-----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, HRz5lSa3h9GSvwTG4nkVkNJM8Q34fd0GzUPOoxQpfjEk8onzxjr4nuppyYH2BHQj eO6MBMjqE9sVOoHVneukiw== 0001047469-98-002220.txt : 19980129 0001047469-98-002220.hdr.sgml : 19980129 ACCESSION NUMBER: 0001047469-98-002220 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980128 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERENGETI EYEWEAR INC CENTRAL INDEX KEY: 0000940183 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 112396918 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-26022 FILM NUMBER: 98514677 BUSINESS ADDRESS: STREET 1: 8125 25TH COURT E CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9413593599 MAIL ADDRESS: STREET 1: 800 THIRD AVENUE CITY: NNEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: SOLAR MATES INC DATE OF NAME CHANGE: 19960530 10QSB/A 1 FORM 10QSB/A U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB/A QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 1997 Commission file number: 0-26022 Serengeti Eyewear, Inc. (Exact Name of Small Business Issuer as specified in its charter) New York 65-0665659 (State or other jurisdiction (IRS Employer Identi- of incorporation or organization) fication Number) 8125 25th Court East Sarasota, Florida 34243 (Address of principal executive offices) (941) 359-3599 (Issuer's telephone number including area code) Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES: X NO: Number of shares outstanding as of October 31, 1997: 2,384,000 shares of Common Stock, $.001 par value. Transitional Small Business Disclosure Format: YES: NO: X Serengeti Eyewear, Inc. Index Part I Item 1. Financial Statements Consolidated Balance Sheet as of September 30, 1997 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1997 and 1996 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 14 Part II Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Balance Sheet September 30, 1997 (Unaudited) ASSETS Current Assets: Cash................................................ $ 596,907 Accounts receivable -- trade........................ 7,718,557 Other receivables................................... 10,303 Inventories......................................... 14,349,451 Prepaid expenses.................................... 1,149,121 ------------- Total current assets............................... 23,824,339 Fixed assets--net of accumulated depreciation........ 2,283,793 Other assets: Goodwill............................................ 14,045,736 Prepaid expenses--non-current....................... 150,000 Accounts receivable--stockholders................... 45,215 Patents and trademarks--net......................... 4,466,758 Other assets........................................ 27,183 ------------- $ 44,843,024 ------------- ------------- See accompanying notes to financial statements. 3 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Balance Sheet September 30, 1997 (Unaudited) (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable--bank.................................. $ 3,525,000 Note payable--stockholder........................... 30,516 Current portion of long-term debt................... 50,000 Accounts payable--related party..................... 40,812 Income taxes payable................................ 8,400 Accounts payable.................................... 5,499,728 Accrued dividends................................... 1,045,000 Accrued expenses.................................... 1,390,728 ------------ Total current liabilities.......................... 11,590,184 ------------ Long-term debt....................................... 135,696 Note payable -- bank................................. 7,750,000 Commitments and contingencies Stockholders' equity Preferred stock, $.001 par value, 1,000,000 shares authorized 22,500 shares issued and outstanding.... 20,925,000 Common stock, $.001 par value, 10,000,000 shares authorized, 2,384,000 shares issued and outstanding......................................... 2,384 Additional paid in capital........................... 10,586,094 Retained earnings.................................... (6,146,334) ------------ Total stockholders' equity......................... 25,367,144 ------------ $ 44,843,024 ------------ ------------ See accompanying notes to financial statements. 4 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statements of Operations For The Three Months and Nine Months Ended September 30, 1997 and 1996 (Unaudited)
THREE MONTHS NINE MONTHS -------------------------- ------------------------- 1997 1996 1997 1996 ------------ ------------ ------------- ---------- Net sales.................................... $ 8,376,546 $ 1,865,166 $24,280,638 $7,406,439 Cost of goods sold........................... 3,882,554 1,212,358 11,587,872 4,776,085 ------------ ------------ ----------- ---------- Gross profit................................. 4,493,992 652,808 12,692,766 2,630,354 ------------ ------------ ----------- ---------- Operating expenses: Depreciation and amortization............... 588,684 31,496 1,591,653 94,488 Selling expenses............................ 1,273,531 550,221 5,009,826 1,433,645 General and administrative, expenses........ 2,319,685 354,309 5,253,125 940,907 ------------ ------------ ----------- ---------- Total operating expenses..................... 4,181,900 936,026 11,854,604 2,469,040 ------------ ------------ ----------- ---------- Income (loss) from operations................ 