<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION NO. 333-61119
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AAI.FOSTERGRANT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
RHODE ISLAND 5094 05--0419304
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
THE BONNEAU COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6719 75--1280454
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
BONNEAU GENERAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 75--2572796
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
BONNEAU HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 51--0364025
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
F.G.G. INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 36--3956826
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
FANTASMA, LLC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5094 11--3340245
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
FOSTER GRANT GROUP, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5048 75--2572797
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
<PAGE> 2
FOSTER GRANT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 05-0500108
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
O-RAY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 51--0364026
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
OPTI-RAY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEW YORK 6719 11--1812045
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
500 GEORGE WASHINGTON HIGHWAY
SMITHFIELD, RI 02917
(401) 231-3800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DUANE M. DESISTO, CHIEF FINANCIAL OFFICER
AAi.FOSTERGRANT, Inc.
500 George Washington Highway
Smithfield, RI 02917
(401) 231-3800
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
WITH COPIES TO:
MARGARET D. FARRELL, ESQ.
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, RI 02903
(401) 274-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
PROSPECTUS
[AAI.FOSTER GRANT LOGO]
OFFER TO EXCHANGE ITS 10 3/4% SERIES B SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
10 3/4% SERIES A SENIOR NOTES DUE 2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
AAi.FosterGrant, Inc. ("AAi" or the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal" and, together with this
Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount of its
10 3/4% Series B Senior Notes due 2006 (the "New Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement (the "Registration Statement") of which
this Prospectus is a part, for each $1,000 principal amount of its outstanding
10 3/4% Series A Senior Notes due 2006 (the "Old Notes"), of which $75,000,000
principal amount is outstanding as of the date hereof. See "The Exchange Offer."
The Old Notes and the New Notes are sometimes collectively referred to herein as
the "Notes."
Although the Notes are titled "Senior," the Company has not issued, and does
not have any current firm arrangements to issue, any significant additional
indebtedness to which the Notes would be senior. The Notes are general unsecured
obligations of the Company and rank pari passu in right of payment to all
existing and future unsubordinated indebtedness of the Company, including
indebtedness under the Senior Credit Facility (as defined). The obligations of
the Company under the Senior Credit Facility, however, are secured by the
accounts receivable and inventory of the Company and its Domestic Subsidiaries
(as defined). Accordingly, the Company's obligations under the Senior Credit
Facility will effectively rank senior in right of payment to the Notes to the
extent of the assets subject to such security interest. The Company's payment of
principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes are fully and unconditionally guaranteed on a senior unsecured and joint
and several basis (the "Subsidiary Guarantees") by all existing and future
Domestic Subsidiaries of the Company (the "Guarantors"). The Subsidiary
Guarantees will rank pari passu in right of payment with all existing and future
unsecured and unsubordinated indebtedness of the Guarantors but secured
indebtedness of a Guarantor (including the secured guarantees granted under the
Senior Credit Facility) will effectively rank senior in right of payment to the
Notes to the extent of the assets subject to such security interest. As of July
4, 1998, on a pro forma basis after giving effect to the Acquisitions (as
defined herein) and the Offering (as defined) and the application of the net
proceeds therefrom, the Company and the Guarantors would have had approximately
$76.2 million of unsecured indebtedness outstanding (including $75.0 million
principal amount of the Old Notes) and the Company would have had approximately
$60.0 million of secured indebtedness available to be incurred under the Senior
Credit Facility. As of October 3, 1998, the Company had approximately $5.0
million of debt which ranks senior to the New Notes and $1.2 million which ranks
pari passu to the New Notes. See "Description of Other Indebtedness." The terms
of the Indenture (as defined) will permit the Company and its subsidiaries to
incur additional indebtedness (including secured indebtedness), subject to
certain limitations, but the Company has no current or pending arrangements or
agreements to incur any additional significant indebtedness to which the Notes
would rank subordinate or pari passu in right of payment.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 p.m., New York City time, on , 1998, unless extended by
the Company (such date, as it may be extended, the "Expiration Date"). The
Expiration Date will not be extended beyond the 30th business day after the date
of this Prospectus. The Old Notes may be tendered only in integral multiples of
$1,000. Tenders of the Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of the Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain customary
conditions. In the event the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the holders thereof. The Company will not receive any proceeds from the
Exchange Offer. See "The Exchange Offer."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF THE OLD NOTES ON , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 4
The New Notes will be obligations of the Company evidencing the same debt
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Notes." The form and terms of the New Notes are the same as the
form and terms of the Old Notes in all material respects except that the New
Notes have been registered under the Securities Act and hence do not include
certain rights to registration thereunder and do not contain transfer
restrictions or terms with respect to certain special payments applicable to the
Old Notes. See "The Exchange Offer."
The New Notes are being offered hereunder in order to satisfy certain
obligations under the Registration Rights Agreement, dated as of July 21, 1998
(the "Registration Rights Agreement"), among the Company, the Guarantors, and
NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and
BancBoston Securities Inc. (the "Initial Purchasers"), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Exchange Offer is intended to satisfy the Company's obligations under
the Registration Rights Agreement to register the New Notes and exchange them
for the Old Notes under the Securities Act. Once the Exchange Offer is
consummated, the Company will have no further obligations to register any of the
Old Notes tendered for exchange except pursuant to a shelf registration
statement to be filed under certain limited circumstances specified in "The
Exchange Offer -- Purpose of the Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering Holders of the Old Notes." The Company
has agreed to pay the expenses of the Exchange Offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters issued to
third parties (the "Exchange Offer No-Action Letters"), the Company believes
that the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by Holders
thereof who are not affiliates of AAi (other than a broker-dealer who acquired
such Old Notes directly from the Company for resale pursuant to Rule 144A under
the Securities Act or any other available exemption under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act; provided that the Holder is acquiring the New Notes in its
ordinary course of business and has not engaged in, and does not intend to
engage in, any distribution (within the meaning of the Securities Act) of the
New Notes and has no arrangement or understanding with any person to participate
in a distribution of the New Notes. Persons wishing to exchange the Old Notes in
the Exchange Offer must represent to the Company that such conditions have been
met. However, any Holder who may be deemed an "affiliate" (as defined under Rule
405 of the Securities Act) of the Company or who tenders in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of the New Notes cannot rely on the interpretation by the staff of
the Commission set forth in the Exchange Offer No-Action Letters and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. See "The Exchange Offer -- Purpose of
the Exchange Offer." In addition, each broker-dealer that receives the New Notes
for its own account pursuant to the Exchange Offer in exchange for Old Notes
where such Old Notes were acquired by such broker-dealer for its own account as
a result of market-making activities or other trading activities (other than
acquisitions directly from the Company) must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Notes received in exchange for the Old Notes where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than acquisitions directly from
the Company). The Company has agreed that, for a period of 180 days after the
Exchange Offer is consummated, it will, upon reasonable request, make this
Prospectus available promptly to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS
PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER TO RESELL, RESALE OR
OTHER TRANSFER OF THE NEW NOTES.
i
<PAGE> 5
The Old Notes were initially represented by a single Global Old Note (as
defined) in fully registered form, registered in the name of a nominee of The
Depository Trust Company ("DTC"), as depository. The New Notes exchanged for the
Old Notes represented by the Global Old Note will be represented by one or more
Global New Notes (as defined) in fully registered form, registered in the name
of the nominee of DTC. The Global New Notes will be exchangeable for New Notes
in registered form, in denominations of $1,000 and integral multiples thereof as
described herein. The New Notes in global form will trade in DTC's Same-Day
Funds Settlement System, and secondary market trading activity of such New Notes
will therefore settle in immediately available funds. See "Description of
Notes -- Book Entry, Delivery and Form."
The New Notes will bear interest at a rate equal to 10 3/4% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor, or if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the Notes is payable semi-annually on
January 15 and July 15 of each year, commencing January 15, 1999.
The Notes are redeemable at the option of the Company, in whole or in part,
on or after July 15, 2002, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon and liquidated damages, if any, payable
pursuant to Section 5 of the Registration Rights Agreement with respect to the
Old Notes ("Liquidated Damages") to the redemption date. Notwithstanding the
foregoing, at any time on or before July 15, 2001, the Company may redeem up to
35% of the original aggregate principal amount of the Notes with the net
proceeds of a public sale of common stock of the Company at the redemption
prices set forth herein, plus accrued and unpaid interest thereon, if any, to
the redemption date, provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding immediately after the
occurrence of such redemption, and provided, further, that such redemption shall
occur within 45 days of the date of the closing of such public sale. Upon a
Change of Control (as defined), the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest thereon and Liquidated Damages, if any, to the date
of repurchase. There can be no assurance that the Company will have the
financial resources necessary or be permitted by its other debt agreements to
repurchase the Notes upon the occurrence of a Change of Control.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. Prior to this
offering, there has been no public market for the Notes. The Company does not
intend to apply for listing or quotation of the Notes on any securities exchange
or stock market. As the Old Notes were issued and the New Notes are being issued
primarily to a limited number of institutions who typically hold similar
securities for investment, the Company does not expect that an active public
market for the Notes will develop. In addition, resales by certain holders of
the Notes of a substantial percentage of the aggregate principal amount of such
Notes could constrain the ability of any market maker to develop or maintain a
market for the Notes. To the extent that a market for the Notes should develop,
the market value of the Notes will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of the Company. Such factors might cause
the Notes to trade at a discount from face value. See "Risk Factors -- Lack of a
Public Market for the Notes."
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. THE
COMPANY HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO UNDERWRITER IS
BEING USED IN CONNECTION WITH THE EXCHANGE OFFER.
ii
<PAGE> 6
NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM CONTAINS
FORWARD-LOOKING STATEMENTS WHICH ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "COULD," "SHOULD," "EXPECT," "ANTICIPATE,"
"INTEND," "PLAN," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREOF. SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED ON
VARIOUS ASSUMPTIONS AND ESTIMATES AND ARE INHERENTLY SUBJECT TO VARIOUS RISKS
AND UNCERTAINTIES, INCLUDING RISKS AND UNCERTAINTIES RELATING TO THE POSSIBLE
INVALIDITY OF THE UNDERLYING ASSUMPTIONS AND ESTIMATES AND POSSIBLE CHANGES OR
DEVELOPMENTS IN SOCIAL, ECONOMIC, BUSINESS, INDUSTRY, MARKET, LEGAL AND
REGULATORY CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR OMITTED TO BE TAKEN
BY THIRD PARTIES, INCLUDING CUSTOMERS, SUPPLIERS, BUSINESS PARTNERS AND
COMPETITORS AND LEGISLATIVE, REGULATORY, JUDICIAL AND OTHER GOVERNMENTAL
AUTHORITIES AND OFFICIALS. IN ADDITION TO ANY RISKS AND UNCERTAINTIES
SPECIFICALLY IDENTIFIED IN THE TEXT SURROUNDING SUCH FORWARD-LOOKING STATEMENTS,
THE STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS OFFERING
MEMORANDUM OR IN THE REPORTS AND OTHER INFORMATION REFERRED TO IN "AVAILABLE
INFORMATION" CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL AMOUNTS, RESULTS, EVENTS AND CIRCUMSTANCES TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
------------------------
Foster Grant(R) is a registered trademark of AAi and Tempo(TM) is a
trademark of AAi.
Disney(R), Winnie the Pooh(R), Mickey Mouse(R), and Minnie Mouse(R) are
registered trademarks of Disney Enterprises, Inc. and Mickey's Stuff for
Kids(TM) is a trademark of Disney Enterprises, Inc.
Revlon(R) and Almay(R) are registered trademarks of Revlon Consumer
Products Corporation.
Ironman Triathlon(R) is a registered trademark of World Triathlon
Corporation.
Barbie(R) is a registered trademark of Mattel, Inc.
Crayola(R) is a registered trademark of Binney & Smith Properties, Inc.
Sesame Street(R) and Elmo(R) are registered trademarks of Children's
Television Workshop.
Tweety(R) and Warner Bros.(R) are registered trademarks of Time Warner
Entertainment Company, L.P.
Hawaiian Tropic(R) is a registered trademark of Tanning Research
Laboratories, Inc.
Wet 'N Wild(R) is a registered trademark of AM Cosmetics.
iii
<PAGE> 7
SUMMARY
The following Summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated: (i) references to
"AAi" or the "Company" are to AAi.FosterGrant, Inc. and its direct and indirect
subsidiaries (including Foster Grant Holdings, Inc.), (ii) references to the
"Fantasma Acquisition" are to the Company's recent acquisition of an 80%
interest in Fantasma, LLC ("Fantasma") and (iii) references to the
"Acquisitions" are to AAi's recent acquisition of certain assets and liabilities
of Eyecare Products UK Ltd. ("Foster Grant UK") and Superior Jewelry Company
("Superior") and the Fantasma Acquisition. See "The Company."
THE COMPANY
AAi is a value-added distributor of optical products, costume jewelry,
watches, clocks and other accessories to mass merchandisers, variety stores,
chain drug stores and supermarkets in North America and the United Kingdom. The
Company sells its products in over 30,000 retail locations, including Wal-Mart,
Target, Kmart, Eckerd Drugstores, Walgreens, Rite Aid, Albertsons, Dollar
General and Family Dollar stores. Sales to these customers accounted for 58.5%
of AAi's net sales in 1997. The Company markets its products under its own brand
names such as Foster Grant as well as customers' private labels. AAi also has
the right to distribute products under numerous licensed brand names, including
Ironman Triathlon, Revlon, Mickey's Stuff for Kids, Winnie the Pooh, Barbie and
Crayola. The Company outsources all of its manufacturing.
The Company's product lines contain a large number of stock keeping units
("SKUs") with low retail price points and typically represent a small percentage
of retailers' total sales. As a result, many of AAi's customers have chosen to
outsource the merchandising of these products to the Company. AAi's award-
winning service program provides retailers with customized displays and product
packaging and store-level merchandising designed to maximize sales and inventory
turnover. The Company employs over 1,500 field service representatives who
regularly visit program customers' stores to arrange, replenish and restock
displays, reorder product and attend to markdowns and allowances. By providing
retailers with in-store product management, the Company retains control of its
product marketing and pricing, allowing AAi to maximize product sales and
increase the floor space allocated to its product lines. In 1997, sales to
customers utilizing the Company's service program accounted for 73% of AAi's net
sales.
AAi has grown rapidly through strategic acquisitions and internal growth,
principally by expanding its product offerings, entering new domestic and
international markets, adding new customers, cross-selling existing product
lines to current customers and supporting its U.S.-based customers'
international expansion. Net sales grew at a compounded annual rate of 12.7%,
from $53.4 million in 1992 to $86.3 million in 1996, of which $10.5 million or
12.2% was attributable to acquisitions. Net sales grew an additional 73.1% from
1996 to $149.4 million in 1997, of which $65.8 million or 44.0% was attributable
to acquisitions. There can be no assurance that the Company's net sales will
continue to grow at these rates.
INDUSTRY OVERVIEW
The Sunglass Association of America reports that 1997 domestic retail sales
of sunglasses totaled $2.6 billion. Accessories Magazine estimates that 1997
domestic retail sales of fashion jewelry and watches totaled $4.8 billion and
$3.0 billion, respectively. As a result of industry-wide consolidation among
mass merchandisers and discount retailers, a small number of large companies
dominate the Company's primary channels of distribution. These retailers have
sought to reduce their purchasing and administrative costs by limiting the
number of their suppliers and have utilized their market position to obtain
minimum sell-throughs, reduced in-store inventory levels and price concessions.
These retailers tend to require a high level of service, including customized
sales and service programs, reliable delivery services and electronic
interfaces. These trends have contributed to the growth of larger national and
regional distributors, such as AAi, that have the service organizations, product
offering, distribution technology and capital necessary to meet the demands of
these customers.
1
<PAGE> 8
COMPETITIVE STRENGTHS
In order to increase its sales and profitability, the Company relies on the
following competitive strengths:
Innovative Service Program. Since many of its product sales are impulse
driven, AAi believes that a well-positioned, visually appealing display is
critical to making the sale to the consumer. In addition, the SKU-intensive
nature of optical products and accessories and their low retail price points
have led many retailers to outsource the merchandising of such products. AAi has
responded by offering its customers a service program that includes store-level
merchandise mix planning and in-store display maintenance and inventory
stocking, balancing and reordering by the Company's field service
representatives. AAi's service program is consistently recognized as one of the
best in the mass retail industry. The Company has received several
vendor-of-the-year awards from its retail customers, including Wal-Mart, as well
as numerous Supplier Performance Awards by Retail Category (S.P.A.R.C.) from the
International Mass Retail Institute. As part of its service program, the Company
makes a significant investment in the design, production and installation of
display fixtures in its customers' retail stores. The Company purchased
approximately $6.5 million of display fixtures in 1997 and $6.4 million of
display fixtures during the six months ended July 4, 1998. The Company believes
that its award-winning service program and store-level investment in display
fixtures solidify its customer relationships and create opportunities to
cross-sell its products and increase the Company's allotted display space.
Diverse Product Offering. AAi offers a comprehensive selection of
popularly priced optical products and accessories with over 15,000 SKUs. AAi's
product lines include sunglasses, reading glasses, costume jewelry, small
synthetic leather goods, handbags, hair accessories, cosmetic bags and key
rings. With the Fantasma Acquisition, the Company added watches and clocks to
its product lines. The substantial majority of the Company's products have
retail price points at less than $20, with 57% at $10 or less. The diversity of
AAi's product lines enables retailers to satisfy a substantial portion of their
optical products and accessories needs from a single source and allows the
Company to achieve operating efficiencies for low price point products.
Powerful Proprietary and Licensed Brand Names. Branded products provide
entry to new customers and retail channels and generally allow for higher gross
margins on product sales. The Company owns several brands, most notably Foster
Grant. In the 1998 annual Women's Wear Daily survey, the Foster Grant brand was
ranked the third most recognized name in accessories by consumers. In addition
to its own brands, AAi holds licenses for a variety of Disney, Sesame Street,
Warner Bros. and Mattel characters (e.g., Winnie the Pooh, Mickey Mouse, Minnie
Mouse, Elmo, Tweety, Barbie and others) as well as for several well-recognized
brands such as Ironman Triathlon, Revlon, Almay and Crayola for terms generally
ranging from one to three years. During 1997, the sales of the Company's own
branded products and licensed branded products represented approximately 29% and
15%, respectively, of AAi's net sales.
State-of-the-Art Distribution Capabilities. The Company's flexible
distribution systems are capable of processing virtually any small package. AAi
utilizes a high velocity fulfillment system that enables the Company to provide
its customers with short delivery times and high order fulfillment rates,
allowing retailers to maintain lower inventory levels. On average, the Company
ships over 98% of all restocking orders within 24 hours of receipt of the order.
AAi is currently expanding its Smithfield, Rhode Island distribution center and
installing an inventory management system that utilizes radio frequency and
bar-coding technologies to optimize supply chain operations, improve customer
service, increase inventory turns and lower operating costs. The Company
believes that its small package distribution capabilities provide a platform to
add complementary product lines without requiring significant capital investment
or additional fixed costs.
Efficient Low-Cost Sourcing. The Company outsources manufacturing for all
of its products. Approximately 75% of AAi's manufacturing is sourced to
manufacturers in Asia through its joint venture in Hong Kong, with the remainder
outsourced to independent domestic manufacturers. The Hong Kong joint venture
monitors the contract manufacturing process, maintains relations with
manufacturers, ensures quality control and serves as a sourcing agent to certain
U.S. and European customers. AAi's sourcing capabilities allow it to reliably
deliver competitively priced products to the retail market while retaining
considerable flexibility in its cost structure.
2
<PAGE> 9
Experienced Management Team. AAi's senior management team averages over 22
years in the industry and 18 years experience with the Company. Over the
Company's 26 year history, its senior management team has developed strong
relationships with suppliers and retailers. This team of seasoned managers has
led the Company's transition from a small costume jewelry manufacturer to a
leading distributor of optical products and accessories and has successfully
completed six acquisitions over the past three years.
AAi believes that it is a leading value-added distributor of its products
based on the breadth of its product offering, strength of its licensed and
proprietary brands and the size of its field service force. For a discussion of
competitive factors, see "Risk Factors -- Competition" and
"Business -- Competition."
BUSINESS STRATEGY
The Company's objective is to increase sales and profitability by enhancing
its position as a leading distributor of optical products and accessories. The
key elements of the Company's business strategy are:
Promote and Expand Branded Product Offering. Branded products enable the
Company to reach new customers and enter new distribution channels which, in
turn, present the Company with expanded cross-selling opportunities. The Company
intends to actively promote its Foster Grant name through advertising as well as
co-branding with licensed names. For example, AAi plans to roll out the Ironman
Triathlon by Foster Grant co-branded line of sunglasses in the fourth quarter of
1998. The Company also plans to pursue licensing and acquisition of additional
brands.
Expand Product Lines. AAi believes it can increase sales to existing
customers and access new distribution channels by expanding its product lines to
include other accessories and small package products. The Company intends to
achieve this goal by developing and acquiring new products and brands that
deepen and broaden its product offering. By diversifying its product lines, the
Company can enhance its capacity to provide regional and national retailers with
convenient "one-stop" shopping for optical products and accessories. In
addition, a diverse product offering provides cross-selling opportunities and
permits the Company to achieve operating efficiencies in distribution and
service programs.
Expand Internationally. The Company's goal is to grow with its customers,
particularly internationally, as they add new stores and expand into new
geographic markets. For example, during the past several years, Wal-Mart has
opened over 350 new stores in foreign markets, including Canada, Mexico, Germany
and Argentina. In response, the Company established operations in Canada and
Mexico to serve Wal-Mart and other potential customers in these markets. The
Company's international net sales have grown from $1.3 million in 1995 to $6.7
million in 1997.
Diversify Customer Base and Distribution Channels. Through its small
package distribution capabilities, diverse product offering and unique service
program, the Company has increased its customer base and sales to certain
existing customers desiring more centralized and efficient distribution. The
Company seeks to expand its distribution to additional retail channels such as
department stores through internal growth and strategic acquisitions.
Pursue Strategic Acquisitions. The Company intends to acquire
complementary businesses and product lines in order to diversify its product
offering, gain access to new customers and retail channels, penetrate
international markets, lower operating cost margins and improve service to
existing customers. For example, through the acquisitions in December 1996 and
March 1998 of the Foster Grant businesses, AAi expanded its optical product line
and extended operations to the United Kingdom. The June 1998 Fantasma
Acquisition added watches, clocks and several brand licenses to AAi's product
offering and provided the Company with access to new customers. The Company
seeks to leverage its purchasing power and distribution capabilities to improve
the financial performance of its acquired businesses and product lines.
The Company's successful execution of its business strategy is subject to
risks and limitations, particularly those related to the Company's substantial
leverage. For discussion of these risks, see "Risk Factors," particularly "Risk
Factors -- Substantial Leverage."
3
<PAGE> 10
THE EXCHANGE OFFER
The Exchange Offer applies to the entire $75.0 million aggregate principal
amount outstanding of the Old Notes. The New Notes will be obligations of the
Company evidencing the same debt as the Old Notes and will be entitled to the
benefits of the same Indenture. See "Description of Notes." The form and terms
of the New Notes are generally the same as the form and terms of the Old Notes
in all material respects except that the New Notes have been registered under
the Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to
certain special payments applicable to the Old Notes. See "Description of
Notes."
The Exchange Offer................. $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount
of Old Notes. As of the date hereof,
$75.0 million in aggregate principal
amount of Old Notes were outstanding. The
Company will issue the New Notes to
Holders (as defined in "Description of
Notes") on or promptly after the
Expiration Date.
Based on interpretations by the staff of
the Commission set forth in the Exchange
Offer No-Action Letters, the Company
believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold
and otherwise transferred by Holders
thereof who are not affiliates of the
Company (other than a broker-dealer who
acquired such Old Notes directly from the
Company for resale pursuant to Rule 144A
under the Securities Act or any other
available exemption under the Securities
Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act;
provided that the Holder is acquiring New
Notes in its ordinary course of business
and has not engaged in, and does not
intend to engage in, any distribution
(within the meaning of the Securities
Act) of the New Notes and has no
arrangement or understanding with any
person to participate in a distribution
of the New Notes. Persons wishing to
exchange Old Notes in the Exchange Offer
must represent to the Company that such
conditions have been met. However, any
Holder who is an affiliate of the Company
or who tenders in the Exchange Offer with
the intention to participate, or for the
purpose of participating, in a
distribution of the New Notes cannot rely
on the interpretation by the staff of the
Commission set forth in such Exchange
Offer No-Action Letters and must comply
with the registration and prospectus
delivery requirements of the Securities
Act in connection with any resale
transaction. See "The Exchange
Offer -- Purpose of the Exchange Offer."
Each broker-dealer that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it
will deliver a prospectus in connection
with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it
may be amended or
4
<PAGE> 11
supplemented from time to time, may be
used by a broker-dealer in connection
with resales of New Notes received in
exchange for Old Notes where such Old
Notes were acquired by such broker-dealer
for its own account as a result of
market-making activities or other trading
activities (other than acquisitions
directly from the Company). The Company
has agreed that, for a period of 180 days
after the Exchange Offer is consummated,
it will, upon reasonable request, make
this Prospectus available promptly to any
broker-dealer for use in connection with
any such resale. See "Plan of
Distribution."
Expiration Date.................... 5:00 p.m., New York City time, on
, 1998, unless the
Exchange Offer is extended by the Company
to the extent necessary to comply with
applicable federal and state securities
laws, in which case the term "Expiration
Date" means the latest date and time to
which the Exchange Offer is extended. The
Expiration Date will not be extended
beyond the 30th business day after the
date of this Prospectus.
Accrued Amounts on the Notes....... The New Notes will bear interest from the
last date on which interest was paid on
the Old Notes surrendered in exchange
therefor or, if no interest has been
paid, from the date of original issue of
such Old Notes.
Conditions to the Exchange Offer... The Exchange Offer is subject to certain
customary conditions. The conditions are
limited and relate in general to laws or
Commission policies that might impair the
ability of the Company to proceed with
the Exchange Offer. As of the date of
this Prospectus, none of these events had
occurred, and the Company believes their
occurrence to be unlikely. If any such
conditions do exist prior to the
Expiration Date, the Company may (i)
refuse to accept any Old Notes and return
all previously tendered Old Notes, (ii)
extend the Exchange Offer, or (iii) waive
such conditions. See "The Exchange
Offer -- Conditions."
Procedures for Tendering........... Each Holder of Old Notes wishing to
accept the Exchange Offer must complete,
sign and date the Letter of Transmittal,
or a facsimile thereof, in accordance
with the instructions contained herein
and therein, and mail or otherwise
deliver such Letter of Transmittal, or
such facsimile, together with such Old
Notes to be exchanged and any other
required documentation to IBJ Schroder
Bank & Trust Company, as Exchange Agent
(the "Exchange Agent"), at the address
set forth herein and therein or effect a
tender of such Old Notes pursuant to the
procedures for book-entry transfer as
provided for herein and therein. By
executing the Letter of Transmittal, each
Holder will represent to the Company
that, among other things, the New Notes
acquired pursuant to the Exchange Offer
are being obtained in the ordinary course
of business of the person receiving such
New Notes, whether or not such person is
the Holder, that neither the Holder nor
any such other person has engaged in, nor
5
<PAGE> 12
intends to engage in, any distribution of
the New Notes or has an arrangement or
understanding with any person to
participate in the distribution of such
New Notes and that neither the Holder nor
any such other person is an "affiliate,"
as defined under Rule 405 of the
Securities Act, of the Company or any of
its subsidiaries. Each broker-dealer that
receives New Notes for its own account in
exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer
as a result of market-making activities
or other trading activities, must
acknowledge that it will deliver a
prospectus in connection with any resale
of such New Notes. This Prospectus, as it
may be amended or supplemented from time
to time, may be used by a broker-dealer
in connection with resales of New Notes
received in exchange for Old Notes where
such Old Notes were acquired by such
broker-dealer as a result of
market-making activities or other trading
activities (other than acquisitions
directly from the Company). The Company
has agreed that, for a period of 180 days
after the Exchange Offer is consummated,
it will make this Prospectus available to
any broker-dealer for use in connection
with any such resale (other than
acquisitions directly from the Company).
