-----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, SLqRs6McXP2YpOtM6O4zCdZegeVRIv45xZ5/PTHXbjDwr1FaPPWHNF0eADJaHnmT hdFFuYQUMVm+1yYS9SBZzA== 0001047469-99-022057.txt : 19990624 0001047469-99-022057.hdr.sgml : 19990624 ACCESSION NUMBER: 0001047469-99-022057 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990525 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-26022 FILM NUMBER: 99633607 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 10KSB 1 FORM 10-KSB 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 DECEMBER 31, 1998 COMMISSION FILE NUMBER: 0-26022 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. 9 The issuer's revenues for the year ended December 31, 1998 were $43,323,222 The aggregate market value of the voting stock of the issuer held by non-affiliates of the issuer as of March 31, 1999 was approximately $591,356. Number of shares of Common Stock outstanding as of March 31, 1999: 2,384,000 Transitional Small Business Disclosure Format Yes No X --- --- PART I ITEM 1. DESCRIPTION OF BUSINESS. COMPANY OVERVIEW Serengeti Eyewear, 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") in cash the assets of the Serengeti Eyewear division of Corning Incorporated ("Corning") used in the design, manufacture and distribution of Serengeti brand sunglasses. Drivers sunglasses, first introduced by Corning in 1985, constitute the core of the Serengeti product line. Over the years, Serengeti sunglasses have developed a brand identity which provides appeal to consumers in the market for premium sunglasses. The Serengeti brand identity is based upon superior lens technology, quality and performance. Prior to the Acquisition, the Company primarily designed and marketed selected non-premium lines of sunglasses, such as Solar*X sunglasses, which were targeted for distribution through mass merchandisers and designed as a sunglass with quality comparable to that of premium 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 mass merchandisers other sunglass brands, each of which the Company believes creates a niche among popular priced sunglasses of various categories. Non-premium sunglass sales accounted for approximately 31% of the Company's total sales in 1998. 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. H2Optix sales approximated $1.2 million in each of 1996 and 1997 and $2 million in 1998. The Company has included H2Optix within the Serengeti (premium) line, thereby tapping into Serengeti's well-established distribution networks. Premium sunglass sales accounted for approximately 69% of the Company's total sales in 1998. 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 "non-premium" 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, -1- 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 82%, from $825.6 million in 1989 to $1.5 billion in 1998. 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 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 merchandisers such as Wal-Mart, 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, Sensor-X and Grafix brands 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 continue to 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. -2- INTRODUCING INNOVATIVE NEW PRODUCTS. The Company has capitalized and will continue to capitalize on Serengeti's strong brand identity by introducing new Serengeti signature styles. These new styles incorporate the Serengeti name and logo into the frame decor with logo plaques and lens decoration. In addition to the retail space Serengeti accounts have provided for the Company's strong performing existing products, such accounts have made space available for the new products introduced by the Company in 1998. These new products accounted for approximately 25% of premium sales in 1998. The Company will utilize its existing relationships with European and Asian 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 four years and which has developed new products for other well-known sunglass distributors. The Company believes that this team has consistently demonstrated the ability to create top selling styles. 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 15% of total sales of the Serengeti line in 1998. To improve the consistency of its image and operating strategy worldwide, the Company is establishing closer working relationships with its international distributors. The Company believes that concentrating its efforts in existing regions and introducing 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. PRODUCT LINES PREMIUM PRODUCTS The Serengeti line is presently divided into two distinct lines, Drivers and Kinetix, each of which is targeted at a different portion of the premium area of the sunglass market. The Company has also integrated its H2Optix products into the Serengeti line. The premium product line accounted for approximately 64% and 69% of the Company's total sales in 1997 and 1998, respectively. DRIVERS Drivers, which is a general purpose sunglass, is the core Serengeti product line, accounting for approximately 84% of 1998 premium product sales. 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 incorporate "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 -3- 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 in a single-gradient lens that reduces glare from above and are also available in a darker, non-gradient version known as Drivers Sienna. The Company presently offers 10 collections and 115 products within the Drivers line. KINETIX Kinetix, Serengeti's sports/lifestyle, active line, is equipped with photochromic, spectral control lenses of specific colors engineered 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 nine 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 26 products within the H2Optix line. NON-PREMIUM PRODUCTS The Company's Solar*X, Sensor-X, Grafix and Mach 1 lines of sunglasses have 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 premium market. They are available in a variety of popular, classic and contemporary frame styles. The non-premium product line accounted for approximately 36% and 31% of the Company's total sales in 1997 and 1998, respectively. DISTRIBUTION PREMIUM DISTRIBUTION The Company's principal customers are regional optical distributors, sunglass specialty stores and optical chains. The Company also uses independent direct sales representatives to focus on sporting goods and non-direct optical accounts. Regional sales managers are -4- 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 eight regional optical distributors which distribute to optical chains, independent optical retailers and specialty sunglass retailers throughout the United States and Canada. The Company encourages its optical distributors to distribute exclusively to premium retailers. The number of distributors was reduced to eight in 1998 from 13 in 1997. The remaining distributors' territories were expanded and granted regional exclusivity to induce increased market penetration. Distributors are limited to selling Serengeti products to optical retail outlets. In 1998, optical distributors accounted for approximately seven percent of total sales of the Serengeti product line. The Company intends to increase distribution through independent optical retailers with prescription Serengeti lenses as it believes that continued opportunities for growth lie in increasing Serengeti sales to independent optical retailers. SPECIALTY SUNGLASS RETAILERS The principal specialty sunglass retailer of the Serengeti product line is Sunglass Hut, the world's largest sunglass retailer, which has more than 2,000 stores worldwide. Sunglass Hut, which is serviced directly by the Company's in-house sales staff, accounted for approximately 22% of total sales of the Serengeti product line in 1998, up from 11% in 1997. OPTICAL CHAINS In 1998, approximately 19% of total sales of the Serengeti product line were to optical chains. Of these optical chains, Lenscrafters was the most significant customer. The Serengeti brand also has long-standing relationships with other large chains, including Pearle Incorporated, Eyecare Centers of America, National Vision, Wal-Mart Optical and DOC Optics Inc. The Company believes that optical chains present 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 14% of total sales of the Serengeti product line in 1998. Sales in each region are conducted through distributors and, in certain countries, directly to large retail chains or buying groups. European sales, which includes sales to markets in the Netherlands, Switzerland, Belgium and Finland accounted for -5- approximately two-thirds of 1998 foreign sales. The Asia Pacific region accounted for the balance of such sales. OTHER The Company further sold its premium products to sporting goods stores and non-direct optical stores, both domestically and internationally, and excess inventories of its premium products through a variety of outlets, aggregating approximately 38% of the Company's 1998 premium sales. 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 network for its non-premium products, the Company had sales in 1996 of approximately $7.2 million to Wal-Mart, representing approximately 53% of the Company's total sales. With the acquisition of the Serengeti business, the Company's dependence upon Wal-Mart was further reduced, with sales to Wal-Mart of approximately $9.2 million or approximately 27% of the Company's total sales in 1997 and $8.2 million or approximately 19% of the Company's total sales in 1998. 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 sells its premium products through a nationwide network of sales representatives and distributors, but intends to continue to sell its non-premium products directly 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 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 utilizes independent sales representatives throughout the United States to generate its non-premium sales. 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 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 -6- specific demand, the tracking of supply inventory by direct computer link-up and the implementation of specifically tailored systems for the shipment of inventory. 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 coordinates the sales efforts of the Company's distributors and develops 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 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, as well as through catalogs, billboards, event sponsorships, product promotions, trade and consumer publications and trade shows. The Company 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. Additionally, 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 continue 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, Brazil and France and then shipped to Italy and other locations overseas for finishing. All lenses currently mounted in the Drivers and Kinetix lines are then subjected to the Company's -7- proprietary hydrogen firing process at a Corning facility in France or manufacturing facilities in Italy or Japan. Lenses are cut, edged, tempered, coated, drop ball tested and inserted into the frames by third-party contractors in Japan, Italy and the United States. Pursuant to a settlement agreement between the Company and Corning, the Company may defer payment, without interest, until December 31, 1999 for up to 250,000 lens blanks which were purchased in 1998. The Company currently sources all of its sunglass frames from third-party suppliers. 