312,092 (283,218) 838,162 161,314 ------------ ------------ ----------- ---------- Other (expenses) income: Other (expense) income...................... 8,198 -- 40,719 -- Interest.................................... (337,551) (57,361) (836,443) (197,789) ------------ ------------ ----------- ---------- (329,353) (57,361) (795,724) (197,789) ------------ ------------ ----------- ---------- Income (loss) before taxes................... (17,261) (340,579) 42,438 (36,475) Provision for income taxes Current.................................... 8,300 82,000 (8,400) (12,400) ------------ ------------ ----------- ---------- Net income (loss)............................ (8,961) (258,579) 34,038 (48,875) Preferred stock dividends *.................. (347,000) -- 4,677,000 -- ------------ ------------ ----------- ---------- Net income (loss) available to Common shareholders............................... $ (355,961) $ (258,579) $(4,642,962) $ (48,875) ------------ ------------ ----------- ---------- ------------ ------------ ----------- ---------- Per share information: Net (loss) per share:....................... $ (.15) $ (.11) $ (1.95) $ (.02) ------------ ------------ ----------- ---------- ------------ ------------ ----------- ---------- Weighted average shares:..................... 2,384,000 2,384,000 2,384,000 2,384,000 ------------ ------------ ----------- ---------- ------------ ------------ ----------- ----------
- ------------------------ * amounts have been restated from those previously reported to reflect a stock dividend which is convertible at a discount from the market value at the date of issuance (see Note F). See accompanying notes to financial statements. 5 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 1997 and 1996
1997 1996 ------------- ---------- Cash flows from operating activities................................................... $ 4,959,463 $ 132,714 ------------- ---------- Cash flows from investing activities: Acquisition of business interest...................................................... (26,427,926) -- Acquisitions of patents and trademarks................................................ (22,698) (6,159) Acquisition of other assets........................................................... -- (112,036) Purchase of fixed assets.............................................................. (898,240) (219,877) ------------- ---------- Net cash provided by (used in) investing activities.................................. (27,348,864) (338,072) ------------- ---------- Cash flows from financing activities: Increases in stockholder advances..................................................... -- 45,214 Increase in deferred acquisition costs................................................ (1,065,548) (15,000) Repayments of related party debt...................................................... (182,449) (13,394) Proceeds from the sale of preferred stock............................................. 13,950,000 -- S corporation distribution............................................................ -- (92,365) Proceeds from bank borrowings......................................................... 11,900,000 -- Repayment of bank loans............................................................... (2,125,000) -- Proceeds from long term borrowings.................................................... -- 22,318 Principal payments on notes payable--other............................................ (123,422) (106,362) ------------- ---------- Net cash provided by (used in) Financing activities.................................. 22,353,581 (159,589) ------------- ---------- Net increase (decrease) in cash........................................................ (35,820) (364,947) Beginning--cash balance................................................................ 632,727 479,256 ------------- ---------- Ending--cash balance................................................................... $ 596,907 $ 114,309 ------------- ---------- ------------- ----------
See accompanying notes to financial statements. 6 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) Note A. Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Item 310(b) of Regulation S-B. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements of the Company as of December 31, 1996 and for the two years then ended, including notes thereto included in the Company's Form 10-KSB. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Solartechnics (HK) Ltd. Intercompany transactions and balances have been eliminated in consolidation. Inventories Inventories, consisting principally of finished goods and work in process, are valued at the lower of cost or market on a first in - first out basis. The cost of sales for the periods presented have been determined using the gross profit method. Income taxes The amounts shown for income taxes in the statements of operations differ from amounts that would be derived from computing income taxes at federal statutory rates (34%--adjusted for the surtax exemption) primarily as a result of state income taxes net of the federal benefit (3%). 