See "The Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for Beneficial
Owners............................. Any beneficial owner whose Old Notes are
registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
such Old Notes in the Exchange Offer
should contact such registered Holder
promptly and instruct such registered
Holder to tender on such beneficial
owner's behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in
such owner's name or obtain a properly
completed bond power from the registered
Holder. The transfer of registered
ownership may take considerable time and
it may not be possible to complete a
transfer initiated shortly before the
Expiration Date. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery Procedures..... Holders of Old Notes who wish to tender
their Old Notes and whose Old Notes are
not immediately available or who cannot
deliver their Old Notes, the Letter of
Transmittal or any other documents
required by the Letter of Transmittal to
the Exchange Agent, or cannot complete
the procedure for book-entry transfer
prior to 5:00 p.m. on the Expiration
Date, may tender their Old Notes
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.................. Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date.
6
<PAGE> 13
Acceptance of Old Notes and
Delivery of New Notes.............. The Company will accept for exchange any
and all Old Notes which are properly
tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the
Expiration Date. Any Old Notes not
accepted for exchange will be returned
without expense to the tendering Holder
thereof as promptly as practicable after
the expiration or termination of the
Exchange Offer. See "The Exchange
Offer -- Terms of the Exchange Offer."
Tax Considerations................. The exchange pursuant to the Exchange
Offer will not be a taxable event for
federal income tax purposes. See "United
States Federal Tax Considerations."
Exchange Agent..................... IBJ Schroder Bank & Trust Company is
serving as Exchange Agent in connection
with the Exchange Offer.
TERMS OF NEW NOTES
The New Notes...................... $75.0 million principal amount of 10 3/4%
Series B Senior Notes due 2006.
Maturity Date...................... July 15, 2006.
Interest Rate and Payment Dates.... The New Notes will bear interest at a
rate of 10 3/4% per annum. Interest on
the New Notes will accrue from the last
date on which interest was paid on the
Old Notes surrendered in exchange
therefor, or if no interest has been
paid, from the date of original issue of
such Old Notes. Interest on the Notes is
payable semi-annually in cash in arrears
on January 15 and July 15 of each year,
commencing January 15, 1999.
Subsidiary Guarantees.............. The Notes are fully and unconditionally
guaranteed on a senior and joint and
several basis by each of the existing and
future Domestic Subsidiaries of the
Company (each a "Subsidiary Guarantor"
and collectively, the "Subsidiary
Guarantors").
Ranking............................ Although the Notes are entitled "Senior,"
the Company has not issued, and does not
have any current firm arrangements to
issue, any significant additional
indebtedness to which the Notes would be
senior. The Notes are general unsecured
obligations of the Company and rank
senior in right of payment to all future
subordinated indebtedness of the Company
and pari passu in right of payment to all
existing and future unsubordinated
indebtedness of the Company, including
indebtedness under the Senior Credit
Facility. The Subsidiary Guarantees are
general unsecured obligations of the
Subsidiary Guarantors and rank senior in
right of payment to all future
subordinated indebtedness of the
Subsidiary Guarantors and pari passu in
right of payment to all existing and
future unsubordinated indebtedness of the
Subsidiary Guarantors, including
guarantees of indebtedness under
7
<PAGE> 14
the Senior Credit Facility. Borrowings,
if any, under the Company's Senior Credit
Facility are secured by the accounts
receivable and inventory of the Company
and are guaranteed by the Subsidiary
Guarantors, which guarantees are secured
by the accounts receivable and inventory
of the Subsidiary Guarantors.
Accordingly, the Notes and the Subsidiary
Guarantees are effectively subordinated
to the borrowings outstanding under the
Senior Credit Facility and the guarantees
of such borrowings, respectively, to the
extent of the value of the assets
securing such borrowings and guarantees.
As of July 4, 1998, on a pro forma basis
after giving effect to the Acquisitions
and the Offering and the application of
the net proceeds therefrom, the Company
and its subsidiaries would have had $2.5
million of senior indebtedness
outstanding other than the Notes, all of
which would have been secured debt. As of
October 3, 1998, the Company had
approximately $5.0 million of debt which
ranks senior to the New Notes and $1.2
million which ranks pari passu to the New
Notes.
Optional Redemption................ The Notes may be redeemed at the option
of the Company, in whole or in part, on
or after July 15, 2002, at the redemption
prices set forth herein, plus accrued and
unpaid interest thereon and Liquidated
Damages, if any, to the date of
redemption. Notwithstanding the
foregoing, at any time on or before July
15, 2001, the Company may redeem up to
35% of the original aggregate principal
amount of the Notes with the net proceeds
of a public sale of Common Stock of the
Company at the redemption price set forth
herein, plus accrued and unpaid interest
thereon and Liquidated Damages, if any,
to the redemption date; provided, that
65% of the original aggregate principal
amount of Notes remains outstanding
immediately after the occurrence of such
redemption; and, provided, further, that
such redemption shall occur within 45
days of the date of the closing of such
public sale. See "Description of
Notes -- Optional Redemption."
Change of Control.................. Upon a Change of Control, the Company is
required to make an offer to repurchase
all outstanding Notes at a repurchase
price equal to 101% of the principal
amount thereof plus accrued and unpaid
interest thereon and Liquidated Damages,
if any, to the date of repurchase. See
"Description of Notes -- Repurchase at
the Option of Holders -- Change of
Control."
Covenants.......................... The Indenture contains certain covenants
that, among other things, limit the
ability of the Company and its
subsidiaries to incur additional
Indebtedness (as defined) and issue
preferred stock, enter into sale and
leaseback transactions, incur liens, pay
dividends or make certain other
restricted payments, apply net proceeds
from certain asset sales, enter into
certain transactions with affiliates,
merge or consolidate with any other
person, sell stock of subsidiaries, and
assign, transfer, lease, convey or other-
8
<PAGE> 15
wise dispose of substantially all of the
assets of the Company. See "Description
of Notes -- Certain Covenants."
Exchange Rights.................... Holders of New Notes are not entitled to
any exchange rights with respect to the
New Notes. Holders of Old Notes are
entitled to certain exchange rights
pursuant to the Registration Rights
Agreement. Under the Registration Rights
Agreement, the Company is required to
offer to exchange the Old Notes for new
notes having substantially identical
terms which have been registered under
the Securities Act. This Exchange Offer
is intended to satisfy such obligation.
Once the Exchange Offer is consummated,
the Company will have no further
obligations to register any of the Old
Notes not tendered by the Holders for
exchange, except pursuant to a shelf
registration statement to be filed under
certain limited circumstances specified
in "The Exchange Offer -- Purpose of the
Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering
Holders of Old Notes."
Use of Proceeds.................... The Company will not receive any proceeds
from the Exchange Offer.
RISK FACTORS
SEE "RISK FACTORS" AS WELL AS OTHER INFORMATION AND DATA INCLUDED IN THIS
PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
EVALUATING AN INVESTMENT IN THE NOTES.
9
<PAGE> 16
- --------------------------------------------------------------------------------
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following pro forma statement of operations data and other data of AAi
for the year ended December 31, 1997 and for the six and twelve months ended
July 4, 1998 and balance sheet data as of July 4, 1998 have been derived from,
and are qualified by reference to, the Unaudited Pro Forma Combined Financial
Statements of AAi included elsewhere in this Prospectus. The pro forma financial
information and other data give effect to the Acquisitions and the sale of the
Old Notes (the "Offering") and the application of the net proceeds therefrom as
if they had occurred at the beginning of each of the periods indicated. The pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. The pro forma consolidated financial
data presented below should not be considered indicative of actual results that
would have been achieved had the Acquisitions been consummated on the dates
assumed and do not purport to indicate results of operations as of any future
date or for any future period. The pro forma consolidated financial data
presented below should be read in conjunction with "Use of Proceeds,"
"Capitalization," "Selected Historical Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 JULY 4, 1998 JULY 4, 1998
----------------- ---------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $181,992 $94,853 $184,262
Cost of goods sold............................ 97,706 51,435 98,369
-------- ------- --------
Gross profit.................................. 84,286 43,418 85,893
Operating expenses............................ 76,831 41,725 80,582
-------- ------- --------
Income from operations........................ 7,455 1,693 5,311
Interest expense(a)........................... (8,643) (4,300) (8,562)
Other (expense) income, net................... (49) (28) (217)
-------- ------- --------
Income (loss) before taxes.................... (1,237) (2,635) (3,468)
Income tax benefit (expense).................. 711 1,159 1,526
-------- ------- --------
Net loss...................................... $ (526) $(1,476) $ (1,942)
======== ======= ========
Net loss applicable to common
shareholders(b)............................ $ (3,022) $(2,833) $ (4,585)
======== ======= ========
OTHER DATA:
Depreciation and amortization................. $ 10,044 $ 5,858 $ 10,763
EBITDA(c)..................................... 17,450 7,523 15,857
Capital expenditures.......................... 8,445 11,386 14,888
Cash interest expense......................... 8,128 3,800 7,845
SELECTED RATIOS:
Ratio of EBITDA to cash interest expense...... 2.15x 1.98x 2.02x
Ratio of total debt to EBITDA................. 4.41x 5.06x 4.80x
Ratio of earnings to fixed charges(d)......... -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
JULY 4, 1998
------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 51,904
Total assets.............................................. 132,138
Total debt(e)............................................. 76,163
Preferred securities(f)................................... 28,343
Total shareholders' deficit............................... (9,309)
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 17
- --------------------------------------------------------------------------------
- ---------------
(a) Reflects the estimated additional interest expense associated with the Notes
at a rate of 10.75% per annum.
(b) Reflects a reduction for accretion and noncash dividends on the Series A
Preferred Stock (as defined). See Note 8 of the Notes to the Company's
Consolidated Financial Statements.
(c) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles ("GAAP"), AAi
believes that EBITDA is accepted as a generally recognized measure of
performance in the distribution industry because it is an indicator of the
earnings available to meet the Company's debt service obligations.
Nevertheless, this measure should not be considered in isolation or as a
substitute for operating income, net income, net cash provided by operating
activities or any other measure for determining AAi's operating performance
or liquidity which is calculated in accordance with GAAP.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs, accretion
and noncash dividends on Series A Preferred Stock and the portion of rental
expense that is representative of the interest factor. On a pro forma basis,
earnings were insufficient to cover fixed charges by $5.6 million, $5.9
million and $9.0 million for the year ended December 31, 1997, the six
months ended July 4, 1998 and the twelve months ended July 4, 1998,
respectively.
(e) Includes the Notes and $1.2 million in various lease and other long-term
obligations.
(f) Includes redeemable preferred stock of AAi's subsidiary, Foster Grant
Holdings, Inc. See Note 4 of the Notes to the Company's Consolidated
Financial Statements.
- --------------------------------------------------------------------------------
11
<PAGE> 18
- --------------------------------------------------------------------------------
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information of AAi as of the end of and for each of the five years ended
December 31, 1997, for the six months ended June 30, 1997 and July 4, 1998 and
as of July 4, 1998. The summary historical consolidated financial data as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 were derived from the Consolidated Financial Statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this Prospectus. The summary
historical consolidated financial data as of December 31, 1993, 1994 and 1995
and for the years ended December 31, 1993 and 1994 were derived from audited
consolidated financial statements of the Company that are not included in this
Prospectus. The summary historical consolidated financial data as of July 4,
1998 and for the six months ended June 30, 1997 and July 4, 1998 are unaudited,
but have been prepared on the same basis as the audited Consolidated Financial
Statements, which, in the opinion of management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the information set forth therein. The results of operation for
the six months ended July 4, 1998 are not necessarily indicative of the results
that may be expected for the full year. The following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, -----------------------
------------------------------------------------- June 30, July 4,(a)
1993 1994 1995 1996(a) 1997(a) 1997 1998
------- ------- ------- -------- -------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $68,703 $76,611 $88,050 $ 86,336 $149,411 $75,885 $ 88,631
Cost of goods sold.............. 30,932 37,096 43,690 47,871 77,928 41,198 47,543
------- ------- ------- -------- -------- ------- --------
Gross profit.................... 37,771 39,515 44,360 38,465 71,483 34,687 41,088
Operating expenses.............. 32,785 36,441 34,782 37,524 65,323 30,683 39,208
------- ------- ------- -------- -------- ------- --------
Income from operations.......... 4,986 3,074 9,578 941 6,160 4,004 1,880
Interest expense................ (491) (342) (1,031) (1,469) (4,214) (2,071) (2,638)
Other (expense) income.......... 459 88 (80) (331) 31 (41) (10)
------- ------- ------- -------- -------- ------- --------
Income before taxes............. 4,954 2,820 8,467 (859) 1,977 1,892 (768)
Income tax benefit (expense).... -- -- (42) 948 (1,162) 1,102 338
------- ------- ------- -------- -------- ------- --------
Net income(b)................... $ 4,954 $ 2,820 $ 8,425 $ 89 $ 815 $ 790 $ (430)
======= ======= ======= ======== ======== ======= ========
Net income (loss) applicable to
common shareholders(c)....... $ 4,954 $ 2,820 $ 8,425 $ (1,034) $ (1,681) $ (420) $ (1,787)
======= ======= ======= ======== ======== ======= ========
Pro forma net income (loss)
applicable to common
shareholders(d).............. $ 2,972 $ 1,692 $ 5,055 $ (1,638) $ (1,681) $ (420) $ (1,787)
======= ======= ======= ======== ======== ======= ========
OTHER DATA:
Depreciation and amortization... $ 473 $ 628 $ 783 $ 1,868 $ 8,248 $ 3,911 $ 5,479
Cash flow from operating
activities................... 9,712 2,265 1,818 (1,892) 1,886 (6,234) (3,895)
Cash flow from investing
activities................... (738) (1,891) (2,104) (12,825) (9,363) (5,798) (23,212)
Cash flow from financing
activities................... (8,672) (600) 259 16,159 8,779 14,090 26,701
EBITDA(e)....................... 5,918 3,790 10,281 2,488 14,439 7,874 7,349
Capital expenditures(f)......... 680 1,552 1,555 1,572 7,583 4,366 10,863
Ratio of earnings to fixed
charges(g)................... 8.30x 5.69x 8.12x -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------ JULY 4,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)... $ 4,003 $ 4,436 $ 7,795 $ 687 $ 5,936 $ 48,051
Total assets................ 14,730 16,773 25,187 82,010 93,746 127,755
Total debt(h)............... 683 2,593 5,542 35,588 44,959 71,780
Preferred securities(i)..... -- -- -- 24,338 26,918 28,343
Total shareholders' equity
(deficit)................ 4,848 4,890 11,523 (5,281) (7,359) (9,309)
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 19
- --------------------------------------------------------------------------------
- ---------------
(a) Includes the results of operations of the acquired businesses from the
respective dates of acquisition: the Tempo Division of Allison Reed Group,
Inc. ("Tempo") in June 1996; Foster Grant Group L.P., The Bonneau Company,
Opti Ray, Inc. and Asian Buying Source, Inc. (collectively, "Foster Grant
US") in December 1996; Superior in July 1997; Foster Grant UK in March 1998;
and Fantasma in June 1998.
(b) Represents net income before (i) a reduction for accretion and noncash
dividends on the Series A Preferred Stock in the years ended December 31,
1996 and 1997 and the six months ended June 30, 1997 and July 4, 1998, and
(ii) a pro forma income tax provision in the years ended December 31, 1993
through 1996.
(c) Reflects a reduction from net income for accretion and noncash dividends on
the Series A Preferred Stock. See Note 8 of the Notes to Company's
Consolidated Financial Statements.
(d) The Company was an S corporation under Section 1362 of the Internal Revenue
Code until May 31, 1996. Pro forma income taxes, assuming the Company was
subject to C corporation income taxes, have been provided, in the
accompanying statement of operations for 1993, 1994, 1995 and 1996, at an
estimated statutory rate of 40%.
(e) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it is
an indicator of the earnings available to meet the Company's debt service
obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP.
(f) Does not include capital assets acquired in connection with the acquisitions
of Tempo, Foster Grant US, Superior, Foster Grant UK and Fantasma.
(g) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs, accretion
and noncash dividends on Series A Preferred Stock and the portion of rental
expense that is representative of the interest factor. Earnings were
insufficient to cover fixed charges by $3.7 million, $2.4 million, $0.2
million and $4.0 million for the years ended December 31, 1996 and 1997 and
the six months ended June 30, 1997 and July 4, 1998, respectively.
(h) Includes amounts outstanding under Revolving Credit Facility (as defined),
various long-term obligations and subordinated promissory notes payable to
shareholders at each applicable period.
(i) Includes redeemable preferred stock of Foster Grant Holdings, Inc. See Note
4 of the Notes to Company's Consolidated Financial Statements.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before tendering the Old Notes in exchange for the New Notes
offered hereby. The risk factors set forth below are generally applicable to the
New Notes as well as the Old Notes.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Notes except pursuant to a shelf registration
statement to be filed under certain limited circumstance specified in "The
Exchange Offer -- Purpose of the Exchange Offer." Thereafter, subject to such
exception, any Holder of Old Notes who does not tender its Old Notes in the
Exchange Offer will continue to hold restricted securities which may not be
offered, sold or otherwise transferred, pledged or hypothecated except pursuant
to Rule 144 and 144A under the Securities Act or pursuant to any other exemption
from registration under the Securities Act relating to the disposition of
securities, in which case, an opinion of counsel must be furnished to the
Company that such an exemption is available. Based on interpretations by the
staff of the Commission, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for the Old Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Each broker-dealer that receives the New Notes for its own account in
exchange for the Old Notes, where such New Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The interpretations by the staff of the
Commission on which the Company has relied were based on the Exchange Offer
No-Action Letters. The Company has not sought, and does not intend to seek, its
own no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer. See "Plan of Distribution"
SUBSTANTIAL LEVERAGE
As a result of the sale of the Old Notes, the Company is highly leveraged.
On October 3, 1998 the Company had total indebtedness of approximately $81.3
million (of which $75.0 million consisted of the Notes and the balance consisted
of other long-term obligations). As of August 29, 1998, AAi's shareholders'
deficit was approximately $12.8 million. In addition, the Company, through a
subsidiary, has issued preferred stock which is subject to mandatory redemption
at an amount ranging from $1.0 million to $4.0 million upon certain events, but
not later than February 28, 2000. See "Certain Transactions" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." On a
pro forma basis after giving effect to the Acquisitions, for the twelve months
ended July 4, 1998, earnings were insufficient to cover fixed charges by $9.0
million. Subject to certain limitations in the Senior Credit Facility and the
Indenture, the Company and its subsidiaries will be permitted to incur
substantial additional indebtedness in the future. See "Capitalization,"
"Description of Notes" and "Description of Senior Credit Facility."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations
and anticipated cost savings of $2.8 million associated with the planned closure
of its Dallas distribution facility, the Company believes that cash flow from
operations and available cash, together with available borrowings under the
Senior Credit Facility, will be adequate to meet the Company's future liquidity
needs for at least the next several years. The Company may, however, need to
refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated cost savings and revenue
growth
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<PAGE> 21
will be realized or that future borrowings will be available under the Senior
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i) making
it more difficult for the Company to satisfy its obligations with respect to the
Notes, (ii) increasing the Company's vulnerability to general adverse economic
and industry conditions, (iii) limiting the Company's ability to obtain
additional financing to fund future working capital, capital expenditures,
research and development and other general corporate requirements, (iv)
requiring the dedication of a substantial portion of the Company's cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate purposes, (v)
limiting the Company's flexibility in planning for, or reacting to, changes in
its business and the industry and (vi) placing the Company at a competitive
disadvantage vis-a-vis less leveraged competitors. In addition, the Indenture
and the Senior Credit Facility contain financial and other restrictive covenants
that may limit the ability of the Company to, among other things, borrow
additional funds. Failure by the Company to comply with such covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company. In addition, the degree to which the
Company is leveraged could prevent it from repurchasing all of the Notes
tendered to it upon the occurrence of a Change of Control. See "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control" and
"Description of Senior Credit Facility."
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes and the Subsidiary Guarantees will be senior unsecured
obligations and will rank pari passu in right of payment with all other current
and future senior obligations of the Company and the Subsidiary Guarantors,
respectively. However, loans under the Senior Credit Facility will be secured by
the accounts receivable and inventory of the Company and will be guaranteed by
the Company's Domestic Subsidiaries, which guarantees will be secured by the
accounts receivable and inventory of such subsidiaries. Accordingly, the Notes
and the Subsidiary Guarantees will be effectively subordinated to all secured
indebtedness to the extent of the collateral and will rank pari passu in right
of payment with all other existing and future senior obligations of the Company
or the Guarantors, respectively. Upon an event of default under any such secured
indebtedness, the lenders of any secured indebtedness, including indebtedness
under the Senior Credit Facility, could elect to declare all amounts
outstanding, together with accrued and unpaid interest thereon, to be
immediately due and payable. If the Company or the Subsidiary Guarantors were
unable to repay those amounts, such lenders could proceed against the collateral
granted them to secure that indebtedness. There can be no assurance that the
assets of the Company or the relevant Subsidiary Guarantor remaining after
repayment in full of such secured indebtedness would be sufficient to repay the
holders of the Notes.
FOREIGN SUBSIDIARIES WILL NOT PROVIDE SUBSIDIARY GUARANTEES
Certain of the Company's operations are conducted through its subsidiaries.
However, only the Company's Domestic Subsidiaries will be guarantors of the
Notes. As a result, holders of indebtedness of, and trade creditors of, the
Company's foreign subsidiaries will generally be entitled to payment of their
claims from the assets of such subsidiaries before such assets will be made
available to the Company. On a pro forma basis after giving effect to the
Acquisitions, the Company's foreign subsidiaries would have held 9.3% of the
Company's consolidated assets as of July 4, 1998 and would have accounted for
9.5% of the Company's consolidated net sales for the twelve months ended July 4,
1998. See Note 19 of the Notes to the Company's Consolidated Financial
Statements included elsewhere herein.
LOSS OF CUSTOMERS; CUSTOMER CONCENTRATION AND CONSOLIDATION
During the years ended December 31, 1996 and 1997, three customers
accounted for approximately 57% and 39% of the Company's net sales,
respectively. These customers' accounts receivable balances represented
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<PAGE> 22
approximately 34% and 45% of the Company's accounts receivable as of December
31, 1996 and 1997, respectively. In 1997, Wal-Mart accounted for approximately
25% of the Company's net sales. The loss of any significant customer, whether
through competition or otherwise, could have a material adverse effect on the
Company's business, financial condition and results of operations. A significant
portion of the Company's business activity is with mass merchandisers whose
ability to meet their financial obligations is dependent on economic conditions
affecting the retail industry. During recent years, many major retailers have
experienced significant financial difficulties and some, including customers of
the Company, have filed for bankruptcy protection. There can be no assurance
that the financial difficulties of the Company's significant customers would not
materially adversely affect the Company's business, financial condition and
results of operations. In addition, certain segments of the retail industry,
particularly mass merchandisers, variety stores, drug stores and supermarkets,
are experiencing significant consolidation. In 1997, the Company lost two
customers, one as a result of a merger into a retail chain that does not carry
costume jewelry and the other due to a retailer ceasing operations, which
together accounted for an estimated $5.1 million in net sales. Further industry
consolidation could result in the Company's loss of additional customers that
are acquired by retailers serviced by other suppliers as well as further
concentration of the Company's credit risks which could have a material adverse
effect on the Company's results of operations.
DEPENDENCE ON LICENSED BRANDS
A key element of the Company's marketing strategy is to utilize licensed
brand names and characters to expand its product offering and gain access to new
customers. Most of the Company's license agreements are non-exclusive, of short
duration and may be terminated if the Company fails to comply with any material
terms thereof. There can be no assurance that any of these relationships with
licensors will continue, that such agreements will be renewed or that the
Company will be able to obtain licenses for additional brands. If the Company
were unable in the future to obtain such licenses on terms it deems reasonable,
it would be required to modify its marketing plans and could be forced to rely
more heavily on its proprietary brands or generic product sales, which could
materially adversely affect its business, financial condition and results of
operations. See "Business - Business Strategy" and "-- Intellectual Property and
Licenses."
RISKS ASSOCIATED WITH ACQUISITIONS
General. As part of its operating history and growth strategy, the Company
has acquired and seeks to continue acquiring other businesses. The Company
continually seeks acquisition candidates in selected markets and from time to
time engages in exploratory discussions with potential acquisition candidates.
As of the date of this Prospectus, the Company has no specific agreements or
commitments for any acquisitions. There can be no assurance, however, that the
Company will be able to identify and acquire targeted businesses or obtain
financing for such acquisitions on satisfactory terms. Furthermore, there can be
no assurance that competition for acquisition candidates will not escalate,
thereby increasing the costs of making acquisitions or making suitable
acquisitions unattainable.
Limited Knowledge and Operating History. Notwithstanding its own due
diligence investigation, management has, and will have, limited knowledge about
the specific operating history, trends and customer buying patterns of
businesses acquired in its recent acquisitions or future acquisitions.
Consequently, no assurance can be given that the Company will be able to make
future acquisitions at favorable prices, that acquired lines of business will
perform as well as they had performed historically or that the Company will have
sufficient information to analyze accurately the markets in which it elects to
make acquisitions. Furthermore, additions by the Company of new products present
certain risks and uncertainties resulting from the Company's relative
unfamiliarity with these new products, the market for such new products, and the
financial and operating controls required to manage such new product offerings.
There can be no assurance that the Company will be successful in marketing these
or other additions to its product offering or that its existing customers will
accept such additions to the products currently purchased from the Company.
Integration. The process of integrating acquired businesses into the
Company's operations may result in unforeseen difficulties and may require a
disproportionate amount of resources and management attention. Although the
Company endeavors to integrate and assimilate the operations of acquired lines
of business in an
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effective and timely manner, no assurance can be given that the Company will be
successful in such integration attempts or that the Company will be able to
hire, train, retain and assimilate individuals employed at the acquired
businesses. Further, no assurance can be given that the Company will
successfully integrate its recent acquisitions or any other future acquired
businesses into the Company's purchasing, marketing and management information
systems, or that the Company's management and financial controls, personnel,
computer systems and other corporate support systems will be adequate to manage
the increase in the size and scope of the Company's operations and acquisition
activity. Integration of acquisitions is often a complex process which may
entail material, non-recurring expenditures, including facility closing costs,
warehouse assimilation expenses, asset writedowns and severance payments. These
expenditures have in the past had, and may continue to have, an adverse impact
on the Company's results of operations. For example, during the second quarter
of 1998, the Company incurred a $2.6 million restructuring charge and also
experienced increased operating costs due to operating inefficiencies in
connection with closing the Dallas, Texas distribution center which AAi acquired
with Foster Grant US. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of the Notes to the Company's
Consolidated Financial Statements included elsewhere herein.
Availability of Funds for Expansion Strategy. The Company's expansion
strategy will require that substantial capital investment and adequate financing
be available to the Company not only for acquisitions, but also for AAi's
internal development and the integration of operations. The Company anticipates
that the required funds will be obtained through additional borrowings or the
issuance of debt or equity securities. Accordingly, future acquisitions by the
Company could result in the incurrence of substantial additional indebtedness,
which could have an adverse effect on the Company's financial condition and
results of operations. There can be no assurance that the Company will be able
to obtain such financing or that, if available, such financing will be on terms
acceptable to the Company. If the Company is unable to obtain suitable
additional financing it would be required to change its expansion strategy,
which could have a material effect on the Company's business, financial
condition and results of operations. See "Substantial Leverage" and
"Business -- Business Strategy".