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 manufacturing process, the finished sunglasses are shipped to the Company's facility in Sarasota, Florida from where distribution takes place. The Company has developed long-standing collaborative relationships with established manufacturers of sunglasses throughout the Far East for the manufacture of its non-premium 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 primarily produces the Company's non-premium 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 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 with the capability of fabricating Serengeti lenses utilizing the hydrogen firing process, there can be no assurance that an alternative manufacturer with such capability 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 a material 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 manufacturers, including foreign manufacturers. Risks inherent in the use of such manufacturers include the absence of an adequate guaranteed supply, unavailability of or delays in obtaining access to transportation 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 as well -8- as 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 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's trademarks include Country Club-Registered Trademark-, Drivers-Registered Trademark-, Flex-Grip-TM-, Flyers-TM-, Grafix-Registered Trademark-, H2Optix-Registered Trademark-, H2Optix Zero Tolerance-Registered Trademark-, In-B-Teen-Registered Trademark-, KidzFlipz-TM-, Kinetix-Registered Trademark-, Mach 1-Registered Trademark-, Marine Vision Systems-TM-, Outa Limitz-Registered Trademark-, Photo-Blues-TM-, Power Plus-Registered Trademark-, Range & River-Registered Trademark-, Rhythm `n' Blues-TM-, S Design-TM-, Sensor-X-Registered Trademark-, Serengeti7, Signia-Registered Trademark-, Solar Barriers-Registered Trademark-, Solar-Mates-Registered Trademark-, Solar*X-Registered Trademark-, Spectral Control-Registered Trademark-, Sport Shields-Registered Trademark-, Strata-Registered Trademark-, Sunglasses for the Waters of the World-TM-, Sunpets-Registered Trademark-, Surf and Cycle-Registered Trademark-, The Best Sunglass Value Money Can Buy-Registered Trademark-, Vision Mates-Registered Trademark-, When You Buckle Up Clip It On-TM- and Wickets-Registered Trademark-. As of March 31, 1999, the Company had 25 trademark registrations in the United States and 135 trademark registrations in foreign countries, including those for Serengeti, Drivers, Kinetix and H2Optix. As of such date, the Company had 10 trademark applications pending in the United States and 21 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 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. -9- 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. The Company owns twelve additional patents, which expire at various dates through July 15, 2017. 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. 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 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 experienced any difficulties with regulatory compliance. -10- INSURANCE 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. EMPLOYEES As of March 31, 1999, the Company employed 67 individuals on a full-time basis, 42 of whom were employed in executive, sales 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. 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 under a lease expiring in March 2000 at a monthly rental of approximately $6,700. The lease provides for various escalations based on cost of living and real estate taxes. The Company also leases a satellite sales office in Windsor, England expiring in March 2001 and an off-site warehouse facility in Sarasota, Florida on a month-to-month basis. ITEM 3. LEGAL PROCEEDINGS. On or about August 18, 1997, Argon, Inc. filed an action against the Company and Corning in the Superior Court of California, County of Los Angeles. The complaint alleges breach of contract in which the plaintiff seeks approximately $250,000 based upon a non-exclusive distributor agreement and a service agreement. The Company has denied the substantive allegations and has asserted a counterclaim for $118,000 based upon Argon's breach of the above mentioned agreements and non-payment of amounts due to the Company. This proceeding is in the discovery stage. On or about January 28, 1998, RBB Bank Aktiengesellschaft ("RBB"), the entity which purchased $22.5 million of the Company's Preferred Shares, 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 its purchase of the Preferred Shares. RBB contends that the Company failed to disclose certain material information and that RBB relied to its detriment on these omissions in purchasing the Preferred Shares. 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 Shares, and punitive damages in the sum of $25 -11- million. The Company has denied the substantive allegations and has moved to dismiss the complaint. On or about March 19, 1997, Argent Securities, Inc. ("Argent"), the underwriter of the Company's initial public offering, filed an action against the Company which alleged, 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, more fully discussed in Item 12, below, and misstatements in the Company's Proxy Statement relating to the issuance of the Preferred Shares. A settlement whereby the Company is required to pay to Argent $35,000 was reached and the action was discontinued with prejudice. In the normal course of conducting its business, the Company is involved in various other legal matters. The Company is not a party to any other legal matter which management believes could result in a judgment that would have a material adverse affect on the Company's financial position, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable -12- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is quoted on the OTC Bulletin Board, an NASD sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Market ("Nasdaq"). The trading symbol of the Company's common stock is SOLR. The following table sets forth for the periods indicated the range of the high and low sales prices of the common stock, as reported by Nasdaq.
Quarter Ended(1) High Low - --------------------------------------------------------------------- ---- --- March 31, 1997....................................................... $7.56 $2.13 June 30, 1997........................................................ 3.44 2.00 September 30, 1997................................................... 3.50 1.88 December 31, 1997.................................................... 2.88 1.63 March 31, 1998....................................................... 2.44 1.50 June 30, 1998........................................................ 1.81 0.63 September 30, 1998................................................... 1.00 0.25 December 31, 1998.................................................... 0.56 0.25
- ---------- (1) On June 11, 1998, the quotation of the Company's common stock and warrants was transferred from the Nasdaq National Market to the Nasdaq SmallCap Market. On October 1, 1998, the Company's securities ceased being listed on the Nasdaq SmallCap Market. At March 31, 1999, there were approximately 35 shareholders of record of the common stock. Such number does not include beneficial owners holding shares through nominee names. DIVIDEND POLICY The Company has never paid any dividends and does not expect to pay any 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. The Company's bank credit facility restricts the Company's ability to pay dividends on its common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations C Liquidity and Capital Resources." -13- 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. 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 late 1992, the Company introduced its line of Solar*X sunglasses, which feature a ground and polished lens, comparable to optical quality sunglasses, at non-premium prices. This product was the Company's predominant line from 1994 until the Acquisition. The Company expects its Solar*X line of sunglasses to remain its predominant product in the non-premium product line of its business. During 1997 and 1998, the non-premium product line accounted for approximately 36% and 31%, respectively, of the Company's total sales. The Company intends to continue and expand the marketing of its non-premium sunglasses to the mass merchandise market. On February 13, 1997, the Company acquired the assets of the Serengeti Eyewear division of Corning. Corning's Serengeti Eyewear division had first entered the premium sunglass market in 1985 with the introduction of the Drivers line of sunglasses, which remain the core of the Serengeti product line. Over the years, Serengeti sunglasses have developed a brand identity based upon superior lens technology, quality and performance. During 1997 and 1998 the premium line accounted for approximately 64% and 69%, respectively, of the Company's total sales. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998 Net sales increased from approximately $32.5 million in 1997 to approximately $43.3 million in 1998, primarily as a result of increased sales of the Serengeti premium eyeglass product line which accounted for approximately 69% of the Company's total sales in 1998. The Company also experienced increased sales in its H2Optix products, as well as sales from new products introduced late in 1997 and 1998. In addition, sales increased as a result of the inventory reduction program that was put into place in the third quarter of 1998. The Company has restated its financial statements for the year ended December 31, 1997 to correct certain erroneous information which was discovered upon implementation of the Company's new inventory system and integrating this system with its financial reporting and accounting system. In particular, the 1997 financial statements have been restated to reflect an -14- inventory write-down of $1,510,911 ($0.63 per share). Reference is made to Note 14 of Notes to the Consolidated Financial Statements. In the fourth quarter of 1998, the Company made adjustments to its inventory balance, resulting in a charge to operations of approximately $4.2 million. These adjustments resulted from difficulties encountered by the Company in connection with its implementation and integration of its new financial reporting and accounting system, as noted above. Reference is made to Note 14 of Notes to the Consolidated Financial Statements. Gross profit declined from 37.9% (restated) in 1997 to 30.9% in 1998 primarily as a result of lower profit margins from the inventory reduction program and markdowns and other allowances provided to certain customers as inducements to acquire new Company product offerings. Selling expenses decreased by approximately $0.5 million, from approximately $6.2 million in 1997 to approximately $5.7 million in 1998. The Company reduced its advertising expenses in 1998 as a response to cost reduction programs. In 1997 the Company spent in excess of $1.1 million on a radio advertising campaign which was not repeated in 1998. General and administrative expenses increased by approximately $1.0 million, from approximately $8.8 million in 1997 to approximately $9.8 million in 1998, primarily as a result of an increase in executive and administrative salaries incurred during the first half of 1998. Outside labor costs increased due to the temporary help required to pack, ship and administer the Company's inventory reduction programs. Higher consulting fees were also incurred in 1998, attributable to the costs incurred upon the implementation of the financial reporting and accounting systems. Interest expense increased by approximately $600,000 from approximately $1.3 million in 1997 to approximately $1.9 million in 1998, primarily as a result of the interest charges incurred on higher outstanding debt and higher interest rates from its renegotiated bank credit facility, discussed below. LIQUIDITY AND CAPITAL RESOURCES The Company is presently not in compliance with the minimum tangible net worth and other financial covenants set forth in its bank credit facility. The Lenders have not declared the Company in formal default or accelerated payment of the Company's indebtedness thereunder. There can be no assurance that they will not do so in the future. The Company is engaged in discussions with a prospective replacement lender. There can be no assurance that the Company will successfully negotiate a new credit loan facility. The Company's current credit facility, last amended as of August 21, 1998, includes two term loans with renewed principal balances of $2,000,000 and $5,575,000, respectively, and a $7,500,000 revolver facility. The first term loan is to be paid in installments of $437,500 on each of September 30, 1998 and December 31, 1998 and $538,333 on March 31, 1999, with the -15- balance due and payable on June 30, 1999. The second term loan is payable in monthly installments of $300,000 with the balance due on December 31, 1999. The banks have permitted the Company to delay its 1999 payments of principal, pending negotiations with a potential new lender. Interest on the first term loan is payable at the LIBOR rates plus 325 basis points or the "Base Rate" plus 1.75%. Interest on the second term loan is payable at the LIBOR rate plus 500 basis points or the "Base Rate" plus 3.50%. Under the current revolver facility, as amended, the Company was able to borrow up to 75% of eligible accounts receivable and up to 50% of the value of the Company's eligible inventory, subject to additional limitations on inventory-based loans. The unused portion of the facility was $177,000 at December 31, 1998. Interest on the revolver facility is payable at the LIBOR rate plus 325 basis points or the "Base Rate" plus 1.75%. Pursuant to the 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 facility through March 31, 2000. The credit facility requires the Company to maintain certain financial ratios. Pursuant to the 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 credit facility. The 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 credit facility is secured by a first priority lien on all of the assets of the Company. The Company's liquidity decreased from a working capital deficit of approximately $0.8 million at December 31, 1997 to a working capital deficit of approximately $4.1 million at December 31, 1998. This decrease resulted primarily from a decrease of approximately $3.5 million in accounts receivable resulting from increased collection efforts and a decrease of approximately $4.4 million in inventory resulting from the sale of excess inventory. The decreases were partially offset by an increase of approximately $1.6 million in accounts payable and a reduction of $2.7 million in secured debt. The Company incurred approximately $0.3 million in capital expenditures during 1998 primarily relating to the acquisition of equipment, and furniture and fixtures. The Company anticipates that its level of capital expenditures will decrease during 1999. The Company anticipates, based on its currently proposed plans, including (i) replacement of its current senior bank lenders with a new lender, of which there can be no assurance, (ii) the introduction of procedures designed to strengthen management and increase sales effectively and (iii) the development and introduction of new products, that the net cash available from operations will be sufficient to satisfy its anticipated cash requirements for the 1999 fiscal year. -16- GOING CONCERN CONSIDERATION As indicated by the independent certified public accountants in their report and as shown in the financial statements, the Company has experienced significant operating losses which have resulted in an accumulated deficit of $18,221,197 at December 31, 1998. For the years ended December 31, 1998 and 1997, the Company reported net losses before preferred dividends of $5,289,033 and $4,912,792, respectively and was not in compliance with certain financial covenants under the credit facility. These conditions raise substantial doubt about the Company's ability to continue as a going concern. 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. YEAR 2000 ISSUES The Year 2000 problem arises because many computer systems were designed to identify a year using two digits, instead of four digits, in order to conserve memory and other resources. For instance, A1997" would be held in the memory of a computer as A97". When the year changes from 1999 to 2000, a two digit system would read the year as changing from A99" to A00." For a variety of reasons, many computer systems are not designed to make such a date change or are not designed to "understand" or react appropriately to such a date change. Therefore, as the date changes to the year 2000, many computer systems could completely stop working or could perform in an improper and unpredictable manner. During November, 1997 the Company began converting its information system to be year 2000 compliant. At December 31, 1997, the Company had completed the installation of the new software and completed the process of updating application by mid-1998. The Company incurred charges aggregating approximately $50,000 in 1998 and estimates that additional costs will aggregate approximately $50,000 in 1999. Pursuant to the Company's year 2000 planning, the Company is in the process of requesting information regarding the computer systems of its key suppliers, customers, creditors and financial service organizations. Where practicable, the Company will attempt to mitigate its risks with respect to the failure of any of these institutions to be year 2000 compliant. The effect, if any, on the Company's results of operations from the failure of each party to be year 2000 compliant is not readily determinable. -17- 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. RECENT PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the: (i) exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedges"), (ii) exposure to variable cash flows of a forecasted transaction ("cash flow hedges"), or (iii) foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency- denominated forecasted transaction ("foreign currency hedges"). The objective of hedge accounting is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument (e.g., derivative contracts entered into for speculative purposes), the gain or loss is recognized as income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently plans to adopt SFAS 133 on July 1, 1999. On that date, hedging relationships will be designated anew and documented. The Company periodically enters into derivative contracts for the purpose of hedging risks attributable to interest rate fluctuations and, in general, such hedges have been fully effective in offsetting the changed in fair value of the underlying risk. The Company expects to continue its hedging activities in the future. However, it has not yet evaluated the financial statement impact of adopting SFAS 133. FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS This report contains forward-looking statements, including statements with respect to proposed financing activities and anticipated business trends, which are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond the -18- Company's control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Report, including those set forth under "Risk Factors," below, describe factors, among others such as (i) the Company's continued ability to develop and introduce innovative products, (ii) changing consumer preferences, (iii) manufacturing capacity constraints of its outside sources and the availability of raw materials, (iv) the effect of economic conditions, (v) dependence on certain customers and (vi) other risks identified from time to time in the Company's Securities and Exchange Commission filings, that could contribute to or cause such differences. RISK FACTORS - - OPERATING LOSSES; ACCUMULATED DEFICIT. For the years ended December 31, 1998 and 1997, the Company incurred net losses before preferred dividends of $5,289,033 and $4,912,792, respectively. Its accumulated deficit at December 31, 1998 was $18,221,197 and its working capital deficit at that date was $4,084,529. The Company's ability to expand, let alone sustain its current level of operations is dependent upon its receipt of additional financing. There can be no assurance as to the availability of such additional financing or, if available, the commercial reasonableness of its terms. - - QUALIFIED INDEPENDENT AUDITORS' REPORT. The independent auditors' report upon the Company's consolidated financial statements comprising a portion of this Report includes an explanatory paragraph stating that such financial statements have been prepared assuming the Company's continuity as a going concern and also stating that the Company experienced net losses from operations, had an accumulated deficit and was in violation of certain debt financial covenants, which raises substantial doubt about the Company's ability to continue as a going concern. - - CREDIT FACILITY NON-COMPLIANCE. The Company is currently not in compliance with the minimum tangible net worth and certain other financial covenants contained in its bank credit facility. Although the lenders have not declared the Company in formal default nor have they accelerated payment of the Company's indebtedness incurred thereunder, there can be no assurance that the lenders will not do so in the future. - - CREDIT FACILITY TO EXPIRE ON DECEMBER 31, 1999. The Company's bank credit facility is scheduled to expire on December 31, 1999. The Company will have to negotiate an extension of this facility prior to its scheduled expiration date or, alternatively, secure replacement financing. The Company is currently seeking alternative financing. There can be no assurance of the Company's ability to secure such alternative financing in a timely fashion, if at all. In such event, the Company's ability to sustain its current level of operations may be materially adversely affected. - - CONCENTRATION OF CUSTOMERS. Wal-Mart and Sunglass Hut accounted for 19% and 10%, respectively, of the Company's sales for the year ended December 31, 1998. Such customers accounted for 28% and 11% of sales, respectively, for the year ended December 31, 1997. The loss of either or both of these customers or a significant future -19- reduction in their respective purchases of the Company's products may be expected to materially adversely affect the Company's operations and prospects. - - PENDING LITIGATION. Litigation instituted by RBB against the Company, discussed elsewhere herein, stemming from RBB's acquisition of certain of the Company's Preferred Stock in October 1996, seeks substantial damages against the Company. The Company's operations and prospects would be materially adversely affected if RBB were to prevail in this litigation. - - DEPENDENCE ON SINGLE SUPPLIER. The Company relies on Corning as its sole source of supply for lens blanks for its Serengeti product line. Any disruption of this source may result, at a minimum, in a temporary curtailment of the Company's ability to ship these products, while a loss of this source may materially adversely affect the Company's operations and prospects. - - SEASONALITY. The Company's sales are seasonal with historical premium product sales higher in the second quarter of each year. -20- ITEM 7. FINANCIAL STATEMENTS. Index to Consolidated Financial Statements ------------------------------------------
Page ---- Report of Independent Certified Public Accountants............................. F-1 Consolidated Balance Sheet as of December 31, 1998....................... F-2 - F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997............................................. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997............................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997........................................F-6 - F-7 Notes to Consolidated Financial Statements...............................F-8 - F-31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Serengeti Eyewear, Inc. We have audited the accompanying consolidated balance sheet of Serengeti Eyewear, Inc. and subsidiary as of December 31, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Serengeti Eyewear, Inc. and subsidiary as of December 31, 1998 and the results of their operations and their cash flows for each of the two years in the period then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced significant operating losses, has a working capital deficit and accumulated deficit at December 31, 1998, and is in default of certain loan covenants of its senior debt. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ----------------------------------- BDO Seidman, LLP Orlando, Florida March 26, 1999 F-1
