit by $411,015 and also maintained investments at this bank in the amount of $4,976,625. Revenue recognition The Company generally recognizes revenue upon shipment of goods to its customers. Patents and trademarks Patents and trademarks are amortized using the straight line method over a period of ten years and are stated net of accumulated amortization of $13,209 and $20,882 at December 31, 1995 and 1996. 30 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Estimates The preparation of the Company's financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Advertising costs Advertising costs are charged to operations when the advertising first takes place. Advertising costs charged to operations were $123,140 and $658,461 in 1995 and 1996. Stock based compensation The Company adopted Statement of Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock Based Compensation beginning in 1996. Upon adoption of FAS 123, the Company continued to measure compensation expense for its stock based compensation using the intrinsic value method prescribed by APB No. 25, Accounting for Stock issued to Employees, and has provided in Note 15 proforma disclosures of the effect on net income and earnings per share as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense. Fair value of financial instruments The Company's short-term financial instruments consist of cash and cash equivalents, accounts and loans receivable, and payables and accruals. The carrying amounts of these financial instruments approximates fair value because of their short-term maturities. Recent pronouncement In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities was issued. FAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The Company will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a material effect on the Company's consolidated financial position or operating results. Reclassifications Certain amounts in the 1995 financial statements have been reclassified to conform to the 1996 presentation. 31 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 2 - Marketable securities The Company's securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value as a current asset with the change in fair value during the period included in earnings. At December 31, 1996 the Company held an uninsured investment in commercial paper with a cost and fair market value of $4,976,625. The Company had no sales proceeds from trading securities during the years ended December 31, 1995 and 1996. Note 3 - Prepaid expenses Sunglass displays: It is the Company's policy to amortize displays shipped to customers over the two year period of the distribution program. At December 31, 1996 unamortized costs related to these displays was $624,749 of which $541,195 is classified as a current asset. Amortization charged to cost of sales was $169,319 and $396,456 during 1995 and 1996. Other prepaid expenses were $177,613 at December 31, 1996. Note 4 - Fixed assets Fixed assets consist of the following at December 31, 1996: Furniture and equipment $ 406,483 Leasehold improvements 201,842 Transportation equipment 284,135 --------- 892,460 Less: accumulated depreciation 313,928 --------- $ 578,532 ========= Depreciation expense was $72,740 and $118,612 for the years ended December 31, 1995 and 1996. Note 5 - 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 is secured by substantially all of the Company's assets. The Company is entitled to advances of up to 70% of its accounts receivable less than 61 days old and 25% of its inventory cost. The line has an interest rate of prime plus 1.5% (9.75% at December 31, 1996). The balance of $1,500,000 at December 31, 1996 was repaid on February 13, 1997 (see Note 13). 32 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 6 - Notes and accounts payable - related parties The Company at January 1, 1994, had an unsecured 9% interest-bearing note payable to a stockholder due on April 30, 1995, in the amount of $880,522. During December, 1994 $510,000 of this note was converted to equity with the balance of $370,522 converted into a term note with interest at 9% per annum payable interest only of $2,779 per month for 12 months and principal and interest of $16,927 for 24 months thereafter. The balance of $173,921 at December 31, 1996 is due and payable during 1997. The Company borrowed $285,000 from a shareholder during November, 1993, for working capital purposes. During 1994 $157,180 was repaid, during 1995 $30,499 was repaid and during 1996 $17,465 was repaid. This advance, aggregating $79,856 is due on demand and is included in Accounts payable - stockholders and related parties at December 31, 1996. During December, 1994, the Company borrowed $343,952 from a shareholder for working capital. This advance was repaid in full with interest of $20,414 on February 3, 1995. Approximate interest expense related to loans from related parties aggregated $54,000 and $29,000 in 1995 and 1996. Note 7 - Long-term debt Long-term debt consists of the following at December 31, 1996: Note payable due in monthly installments of $1,373 including interest at 8.3% per annum, due in May, 1999 (secured by transportation equipment) $ 35,975 Note payable due in monthly installments of $1,168 including interest at 7.2% per annum, due in Nov., 2000 (secured by transportation equipment) 47,690 Note payable due in monthly installments of $479 including interest at 4.9% per annum, due in Aug., 2000 (secured by transportation equipment) 19,268 Note payable due in monthly installments of $510 including interest at 9.3% per annum, due in June, 2001 (secured by transportation equipment) 22,445 Note payable due in monthly installments of $488 including interest at 9.0% per annum, due in Oct., 2000 (secured by transportation equipment) 18,911 -------- 144,289 Less current portion 38,403 -------- $105,886 ======== Maturity of long-term debt is as follows: 1997: $38,403 1998:$41,490 1999:$35,013 2000:$26,405 2001:$2,978 33 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 8 - 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. The following is a summary of transactions: Weighted Shares Under Option Average ------------------- Exercise 1995 1996 Price ------ ------- -------- Outstanding, beginning of year - 10,000 $ 4.19 Granted/vested during the year 10,000 691,262 $ 7.93 Cancelled during the year - - Exercised during the year - - ------ ------- Outstanding, end of year (prices from $4.19 to $9.15 per share) 10,000 701,262 $ 7.88 ====== ======= Exercisable, end of year (prices from $4.19 to $9.15 per share) 10,000 701,262 $ 7.88 ====== ======= An additional 223,738 options have been granted to employees and affiliates which are not vested or exercisable as of December 31, 1996. 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. 34 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 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 13 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 December 31, 1996 dividends aggregating 118 shares of preferred stock 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. The Company valued these warrants at $462,000 which represents the difference between the exercise price of the warrants and the bid price of the common stock on the date of issue. 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. 35 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 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 9 - Commitments and contingencies Operating Leases The Company leases its warehouse and office facilities pursuant to a lease expiring March 1998, with an option to renew for an additional two years. This lease provides for various escalations based on cost of living, real estate taxes, etc. In addition, the Company leases certain transportation equipment pursuant to leases classified as operating leases. Total monthly lease payments aggregate approximately $12,900. Rent expense was $88,922 and $108,775 for 1995 and 1996. Future minimum rentals are as follows: 1997: $147,436 1998: $32,241 1999 $3,495 Concentration of credit risk/major customer During the years ended December 31, 1995 and 1996, the Company made net sales to the Customer described in Note 1 of approximately $9,607,000 and $7,206,000 or 92% and 53% of its total sales. In addition, during 1996 the Company made net sales to a Canadian distributor aggregating $2,810,000 or 21% of total sales. Approximately $1,992,000 (33%) and $2,322,825 (38%) of the gross accounts receivable are due from the significant customer described in Note 1 and the Canadian distributor, respectively, at December 31, 1996 and are unsecured. Employment agreements The Company entered into three year employment agreements with its president and a vice president effective on August 11, 1995. The president's agreement provides for an annual salary of $150,000 and the vice president's agreement provides for a salary of $125,000. The agreements provide for annual increases of 4% and certain incentive compensation as declared by the Board of Directors. The Board did not effect this incentive compensation for 1995 or 1996. 