Significant Future Charges to Earnings. On a pro forma basis after giving
effect to the Acquisitions, as of July 4, 1998, the Company would have had $21.4
million of net intangible assets consisting principally of goodwill on its
balance sheet. The Company expects that amortization of these intangibles will
result in quarterly noncash charges of $436,000 for the next four quarters,
$426,000 for the next 24 quarters, $343,000 for the next four quarters, $260,000
for the next four quarters, $150,000 for the following 34 quarters, $146,000 for
the following five quarters and $133,000 for the final 75 quarters. The Company
also anticipates that future acquisitions will involve the recording of a
significant amount of intangible assets, particularly goodwill, on its balance
sheet, which will be amortized over varying periods of time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1 of the Notes to the Company's Consolidated Financial Statements included
elsewhere herein.
PLANNED SINGLE SITE DISTRIBUTION FACILITY
The Company distributes substantially all of its optical products from its
Dallas, Texas distribution facility and the remainder of its products from its
distribution center in Smithfield, Rhode Island. Upon completion of the
expansion of the Rhode Island distribution center scheduled for the fourth
quarter of 1998, the Company intends to close the Texas facility and consolidate
its distribution operations in Rhode Island. A disruption of the Company's
distribution operations for any reason, including theft, government intervention
or a natural disaster such as fire, earthquake, flood or other casualty could
cause the Company to limit or cease its operations, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company maintains approximately $31.0 million in
business interruption insurance to cover natural disasters, no assurance can be
given that such insurance will continue to be available to the Company on
commercially reasonable terms, if at all, or that such insurance would be
sufficient to compensate the Company for damages resulting from such casualty.
In addition, no assurance can be given that an interruption in the Company's
operations would not result in permanent loss of significant customers, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Property."
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RELIANCE ON KEY PERSONNEL
The Company's long-term success and its growth strategy depend on its
existing management team. The Company maintains key man life insurance policies
on the lives of several of its key executives and has entered into employment
agreements with its executive officers. See "Management." However, the loss of
the services of any of the key executives could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's continued growth and operations also depends to a significant extent
on its ability to retain other key employees and to attract new qualified
employees. Competition for highly skilled business, marketing and other
personnel is intense, particularly in the strong economic cycle currently
prevailing. The loss of one or more key employees or the Company's inability to
attract additional qualified employees could have an adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company may experience increased compensation costs in order to compete for
skilled employees.
RELIANCE ON LIMITED NUMBER OF DELIVERY COMPANIES
The Company primarily relies on a single independent delivery company,
United Parcel Service ("UPS"). The 1997 UPS strike delayed the Company's product
deliveries, thereby slowing the collection of its accounts receivable and
requiring AAi temporarily to draw additional funds under its credit facility.
The Company also incurred an indeterminable amount of internal costs related to
increased administrative time required to arrange for alternate shipping
arrangements. The Company does not believe that the UPS strike had any long-term
effects on its customer relations, business and results of operations. The
Company is attempting to establish multiple delivery services to deal with the
possibility of a future disruption in UPS delivery services. There can be no
assurance that the precautions taken by the Company will be adequate or that
alternate delivery services can be located or developed by the Company in a
timely manner. Any future interruption in service by UPS may have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company has operations in Canada, Mexico and the United Kingdom and
intends to enter additional international markets in the future. International
sales were approximately 4% and 11%, respectively, of the Company's total net
sales for the year ended December 31, 1997 and the six months ended July 4,
1998. No assurance can be given that the Company will be able to maintain or
increase its international sales or that the Company's brands and products will
be as popular in the various foreign countries as they are in the United States.
In addition, the Company purchases a significant portion of its inventory from
certain suppliers in Asia through its Hong Kong joint venture. Consequently, the
Company is subject to the risks generally associated with conducting business
abroad. This includes risks relating to currency exchange rates, new and
different legal, tax, accounting and regulatory requirements, "local content"
laws and tariff regulations, difficulties in staffing and managing foreign
operations, political instability, trade restrictions and other factors. The
Company's business could be affected by economic events or political instability
that might affect exports, including duties, quotas and work stoppages. Although
there are other suppliers of the inventory items purchased and the Company
believes that these suppliers could provide similar inventory on fairly
comparable terms, a change in suppliers could cause a delay in the Company's
distribution process and a possible loss of sales, which would adversely affect
the Company's results of operations. As with other companies that denominate
purchases in dollars, declines in the dollar relative to foreign currencies
could, over time, increase the cost to the Company of merchandise purchased in
foreign countries, which could materially adversely affect the Company's
business, financial condition and results of operations.
To date, the current financial crisis in Asia has had a favorable impact on
the Company's costs and results of operations, but there is no assurance that
this will continue. Since the Company's international operations have not been
significant, exchange rate fluctuations and other international factors have not
had a material adverse impact on the Company's business, financial condition and
results of operations. However, AAi expects that as its business and
international operations expand, the Company will become increasingly vulnerable
to the risks associated with international operations, including exchange rate
fluctuations. The Company has not employed currency hedging strategies in the
past. As its international business expands, the
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Company expects to use foreign currency exchange contracts to hedge its currency
risk. However, the forecasting of currency market movement is difficult and
whether a currency hedging strategy will be successful is highly uncertain.
Therefore, there can be no assurance that a hedging strategy will reduce the
Company's risks associated with currency fluctuations.
UNPREDICTABILITY OF DISCRETIONARY CONSUMER SPENDING
The success of the Company's business depends to a significant extent upon
a number of factors relating to discretionary consumer spending, including
general economic conditions affecting disposable consumer income, such as
employment, business conditions, interest rates and taxation. Any significant
decline in such general economic conditions or uncertainties regarding future
economic prospects that adversely affect discretionary consumer spending
generally, or purchasers of accessories or optical products specifically, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The industries in which the Company operates are highly competitive and
price sensitive. The Company competes with other distributors, manufacturers who
distribute directly to retailers and vertically integrated retailers that
perform their own manufacturing as well as indirectly with alternate channels of
distribution to the consumer such as internet commerce. In addition, certain
manufacturers and distributors of upscale optical products and accessories have
manifested their intention to offer products in the popularly priced segment
($20 or less). Furthermore, many retailers require a new supplier to buy back
the retailer's existing inventory as a condition to changing vendors. These
inventory costs can be substantial and serve as a barrier to obtaining new
customers and entering new distribution channels. The Company is also under
continuous pressure from its major customers to reduce product costs. The
failure of the Company to compete effectively with respect to product costs or
other competitive factors could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON COMPUTER SOFTWARE APPLICATIONS
The Company has made a substantial investment in the development and
enhancement of its computer and information systems. The Company anticipates
that it will continue to make enhancements and modifications to its computer
systems as it executes its expansion plans and increases the scope of its
product and service offerings in response to customer needs and new developments
in technology. Such modifications may cause disruptions in operations, delay the
integration of acquisitions, or cost more to design, implement or operate than
currently budgeted. Any such disruptions, delays or costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is currently implementing a substantial information system
conversion which is scheduled to be completed by the first quarter of 1999. The
Company believes that with planned modifications to existing software and
successful conversion to the new software, the Year 2000 issue will not pose
significant operational problems for the Company's systems as so modified or
converted. Any delays or omissions by AAi or its agents to resolve such issues
may have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000."
SEASONALITY
Significant portions of the Company's business are seasonal. Sunglasses are
shipped primarily during the first half of the fiscal year as retailers build
inventory for the spring and summer selling seasons, while costume jewelry and
other accessories are shipped primarily during the second half of the fiscal
year as retailers build inventory for the holiday season. Reading glasses sales
are generally uniform throughout the year. Although the expansion of the
Company's optical product line has, in part, offset the seasonality of the
costume jewelry and other accessories product lines, the Company's financial
condition and results of operations are highly dependent on these two principal
shipping seasons. In addition, the Company's quarterly results could be
adversely impacted by the timing of customer orders and scheduled shipping
dates.
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SUSCEPTIBILITY TO CHANGING CONSUMER PREFERENCES
The sunglasses and accessories industries are subject to changing consumer
preferences. A significant portion of the Company's sunglasses, costume jewelry
and small synthetic leather goods are susceptible to fashion trends. If the
Company misjudges the market for a particular product or is unable to respond
quickly to fashion trends, the Company's sales may be adversely affected which
may leave the Company with excess inventory. In addition, the Company may be
required to provide its customers with a higher level of markdowns and
allowances on slow moving products. While the Company has a limited ability to
modify slow-moving product lines to satisfy consumer preferences and otherwise
utilize excess inventory, the Company cannot ensure that any such actions will
be sufficient to redress a market misjudgment. Accordingly, a market misjudgment
could adversely affect the Company's business, financial condition and results
of operations.
CERTAIN REGULATORY MATTERS
Certain of the products sold by AAi must comply with quality control
standards set by various governmental entities, including the Food and Drug
Administration (the "FDA"). The FDA regulates the manufacture and sale of
ophthalmic products under the Federal Food, Drug and Cosmetic Act, as amended by
the 1976 Medical Device Amendments and certain subsequent amendments. Recently,
the FDA has become more restrictive in the regulatory process and has increased
its surveillance over existing products and manufacturing facilities. The FDA
has authority to suspend or remove a product from the market or to cause a
manufacturer to cease operations either at a facility or company-wide if it
deems a product or a manufacturing process to be outside regulatory guidelines.
Failure of the Company to comply with governmental standards could have a
material adverse effect on the Company's business, financial condition and
results of operations.
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required repurchases
of Notes tendered or that restrictions in the Senior Credit Facility will allow
the Company to make such required repurchases. Notwithstanding these provisions,
the Company could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time. See "Description of
Notes -- Repurchase at the Option of Holders."
LACK OF A PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to holders of the Old Notes. The Old Notes
were offered and sold in July 1998 to a small number of institutional investors
and are eligible for trading at the PORTAL market. The Notes are a new issue of
securities for which there is no existing trading market. There can be no
assurance regarding the future development of a market for the Notes or the
ability of holders of the Notes to sell their Notes or the price at which such
holders may be able to sell their Notes. If such a market were to develop, the
Notes could trade at prices that may be higher or lower than the initial
offering price depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. The
Initial Purchasers have advised the Company that they currently intend to make a
market in the New Notes. The Initial Purchasers are not obligated to do so,
however, and any market making with respect to the Notes may be discontinued at
any time without notice. Therefore, there can be no assurance as to the
liquidity of any trading market for the Notes or that an active trading market
for the Notes will develop. The Company does not intend to apply for listing or
quotation of the Notes on any securities exchange or stock market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on holders of the Notes.
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FRAUDULENT CONVEYANCE
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Subsidiary Guarantor, at the time it incurred the indebtedness evidences
by the Notes or its Subsidiary Guarantee, (i) (a) was or is insolvent or
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Subsidiary Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond its
ability to pay such debts as they mature, and (ii) the Company or such
Subsidiary Guarantor received or receives less than reasonably equivalent value
or fair consideration for the incurrence of such indebtedness, then the Notes
and the Subsidiary Guarantees, and any pledge or other security interest
securing such indebtedness, could be voided, or claims in respect of the Notes
or the Subsidiary Guarantees could be subordinated to all other debts of the
Company or such Subsidiary Guarantor, as the case may be. In addition, the
payment of interest and principal by the Company pursuant to the Notes or the
payment of amounts by a Subsidiary Guarantor pursuant to a Subsidiary Guarantee
could be voided and required to be returned to the person making such payment,
or to a fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and each Subsidiary Guarantor believes that,
after giving effect to the indebtedness incurred in connection with the Offering
and the Senior Credit Facility, it will not be insolvent, will not have
unreasonably small capital for the business in which it is engaged and will not
incur debts beyond its ability to pay such debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making such
determinations or that a court would agree with the Company's or the Subsidiary
Guarantors' conclusions in this regard.
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THE COMPANY
The Company, which was founded in 1962 as a jewelry manufacturer, was
acquired by Gerald F. Cerce and Felix A. Porcaro, Jr. in 1972. Since that time,
through a series of acquisitions and internal growth, AAi has evolved from a
regional costume jewelry manufacturer into an international value-added
distributor of optical products, costume jewelry, watches, clocks and synthetic
leather goods with annual net sales of $182.0 million in 1997 on a pro forma
basis after giving effect to the Acquisitions.
In 1990, AAi partnered with Milagros Corporation Limited, a Hong Kong
corporation, to form a joint venture (consisting of three operating entities)
through which the Company outsources a majority of its manufacturing to
independent manufacturers located in Asia. The Hong Kong joint venture, in which
the Company currently holds a 49% interest, monitors contract manufacturing of
the Company's products, serves as sourcing agent to certain customers of AAi and
manufactures certain other accessories such as scarves, belts and beach towels
for distribution directly to retailers. Outsourcing product manufacturing allows
AAi to compete as a low cost supplier of its product lines and provides the
Company with flexibility in its cost structure. The Hong Kong joint venture had
1997 net sales of $37.0 million, of which $15.2 million or 41.1% were to the
Company.
In response to a major customer's North American expansion, the Company
established operations in Canada in 1994 and Mexico in 1996. The Company's
Mexican operations are conducted through a 55% owned joint venture with a local
costume jewelry manufacturer. The Company's Canadian operations and the Mexican
joint venture had 1997 net sales of $5.3 million and $1.4 million, respectively.
In December 1996, AAi acquired Foster Grant US, a major marketer and
distributor of sunglasses and reading glasses and owner of the domestic rights
to the Foster Grant trademark. This acquisition generated net sales of
approximately $66.2 million in 1997 and significantly expanded AAi's optical
product line. In March 1998, AAi acquired the European reading glasses and
sunglasses business of Foster Grant UK, and the rights to the Foster Grant
trademark in Europe, giving AAi worldwide rights to the Foster Grant brand.
In June 1998, the Company acquired an 80% interest in Fantasma. The other
20% interest in Fantasma is held by Roger Dreyer, President of that company. Mr.
Dreyer and another Fantasma officer have options to acquire in the aggregate an
additional 13% interest in Fantasma subject to satisfaction of certain earnings
targets in 1998, 1999 and 2000. The Company's acquisition of Fantasma added
watches and clocks to AAi's product lines and Disney and Warner Bros. stores to
its customer base.
AAi was incorporated in Rhode Island in December 1985 and is the successor
by merger to a Rhode Island corporation incorporated in 1962.
The Company's principal executive offices are located at 500 George
Washington Highway, Smithfield, Rhode Island 02917, and its telephone number is
(401) 231-3800.
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<PAGE> 29
USE OF PROCEEDS
THE EXCHANGE OFFER
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange the Old Notes in like
principal amount, the form and terms of which are the same in all material
respects as the form and terms of the New Notes except that the New Notes have
been registered under the Securities Act and hence do not include certain rights
to registration thereunder or contain transfer restrictions or terms with
respect to Liquidated Damages. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in any proceeds to the Company or increase in
the indebtedness of the Company.
THE SALE OF THE OLD NOTES
The net proceeds received by the Company from the Offering, after deducting
the discount to the Initial Purchasers and related fees and expenses, were
approximately $72.0 million. The Company used the net proceeds as follows: (i)
$17.3 million was used to repay borrowings under three term loans (the "Term
Loans"); (ii) $52.3 million was used to repay borrowings under the Company's
Revolving Credit Facility (the "Revolving Credit Facility") under the Senior
Credit Facility (see "Description of Senior Credit Facility"); (iii) $2.2
million was used to repay the entire debt due to certain common and preferred
shareholders under subordinated notes, less the advances made by the Company to
certain shareholders (see "Certain Transactions"); and (iv) $0.2 million was
retained as cash proceeds by the Company. Two of the Term Loans which
represented $7.3 million in indebtedness were incurred in connection with the
Company's purchase and expansion of its Rhode Island headquarters and the
Fantasma Acquisition. See "Business--Property" and "The Company." The Term Loans
(which have been repaid in their entirety) bore interest, at the election of
Company, at either the prime lending rate of NationsBank, N.A. plus 0.50% per
annum or at LIBOR plus 2.50% per annum. The Term Loans matured at May 1, 2000
and October 15, 1998, or upon the expiration of the Revolving Credit Facility,
whichever was earlier. See "Description of Senior Credit Facility" for the terms
and conditions of the Revolving Credit Facility. The Company expects to use the
balance of the net proceeds from the sale of the Old Notes for general corporate
purposes. Pending use of such cash, the balance of the net proceeds of the sale
of the Old Notes will be invested in cash equivalents.
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<PAGE> 30
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on July 21, 1998 (the "Closing
Date") through the Initial Purchasers to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act). In connection with the sale of
the Old Notes, the Company, the Guarantors and the Initial Purchasers entered
into the Registration Rights Agreement pursuant to which the Company and the
Guarantors agreed to cause to be filed with the Commission within 45 days after
the Closing Date, and use their best efforts to cause to become effective on or
prior to 135 days after July 21, 1998, a registration statement with respect to
the Exchange Offer. However, if (i) the Company is not required to file an
Exchange Offer registration statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) if any Holder of Old Notes shall notify the Company within 20
business days of the consummation of the Exchange Offer (A) that such Holder is
prohibited by applicable law or Commission policy from participating in the
Exchange Offer, or (B) that such Holder may not resell the New Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and that
the Prospectus contained in the Exchange Offer registration statement is not
appropriate or available for such resales by such holder, or (C) that such
Holder is a broker-dealer and holds Old Notes acquired directly from the Company
or one of its affiliates, then the Company and the Guarantors will file with the
Commission a Shelf Registration Statement to cover resales of the Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Once the Exchange Offer is consummated, the Company
will have no further obligations to register any of the Old Notes not tendered
by the Holders for exchange, except pursuant to a Shelf Registration Statement
filed under the limited circumstances described in the immediately preceding
paragraph. Thereafter, any Holder of Old Notes who does not tender its Old Notes
in the Exchange Offer and which is not eligible to use such a Shelf Registration
Statement will continue to hold restricted securities which may not be offered,
sold or otherwise transferred, pledged or hypothecated except pursuant to Rule
144 and Rule 144A under the Securities Act or pursuant to any other exemption
from registration under the Securities Act relating to the disposition of
securities.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, including the Exchange Offer
No-Action Letters, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof who are not affiliates of the Company
(other than a broker-dealer who acquired such Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided
that the Holder is acquiring New Notes in its ordinary course of business and
has not engaged in, and does not intend to engage in, any distribution (within
the meaning of the Securities Act) of the New Notes and has no arrangement or
understanding with any person to participate in a distribution of the New Notes.
Persons wishing to exchange Old Notes in the Exchange Offer must represent to
the Company that such conditions have been met. However, any Holder who may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company or who tenders in the Exchange Offer with the intention to participate,
or for the purpose of participating, in a distribution of the New Notes cannot
rely on the interpretation by the staff of the Commission set forth in such
no-action letters, including the Exchange Offer No-Action Letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Old Notes where such Old Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities (other than acquisitions directly from the Company) must
24
<PAGE> 31
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received as aforesaid. The
Company has agreed that for a period of 180 days after the Exchange Offer is
consummated, it will, upon reasonable request, make this Prospectus available
promptly to such broker-dealers for use in connection with any such resale. See
"Plan of Distribution."
Except as set forth above, this Prospectus may not be used for an offer to
resell, or for a resale or other transfer of New Notes.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer registration statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer registration statement declared effective by the Commissions
on or prior to 135 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer registration statement
was declared effective by the Commission, New Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 30 days
after such filing obligation arises and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 90 days after such
obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer registration statement, or (d)
the Shelf Registration Statement or the Exchange Offer registration statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Transfer Restricted Securities held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages for all Registration Defaults of
$.30 per week per $1,000 principal amount of Transfer Restricted Securities. All
accrued Liquidated Damages will be paid by the Company on each interest payment
date to the Global Note Holder by wire transfer of immediately available funds
or by federal funds check and to Holders of certificated Notes by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old Note
until (i) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note,
the date on which such New Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer registration statement, (iii) the date on which
such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the date
on which such Old Note is distributed to the public pursuant to Rule 144 under
the Act.
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<PAGE> 32
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
As of October 3, 1998, there was $75.0 million aggregate principal amount
of the Old Notes outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of , 1998.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depository. The New Notes exchanged for the Old
Notes will initially be issued and transferable in book-entry form through DTC.
See "Description of Notes -- Book-Entry Delivery and Form."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Company has the right to extend the Exchange Offer but only to the
extent necessary to comply with applicable federal and state securities laws or
if any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer which, in the
reasonable judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer. In order to extend the Expiration Date, the
Company will notify the Exchange Agent and the record Holders of Old Notes of
any extension by oral or written notice, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
The Expiration Date will not be extended beyond the 30th business day after the
date of this Prospectus.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if the applicable
condition set forth herein under "Conditions" shall have occurred and shall not
have been waived by the Company by giving oral or written notice of such delay,
extension, amendment or termination to the Exchange Agent. Any such delay in
acceptance, extension, amendment or termination will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably calculated
to inform the Holders of such amendment and the Company will extend the Exchange
Offer as necessary to provide to such Holders a period of five to ten business
days after such amendment, depending upon the significance of the amendment and
the manner of disclosure to Holders of the Old Notes if the Exchange Offer would
otherwise expire during such five to ten business day period.
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<PAGE> 33
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRUED AMOUNTS ON THE NOTES
The New Notes will bear interest at a rate equal to 10 3/4% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor or, if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the Notes is payable semi-annually on
January 15 and July 15 of each year, commencing on January 15, 1999.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of Old Notes must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the instructions to the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes and any other required documents, so that it is
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in DTC (the "Book-Entry
Transfer Facility") may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account in accordance with the Book-Entry Transfer Facility procedure
for such transfer. Although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth in "-- Exchange Agent" below prior to 5:00 p.m., New York City time,
on the Expiration Date. DELIVERY OF DOCUMENTS TO THE COMPANY IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
The method of delivery of the tendered Old Notes, the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that the
Holder use an overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure timely delivery. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
ANY BENEFICIAL HOLDER WHOSE OLD NOTES ARE REGISTERED IN THE NAME OF ITS
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES
TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH
REGISTERED HOLDER TO TENDER ON ITS BEHALF. IF SUCH BENEFICIAL HOLDER WISHES TO
TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO COMPLETING AND
EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS OLD NOTES, EITHER MAKE
APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE OLD NOTES IN SUCH HOLDER'S
NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE
TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
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<PAGE> 34
Signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, must be guaranteed by an Eligible Institution
(as defined below) unless the Old Notes tendered pursuant thereto are tendered
(i) by a registered Holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by or through a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
institution which falls within the definition of "Eligible Guarantor
Institution" contained in Rule 17Ad-15 promulgated by the Commission under the
Exchange Act (each an "Eligible Institution").
If the Letter of Transmittal (or facsimile thereof) is signed by a person
other than the registered Holder of the Old Notes tendered thereby, such Old
Notes must be endorsed or accompanied by appropriate bond powers signed as the
name of the registered Holder or Holders appears on the Old Notes, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If the Letter of Transmittal (or facsimile thereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. The Company reserves the
absolute right to reject any and all Old Notes not properly tendered or any Old
Notes the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to the Exchange Offer and/or
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. None of the Company, the Exchange Agent nor
any other person shall be under any duty to give notification of defect or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which any defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
Holder(s) of Old Notes, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being acquired
in the ordinary course of such Holder's business, that such Holder has not
engaged in, nor intends to engage in, any distribution of the New Notes and has
no arrangement or understanding with any person to participate in the
distribution of such New Notes, and that such Holder is not an "affiliate" (as
defined under Rule 405 of the Securities Act) of the Company or any of its
subsidiaries. If the Holder is a broker-dealer that will receive New Notes for
is own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, such Holder by tendering
will acknowledge that it will deliver a Prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the
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<PAGE> 35
Exchange Agent, or cannot complete the procedure for book-entry transfer, prior
to 5:00 p.m. on the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the date of execution of the Notice of Guaranteed
Delivery, the Letter of Transmittal (or facsimile thereof) together with
the certificate(s) representing the Old Notes to be tendered in proper form
for transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility of Old Notes delivered
electronically) and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility of Old Notes delivered electronically) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery. Upon request to the
Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who
wish to tender their Old Notes according to the guaranteed delivery
procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the principal amount of such
Old Notes), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, which determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for payment will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company may
terminate or amend the Exchange Offer as provided herein and will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable policy of the Commission; or
29
<PAGE> 36
(b) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the reasonable judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders") or (iii) waive certain of such conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn or revoked. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver in
a manner reasonably calculated to inform Holders of Old Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, (i) if, because of any change in applicable law or applicable
policy thereof by the Commission the Company is not permitted to effect the
Exchange Offer, (ii) the Exchange Offer is not consummated within 135 days after
the date of original issue of the Old Notes or (iii) any Holder of Old Notes
notified the Company within 20 business days of the consummation of the Exchange
Offer that, for certain specified reasons, such Holder is precluded from
participating in the Exchange Offer, then the Company shall file a Shelf
Registration Statement. Thereafter, the Company's obligation to consummate the
Exchange Offer shall be terminated.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By registered or certified mail:
IBJ Schroder Bank & Trust-Company
Bowling Green Station
P.O. Box 84
New York, New York 10274-0084
Attention: Reorganization Operations Department
By hand or by overnight courier:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Securities Processing Window
Subcellar one, (SC-1)
By facsimile: (212) 858-2611
Attention: Customer Service
Confirm by telephone: (212) 858-2103
30
<PAGE> 37
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Old Notes, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate not to exceed $300,000,
and include fees and expenses of the Exchange Agent and Trustee under the
Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the Holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the Holder or any
other person(s)) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
that is, face value as reflected in the Company's accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized upon the consummation of the Exchange Offer. The issuance costs
incurred in connection with the Exchange Offer will be capitalized and amortized
over the term of the New Notes.
A copy of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
31
<PAGE> 38
CAPITALIZATION
The following table sets forth the Company's consolidated capitalization as
of July 4, 1998 on a historical basis and on an as adjusted basis after giving
effect to the Offering and the application of the net proceeds therefrom as if
they had occurred as of July 4, 1998.
<TABLE>
<CAPTION>
JULY 4, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations:
Current maturities of long-term obligations (a)........... $ 543 $ 543
Long-term obligations:
Senior credit facility(b)................................. 65,024 --
10 3/4% senior notes due 2006............................. -- 75,000
Subordinated promissory notes payable to shareholders..... 5,593 --
Other long-term obligations(a)............................ 1,950 1,950
------- -------
Total obligations......................................... 73,110 77,493
Redeemable preferred stock:
Redeemable preferred stock of a subsidiary................ 903 903
Preferred stock, $.01 par value, 200,000 authorized;
43,700 designated, issued and outstanding as Series A
Preferred Stock........................................ 27,440 27,440
------- -------
Total redeemable preferred stock.......................... 28,343 28,343
------- -------
Total shareholders' deficit................................. (9,309) (9,309)
------- -------
Total capitalization........................................ $92,974 $97,357
======= =======
</TABLE>
- ---------------
(a) Excludes approximately $1.3 million of deferred compensation.
(b) Represents borrowings of approximately $48.4 million outstanding under the
Revolving Credit Facility and approximately $16.7 million outstanding under
the Term Loans.
32
<PAGE> 39
SELECTED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statements of Operations for the
year ended December 31, 1997 and the six and twelve months ended July 4, 1998
give effect to the Acquisitions and the Offering and the application of the net
proceeds therefrom as if each had occurred at the beginning of the earliest
period presented. The Unaudited Pro Forma Combined Statements of Operations do
not include the effects of the Company's acquisition of Donley Company in May
1998 as the Company has determined that its effects are not material. The
following Unaudited Pro Forma Combined Balance Sheet as of July 4, 1998 gives
effect to the Offering and the application of the net proceeds therefrom.