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ================================================================================================= DECEMBER 31, 1998 - ------------------------------------------------------------------------------------------------- ASSETS (Notes 6 and 7) CURRENT ASSETS: Cash and cash equivalents $ 87,774 Accounts receivable, less allowance for doubtful accounts of $752,436 (Note 9) 7,796,963 Income tax refund receivable (Note 11) 358,055 Inventories (Notes 4 and 9) 12,536,224 Prepaid expenses 958,603 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 21,737,619 - ------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, less accumulated depreciation (Note 5) 2,170,582 - ------------------------------------------------------------------------------------------------- OTHER ASSETS: Patents and trademarks, net of accumulated amortization of $1,187,157 (Note 3) 10,258,068 Goodwill, net of accumulated amortization of $696,613 (Note 3) 6,290,314 Other assets (Note 7) 157,261 - ------------------------------------------------------------------------------------------------- $40,613,844 ================================================================================================= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ===================================================================================== DECEMBER 31, 1998 - ------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank overdraft $ 288,414 Accounts payable 10,952,090 Note payable - bank (Note 6) 7,322,704 Accrued expenses 519,492 Accrued dividends (Note 8) 1,476,000 Current portion of long-term debt (Note 7) 5,263,448 - ------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 25,822,148 - ------------------------------------------------------------------------------------- LONG-TERM DEBT, less current portion (Note 7) 91,415 COMMITMENTS AND CONTINGENCIES (Note 9) -- STOCKHOLDERS' EQUITY (Note 8): Convertible 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 Accumulated deficit (18,221,197) - ------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 14,700,281 - ------------------------------------------------------------------------------------- $ 40,613,844 ===================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS ====================================================================================== YEARS ENDED DECEMBER 31, 1998 1997 - -------------------------------------------------------------------------------------- NET SALES $ 43,323,222 $ 32,458,362 COST OF GOODS SOLD 29,927,850 20,155,683 - -------------------------------------------------------------------------------------- Gross profit 13,395,372 12,302,679 - -------------------------------------------------------------------------------------- OPERATING EXPENSES: Depreciation 490,776 364,753 Amortization 977,699 906,071 Selling expenses 5,664,785 6,245,338 General and administrative expenses 9,766,906 8,759,208 - -------------------------------------------------------------------------------------- Total operating expenses 16,900,166 16,275,370 - -------------------------------------------------------------------------------------- LOSS FROM OPERATIONS (3,504,794) (3,972,691) - -------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest (1,889,446) (1,334,733) Other income, net 135,409 64,644 - -------------------------------------------------------------------------------------- (1,754,037) (1,270,089) - -------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES (BENEFIT) (5,258,831) (5,242,780) PROVISION FOR INCOME TAXES (BENEFIT) (Note 11) 30,202 (329,988) - -------------------------------------------------------------------------------------- NET LOSS (5,289,033) (4,912,792) PREFERRED STOCK DIVIDENDS (Note 8) (1,476,000) (5,040,000) - -------------------------------------------------------------------------------------- NET LOSS APPLICABLE TO COMMON STOCK $ (6,765,033) $ (9,952,792) ===================================================================================== BASIC LOSS PER SHARE $ (2.84) $ (4.17) ===================================================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,384,000 2,384,000 ===================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ==================================================================================================================================== CONVERTIBLE ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1996 7,500 $ 6,975,000 2,384,000 $ 2,384 $ 6,836,094 $ (1,503,372) Preferred stock issued for cash pursuant to a Regulation S offering 15,000 15,000,000 -- -- -- -- Costs associated with Regulation S offering -- (1,050,000) -- -- -- -- Issuance of preferred stock as payment of preferred stock dividends 118 118,000 -- -- -- -- Preferred stock dividend accrual -- -- -- -- -- (1,290,000) Beneficial conversion feature of preferred stock (Note 8) -- -- -- -- 3,750,000 (3,750,000) Net loss -- -- -- -- -- (4,912,792) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1997 22,618 21,043,000 2,384,000 2,384 10,586,094 (11,456,164) Issuance of preferred stock as payment of preferred stock dividend 1,290 1,290,000 -- -- -- -- Preferred stock dividend accrual -- -- -- -- -- (1,476,000) Net loss -- -- -- -- -- (5,289,033) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1998 23,908 $ 22,333,000 2,384,000 $ 2,384 $ 10,586,094 $(18,221,197) ==================================================================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS ====================================================================================================== YEARS ENDED DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,289,033) $ (4,912,792) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,468,475 1,270,824 Deferred loan fees charged to interest 291,097 105,000 Loss on sale of assets 35,754 -- Cash provided by (used for): Accounts receivable 3,462,093 (5,178,249) Other receivables 78,730 20,462 Income tax refund receivable 30,202 (388,257) Inventories 4,391,446 (4,088,433) Trading securities -- 4,976,625 Prepaid expenses and other assets 539,370 (469,057) Accounts payable (1,580,963) 8,417,744 Customer deposits (900,122) 900,122 Accrued expenses 129,529 (290,213) Accrued income taxes -- (232,930) - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,656,578 130,846 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Corning division assets -- (26,264,530) Purchase of patents (53,113) (23,053) Proceeds from disposal of property and equipment -- 64,841 Proceeds received from Corning settlement 405,500 -- Purchase of property and equipment (344,061) (1,207,583) - ------------------------------------------------------------------------------------------------------ Net cash provided by (used for) investing activities 8,326 (27,430,325) - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft 288,414 -- Net proceeds from note payable 822,704 5,000,000 Proceeds from long-term debt -- 10,000,000 Principal payments on long-term debt (3,607,820) (1,345,858) Principal payments on note payable to related party (44,575) (209,202) Net proceeds from preferred stock sales -- 13,950,000 Deferred loan costs (164,041) (600,000) - ------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (2,705,318) 26,794,940 - ------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (40,414) (504,539) CASH AND CASH EQUIVALENTS, beginning of year 128,188 632,727 - ------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, end of year $ 87,774 $ 128,188 ====================================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
SERENGETI EYEWEAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS ====================================================================================================== YEARS ENDED DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $1,835,411 $1,053,618 Income taxes -- 233,166 ====================================================================================================== NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property and equipment with debt $ -- $ 164,252 Issuance of preferred stock as payment of preferred stock dividends 1,290,000 118,000 ====================================================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. SIGNIFICANT NATURE OF BUSINESS ACCOUNTING POLICIES Serengeti Eyewear, Inc. and subsidiary (the "Company") is a distributor of premium and nonpremium sunglasses. The Company maintains its office and warehouse operations in Sarasota, Florida. Suppliers for the Company are primarily located in the United States, Asia and Europe. The Company's customers operate retail stores located principally throughout North America, Europe and the Pacific Rim. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Solartechnics (HK) Ltd. Intercompany transactions and balances were eliminated upon consolidation. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost or market on a first in-first out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the expected useful lives of the assets. F-8 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ INTANGIBLE ASSETS Patents and trademarks are amortized using the straight-line method over periods of 10 to 13 years for patents and 20 years for trademarks, which are based upon their estimated useful lives. Goodwill resulting from the acquisition of the Serengeti business is amortized using the straight line method over a period of 20 years. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 requires impairment losses to be recorded on long-lived assets used in operations and intangible assets when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. REVENUE RECOGNITION The Company recognizes revenue upon the shipment of goods to its customers. ADVERTISING COSTS Advertising costs are charged to operations when incurred. Advertising costs charged to operations were $3,522,603 and $3,471,828 during 1998 and 1997, respectively. WARRANTY COSTS The Company offers a one-year warranty on its premium sunglasses. Warranty costs are charged to operations as incurred. The Company accrued $150,000 for future estimated warranty F-9 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ costs at December 31, 1998. Warranty costs were approximately $378,000 and $357,000 during 1998 and 1997, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 1998. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, trade receivables, accounts payable and accrued expenses. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company's long-term debt approximates its carrying value based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. LOSS PER SHARE Basic loss per share amounts have been computed based upon the weighted average number of shares outstanding of 2,384,000 in 1998 and 1997. Potential common shares and the computation of diluted earnings per share are not considered as their effect would be anti-dilutive. Potential common shares consist of 925,000 options, 2,245,000 warrants and 55,000,000 shares underlying the F-10 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ convertible preferred stock. SEGMENT INFORMATION The Company does not identify separate operating segments for management reporting purposes. The consolidated results of operations are the basis on which management evaluates operations and makes business decisions. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the: (i) exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedges"), (ii) exposure to variable cash flows of a forecasted transaction ("cash flow hedges"), or (iii) foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction ("foreign currency hedges"). The objective of hedge accounting is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument (e.g., derivative contracts entered into for speculative purposes), the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently plans to adopt SFAS 133 on July 1, 1999. On that date, hedging relationships will F-11 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ be designated anew and documented. The Company periodically enters into derivative contracts for the purpose of hedging risks attributable to interest rate fluctuations and, in general, such hedges have been fully effective in offsetting the changes in fair value of the underlying risk. The Company expects to continue its hedging activities in the future. However, it has not yet evaluated the financial statement impact of adopting SFAS 133. RECLASSIFICATIONS Certain amounts in the 1997 financial statements have been reclassified to conform to the 1998 presentation. 2. GOING CONCERN The Company's financial statements are CONSIDERATIONS presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company experienced net losses before preferred dividends of $5,289,033 and $4,912,792 for the years ended December 31, 1998 and 1997, respectively. These losses resulted in a working capital deficit of $4,084,529 and an accumulated deficit of $18,221,197 at December 31, 1998. In addition, the Company was in violation of certain of its loan financial covenants at December 31, 1998 (see Notes 6 and 7). These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company believes that the following actions and plans will allow it to continue operations for a reasonable period of time. - The Company is negotiating with a new lender to replace its current senior debt and to provide additional working capital. - The Company has introduced procedures to strengthen management and increase sales efficiency. - The Company has developed and introduced new product F-12 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ styles for its 1999 catalog which management believes will become widely accepted by its customers. - The Company has added to its non-premium line customer base during 1999. 