36 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 The agreements may be terminated as of the end of the first and second years by giving 90 days notice to the other party. The employment agreements also contain non-compete covenants which expire one year after termination of employment. Note 10 - Income taxes Prior to the completion of its public offering the Company had elected to be treated as an "S" Corporation under the provisions of the Internal Revenue Code and state statutes. Under these provisions no income taxes are incurred on a corporate level. Instead, shareholders of the Company include their pro-rata share of income or loss on their individual income tax returns. During August, 1995 the Company completed a public offering of its common stock and the "S" Corporation status was thereby terminated and the Company became subject to corporate income taxes. Effective September 1, 1995 the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Of the income for the year ended December 31, 1995 $12,129 was allocated to the shareholders and $945,198 was subject to corporate income taxes. The accumulated deficit through the termination of the "S" election of $1,062,011 has been reclassified to paid in capital. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The amounts shown for income taxes in the statements of operations differ from amounts that would be derived from computing income taxes at federal statutory rates. The following is a reconciliation of those differences. 1995 1996 ---- ---- Tax at federal statutory rate 34 % 34 % Foreign tax benefit (6)% (8)% Other 3 % - State income tax net of federal tax benefit 5 % 3 % ---------- ---------- 36 % 29 % ========== ========== Income taxes consisted of $294,300 of domestic and $47,700 of foreign income taxes in 1995 and $188,595 of domestic and $44,335 of foreign income taxes in 1996. After the closing of its public offering the Company had agreed to make a distribution to its existing shareholders in an amount not to exceed $300,000. The total amount of the distribution was $219,075. 37 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 11 - Foreign operations During 1995 and 1996 the Company operated in 2 geographic areas: The United States and Hong Kong. Following is a summary of information by area: 1995 1996 ------------ ------------ Net sales to unaffiliated customers: United States $ 8,417,838 $ 12,634,908 Hong Kong 2,054,818 949,347 ------------ ------------ $ 10,472,656 $ 13,584,255 ============ ============ Income from operations: United States $ 918,280 734,899 Hong Kong 270,552 269,758 ------------ ------------ 1,188,832 1,004,657 Other income 71,082 189,632 Other expenses (302,587) (393,112) ------------ ------------ Income before income taxes $ 957,327 $ 801,177 ============ ============ Identifiable assets: United States $ 9,642,347 $ 18,762,738 Hong Kong 247,146 591,849 ------------ ------------ $ 9,889,493 $ 19,354,587 ============ ============ Income before income taxes represents net sales, less operating expenses for each geographic area and other income and expenses of a general corporate nature. Identifiable assets are those that are identifiable with operations in each geographic area. All sales made by the foreign subsidiary were made to the significant customer described in note 1 in 1995 and approximately 87% of the sales made by the foreign subsidiary were made to the significant customer described in note 1 in 1996. Note 12 - Earnings per share Primary earnings per share amounts are computed based upon the weighted average number of shares actually outstanding plus the shares that would be outstanding assuming exercise of dilutive stock options. The number of shares that would be issued from the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's common stock. The number of shares used in the computations were 1,682,000 in 1995 and 2,770,143 in 1996. The fully diluted earnings per share amount in 1996 is based on an increased number of shares that would be outstanding assuming conversion of the convertible preferred stock. The number of shares used in the computation was 3,111,052. 38 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 Note 13 - Subsequent events 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 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 (see Note 8) and the borrowings under the credit facility described below. At December 31, 1996 the Company carried a deposit of $1,500,000 on its books for the down payment and $591,031 of deferred acquisition costs related to this acquisition. Concurrently with the closing of the above acquisition, 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 in Note 5. The Company is able to borrow up to 85% of eligible accounts receivable under 91 days old 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. 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 prices ranging from $5.00 to $7.50 per share through August, 1999 based on sales and profit targets set by the Company. Note 14 - Subsequent events During April 1997, the option price of the 701,262 options described in Note 8 and the 485,000 options described above was reduced to $3.00 per share. 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 39 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements December 31, 1996 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 meritless. The Company intends vigorously to defend the action and is presently considering counterclaims. Note 15 - Stock based compensation The weighted average fair value at date of grant for options granted during 1996 was $7.90 per option. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: Expected Life 3 years Risk free interest rate 5.25% Expected volatility 22.00% Dividend yield 0.00% Stock based compensation costs would have increased 1996 pre-tax income by $11,911 and $7,861 after tax if the fair value based method prescribed by FAS 123 had been applied in measuring compensation expense. The following is a summary of the status of fixed options outstanding at December 31, 1996: Weighted Average Weighted Remaining Average Exercise Number of Contractual Exercise Price Range Options Life Price ------------- --------- ----------- --------- $4.19 - $5.20 89232 2.7 years $4.74 $8.32 - $9.15 612030 2.8 years $8.34 40 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On February 11, 1997, Winter, Scheifley & Associates, P.C. declined to stand for re-election as the Company's independent auditors, and on the same date the Company appointed Bartnick, P.A. as its new independent auditors commencing with the audit of the Company's consolidated financial statements for the year ended December 31, 1996. The Company's financial statements for the past two fiscal years and any interim period through February 11, 1997 did not contain an adverse opinion or disclaimer of opinion, nor were they modified as to uncertainty, audit scope or accounting principles. The decision to change auditors was approved by the Company's Board of Directors at a meeting duly held on February 6, 1997. There were no disagreements with such former auditors on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure during the past two fiscal years or any interim period through February 11, 1997. The Company did not consult with its new independent auditors regarding any matters relating to periods prior to their engagement. The Company has received from its former auditors a letter addressed to the Securities and Exchange Commission stating their agreement with the foregoing statements by the Company. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. Information called for by Item 9 is set forth under the headings "Election of Directors" and "Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement"), which is incorporated herein by this reference. Item 10. Executive Compensation. Information called for by Item 10 is set forth under the heading "Executive Compensation" in the 1997 Proxy Statement, which is incorporated herein by this reference. Item 11. Security Ownership of Certain Beneficial Owners and Management. Information called for by Item 11 is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement, which is incorporated herein by this reference. 