The Unaudited Pro Forma Combined Financial Statements have been prepared
using the purchase method of accounting for the Acquisitions whereby the total
cost of each acquisition is allocated to the tangible and intangible assets
acquired and liabilities assumed based upon their respective fair values at the
effective dates of such acquisitions. Such allocations for the Fantasma
Acquisition have been made based upon currently available information and
management's estimates. Final allocations will be determined upon completion of
the analysis of the assets acquired and liabilities assumed.
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 is derived from the audited financial statements of the
Company for the year ended December 31, 1997, the unaudited financial statements
of Fantasma and Foster Grant UK for the year ended December 31, 1997 and the
unaudited financial statements of Superior for the six months ended June 30,
1997. The Unaudited Pro Forma Combined Statement of Operations for the twelve
months ended July 4, 1998 is derived from the unaudited financial statements of
the Company for the twelve months ended July 4, 1998, the unaudited financial
statements of Fantasma for the eleven and one-half months ended June 10, 1998,
and the unaudited financial statements of Foster Grant UK for the eight months
ended March 5, 1998. The Unaudited Pro Forma Combined Statement of Operations
for the six months ended July 4, 1998 is derived from the unaudited financial
statements of the Company for the six months ended July 4, 1998, the unaudited
financial statements of Fantasma for the five and one-half months ended June 10,
1998, and the unaudited financial statements of Foster Grant UK for the two
months ended March 5, 1998. The historical financial information included in the
pro forma Statements of Operations for Fantasma, Foster Grant UK and Superior
for the above mentioned periods represents the operating results of these
entities prior to the Company's acquisition for each period presented. The
unaudited financial statements reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary for a
presentation of results for the respective periods in accordance with the basis
of presentation described in Note 1 of the Notes to the Company's Consolidated
Financial Statements and similar statements found in the other entities'
unaudited financial statements.
The Unaudited Pro Forma Combined Financial Statements do not purport to
represent what the results of operations or financial position of the Company
would actually have been if any of the transactions had occurred on such dates
or to project the results of operations or financial positions of the Company
for any future date or period. The Unaudited Pro Forma Combined Financial
Statements set forth below should be read in conjunction with the respective
Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
33
<PAGE> 40
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------------- COMBINED
FOSTER FOR THE
AAI SUPERIOR(a) GRANT UK FANTASMA ADJUSTMENTS ACQUISITIONS
-------- ----------- -------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $149,411 $6,314 $9,104 $17,163 $ -- $181,992
Cost of goods sold............ 77,928 2,939 4,089 12,750 -- 97,706
-------- ------ ------ ------- ------- --------
Gross profit.................. 71,483 3,375 5,015 4,413 -- 84,286
Operating expenses............ 65,323 2,940 4,336 3,572 53 (b) 76,831
166 (c)
441 (d)
-------- ------ ------ ------- ------- --------
Income from operations........ 6,160 435 679 841 (660) 7,455
Interest expense.............. (4,214) (134) (112) (480) (778)(e) (5,718)
Other (expense) income, net... 31 21 (101) -- -- (49)
-------- ------ ------ ------- ------- --------
Income (loss) before taxes and
dividends and accretion on
preferred stock............. 1,977 322 466 361 (1,438) 1,688
Income tax benefit
(expense)................... (1,162) -- -- (58) 234 (h) (986)
-------- ------ ------ ------- ------- --------
Net income (loss) before
dividends and accretion on
preferred stock............. 815 322 466 303 (1,204) 702
Dividends and accretion on
preferred stock............. 2,496 -- -- -- -- 2,496
-------- ------ ------ ------- ------- --------
Net income (loss) applicable
to common shareholders...... $ (1,681) $ 322 $ 466 $ 303 $(1,204) $ (1,794)
======== ====== ====== ======= ======= ========
OTHER OPERATING DATA:
Depreciation and
amortization................ $ 8,248 $ 319 $ 806 $ 11 $ 660 $ 10,044
EBITDA (i).................... 14,439 775 1,384 852 -- 17,450
Capital expenditures.......... 7,583 298 523 41 -- 8,445
Cash interest expense......... -- -- -- -- -- --
SELECTED RATIOS:
Ratio of EBITDA to cash interest expense.................................................................
Ratio of total debt to EBITDA............................................................................
Ratio of earnings to fixed charges(j)....................................................................
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------
PRO FORMA
COMBINED AS
PRO FORMA ADJUSTED FOR THE
EFFECTS OF OFFERING AND THE
THE OFFERING ACQUISITIONS
------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ -- $181,992
Cost of goods sold.................... -- 97,706
------- --------
Gross profit.......................... -- 84,286
Operating expenses.................... -- 76,831
------- --------
Income from operations................ -- 7,455
Interest expense...................... (2,550)(f) (8,643)
(375)(g)
Other (expense) income, net........... -- (49)
------- --------
Income (loss) before taxes and
dividends and accretion on
preferred stock..................... (2,925) (1,237)
Income tax benefit
(expense)........................... 1,697 (h) 711
------- --------
Net income (loss) before
dividends and accretion on
preferred stock..................... (1,228) (526)
Dividends and accretion on
preferred stock..................... -- 2,496
------- --------
Net income (loss) applicable
to common shareholders.............. $(1,228) $ (3,022)
======= ========
OTHER OPERATING DATA:
Depreciation and
amortization........................ $ -- $ 10,044
EBITDA (i)............................ -- 17,450
Capital expenditures.................. -- 8,445
Cash interest expense................. -- 8,128
SELECTED RATIOS:
Ratio of EBITDA to cash intere........ 2.15x
Ratio of total debt to EBITDA......... 4.41x
Ratio of earnings to fixed cha........ --
</TABLE>
- ---------------
(a) Includes the results of operations from the beginning of the period reported
to July 1, 1997, the date of acquisition by AAi.
(b) Reflects the amortization of intangible assets associated with the
acquisition of certain assets of Foster Grant UK.
(c) Reflects the amortization of intangible assets associated with the
acquisition of certain assets of Superior.
(d) Reflects the amortization of intangible assets associated with the Fantasma
Acquisition.
(e) Reflects pro forma interest expense on debt used to finance the Acquisitions
calculated using an assumed interest rate of 8.1% per annum on the Revolving
Credit Facility and Term Loans. (See Note k)
(f) Reflects additional interest expense which would have been incurred if the
Notes (at a rate of 10.75% per annum) had been outstanding for the entire
period and the Company had paid off all debt except debt (which accrued
interest of $205,000) that was not paid off with the proceeds of the
Offering. (See Note k)
(g) Reflects the estimated additional amortization of deferred financing costs
associated with the Offering of approximately $3.0 million over the eight
year term of the Notes. (See Note k)
(h) Reflects pro forma tax impact of pro forma adjustments stated at the
Company's effective tax rate.
(i) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it is
an indicator of the earnings available to meet the Company's debt service
obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP.
(j) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs, accretion
and noncash dividends on Series A Preferred Stock and the portion of rental
expense that is representative of the interest factor. On a pro forma basis,
earnings were insufficient to cover fixed charges by $5.6 million.
34
<PAGE> 41
(k) Pro forma interest expense was calculated as follows:
<TABLE>
<S> <C> <C>
Historical Interest Expense:
- AAi................................................... $ 4,214
- Superior.............................................. 134
- Foster Grant UK....................................... 112
- Fantasma.............................................. 480
</TABLE>
<TABLE>
<S> <C> <C>
Pro forma interest incurred to effect the Acquisitions:
Foster Grant UK
Approximate purchased price financed................ $ 5,500
Approximate weighted average interest rate for the
period.............................................. 8.1% $ 446
-------
Fantasma
Approximate purchased price financed................ $ 4,100
Approximate weighted average interest rate for the
period.............................................. 8.1% $ 332
------- -------
Acquisition subtotal................................ 778
-------
Total interest subtotal......................... $ 5,718
Pro forma interest expense incurred to effect the Offering:
Principal balance of the Notes...................... $75,000
Interest rate....................................... 10.75% 8,063
-------
Interest expense related to debt paid off with
proceeds from Offering.............................. (5,513)
Amortization of financing costs..................... 375
-------
Total........................................... $ 8,643
=======
</TABLE>
35
<PAGE> 42
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 4, 1998
------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------- PRO FORMA COMBINED AS
FOSTER COMBINED PRO FORMA ADJUSTED FOR THE
GRANT (a) FOR THE EFFECTS OF OFFERING AND THE
AAI UK(a) FANTASMA ADJUSTMENTS ACQUISITIONS THE OFFERING ACQUISITIONS
------- ------ -------- ----------- ------------ ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $88,631 $1,883 $ 4,339 $ -- $ 94,853 $ -- $94,853
Cost of goods sold................ 47,543 839 3,053 -- 51,435 -- 51,435
------- ------ ------- ------- -------- ------ -------
Gross profit...................... 41,088 1,044 1,286 -- 43,418 -- 43,418
Operating expenses 39,208 941 1,485 9 (b) 41,725 -- 41,725
82 (c)
------- ------ ------- ------- -------- ------ -------
Income from operations............ 1,880 103 (199) (91) 1,693 -- 1,693
Interest expense.................. (2,638) (15) (160) (250)(d) (3,063) (1,049)(e) (4,300)
(188)(f)
Other (expense) income, net....... (10) (18) -- -- (28) -- (28)
------- ------ ------- ------- -------- ------ -------
Income (loss) before taxes and
dividends and accretion on
preferred stock................. (768) 70 (359) (341) (1,398) (1,237) (2,635)
Income tax benefit (expense)...... 338 -- -- 277 (g) 615 544 (g) 1,159
------- ------ ------- ------- -------- ------ -------
Net income (loss) before dividends
and accretion on preferred
stock........................... (430) 70 (359) (64) (783) (693) (1,476)
Dividends and accretion on
preferred stock................. 1,357 -- -- -- 1,357 -- 1,357
------- ------ ------- ------- -------- ------ -------
Net income (loss) applicable to
common shareholders............. $(1,787) $ 70 $ (359) $ (64) $ (2,140) $ (693) $(2,833)
======= ====== ======= ======= ======== ====== =======
OTHER OPERATING DATA:
Depreciation and amortization..... $ 5,479 $ 284 $ 4 $ 91 $ 5,858 -- $ 5,858
EBITDA (h)........................ 7,349 369 (195) -- 7,523 -- 7,523
Capital expenditures.............. 10,863 521 2 -- 11,386 -- 11,386
Cash interest expense............. -- -- -- -- -- -- 3,800
SELECTED RATIOS:
Ratio of EBITDA to cash interest expense................................................................... 1.98x
Ratio of total debt to EBITDA.............................................................................. 5.06x
Ratio of earnings to fixed charges(i)...................................................................... --
</TABLE>
- ---------------
(a) Includes the results of operations of the acquired businesses from the
beginning of the period reported to the respective dates of acquisition by
AAi (Foster Grant UK on March 5, 1998 and Fantasma on June 10, 1998).
(b) Reflects the amortization of intangible assets associated with the
acquisition of certain assets of Foster Grant UK.
(c) Reflects the amortization of intangible assets associated with the Fantasma
Acquisition.
(d) Reflects pro forma interest expense on debt used to finance the acquisitions
calculated using an assumed interest rate of 8.6% per annum on the Revolving
Credit Facility and Term Loans. (See Note j)
(e) Reflects additional interest expense which would have been incurred if the
notes (at a rate of 10.75% per annum) had been outstanding for the entire
period and the Company had paid off all debt except debt (which accrued
interest of $81,000) that was not paid off with the proceeds of the
Offering. (See Note j)
(f) Reflects the estimated additional amortization of deferred financing costs
associated with the Offering of approximately $3.0 million over the eight
year term of the Notes. (See Note j)
(g) Reflects pro forma tax impact of pro forma adjustments stated at the
Company's effective tax rate.
(h) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it is
an indicator of the earnings available to meet the Company's debt service
obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP.
(i) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs, accretion
and noncash dividends on the Series A Preferred Stock and the portion of
rental expense that is representative of the interest factor. On a pro forma
basis, earnings were insufficient to cover fixed charges by $5.9 million.
36
<PAGE> 43
(j) Pro forma interest expense was calculated as follows:
<TABLE>
<S> <C> <C>
Historical Interest Expense:
- AAi................................................... $ 2,638
- Superior.............................................. 15
- Fantasma.............................................. 160
</TABLE>
<TABLE>
<S> <C> <C>
Pro forma interest incurred to effect the Acquisitions:
Foster Grant UK
Approximate purchased price financed................ $ 5,500
Approximate weighted average interest rate for the
period.............................................. 8.6%
Period of 12 months which debt would be
outstanding......................................... 2.25/12 $ 89
-------
Fantasma
Approximate purchased price financed................ $ 4,100
Approximate weighted average interest rate for the
period.............................................. 8.6%
Period of 12 months which debt would be
outstanding......................................... 5.5/12 $ 161
------- -------
Acquisition subtotal................................ 250
-------
Total interest subtotal......................... $ 3,063
Pro forma interest expense incurred to effect the Offering:
Principal balance of the Notes...................... $75,000
Interest rate....................................... 10.75%
Period of 12 months which debt would be
outstanding......................................... 6/12 4,031
-------
Interest expense related to debt paid off with
proceeds from Offering.............................. (2,982)
Amortization of financing costs..................... 188
-------
Total........................................... $ 4,300
=======
</TABLE>
37
<PAGE> 44
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JULY 4, 1998
--------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------- PRO FORMA COMBINED AS
FOSTER COMBINED PRO FORMA ADJUSTED FOR THE
GRANT FOR THE EFFECTS OF OFFERING AND THE
AAI UK(a) FANTASMA ADJUSTMENTS ACQUISITIONS THE OFFERING ACQUISITIONS
-------- ------ -------- ----------- ------------ ------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $162,157 $4,742 $17,363 $ -- $184,262 $ -- $184,262
Cost of goods sold............... 84,272 1,936 12,161 -- 98,369 -- 98,369
-------- ------ ------- ------- -------- ------- --------
Gross profit..................... 77,885 2,806 5,202 -- 85,893 -- 85,893
Operating expenses............... 73,849 2,799 3,475 36 (b) 80,582 -- 80,582
423 (c)
-------- ------ ------- ------- -------- ------- --------
Income from operations........... 4,036 7 1,727 (459) 5,311 -- 5,311
Interest expense................. (4,782) (62) (477) (706)(d) (6,027) (2,160)(e) (8,562)
(375)(f)
Other (expense) income, net...... (147) (70) -- -- (217) -- (217)
-------- ------ ------- ------- -------- ------- --------
Income (loss) before taxes and
dividends and accretion on
preferred stock................ (893) (125) 1,250 (1,165) (933) (2,535) (3,468)
Income tax benefit (expense)..... 53 -- (58) 295(g) 290 1,236 (g) 1,526
-------- ------ ------- ------- -------- ------- --------
Net income (loss) before
dividends and accretion on
preferred stock................ (840) (125) 1,192 (870) (643) (1,299) (1,942)
Dividends and accretion on
preferred stock................ 2,643 -- -- -- 2,643 -- 2,643
-------- ------ ------- ------- -------- ------- --------
Net income (loss) applicable to
common shareholders............ $ (3,483) $ (125) $ 1,192 $ (870) $ (3,286) $(1,299) $ (4,585)
======== ====== ======= ======= ======== ======= ========
OTHER OPERATING DATA:
Depreciation and amortization.... $ 9,816 $ 474 $ 14 $ 459 $ 10,763 $ -- $ 10,763
EBITDA (h)....................... 13,705 411 1,741 -- 15,857 -- 15,857
Capital expenditures............. 14,080 519 289 -- 14,888 -- 14,888
Cash interest expense............ -- -- -- -- -- -- 7,845
SELECTED RATIOS:
Ratio of EBITDA to cash interest expense................................................................... 2.02x
Ratio of total debt to EBITDA.............................................................................. 4.80x
Ratio of earnings to fixed charges(i)...................................................................... --
</TABLE>
- ---------------
(a) Includes the results of operations of the acquired businesses from the
beginning of the period reported to the respective dates of acquisition by
AAi (Foster Grant UK on March 5, 1998 and Fantasma on June 10, 1998).
(b) Reflects the amortization of intangible assets associated with the
acquisition of certain assets of Foster Grant UK.
(c) Reflects the amortization of intangible assets associated with the Fantasma
Acquisition.
(d) Reflects pro forma interest expense on debt used to finance the acquisitions
calculated using an assumed average interest rate of 9.1% per annum on the
Revolving Credit Facility and Term Loans. (See Note j)
(e) Reflects additional interest expense which would have been incurred if the
Notes (at a rate of 10.75% per annum) had been outstanding for the entire
period and the Company had paid off all debt except debt (which accrued
interest of $127,000) that was not paid off with the proceeds of the
Offering. (See Note j)
(f) Reflects the estimated additional amortization of deferred financing costs
associated with the Offering of approximately $3.0 million over the eight
year term of the Notes. (See Note j)
(g) Reflects pro forma tax impact of pro forma adjustments stated at the
Company's effective tax rate.
(h) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it is
an indicator of the earnings available to meet the Company's debt service
obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP.
(i) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs, accretion
and noncash dividends on the Series A Preferred Stock and the portion of
rental expense that is representative of the interest factor. On a pro forma
basis, earnings were insufficient to cover fixed charges by $9.0 million.
38
<PAGE> 45
(j) Pro forma interest expense was calculated as follows:
<TABLE>
<S> <C> <C>
Historical Interest Expense:
- AAi................................................... $ 4,782
- Superior.............................................. 62
- Fantasma.............................................. 477
</TABLE>
<TABLE>
<S> <C> <C>
Pro forma interest incurred to effect the Acquisitions:
Foster Grant UK
Approximate purchased price financed................ $ 5,500
Approximate weighted average interest rate for the
period.............................................. 9.1%
Period of 12 months which debt would be
outstanding......................................... 8.25/12 $ 346
-------
Fantasma
Approximate purchased price financed................ $ 4,100
Approximate weighted average interest rate for the
period.............................................. 9.1%
Period of 12 months which debt would be
outstanding......................................... 11.5/12 $ 360
------- -------
Acquisition subtotal................................ 706
-------
Total interest subtotal......................... $ 6,027
Pro forma interest expense incurred to effect the Offering:
Principal balance of the Notes...................... $75,000
Interest rate....................................... 10.75% 8,063
-------
Interest expense related to debt paid off with
proceeds from Offering.............................. (5,903)
Amortization of financing costs..................... 375
-------
Total........................................... $ 8,562
=======
</TABLE>
39
<PAGE> 46
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JULY 4, 1998
--------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
---------------- EFFECTS OF COMBINED
AAi CONSOLIDATED THE OFFERING(a) AS ADJUSTED
---------------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,373 $ 3,853 $ 6,226
Accounts receivable......................................... 39,416 -- 39,416
Inventories................................................. 30,922 -- 30,922
Prepaids.................................................... 808 -- 808
Deferred tax assets, net.................................... 10,041 -- 10,041
-------- -------- --------
Total current assets.................................... 83,560 3,853 87,413
-------- -------- --------
Property and equipment -- net............................... 17,298 -- 17,298
Investments in affiliates................................... 1,351 -- 1,351
Intangibles, net............................................ 21,432 -- 21,432
Advances to officers/shareholders........................... 2,470 (2,470) --
Other....................................................... 1,644 3,000(b) 4,644
-------- -------- --------
Total assets............................................ $127,755 $ 4,383 $132,138
======== ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current maturities -- long term obligations................. 543 543
Accounts payable............................................ 21,242 -- 21,242
Accrued income taxes........................................ 2,197 -- 2,197
Accrued expenses............................................ 11,527 -- 11,527
-------- -------- --------
Total current liabilities............................... 35,509 35,509
-------- -------- --------
Notes....................................................... -- 75,000 75,000
Long term obligations
less current maturities................................... 66,974 (65,024) 1,950
Deferred tax liabilities.................................... 645 -- 645
Subordinated notes payable.................................. 5,593 (5,593) --
-------- -------- --------
Total liabilities....................................... 108,765 4,383 113,104
Redeemable preferred stock -- subsidiary.................... 903 -- 903
Redeemable preferred stock.................................. 27,440 -- 27,440
Common stock................................................ 6 -- 6
Additional paid in capital.................................. 270 -- 270
Cumulative foreign currency translation adjustment.......... (241) -- (241)
Accumulated deficit......................................... (9,344) -- (9,344)
-------- -------- --------
Total shareholders' equity (deficit)...................... (9,309) -- (9,309)
-------- -------- --------
Total liabilities and shareholders' deficit............. $127,755 $ 4,383 $132,138
======== ======== ========
</TABLE>
- ---------------
(a) Reflects the impact of the sources and uses of funds related to the
Company's cash and debt from the Offering.
(b) Reflects deferred financing costs of $3.0 million associated with the
Offering.
40
<PAGE> 47
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information of AAi as of the end of and for each of the five years ended
December 31, 1997, for the six months ended June 30, 1997 and July 4, 1998 and
as of July 4, 1998. The selected historical consolidated financial data as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, were derived from the Consolidated Financial Statements of
the Company, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this Prospectus. The selected
historical consolidated financial data as of December 31, 1993, 1994 and 1995
and for the years ended December 31, 1993 and 1994 were derived from audited
consolidated financial statements of the Company that are not included in this
Prospectus. The selected historical consolidated financial data as of July 4,
1998 and for the six months ended June 30, 1997 and July 4, 1998 are unaudited,
but have been prepared on the same basis as the audited Consolidated Financial
Statements, which, in the opinion of management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the information set forth therein. The results of operation for
the six months ended July 4, 1998 are not necessarily indicative of the results
that may be expected for the full year. The following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------
----------------------------------------------------- JUNE 30, JULY 4,
1993 1994 1995 1996(a) 1997(a) 1997 1998(a)
------- ------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $68,703 $76,611 $88,050 $ 86,336 $149,411 $75,885 $ 88,631
Cost of goods sold............................... 30,932 37,096 43,690 47,871 77,928 41,198 47,543
------- ------- ------- -------- -------- ------- --------
Gross profit..................................... 37,771 39,515 44,360 38,465 71,483 34,687 41,088
Operating expenses............................... 32,785 36,441 34,782 37,524 65,323 30,683 39,208
------- ------- ------- -------- -------- ------- --------
Income from operations........................... 4,986 3,074 9,578 941 6,160 4,004 1,880
Interest expense................................. (491) (342) (1,031) (1,469) (4,214) (2,071) (2,638)
Other (expense) income, net...................... 459 88 (80) (331) 31 (41) (10)
------- ------- ------- -------- -------- ------- --------
Income before taxes.............................. 4,954 2,820 8,467 (859) 1,977 1,892 (768)
Income tax benefit (expense)..................... -- -- (42) 948 (1,162) (1,102) 338
------- ------- ------- -------- -------- ------- --------
Net income....................................... 4,954 2,820 8,425 89 815 780 (430)
Dividends and accretion on preferred stock(b).... -- -- -- 1,123 2,496 1,210 1,357
------- ------- ------- -------- -------- ------- --------
Net income (loss) applicable to common
shareholders................................... 4,954 2,820 8,425 (1,034) (1,681) (420) (1,787)
Pro forma income tax adjustment(c)............... (1,982) (1,128) (3,370) (604) -- -- --
------- ------- ------- -------- -------- ------- --------
Pro forma net income (loss) applicable to common
shareholders................................... $ 2,972 $ 1,692 $ 5,055 $ (1,639) $ (1,681) $ (420) $ (1,787)
======= ======= ======= ======== ======== ======= ========
OTHER DATA:
Depreciation and amortization.................... $ 473 $ 628 $ 783 $ 1,868 $ 8,248 $ 3,911 $ 5,479
Cash flow from operating activities.............. 9,712 2,265 1,818 (1,892) 1,886 (6,234) (3,895)
Cash flow from investing activities.............. (738) (1,891) (2,104) (12,825) (9,363) (5,798) (23,212)
Cash flow from financing activities.............. (8,672) (600) 259 16,159 8,779 14,090 26,701
EBITDA (d)....................................... 5,918 3,790 10,281 2,488 14,439 7,874 7,349
Capital expenditures (e)......................... 680 1,552 1,555 1,572 7,583 4,366 10,863
Ratio of earnings to fixed charges (f)........... 8.30x 5.69x 8.12x -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------- JULY 4,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................... $ 4,003 $ 4,436 $ 7,795 $ 687 $ 5,936 $ 48,051
Total assets....................................... 14,730 16,773 25,187 82,010 93,746 127,755
Total debt(g)...................................... 683 2,593 5,542 35,588 44,959 71,780
Preferred securities(h)............................ -- -- -- 24,338 26,918 28,343
Total shareholders' equity(deficit)................ 4,848 4,890 11,523 (5,281) (7,359) (9,309)
</TABLE>
- ---------------
(a) Includes the results of operations of the acquired businesses from the
respective dates of acquisition: Tempo in June 1996, Foster Grant US in
December 1996, Superior in July 1997 and Foster Grant UK in March 1998.
(b) Reflects a reduction from net income for the accretion and noncash dividends
on Series A Preferred Stock. See Note 9 of the Notes to the Company's
Consolidated Financial Statements.
(c) The Company was an S corporation under Section 1362 of the Internal Revenue
Code until May 31, 1996. Pro forma income taxes, assuming the Company was
subject to C corporation income taxes, have been provided, in the
accompanying statement of operations for 1993, 1994, 1995 and 1996, at an
estimated statutory rate of 40%.
(d) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it is
an indicator of the earnings available to meet the Company's debt service
obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP.
(e) Does not include capital assets acquired in connection with the acquisitions
of the Foster Grant US, Tempo, Superior and Foster Grant UK.
(f) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges (excluding
accretion and noncash dividends on Series A Preferred Stock). Fixed charges
consist of interest expense, amortization of debt issuance costs and the
portion of rental expense that is representative of the interest factor.
Earnings were insufficient to cover fixed charges by $3.7 million, $2.4
million, $0.2 million and $4.0 million for the years ended December 31, 1996
and 1997 and the six months ended June 30, 1997 and July 4, 1998,
respectively.
(g) Includes amounts outstanding under Revolving Credit Facility, various
long-term obligations and subordinated promissory notes payable to
shareholders at each applicable period.
(h) Includes preferred stock of Foster Grant Holdings, Inc.
41
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
AAi is a value-added distributor of optical products, costume jewelry,
watches, clocks and other accessories primarily to mass merchandisers, variety
stores, chain drug stores and supermarkets in North America and the United
Kingdom. As a value-added distributor, the Company provides customized store
displays, merchandising management and a store-level field service force to
replenish and restock displays, reorder product and attend to markdowns and
allowances. Upon shipment to the customer, the Company estimates agreed upon
future allowances, returns and discounts, taking into account historical
experience, and reflects revenue net of these estimates.
When establishing or expanding a customer relationship, the Company
generally enters into multi-year agreements for the supply of specified product
lines to specific customer stores. The agreements typically do not contain
required minimum sales volumes, but may provide for termination penalties equal
to the Company's unamortized cost of product displays provided to the customer.
The Company believes its relationships with retailers are dependent upon its
ability to efficiently utilize allocated floor space to generate satisfactory
returns for its customers. To meet this end, the Company strives to consistently
deliver competitively priced products and service programs which provide
retailers with attractive gross margins and inventory turnover rates. The
Company has historically retained customers from year to year, although
retailers may drop or add product lines supplied by the Company. Generally,
customer loss has been attributable to such customer going out of business or
being acquired by a company which does not carry AAi's product line or has prior
relationships with a competitor of the Company.
Certain segments of the retail industry, particularly mass merchandisers,
variety stores, drugstores and supermarkets, are experiencing significant
consolidation and in recent years many major retailers have experienced
financial difficulties. These industry wide developments have had and may
continue to have an impact on the Company's results of operations. For example,
net sales were adversely affected in 1997 by the loss of two customers, one as a
result of a merger into a retail chain that does not carry costume jewelry and
the other due to the retailer ceasing operations. In addition, also as a result
of financial pressures, many major retailers have sought to reduce inventory
levels in order to reduce their operating costs. For example, in 1996 certain
mass merchandisers adopted inventory management programs which adversely
impacted the Company's sales and net income in that year.