3. BUSINESS On February 13, 1997, the Company changed its ACQUISITION name to Serengeti Eyewear, Inc. in conjunction with the acquisition of certain assets ("Serengeti Acquisition") of the Serengeti Eyewear division of Corning Incorporated ("Corning") used in the design, manufacture and distribution of Serengeti premium 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 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. In addition, the Company incurred other costs related to the acquisition aggregating $855,561, which have been included in goodwill. In 1998, the Company received $405,500 under a settlement agreement with Corning which was recorded as a reduction of goodwill (see Note 9). In order to partially finance the acquisition, the Company entered into a bank revolving line of credit and term loan agreements. Under these agreements, the Company had 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 an existing line of credit. As more fully described in Notes 6 and 7, the Company restructured the F-13 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ terms of these debt agreements during 1998. The purchase price of the Serengeti division, including the additional costs and settlement described above, was allocated as follows: ----------------------------------------------- Inventory $ 8,830,856 Furniture and equipment 832,278 Trademarks 9,500,000 Patents 1,800,000 Goodwill 6,986,927 ----------------------------------------------- $27,950,061 ===============================================
The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of 1997 and does not purport to be indicative of what would have occurred had the acquisition been made as of that date or the results which may occur in the future. 1997 ------------------------------------------------------ (IN THOUSANDS) Net sales $ 35,097 Net loss applicable to common stock $ (9,971) Per share $ (4.18) ======================================================
F-14 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 4. INVENTORIES Inventories consist of the following:
1998 ------------------------------------------------------------------------ Raw materials $ 4,490,117 Work-in-process 2,768,884 Finished goods 5,277,223 ------------------------------------------------------------------------ $12,536,224 ========================================================================
5. PROPERTY, PLANT Property, plant and equipment consist of the AND EQUIPMENT following:
USEFUL DECEMBER 31, LIFE 1998 ------------------------------------------------------------------------ Furniture and equipment 3-10 years $ 2,386,535 Leasehold improvements 3-7 years 519,192 Transportation equipment 5 years 178,084 ------------------------------------------------------------------------ 3,083,811 Less accumulated depreciation 913,229 ------------------------------------------------------------------------ $ 2,170,582 ========================================================================
F-15 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. NOTE PAYABLE - BANK During February 1997, the Company secured a $7,500,000 line of credit with a bank with interest payable at the LIBOR rate or a base rate, plus applicable margins. In July 1998, the Company renegotiated this borrowing facility. The terms of the new agreement allow the Company to borrow up to $7,500,000 with interest payable at the LIBOR rate plus 325 basis points (8.8% at December 31, 1998) or the bank's prime lending rate plus 1 3/4% (9 1/2% AT December 31, 1998), at the borrower's option. Under the renegotiated borrowing facility, the Company is able to borrow up to 75% of eligible accounts receivable and 50% of eligible inventory with certain limitations. The credit facility is collateralized by substantially all the Company's assets. The credit line is guaranteed by the Company's wholly-owned subsidiary. At December 31, 1998, the Company's balance outstanding on this credit line was $7,322,704. The current line of credit agreement is scheduled to mature on December 31, 1999. Certain information related to this note is as follows:
1998 ----------------------------------------------------------- Maximum amount outstanding during year $7,500,000 Average month-end balance $6,924,017 Weighted average interest rate 8.82% Unused balance at December 31 $ 177,296 -----------------------------------------------------------
As more fully described in Note 7, the Company was in violation of certain of the financial loan covenants under the renegotiated revolving loan agreement. F-16 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. LONG-TERM DEBT Long-term debt consists of the following:
1998 --------------------------------------------------------------------------------------- $5,575,000 note payable to bank; due in monthly principal payments of $300,000, plus interest at the LIBOR rate plus 500 basis points (10.6% at December 31, 1998) or the bank's prime lending rate plus 3 1/2% (11 1/4% at December 31, 1998), at the borrower's option; all unpaid principal and accrued interest due December 31, 1999; collateralized by substantially all the Company's assets and a $2,000,000 key man life insurance policy on the Company's CEO; guaranteed by the Company's wholly-owned subsidiary. $4,075,000 $2,000,000 note payable to bank; principal payments of $583,333 due March 31, 1999 with the remaining unpaid principal and accrued interest due June 30, 1999; interest at the LIBOR rate plus 325 basis points (8.8% at December 31, 1998) or the bank's prime lending rate plus 1 3/4% (9 1/2% at December 31, 1998), at the borrower's option; collateralized by substantially all the Company's assets and a $2,000,000 key man life insurance policy on the Company's CEO; guaranteed by the Company's wholly-owned subsidiary. 1,125,000 Various equipment notes payable in aggregate monthly installments totaling approximately $6,300 principal and interest at rates ranging from 5% to 13%; maturing at various dates between December 1999 to August 2002; collateralized by equipment. 154,863 --------------------------------------------------------------------------------------- 5,354,863 Less current portion 5,263,448 --------------------------------------------------------------------------------------- $ 91,415 --------------------------------------------------------------------------------------- Long-term debt maturities are as follows: --------------------------------------------------------------------------------------- 1999 $5,263,448 2000 48,453 2001 27,600 2002 15,362 --------------------------------------------------------------------------------------- $5,354,863 =======================================================================================
F-17 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The notes payable to bank were renegotiated in July 1998 when the principal balance under the original term loan was $7,575,000. The original term loan was restructured into two separate notes, and the maturity date was changed from December 2001 to December 31, 1999 for the $5,575,000 note and June 30, 1999 for the $2,000,000 note. INTEREST RATE SWAP In February 1997, the Company entered into an interest rate swap agreement for the line of credit and long-term debt. The fair value of the interest rate swap was approximately $77,000 at December 31, 1998 and is included in other assets. In connection with this agreement, the counterparty will pay the Company interest at a variable rate based on LIBOR. In the event the counterparty to the agreements default in all the provisions, the accounting loss suffered by the Company would be limited to the interest rate differential between the fixed rate and the LIBOR rate if the LIBOR rate is in excess of the fixed rate. In the event the agreements are terminated, the Company may be required to pay a termination fee to the counterparty based on the difference between the LIBOR rate and the fixed rate. LOAN COVENANTS The Company is subject to various loan covenants with respect to its line of credit and long-term debt borrowings with the bank. The Company was in violation of the minimum tangible net worth requirement and "going-concern" covenant. The Company did not obtain a waiver from the bank for these violations. F-18 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. STOCKHOLDERS' STOCK OPTIONS EQUITY The Company sponsors the Serengeti Eyewear 1995 Stock Option Plan (the "Plan"). Under the Plan, the Company's Board of Directors has reserved 1,500,000 shares which may be granted at the Board of Directors' discretion. No options may be granted after January, 2005 and the maximum term of the options granted under the Plan is ten years. The Company applies APB 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for options issued. Under APB Opinion 25, compensation expense is recorded for the difference between the grant price and the fair market value only if options are granted or extended at exercise prices less than fair market value. Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting for Stock Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value based method prescribed in FAS 123. The Company estimated the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during 1997. No options were granted in 1998. - No dividend yield for both years, - Volatility of 50% and 60%, - Risk-free interest rates of 6.1% and 6.6% and - Expected lives of three years for both years. F-19 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Under the accounting provisions of FAS 123, the Company's net loss and loss per share for 1997 would be as follows: ------------------------------------------------------------------ Net loss $(6,403,977) Net loss per share $ (2.69) ==================================================================
Changes in options outstanding under the Plan are summarized as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE FAIR VALUE EXERCISE OF OPTIONS SHARES PRICE GRANTED --------------------------------------------------------------------------------- BALANCE, December 31, 1996 925,000 $8.08 $ -- Granted above market 220,065 3.24 1.25 Granted at market 914,935 2.94 1.33 Forfeited (925,000) 8.08 -- --------------------------------------------------------------------------------- BALANCE, December 31, 1997 1,135,000 3.00 -- Forfeited (210,000) 2.94 -- --------------------------------------------------------------------------------- BALANCE, December 31, 1998 925,000 $3.02 -- =================================================================================
As of December 31, 1998, a total of 807,487 of the outstanding Plan options were exercisable with a weighted-average exercise price of $2.99 per share and a weighted-average remaining contractual life of 3.6 years. F-20 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ STOCK WARRANTS The following details the common stock warrants outstanding as of December 31, 1998:
UNDERLYING EXERCISE WARRANT SERIES SHARES PRICE EXPIRATION -------------------------------------------------------------------------------------------- IPO warrants 1,174,000 $ 6.50 8/16/99 Underwriter warrants 96,000 6.50 8/16/99 Class A preferred stock 150,000 5.56 12/31/02 Class B preferred stock 300,000 7.50 12/31/02 Class C preferred stock 300,000 10.00 12/31/02 Class D (commission on Class A preferred stock) 200,000 5.50 9/30/01 Class F 25,000 3.50 8/31/03 ---------- 2,245,000 ==========
SHARES RESERVED At December 31, 1998, the Company has reserved common stock for the following purposes:
1998 ----------------------------------------------- Convertible preferred stock 11,000,000 Stock options 1,500,000 Stock warrants 2,245,000 ----------------------------------------------- 14,745,000 ===============================================