41 Item 12. Certain Relationships and Related Transactions. Information called for by Item 11 is set forth under the heading "Certain Transactions" in the 1997 Proxy Statement, which is incorporated herein by this reference. Item 13. Exhibits, Lists and Reports on Form 8-K. (a) Exhibits. Exhibit Number Exhibit Description - ------- ------------------- 3(i).1 Restated Certificate of Incorporation of the Company* 3(i).2 Certificate of Amendment of the Certificate of Incorporation of the Company relating to the designation of the Preferred Shares 3(ii).1 Amended and Restated By-laws of the Company ("By-laws")* 3(ii).2 Amendment No. 1 to By-laws* 10.1 Agreement dated December 30, 1994 between the Company and Joseph Feldman* 10.2 Agreement dated January 17, 1994 between the Company and Michael J. Guccione, Inc.* 10.3 Agreement dated December 7, 1994 between the Company and Michael J. Guccione* 10.4 Revolving Line of Credit and Term Loan Agreement dated as of February 13, 1997 by and among the Company, SunTrust Bank, Central Florida, National Association, individually and as agent, and Creditanstalt-Bankverein (Exhibits omitted; the Company agrees to furnish supplementally a copy of any exhibits to the Commission upon request)** 10.5 Lease Agreement dated March 3, 1993 between DRI II Partnership and the Company* 10.6 1995 Stock Option Plan of the Company* 10.7 Employment Agreement between the Company and Stephen Nevitt* 10.8 Employment Agreement between the Company and Michael Guccione* 10.9 Form of Consulting Agreement between the Company and Argent Securities, Inc.* 10.10 Agreement of Purchase and Sale, dated as of October 29, 1996, between the Company and Corning*** 10.11 Subscription Agreement, dated September 26, 1996, between the Company and RBB*** 10.12 Lens Blank Supply Agreement, dated as of February 13, 1997, between the Company and Corning (confidential treatment has been requested with respect to certain information contained in this Agreement) 10.13 License Agreement, dated as of February 13, 1997, between the Company and Corning 16 Letter on change in certifying accountant** 21 Subsidiaries of the Company**** 27 Financial Data Schedule - ---------- * Filed as an Exhibit to the Company's Registration Statement on Form SB-2, Registration No. 33-89752-A, under the Securities Act of 1933 and incorporated herein by reference. ** Filed as an Exhibit to the Company's Current Report on Form 8-K, dated February 11, 1997. *** Filed as an Exhibit to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996. **** Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. 42 (b) The Company filed the following report on Form 8-K during the fourth quarter of the year ended December 31, 1996: Current Report on Form 8-K dated October 4, 1996 reporting the Preferred Shares financing. 43 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERENGETI EYEWEAR, INC. Date: April 11, 1997 By /s/ Stephen Nevitt ------------------------ Stephen Nevitt President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Stephen Nevitt - -------------------------- Stephen Nevitt President, Treasurer and Director April 11, 1997 (principal executive officer) /s/ Milton Nevitt - -------------------------- Milton Nevitt Vice President, Secretary April 11, 1997 and Director /s/ Michael J. Guccione - -------------------------- Michael J. Guccione Vice President and April 11, 1997 Director /s/ Neil Winter - -------------------------- Neil Winter Chief Financial Officer April 11, 1997 (principal financial and accounting officer) /s/ David B. Newman - -------------------------- David B. Newman Director April 11, 1997 /s/ William Keener - -------------------------- William Keener Director April 11, 1997 44 EX-3.(I)(2) 2 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF SOLAR-MATES, INC. Under Section 805 of the Business Corporation Law We, the undersigned, being the President and Secretary of SOLAR-MATES, INC., do hereby certify and set forth: 1. The name of the corporation (the "Corporation") is "SOLARMATES, INC." The name under which the Corporation was formed is "Nevitt Sales Corp." On December 30, 1994, the Corporation changed its name to its present name. 2. The Certificate of Incorporation of the Corporation was filed in the Office of the Department of State on September 8, 1976. 3. The Certificate of Incorporation of the Corporation is hereby amended, pursuant to Section 801(b)(12) of the Business Corporation Law, to create three classes of preferred shares, one consisting of 15,000 shares, designated as Series A 6.5% Convertible Preferred Stock, $.001 par value, one consisting of 15,000 shares, designated as Series B 6% Convertible Preferred Stock, $.001 par value, and one consisting of 15,000 shares, designated as Series C 6% Convertible Preferred Stock, $.001 par value, and to provide for the relative voting, dividend, liquidation and other rights, preferences and limitations of each such class. 4. To accomplish the foregoing, a new Paragraph C is added to Article FOURTH of the Certificate of Incorporation of the Corporation which shall read as follows: "C. Creation of Preferred Stock. I. Designation and Amount The designation of the series of preferred stock fixed by this paragraph C shall be (i) "Series A 6.5% Convertible Preferred Stock" (the "Series A Preferred Stock"), (ii) "Series B 6% Convertible Preferred Stock" (the "Series B Preferred Stock") and (iii) "Series C 6% Convertible Preferred Stock" (the "Series C Preferred Stock"; together with the Series A Preferred Stock and the Series C Preferred Stock, the "Preferred Stock"). Each such series of Preferred Stock shall have a stated value of $1,000 per share (the "Stated Value"). The number of shares constituting each such series shall be 15,000, subject to reduction by vote of the Board of Directors as to any shares of Preferred Stock which are not issued or are reacquired. II. Rank Each series of Preferred Stock shall rank (i) prior to the Corporation's Common Stock, $.001 par value ("Common Stock"); (ii) pari passu with the other series of Preferred Stock and any other class or series of preferred stock of the Corporation; and (iii) unless the holders of Preferred Stock shall otherwise consent pursuant to Article V.B, prior to any other class or series of the Corporation's capital stock, both as to payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. III. Transfer Restrictions The persons to whom Preferred Stock are initially issued by the Corporation shall be hereafter referred to as "Holders." The Preferred Stock shall not be transferable by the Holders thereof other than to an affiliate of such Holder, as the term affiliate is defined under Rule 144 of the Securities Act of 1933, as amended, and then only in accordance with applicable laws, including but not limited to, applicable securities laws. Hereafter, the term "Holder" shall be deemed to include the initial Holder and any such affiliated acquiror. IV. Dividends and Distributions A. There shall be (i) a 6.5%, per annum, cumulative cash dividend payable on the Series A Preferred Stock, (ii) a 6%, per annum, cumulative cash dividend payable on the Series B Preferred Stock and (iii) a 6%, per annum, cumulative cash dividend payable on the Series C Preferred Stock (collectively, the "Cash Dividends"). The Cash Dividends shall be payable annually, in arrears. For purposes of calculation of the Cash Dividends, each series of Preferred Stock shall be valued at the Stated Value. The Cash Dividends shall be sometimes hereafter referred to as the "Dividends." The Dividends applicable to an issued and outstanding share of Preferred Stock will accrue beginning upon issuance, and will be payable annually as of December 31 in each calendar year, in arrears (the "Dividend Payment Date"). 2 B. When a Holder elects to convert any share(s) of Preferred Stock, as hereinafter provided, the Holder of the Preferred Stock so converted shall be entitled to receive, on the Dividend Payment Date next succeeding the Conversion Date, as defined herein, in respect of each share of Preferred Stock so converted, a partial Dividend based upon the portion of the year the Preferred Stock was held beginning with the first day following the Dividend Payment Date immediately preceding such conversion and ending with the Conversion Date. C. The Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. D. Notwithstanding the provisions of this Article IV above, the Corporation may, in its sole discretion, but is not obligated to, pay any or all Dividends in Preferred Stock of the same series rather than in cash. The Corporation shall pay such dividend by issuing to such shares of Preferred Stock of the same series that have an aggregate Stated Value equal to the amount of the Cash Dividends otherwise payable to such holder on the applicable Dividend Payment Date. V. Voting Rights A. Other than pursuant to paragraph B below and other than as required by law, the shares of Preferred Stock shall not carry with them the right to vote on any matter relating to the business or affairs of the Corporation as to which shareholders generally have the right to vote under the Business Corporation Law, or to receive notice of or to be represented at any meeting of shareholders of the Corporation called for such purpose. B. The affirmative vote of the holders of at least a majority of the outstanding shares of Preferred Stock, voting together as a separate single class, shall be necessary to (i) authorize, adopt or approve an amendment to the Certificate of Incorporation of the Corporation that would alter or change the powers, preferences or special rights of the shares of Preferred Stock so as to affect such shares of Preferred Stock materially and adversely and (ii) issue any capital stock senior to the Preferred Stock (either as to dividends or upon liquidation). With respect to any such vote, each such holder shall have the right to cast such number of votes as may be cast by the holder of the number of shares of Common Stock into which such Preferred Stock is convertible on the record date for such vote. VI. Liquidation, Dissolution or Winding Up A. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary 3 (any such event being hereinafter referred to as a "Liquidation") occurring while any share of Preferred Stock is outstanding, the holders of the Preferred Stock shall be entitled to be paid out of the assets of the Corporation, in cash, an amount per share equal to the Stated Value (such amounts hereinafter called the "Liquidation Preference") before any distribution of assets shall be made to the holders of the Common Stock or any other stock ranking junior to the Preferred Stock. The Liquidation Preference shall be subject to equitable adjustment if there shall occur a stock split, combination, reclassification or other similar event involving the Preferred Stock. After the payment of the full amount of the Liquidation Preference, the Holders shall not be entitled to participate in any distribution of assets by the Corporation. If, upon a Liquidation, the assets of the Corporation available for distribution among the Holders and holders of any other series of preferred stock then outstanding which is in parity with the Preferred Stock shall be insufficient to permit payment to the Holders of the aggregate amount which they are entitled to be paid, then the assets of the Corporation available for distribution to the Holders and the holders of any other series of preferred stock then outstanding which is in parity with the Preferred Stock as to Liquidation shall be distributed ratably among the Holders and the holders of such other series based upon the proportion the total amount distributable on each share upon Liquidation bears to the aggregate amount available for distribution on all shares of Preferred Stock and of such other series of preferred stock, if any. B. Neither the consolidation nor merger of the Corporation with or into any other corporation, or any other business combination of the Corporation or the sale or lease of all or substantially all of the assets of the Corporation for cash, property or securities shall be deemed a Liquidation of the Corporation for purposes of this Article VI. VII. Conversion of Preferred Stock A. A holder of shares of Series A Preferred Stock may, at any time after the approval by the Corporation's shareholders of the issuance of the shares of Common Stock into which such shares of Series A Preferred Stock is convertible, by means of a majority of the total votes cast in person or by proxy at a meeting of the Corporation's shareholders held for such purpose, convert all Series A Preferred Stock held by such holder into fully paid and non-assessable shares of Common Stock as follows. Each share of Series A Preferred Stock shall be convertible into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value by a conversion rate equal to the lower of (i) $5.50 and (ii) 80% of the average Market Price, as defined below, for the 10 consecutive trading days ending three 4 days prior to the giving by such holder to the Corporation of a notice of conversion. B. A holder of shares of Series B Preferred Stock may, at any time after the later to occur of (i) January 1, 1997 and (ii) the approval by the Corporation's shareholders of the issuance of the shares of Common Stock into which such shares of Series B Preferred Stock is convertible, by means of a majority of the total votes cast in person or by proxy at a meeting of the Corporation's shareholders held for such purpose, convert all Series B Preferred Stock held by such holder into fully paid and non-assessable shares of Common Stock as follows. Each share of Series B Preferred Stock shall be convertible into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value by a conversion rate equal to the lower of (i) $6.75 and (ii) 80% of the average Market Price, as defined below, for the 10 consecutive trading days ending three days prior to the giving by such holder to the Corporation of a notice of conversion. C. A holder of shares of Series C Preferred Stock may, at any time after the later to occur of (i) July 1, 1997 and (ii) the approval by the Corporation's shareholders of the issuance of the shares of Common Stock into which such shares of Series C Preferred Stock is convertible, by means of a majority of the total votes cast in person or by proxy at a meeting of the Corporation's shareholders held for such purpose, convert all Series C Preferred Stock held by such holder into fully paid and non-assessable shares of Common Stock as follows. Each share of Series C Preferred Stock shall be convertible into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value by a conversion rate equal to the lower of (i) $8.25 and (ii) 80% of the average Market Price, as defined below, for the 10 consecutive trading days ending three days prior to the giving by such holder to the Corporation of a notice of conversion. "Market Price" shall be deemed to have the following meaning for the purposes hereof. As long as the Common Stock is listed on The Nasdaq National Market, the "Market Price" shall be equal to the closing high bid price of the Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). If the Common Stock is no longer listed on The Nasdaq National Market, the "Market Price" shall be equal to the closing bid price of the Common Stock, as reported by NASDAQ (assuming that the Common Stock is listed on the Nasdaq SmallCap Market or is included in the "pink sheets" or other inter-dealer quotation service or publication) or the closing price for the Common Stock (assuming that the Common Stock is listed on a national securities exchange). At any time after September 30, 2000, the Corporation shall have the right, in its sole and absolute discretion, to force 5 the conversion of all issued and outstanding shares of Preferred Stock. Upon a conversion hereunder, the Holder shall surrender to the Corporation the certificate or certificates therefor, duly endorsed to the Corporation or in blank. Within two business days after the effective date of such conversion, the Corporation will issue and deliver to the Holder certificates for the number of shares of Common Stock issuable upon a conversion hereunder. Shares of Preferred Stock shall be deemed to have been converted on the date of surrender of the certificate or certificates as above provided, and the Holder thereof shall be entitled to receive the certificate(s) representing the shares of Common Stock issuable upon such conversion and the beneficial holders of such shares shall be treated for all purposes as the record holder of such shares of Common Stock on such date (the "Conversion Date"). Notwithstanding the failure of a Holder to remit a certificate upon a forced conversion hereunder, such forced conversion shall be deemed to have occurred as of the date specified by the Corporation. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the conversion of the Preferred Stock. If any fractional share is called for upon any conversion of Preferred Stock, the Corporation shall purchase such fractional interest for an amount equal to the dollar value of such fractional interest. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Preferred Stock as herein provided, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all of the shares of Preferred Stock at the time outstanding. The Corporation shall from time to time, subject to and in accordance with the laws of New York, use its best efforts to increase the authorized amount of Common Shares if at any time the number of authorized shares of Common Stock remaining unissued shall not be sufficient to permit the conversion at such time of all then outstanding shares of Preferred Stock. The issuance of certificates for shares of Common Stock upon the conversion of Preferred Stock shall be made without charge to the Corporation for any tax in respect of such issuance. The Corporation shall not be required to pay any other tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in any name other than that of the Holder of such shares of Preferred Stock converted, and the Corporation shall not be required to issue or deliver any such shares unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the 6 Corporation that such tax has been paid. Notwithstanding the foregoing, the Corporation may require an opinion of counsel satisfactory to the Corporation that the issuance of shares of Common Stock in the name of any person other than the Holder of the Preferred Stock whose shares are being converted may be made without registration under applicable federal and state securities laws. If such an opinion is not thereafter promptly presented to the Corporation, such shares shall be issued only in the name of the beneficial holder whose shares were surrendered for conversion. VIII. Adjustments to Conversion Rate A. In case the Corporation shall issue Common Stock as a dividend upon Common Stock or in payment of a dividend thereon, shall subdivide the number of outstanding shares of its Common Stock into a greater number of shares or shall contract the number of outstanding shares of its Common Stock into a lesser number of shares, the conversion rate (the "Conversion Rate") then in effect with respect to the Preferred Stock under Article VII hereof shall be adjusted, effective at the close of business on the record date for the determination of shareholders entitled to receive the same, to the rate determined by taking the product obtained by multiplying (i) the Conversion Rate in effect immediately prior to the close of business on such record date by (ii) the number of shares of Common Stock outstanding immediately prior to such dividend, subdivision, or contraction, and dividing it by (iii) the number of shares of Common Stock outstanding immediately after such dividend, subdivision or contraction. B. If any capital reorganization or reclassification of the Common Stock (excluding any transaction to which paragraph C below applies), or consolidation, or merger of the Corporation with or into another corporation, or the sale or conveyance of all or substantially all of its assets to another corporation shall be effected, then, as a condition of such reorganization or sale, lawful and adequate provision shall be made, whereby the holders of Preferred Stock shall thereafter have the right to receive, in lieu of the shares of Common Stock of the Corporation immediately theretofore receivable with respect to such shares of Preferred Stock, upon the exercise of their conversion rights, such shares of stock, securities or assets as would have been issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock immediately theretofore receivable with respect to such shares of Preferred Stock, upon the exercise of such rights, had such reorganization, reclassification, consolidation, merger or sale not taken place. In any such case, appropriate provision shall be made with respect to the rights and interests of the holders of Preferred Stock to the end that such conversion rights (including, without limitation, provisions for appropriate adjustments) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock, 7 securities or assets thereafter deliverable upon the exercise thereof. The Corporation shall not be required to make any adjustment in the Conversion Rate in any case in which the number of shares of Common Stock into which each share of Preferred Stock may be converted, as required pursuant to Article VII, would be increased or decreased by less than 1%, but in such case the amount of any such adjustment shall be carried forward and adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment, which, together which such amount and any other amount or amounts so carried forward, shall aggregate at least 1% of the number of shares of Common Stock into which each share of Preferred Stock is then convertible. IX. Reacquired Shares The Corporation shall cancel each share of Preferred Stock which shall be converted by the Corporation. All such shares of Preferred Stock shall become authorized but unissued shares of preferred stock of the Corporation, and the number of shares of preferred stock which the Corporation shall have authority to issue shall not be decreased by such conversion. Such shares may only be issued as part of another series of preferred stock of the Corporation. X. Notices Any notice required by the above provisions to be given to the holders of shares of Preferred Stock shall be deemed given when deposited in the United States mail, first class postage prepaid, and addressed to the shareholder at its address appearing on the books of the Corporation. Any notice required by the provisions of this Paragraph C by the holders of Preferred Stock shall be deemed given when deposited in the United States mail, first class postage prepaid and addressed to the Corporation at its principal executive offices." 5. This Amendment to the Certificate of Incorporation of the Corporation was authorized by the Board of Directors of the Corporation in accordance with the provisions of Section 502 of the Business Corporation Law pursuant to the authority expressly 8 granted to and vested in the Board of Directors by the Corpor- ation's Certificate of Incorporation. IN WITNESS WHEREOF, we have signed this certificate on September 26, 1996 and we affirm the statements contained herein are true under the penalties of perjury. /s/ Stephen Nevitt ------------------------- Stephen Nevitt, President /s/ Milton Nevitt ------------------------- Milton Nevitt, Secretary 9 EX-10.12 3 LENS BLANK SUPPLY AGREEMENT LENS BLANK SUPPLY AGREEMENT This Agreement is made as of this 13 day of February, 1997, between Corning Incorporated, a New York corporation, having its principal place of business at One Riverfront Plaza, Corning, New York 14831 (hereinafter "Corning") and Serengeti Eyewear, Inc. (formerly known as Solar-Mates, Inc.), a New York corporation having its principal place of business at 8125 25th Court East, Sarasota, Florida 34243 (hereinafter "Customer"). INTRODUCTION: Corning manufactures certain fixed-tint and photochromatic glass lens blanks; and Customer and Corning have entered into an Agreement of Purchase and Sale, dated as of October 29, 1996 (the "Purchase Agreement"), pursuant to which Customer has acquired from Corning certain assets; and It is a condition to the consummation of the Purchase Agreement that Corning and Customer will have entered into this supply agreement. In consideration of the foregoing and the covenants, terms and conditions set forth herein, the sufficiency of which as consideration is acknowledged by each of the parties and intending to be legally bound, Corning and Customer agree as follows: ARTICLE I. Definitions The following terms when used in this Agreement with initial capital letters shall have the following meanings for the purposes of this Agreement unless the context in which they are used clearly requires otherwise. -2- 1.1 "Lens Blanks" shall mean the glass lens blanks specifically described in the Specifications identified on Appendix A hereto, as such Specifications may be revised by mutual written agreement of Corning and Customer from time to time. 1.2 "Party" shall mean either Corning or Customer, as the case may be, and both Corning and Customer when used in the plural. 1.3 "Purchase Agreement" shall mean the Purchase Agreement described in the second paragraph of the Introduction to this Agreement. 1.4 "Specifications" shall mean Corning's written specifications relating to the Lens Blanks identified on Appendix A. 1.5 "Term of this Agreement" shall mean the period of time commencing on the date hereof, and ending three years from the date hereof; provided however, that if neither party gives the other notice of its desire to have this Agreement terminated at least ninety (90) days before the end of such period or any yearly extension, this Agreement shall be extended on a year-to-year basis unless earlier terminated in accordance with Article IX. ARTICLE II. Sale and Purchase Obligation Subject to the terms and conditions of this Agreement, Customer agrees to purchase from Corning and Corning agrees to sell to Customer during the Term of this Agreement Lens Blanks in the quantities set forth below. ARTICLE III. Quantity and Price 3.1 During the Term of this Agreement, Customer shall purchase from Corning and Corning shall sell to Customer under the terms and conditions of this Agreement the Lens -3- Blanks sufficient to meet all of Customer's requirements for the products offered in the Serengeti Business immediately prior to the Closing Date (as such terms are defined in the Purchase Agreement) for photochromic lens blanks of the same or substantially similar type as Corning Glass Code 8155 and 8111 Lens Blanks in an amount not to exceed 3,000,000 Lens Blanks per year for Glass Code 8155; and in an amount not to exceed 1,000,000 Lens Blanks per year for Glass Code 8111 and such amounts of Lens Blanks for Code 8013 as customer deems appropriate and in an amount not to exceed 1,000,000 Lens Blanks per year for Glass Code 8013. 