During the first quarter of 1998, the Company elected to change its fiscal
year end from December 31 to the Saturday closest to December 31. The Company
has also applied this change to its quarterly interim periods during 1998
whereby each interim period will end on the last Saturday of the thirteen week
period.
Net Sales. The Company offers optical products, costume jewelry, small
synthetic leather goods and other accessories, generally at retail price points
of $20 or less. In December 1996, the Company acquired Foster Grant US, a major
marketer and distributor of sunglasses and reading glasses, a product line in
which the Company had only minimal sales before the acquisition. Foster Grant US
represented approximately $66.0 million or 44.2% of the Company's net sales in
1997. Accordingly, the Company's product mix changed dramatically as a result of
this acquisition. Net sales of the Company's optical products accounted for
approximately 17.4% and 50.7% of the Company's net sales in 1996 and 1997,
respectively; net sales of the Company's costume jewelry accounted for
approximately 74.6% and 43.5% of the Company's net sales in 1996 and 1997,
respectively, and the balance represented sales of synthetic leather goods and
other accessories. Optical products generally have slightly higher gross margins
than the Company's other product lines.
Cost of Goods Sold. The Company outsources manufacturing for all of its
products, 75% of which is sourced to manufacturers in Asia through its joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. Accordingly, the principal element comprising the Company's cost
of goods sold is the price of manufactured goods purchased through the Company's
joint venture or from independent manufacturers. The Company believes
outsourcing manufacturing allows it to reliably deliver competitively priced
products to the retail market while retaining considerable flexibility in its
cost structure.
42
<PAGE> 49
Operating Expenses. Operating expenses are comprised primarily of payroll
and occupancy costs related to the Company's selling, general and administrative
activities as well as depreciation and amortization. The Company incurs various
costs in connection with the acquisition of new customers and new stores for
existing customers, principally the cost of new product display fixtures and
costs related to the purchase of the customer's existing inventory. The Company
makes substantial investments in the design, production and installation of
display fixtures in connection with establishing and maintaining customer
relationships. The Company capitalizes the production cost of these display
fixtures as long as it retains ownership of them. These costs are amortized to
selling expenses on a straight-line basis over their estimated useful life,
which is one to three years. If the Company does not retain title to the
displays, the display costs are expensed as shipped.
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with these agreements. In
these situations, the Company values this inventory at its fair market value and
records that value as inventory. The excess cost over the fair market value of
the inventory received is charged to operating expenses when incurred. During
the years ended December 31, 1995, 1996 and 1997 and the six month periods ended
June 30, 1997 and July 4, 1998, the Company expensed customer acquisition costs
of $1.2 million, $2.7 million, $1.6 million, $0.2 million and $0.5 million,
respectively.
Dividends and Accretion on Preferred Stock. The Company has 43,700 shares
of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock")
outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0
million, and an additional 9,500 shares were issued for gross proceeds of $5.0
million in connection with the December 1996 acquisition of Foster Grant US.
Beginning on June 30, 2002, shares of the Series A Preferred Stock are
redeemable at the option of the holder for an amount equal to the original issue
price plus accrued and unpaid dividends yielding a 10% compounded annual rate of
return, provided, however, that the right to require redemption is suspended as
long as any Restrictive Indebtedness (as defined) is outstanding. Net income
applicable to common shareholders represents net income less accretion of
original issuance costs and cumulative dividends due on the Series A Preferred
Stock. See "Description of Capital Stock."
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA). EBITDA was $10.3 million, $4.9 million and $16.1 million, in 1995,
1996 and 1997, respectively, and $8.1 million and $7.8 million for the six
months ended June 30, 1997 and July 4, 1998, respectively. Although EBITDA is
not a measure of performance calculated in accordance with GAAP, the Company
believes that EBITDA is accepted as a generally recognized measure of
performance in the distribution industry. EBITDA should not be considered in
isolation or as a substitute for operating income, net income, net cash provided
by operating activities or any other measure for determining AAi's operating
performance or liquidity which is calculated in accordance with GAAP.
RECENT SIGNIFICANT ACQUISITIONS
The Company has grown rapidly through strategic acquisitions in recent
years and expects to continue this strategy into the future. See "Risk
Factors -- Risks Associated with Acquisitions."
In June 1998, the Company acquired 80% of the membership interests of
Fantasma for $4.1 million in cash. The remaining 20% membership interest of
Fantasma is held by Roger Dreyer, president of that company. Mr. Dreyer and
another officer of Fantasma have options to acquire in the aggregate an
additional 13% membership interest in Fantasma subject to satisfaction of
certain earnings targets in 1998, 1999 and 2000. AAi's acquisition of Fantasma
added watches and clocks to AAi's product lines and Disney and Warner Bros.
stores to its customer base. As a result of this transaction, the Company
recorded approximately $4.6 million in intangible assets which will be amortized
over 10 years.
In March 1998, the Company acquired certain assets of Foster Grant UK for
the aggregate book value of certain acquired assets, including inventory items
of $3.3 million and accounts receivable of $1.7 million, less the aggregate
amount of trade payables assumed of $1.1 million and bank debt assumed of $1.7
million. In
43
<PAGE> 50
addition, the Company acquired the Foster Grant trademark in the United Kingdom
and Europe for $0.7 million, which amount is subject to upward adjustment at the
end of 1998 and 1999 based on annual sales, up to a maximum additional payment
of $0.7 million. As a result of this acquisition, the Company recorded
approximately $1.1 million of intangible assets which are being amortized over
20 years.
In July 1997, the Company acquired the assets of Superior, a distributor of
costume jewelry to chain drug stores and mass merchandisers in the United
States. The Company paid $2.7 million in cash, including a contingent cash
payment of $875,000 and assumed certain liabilities in the amount of $4.1
million. The purchase price is subject to upward adjustment based on 1998
earnings attributable to Superior operations, up to a maximum amount of $2.0
million. As a result of this acquisition, the Company recorded approximately
$3.5 million of goodwill which is being amortized over 10 years.
In December 1996, the Company, through a newly-formed subsidiary, Foster
Grant Holdings, Inc. ("FG Holdings") acquired Foster Grant US, a marketer and
distributor of sunglasses, reading glasses and eyewear accessories in the United
States and Canada. The consideration consisted of $10.0 million in cash, assumed
liabilities in the amount of $34.0 million and 100 shares of redeemable
non-voting preferred stock of FG Holdings (the "FG Preferred Stock") initially
valued at $750,000. The redemption value of the FG Preferred Stock is subject to
upward adjustment, based on annual sales of the Foster Grant US operations
through the year ending January 1, 2000 or, upon the occurrence of certain
specified capital transactions, based upon the valuation of the Company at the
time of the transaction. The maximum redemption amount is $4.0 million. As a
result of this acquisition, the Company recorded approximately $11.0 million of
intangible assets which are being amortized over 40 years. Any difference in the
redemption amount from the carrying value of the FG Preferred Stock immediately
prior to redemption may be recorded as additional purchase price.
EFFECTS OF ACQUISITIONS
Historically, the Company has selected acquisition candidates based, in
part, on the opportunity to improve their operating results. The Company seeks
to leverage its purchasing power, distribution capabilities and lower operating
costs to improve the financial performance of its acquired businesses. Results
of operations reported herein for each period only include the results of
operations for acquired businesses from their respective dates of acquisition.
Full year operating results, therefore, could differ materially from those
presented.
The Company has accounted for its acquisitions, and intends to account for
the Fantasma Acquisition, using the purchase method of accounting. As a result,
these acquisitions have affected, and will prospectively affect, the Company's
results of operations in certain significant respects. The aggregate acquisition
costs are allocated to the tangible and intangible assets acquired and
liabilities assumed by the Company based upon their respective fair values as of
the acquisition date. The cost of such assets are then amortized according to
the classes of assets and the useful lives thereof. The acquisitions
necessitating payment of purchase price in excess of the fair value of the net
assets acquired results in intangible assets consisting of goodwill and
trademarks which are being amortized on a straight-line basis over a period of
10 to 40 years. Similar future acquisitions or additional consideration paid for
existing acquisitions may result in additional amortization expense. In
addition, due to the effects of the increased borrowing to finance any future
acquisitions, the Company's interest expense may increase in future periods. As
of July 4, 1998, net intangible assets as a result of acquisitions was $21.4
million. Amortization of these intangibles will result in quarterly noncash
charges of $436,000 for the next four quarters, $426,000 for the next 24
quarters, $343,000 for the next four quarters, $260,000 for the next four
quarters, $150,000 for the following 34 quarters, $146,000 for the following
five quarters and $133,000 for the final 75 quarters.
CONSOLIDATION OF DISTRIBUTION OPERATIONS
In the second quarter of 1998, the Company adopted a plan to consolidate
distribution operations at its expanded Rhode Island facility and close its
Texas distribution center in the fourth quarter of 1998. AAi expects this
restructuring will generate permanent annual operating expense savings of
approximately $2.8 million commencing in 1999. The Company recorded a $2.6
million charge ($1.4 million net of tax benefit) in
44
<PAGE> 51
the second quarter of 1998 in connection with closure of the Texas distribution
center. See Note 1 of the Notes to the Company's Consolidated Financial
Statements included elsewhere within.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in the Company's statement
of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------
----------------------- JUNE 30, JULY 4,
1995 1996 1997 1997 1998
----- ----- ----- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 49.6 55.4 52.2 54.3 53.7
----- ----- ----- ----- -----
Gross profit............................... 50.4 44.6 47.8 45.7 46.3
Operating expenses......................... 39.5 43.5 43.7 40.4 44.2
----- ----- ----- ----- -----
Income from operations..................... 10.9 1.1 4.1 5.3 2.1
Interest expense........................... 1.2 1.7 2.8 2.7 3.0
Other (expense) income, net................ (0.1) (0.4) -- (0.1) --
----- ----- ----- ----- -----
Income before taxes and dividends and
accretion on preferred stock............. 9.6 1.0 1.3 2.5 (0.9)
Dividends and accretion on preferred
stock.................................... -- 1.3 1.7 1.6 1.5
Income tax benefit (expense)............... -- 1.1 (0.7) (1.5) 0.4
----- ----- ----- ----- -----
Net income (loss) applicable to common
shareholders............................. 9.6 (1.2) (1.1) (0.6) (2.0)
Pro forma tax expense...................... (3.9) (0.7) -- -- --
----- ----- ----- ----- -----
Pro forma net income (loss) applicable to
common shareholders...................... 5.7% (1.9)% (1.1)% (0.6)% (2.0)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended July 4, 1998 compared to Six Months Ended June 30, 1997
Net Sales. Consolidated net sales were $88.6 million for the six months
ended July 4, 1998 compared to $75.9 million for the six months ended June 30,
1997, an increase of 16.8% or $12.7 million. The increase was due, in part, to
the Superior and Foster Grant UK acquisitions which contributed $4.7 million and
$4.9 million, respectively. Net sales attributable to continuing business
increased by approximately $2.5 million in the six months ended July 4, 1998
compared to the six months ended June 30, 1997.
Gross Profit. Gross profit was $41.1 million for the six months ended July
4, 1998, compared to $34.7 million for the six months ended June 30, 1997, an
increase of 18.5% or $6.4 million, which was primarily attributable to increased
sales volume. Gross margin increased to 46.3% for the six months ended July 4,
1998, from 45.7% for the six months ended June 30, 1997, primarily due to the
increase in sales of higher margin optical products during the six months ended
July 4, 1998 as compared to the six months ended June 30, 1997.
Operating Expenses. Operating expenses were $39.2 million for the six
months ended July 4, 1998 compared to $30.7 million for the six months ended
June 30, 1997, an increase of 27.8% or $8.5 million. Included in operating
expenses for the period ended July 4, 1998 is a one-time restructuring charge of
$2.6 million incurred for the closure of the Dallas office and distribution
facility. The balance of the increase costs is associated with the operating
expenses of the acquired entities and operating inefficiencies incurred
subsequent to the announced closure.
Interest Expense. Interest expense was $2.6 million for the six months
ended July 4, 1998, compared to $2.1 million for the six months ended June 30,
1997, an increase of 27.4% or $567,000. This resulted from additional borrowings
under the Company's credit facilities to fund acquisitions and expanded
operations.
Income Tax (Expense) Benefit. Income tax benefit was $338,000 for the six
months ended July 4, 1998 compared to an income tax expense of $1.1 million for
the six months ended June 30, 1997. The Company's estimated consolidated
effective income tax rate has decreased for 1998 compared to the consolidated
45
<PAGE> 52
effective income tax rate in 1997, due to the expected reduction of
nondeductible amortization of intangible assets in proportion to pretax income
in 1998 versus 1997.
Net Income (Loss). As a result of the factors discussed above, net loss
was $430,000 for the six months ended July 4, 1998, compared to net income of
$790,000 for the six months ended June 30, 1997, a decrease of $1.2 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $1.8 million for the six months ended July 4, 1998, compared to
a loss of $420,000 for the six months ended June 30, 1997, an increase of $1.4
million. The increase was attributable to the $1.2 million decrease in earnings
and a $146,000 increase in dividends and accretion on Series A Preferred Stock
due to the compounding of accrued dividends.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Sales. Consolidated net sales were $149.4 million for 1997 compared to
$86.3 million for 1996, an increase of 73.1% or $63.1 million. The increase was
primarily due to a full year of sales attributable to Foster Grant US operations
and six months of sales attributable to Superior operations in 1997, which
accounted for $60.6 million and $5.2 million of the increase, respectively. This
increase was partially offset by the loss of two customers in 1997, one as a
result of the customer's merger into a retailer that does not offer costume
jewelry and the other due to a retailer ceasing operations, which together
accounted for an estimated $5.1 million decrease in net sales.
Gross Profit. Gross profit was $71.5 million in 1997 compared to $38.5
million in 1996, an increase of 85.8% or $33.0 million. Gross profit from sales
generated from the aforementioned acquisitions accounted for a $35.3 million
increase which was partially offset by the decline in gross profit on the two
lost customers. Gross profit increased as a percentage of net sales from 44.6%
to 47.8%, primarily as a result of an increase in the net sales of optical
products (which carry higher margins) and savings related to consolidated
purchasing efficiencies. These purchasing efficiencies were a result of
increased purchasing volume with selected vendors and the combination of the
Company's optical product sourcing with the sourcing of Foster Grant US
following the Company's acquisition of Foster Grant US in December 1996.
Operating Expenses. Operating expenses were $65.3 million or 43.7% of net
sales in 1997 compared to $37.5 million or 43.5% of net sales in 1996, an
increase of 74.1% or $27.8 million. The increase resulted from the acquisition
of entities with $29.0 million of operating expenses, offset by a decrease of
$1.2 million of operating expenses in existing businesses.
Interest Expense. Interest expense was $4.2 million in 1997 compared to
$1.5 million in 1996, an increase of 186.9% or $2.7 million. This resulted from
interest charged on additional borrowings under the Company's credit facilities
to fund acquisitions and expanded working capital and capital expenditure
requirements.
Income Tax (Expense) Benefit. Income tax expense was $1.2 million in 1997
compared to an income tax benefit of $948,000 in 1996, an increase of $2.1
million. The Company's consolidated effective income tax rate was 58.8% for
1997, reflecting the impact of nondeductible amortization of intangible assets
for income tax purposes. The Company was operated as a subchapter S corporation
under Section 1362 of the Internal Revenue Code until May 31, 1996, and as a
result, taxable income or loss of the Company was passed through to the
shareholders and reported on their individual tax returns. Accordingly, the
Company did not incur federal and state income taxes (except with respect to
certain states) for the period prior to June 1, 1996.
Net Income. As a result of the factors discussed above, net income was
$815,000 in 1997 compared to $89,000 in 1996, an increase of 815.7% or $726,000.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $1.7 million for the year ended December 31, 1997 compared to a
net loss of $1.0 million for the year ended December 31, 1996, an increase of
$0.7 million. The increased loss is primarily attributable to a $1.4 million
increase in dividends and accretion on Series A Preferred Stock offset by a
$726,000 increase in net income over 1996. The increase in dividends and
accretion on Series A Preferred Stock is due to an increased number
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<PAGE> 53
of shares (43,700) being outstanding for the entire year in 1997, as compared to
fewer shares (34,200) being outstanding for less than seven months in 1996.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Sales. Consolidated net sales were $86.3 million for 1996 compared to
$88.1 million for 1995, a decrease of 2.0% or $1.8 million. The decrease in net
sales was due to reduced sales within the mass merchandiser and chain drugstore
channels of distribution, as a result of customers' desire to decrease in-store
inventories and increase inventory turnover rates. The product lines most
affected were costume jewelry and synthetic leather goods. This decrease was
partially offset by a $5.4 million increase in net sales of optical products as
a result of the Foster Grant US acquisition in mid-December 1996.
Gross Profit. Gross profit was $38.5 million in 1996 compared to $44.4
million in 1995, a decrease of 13.3% or $5.9 million. Gross margin decreased as
a percentage of net sales from 50.4% to 44.6% primarily due to discounting of
synthetic leather goods within the aforementioned channels and providing product
to the mass merchandiser channel of distribution at lower gross margins as part
of promotional programs.
Operating Expenses. Operating expenses were $37.5 million in 1996 compared
to $34.8 million in 1995, an increase of 7.9% or $2.7 million. This increase was
due to increased depreciation and amortization.
Interest Expense. Interest expense was $1.5 million in 1996 compared to
$1.0 million in 1995, an increase of 42.5% or $0.5 million. This resulted from
additional borrowings under the Company's credit facilities to fund acquisitions
and expanded operations.
Income Tax (Expense) Benefit. Income tax benefit was $948,000 in 1996 and
a provision of $42,000 was provided in 1995. The Company was operated as a
subchapter S corporation under Section 1362 of the Internal Revenue Code until
May 31, 1996, and as a result, the taxable income or loss of the Company was
passed through to the shareholders and reported on their individual tax returns.
Accordingly, the Company did not incur federal and state income taxes (except
with respect to certain states) for periods prior to June 1, 1996.
Net Income. As a result of the factors discussed above, net income was
$89,000 in 1996 compared to $8.4 million in 1995, a decrease of 98.9% or $8.3
million.
Net Income (Loss) Applicable to Common Shareholders. Net loss applicable
to common shareholders was $1.0 million for the year ended December 31, 1996
compared to net income of $8.4 million for the year ended December 31, 1995, a
decrease of $9.4 million. The decrease reflects the $8.3 million decrease in net
income and the absence of any dividends and accretion on Series A Preferred
Stock in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At July 4, 1998 the Company had cash and cash equivalents of $2.4 million
and working capital of $47.6 million. To date, the Company has funded its
operations through credit facilities, issuances of equity and debt securities,
and cash generated from operations.
The Company generated $1.9 million of cash from operations during 1997 and
$1.8 million in 1995, compared to the use of cash of $1.9 million in 1996. The
increase in cash generated from operations in 1997 over 1996 was primarily
attributable to the increase in noncash expenses partially offset by cash used
to reduce accounts payable and accrued expenses. The decrease in cash generated
from operations in 1996 as compared to 1995 was primarily attributable to a
decrease in net income partially offset by an increase in noncash expenses and
accounts payable. During the six months ended July 4, 1998, the Company used
$3.9 million of cash to fund operations compared to $6.2 million during the six
months ended June 30, 1997. Cash generated from operations and a reduction in
inventory were offset by increased accounts receivables.
The Company used $11.0 million of cash in investing activities during 1997,
compared to $15.2 million in 1996 and $2.1 million in 1995. Cash used in
investing activities decreased in 1997 as compared to 1996 as a result of a
decrease in cash used in acquisitions partially offset by an increase in
deferred costs and the purchases of property and equipment. Cash used in
investing activities increased in 1996 as compared to 1995 as a result of an
increase in cash used in acquisitions and deferred costs and purchases of
property and
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<PAGE> 54
equipment. During the six months ended July 4, 1998, the Company used $23.2
million of cash in investing activities compared to $9.0 million during the six
months ended July 30, 1997. The uses included the $4.1 million purchase of the
Company's Smithfield, Rhode Island headquarters, $5.7 million for display
fixtures, $5.5 million to acquire certain assets of Foster Grant UK and to
acquire the Foster Grant trademark for the United Kingdom and Europe and $4.1
million to acquire certain assets of Fantasma. The Company anticipates open
additional capital expenditures in 1998 of $3.2 million, consisting primarily of
additional costs associated with the expansion of its Smithfield, Rhode Island
distribution facility and its information system conversion. The Company expects
its annual maintenance capital expenditure level (excluding costs of display
fixtures) to be approximately $1.0 million for the next two years.
The Company generated $8.8 million of cash from financing activities during
1997, compared to $16.2 million in 1996 and $259,000 in 1995. Cash generated
from financing activities decreased in 1997 as compared to 1996 primarily as a
result of the Company's $22.5 million issuance of Series A Preferred Stock in
1996 partially offset by a 1996 cash distribution to the Company's shareholders
of $12.9 million and an increase in borrowings during 1997. During the six
months ended July 4, 1998, the Company generated $26.7 million of cash from
financing activities compared to $14.0 million during the six months ended June
30, 1997. These funds consisted primarily of borrowings under the Senior Credit
Facility.
The Series A Preferred Stock is redeemable for an aggregate of $23.0
million. Shares of Series A Preferred Stock are convertible into Common Stock at
a rate of 10 for 1, adjustable for certain dilutive events. Conversion is at the
option of the shareholder, but is automatic upon the consummation of a Qualified
Public Offering (as defined). The holders of Series A Preferred Stock have the
right to require redemption for cash for any unconverted shares, beginning June
30, 2002, provided, however, that the right to require redemption is suspended
as long as any Restrictive Indebtedness (as defined) is outstanding. The Notes
constitute Restrictive Indebtedness. The redemption price of the Series A
Preferred Stock is an amount equal to the original issue price, $526.32 per
share, plus any accrued and unpaid dividends yielding a 10% compounded annual
rate of return. See "Description of Capital Stock."
As described under "Recent Significant Acquisitions," in connection with
the purchase of Foster Grant US, the Company's wholly-owned subsidiary, FG
Holdings issued 100 shares of FG Preferred Stock, which are redeemable on
February 28, 2000, or earlier upon the occurrence of certain specified capital
transactions. The redemption price will range between $1.0 million and $4.0
million depending upon the net sales of sunglasses, reading glasses and
accessories by FG Holdings and AAi, and upon the total transaction value. See
"Certain Transactions".
The Company is continually engaged in evaluating potential acquisitions.
The Company expects that funding for future acquisitions may come from a variety
of sources, depending on the size and nature of any such acquisition. Potential
sources of capital include cash generated from operations, borrowings under the
Senior Credit Facility, or other external debt or equity financings. There can
be no assurance that such additional capital sources will be available to the
Company, if at all, on terms which the Company finds acceptable.
The Company has substantial indebtedness and significant debt service
obligations. As of July 4, 1998, on a pro forma basis after giving effect to the
Acquisitions and the Offering and the application of the net proceeds therefrom,
the Company would have had long-term indebtedness, including current maturities,
in the aggregate principal amount of $77.5 million. The Company had current
liabilities of approximately $35.5 million, which includes $0.3 million in the
present value of minimum lease payments under its capital leases. In addition,
the Company has significant annual obligations which include interest on the
Notes of approximately $8.1 million and minimum payments under its operating
leases of approximately $800,000. The Indenture permits the Company to incur
additional indebtedness, including secured indebtedness, subject to certain
limitations. See "Description of Notes--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
In addition, the Company has up to $60.0 million available for borrowings
under the Senior Credit Facility. Interest rates on the revolving loans under
the Senior Credit Facility are based, at the Company's option, on the Base Rate
(as defined) or LIBOR plus an applicable margin. The Senior Credit Facility
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<PAGE> 55
contains certain restrictions and limitations, including financial covenants
that require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar restricted
payments. See "Description of Senior Credit Facility."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations
and anticipated cost savings and revenue growth, the Company believes that cash
flow from operations and available cash, together with available borrowings
under the Senior Credit Facility, will be adequate to meet the Company's future
liquidity needs for at least the next several years. The Company may, however,
need to refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated cost savings and revenue
growth will be realized or that future borrowings will be available under the
Senior Credit Facility in an amount sufficient to enable the Company to service
its indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." See "Risk Factors."
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during the past three years.
SEASONALITY AND QUARTERLY INFORMATION
Significant portions of the Company's business are seasonal. Sunglasses are
shipped primarily during the first half of the fiscal year as retailers build
inventory for the spring and summer selling seasons, while costume jewelry and
other accessories are shipped primarily during the second half of the fiscal
year as retailers build inventory for the holiday season. Reading glasses sales
are generally uniform throughout the year. As a result of these shipping trends,
the Company's historical working capital requirements grow through the first
three quarters of the year to fund inventory purchases and the growth in
accounts receivable. Historically, in the fourth quarter, the Company's working
capital requirements have decreased as accounts receivable are collected.
The following table sets forth selected quarterly financial information.
This information is derived from unaudited financial statements of the Company
and includes, in the opinion of management, all normal and recurring adjustments
that management considers necessary for a fair statement of the results for such
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............ $17,372 $20,749 $24,659 $23,556 $34,851 $41,034 $34,213 $39,313 $42,703 45,928
</TABLE>
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, costs related to acquisitions, fluctuations in
product cost, changes in product mix, timing of customer orders and shipments
and general economic conditions.
YEAR 2000
The Company uses several application programs written over many years using
two-digit fields to define the applicable year, rather than four-digit year
fields. Programs that are time-sensitive may recognize a date using "00" as the
year 1900 rather than the year 2000. This misinterpretation of the year could
result in an incorrect computation or a computer shutdown.
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<PAGE> 56
As a result of the Company's growth, AAi is currently implementing a new
information management system which includes upgrading both hardware and
software. The new system, which is expected to be Year 2000 compliant, is
scheduled for completion by the first quarter of 1999. Accordingly, the Company
believes that with the successful conversion to the new software, the Year 2000
issue will not pose significant operational problems for the Company's systems.
Any delays or omissions by AAi or its agents to resolve such issues may have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Dependence on Computer Software
Applications." The Company will evaluate the need for contingency planning in
the first quarter of 1999 based on the status of the system installation.
Since Year 2000 compliance is being addressed with the implementation of
the Company's new system, the costs of addressing the Year 2000 issue are not
separately identifiable. No material additional costs are anticipated at this
time.
The Company has completed a compliance review of its property which uses
embedded technology. Although the Company believes that the Year 2000 issue will
not pose a significant problem for any of the Company's systems or property
utilizing embedded technology, there can be no assurance that the Year 2000
issue will not interfere with the function and use of such property.
The Company's major customers and vendors have informed the Company that
they are currently addressing the Year 2000 issue and expect to be Year 2000
compliant by mid-1999. The Company's contingency plan in the event other parties
are unable to provide Year 2000 compliant electronic data is to revert to paper
documentation from these parties.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of information about operating segments by public
business enterprises in their annual and interim financial reports issued to
shareholders. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information, including profit or loss, certain
specific revenue and expense items, and segment assets, about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-makers in deciding how to
allocate resources and in assessing performance. The Company will adopt SFAS No.
131 in its financial statements for the fiscal year ending January 2, 1999. SFAS
No. 131 is a disclosure requirement and therefore will not have an effect on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not believe that the adoption of SFAS No.
133 will have a material impact on its financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 Reporting on the Costs of Start Up Activities,
(SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start up
activities and organization costs to be expensed as incurred. The Company does
not believe that the adoption of SOP 98-5 will have a material impact on its
financial statements.