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 F-21 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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 2, RBB purchased pursuant to said Regulation S offering 7,500 shares of the Company's $.001 par value Series B 6% cumulative convertible non-voting preferred stock and 7,500 shares of the Company's $.001 par value Series C 6% cumulative convertible non-voting preferred stock for cash aggregating $15,000,000 less commissions aggregating $1,050,000. The dividends on the preferred shares are payable in cash or additional shares of preferred stock at the option of the Company. During 1997, 118 shares of preferred stock valued at $118,000, which represent dividends accrued in 1996 were issued. During 1998, dividends aggregating 1,290 shares of preferred stock, valued at $1,290,000, which represent dividends accrued in 1997, were issued. At December 31, 1998, dividends aggregating $1,476,000 were due and payable to RBB. 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 F-22 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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. During 1998, the Company recorded dividends of $1,476,000 ($61.74 per share). During 1997, the Company recorded preferred dividends of $5,040,000 ($222.83 per share) including $3,750,000 of dividends recorded as an issuance of the beneficial conversion features of the preferred stock. At any time after September 30, 2000, the Company will have the right to force conversion of the preferred shares into common stock. 9. COMMITMENTS EMPLOYMENT CONTRACTS AND CONTINGENCIES On December 31, 1998, the Company is a party to employment agreements with four officers and two sales personnel. These agreements call for aggregate salaries of approximately $760,000 in 1999, $294,000 in 2000 and $70,000 in 2001. Also included in the contracts are certain bonus compensation and options to purchase up to 375,000 shares of common stock at $2.94 per share through June 2001 based on sales and profit targets set by the Company. The sales and profit targets were not met in 1998 or 1997. OPERATING LEASES The Company leases its warehouse and office facilities pursuant to a lease expiring March 2000. This lease provides for various escalations based on cost of living, real estate taxes, and other provisions. In addition, the Company leases sales offices on a month-to-month basis and certain transportation equipment pursuant to leases classified as operating leases. Total monthly lease F-23 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ payments for the warehouse and office facility aggregate approximately $6,700 per month. Rent expense was $198,457 and $278,823 for 1998 and 1997, respectively. Future minimum rentals for operating leases with remaining terms in excess of one year are as follows as of December 31, 1998: ------------------------------------------------- 1999 $112,500 2000 21,300 ------------------------------------------------- $133,800 -------------------------------------------------
CONCENTRATION OF CREDIT RISK During the years ended December 31, 1998 and 1997, the Company made net sales to customers for amounts exceeding 10% of total net sales as follows:
1998 1997 ----------------------------------------------------------------- WalMart $8,200,000 19% $9,200,000 28% Sunglass Hut 4,200,000 10% 3,600,000 11% =================================================================
Approximately $4,082,000 of the gross accounts receivable are due from the above two customers at December 31, 1998 and are unsecured. The Company relies on a single source for the supply of lens blanks for its Serengeti line of products. The loss of the source for lens blanks or a disruption of the supply from this source could cause, at a minimum, temporary shortages in needed materials and could have a material adverse effect on the Company's business operations. F-24 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ During 1998, the Company had four suppliers which accounted for approximately 10%, 15%, 19% and 20% of total purchases, respectively. During 1997, the Company had one supplier which accounted for approximately 17% of total purchases. LEGAL PROCEEDINGS 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. This 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. In March 1999, a preliminary settlement was made in which the Company is obligated to make a cash payment in the amount of approximately $30,000 to Argent. 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 F-25 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ million. The Company has reviewed the claims and intends to vigorously defend itself against this action. Although the risk of loss for this action is deemed reasonably possible, the amount of loss is not estimable, and therefore, no accrual for such is reflected in these financial statements. 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 owed by the Company for certain "transition services" rendered during the Serengeti Acquisition. Any funds owed for these transition services were to be disbursed from a $1.5 million escrow account established during the acquisition process. In May 1998, the Company and Corning entered into a settlement agreement releasing all claims. In connection therewith, Corning received $1,094,500 from the escrow account. The Company received the remaining $405,500, which was recorded as a reduction to the acquisition goodwill. In addition to the above matters and in the normal course of conducting its business, the Company is involved in various other legal matters. The Company is not a party to any legal matter which management believes could result in a judgment that would have a material adverse affect on the Company's financial position, liquidity or results of operations. 10. RELATED PARTY Certain of the Company's legal services are TRANSACTIONS rendered by a law firm in which a member of the Company's Board of Directors is a partner. All of these services have been accounted for as an arm's-length transaction. Legal expenses for these services of approximately $370,000 and $565,000 were incurred during 1998 and 1997, respectively. F-26 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 11. INCOME TAXES The Company accounts for income taxes on the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Measurement of deferred income tax is based on enacted tax rates and laws that will be in effect when the differences are expected to reverse, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. The components of deferred tax assets and liabilities consisted of the following:
1998 ------------------------------------------------------------------ Deferred tax assets: Warranty reserve $ 57,000 Allowance for doubtful accounts 256,000 Net operating loss carryforward 3,547,000 Inventory 37,000 Valuation allowance (3,654,000) ------------------------------------------------------------------ Deferred tax assets 243,000 Deferred tax liabilities: Depreciation and amortization (243,000) ------------------------------------------------------------------ Net deferred tax assets $ -- ==================================================================
The Company's valuation allowance increased by $3,038,000 during 1998. The Company has recorded a valuation allowance to state its deferred tax assets at estimated net realizable value due to the uncertainty related to realization of these assets through future taxable income. 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: F-27 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
1998 1997 --------------------------------------------------------------- Tax at federal statutory rate 34 % (34)% Operating loss with no tax benefit (33) 28 --------------------------------------------------------------- 1 % (6)% ===============================================================
Due to the net operating loss, the Company was able to file a claim for federal income tax refunds from 1995 and 1996 aggregating $358,055, which was received in January 1999. The unused amount of operating loss carryforwards will expire as follows: --------------------------------------------------------------- 2012 $4,153,000 2018 5,273,000 --------------------------------------------------------------- $9,426,000 ===============================================================
F-28 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 12. FOREIGN OPERATIONS During 1998 and 1997, the Company operated in two 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 $ 41,010,380 $ 31,341,200 Hong Kong 2,312,842 1,117,162 ----------------------------------------------------------------------------- $ 43,323,222 $ 32,458,362 ============================================================================= INCOME (LOSS) FROM OPERATIONS: United States $ (3,558,690) $ (3,466,468) Hong Kong 53,896 (506,223) ----------------------------------------------------------------------------- (3,504,794) (3,972,691) OTHER INCOME 135,409 64,644 INTEREST (1,889,446) (1,334,733) ----------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES $ (5,258,831) $ (5,242,780) ============================================================================= IDENTIFIABLE ASSETS: United States $ 39,732,702 $ 50,462,001 Hong Kong 881,142 1,396,696 ----------------------------------------------------------------------------- $ 40,613,844 $ 50,795,710 =============================================================================
Loss 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 of the sales made by the foreign subsidiary in 1998 and 1997 were made to a significant customer described in Note 9. Export sales for the years ended December 31, 1998 and 1997 aggregated approximately $6,580,000 and $9,500,000, respectively, and were distributed to the following geographic regions: F-29 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
1998 1997 -------------------------------------------------------------------- Canada $1,630,000 $2,000,000 Europe 2,850,000 5,000,000 Pacific Rim and Latin America 2,100,000 2,500,000 -------------------------------------------------------------------- $6,580,000 $9,500,000 ====================================================================
13. SIGNIFICANT ACCOUNTS RECEIVABLE FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1998 and 1997, the Company issued credits and markdowns to several customers which resulted in a charge to operations aggregating approximately $1,100,000 and $2,100,000, respectively. These credits and markdowns were issued by the Company at the request of certain significant customers to allow them to increase the rate of sale of the Company's products and to allow these customers to adjust their mix of the Company's products at the retail level. INVENTORY During the fourth quarter of 1998, the Company made adjustments to its inventory balance, resulting in a charge to operations of approximately $4.2 million. These adjustments are the result of difficulties encountered by the Company in implementing the inventory system installed in late 1997 and integrating this system with their financial reporting and accounting system. Of the $4.2 million, approximately $2.0 million relates to the following fiscal quarters:
---------------------------------------------- First quarter 1998 $1,200,000 Second quarter 1998 800,000 ---------------------------------------------- Total $2,000,000 ==============================================
F-30 SERENGETI EYEWEAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 14. RESTATEMENT OF The Company has restated its financial FINANCIAL statements for the year ended December 31, 1997 INFORMATION related to errors encountered by the Company in implementing their new inventory system and integrating this system with their financial reporting and accounting system as discussed in Note 13. The 1997 financial statements have been restated to properly reflect the write-down of inventory in the amount of $1,510,911 as of December 31, 1997. The impact of this restatement on the Company's 1997 financial results as originally reported is summarized below:
1997 ----------------------------- AS REPORTED AS RESTATED -------------------------------------------------------------- Gross profit $13,813,590 $ 12,302,679 Net loss (3,401,881) (4,912,792) Basic loss per share (3.54) (4.17) ==============================================================
F-31 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. -22- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The names and ages of the directors and executive officers of the Company are set forth below.