3.2 Customer shall order Lens Blanks under this Agreement from Corning for so long as Corning is able to fulfill Customer's orders in full within the agreed upon delivery times pursuant to Article IV below. If at any time Corning cannot fulfill such an order as required by this Agreement, then Customer shall be entitled to order such Lens Blanks from a third party until such time as Corning is able to resume fulfillment of Customer's orders for Lens Blanks in full within such agreed upon delivery times. Corning shall use reasonable commercial efforts to notify Customer of its inability to fulfill an order and of the resumption of its ability to fill such orders. 3.3 The price charged and to be paid by Customer for the Lens Blanks sold hereunder shall be as set forth on Appendix B. At the end of the first year of this Agreement and for every year thereafter during the Term of this Agreement, these prices shall be increased for each subsequent year by a percentage equal to the percentage increases in the Consumer Price Index (all cities) published by the Department of Labor of the United States for the month of December immediately preceding each such anniversary year of the Agreement for all products other than Lens Blanks for Glass Code 8111. -4- ARTICLE IV. Forecasting and Ordering 4.1 At least three (3) months prior to the beginning of each calendar year, Customer will issue to Corning a forecast for such calendar year covered by the Term of this Agreement. Such forecast shall contain anticipated annual quantities of each type of Lens Blank subject to Section 3.1, and projected Customer delivery requirements (provided, however, that in respect of 1997, Customer shall have delivered such forecast and projections promptly after execution of the Purchase Agreement). Customer will provide to Corning quarterly updated forecasts of its quantity and delivery requirements for each type of Lens Blank during the balance of the calendar year. 4.2 At least six (6) weeks prior to the scheduled melting of the glass to be used in manufacturing the Lens Blanks, Customer will provide Corning with a binding forecast containing its commitment to purchase quantities of each type of Lens Blank, where each such binding forecast shall be for at least 10,000 pounds. 4.3 Lens Blanks sold hereunder will be released pursuant to four times yearly firm releases issued by Customer and accepted by Corning releasing the Lens Blanks for shipment as provided in such releases and as agreed upon by Customer and Corning. No delivery date will be required to be less than one hundred and twenty (120) days from date of Customer's first order therefor. ARTICLE V. Delivery and Payment 5.1 All Lens Blanks sold under this Agreement shall be delivered by Corning, FOB Harrodsburg, Kentucky; Suzano, Brazil; or Bagneaux, France, as applicable. Payment for all Lens Blanks sold hereunder shall be made by Customer to Corning in U.S. dollars net thirty (30) days (i.e., within thirty (30) days of the date of Corning's invoice therefor) except in the -5- case of the first order of any Lens Blanks pursuant to this Agreement as to which payment will be made in U.S. dollars net sixty (60) days. 5.2 Title and risk of loss or damage to all Lens Blanks shall pass from Corning to Customer when the Lens Blanks are shipped FOB Harrodsburg, Kentucky; Suzano, Brazil; or Bagneaux, France, as applicable. ARTICLE VI. Specifications, Inventory, New Products 6.1 Except as provided below, Corning shall have the right to make changes in the Specifications with the written approval of Customer in each case, which approval shall not be unreasonably withheld. ARTICLE VII. Inspection and Warranty 7.1 Customer shall promptly after receipt, inspect each shipment of the Lens Blanks to: (1) verify the quantity; (2) identify damage, if any; and (3) determine compliance with the Specifications. Customer will notify Corning in writing of any such noncompliance of Lens Blanks within thirty (30) days of delivery to Customer. 7.2 Subject to Section 7.1 above, Corning warrants to Customer that the Lens Blanks sold hereunder shall meet the Specifications and be free from defects in materials and workmanship to the acceptable quality levels set forth on Appendix A. Lens Blanks which fail to meet the foregoing warranty shall be replaced or Corning shall issue a credit for such Lens Blanks which fail to meet the Specifications and which have been purchased and paid for by Customer. The option to replace or issue a credit shall be determined solely by Customer. The foregoing shall be Customer's sole and exclusive remedies notwithstanding any of the provisions of this Agreement and under no circumstances will Corning be liable to Customer or any third party for any special, consequential, or indirect damage or damages -6- including, without limitation the loss of profits or production arising from any cause whatsoever (and expressly excluding third party claims for personal injury or property damage), even if Corning has been advised of the possibility of such damage or damages. 7.3 Corning warrants to Customer that the Lens Blanks sold hereunder and delivered by Corning do not infringe upon any patent rights of third parties when used for their intended purpose and Corning will hold the Customer harmless from any such claim; provided however that no such warranty is extended to any Lens Blanks made in accordance with specifications or designs supplied by Customer. 7.4 THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ARTICLE VIII. Force Majeure If the performance of this Agreement or any obligation under it is prevented, restricted or interfered with by reason of fire, explosion, strike, lockout, labor dispute, casualty, accident, lack or failure in part or in whole of transportation facilities, sources of supply and labor, raw materials, power or supplies; or war, revolution, civil commotion, acts of public enemies; or any law, order, proclamation, regulation, ordinance, demand or requirement of any government or subdivision, authority or representative of any such government or delay or failure of a government authority to issue, export or import licenses or approvals or any other conditions or acts whatsoever whether similar or dissimilar to those enumerated which are beyond the reasonable control of the parties, the party so affected by giving prompt notice to the other party shall be excused from such performance to the extent of such prevention, restriction or interference; provided that the party so affected uses its best efforts to remedy or -7- remove such causes of nonperformance and resumes performance hereunder whenever such causes are removed. ARTICLE IX. Default and Termination If either party hereto shall fail to comply with any material term or condition of this Agreement, or shall commit a material breach of any covenant contained within this Agreement, and shall fail to remedy such breach within thirty (30) days after notice of writing of the breach to the party in default, the party not in default shall have the right to terminate this Agreement by giving written notice of the termination within twenty (20) days following the end of said thirty (30) day period and this Agreement shall terminate as of the date of such notice with no further action being required by the terminating party. The termination right provided for in this paragraph shall not affect any other legal or equitable remedies which may be available to the non-defaulting party and shall not affect obligations under this Agreement which have risen prior to such termination. The parties acknowledge that Corning's failure to deliver Len Blanks duly ordered hereunder within thirty (30) days of the delivery date agreed upon pursuant to Article IV is a material breach of this Agreement as described above. ARTICLE X. Choice of Law and Venue This Agreement shall be construed and enforced in accordance with the laws of the State of New York and the United States of America, applicable to contracts relating to the same subject matter hereof entered into and fully performed within said State, notwithstanding any choice of