7 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) Note B. Note payable--bank During October, 1994 the Company arranged a line of credit with a bank whereby the Company was able to borrow up to $1,000,000. During October, 1995 the Company replaced this line of credit with a $1,500,000 line with the same bank. The line was renewed again in September 1996 with a due date of September 1997. The line was secured by substantially all of the Company's assets. The Company was entitled to advances of up to 70% of its accounts receivable less than 61 days old and 25% of its inventory cost. The line had an interest rate of prime plus 1.5%. The balance of $1,500,000 at December 31, 1996 was repaid on February 13, 1997 (see below). Concurrently with the closing of the acquisition described below, the Company entered into a Revolving Line of Credit and Term Loan Agreement with SunTrust Bank. Under the agreement the Company has the ability to borrow up to $17.5 million in the form of (a) a three year revolving credit facility in the amount of $7.5 million and (b) a five year amortizing term loan facility in the amount of $10 million. The Company borrowed the entire $10 million under the term loan to finance a portion of the acquisition and to repay the $1.5 million of outstanding indebtedness under the line of credit described above. The Company is able to borrow up to 85% of eligible accounts receivable less than 91 days past due and 50% of eligible inventory under the revolving credit facility for working capital. The credit facility is secured by a first priority lien on all of the assets of the Company and its subsidiaries. Pursuant to the credit facility interest is payable at the LIBOR rate or Base Rate plus applicable margins based upon the Company's earnings. In addition, the Company is subject to certain financial covenants. The Company is currently discussing with the bank the restructuring of certain of the financial covenants. 8 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) Note C. Stockholders' equity During December, 1994 the Company adopted a stock option plan to be administered by the Board of Directors. The plan provides for the granting of options for specified individuals to purchase common stock at an exercise price to be determined by the Board of Directors. No option may be granted after January, 2005 and no option may be granted for a period of greater than 10 years. The total number of shares with respect to which options may be granted under the plan is 1,500,000. A total of 1,410,000 options have been granted under the plan at September 30, 1997 at prices ranging from $2.94 to $3.24. During August, 1995 the Company completed a public offering of units. Pursuant to the offering the Company issued 1,174,000 units consisting of 1,104,000 shares of its $.001 par value common stock and 1,174,000 redeemable common stock purchase warrants for cash aggregating $3,865,131 net of offering expenses of $1,654,869. Included in the offering were 70,000 common shares sold by a shareholder. Each warrant entitles the holder to purchase one share of the Company's $.001 par value common stock at a price of $6.50 per share for a period of four years from September 29, 1996. These warrants may be redeemed by the Company at any time after August 12, 1996 at a price of $.10 per warrant if the average bid price for the Company's common stock exceeds $8.75 per share for the 20 consecutive trading days ending on the third day prior to the date of the notice of redemption. In addition the Company sold an option to purchase an aggregate of 96,000 units, with each unit consisting of one share of common stock and one warrant, for cash aggregating $960 to the underwriter. The options are exercisable for a period of 4 years from August 11, 1996 at an exercise price of $7.50 per unit. The terms of the warrants are the same as those issued pursuant to the public offering except that they are not redeemable by the Company. 9 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) On October 4, 1996 the Company issued 7,500 shares of its $.001 par value Series A 6.5% cumulative convertible non-voting preferred stock, to RBB Bank Aktiengesellschaft (RBB) a banking institution located in Austria, in a private offshore offering pursuant to Regulation S for cash aggregating $7,500,000 less commissions aggregating $525,000. Concurrently with the closing of the acquisition described in Note E, RBB purchased pursuant to said Regulation S offering 7,500 shares of the Company's $.001 par value Series B 6% cumulative convertible non-voting preferred stock and 7,500 shares of the Company's $.001 par value Series C 6% cumulative convertible non-voting preferred stock for cash aggregating $15,000,000 less commissions aggregating $1,050,000. The dividends on the preferred shares are payable in cash or additional shares of preferred stock at the option of the Company. At September 30, 1997 dividends aggregating 1,045 shares of preferred stock valued at $1,045,000 were due and payable to RBB. Concurrently with the issuance of the Series A preferred shares, the Company also issued RBB a Series A warrant to purchase up to 150,000 shares of the Company's $.001 par value common stock at an exercise price of $5.5625 per share at any time commencing January 1, 1999 through December 31, 2002. In addition, concurrently with the issuance of the Series B and C preferred shares, the Company issued to RBB a Series B and a Series C warrant each of which entitles RBB to purchase up to an aggregate of 300,000 shares of the Company's $.001 par value common stock at a per share exercise price of $7.50 with respect to the Series B warrant and $10 with respect to the Series C warrant at any time commencing January 1, 1999 through December 31, 2002. The Company also issued as part of the commission in connection with the Series A preferred shares a Series D warrant to purchase up to an aggregate of 200,000 shares of $.001 par value