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<PAGE> 57
BUSINESS
AAi is a value-added distributor of optical products, costume jewelry,
watches, clocks and other accessories to mass merchandisers, variety stores,
chain drug stores and supermarkets in North America and the United Kingdom. The
Company sells its products in over 30,000 retail locations, including Wal-Mart,
Target, Kmart, Eckerd Drugstores, Walgreens, Rite Aid, Albertsons, Dollar
General and Family Dollar stores. Sales to these customers accounted for 58.5%
of AAi's net sales in 1997. The Company markets its products under its own brand
names such as Foster Grant as well as customers' private labels. AAi also has
the right to distribute products under numerous licensed brand names, including
Ironman Triathalon, Revlon, Mickey's Stuff for Kids, Winnie the Pooh, Barbie and
Crayola. The Company outsources all of its manufacturing.
The Company's product lines contain a large number of SKUs with low retail
price points and typically represent a small percentage of retailers' total
sales. As a result, many of AAi's customers have chosen to outsource the
merchandising of these products to the Company. AAi's award-winning service
program provides retailers with customized displays and product packaging and
store-level merchandising designed to maximize sales and inventory turnover. The
Company employs over 1,500 field service representatives who regularly visit
program customers' stores to arrange, replenish and restock displays, reorder
product and attend to markdowns and allowances. By providing retailers with
in-store product management, the Company retains control of its product
marketing and pricing, allowing AAi to maximize product sales and increase the
floor space allocated to its product lines. In 1997, sales to customers
utilizing the Company's service program accounted for 73% of AAi's net sales.
AAi has grown rapidly through strategic acquisitions and internal growth,
principally by expanding its product offerings, entering new domestic and
international markets, adding new customers, cross-selling existing product
lines to current customers and supporting its U.S.-based customers'
international expansion. Net sales grew at a compounded annual rate of 12.7%,
from $53.4 million in 1992 to $86.3 million in 1996, of which $10.5 million or
12.2% was attributable to acquisitions. Net sales grew an additional 73.1% from
1996 to $149.4 million in 1997, of which $65.8 million or 44.0% was attributable
to acquisitions. There can be no assurance that the Company's net sales will
continue to grow at these rates.
INDUSTRY OVERVIEW
The Sunglass Association of America reports that 1997 domestic retail sales
of sunglasses totaled $2.6 billion. Accessories Magazine estimates that 1997
domestic retail sales of fashion jewelry and watches totaled $4.8 billion and
$3.0 billion, respectively. As a result of industry-wide consolidation among
mass merchandisers and discount retailers, a small number of large companies
dominate the Company's primary channels of distribution. These retailers have
sought to reduce their purchasing and administrative costs by limiting the
number of their suppliers and have utilized their market position to obtain
minimum sell-throughs, reduced in-store inventory levels and price concessions.
These retailers tend to require a high level of service, including customized
sales and service programs, reliable delivery services and electronic
interfaces. These trends have contributed to the growth of larger national and
regional distributors, such as AAi, that have the service organizations, product
offering, distribution technology and capital necessary to meet the demands of
these customers.
COMPETITIVE STRENGTHS
In order to increase its sales and profitability, the Company relies on the
following competitive strengths:
Innovative Service Program. Since many of its product sales are impulse
driven, AAi believes that a well-positioned, visually appealing display is
critical to making the sale to the consumer. In addition, the SKU-intensive
nature of optical products and accessories and their low retail price points
have led many retailers to outsource the merchandising of such products. AAi has
responded by offering its customers a service program that includes store-level
merchandise mix planning and in-store display maintenance and inventory
stocking, balancing and reordering by the Company's field service
representatives. AAi's service program is consistently recognized as one of the
best in the mass retail industry. The Company has received several
vendor-of-the-year awards from its retail customers, including Wal-Mart, as well
as numerous Supplier
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Performance Awards by Retail Category (S.P.A.R.C.) from the International Mass
Retail Institute. As part of its service program, the Company makes a
significant investment in the design, production and installation of display
fixtures in its customers' retail stores. The Company purchased approximately
$6.5 million of display fixtures in 1997 and $6.4 million of display fixtures
during the six months ended July 4, 1998. The Company believes that its
award-winning service program and store-level investment in display fixtures
solidify its customer relationships and create opportunities to cross-sell its
products and increase the Company's allotted display space.
Diverse Product Offering. AAi offers a comprehensive selection of
popularly priced optical products and accessories with over 15,000 SKUs. AAi's
product lines include sunglasses, reading glasses, costume jewelry, small
synthetic leather goods, handbags, hair accessories, cosmetic bags and key
rings. With the Fantasma Acquisition, the Company added watches and clocks to
its product lines. The substantial majority of the Company's products have
retail price points at less than $20, with 57% at $10 or less. The diversity of
AAi's product lines enables retailers to satisfy a substantial portion of their
optical products and accessories needs from a single source and allows the
Company to achieve operating efficiencies for low price point products.
Powerful Proprietary and Licensed Brand Names. Branded products provide
entry to new customers and retail channels and generally allow for higher gross
margins on product sales. The Company owns several brands, most notably Foster
Grant. In the 1998 annual Women's Wear Daily survey, the Foster Grant brand was
ranked the third most recognized name in accessories by consumers. In addition
to its own brands, AAi holds licenses for a variety of Disney, Sesame Street,
Warner Bros. and Mattel characters (e.g., Winnie the Pooh, Mickey Mouse, Minnie
Mouse, Elmo, Tweety, Barbie and others) as well as for several well-recognized
brands such as Ironman Triathlon, Revlon, Almay and Crayola for terms generally
ranging from one to three years. During 1997, the sales of the Company's own
branded products and licensed branded products represented approximately 29% and
15%, respectively, of AAi's net sales.
State-of-the-Art Distribution Capabilities. The Company's flexible
distribution systems are capable of processing virtually any small package. AAi
utilizes a high velocity fulfillment system that enables the Company to provide
its customers with short delivery times and high order fulfillment rates,
allowing retailers to maintain lower inventory levels. On average, the Company
ships over 98% of all restocking orders within 24 hours of receipt of the order.
AAi is currently expanding its Smithfield, Rhode Island distribution center and
installing an inventory management system that utilizes radio frequency and
bar-coding technologies to optimize supply chain operations, improve customer
service, increase inventory turns and lower operating costs. The Company
believes that its small package distribution capabilities provide a platform to
add complementary product lines without requiring significant capital investment
or additional fixed costs.
Efficient Low-Cost Sourcing. The Company outsources manufacturing for all
of its products. Approximately 75% of AAi's manufacturing is sourced to
manufacturers in Asia through its joint venture in Hong Kong, with the remainder
outsourced to independent domestic manufacturers. The Hong Kong joint venture
monitors the contract manufacturing process, maintains relations with
manufacturers, ensures quality control and serves as a sourcing agent to certain
U.S. and European customers. AAi's sourcing capabilities allow it to reliably
deliver competitively priced products to the retail market while retaining
considerable flexibility in its cost structure.
Experienced Management Team. AAi's senior management team averages over 22
years in the industry and 18 years experience with the Company. Over the
Company's 26 year history, its senior management team has developed strong
relationships with suppliers and retailers. This team of seasoned managers has
led the Company's transition from a small costume jewelry manufacturer to a
leading distributor of optical products and accessories and has successfully
completed six acquisitions over the past three years.
AAi believes that it is a leading value-added distributor of its products
based on the breadth of its product offering, strength of its licensed and
proprietary brands and the size of its field service force. The Company has no
direct competitors which compete across all of its product lines. For a
discussion of competitive factors, see "Risk Factors -- Competition" and
"-- Competition."
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<PAGE> 59
BUSINESS STRATEGY
The Company's objective is to increase sales and profitability by enhancing
its position as a leading distributor of optical products and accessories. The
key elements of the Company's business strategy are:
Promote and Expand Branded Product Offering. Branded products enable the
Company to reach new customers and enter new distribution channels which, in
turn, present the Company with expanded cross-selling opportunities. The Company
intends to actively promote its Foster Grant name through advertising as well as
co-branding with licensed names. For example, AAi plans to roll out the Ironman
Triathlon by Foster Grant co-branded line of sunglasses in the fourth quarter of
1998. The Company also plans to pursue licensing and acquisition of additional
brands.
Expand Product Lines. AAi believes it can increase sales to existing
customers and access new distribution channels by expanding its product lines to
include other accessories and small package products. The Company intends to
achieve this goal by developing and acquiring new products and brands that
deepen and broaden its product offering. By diversifying its product lines, the
Company can enhance its capacity to provide regional and national retailers with
convenient "one-stop" shopping for optical products and accessories. In
addition, a diverse product offering provides cross-selling opportunities and
permits the Company to achieve operating efficiencies in distribution and
service programs.
Expand Internationally. The Company's goal is to grow with its customers,
particularly internationally, as they add new stores and expand into new
geographic markets. For example, during the past several years, Wal-Mart has
opened over 350 new stores in foreign markets, including Canada, Mexico, Germany
and Argentina. In response, the Company established operations in Canada and
Mexico to serve Wal-Mart and other potential customers in these markets. The
Company's international net sales have grown from $1.3 million in 1995 to $6.7
million in 1997.
Diversify Customer Base and Distribution Channels. Through its small
package distribution capabilities, diverse product offering and unique service
program, the Company has increased its customer base and sales to certain
existing customers desiring more centralized and efficient distribution. The
Company seeks to expand its distribution to additional retail channels such as
department stores through internal growth and strategic acquisitions.
Pursue Strategic Acquisitions. The Company intends to acquire
complementary businesses and product lines in order to diversify its product
offering, gain access to new customers and retail channels, penetrate
international markets, lower operating cost margins and improve service to
existing customers. For example, through the acquisitions in December 1996 and
March 1998 of the Foster Grant businesses, AAi expanded its optical product line
and extended operations to the United Kingdom. The June 1998 Fantasma
Acquisition added watches, clocks and several brand licenses to AAi's product
offering and provided the Company with access to new customers. The Company
seeks to leverage its purchasing power and distribution capabilities to improve
the financial performance of its acquired businesses and product lines.
The Company's successful execution of its business strategy is subject to
risks and limitations, particularly those related to the Company's substantial
leverage. For discussion of these risks, see "Risk Factors," particularly "Risk
Factors -- Substantial Leverage."
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DISTRIBUTION CHANNELS AND CUSTOMERS
AAi sells its products to over 200 customers, primarily in three
distribution channels: (1) mass merchandisers, (2) chain drug stores, combo
stores (stores combining general merchandise, food and drug items) and
supermarkets and (3) variety stores. To a lesser extent, AAi also distributes
its products through department stores, military post exchanges, card and gift
shops, specialty stores and catalogues.
PERCENTAGE OF 1997 REVENUE BY DISTRIBUTION CHANNEL
[AAI DISTRIBUTION PIE CHART]
The Company customizes its product and service program offerings to meet
the distinctive characteristics and requirements of each of these retail
distribution channels.
Mass Merchandisers. AAi's sales to mass merchandisers accounted for
approximately $83.9 million, or 56.1%, of net sales in 1997. These customers
include large discount retailers such as Wal-Mart, Target, Kmart, Fred Meyer,
Meijer, Ames, Hills and Zellers Canada. As a result of substantial
consolidation, mass merchandisers have increased leverage over their suppliers
and have utilized their market position to obtain minimum sell-throughs, reduced
in-store inventory levels and price concessions. The mass merchandisers have
begun to expand their market internationally, particularly in Mexico, Canada,
Europe and South America, which affords their suppliers access to these new
markets. These customers demand a high level of merchandise support as well as
national and, as they expand overseas, international distribution capability.
Chain Drug Stores/Combo Stores/Supermarkets. AAi's sales to this channel
accounted for approximately $43.7 million, or 29.1%, of net sales in 1997. These
customers include Eckerd Drugstores, Walgreens, Rite Aid, Thrifty Payless Drug,
Albertsons, Publix, Smith Food & Drug, Tesco (U.K.), Boots and Arbor Drugs. This
industry is experiencing substantial consolidation similar to that which
occurred in the mass merchandiser channel several years ago. This consolidation
activity presents both opportunities and risks for suppliers such as AAi, as the
Company may gain or lose accounts depending on whether its existing customer is
an acquiror or is acquired. These stores tend to be smaller than mass
merchandisers and attract a broader class of trade, which is often less price
sensitive and more convenience-oriented than the mass merchandiser or variety
store customer.
Variety Stores. AAi's sales to variety stores accounted for approximately
$14.8 million, or 9.9%, of net sales in 1997. These customers include national
and regional chains such as Family Dollar, Dollar General and Fred's. They tend
to be more price sensitive but less fashion driven than mass merchandisers and
cater to
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<PAGE> 61
consumers with limited budgets for discretionary or impulse purchases. The
stores are generally smaller than the typical mass merchandiser outlet which
makes it difficult for suppliers without broad product lines to service this
channel profitably. The Company's extensive product lines enable it to provide
service programs on a cost-effective basis, which affords the Company a
significant competitive advantage in this market.
Department Stores and Others. The Company's sales to department stores,
armed forces' PX stores, boutique stores, gift shops, book stores and catalogue
sales accounted for $7.3 million, or 4.9%, of its 1997 net sales. These include
sales of its Tempo jewelry line to J.C. Penney as well as sales to customers
such as Waldenbooks, Avon, Sears Canada, OfficeMax, Montgomery Ward and The Bay.
Each of these channels has different characteristics and product and service
requirements and caters to different types of consumers. For example, department
stores generally offer higher-end products with higher price points and sales of
accessories at such outlets represent a larger percentage of total store sales.
These channels present opportunities for growth as the Company implements its
strategy to diversify its product lines through the acquisition of new products
and brands.
Most of the Company's business is based upon annual contracts or open
purchase orders which are terminable at will. When establishing or expanding a
customer relationship, the Company generally enters into multi-year agreements
for the supply of specified product lines to specific customer stores. Such
agreements, in addition to identifying the stores and product lines to be
supplied, prescribe inventory and service levels and anticipated turnover rates
and sales volumes, as well as the amount of any fixed obligation due to the
customer in connection with establishing the relationship. The agreements
typically do not contain required minimum sales volumes, but may provide for
early termination penalties equal to the Company's unamortized cost of product
displays provided to the customer.
Three customers accounted for approximately 39% of the Company's net sales
in fiscal 1997. In 1997, Wal-Mart accounted for approximately 25% of the
Company's net sales. No other customer accounted for 10% or more of the
Company's total net sales in 1997.
PRODUCTS
The Company offers sunglasses, reading glasses, costume jewelry, small
synthetic leather goods and other accessories generally at retail price points
of $20 or less. In June 1998, the Company added watches and clocks to its
product lines with the acquisition of an 80% interest in Fantasma. The
percentage of net sales for each product category for 1995, 1996 and 1997 are
set forth in the following table:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Optical Products.................................. 10.0% 17.4% 50.6%
Costume Jewelry................................... 75.2 74.6 43.5
Small synthetic leather goods and other........... 14.8 8.0 5.9
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
Optical Products. The Company's optical product line includes sunglasses
and non-prescription reading glasses which are sold on both a program and
non-program basis. As a result of its acquisition of Foster Grant US, AAi has
become a leading seller of popularly priced sunglasses (retail price points of
$8 to $30). The Company is pursuing co-branding opportunities for its Foster
Grant name. For example, AAi plans to distribute the Ironman Triathlon by Foster
Grant co-branded line of sunglasses in the fourth quarter of 1998. The Company
also sells sunglasses under licensed brand names such as Mickey's Stuff for
Kids, Sesame Street and Revlon. The Company offers a variety of styles as well
as color options for both frames and lenses. Sunglasses have a significant
fashion component and positive or negative consumer response in any year can
impact not only that year's profitability but also sales for the following year
since retailers' orders tend to mirror the prior year's sales. Such sales are
also highly seasonal, with initial orders placed in the first quarter and,
depending on consumer response, restocking orders in the second quarter.
The Company also offers a variety of styles of non-prescription reading
glasses marketed under Foster Grant, Revlon or private labels at price points of
$6 to $13. The reading glasses business has no significant fashion component and
is non-cyclical and non-seasonal. Since magnification strength is the primary
55
<PAGE> 62
purchasing consideration for this product line, proper stocking and restocking
is essential to maximizing sales. As a result, reading glasses are typically
marketed through the Company's service program.
Costume Jewelry. AAi offers a wide variety of ladies' and children's
costume jewelry with low retail price points (between $3 and $20), including
earrings, necklaces and bracelets. The Company's jewelry line includes private
labeled products and branded products distributed pursuant to arrangements with
licensors such as Disney Enterprises, Inc., Warner Bros. and Revlon Consumer
Products Corporation as well as under the Company's Tempo name. Tempo is the
opening retail price point costume jewelry line at J.C. Penney. Most of the
Company's jewelry line is basic (non-seasonal) and approximately one-third has a
fashion or holiday component. The Company's costume jewelry line is typically
sold through its service program.
Small Synthetic Leather Goods and Other. Through a 1986 acquisition, AAi
expanded its product lines to include small synthetic leather goods with retail
price points of $6 to $10, such as small backpacks, handbags, wallets and
purses. Many of the lines of small accessories are designed to complement AAi's
costume jewelry and are likewise often sold under licensed brands such as
Revlon, Hawaiian Tropic and Wet 'N Wild. The bulk of these products are sold on
a non-program basis and are shipped direct from the Company's suppliers to the
customer. The Company recently added watches and clocks (with average retail
price points between $10 and $20) to its product lines.
DISTRIBUTION
The Company distributes its products primarily from its distribution
centers in Rhode Island (costume jewelry and other accessories) and Texas
(optical products). AAi is currently expanding its distribution center in
Smithfield, Rhode Island. The plant expansion will more than double the capacity
of the Rhode Island distribution center and, together with the scheduled systems
enhancements, will enable the Company to optimize supply chain operations,
improve customer service, increase inventory turns and lower operating costs and
will position the Company to add complementary product lines without incurring
significant added fixed costs or capital expenditures. AAi intends to
consolidate distribution at its Rhode Island facility in the fourth quarter of
1998.
AAi has made a substantial investment in the development and enhancement of
its computer and information systems. These systems enable the Company to
rapidly respond to marketplace demands, permitting the Company to restock
retailers' inventory on a just-in-time basis. The Company believes that this
technology-based system has been a significant factor in reducing its inventory
costs. In 1998, the Company plans to invest in new inventory management software
that utilizes voice recognition technology to increase order flow.
The Company's flexible distribution systems are capable of processing
virtually any small package. AAi's Rhode Island facility utilizes a high
velocity fulfillment system that allows the Company to provide its customers
short delivery times and high order fulfillment rates. AAi typically delivers
its products to its high volume customers on a bi-weekly basis and, on average,
ships over 98% of all restocking orders within 24 hours of receipt. A VNA (very
narrow aisle) facility configuration serviced by wire guided stock pickers
resupplies a rapid response order picking line. After receiving a customer
order, the Company's computer system automatically generates a list of the
ordered items, also known as a "picking" order, which the distribution staff
utilizes in packing the customer's shipment. With the planned improvements to
the Company's inventory management computer system, "picking" orders will be
arranged according to the location of the ordered items within the Company's
distribution center, improving the efficiency of employees in filling orders.
The Company delivers ordered items to customers using unaffiliated delivery
companies, primarily UPS.
In addition, the Company uses an electronic data interchange ("EDI") system
between the Company and certain of its major customers, particularly for the
distribution of its small synthetic leather goods. Using the EDI system, the
Company's computer system automatically generates orders based on point of sale
("POS") information received from customers and the products are sent directly
to the customer from the Hong Kong joint venture.
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<PAGE> 63
SERVICE PROGRAM
The Company believes that an attractive, well-positioned display is
critical to maximizing sales to the ultimate consumer. The SKU-intensive nature
of the Company's product line and the low retail price points (ranging from $3
to $20 on costume jewelry) relative to the required display space has led many
retailers to outsource the merchandising function to the Company for its product
lines. To better serve these customers, in 1982 the Company initiated an
innovative sales program through which AAi provides its program customers with
store-level management of its products. In 1997, the sales to customers who
utilize the Company's service program accounted for approximately 73% of net
sales.
Program customers select the products to be sold in their stores and, in
consultation with AAi sales and service personnel, determine the initial order
and display requirements. Thereafter, based on POS information, the Company's
management adjusts product mix, generates display planograms and determines
discounts and markdowns. This information is transmitted to AAi's field service
representatives who regularly visit the retailers' stores to replenish and
restock displays, reorder product and attend to markdowns and allowances,
thereby providing customers with a real-time response to the market. The
frequency of service visits is dictated by the size of the store and the number
of the Company's products carried by the retailer. The Company has over 1,500
field service representatives.
SALES AND MARKETING
The Company's six sales managers have an average of over 20 years of
industry experience. The sales force is organized by both distribution channel
and product line. The product-based sales approach is dictated by customers
since most retailers divide their buyers' responsibilities by product. Sales
representatives service existing customers and are responsible for increasing
product penetration and solving customer problems.
The Company markets its products to the retailers by attending trade shows
and advertising in industry trade magazines. The Company also maintains
showrooms and sales offices domestically in New York City, New York, Cincinnati,
Ohio and Bentonville, Arkansas as well as internationally in Toronto, Canada,
Mexico City, Mexico, London, England and Hong Kong. The marketing staff is
responsible for sales and marketing efforts directed at new customers and for
negotiating contract terms for existing and prospective customers. Marketing
focuses on designing a customized product and service package for each customer
after determining the retailer's specific needs. Often, branded products provide
AAi with initial access to a new customer. The Company then leverages the
strength of the Company's field service and breadth of its product lines to
increase product penetration.
Since acquiring the Foster Grant brand, the Company has begun to advertise
directly to the end-consumer. In the 1998 annual Women's Wear Daily survey, the
Foster Grant brand was ranked the third most recognized name in accessories by
consumers. In 1997, the Company launched an Elvis Presley promotion that
featured a televised performance by the Flying Elvi, a skydiving team of Elvis
look-alikes, as well as a sweepstakes to win a pair of Foster Grants actually
worn by Elvis. For the 1998 sunglasses season, AAi teamed with the Warner Bros.
TV Network for a summer retail promotion that combined the brand's classic
advertising theme, "Who's That Behind Those Foster Grants?" with a $1 million
sweepstakes.
INTELLECTUAL PROPERTY AND LICENSES
Proprietary Trademarks. The Company owns trademarks in the words and
designs used on or in connection with many of its products. The Company has
registered a variety of trademarks under which it sells a number of its
products, including Foster Grant. The level of copyright and trademark
protection available to the Company for proprietary words, phrases and designs
varies depending on several factors including the degree of originality and the
distinctiveness of the associated trademarks and design.
Licenses. In 1992, AAi began distributing licensed products pursuant to an
agreement with Disney Enterprises, Inc. The Company currently holds numerous
non-exclusive licenses from various licensors to market products with classic
cartoon characters and other images or under other brand names and trademarks.
Many of the Company's license agreements limit sales of products to certain
market categories. The Company pays each of these licensors a royalty on sales
of licensed products. The Company's licenses generally are for
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<PAGE> 64
terms of one to three years. The license agreements generally require minimum
annual payments and certain quality control procedures and give the licensor the
right to approve products licensed by the Company. Typically, the licensor may
terminate the license if specified minimum levels of annual net sales for
licensed products are not met or for failure by the Company to comply with the
material terms of the license. Certain licenses require minimum advertising
expenditures by the Company and also require the Company to make lump-sum
payments in the event of a change of ownership. Accordingly, the Company's
licensing arrangements are dependent primarily upon maintaining a good
relationship between the Company and its licensors. The Company believes it has
good relationships with its licensors and has generally been able to obtain
renewals of expired licenses and to obtain the required approval for licensed
products.
PRODUCT DESIGN, SOURCING AND ASSEMBLY
Product Design. AAi's in-house design staff develops new products in line
with the current and anticipated trends for each season. For licensed brands,
the Company works extensively with the licensor in approving each detail of the
new products. The Company believes that its future success will depend, in part,
on its ability to enhance its existing product lines and develop new styles and
products to meet an expanding range of customer requirements.
Sourcing and Assembly. The Company outsources manufacturing for all of its
products, 75% of which is sourced to manufacturers in Asia through its joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. The joint venture is co-owned with a Hong Kong investor who
provides on-site management. See "The Company." The joint venture monitors
production and ensures that products meet the Company's quality standards. The
Company also utilizes domestic manufacturers to accommodate short delivery lead
times or when otherwise necessary. The Company believes that the quality and
cost of the products manufactured by its suppliers provide it with a significant
competitive advantage. In addition, sourcing the majority of its products
through the joint venture enables the Company to better control costs, monitor
product quality, manage inventory and provide efficient order fulfillment.
COMPETITION
The optical products and accessories industries are highly competitive.
Although none of the Company's competitors compete across all of the Company's
product lines, there are numerous competitors for each of its product lines both
in the retail channels serviced by the Company and in its other channels of
distribution. Competitors include numerous accessory vendors, including those
with their own retail stores, smaller independent specialty manufacturers, and
in the case of costume jewelry and reading glasses, divisions or subsidiaries of
large companies with greater financial or other resources than those of the
Company. Certain of these competitors control licenses for widely recognized
images, such as cartoon or movie characters which could provide them with a
competitive advantage. The Company may also experience increased competition
from suppliers of upscale fashion accessories seeking to enter the mass
merchandise market.
There are significant costs associated with the design, production and
installation of display fixtures for new customers. Furthermore, many retailers
require a new supplier to buy back the retailer's existing inventory as a
condition to changing vendors. These inventory costs can be substantial and
serve as a barrier to entry for both competitors in attempting to reach the
Company's existing customers as well as for the Company in obtaining new
customers.
AAi competes on the basis of diversity and quality of its product designs,
the breadth of its product lines, product availability, price and reputation as
well as customer service and support programs. The Company has many competitors
with respect to one or more of its products but believes that there are few
competitors that distribute products with the same product diversity and service
quality as the Company.
EMPLOYEES
As of October 5, 1998, the Company had approximately 650 full-time
employees and 1,350 part-time employees, none of whom were represented by a
labor union. The Company considers its relationship with its employees to be
good.
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<PAGE> 65
PROPERTY
The Company's principal executive office is located at 500 George
Washington Highway, Smithfield, Rhode Island. The Company's primary distribution
facilities are adjacent to the Company's recently expanded headquarters, which
together are 115,000 square feet. AAi is currently constructing a 65,000 square
foot, 40 foot clearance addition to its Smithfield, Rhode Island distribution
center, which will more than double the capacity of the Rhode Island facility.
The Company also leases a 200,000 square foot distribution center in Dallas,
Texas. Upon completion of the Rhode Island expansion (scheduled for the fourth
quarter of 1998), the Company plans to consolidate its distribution activities
and move the Texas operations to Rhode Island. For discussion of the costs and
savings associated with the consolidation of distribution operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Consolidation of Distribution Operations."
The following table describes the material properties owned and leased by
the Company:
<TABLE>
<CAPTION>
USE
----------------------------------
<S> <C>
OWNED PROPERTY:
Smithfield, Rhode Island Warehousing & Distribution,
Product Showroom and Sales
Office and Office Administration
LEASED PROPERTIES:
Dallas, Texas(a) Warehousing & Distribution
Office Administration
New York, New York Product Showroom and Sales Office
Bentonville, Arkansas Product Showroom and Sales Office
Cincinnati, Ohio Sales Office
Warren Avenue, Providence, Rhode Island(b) Warehousing
Carpenter St., Providence, Rhode Island(b) Warehousing
Toronto Canada Product Showroom and Sales Office
Newcastle Under Lyme, Staffordshire, United Kingdom Warehousing & Distribution and
Office Administration
</TABLE>
- ---------------
(a) Upon completion of the expansion at AAi's Rhode Island facility, the Company
plans to move the Texas operations to Rhode Island and close the Texas
distribution center. The Texas facility was leased from a related party
until May 1998 when it was sold to an independent third party. See "Certain
Transactions."
(b) Leased to the Company from related parties. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is subject to legal proceedings in the ordinary course of
business. While the outcome of law suits or other proceedings cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial condition, results of operation or cash
flow of the Company.