law principles to the contrary. THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS IS SPECIFICALLY EXCLUDED. -8- ARTICLE XI. Confidential Information All information which a Party has derived from the other Party as a result of the provisions of this Agreement, including, but not limited to specifications, designs or financial information, whether contained in blueprints, drawings, written reports, letters or memoranda, process descriptions, operating procedures, documents or samples shall be treated as confidential unless: (a) such information shall have been in the possession of such Party prior to its receipt from such other Party; (b) such information is or becomes part of the public knowledge or literature through no fault of such Party; (c) such information shall otherwise become available to such Party from a source other than such other Party, said source not being known by such other Party to be violative of any obligation of secrecy with respect to such information; or (d) such Party is legally required to disclose information provided it gives such other Party reasonable opportunity to seek a protective order. Each Party shall use all reasonable efforts to prevent the use of all or any part of such confidential information in any other connection or the transmission thereof to third parties unless and until it has first obtained the written consent of the other Party specifically authorizing such use or transmission. All of a Party's obligations with respect to such confidential information disclosed or made available to it by the other Party shall survive for a period of five (5) years from the date such information was disclosed or made available. ARTICLE XII. General Provisions 12.1 This instrument sets forth the entire agreement between the parties with respect to the supply of the Lens Blanks by Corning to Customer, and the terms of this Agreement shall supersede the terms and conditions upon any Customer's purchase orders and Corning's order acknowledgments issued to implement purchases and sales of Lens Blanks under this Agreement, if such terms and conditions are in conflict with, or purport to address the same matters as the terms and conditions of this Agreement. This Agreement shall not be modified -9- or extended except in writing identifying this instrument and executed by the duly authorized officers of both parties. 12.2 In all matters relating to this Agreement, both parties will be acting solely as independent contractors and will be solely responsible for the acts of their employees; and employees of one party shall not be considered employees of the other party. Neither party will have any right, power, or authority to create any obligations, express or implied, on behalf of the other party. 12.3 Each party agrees to use its best efforts to comply with, and undertakes to notify the other party of any changes of which it becomes aware in, all applicable laws, statutes, ordinances and governmental rules and regulations applicable to the purchase and sale of Lens Blanks contemplated by this Agreement. 12.4 All of the terms and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No party to this Agreement may assign its interest in this Agreement or any rights or duties thereunder without the prior written consent of the other party, not to be unreasonably withheld, delayed or conditioned. 12.5 All notices and other communications provided for hereunder shall be given in writing and shall be sent to the principal office of Customer or Corning set forth below. (a) All notices and other communications to Corning shall be sent by hand delivery, telex or telecopier, and if by telex or telecopier, confirmed, or by certified mail with postage prepaid (return receipt requested) to: -10- Corning Incorporated One Riverfront Plaza Corning, NY 14831 Attention: The Secretary (b) All notices and other communications to Customer shall be sent by hand delivery, telex or telecopier, and if by telex or telecopier, confirmed, or by certified or registered mail with postage prepaid (return receipt requested) to: Serengeti Eyewear, Inc. 8125 25th Court East Sarasota, Florida 34243 Attention: President or, as to either party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall be effective either: (a) when delivered by hand; (b) ten (10) days after being deposited in the mail; (c) when telexed, answer-back received; or (d) when telecopied, receipt acknowledged. 12.6 This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. 12.7 The rights of Corning and Customer shall not be prejudiced or restricted by any indulgence or forbearance extended by either party to the other. No waiver by either party in respect of any breach shall operate as a waiver in respect of any subsequent breach. 12.8 All provisions of this Agreement shall be severable for purposes of enforcement. If any provision of this Agreement is invalid, ruled illegal by any court of competent jurisdiction, or unenforceable under present or future laws effective during the term hereof, then and in that event, and provided the invalid provision does not materially affect -11- the intent and performance of this Agreement, it is the intention of the parties hereto that the remainder of this Agreement shall not be affected thereby, and it is also the intention of the parties that in lieu of each of such provision which is invalid, illegal or unenforceable, there be added as part of this Agreement a provision which shall be as similar in terms of such invalid, illegal or unenforceable provision, and that deals equitably with the intended benefits and obligations of the parties. 12.9 Corning and Customer shall cooperate in good faith in order that all obligations of the parties are fulfilled hereunder and Corning shall use its best reasonable efforts to inform Customer of any conditions which will prevent Corning from fulfilling its obligations hereunder. 12.10 Preparation of this Agreement has been a joint effort of both Corning and Customer and this Agreement shall not be construed more severely against either Corning or Customer. 12.11 This Agreement shall be held in confidence by both parties and shall not be disclosed to any third parties without the other party's prior written consent. -12- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first written above. CORNING INCORPORATED By: /s/ Howard J. Zingler --------------------------- SERENGETI EYEWEAR, INC. By: /s/ Stephen Nevitt --------------------------- APPENDIX A SPECIFICATIONS Glass Code 8013 Corning Incorporated North American Optical division Ophthalmic Product Specifications No. OPS-54, issued 2/01/89, applies to the control of quality of standard fixed tint lens pressings intended for sunglass lenses. Glass Code 8111 Corning Incorporated North American Optical division Ophthalmic Product Specifications No. OPS-53, issued 2/01/89, applies to the control of quality of photochromic lens pressings intended for sunglass lenses. Glass Code 8155 Corning Incorporated North American Optical division Ophthalmic Product Specifications No. OPS-53, issued 2/01/89, applies to the control of quality of photochromic lens pressings intended for sunglass lenses. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE PRICE/LB. INFORMATION BELOW, WHICH INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION APPENDIX B PRICES FOB POINT GLASS CODE PRICE/LB. Harrodsburg, KY 8155 (Drivers, Strata) Harrodsburg, KY 8111 (PhotoGray Extra Base Glass) Suzano, Brazil 8013 (UV Gray - Signia Slate) EX-10.13 4 LICENSE AGREEMENT LICENSE AGREEMENT THIS AGREEMENT, made as of the 13th day of February, 1997, by and between Corning Incorporated, a corporation organized and existing under the laws of the State of New York, United States of America, having its principal place of business in the City of Corning, County of Steuben, State of New York, U.S.A. ("Corning") and Serengeti Eyewear, Inc. (formerly known as Solar-Mates, Inc.), a New York corporation ("Serengeti"). WITNESSETH: WHEREAS, Corning and Serengeti have entered into a Purchase Agreement (as defined below) dated as of October 29, 1996 pursuant to which Serengeti will acquire the Serengeti Business (as defined in the Purchase Agreement); WHEREAS, in connection with the Purchase Agreement, Corning has assigned certain patents to Serengeti, including the Licensed Patents (as defined below); WHEREAS, it is a condition to the consummation of the Purchase Agreement that Corning and Serengeti will have entered into this license agreement; WHEREAS, Corning wishes to have a license for certain rights in the Licensed Patents as defined below; and WHEREAS, the Parties (as defined below) are willing to enter into this License Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Parties hereby agree as follows: -2- I. DEFINITIONS As used in this Agreement, the following terms shall have the following respective meanings: 1.1 Licensed Patent shall mean the letters patent identified in Exhibit A hereto (including without limitation any U.S. or non-U.S. patents that are counterparts thereof and/or any divisions, continuations, continuations-in-part or reissues thereof). 