NAME AGE POSITIONS Stephen Nevitt 51 President, Treasurer and Director Milton Nevitt 77 Vice President, Secretary and Director Michael J. Guccione 51 Vice President and Director Michael Burke 49 Vice President-Marketing and Director Edward Borix 49 Vice President of Operations, Worldwide and Director Lucia Almquist 45 Vice President-Corporate Development Douglas Hinton 46 Vice President - Premium Sales William McMahon 46 Chief Financial Officer and Director David B. Newman 44 Director William Keener 53 Director Dr. Jeffrey Sack 37 Director John Kopinski 46 Director
Stephen Nevitt became the President of the Company in 1993. Prior to such time, he served as Vice President and a director of the Company since its founding in 1976 by his father, Milton Nevitt. As Vice President, he was involved in all phases of operations including management and sales. As President he has been given primary responsibility for management -23- and sales and has also been responsible for design and development of the Company's products as well as product procurement. Milton Nevitt founded the Company in 1976 and served as its President and a director until 1993, and has since served the Company as a Vice President and a director. As President, Mr. Nevitt was primarily responsible for sales and administration. Mr. Nevitt's career in the sunglass industry began in 1950 as a manufacturer's representative for Rayex Corporation, a major domestic supplier of popular priced sunglasses. Mr. Nevitt worked in that capacity until Rayex ceased its business operations in 1976. Mr. Nevitt founded the Company shortly thereafter. Michael J. Guccione became a Vice President and director of the Company in December 1994. Since joining the Company in 1992, Mr. Guccione's primary responsibilities have been marketing and product development of the Company's H2Optix and other product lines. Mr. Guccione became employed by Wal-Mart in 1976 and started and headed its fine jewelry division. Mr. Guccione was also in charge of the development of the sunglass business at Wal-Mart and traveled extensively throughout the Far East and Pacific Rim for the purpose of developing resources for the purchase of sunglasses. After leaving Wal-Mart in 1990, Mr. Guccione independently ran a management consulting firm until joining the Company. Michael Burke became Vice President-Marketing of the Company in January 1997 and a director of the Company in May 1997. From January 1995 until joining the Company, Mr. Burke served as a marketing consultant to the Company. From November 1992 through June 1994, he was Vice President and general manager of the sunglass division of Smith Sport Optics, a sunglass distributor. From June 1985 until November 1992, Mr. Burke served as Vice President-Marketing of Bausch & Lomb, Inc.'s Ray-Ban sunglasses division. Edward Borix became Vice President of Operations, Worldwide of the Company in March 1997 and a director of the Company in May 1997. From January 1995 until joining the Company, Mr. Borix was a Vice President of Fidelity Investments, an investment company. From 1979 to 1995, he was a general manager and director of distribution for various manufacturing plants of Bausch & Lomb, Inc., a manufacturer of diverse eyeglass, eyewear and other optical products. Lucia Almquist became Vice President-Corporate Development of the Company in January 1997. Ms. Almquist was a director of the Company from May 1997 to May 1998. From 1991 through 1997, Ms. Almquist served as Vice President - - Licensing and Merchandising for the Bon Jour Group, Ltd., a designer and manufacturer of various fashion products. Douglas Hinton became Vice-President-Premium Sales of the Company in 1998. From 1997 until joining the Company, Mr. Hinton was National Sales Manager for Bucci, Inc. From 1996 to 1997, Mr. Hinton was Senior Vice President/Sales and marketing for Optic Video USA. From 1990 to 1996, Mr. Hinton was Senior Vice President/Optical & Golf Divisions for Bolle USA. -24- William McMahon became the Chief Financial Officer of the Company and a director in June 1998. From 1992 until joining the Company, Mr. McMahon was Director of Financial Reporting and Corporate Development for Uniroyal Technology Corporation, a plastic manufacturing company. From 1984 until 1992, Mr. McMahon was a vice president of Buccino and Associates, Inc. a national turnaround consulting firm. David B. Newman, a director of the Company since December 1994, has for over the last ten years been a partner of Cooperman Levitt Winikoff Lester & Newman, P.C., which has acted as outside counsel to the Company since 1987. William Keener, a director of the Company since July 1996, has served as an Executive Vice President and Chief Credit Officer of SouthTrust Bank of the Suncoast, a commercial bank, since May 1994. From March 1990 to May 1994, Mr. Keener served as a Senior Vice President and Group President for Commercial Lending and, thereafter, as First Vice-President for Commercial Real Estate for Sunbank, N.A., a commercial bank. Jeffrey B. Sack, M.D. became a director of the Company in 1998. He is board certified in internal medicine and cardiovascular disease and currently practices in Sarasota, Florida. Dr. Sack has a degree in economics and over twenty years of business experience in the management of small growth companies. John Kopinski became a director of the Company in 1998. He has been serving as President of Rikart South, Inc. in Bradenton, Florida for the past ten years. Rikart South, Inc. is a leader in the manufacturing of polyethylene bags. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who beneficially own more than 10% of the common stock to file reports of ownership and changes in ownership of such common stock with the Securities and Exchange Commission, and to file copies of such reports with the Company. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no such forms were required for those persons, the Company believes that during the fiscal year ended December 31, 1998, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with except that Messrs. Hinton, McMahon, Sack and Kopinski were not timely in the filing of their respective Initial Statements of Beneficial Ownership of Securities and Mr. Burke was not timely in his filing of one monthly report of one transaction. ITEM 10. EXECUTIVE COMPENSATION. The following table summarizes the aggregate compensation for services rendered in all capacities to the Company paid in 1996, 1997 and 1998 to the Chief Executive Officer and the Company's four most highly paid executive officers whose compensation exceeded $100,000 (collectively, the "Named Executives"): -25- SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------ SECURITIES ANNUAL COMPENSATION UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) OPTIONS - --------------------------- ---- ------------- ------- Stephen Nevitt ......... 1998 289,103 -- President (CEO) ...... 1997 178,763 -- 1996 166,730 750,000 Michael Burke .......... 1998 168,632 -- Vice President ........ 1997 158,515 -- Lucia Almquist ......... 1998 158,271 -- Vice President ........ 1997 144,193 -- Ed Borix ............... 1998 139,342 -- Vice President ........ 1997 139,342 -- William McMahon Chief Financial Officer 1998 130,000 --
- ---------- (1) Messrs. Burke, Almquist and Borix received their respective salaries for the year ended December 31, 1998 at their respective 1997 salary rates. The difference between their respective 1998 salaries as shown above and 1997 salaries includes perquisites paid to each officer pursuant to their respective employment agreements. OPTION GRANTS IN 1998 No options were granted to any of the Company's directors or executive officers during the year ended December 31, 1998. OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES No options were exercised by any of the Company's directors or executive officers during the year ended December 31, 1998. Set forth below is certain information with respect to exercisable and non-exercisable options to acquire shares of the Company's common stock held by the Company's directors and executive officers: -26-
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR END FISCAL YEAR END ** ------------------------------------------- -------------------------------------------- NAME EXERCISABLE UNEXERCISABLE* EXERCISABLE UNEXERCISABLE - ---- ----------- -------------- ----------- ------------- Stephen Nevitt.............. 647,961 102,039 -- -- Michael Burke............... 15,000 -- -- -- Lucia Almquist.............. -- -- -- -- Ed Borix.................... -- -- -- -- William McMahon............. -- -- -- --
- ---------- * Pursuant to their respective employment agreements, Messrs. Burke, Almquist, Borix and McMahon are each entitled to stock options upon certain performance criteria being met for the year ending December 31, 1999. See "Employment Agreements" below. ** The last sales price of the common stock was approximately $0.25 per share on December 31, 1998. EMPLOYMENT AGREEMENTS In January 1997, the Company entered into a three year employment agreement with Michael Burke, whereby Mr. Burke became employed as Vice President-Marketing of the Company, which provides for a current annual base salary of $190,000. Mr. Burke has agreed to receive his 1997 annual salary of $158,515 for the year ended December 31, 1998, notwithstanding his current annual base salary pursuant to his employment agreement. The Company will not accrue any portion of Mr. Burke's unpaid salary. This agreement also provides that if the Company's net sales and pretax profits for the year ending December 31, 1999 exceed $80.0 million and $6.9 million, respectively, then Mr. Burke will receive $15,000 and 20,000 stock options. Alternatively, if such net sales and pretax profits exceed $84.0 million and $7.25 million, respectively, Mr. Burke will receive $35,000 and 45,000 stock options. In January 1997, the Company entered into a three year employment agreement with Lucia Almquist, whereby Ms. Almquist became employed as Vice President-Corporate Development of the Company, which provides for a current annual base salary of $180,000. Ms. Almquist has agreed to receive her 1997 annual salary of $144,193 for the year ended December 31, 1998, notwithstanding her current annual base salary pursuant to her employment agreement. The Company will not accrue any portion of Ms Almquist's unpaid salary. This Agreement also provides that if the Company's net sales and pretax profits exceed $80.0 million and $6.9 million, respectively, then Ms. Almquist will receive $15,000 and 10,000 stock options. Alternatively, if such net sales and pretax profits exceed $84.0 million and $7.25 million, respectively, then Mr. Almquist will receive $30,000 and 25,000 stock options. In January, 1997, the Company entered into a three year employment agreement with Edward Borix, whereby Mr. Borix became employed as Vice President of Operations, Worldwide, which provides for a current annual base salary of $165,000. Mr. Borix has agreed to receive his 1997 annual salary of $139,342 for the year ended December 31,1998, notwithstanding his current annual base salary pursuant to his employment agreement. The Company will not accrue any portion of Mr. Borix's unpaid salary. This agreement also provides that if the Company's net sales and net profits for the year ended December 31, 1999 exceed -27- $80.0 million and $6.9 million, respectively, then Mr. Borix will receive $30,000 and 20,000 stock options. Alternatively, if such net sales and net profits exceed $84.0 million and $7.25 million, respectively, then Mr. Borix will receive $45,000 and 40,000 stock options. In June 1998, the Company entered into a three year employment agreement with William McMahon, whereby Mr. McMahon became employed as Chief Financial Officer of the Company, which provides for an annual base salary of $130,000 in 1998 with annual increases each January 1 by an amount equal to the increase, if any, in the Consumer Price Index. The agreement also provides that if the Company achieves revenue and EBITDA projections as determined in consultation with the optionee, Mr. McMahon will receive 35,000 stock options for the year ended December 31, 1999 and 45,000 stock options for the year ended December 31, 2000. In January 1999, the Company entered into a three year employment agreement with Douglas Hinton whereby Mr. Hinton became employed as Vice President - Premium Sales of the Company which provides for a current annual base salary of $130,000 and annual increases each January 1 by an amount equal to the increase, if any, in the Consumer Price Index. Each of the employment agreements contain a covenant by the employee not to compete with the Company until the expiration of a one year period after the expiration or termination of the agreement. William Keener, a non-employee director of the Company, receives a fee of $500 per month for his service as a director. No other non-employee director receives any compensation for his services as such. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of March 31, 1999 with respect to the beneficial ownership of the outstanding shares of common stock by (i) any shareholder known by the Company to beneficially own more than five percent of such outstanding shares, (ii) the Company's directors and Named Executive Officers, and (iii) the directors and executive officers of the Company as a group. Except as otherwise indicated, the address of each beneficial owner of five percent or more of such common stock is the same as the Company. -28-