common stock at an exercise price of $5.50 per share through September 30, 2001. Each of the Series A Preferred Shares may be converted into shares of common stock at any time. Each Series A share is convertible into such number of common shares as is determined by dividing its stated value of $1,000 by a conversion rate equal to the lower of 10 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) (a) $5.50 or (b) 80% of the average market price for the common stock for the ten trading days ending three days prior to the giving by the holder of a notice of conversion. Each of the Series B Preferred Shares may be converted into shares of common stock at any time. Each Series B share is convertible into such number of common shares as is determined by dividing its stated value of $1,000 by a conversion rate equal to the lower of (a) $6.75 or (b) 80% of the average market price for the common stock for the ten trading days ending three days prior to the giving by the holder of a notice of conversion. Each of the Series C Preferred Shares may be converted into shares of common stock at any time after July 1, 1997. Each Series C share is convertible into such number of common shares as is determined by dividing its stated value of $1,000 by a conversion rate equal to the lower of (a) $8.25 or (b) 80% of the average market price for the common stock for the ten trading days ending three days prior to the giving by the holder of a notice of conversion. At any time after September 30, 2000 the Company will have the right to force conversion of the preferred shares into common stock. Note D. Commitments and contingencies Concentration of credit risk/major customers: During the nine months ended September 30, 1997, the Company made net sales to significant customers of approximately $6,118,000 and $3,496,000 or 24% and 14% of its total sales. Approximately $2,327,000, $926,654 and $760,000 of the gross accounts receivable are due from three customers at September 30, 1997 and are unsecured. 11 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) Litigation: On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of the Company's initial public offering, filed an action against the Company in the United States District Court for the Northern District of Georgia, Atlanta Division. The civil complaint alleges, among other things, breaches by the Company of its underwriting agreement with Argent, breach of corporate duties relating to the issuance of the Preferred Shares, and misstatements in the Company's Proxy Statement relating to the issuance of the Preferred Shares. The complaint seeks, among other things, monetary relief as well as a preliminary injunction enjoining the Company from permitting the conversion of any Preferred Shares, and requiring that the Company secure a seat on its Board of Directors for an Argent representative. The Company has reviewed Argent's claims and believes them to be without merit. The Company has filed a motion to dismiss on jurisdictional and substantive grounds and intends to continue to vigorously defend the action, and is presently considering counterclaims. The Company is unable to estimate the range of loss (if any). Commitments: During January and February, 1997, the Company entered into employment agreements with certain officers and sales personnel. These agreements call for aggregate salaries of $822,000 in 1997, $936,000 in 1998, $1,029,000 in 1999 and $69,000 in 2000 and auto allowances aggregating $36,000 per year. Also included in the contracts is certain bonus compensation and options to purchase up to 485,000 shares of common stock at a price of $2.94 per share through August, 1999 based on sales and profit targets set by the Company. Note E. Acquisition of business interest On February 13, 1997, the Company changed its name to Serengeti Eyewear, Inc. in conjunction with the acquisition of certain assets of the Serengeti Eyewear division of Corning Incorporated 12 Serengeti Eyewear, Inc. (Formerly Solar-Mates, Inc.) Notes to Consolidated Financial Statements (Unaudited) used in the design, manufacture and distribution of Serengeti brand sunglasses. The Company acquired the Serengeti assets for cash aggregating $27.5 million. The Company financed the purchase and related transaction expenses with the net proceeds from the sale of shares of preferred stock and the borrowings under the credit facility described above. On July 16, 1997, the Company received a statement from Corning detailing costs aggregating approximately $1,700,000 incurred by Corning which it claims were on behalf of the Company for the operation of Corning facilities during the period from February 13, 1997 to May 18, 1997. Corning is asking that the Company reimburse these costs which relate to operational expenses of approximately $800,000 and inventory items of approximately $900,000. The Company has requested that Corning provide documentation for these costs as they are in excess of what the Company anticipated the charges should be. To date the Company has charged approximately $427,000 to operations and adjusted its inventory carrying value by $500,000 related to these charges. Should Corning be able to document the balance of the charges to the satisfaction of the Company the Company will accrue the additional amounts at such time. Note F. Restatement of Stockholders' Equity In March, 1997 the Securities and Exchange Commission (SEC) announced its position on accounting for preferred stock which is convertible at a discount from the market price at the date of issuance. The SEC's position is that a dividend should be recorded for the difference between the conversion price and the quoted price of the common stock on the date of issuance. To comply with this position, the Company restated its financial statements to reflect a dividend of $3,750,000 at March 31, 1997, related to the sale of the convertible preferred stock discussed in note C. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report. FORWARD-LOOKING STATEMENTS THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE NEWLY ACQUIRED SERENGETI BUSINESS, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE INNOVATIVE PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY COMPETITORS, MANUFACTURING CAPACITY CONSTRAINTS AND THE AVAILABILITY OF RAW MATERIAL, THE EFFECT OF ECONOMIC CONDITIONS, DEPENDENCE ON CERTAIN CUSTOMERS AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. General Prior to the 1980's, the Company manufactured its own sunglasses for sale to the wholesale trade. As manufacturers in the Far East began playing greater roles in the sunglass industry in the late 1970's, the Company began importing its products and in 1980 discontinued its manufacturing operations completely. Since 1978, the Company has focused primarily on the sale of sunglasses and sunglass products to mass merchandisers such as large retail chain stores. In the late 1980's, the Company began developing programs for mass merchants designed to enhance its sale of sunglasses. The Company continually adds new products and develops new marketing programs for its product lines. In late 1992, the Company introduced its line of Solar*X-Registered Trademark-sunglasses, which feature a ground and polished lens, comparable to optical quality sunglasses, at popular prices. This product was the predominant line of the Company from 1994 until the Company acquired Serengeti in February 1997, and has contributed significantly to the sales growth of the Company. The Company 14 expects its Solar*X-Registered Trademark- line of sunglasses to remain its predominant line in the non-premium segment of its business. In the latter part of 1995, with the proceeds of its initial public offering completed in August 1995, the Company launched its H2Optix-Registered Trademark-line, a premium sunglass line. The Company sought to emphasize sales of H2Optix-Registered Trademark- and thereby reduce its dependence upon mass merchandisers. The Company experienced only limited sales of its H2Optix-Registered Trademark- sunglasses in 1995 as it commenced its marketing efforts to establish H2Optix-Registered Trademark- brand name recognition and broaden the distribution network for the H2Optix-Registered Trademark- product line. In 1996, the Company experienced $1.2 million in H2Optix-Registered Trademark- sales, representing approximately 9% of the Company's total sales. On February 13, 1997, the Company acquired (the "Acquisition") the assets of the Serengeti Eyewear division of Corning Incorporated ("Serengeti"). Corning's Serengeti Eyewear division entered the premium sunglass market in 1985 with the introduction of Drivers sunglasses, which remain the core of the Serengeti product line. Over the years, Serengeti sunglasses have developed a brand identity which provides appeal to consumers in the premium market. The Serengeti brand image is based upon superior lens technology, quality and performance. The Serengeti Drivers line of sunglasses, which accounted for approximately 91% of plano sales of the Serengeti Eyewear division in 1996, is principally responsible for this image. The Company intends to increase Serengeti's market share by introducing new Serengeti signature styles that exploit the Serengeti brand image. In addition, the Company intends to benefit its H2Optix-Registered Trademark- line by including it within the Serengeti line, thereby tapping into Serengeti's well-established distribution networks. Historically, the Serengeti line has suffered delays in new product launches, resulting in depressed orders for those products. In response, Corning's Serengeti Eyewear division focused on timing the product development cycle to ensure that new products are introduced in October, which is the optimal time for selling to the largest Serengeti customers for the spring and summer seasons. 15 Results of Operations Comparison of the three months ended September 30, 1997 to the three months ended September 30, 1996 Net sales increased 342%, from approximately $1.9 million for the three months ended September 30, 1996 to approximately $8.4 million for the same period in 1997, primarily as a result of the sales of Serengeti products subsequent to the Acquisition of the Serengeti business on February 13, 1997 (which accounted for $6.1 million of such net sales) and increased sales of the Company's non-premium products to a significant customer. Gross profit increased as a percentage of sales, from approximately 35% for the three months ended September 30, 1996 to approximately 54% for the same period in 1997, primarily as a result of product mix. Approximately 73% of the 1997 sales consisted of premium Serengeti products which carry gross margins significantly higher than the Company's non-premium products which comprised substantially all of the Company's sales in 1996. Depreciation and amortization increased by approximately $558,000 during the three months ended September 30, 1997 as a result of the amortization of the intangible assets related to