1.2 Party: Corning or Serengeti, as the case may be, and both Corning and Serengeti when used in the plural. 1.3 Purchase Agreement shall mean the Agreement of Purchase and Sale dated as of October 29, 1996 between Serengeti and Corning for the purchase of the Serengeti Business as defined in that Agreement. Unless the context otherwise requires, capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed thereto in the Purchase Agreement. II. LICENSE FROM SERENGETI TO CORNING 2.1 Serengeti hereby grants to Corning a paid up, royalty-free, worldwide license, with the right to sublicense its subsidiaries and affiliates, (i) to make, have made, use, sell or offer to sell lenses, lense blanks and other optical materials or prescription eyeglasses or lenses used to treat or mitigate medical conditions or symptoms such as light sensitivity, and other products currently manufactured by Corning (other than through the Serengeti Business) that do not relate to plano or prescription sunglass lenses, or practice any method claimed in the Licensed Patent currently practiced by Corning (other than through the Serengeti Business) that do not relate to plano or prescription sunglass lenses, and (ii) subject to subparagraph 2.2 -3- hereof, to make, have made, use, sell or offer to sell a plano or prescription sunglass lens that has spectral filtration (i.e., light transmission) outside the spectral filtration limits set forth on Exhibit B. 2.2 The license granted in Section 2.1 above shall be exclusive (even as against Serengeti), except as set forth in subparagraphs (a) and (b) below: (a) in the event that Serengeti wishes to practice the Licensed Patents to produce a sunglass lens which has spectral filtration outside the spectral filtration limits set forth on Exhibit B, Serengeti will so notify Corning in writing and Corning will, no later than ninety (90) days from such notice, give Serengeti its estimates of the feasibility, time and costs likely to be incurred to develop such a lens to meet Serengeti's requirements, and if the Parties (i) cannot agree in good faith on the payment of development costs or (ii) are unable or unwilling to agree in good faith on a supply arrangement pursuant to which Corning would provide to Serengeti the photochromic lens blanks for such lenses at reasonable prices and under reasonable terms and conditions at least one hundred eighty (180) days from the date of Serengeti's written notice to Corning, Serengeti shall have the right to practice the Licensed Patents to the extend necessary to manufacture, use or sell such lenses for use in its sunglass products; and (b) in the event that Corning wishes to practice the Licensed Patents to make, have made, use or sell a plano or prescription sunglass lens outside the spectral filtration limits set forth on Exhibit B, Corning will so notify Serengeti in writing and offer Serengeti an exclusive supply of such lenses on reasonable terms and conditions including quantities, prices, duration, and other terms and conditions; provided however, if within sixty (60) days of such notice Serengeti notifies Corning that Serengeti agrees to purchase at least 50,000 of such lenses to test market, Corning shall not sell such products to third parties for a period of one (1) year after such notice from Serengeti and the parties will, during that one (1) year period, attempt to negotiate a further exclusive supply arrangement with Serengeti. If -4- Serengeti and Corning cannot agree on such a supply arrangement within such one (1) year period from such notice, nothing herein shall prevent Corning from selling such lenses to any other party after such period. 2.3 Serengeti will pay all necessary fees to retain in force each Licensed Patent. Serengeti shall advise Corning if it no longer wishes to retain any Licensed Patent in which case Serengeti shall at Corning's written request assign such Licensed Patent to Corning. III. ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns. This Agreement may not be assigned in whole or in part by either Party except with the prior written consent of the other Party. Any purported assignment of this Agreement without the other Party's consent shall be void. IV. DURATION OF AGREEMENT This Agreement shall take effect as of the date first above written and shall continue in effect until the expiry of the last to expire of the Licensed Patents. V. DISPUTE All disputes arising in connection with the present Agreement shall be resolved in accordance with Section 16.2 of the Purchase Agreement. -5- VI. NOTICES All notices, reports, requests or demands to be given by either Party to the other under the provisions of this Agreement shall be forwarded, charges prepaid, by cablegram, confirmed by letter, by facsimile or by registered or certified airmail properly addressed to the respective Parties as follows: Corning Incorporated One Riverfront Plaza Corning, NY 14831 Attention: The Secretary Fax: (607) 974-6135 and Serengeti Eyewear, Inc. 8125 25th Court East Sarasota, EL 34243 Attention: Stephen Nevitt, President Fax: (941) 359-3598 or at such other address as either Party may from time to time by written notice designate as its address for the purposes hereof and shall be deemed to have been received on the day following dispatch of any such cablegram and the eighth day following posting of any such letter. VII. ENTIRE AGREEMENT The terms and provisions herein contained constitute the entire Agreement between the Parties and shall supersede all previous communications, representations, agreements or understandings, either oral or written, between the Parties hereto with respect to the subject matter hereof; and no agreement or understanding varying or extending the same will be -6- binding upon either Party hereto unless in writing, and signed by duly authorized officers or representatives of the respective Parties. VIII. CONSTRUCTION This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflicts of law principles and the United States of America. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in New York, New York in a manner binding upon them by their duly authorized officers as of the date first above written. CORNING INCORPORATED By: /s/ Howard J. Zingler --------------------------- SERENGETI EYEWEAR, INC. By: /s/ Stephen Nevitt --------------------------- EXHIBIT A LICENSED PATENTS Patent Number Title Exp. Date U.S. 4,118,214 Treating Polychromatic Glass in Reducing Atmospheres 06/21/97 U.S. 4,240,836 Colored Photochromic Glasses and Method 11/18/99 U.S. 4,290,794 Method of Making Colored Photochromic Glasses 11/18/99 U.S. 4,537,612 Colored Photochromic Glasses 09/16/04 U.S. 4,710,430 Colored Photochromic Glasses 05/02/05 U.S. 4,979,976 Making Colored Photochromic Glasses 04/15/00 -7- EXHIBIT B SPECTRAL FILTRATION LIMITS The colored box is based on the x and y coordinates determined using Illuminant C and the CIE Standard Observer. ================================================================================ x y - -------------------------------------------------------------------------------- DRIVER 0.3625 0.3320 ------------------------------------------------------ 0.3800 0.3440 ------------------------------------------------------ 0.3850 0.3375 ------------------------------------------------------ 0.3670 0.3250 ------------------------------------------------------ VERMILLION 0.3685 0.2990 ------------------------------------------------------ 0.3795 0.3035 ------------------------------------------------------ 0.3795 0.2950 ------------------------------------------------------ 0.3685 0.2910 ------------------------------------------------------ VECTOR 0.4390 0.3340 ------------------------------------------------------ 0.4445 0.3300 ------------------------------------------------------ 0.4330 0.3170 ------------------------------------------------------ 0.4280 0.3210 ================================================================================ It must be recognized that working outside the color boxes as currently specified, risks deviations from recognized product colors. EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 632727 4976625 6258300 123516 4008381 16471325 892460 313928 19354587 6820596 105886 0 6975000 2384 5450721 19354587 13584255 13773887 8704447 3875151 0 0 393112 801177 232930 568247 0 0 0 568247 .21 .18
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