Amount Ownership Name and Address of Beneficial Owner Beneficially Ownership(1) Percentage(1) ------------------------------------ ------------------------- ------------- Nevitt Family Trust(2)....................... 506,103 9.3% Milton Nevitt................................ 278,781 5.1% Stephen Nevitt............................... 1,401,922 (3)(4) 25.8% Michael J. Guccione.......................... 200,830 (5) 3.7% David B. Newman.............................. 556,103 (3)(6) 10.2% c/o Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 William Keener............................... 1,000 * Michael Burke................................ 17,000 (7) * Lloyd J. Fuller.............................. 0 -- Lucia Almquist............................... 0 -- Edward Borix................................. 3,000 * William McMahon.............................. 0 -- John R. Clarke............................... 200,000 (8) 3.7% 1725 Lazy River Lane Dunwoody, Georgia 30350 RBB Bank Aktiengesellschaft.................. 750,000 (9) 13.8% (8) Burging 16 8010 Graz, Austria Jerome B. Fox................................ 122,700 (10) 2.3% 7821 Wilton Crescent Circle University Park, Florida 34201 Directors and executive officers as a group (10 persons).......................... 1,952,533 (11) 35.9%
- ---------------- * Less than 1%. (1) Computation based on the term beneficial ownership as used in the regulations of the Securities and Exchange Commission which, for purposes of the computation of ownership by the named holder, deems outstanding shares of common stock issuable upon exercise of options and convertible securities exercisable or convertible on the date, and within sixty days following the date, of determination of beneficial ownership. As of April 1, 1999, 2,384,000 shares of common stock were actually issued and outstanding. (2) The indicated trust (the "Trust") was created pursuant to a Trust Agreement, dated as of September 11, 1992, between Milton Nevitt, as grantor, and Stephen Nevitt and David B. Newman, as trustees. Such trustees have the sole power to vote the shares held by the Trust. The children of Milton Nevitt, including Stephen Nevitt, are the beneficiaries under the Trust. (3) Includes 506,103 shares held by the Trust, for which such beneficial owner acts as trustee. (4) Includes 647,961 shares issuable upon exercise of options granted pursuant to the Company's 1995 Stock Option Plan (the "Plan"). Stephen Nevitt, pursuant to exercise of a power granted in the subscription agreement covering the issuance of the Company's -29- Preferred Shares (as described in Footnote (9) below), has the power to direct the voting of shares of Common Stock issuable upon conversion thereof for the election of a majority of the directors of the Company through October 2000. The table does not include shares of Common Stock issuable upon conversion of such Preferred Shares. (5) Includes 68,026 shares issuable upon exercise of options granted pursuant to the Plan. (6) Includes 50,000 shares issuable upon exercise of options granted pursuant to the Plan. (7) Includes 15,000 shares issuable upon exercise of options granted pursuant to the Plan. (8) Represents shares issuable upon exercise of the Series D Warrant which entitles the holder to purchase such number of shares at an exercise price of $5.50 per share at any time prior to September 30, 2001. (9) RBB is the registered owner of 7,500 shares of Series A 6.5% Convertible Preferred Stock ("Series A Stock"), 7,500 shares of Series B 6% Convertible Preferred Stock ("Series B Stock") and 7,500 shares of Series C 6% Convertible Preferred Stock ("Series C Stock"; collectively with the Series A Stock and the Series B Stock, the "Preferred Shares") of the Company. Such Preferred Shares is presently convertible into shares of Common Stock of the Company at a price determined by dividing the stated value of the series ($7,500,000 for each) by a price equal to the lower of (i) $5.50 in the case of the Series A Stock, $6.75 in the case of the Series B Stock and $8.25 in the case of the Series C Stock, and (ii) 80% of the average market price (as defined) for the ten consecutive trading days ending three days prior to the notice of conversion. As of April 1, 1999, the average market price for the ten previous consecutive trading days was approximately $0.65 per share. The above computation of beneficial ownership excludes shares of Common Stock issuable upon conversion of the Preferred Shares. See "Legal Proceedings" and "Certain Relationships and Related Transactions - To Finance the Serengeti Acquisition." (10) Such information was set forth in a Schedule 13D, dated October 24, 1997. Such Schedule 13D also stated that the spouse of Mr. Fox owns an additional 600 shares of Common Stock and that Mr. Fox disclaims beneficial ownership with respect to those shares. (11) Includes 780,987 shares issuable upon exercise of options granted to pursuant to the Plan. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On October 4, 1996, the Company issued 7,500 shares of its Series A 6.5% Convertible Preferred Stock, $.001 par value (the "Series A Shares"), to 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 (the "Securities Act"). RBB purchased the Series A Shares for a purchase price equal to their aggregate stated value of $7.5 million as set forth in a Regulation S Offshore Subscription Agreement dated September 29, 1996, which also contemplated the purchase of the Series B Shares and Series C Shares referred to below. The purpose of such investment was to fund, in part, the Acquisition. Pursuant to an Agreement of Purchase and Sale, dated as of October 29, 1996, between the Company and Corning, the Company agreed to purchase the Serengeti assets for a purchase price of $27.5 million, which was effected on February 13, 1997. RBB purchased, -30- concurrently with the closing of the Acquisition, 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 were approximately $20.9 million (net of commissions and the estimated expenses of such sale). The Company applied such net proceeds to the Acquisition purchase price. The Company financed the remainder of such purchase price and related costs and expenses with borrowings under the New Credit Facility. Concurrent 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 an aggregate of 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, the Company issued to RBB, concurrent with the issuance of the Series B Shares and the Series C Shares, 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 an aggregate of 300,000 shares of 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. 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") 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 immediately exercisable and expires on or prior to September 30, 2001. During 1997 and 1998, the Company repaid certain indebtedness owed to Joseph Feldman, the brother-in-law of Milton Nevitt, and to Milton Nevitt, respectively. Such indebtedness, incurred in 1991 and 1993, respectively, is described in greater detail in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, to which reference is hereby made. ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K. (a) Exhibits. --------
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 3.1(i) Restated Certificate of Incorporation of the Company(1)
-31-
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 3.1(ii) Certificate of Amendment of the Certificate of Incorporation of the Company relating to the designation of the Preferred Shares(2) 3.2(i) Amended and Restated By-laws of the Company ("By-laws")(1) 3.2(ii) Amendment No. 1 to By-laws(1) 10.1 Agreement dated December 30, 1994 between the Company and Joseph Feldman(1) 10.2 Agreement dated January 17, 1994 between the Company and Michael J. Guccione, Inc.(1) 10.3 Agreement dated December 7, 1994 between the Company and Michael J. Guccione(1) 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(3) 10.5H First Amendment to Revolving Line of Credit and Term Loan Agreement dated as of February 13, 1997 10.6 Lease Agreement dated March 3, 1993 between DRI II Partnership and the Company(1) 10.7 1995 Stock Option Plan of the Company(1) 10.8* Employment Agreement between the Company and Michael Burke(7) 10.9* Employment Agreement between the Company and Lucia Almquist(7) 10.10*H Employment Agreement between the Company and William McMahon 10.11*H Employment Agreement between the Company and Douglas Hinton 10.12 Form of Consulting Agreement between the Company and Argent Securities, Inc.(1) 10.13 Agreement of Purchase and Sale, dated as of October 29, 1996, between the Company and Corning(4) 10.14 Subscription Agreement, dated September 26, 1996, between the Company and RBB(4) 10.15 Lens Blank Supply Agreement, dated as of February 13, 1997, between the Company and Corning (confidential treatment has been granted with respect to certain information contained in this Agreement)(2) 10.16 License Agreement, dated as of February 13, 1997, between the Company and Corning(2) 16.1 Letter on change in certifying accountant(3) 16.2 Letter on change in certifying accountant(5) 21 Subsidiaries of the Company(6) 27 Financial Data Schedule
- ---------- * Management contract or compensatory plan or arrangement H To be filed by amendment to this Annual Report. (1) 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. -32- (2) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. (3) Filed as an Exhibit to the Company's Current Report on Form 8-K, dated February 11, 1997. (4) Filed as an Exhibit to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996. (5) Filed as an Exhibit to the Company's Current Report on Form 8-K, dated December 10, 1997. (6) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. (7) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. (b) The Company filed the following report on Form 8-K during the fourth quarter of the year ended December 31, 1998: None -33- 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: May 24, 1999 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 President, Treasurer and Director May 24, 1999 - ------------------------------ (principal executive officer) Stephen Nevitt /s/ Milton Nevitt Vice President, Secretary May 24, 1999 - ------------------------------ and Director Milton Nevitt /s/ Michael J. Guccione Vice President and May 24, 1999 - ------------------------------ Director Michael J. Guccione /s/ William L. Mcmahon Chief Financial Officer May 24, 1999 - ------------------------------ (principal financial and William L. McMahon accounting officer) and Director /s/ Michael Burke Vice President and May 24, 1999 - ------------------------------ Director Michael Burke /s/ Ed Borix Vice President and May 24, 1999 - ------------------------------ Director Ed Borix /s/ David B. Newman Director May 24, 1999 - ------------------------------ David B. Newman
-34-
SIGNATURES TITLE DATE /s/ William Keener Director May 24, 1999 - ------------------------------ William Keener /s/ Jeffrey Sach Director May 24, 1999 - ------------------------------ Dr. Jeffrey Sach /s/ John Kopinski Director May 24, 1999 - ------------------------------ John Kopinski
-35- EX-27 2 FDS
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 87,774 0 8,549,399 (752,436) 12,536,224 21,737,619 3,033,811 913,229 40,613,844 25,822,148 91,415 0 22,333,000 2,384 (7,635,103) 40,613,344 43,323,222 43,458,631 29,927,850 29,927,850 16,900,166 0 1,889,446 (5,258,831) 30,202 (5,289,033) 0 0 0 (5,289,033) (2.84) (2.84)
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