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<PAGE> 66
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Each director of the Company is elected for a period of one year at the
Company's annual meeting of shareholders and serves until his successor is duly
elected by the shareholders. Vacancies and newly created directorships resulting
from any increase in the number of authorized directors may be filled by a
majority vote of directors then remaining in office. The holders of the Series A
Preferred Stock (the "Preferred Holders") have the right, at their option, to
designate up to two directors to the Board of Directors, as well as the right to
vote on the election of directors at the annual meeting of shareholders. The
Company's shareholders have entered into an agreement that requires them to vote
to fix the number of directors of the Company at seven and elect as directors
two persons designated by the Preferred Holders and five persons designated by
certain management shareholders. In addition, Weston Presidio Capital II, L.P.,
the record holder of 17,100 shares (39.1%) of the Series A Preferred Stock, has
agreed to vote in favor of Martin E. Franklin (or in the event of his death or
disability, the designee of Marlin Capital, L.P.) as a director. See "Certain
Transactions -- Shareholders Agreement." Officers are elected by and serve at
the discretion of the Board of Directors.
The following table sets forth information with respect to each person who
is currently a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Gerald F. Cerce...................... 51 Chairman, President and Chief
Executive Officer
John H. Flynn, Jr.................... 48 Director and Executive Vice President
-- Sales and Customer Service
Stephen J. Carlotti.................. 56 Director and Secretary (a)
Michael F. Cronin *.................. 45 Director (a), (b)
Martin E. Franklin *................. 34 Director
George Graboys....................... 65 Director (a), (b)
Felix A. Porcaro, Jr................. 43 Executive Vice President -- Marketing
and Product Development
Robert V. Lallo...................... 58 Executive Vice
President -- Distribution
Daniel A. Triangolo.................. 63 Executive Vice
President -- International
Duane M. DeSisto..................... 44 Treasurer, Assistant Secretary and
Chief Financial Officer
</TABLE>
- ---------------
* Designated by the Preferred Holders. All other directors were designated by
certain management shareholders pursuant to the Shareholders Agreement. See
"Certain Transactions -- Shareholders Agreement."
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The following is a brief summary of the background of each director and
executive officer. Unless otherwise indicated, each individual has served in his
current position for the past five years.
Gerald F. Cerce co-founded the Company in 1985 with Mr. Porcaro and has
served as the Company's Chairman of the Board since that time. Mr. Cerce also
served as Chairman of the Board of AAi's predecessor company, Femic, Inc., a
Rhode Island jewelry manufacturer which Mr. Cerce and Mr. Porcaro acquired in
1972. Mr. Cerce serves on the Board of Trustees of Bryant College and is a
former member of the Advisory Board of Citizens Savings Bank.
John H. Flynn, Jr. joined AAi's predecessor company in 1981 as Vice
President. He served as President and Chief Executive Officer of the Company
from 1985 to 1998 and has been a Director since 1985. As Executive Vice
President of Sales and Customer Service, Mr. Flynn directly manages all sales
and service operations for the Company in the U.S. Prior to joining the Company,
Mr. Flynn was a service director for K&M Associates, a costume jewelry
distributor, and also served as Vice President of Puccini Accessories where he
supervised all sales and service operations.
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<PAGE> 67
Stephen J. Carlotti has been a Director of the Company since June 1996. He
is an attorney and has been a partner of the firm Hinckley, Allen & Snyder since
1992 and from 1972 to 1989. From 1989 to 1992, he served as Chief Operating
Officer and General Counsel of The Mutual Benefit Life Insurance Company. He is
also a director of WPI Group, Inc. (a manufacturer of hand held computers and
electronic components) and Fleet National Bank.
Michael F. Cronin has been a Director of the Company since June 1996. Mr.
Cronin also serves on the boards of directors of Casella Waste System, Inc. (a
refuse systems company), Tekni Plex, Inc. (a manufacturer of packaging
materials), Tweeter Home Entertainment Group, Inc. (a retailer of audio and
video consumer electronics products) and Physician Health Corporation (a
physician management company). Since 1991, Mr. Cronin has been the Managing
General Partner of Weston Presidio Capital, a venture capital investment firm.
Martin E. Franklin has been a Director of the Company since 1996. Mr.
Franklin is Chairman and Chief Executive Officer of Marlin Holdings, Inc. which
is the general partner of Marlin Capital, L.P., a private investment
partnership. He also serves as Chairman of the respective boards of directors of
Lumen Technologies, Inc. (formerly BEC Group, Inc.) and Bolle, Inc. In addition,
he is non-executive Chairman of Eyecare Products plc and a Director of Specialty
Catalog Corp. From May 1996 to March 1998, Mr. Franklin was Chairman and Chief
Executive Officer of BEC Group, Inc. ("BEC") and served as Chairman and Chief
Executive Officer of BEC's predecessor, Benson Eyecare Corporation from October
1992 to May 1996.
George Graboys has served as a Director of the Company since 1996. Mr.
Graboys served as Chief Executive Officer of Citizens Bank and Citizens
Financial Group, Inc. until he retired in October 1992. From January 1993 to
June 1995, Mr. Graboys was Adjunct Professor and Executive-in-Residence at the
University of Rhode Island School of Business. From March 1995 to June 1998, Mr.
Graboys served as Chairman of the Board of Governors for Higher Education. The
Board oversees the state's three institutions of higher education conducted on
eight campuses throughout the state.
Felix A. Porcaro, Jr. co-founded the Company with Mr. Cerce (his
brother-in-law)in 1985, and served as its Vice Chairman of the Board of
Directors until 1996. Mr. Porcaro is now the Executive Vice President of
Marketing and Product Development and is responsible for the design and
merchandising departments and all advertising and public relations activities.
Robert V. Lallo joined AAi's predecessor company in 1979 as Vice President.
He served as the Company's Chief Operating Officer from 1985 to 1998. As
Executive Vice President -- Distribution, Mr. Lallo is responsible for all
manufacturing, distribution and internal operations of the Company's facilities.
Prior to his association with AAi and its predecessor company, Mr. Lallo was
Production and Inventory Control Manager, Materials Manager and Director of
Operations for Uncas Manufacturing Company.
Daniel A. Triangolo has been the Executive Vice President of AAi's
international operations since 1995. Mr. Triangolo was the founder and President
of Danal Jewelry Corporation prior to its acquisition by AAi in 1983.
Duane M. DeSisto has served as the Company's Vice President and Chief
Financial Officer since 1995. Prior to joining AAi, Mr. DeSisto was Chief
Financial Officer of Zoll Medical Corporation for nine years.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive an annual fee of
$10,000, as well as reimbursement for their reasonable expenses. Messrs. Cerce
and Flynn do not receive any directors' fees.
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<PAGE> 68
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued to the
Company's Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company (together, the "Named Executive
Officers") for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(A) COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#) COMPENSATION($)(B)
--------------------------- ---------------------- ------------ ------------------
<S> <C> <C> <C>
Gerald F. Cerce,.................. $661,024 -- $211,988
Chairman, President and Chief
Executive Officer
John H. Flynn, Jr.,............... 299,898 -- 11,151
Executive Vice
President -- Sales and Customer
Service
Felix A. Porcaro, Jr.,............ 204,213 -- 14,695
Executive Vice President --
Product Development and
Marketing
Michael Aviles,................... 197,490 -- 90,950(d)
President Foster Grant
Division(c)
Daniel A. Triangolo,.............. 162,162 2,000 2,375
Executive Vice President --
International Division
</TABLE>
- ---------------
(a) The aggregate amount of perquisites and other personal benefits received
from the Company by each of the Named Executive Officers was less than the
lesser of $50,000 or 10% of the total of annual salary and bonus reported.
(b) Amounts represent the following: (1) medical payments reimbursed by the
Company to: Mr. Cerce ($4,909), Mr. Flynn ($6,343) and Mr. Porcaro
($10,279); (2) the Company's matching contributions under its Qualified
401(k) Plan and Non-Qualified 401(k) Excess Plan for Named Executive
Officers as follows: Mr. Cerce ($6,929), Mr. Flynn ($4,658), Mr. Porcaro
($4,266), Mr. Aviles ($950) and Mr. Triangolo, ($2,375); (3) premiums paid
by the Company for term life insurance purchased for the Named Executive
Officers and not made available generally to salaried employees in the
amount of $150 for each of Messrs. Cerce, Flynn and Porcaro; and (4) premium
of $200,000 paid with respect to life insurance purchased by the Company in
connection with Mr. Cerce's Supplemental Executive Retirement Plan.
(c) Mr. Aviles' employment with the Company terminated effective December 31,
1997.
(d) Includes a stay bonus of $90,000 paid in connection with the Company's
acquisition of Foster Grant US.
STOCK PLAN
The Company has established the 1996 Incentive Stock Plan (the "1996 Plan")
which provides for the grant of awards covering a maximum of 150,000 shares of
Common Stock to officers and other key employees of the Company and
non-employees who provide services to the Company or its subsidiaries. Awards
under the 1996 Plan may be granted in the form of incentive stock options,
non-qualified stock options, shares of common stock that are restricted, units
to acquire shares of Common Stock that are restricted, or in the form of stock
appreciation rights or limited stock appreciation rights. As of July 15, 1998,
incentive stock options to purchase 12,000 shares of Common Stock which have
been granted under the 1996 Plan were outstanding. The options have an exercise
price equal to the market value of the Common Stock at the time of the grant,
are immediately exercisable and will expire ten years after the date of grant.
To date, no non-qualified stock options, restricted shares, restricted units or
stock appreciation rights have been granted under the 1996 Plan.
The following table sets forth certain information concerning the grant of
stock options under the 1996 Plan to the Named Executive Officers during fiscal
1997. No options were granted to Messrs. Cerce, Flynn, Porcaro or Aviles in
fiscal 1997.
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<PAGE> 69
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE OR
UNDERLYING GRANTED TO BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR ($/SH)(A) DATE VALUE (A)
---- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Daniel A. Triangolo.............. 2,000 33.3% $50.00 12/29/2007 $41,200.00
</TABLE>
- ---------------
(a) Represents the fair value of the option granted and was estimated as of the
date of the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 35.53%;
expected life of five years; and risk-free interest rate of 5.77%. No
dividends on Common Stock were assumed for purposes of this estimate.
The following table contains information with respect to aggregate stock
options held by the Named Executive Officers as of December 31, 1997. Messrs.
Cerce, Flynn and Porcaro do not hold any stock options. All such options were
exercisable as of such date. No stock options were exercised by any Named
Executive Officers during fiscal 1997.
AGGREGATE YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
NAME AT FISCAL YEAR 1997 OPTION/SARS($)(A)
---- ------------------------------ --------------------
<S> <C> <C>
Michael Aviles (b).................................. 2,000 --
Daniel A. Triangolo................................. 4,000 --
</TABLE>
- ---------------
(a) Based on the December 31, 1997 price of the Common Stock being equal to the
exercise price of $50.00.
(b) Mr. Aviles' options expired during the first quarter of 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, dated as of May 31,
1996, with certain of its executive officers, including Messrs. Cerce, Flynn,
Porcaro, Lallo and DeSisto (collectively, the "Executives," each an
"Executive").
Each employment agreement provides that during the term of the contract the
Executive's base salary will not be reduced, will be increased on each
anniversary date of the agreement based upon the consumer price index and may be
increased based on the Company's performance and the Executive's particular
contributions. The employment agreements also stipulate that the Executives will
remain eligible for participation in the Company's Executive Bonus Plan and
other benefit programs, and that the Company will provide each Executive with an
automobile consistent with past practice. The employment agreement of Mr. Cerce
further provides for the reimbursement of certain membership and service fees as
well as reasonable expenses associated with the performance of his duties in New
York City and specifies that the Company will make all annual payments for his
Supplemental Employment Retirement Plan.
Mr. Cerce's agreement provides for an initial ten year term expiring on May
31, 2006, and the employment agreements of Messrs. Flynn, Porcaro, Lallo and
DeSisto each stipulate an initial three year term expiring on May 31, 1999, with
automatic renewals for successive one year terms thereafter (the "Employment
Period"). Upon prior written notice to the Executive, the Company may terminate
the agreement "with cause" for (a) the conviction of the Executive for a crime
involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive
with respect to the Company or its subsidiaries; or, (c) except under certain
circumstances as specified in the agreement, the Executive's refusal to follow
the reasonable and lawful written instructions of the Board of Directors with
respect to the services to be rendered and the manner of rendering such services
by the Executive. In addition, an Executive may terminate his agreement at any
time by providing written notice to the Company, and the Company may terminate
the agreement at any time "without cause" by providing written notice to the
Executive. Mr. Cerce's agreement provides that the Company must provide such
written notice at least six months prior to termination. Termination "without
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cause" means termination for any reason other than "cause" as defined and
specifically includes the Company's material reduction of the Executive's duties
or authority, the disability of the Executive or the Executive's death.
Under the employment agreements, if the Company terminates an agreement
"without cause," the Company is obligated to provide the Executive monthly
severance benefits consisting of one-twelfth of the sum of Executive's then
current annual base salary and the Executive's most recent bonus and to continue
coverage under the Company's insurance programs and any ERISA benefit plans.
Such payments, insurance coverage and plan participation will continue for at
least two years from the date of the Executive's termination, and may be
extended for a longer period depending on the Executive's "Non-compete Period"
as described below. For Messrs. Cerce and Flynn, the maximum period for
severance benefits is five years, for Messrs. Lallo and DeSisto, the comparable
maximum period is four years, and for Mr. Porcaro, the comparable maximum period
is three years.
The employment agreements contain confidentiality provisions and provide
that during the Employment Period and after termination of the agreement, the
Company may restrict the Executive's subsequent involvement in Restricted
Business Activities for two years for Messrs. Cerce, Flynn and Lallo and for one
year for Messrs. Porcaro and DeSisto following the date of the termination (the
"Non-compete Period"). As used in the agreements, "Restricted Business
Activities" means the marketing and sale of ladies' and men's consumer soft
lines to retail stores, which the Company sold and marketed during the
Executive's employment with the Company. Other than with the written approval of
the Company, the Executive may not enter into or engage in or have a proprietary
interest in the Restricted Business Activities other than the ownership of (a)
the stock of the Company held by the Executive, and (b) no more than five
percent of the securities of any other company which is publicly held. The
Non-compete Period may be extended, at the Company's option, by three years for
Messrs. Cerce and Flynn and by two years for Messrs. Porcaro, Lallo and DeSisto,
provided that the Company continues to make the payments and provide the
benefits described in the preceding paragraph.
EXECUTIVE BONUS PLAN
The Company maintains an Executive Bonus Plan for the purpose of providing
incentives in the form of an annual cash bonus to officers and other key
employees. Awards are equal to a percentage of base salaries specified in an
annual plan by reference to the Company's target for sales and net income.
Bonuses awarded to senior executives are equal to 50% of compensation if the
sales and income targets are met. If the targets are not met, the amount of the
bonuses, if any, is subject to the discretion of the Board of Directors.
QUALIFIED 401(k) Plan
The Company has a qualified 401(k) plan (the "Qualified Plan") that permits
all employees to defer, on an elective basis, up to 15% of their salary or
wages. Presently, the Company matches 25% of the first 6% of compensation that
an employee defers under the Qualified Plan. The amount of elective deferrals
for any one employee under the Qualified Plan is limited by the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, the amount that an executive
employee may defer is subject to nondiscrimination rules which may prevent the
executive from deferring the maximum amount. Further, the Qualified Plan may not
take into account compensation in excess of specified amounts for any employee
in computing contributions under the Qualified Plan. If an employee's elective
contributions are reduced or capped under the Qualified Plan, the amount of
matching employer contribution also is restricted.
NON-QUALIFIED EXCESS 401(k) Plan
In May 1997, the Company established the Non-Qualified Excess 401(k) Plan
(the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the
Non-Qualified Plan is to provide deferred compensation to a select group of
management or highly compensated employees of the Company as designated by the
Board of Directors. Presently, five individuals, including the Named Executive
Officers, participate in the Non-Qualified Plan. Under the Non-Qualified Plan, a
participant may elect to defer up to 15% of his or her compensation on an annual
basis. This amount is credited to the employee's deferred
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<PAGE> 71
compensation account (the "Deferred Amount"). Under the Non-Qualified Plan, the
Company also credits the participant's deferred compensation account for the
amount of the matching contribution the Company would have made under the
Qualified Plan with respect to the Deferred Amount. All amounts contributed by
the employee and by the Company under the Non-Qualified Plan are immediately
vested.
A participant under the Non-Qualified Plan is entitled to receive a
distribution of his or her account upon retirement, death, disability or
termination of employment. An executive also is eligible to withdraw funds
credited to the executive's deferred compensation account in the event of
unforeseeable financial hardship. This policy is consistent with the ability of
an employee to obtain hardship withdrawals under the Qualified Plan.
The amount deferred under the Non-Qualified Plan is not includible in the
income of the executive until paid and, accordingly, the Company is not entitled
to a deduction for any liabilities established under the Non-Qualified Plan
until the amount credited to the participant's deferred compensation account is
paid to him or her.
The Company has established a grantor trust effective June 1, 1997 to hold
assets to be used for payment of benefits under the Non-Qualified Plan. In the
event of the Company's insolvency, any assets held by the trust are subject to
claims of general creditors of the Company under federal and state law.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has entered into a Supplemental Executive Retirement Plan (the
"Supplemental Plan") with Mr. Cerce the purpose of which is to provide
supplemental retirement, death, disability and severance benefits to Mr. Cerce
in consideration for his performance of services as a key executive of the
Company. In order to fund the Company's obligations under the Supplemental Plan,
the Company has purchased an insurance policy insuring the life of Mr. Cerce
(the "Policy").
Under the terms and subject to the conditions contained in the Supplemental
Plan, upon Mr. Cerce's voluntary termination of employment for any reason on or
after age 60 ("Retirement") or by reason of disability, the Company will pay to
Mr. Cerce the existing cash surrender value of the Policy. At the discretion of
the Board of Directors of the Company, payment may be made either in a single
lump sum or in monthly installments over a ten year period; provided, however,
in the event that Retirement occurs within one year after a change of control,
the retirement benefit will be paid in a single lump sum.
In the event that Mr. Cerce dies while employed by the Company, the Company
will pay a death benefit to Mr. Cerce's surviving spouse or designated
beneficiary equal to the death benefit payable under the Policy. The death
benefit will be paid in monthly installments over a fifteen year period unless
Mr. Cerce's death occurs within one year after a change of control, in which
event, the death benefit will be paid in a single lump sum no later than ninety
days after his death.
In the event that Mr. Cerce's employment with the Company is terminated for
any reason other than Retirement, death or disability, Mr. Cerce will be
entitled to receive the existing cash surrender value of the Policy, payable at
the discretion of the Board of Directors of the Company in a single lump sum or
in monthly installments over a ten year period. However, if Mr. Cerce's
termination occurs within one year after a change of control, the severance
benefit will be paid in a single lump sum.
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<PAGE> 72
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of October 5, 1998, by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock or Series A Preferred Stock; (ii) each of the
Company's directors and Named Executive Officers; and (iii) all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK COMMON STOCK DILUTED (B)
------------------------ ------------------------ -----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS (A) OWNED OF CLASS OWNED OF CLASS OWNED OF CLASS
-------------------- ------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Gerald F. Cerce(c).................... -- -- 323,953 53.3% 323,953 31.0%
Felix A. Porcaro, Jr.(c).............. -- -- 171,000 28.1 171,000 16.4
John H. Flynn, Jr..................... -- -- 28,500 4.7 28,500 2.7
Stephen J. Carlotti(d)(e)............. -- -- 36,094 5.9 36,094 3.5
Michael F. Cronin(f).................. 17,100 39.1% 19,000 3.1 190,000 18.2
Martin E. Franklin(g)................. 4,750 10.9 -- -- 47,500 4.5
George Graboys........................ -- -- -- -- -- --
David J. Syner(e)(h).................. -- -- 36,094 5.9 36,094 3.5
Daniel A. Triangolo(i)................ -- -- 4,000 * 4,000 *
Weston Presidio Capital II, L.P.
(j)................................. 17,100 39.1 19,000 3.1 190,000 18.2
St. Paul Fire and Marine Insurance
Company(k).......................... 6,840 15.7 7,600 1.3 76,000 7.3
BancBoston Ventures, Inc.(l).......... 6,840 15.7 7,600 1.3 76,000 7.3
Marlin Capital, L.P.(m)............... 4,750 10.9 -- -- 47,500 4.5
National City Capital
Corporation(n)...................... 3,420 7.8 3,800 * 38,000 3.6
Brahman Group(o)...................... 3,117 7.1 -- -- 31,170 3.6
All executive officers and directors
as a group (10 persons)(p).......... 21,850 50.0 597,000 96.9 815,500 78.2
</TABLE>
- ---------------
* Less than one percent
(a) If applicable, beneficially owned shares include shares owned by the spouse,
children and certain other relatives of the director or officer, as well as
shares held by trusts of which the person is a trustee or in which he has a
beneficial interest. All information with respect to beneficial ownership
has been furnished by the respective directors and officers.
(b) Includes full conversion of all outstanding shares of Series A Preferred
Stock into Common Stock at the current ratio of 1 for 10.
(c) Messrs. Cerce's and Porcaro's business address is 500 George Washington
Highway, Smithfield, Rhode Island 02917.
(d) Mr. Carlotti's business address is 1500 Fleet Center, Providence, Rhode
Island 02903.
(e) Represents shares of Common Stock held by Mr. Carlotti and David J. Syner,
as trustees of the benefit of Mr. Cerce's children.
(f) Mr. Cronin's business address is 1 Federal Street, 21(st) Floor, Boston,
Massachusetts 02110. Includes 19,000 shares of Common Stock and 17,100
shares of Series A Preferred Stock held in the name of Weston Presidio
Capital II, L.P. of which Mr. Cronin is a general partner.
(g) Mr. Franklin's business address is 555 Theodore Fremd Avenue, Suite B-302,
Rye, New York 10580. Includes 4,750 shares of Series A Preferred Stock held
in the name of Marlin Capital, L.P., of which Mr. Franklin's majority-owned
company is the sole general partner.
(h) Mr. Syner's business address is 35 Sockanesset Crossroads, Cranston, Rhode
Island 02920.
(i) Represents shares that may be acquired pursuant to options which are or will
become exercisable within 60 days.
(j) The address of Weston Presidio Capital II, L.P. is 1 Federal Street, 21(st)
Floor, Boston, Massachusetts 02110.
(k) The address of St. Paul Fire and Marine Insurance Company is c/o St. Paul
Venture Capital, Inc., 8500 Normandale Lake Boulevard, Suite 1940,
Bloomington, Minnesota 55437.
(l) The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor,
Boston, Massachusetts 02110.
(m) The address of Marlin Capital, L.P. is 555 Theodore Fremd Avenue, Suite
B-302, Rye, New York 10580.
(n) The address of National City Capital Corporation is 1965 E. 6th Street,
Suite 1010, Cleveland, Ohio 44114.
(o) The Brahman Group includes Brahman Partners II, L.P., B.Y. Partners, L.P.
and Brahman Partners II Offshore Ltd., which are a "group" as that term is
used in Section 13(d)(3) of the Exchange Act of 1934, as amended (the
"Exchange Act"). The address for these shareholders is c/o Brahman Capital
Corp., 277 Park Avenue, New York, New York 10172.
(p) Includes 8,000 shares that may be acquired pursuant to options which are or
will become exercisable within 60 days.
All of the Company's shareholders are party to an agreement that requires
the parties thereto to vote to fix the number of directors of the Company at
seven and elect as directors two persons designated by the Preferred Holders and
five persons designated by certain management shareholders. See "Certain
Transactions -- Shareholders Agreement."
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CERTAIN TRANSACTIONS
NOTES PAYABLE TO PREFERRED SHAREHOLDERS
On May 31, 1996, in connection with the Company's sale of shares of its
Series A Preferred Stock, the Company issued subordinated promissory notes in
the aggregate amount of $2.0 million to certain Preferred Holders (Weston
Presidio Capital II, L.P., BancBoston Ventures, Inc., St. Paul Fire and Marine
Insurance Company and National City Capital Corporation). BancBoston Ventures,
Inc., an affiliate of BancBoston Securities Inc., one of the Initial Purchasers,
was a holder of a subordinated note in the principal amount of $400,000. The
subordinated notes bore interest at an annual rate of 7.04% and were due in
2002. These notes were repaid with a portion of the net proceeds from the sale
of the Old Notes. See "Use of Proceeds."
TERMINATION OF S CORPORATION STATUS
Until the issuance of its Series A Preferred Stock on May 31, 1996, the
Company was an S corporation under the Code and comparable state tax laws. As an
S corporation, earnings through the date of termination of S corporation status
were taxed directly to the S corporation shareholders (Messrs. Cerce, Flynn,
Lallo and Porcaro). Upon termination of its S corporation status, the Company
issued to the S corporation shareholders previously taxed undistributed earnings
in the aggregate amount of $13.3 million. Of the $13.3 million, $10.3 million
was paid in cash and $3.0 million was paid by the issuance of subordinated
promissory notes, which bore interest at an annual rate of 7.04% and were due in
2006. These notes were also repaid with a portion of the net proceeds of the
sale of the Old Notes. See "Use of Proceeds."
The Company has entered into an indemnification agreement with the S
Corporation shareholders relating to potential income tax liabilities resulting
from adjustments to reported S corporation taxable income. The S corporation
shareholders will continue to be liable for personal income taxes on the
Company's income for all periods during which the Company was an S corporation,
while the Company will be liable for all income taxes for subsequent periods.
The indemnification agreement provides that the Company will distribute to the S
corporation shareholders 40% of the amount of additional deductions permitted to
be taken by the Company as a C corporation for expenditures made while an S
corporation, which result from adjustments initiated by tax authorities.
During the first and second quarters of 1998, in connection with an income
tax audit, the Company made advances totaling $3.4 million to the S corporation
shareholders to pay a portion of the income tax owed by them with respect to the
Company's S corporation earnings. Upon completion of the sale of the Old Notes,
the shareholders repaid these advances.
LEASES OF RHODE ISLAND WAREHOUSE SITES
The Company has an operating lease agreement for warehouse facilities with
Sunrise Properties, LLC ("Sunrise Properties"), a Rhode Island limited liability
company, of which Mr. Porcaro and Linda Cerce, wife of Mr. Cerce and sister of
Mr. Porcaro, are members. The Company also has an operating lease agreement for
warehouse facilities with 299 Carpenter Street Associates, LLC, a Rhode Island
limited liability company of which Sunrise Properties and Messrs. Lallo and
Flynn are members. The leased properties are located at 4 Warren Avenue, North
Providence, Rhode Island and at 299 Carpenter Street, Providence, Rhode Island.
The present annual rental rates for the Warren Avenue and Carpenter Street
properties are $191,412 and $279,840, respectively. The Company is responsible
for real estate taxes and utilities. Each lease has a three year term ending on
December 31, 2001, and grants the Company an option to extend the lease for an
additional three year term at the greater of the then fair market rent or the
current rent adjusted for the cumulative increase in the consumer price index.
GUARANTY OF MORTGAGE NOTE
The Company has guaranteed a mortgage note payable by Sunrise Properties in
the aggregate amount of $200,000, the outstanding balance of which was
approximately $116,500 as of October 8, 1998. The mortgage note has a remaining
maturity of three years, and bears interest at a rate of 9.5% annually.
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LEASE OF DALLAS, TEXAS SITE
In December 1996, in conjunction with the purchase of Foster Grant US, the
Company entered into a property lease with BEC Group, Inc. (now named Lumen
Technologies, Inc.) ("BEC/Lumen"), the former owner of the Foster Grant US
office and distribution center. In March 1998, BEC/Lumen transferred the Texas
property to Bolle, Inc. an affiliated corporation at the time of transfer.
Martin E. Franklin, a director of the Company, is the chairman of Lumen
Technologies, Inc. and Bolle, Inc. Rental expense for this property was
approximately $494,000 in 1997. In May 1998, Bolle, Inc. sold the Texas property
to an independent third party. The Company gave notice of termination of the
lease effective December 1998.