the Acquisition. Selling expenses increased from approximately $550,000 during the three months ended September 30, 1996 to approximately $1.3 million for the same period in 1997. This increase resulted primarily from increased costs associated with marketing and selling expenses related to the Company's premium products in 1997. General and administrative expenses increased from approximately $354,000 for the three months ended September 30, 1996 to approximately $2.3 million for the same period in 1997, primarily as a result of an increase in executive and administrative salaries, office expenses, and costs incurred in connection with the development of the premium line of sunglasses. The Company anticipates that its general and administrative cost will continue to increase with the growth of its business, and particularly in light of the Acquisition of the Serengeti business. 16 Interest expense increased by approximately $281,000 during the three months ended September 30, 1997 as a result of the interest expense related to the Company's term loan which was used to finance the Acquisition and the interest incurred on the Company's revolving credit facility. Comparison of the nine months ended September 30, 1997 to the nine months ended September 30, 1996 Net sales increased 228%, from approximately $7.4 million in 1996 to approximately $24.3 million in 1997, primarily as a result of the sales of Serengeti products subsequent to the Acquisition (which accounted for $15.9 million of such sales) and increased sales of the Company's non-premium products to a significant customer. The Company has continued to broaden the distribution network for its non-premium products and, as a result, during the nine month period in 1997, sales to Wal-Mart Stores Inc. accounted for approximately 24% of the Company's total sales, compared to approximately 65% in 1996. Net sales for the nine month period ended September 30, 1997 were lower than expected due to reduced sales to one of the Company's significant customers which was in the process of reducing its own inventory levels, less than favorable spring weather conditions in what has historically been one of the Company's strong distribution markets, and backorder situations related to some of the components used in the Company's manufacturing process. These situations improved during the third quarter and the Company anticipates that they should continue to improve during the balance of the year. Gross profit increased as a percentage of sales, from approximately 36% in 1996 to approximately 52% in 1997, primarily as a result of product mix. Approximately 65% of the 1997 sales consisted of premium Serengeti products which carry gross margins significantly higher than the Company's non-premium products which comprised substantially all of the Company's sales in 1996. Depreciation and amortization increased by approximately $1.5 million during 1997 as a result of the amortization of the intangible assets related to the Acquisition. 17 Selling expenses increased from approximately $1.4 million in 1996 to approximately $5.0 million in 1997. This increase resulted primarily from increased costs associated with marketing and selling expenses related to the Company's premium products in 1997 which included an "Eye in the Sky" radio advertising campaign incurred during May and June 1997 for Serengeti products costing approximately $1.1 million. General and administrative expenses increased from approximately $941,000 in 1996 to approximately $5.3 million in 1997 primarily as a result of an increase in executive and administrative salaries, office expenses, and costs incurred in connection with the development of the premium line of sunglasses. The Company anticipates that its general and administrative cost will continue to increase with the growth of its business, and particularly in light of the Acquisition. Interest expense increased by approximately $638,000 in 1997 as a result of the interest expense related to the Company's term loan which was used to finance the Acquisition and the interest incurred on the Company's revolving credit facility. Liquidity and Capital Resources Prior to the Acquisition of the Serengeti business, the Company financed its operations primarily through the proceeds of an initial public offering completed in August 1995, its cash flow and a revolving line of credit in the amount of $1,500,000 from SunBank/Gulf Coast (the "Old Credit Facility"). As of December 31, 1996, the Company had borrowed the maximum amount available under the Old Credit Facility. Concurrently with the closing of the Acquisition, the Company entered into a Revolving Line of Credit and Term Loan Agreement with SunTrust Bank, Central Florida, National Association, individually and as agent, and Creditanstalt-Bankverein pursuant to which the Company refinanced the Old Credit Facility with a new senior credit facility (the "New Credit Facility") which provides the Company with the ability to borrow up to $17.5 million in the form of (i) a three year revolving credit facility in the amount of $7.5 million (the "Revolver Facility") and (ii) a five year amortizing term loan facility in the amount of $10.0 million (the "Term Facility"). 