-----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, JwaRaXb28LsVCAGcHUq5kowXmvQkicKE97OaeQfJGz7q0zz3dFy2zDATdiFlZZLt xI8bJjuYVCNFHoiFnckfkg== 0001047469-98-021620.txt : 19980525 0001047469-98-021620.hdr.sgml : 19980525 ACCESSION NUMBER: 0001047469-98-021620 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980522 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 SEC ACT: SEC FILE NUMBER: 000-26022 FILM NUMBER: 98630692 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 1 10 QSB U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 1998 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 April 30, 1998: 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 March 31, 1998............................................................................. 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997............................................................................ 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997............................................................................ 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............................................................................ 20 Item 6. Exhibits and Reports on Form 8-K............................................................. 20 Signatures............................................................................................ 21
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Serengeti Eyewear, Inc. Consolidated Balance Sheet March 31, 1998 (Unaudited)
ASSETS Current Assets: Cash..................................... $ 558,295 Accounts receivable - trade.............. 8,188,573 Other receivables........................ 426,575 Inventories.............................. 20,725,888 Prepaid expenses......................... 1,387,429 ----------- Total current assets.................... 31,286,760 Fixed assets - net of accumulated depreciation............................. 2,395,667 Other assets: Goodwill................................. 6,961,203 Prepaid expenses - non-current........... 300,000 Debt issue costs......................... 476,452 Patents and trademarks - net............. 10,689,122 Other assets............................. 23,153 ----------- $52,132,357 ----------- -----------
See accompanying notes to financial statements. 3 Serengeti Eyewear, Inc. Consolidated Balance Sheet March 31, 1998 (Unaudited) (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Note payable - bank........................ $ 6,750,000 Current portion of long-term debt.......... 8,362,496 Accounts payable - related party........... 32,820 Accounts payable........................... 13,867,990 Accrued dividends.......................... 369,000 Accrued expenses........................... 269,734 ----------- Total current liabilities................ 29,652,040 ----------- Long-term debt................................ 148,421 Commitments and contingencies Stockholders' equity Preferred stock, $.001 par value, 1,000,000 shares authorized 23,908 shares issued and outstanding.............................. 22,333,000 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............................. (10,589,582) ----------- Total stockholders' equity............. 22,331,896 ----------- $52,132,357 ----------- -----------
See accompanying notes to financial statements. 4 Serengeti Eyewear, Inc. Consolidated Statements of Operations For The Three Months Ended March 31, 1998 and 1997 (Unaudited)
1998 1997 ---- ---- Net sales................................................ $9,766,785 $ 6,734,727 Cost of goods sold....................................... 5,720,662 3,594,639 ------------- ----------- Gross profit............................................. 4,046,123 3,140,088 ------------- ----------- Operating expenses: Depreciation and amortization.......................... 372,948 329,995 Selling expenses....................................... 1,237,461 995,683 General and administrative, expenses............................................. 2,317,998 1,001,679 ------------- ----------- Total operating expenses................................. 3,928,407 2,327,357 ------------- ----------- Income (loss) from operations............................ 117,716 812,731 ------------- ----------- Other (expenses) income: Other (expense) income................................ -- 39,443 Interest.............................................. (393,045) (206,632) ------------- ----------- (393,045) 167,189 ------------- ----------- Income (loss) before taxes............................... (275,329) 645,542 Provision for income taxes Current................................................. -- (238,851) ------------- ----------- Net income (loss)....................................... (275,329) 406,691 Preferred stock dividends.................................. 369,000 3,983,000 ------------- ----------- Net income (loss) applicable to Common stock.............................................. $ (644,329) $(3,576,309) ------------- ----------- ------------- ----------- Basic (loss) per share..................................... $ (.27) $ (1.50) ------------- ----------- ------------- ----------- Weighted average shares:................................... 2,384,000 2,384,000 ------------- ----------- ------------- -----------
See accompanying notes to financial statements. 5 Serengeti Eyewear, Inc. Consolidated Statements of Cash Flows For The Three Months Ended March 31, 1998 and 1997
1998 1997 ---- ---- Cash flows from operating activities......... $ 811,989 $ 5,179,813 ---------- ---------- Cash flows from investing activities: Acquisition of business interest........... -- (26,621,898) Purchase of fixed assets................... (168,361) (300,457) ---------- ---------- Net cash provided by (used in) investing activities.............. (168,361) (26,922,355) ---------- ---------- Cash flows from financing activities: Increase in deferred acquisition costs..... -- (861,220) Repayments of related party debt........... (11,755) -- Proceeds from the sale of preferred stock.. -- 13,950,000 Proceeds from bank borrowings.............. 250,000 10,000,000 Repayment of bank loans.................... (437,500) (1,500,000) Principal payments on long-term debt....... (14,266) (50,568) ---------- ---------- Net cash provided by (used in) Financing activities................... (213,521) 21,538,212 ---------- ---------- Net increase (decrease) in cash.............. 430,107 (204,330) Beginning - cash balance..................... 128,188 632,727 ---------- ---------- Ending - cash balance........................ $ 558,295 $ 428,397 ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 6 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) Note A. Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information 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, 1997 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 Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes", which requires use of the liability method. FAS 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in 7 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) the periods in which the deferred tax assets and liabilities are expected to be settled or realized. The amounts shown for income taxes in the statement of operations in 1997 differs 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%). Loss per share Loss per share amounts are computed based upon the weighted average number of shares outstanding of 2,384,000. Potential common shares are not considered in the computation as their effect would be anti-dilutive. Potential common shares include 1,410,000 options, 2,220,000 warrants and approximately 17,000,000 shares underlying the preferred stock. Note B. Note payable - bank Concurrently with the closing of the acquisition described in Note E, 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 $1.5 million of outstanding indebtedness. 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. 8 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) At March 31, 1998, although the Company was current with its principal and interest payments to the bank it was not in compliance with certain of the loan covenants of the revolving loan and the term loan. The Company is currently attempting to restructure its loan covenants with the bank. As of the date hereof these covenants have not yet been restructured and the entire amounts due under the revolving loan and term loan have been classified as current liabilities. Note C. Stockholders' equity Preferred stock On October 4, 1996 the Company issued 7,500 shares of its $.001 par value Series A 6.5% cumulative convertible non-voting preferred stock, to RBB Bank Aktiengesellschaft (RBB) a banking institution located in Austria, in a private offshore offering pursuant to Regulation S for cash aggregating $7,500,000 less commissions aggregating $525,000. Concurrently with the closing of the acquisition 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 March 31, 1998 dividends aggregating 369 shares of preferred stock valued at $369,000 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 9 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) 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 (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 three months ended March 31, 1998 and 1997, the Company made net sales to two significant customers of approximately $3,300,000 and $2,400,000 or 34% and 36% of its total sales. 10 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) Approximately $2,600,000 of the gross accounts receivable are due from three customers at March 31, 1998 and are unsecured. Litigation: During March, 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 action has since been transferred to the United States District Court for the Southern District of New York. 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 to vigorously defend the action and is presently considering counterclaims. During January, 1998 RBB Bank (RBB), the entity which purchased $22.5 million of the Company's preferred stock, the proceeds of which were utilized by the Company to purchase the Serengeti business, filed an action in the United States District Court, Southern District of New York. In the action, RBB alleges various violations of the securities laws in connection with the purchase by RBB of the 22,500 shares of the Company's convertible preferred stock. RBB contends that the Company failed to disclose certain material information and that RBB relied to its detriment on these omissions in purchasing the Company's convertible preferred stock. There are also common law claims for fraud and negligent misrepresentation. RBB seeks compensatory damages in the sum of $22.5 million, equal to the purchase price of the preferred stock, and punitive damages in the sum of $25 million. The Company has reviewed the claims and denies them. The Company has filed a motion to dismiss the claims. 11 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) During February, 1998 Corning Incorporated (Corning), the entity from whom the Company purchased the Serengeti business filed an action in the Supreme Court, State of New York, County of Steuben. In the action Corning alleged that it was due $843,000 from the Company for services rendered during the period from February 13, 1997 to May 7, 1997. In addition, in conjunction with the Company's acquisition of the Serengeti business $1.5 million was deposited in escrow by the Company as a deposit for the purchase price. These funds were to be released to Corning on February 13, 1998 if the Company had not made indemnification claims against it prior to that date. In the action Corning demanded that the funds held in escrow be released to it even though the Company had made indemnification claims against the fund. The Company had disputed Corning's claim for the $843,000 as it was the Company's contention that it had requested from Corning, on several occasions, documentation for the alleged charges and Corning had not provided the requested documentation. The Company was also disputing the release of the escrow funds to Corning as it had filed an indemnification claim against Corning in the amount of $3,054,000. On May 20, 1998, the Company and Corning entered into a settlement agreement releasing all claims. In connection therewith the Company received $405,500, including interest from the escrow account and Corning received the balance which was held in escrow. In addition, the Company may defer payment for up to 250,000 lens blanks purchased during the next 12 months from Corning until December, 1999 and the suit is being dismissed. 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 used in the design, manufacture and distribution of Serengeti brand sunglasses. The Company used the purchase method of accounting to record this transaction and has included these operations in its statement of operations since the acquisition date. Accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair market values. The 12 Serengeti Eyewear, Inc. Notes to Consolidated Financial Statements (Unaudited) 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 in Notes B and C. In addition, the Company incurred other costs related to the acquisition aggregating $855,561 which are being amortized as goodwill over a period of 20 years and closing costs related to the bank financing aggregating $600,000 which are being amortized as interest expense over a period of 5 years. The purchase price, including the additional costs described above, was allocated as follows:
Inventory................. $ 8,830,856 Furniture and equipment... 832,278 Trademarks................ 9,500,000 Patents................... 1,800,000 Goodwill.................. 7,392,427 ----------- $28,355,561 ----------- -----------
Note F. Foreign operations The Company operates in 2 geographic areas: The United States and Hong Kong. Following is a summary of information by area:
1998 1997 ---- ---- Net sales to unaffiliated customers: United States.................... $ 8,935,089 $ 6,734,727 Hong Kong........................ 831,696 -- ----------- ----------- $ 9,766,785 $ 6,734,727 ----------- ----------- ----------- ----------- Income (loss) from operations: United States.................... $ (210,791) 812,731 Hong Kong........................ 328,507 -- ----------- ----------- 117,716 812,731 Other income....................... -- 39,443 Other expenses..................... (393,045) (206,632) ----------- ----------- Income (loss) before income taxes.. $ (275,329) $ 645,542 ----------- ----------- ----------- ----------- Identifiable assets: United States.................... $51,549,723 $41,108,017 Hong Kong........................ 582,634 581,849 ----------- ----------- $52,132,357 $41,689,866 ----------- ----------- ----------- -----------
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 OF ITS OUTSIDE SOURCES 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, UNDUE RELIANCE SHOULD NOT BE PLACED 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. From 1978 until the acquisition, the Company 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 merchandisers 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 non-premium 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 and 1997, the Company experienced more substantial sales of the H2Optix[Registered-Trademark] product line. 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 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 March 31, 1998 to the three months ended March 31, 1997 Net sales increased 45%, from approximately $6.7 million for the three months ended March 31, 1997 to approximately $9.8 million for the same period in 1998, primarily as a result of the availability of Serengeti inventory and sales of this product line and increased sales of the Company's non-premium products to a significant customer. Gross profit decreased as a percentage of sales, from approximately 47% for the three months ended March 31, 1997 to approximately 41% for the same period in 1998, primarily as a result of product mix and a price reduction of the Serengeti product line. Selling expenses increased from approximately $996,000 during the three months ended March 31, 1997 to approximately $1,237,000 million for the same period in 1998. This increase resulted primarily from increased costs associated with marketing and selling expenses related to the Company's premium products in 1998. General and administrative expenses increased from approximately $1,001,000 for the three months ended March 31, 1997 to approximately $2,318,000 for the same period in 1998, 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 is currently implementing plans to reduce its general and administrative expenses. Interest expense increased from approximately $207,000 for the three months ended March 31, 1997 to approximately $393,000 for the same period in 1998, as a result of the interest expense related to the Company's term loan which was used to partially finance the Serengeti acquisition and the interest incurred on the Company's revolving credit facility. 16 Liquidity and Capital Resources Concurrently with the closing of the Serengeti 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 an existing 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 existing 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. The unused portion of the Revolver Facility is $750,000 at March 31, 1998. To date the bank has not allowed the Company the use of this additional amount due to the non-compliance with financial covenants described below. 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 17 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 first priority lien on all of the assets of the Company and its subsidiaries. As of March 31, 1998, the Company was not in compliance with certain financial covenants with respect to its New Credit Facility. Although the lenders have not declared a default or accelerated payment of the New Credit Facility, there can be no assurance that they will not do so in the future. As a result all balances due under the New Credit Facility have been classified as current debt. The Company is currently in negotiation with its lenders to restructure the New Credit Facility including modification of the financial covenants and obtaining waivers of past non-compliance. The Company's liquidity improved from working capital of approximately $753,000 at December 31, 1997 to working capital of approximately $1.6 million at March 31, 1998 The Company incurred approximately $168,000 in capital expenditures during the three months ended March 31, 1998. The Company anticipates, although there can be no assurance, that based on its currently proposed plans, that the net cash available from operations will be sufficient to satisfy its anticipated cash requirements for the 1998 fiscal year. In this regard the Company will attempt to (a) restructure the New Credit Facility as described above, (b) negotiate with additional 18 lenders to replace its existing senior debt, (c) reduce its current inventory levels by expanding its distribution and (d) restructure its organization to reduce its operating costs. 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. Going Concern Consideration As the independent certified public accountants have indicated in their report on the financial statements for the year ended December 31, 1997, and as shown in the financial statements, the Company has experienced significant operating losses which have resulted in an accumulated deficits of $9,945,253 and $10,589,582 at December 31, 1997 and March 31, 1998 respectively. For the year ended December 31, 1997 and the quarter ended March 31, 1998 the Company reported losses before preferred dividends of $3,401,881 and $275,329 respectively and was not in compliance with certain financial covenants under its senior debt agreement. These conditions raise substantial doubt about the Company's ability to continue as a going concern. 19 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Reference is made to the Company's annual report on Form 10-KSB for a discussion of certain litigation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None. 20 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: May 22, 1998 By:/s/ Stephen Nevitt ----------------------------- Stephen Nevitt President (Principal Executive Officer) By:/s/ Neil R. Winter ----------------------------- Chief Financial Officer 21 EX-27 2 FDS
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 558295 0 8531077 342504 20725888 31286760 3110191 714524 52132357 29652040 148421 0 22333000 2384 (3488) 52132357 9766785 9766785 5720662 5720662 3928407 0 393045 (275329) 0 (275329) 0 0 0 (275329) (.27) 0
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