18 The Company borrowed the entire $10.0 million of availability under the Term Facility to finance a portion of the Acquisition purchase price, to repay in full the outstanding principal indebtedness and accrued interest (approximately $1.5 million) under the Old Credit Facility and to pay related fees and expenses. The Company financed the remaining portion of the Acquisition purchase price with the net proceeds of the sale of Preferred Shares. The Revolver Facility has a $2 million sublimit for the issuance of stand-by letters of credit. Pursuant to the Revolver Facility, the Company is able to borrow up to 85% of eligible accounts receivable and up to 50% of the value of the Company's eligible inventory. Undrawn amounts under the Revolver Facility are available for the working capital and general corporate needs of the Company. Interest under the New Credit Facility is payable at the LIBOR rate or the "Base Rate." In addition to applicable margins, the Company pays a floating percentage tied to the Company's ratio of funded debt to "EBITDA"; ranging, in the case of LIBOR rate loans, from 1.50% based upon a ratio of 1.5:1 or less to 2.75% based upon a ratio of greater than 3:1; and ranging, in the case of Base Rate loans, from .50% based upon a ratio of 2.25:1 or less to 1.25% based upon a ratio of greater than 3:1. Pursuant to the New Credit Facility, the Company is required to enter into exchange agreements and/or other appropriate interest rate hedging transactions for the purpose of interest rate protection covering at least 75% of the borrowings under the Term Facility through February 13, 2000. The New Credit Facility requires the Company to maintain certain financial ratios. Pursuant to the New Credit Facility, the Company is required to apply 75% of its "Excess Cash Flow" for the preceding completed fiscal year, the net proceeds from any sale of assets other than in the ordinary course of business and the net proceeds of equity issuances and permitted debt issuances to prepay outstanding amounts under the Term Facility. The New Credit Facility also contains a number of customary covenants, including, among others, limitations on liens, affiliate transactions, mergers, acquisitions, asset sales, dividends and advances. The New Credit Facility is secured by a 19 first priority lien on all of the assets of the Company and its subsidiaries. The Company's liquidity improved from working capital of approximately $9.7 million at December 31, 1996 to working capital of approximately $13.3 million at September 30, 1997. The Company increased its inventory position at September 30 in anticipation of forth quarter 1997 and first quarter 1998 requirements. The Company incurred approximately $898,000 in capital expenditures during the nine months ended September 30, 1997 primarily relating to the expansion of its facility and the acquisition of furniture and fixtures. The Company anticipates that it will incur additional capital expenditures of approximately $100,000 for the remainder of 1997. The Company anticipates, based on its currently proposed plans, that the net cash available from operations combined with the New Credit Facility will be sufficient to satisfy its anticipated cash requirements for the 1997 fiscal year. Foreign Currency Exchange The Company presently transacts business internationally in United States currency. To date, the Company has not been affected significantly by currency exchange fluctuations. However, future currency fluctuations in countries in which the Company does business could adversely affect the Company by resulting in pricing that is not competitive with prices denominated in local currencies. Seasonality The Company anticipates that the seasonality of its premium sunglass business generally will follow the selling activity of its largest customer for such products, Sunglass Hut. Historically, the strongest quarter in terms of Serengeti sales is the second quarter, followed by the first, fourth and third quarters. The seasonality of the Company's non-premium sunglass business generally follows the selling of its largest customer for such products, Wal-Mart. Historically, the Company's strongest quarter in terms of sales is the fourth quarter, followed by the first, second and third quarters. 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of the Company's initial public offering, filed an action against the Company in the United States District Court for the Northern District of Georgia, Atlanta Division. The civil complaint alleges, among other things, breaches by the Company of its underwriting agreement with Argent, breach of corporate duties relating to the issuance of the Preferred Shares, and misstatements in the Company's Proxy Statement relating to the issuance of Preferred Shares. The complaint seeks, among other things, monetary relief as well as a preliminary injunction enjoining the Company from permitting the conversion of any Preferred Shares, and requiring that the Company secure a seat on its Board of Directors for an Argent representative. The Company has reviewed Argent's claims and believes them to be meritless. The Company has filed a motion to dismiss on jurisdictional and substantive grounds and intends to vigorously defend the action, and is presently considering counterclaims. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 27--Financial Data Schedule (previously filed) (b) Reports on Form 8-K. None. 22 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERENGETI EYEWEAR, INC. Dated: January 27, 1998 BY: /S/ STEPHEN NEVITT -------------------------- Stephen Nevitt President (Principal Executive Officer) Dated: January 27, 1998 BY: /S/ NEIL R. WINTER ------------------------- Neil R. Winter Chief Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----