SHAREHOLDERS AGREEMENT
The Company, the current shareholders and Daniel A. Triangolo, Duane M.
DeSisto and Thomas McCarthy are parties to a Tag-along, Transfer Restriction and
Voting Agreement (the "Shareholders Agreement") which requires the parties
thereto to vote to fix the number of directors at seven and to elect as
directors two persons nominated by the Preferred Holders and five persons
nominated by the other parties to the Shareholders Agreement (the "Management
Shareholders"). In a related Letter Agreement, Weston Presidio Capital II, L.P.,
a Preferred Holder, has agreed to use its best efforts to cause the nomination
of and to vote all of its shares of Series A Preferred Stock for the election of
Martin E. Franklin (or, in the event of his death or incapacity, the designee of
Marlin Capital, L.P.) as a director of the Company, for so long as the Preferred
Holders, in the aggregate, own at least 10% or 4,750 shares of Series A
Preferred Stock.
The Shareholders Agreement also provides that upon the death of a
Management Shareholder, the Company will purchase, at an appraised value
determined by an independent investment banker, all or a portion of the shares
owned by the Management Shareholder at his death. The Company has funded its
obligations under the Shareholders Agreement with life insurance policies on the
lives of the Management Shareholders in the aggregate amount of $27 million. The
Company's obligation to purchase shares upon the death of a Management
Shareholder is limited to the life insurance proceeds received upon the death of
such Management Shareholder. The Company may not decrease the amount of life
insurance coverage without the prior written consent of the affected Management
Shareholder.
The Shareholders Agreement terminates on the earlier of the following: (i)
the time immediately prior to the consummation of a Qualified Public Offering as
defined in the Articles of Incorporation (see "Description of Capital Stock") or
(ii) when no shares of the Series A Preferred Stock and no warrants issuable to
the Preferred Holders are outstanding, except as a result of the conversion,
exchange or exercise of the Series A Preferred Stock or warrants.
OWNERSHIP OF PREFERRED SHARES OF FG HOLDINGS BY BEC/LUMEN
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, FG Holdings, issued BEC/Lumen 100 shares of FG
Preferred Stock which represents all of the issued and outstanding shares of FG
Preferred Stock. By its terms, the FG Preferred Stock must be redeemed on
February 28, 2000 (the "FG Redemption Date") by payment of an amount ranging
from $10,000 to $40,000 per share (the "FG Redemption Amount"), determined with
reference to the combined net sales of sunglasses, reading glasses and
accessories by FG Holdings and the Company for the year ending January 1, 2000,
excluding an amount equal to the net sales by the Company for such items for the
year ending December 31, 1996.
The Certificate of Incorporation of FG Holdings also provides for early
redemption of the FG Preferred Stock if the Company completes either (i) an
initial public offering where the pre-money valuation of the Company equals or
exceeds $75.0 million, (ii) a merger or similar transaction where the
transaction value equals or exceeds $75.0 million or (iii) a private placement
of equity securities representing more than 50% of the outstanding capital stock
for consideration of not less than $37.5 million (each a "Redemption Event")
prior to the FG Redemption Date. Upon completion of a Redemption Event, in lieu
of the FG Redemption Amount, holders of FG Preferred Stock will receive a
payment ranging from $35,000 to $40,000 per share (the "Redemption Event
Amount"), to be determined with reference to, as the case may be, either the
pre-
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money valuation of the Company immediately prior to the initial public offering
or the proceeds of the merger or similar transaction or private equity
placement. If a Redemption Event occurs after the FG Redemption Date, in
addition to the FG Redemption Amount, holders of FG Preferred Stock will receive
a supplemental payment equal to the difference, if any, between the FG
Redemption Amount paid to such holders on the FG Redemption Date and Redemption
Event Amount that would have been received had the Redemption Event occurred on
or prior to the FG Redemption Date.
INITIAL PURCHASERS
BancBoston Ventures, Inc., an affiliate of BancBoston Securities Inc., one
of the Initial Purchasers, is the beneficial owner of 15.7% of the Company's
Series A Preferred Stock and 1.3% of the Common Stock and was a holder of a
$400,000 subordinated note. See "Security Ownership of Management and Certain
Beneficial Owners" and "Plan of Distribution." NationsBank, an agent and lender
under the Senior Credit Facility and lender of the Term Loans, is an affiliate
of NationsBanc Montgomery Securities LLC, one of the Initial Purchasers. The
Company used a portion of the net proceeds from the Offering to repay all of the
outstanding indebtedness under the subordinated notes, Senior Credit Facility
and the Term Loans. See "Use of Proceeds," "Description of Senior Credit
Facility" and "Plan of Distribution."
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DESCRIPTION OF SENIOR CREDIT FACILITY
The Company has a Senior Credit Facility provided by a group of banks and
other financial institutions led by NationsBank, N.A. as a lender and as agent
(the "Agent"). The Agent is an affiliate of NationsBanc Montgomery Securities
LLC, one of the Initial Purchasers. The following summary of the material
provisions of the Senior Credit Facility does not purport to be complete and is
subject to and is qualified in its entirety by reference to the provisions of
the Senior Credit Facility, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Senior Credit Facility currently provides for loans in an aggregate
principal amount not to exceed $60.0 million on a revolving credit basis (the
"Revolving Credit Facility") to fund permitted acquisitions, capital
expenditures and working capital needs. The Revolving Credit Facility includes a
$3.0 million letter of credit sublimit. Advances under the Revolving Credit
Facility are limited to up to 85% of eligible accounts receivable plus the
lesser of (i) 55% of eligible inventory (other than optical inventory) plus 65%
of eligible inventory consisting of optical inventory or (ii) $30.0 million (the
"Borrowing Base Requirements"). The full $60.0 million (subject to Borrowing
Base Requirements) is currently available under the Revolving Credit Facility.
The Senior Credit Facility has an initial expiration date of July 31, 2003, with
automatic annual renewals thereafter (subject to the lenders' continued credit
approval).
The Company's obligations under the Senior Credit Facility are guaranteed
by the Subsidiary Guarantors and are secured by the accounts receivable and
inventory of the Company and its Domestic Subsidiaries. The Notes and the
Subsidiary Guarantees are effectively subordinated to the obligations under the
Senior Credit Facility to the extent of the value of the assets securing the
Senior Credit Facility. See "Description of Notes -- Subordination" and "Risk
Factors -- Effective Subordination of the Notes."
Loans under the Senior Credit Facility bear interest, at the Company's
option, at either (i) a "Base Rate" equal to the Agent's prime lending rate,
plus up to 0.50% (determined based on the Company's fixed charge coverage
ratio); or (ii) a "LIBOR Rate," plus an applicable margin of between 1.50% and
2.25% (determined based on the Company's fixed charge coverage ratio).
The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guaranty obligations, repay other
indebtedness, including the Notes, or amend other debt instruments, pay
dividends, create liens on assets, enter into leases, make investments, make
acquisitions, engage in mergers or consolidations, make capital expenditures,
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. In addition, the Senior Credit Facility requires
compliance with certain financial covenants, including requiring the Company to
maintain a minimum EBITDA level, funded debt to EBITDA ratio and fixed charge
coverage ratio, in each case tested at the end of each fiscal quarter of the
Company. The Company does not expect that such covenants will materially impact
the Company's ability to operate its business. In addition, the Senior Credit
Facility requires the Company to meet certain Borrowing Base Requirements in
order to draw under the Revolving Credit Facility. The Company is also obligated
to pay certain fees with respect to the Senior Credit Facility, including a
revolving credit unused line fee of 0.375% on the average daily unused amount.
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DESCRIPTION OF NOTES
GENERAL
The Notes are issued pursuant to the Indenture dated July 21, 1998 (the
"Indenture"), among the Company, the Guarantors and IBJ Schroder Bank & Trust
Company, as trustee (the "Trustee"). The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture and Registration Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Indenture and Registration Rights Agreement, including the definitions therein
of certain terms used below. The definitions of certain terms used in the
following summary are set forth below under the caption "--Certain Definitions."
For purposes of this "Description of Notes," the term "Company" refers only to
AAi.FosterGrant, Inc. and not to any of its Subsidiaries.
The Notes are general unsecured obligations of the Company and rank pari
passu in right of payment to all current and future unsubordinated Indebtedness
of the Company, including indebtedness under the Senior Credit Facility. The
obligations of the Company under the Senior Credit Facility, however, are
secured by the accounts receivable and inventory of the Company and are
guaranteed by the Guarantors, which guarantees are secured by the accounts
receivable and inventory of the Guarantors. Accordingly, the Notes and the
Subsidiary Guarantees are effectively subordinated to the borrowings outstanding
under the Senior Credit Facility and the guarantees of such borrowings,
respectively, to the extent of the value of the assets securing such borrowings
and guarantees. As of July 4, 1998, on a pro forma basis giving effect to the
Acquisitions and the Offering and the application of net proceeds therefrom, the
Company and its Subsidiaries would have had approximately $1.2 million senior
Indebtedness outstanding other than the Notes, all of which would have been
secured debt. The Indenture permits the incurrence of additional senior
Indebtedness (including secured Indebtedness) in the future.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150.0 million, of
which $75.0 million were issued in the Offering. The Notes mature on July 15,
2006. Interest on the New Notes accrues at the rate of 10 3/4% per annum from
the last date of which interest was paid on the Old Notes surrendered in
exchange therefor, or if no interest has been paid, from the date of the
original issuance of such Old Notes. Interest on the New Notes is payable
semi-annually in arrears on January 15 and July 15, commencing on January 15,
1999, to Holders of record on the immediately preceding January 1 and July 1.
Notes having identical terms and conditions to the Notes offered hereby (the
"Additional Notes") may be issued from time to time after the date hereof,
subject to the provisions of the Indenture, including those described below
under the caption "--Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock." For purposes of this "Description of Notes,"
references to the Notes do not include Additional Notes. The Notes and any
Additional Notes subsequently issued under the Indenture would be treated as a
single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase. Interest is
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on the Notes
is payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments of principal, premium, interest and
Liquidated Damages, if any, with respect to Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York is the office of the Trustee maintained for such purpose.
The Notes are issued in denominations of $1,000 and integral multiples thereof.
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis (the "Subsidiary
Guarantees") by each of the Company's current and future Domestic Subsidiaries
(collectively, the "Guarantors"). The Subsidiary Guarantee of each Guarantor
ranks senior in right of payment to all future subordinated Indebtedness of the
Guarantors and ranks pari passu in right of payment to all unsubordinated
Indebtedness of such Guarantors and the amounts for which the Guarantors are
liable under the guarantees issued from time to time with respect to
unsubordinated Indebtedness. The guarantees by the Guarantors of borrowings
under the Senior Credit Facility are secured by the accounts receivable and
inventory of the Guarantors. Accordingly, the Subsidiary Guarantees are
effectively subordinated to such guarantees under the Senior Credit Facility to
the extent of the value of the assets securing such guarantees. As of July 4,
1998, on a pro forma basis giving effect to the Acquisitions and the Offering
and the application of net proceeds therefrom, the Guarantors would have had no
senior Indebtedness, other than the Subsidiary Guarantees, outstanding. The
obligations of each Guarantor under its Subsidiary Guarantee is limited to the
maximum amount permissible so as not to constitute a fraudulent conveyance under
applicable law. See "Risk Factors -- Fraudulent Conveyance."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and the Registration Rights Agreement;
and (ii) immediately after giving effect to such transaction, no Default or
Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See " -- Repurchase
at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to July 15,
2002. Thereafter, the Notes are subject to redemption at any time at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on July 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 105.375%
2003........................................................ 102.688%
2004 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before July 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price of 110.750% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net cash proceeds of a
public sale of common stock of the Company; provided that at least 65% of the
aggregate principal amount of Notes originally issued under the Indenture
remains outstanding immediately after the occurrence of such redemption
(excluding Notes held by the Company or any of its Subsidiaries); and provided,
further, that such redemption shall occur within 45 days after the date of the
closing of such public sale.
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes has the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within ten days following a Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Senior Credit Facility contains prohibitions of certain events that
would constitute a Change of Control and restricts the Company's ability to
repurchase the Notes. Any future credit agreements or other agreements relating
to senior Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited
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<PAGE> 80
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Senior Credit Facility or other agreements relating to senior Indebtedness.
Furthermore, the exercise by the Holders of Notes of their right to require the
Company to repurchase the Notes could cause a default under such other senior
Indebtedness (even if the Change of Control itself does not or the terms of the
senior Indebtedness do not prohibit such repurchases) due to the financial
effect of such repurchases on the Company. Finally, the Company's ability to pay
cash to the Holders of Notes upon a repurchase may be limited by the Company's
then existing financial resources. See "Risk Factors -- Change of Control."
The Company is not required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 75% of the consideration therefor received by the Company
or such Subsidiary is in the form of cash or Cash Equivalents; provided that the
amount of (a) any liabilities (as shown on the Company's or such Subsidiary's
most recent balance sheet), of the Company or any Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Company
or such Subsidiary from further liability and (b) any securities, notes or other
obligations received by the Company or any such Subsidiary from such transferee
that are contemporaneously (subject to ordinary settlement periods) converted by
the Company or such Subsidiary into cash (to the extent of the cash received)
shall be deemed to be cash for purposes of this provision; provided, further
that the provisions of this paragraph do not apply to transactions pursuant to
the Fantasma Agreement, as in effect on the date of the Indenture.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Indebtedness of the Company under a Credit Facility or (b) to acquire all or
substantially all of the assets of, or a majority of the Voting Stock of,
another business, (c) to make a capital expenditure or (d) to acquire other
long-term assets. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company
will be required to make an offer to all Holders of Notes and all holders of
other Indebtedness that is pari passu with the Notes containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes and such other pari passu
Indebtedness that may be purchased out of the Excess
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<PAGE> 81
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture and such other pari passu Indebtedness. To the extent that any
Excess Proceeds remain after consummation of an Asset Sale Offer, the Company
may use such Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of Notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
such other pari passu Indebtedness to be purchased on a pro rata basis. Upon
completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset
at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any of
its Subsidiaries) or to the direct or indirect holders of the Company's or any
of its Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions (a) payable in Equity Interests (other than
Disqualified Stock) of the Company or (b) to the Company or a Wholly Owned
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire
for value (including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or any
direct or indirect parent of the Company (other than any such Equity Interests
owned by the Company or any Wholly Owned Subsidiary of the Company); (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness of the Company or any of its
Subsidiaries that is subordinated to the Notes or any Subsidiary Guarantee
thereof, except a payment of interest or principal at Stated Maturity; or (iv)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (v)(a) and (vi) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or Disqualified Stock or debt securities of the Company
that have been converted into such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold to a
Subsidiary of the Company), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) $3.0 million.
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The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at the date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Company or any Guarantor or
Equity Interests of the Company in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness of the Company or any Guarantor with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Subsidiary of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any stock purchase, stock redemption,
stock option or similar agreement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests in any
twelve-month period shall not exceed the sum of (a) any amounts available to the
Company under insurance policies insuring the lives of such member of management
and (b) $250,000 in any twelve-month period and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction; and
(vi) repurchases of Capital Stock deemed to occur upon exercise of stock options
if such Capital Stock represents a portion of the exercise price of such
options.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
asset or securities that are required to be valued by this covenant shall be
determined by the Board of Directors whose resolution with respect thereto shall
be delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $1.0 million. Not later than
the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 2 to 1, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred, or the Disqualified Stock
or preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company or a Foreign Subsidiary of
Indebtedness (including letters of credit, with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company and its Subsidiaries thereunder) under Credit Facilities and
the Guarantee thereof by the Guarantors; provided that the aggregate
principal amount of all Indebtedness of the Company and its Subsidiaries
(including letters of credit) outstanding under Credit Facilities after
giving
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effect to such incurrence does not exceed an amount equal to the greater of
(a) $60.0 million less the aggregate amount of all Net Proceeds of Asset
Sales applied to permanently repay any Indebtedness under a Credit Facility
pursuant to the covenant described above under the caption "--Repurchase at
the Option of Holders -- Asset Sales" or (b) the sum of 85% of the accounts
receivable plus 55% of the jewelry inventory, 65% of the optical inventory
and 55% of all other inventory, in each case of the Company and its
Subsidiaries net of reserves, as shown on the most recent balance sheet of
the Company and its Subsidiaries;
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes (other than any Additional Notes) and the Exchange Notes (other than
any Additional Notes) and the incurrence by the Guarantors of Indebtedness
represented by the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount, together with
any Attributable Debt with respect to the Smithfield Property permitted
under the caption "--Sale and Leaseback Transactions," not to exceed $10.0
million at any time outstanding, including any Permitted Refinancing
Indebtedness incurred pursuant to clause (v) below to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (iv);
(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred by the first paragraph of this covenant, or by clauses (ii), (iii)
or (iv) of this covenant;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries; provided, however, that (a) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the Notes and
(b)(1) any subsequent issuance or transfer of Equity Interests that results
in any such Indebtedness being held by a Person other than the Company or a
Subsidiary thereof and (2) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Subsidiary
thereof shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be, that
was not permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of (a) fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this Indenture to be outstanding or (b)
limiting currency exchange rate risks in connection with transactions
entered into in the ordinary course of business;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Subsidiary of the Company that was
permitted to be incurred by another provision of this covenant;
(ix) the incurrence by the Company of Indebtedness in connection with
a repurchase of Notes or Exchange Notes following a Change of Control;
provided that the principal amount of such Indebtedness does not exceed
101% of the aggregate principal amount of the Notes and the Exchange Notes
repurchased, and such Indebtedness (a) has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of
the Notes and the Exchange Notes and (b) does not mature prior to the
Stated Maturity of the Notes and the Exchange Notes;
(x) the incurrence of Indebtedness arising from agreements providing
for indemnification, adjustment of purchase price or similar obligations,
incurred in connection with the disposition of any business, assets or
Subsidiary of the Company (other than Guarantees of Indebtedness incurred
by any Person acquiring all or any portion of such business, assets or
Subsidiary for the purpose of financing such
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acquisition), provided that none of the foregoing results in Indebtedness
required to be reflected as Indebtedness on the balance sheet of the
Company or any such Subsidiary in accordance with GAAP and the maximum
aggregate liability in respect of all such Indebtedness shall at no time
exceed 100% of the gross proceeds actually received by the Company and its
Subsidiaries in connection with such disposition; and
(xi) the incurrence by the Company of additional Indebtedness in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding not to exceed $7.5 million.
For purposes of determining compliance with this covenant, in the event
that an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xi) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness on the
date of its incurrence in any manner that complies with this covenant. Accrual
of interest, the accretion or amortization of original issue discount, the
payment of interest on any Indebtedness in the form of additional Indebtedness
with the same terms, and the payment of dividends on Disqualified Stock in the
form of additional shares of the same class of Disqualified Stock will not be
deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock
for purposes of this covenant; provided, in each such case, that the amount
thereof is included in Fixed Charges of the Company as accrued.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness, Attributable Debt or trade payables on
any asset now owned or hereafter acquired, except Permitted Liens.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, enter into any sale and leaseback transaction; provided
that the Company may enter into a sale and leaseback transaction if (i) the
Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to
the covenant described above under the caption "--Liens," (ii) the gross cash
proceeds of such sale and leaseback transaction are at least equal to the fair
market value (as determined in good faith by the Board of Directors and set
forth in an Officers' Certificate delivered to the Trustee) of the property that
is the subject of such sale and leaseback transaction and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
applies the proceeds of such transaction in compliance with, the covenant
described above under the caption "--Repurchase at the Option of
Holders -- Asset Sales." The foregoing provisions do not apply to a sale and
leaseback transaction relating to the Smithfield Property resulting in
Attributable Debt with respect to such transaction in an aggregate amount not to
exceed $5.0 million at any time outstanding.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Senior Credit
Facility as in effect as of the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases,
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supplements, refundings, replacement or refinancings are no more restrictive,
taken as a whole, with respect to such dividend and other payment restrictions
than those contained in the Senior Credit Facility as in effect on the date of
the Indenture, (c) the Notes and the Subsidiary Guarantees, (d) applicable law,
(e) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (f) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h) any
agreement for the sale or other disposition of a Subsidiary that restricts
distributions by that Subsidiary pending its sale or other disposition, (i)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced, (j) Liens securing Indebtedness otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "--Liens" that limits the right of the debtor to dispose
of the assets securing such Indebtedness, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business and
(l) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not, directly or indirectly,
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another Person unless (i) the Company is the surviving
corporation or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of the Company under the Registration Rights
Agreement, the Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the Person formed by or surviving any such consolidation
or merger (if other than the Company), or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made (a) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (b) will, immediately after such transaction after giving pro
forma effect thereto and any related financing transaction as if the same had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock." The Indenture also provides that the Company may not, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person. The provisions of this
covenant are not applicable to a sale, assignment, transfer, conveyance or other
disposition of assets between or among the Company and its Wholly Owned
Subsidiaries.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding,
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loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Company or such
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any employment agreement or benefit plan
entered into by the Company or any of its Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Subsidiary, (ii) transactions between or among the Company and/or its
Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, (iv) any sale or other issuance of Equity
Interests (other than Disqualified Stock) of the Company, (v) loans or advances
to employees in the ordinary course of business consistent with past practices
of the Company or its Subsidiaries in an aggregate amount at any time
outstanding not to exceed $1.0 million, (vi) transactions pursuant to Existing
Leases, (vii) purchases of Common Stock of deceased shareholders pursuant to the
Shareholders Agreement, (viii) reasonable indemnities of officers, directors and
employees of the Company or any Subsidiary permitted by applicable law and (ix)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Subsidiary of the Company to, transfer, convey, sell, lease or otherwise
dispose of any Equity Interests in any Wholly Owned Subsidiary of the Company to
any Person (other than the Company or a Wholly Owned Subsidiary of the Company),
unless (a) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Subsidiary and (b) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with the covenant described above under the caption
"--Repurchase at the Option of Holders -- Asset Sales," and (ii) will not permit
any Wholly Owned Subsidiary of the Company to issue any of its Equity Interests
(other than, if necessary, shares of its Capital Stock constituting directors'
qualifying shares) to any Person other than to the Company or a Wholly Owned
Subsidiary of the Company.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports, in
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each case within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the Exchange Offer,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability within the time periods specified in the Commission's
rules and regulations (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request. In addition, the Company and the Guarantors have agreed that, for
so long as any Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of the Guarantors shall
acquire or create another Domestic Subsidiary after the date of the Indenture,
or if any Subsidiary of the Company becomes a Domestic Subsidiary, then such
newly acquired or created Domestic Subsidiary shall become a Guarantor and
execute a Supplemental Indenture and deliver an opinion of counsel, in
accordance with terms of the Indenture.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Notes; (iii) failure by
the Company or any of its Subsidiaries to comply with the provisions described
under the captions "--Repurchase at the Option of Holders -- Change of Control,"
"--Repurchase at the Option of Holders -- Asset Sales," "--Certain
Covenants -- Restricted Payments," "--Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" and "--Certain
Covenants -- Merger, Consolidation of Sale of Assets;" (iv) failure by the
Company or any of its Subsidiaries for 60 days after notice by the Trustee or
the Holders of at least 25% in principal amount of the then outstanding Notes to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any
of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any of its Subsidiaries
that would constitute a Significant Subsidiary or any group of Subsidiaries
that, taken together, would constitute a Significant Subsidiary, all outstanding
Notes will become due and payable without further action or notice. Holders of
the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of
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Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to July
15, 2002 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to July 15, 2002 then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Subsidiary Guarantees or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes and to have each
Guarantor's obligations discharged with respect to its Subsidiary Guarantee
("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes
to receive payments in respect of the principal of, and premium, interest and
Liquidated Damages, if any, on such Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under the caption
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, and premium, interest and Liquidated Damages, if any,
on the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have
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delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (a) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (b) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound; (vi) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company shall have
delivered to the Trustee an Officers' Certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders of Notes over
the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and (viii) the
Company must deliver to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes or the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Notes), and any
existing default or compliance with any provision of the Indenture, the Notes or
the Subsidiary Guarantees may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, interest or Liquidated
Damages, if any, on the Notes (except a rescission
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of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of principal of or premium, interest or Liquidated Damages, if
any, on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), (viii) release any Guarantor
from any of its obligations under its Subsidiary Guarantee or the Indenture,
except in accordance with the terms of the Indenture or (ix) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guarantors (with respect to a Subsidiary Guarantee or the
Indenture to which it is a party) and the Trustee may amend or supplement the
Indenture, the Notes or any Subsidiary Guarantee to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption of the Company's or any
Guarantor's obligations to Holders of Notes in the case of a merger or
consolidation or sale of all or substantially all of the Company's assets, to
provide for the issuance of Additional Notes in accordance with the provisions
set forth in the Indenture on the date thereof, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that does
not adversely affect the legal rights under the Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes have been issued to qualified institutional buyers in the
form of a permanent global certificate in definitive, fully registered form (the
"Global Note") and the New Notes will be issued in the form of a permanent
global certificate in definitive, fully registered form (the "Global New Note"
and, together with the Global Old Note, the "Global Notes"). The Global Old Note
was deposited on the date of the closing of the sale of the Old Notes with, or
on behalf of, DTC and registered in the name of the nominee of DTC. Except as
set forth below, the Global Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC
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only through the Participants or the Indirect Participants. The ownership
interests in, and transfers of ownership interests in, each security held by or
on behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global New Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Notes (including principal and interest), is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Participants and the Indirect Participants to
the beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee or
the Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Interest in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. See "-- Same Day
Settlement and Payment."
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the right
to exchange the Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global New Note is exchangeable for definitive New Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global New
Notes and the Company thereupon fails to appoint a successor depositary or (y)
has ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Certificated Notes or (iii) there shall have occurred and be
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continuing a Default or Event of Default with respect to the Notes. In addition,
beneficial interests in a Global New Note may be exchanged for Certificated
Notes upon request but only upon prior written notice given to the Trustee by or
on behalf of DTC in accordance with the Indenture. In all cases, Certificated
Notes delivered in exchange for any Global New Note or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Notes in
certificated form, the Company will make all payments of principal, premium, if
any, interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The Notes represented by the Global Notes are expected to be eligible
to trade in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Notes will, therefore, be required by
the Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any Certificated Notes will also be settled in
immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control'
(including, with correlative meanings, the terms "controlling," "controlled by'
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"--Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under the caption "--Certain Covenants -- Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $1.0 million or (b)
for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by the Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to
the Company or to another Wholly Owned Subsidiary, (ii) an issuance of Equity
Interests by a Wholly Owned Subsidiary to the Company or to another Wholly Owned
Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "--Certain Covenants -- Restricted Payments."
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"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any lender party to the Senior
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $500.0 million and a Thompson Bank Watch Rating of "B" or better,
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition and (vi)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) -- (v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than a Principal or a Related Party; (ii) the adoption of a plan
relating to the liquidation or dissolution of the Company; (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above) other
than the Principals, their Related Parties or a Permitted Group becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is currently exercisable or is exercisable only upon the occurrence
of a subsequent condition), directly or indirectly, of more than 35% of the
Voting Stock of the Company (measured by voting power rather than number of
shares); or (iv) the first day on which a majority of the members of the Board
of Directors of the Company are not Continuing Directors.
"Consolidated Assets" means, with respect to any Person as of any date, the
total assets of such Person and its consolidated Subsidiaries as of such date,
calculated on a consolidated basis in accordance with GAAP.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was deducted in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, noncash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease
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Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other noncash
expenses (excluding any such noncash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or amortization of
a prepaid cash expense that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other noncash expenses were deducted in computing such Consolidated Net
Income, plus (v) Restructuring Charges, minus (vi) noncash items increasing such
Consolidated Net Income for such period (other than items that were accrued in
the ordinary course of business), in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other noncash expenses of, a Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
that a corresponding amount would be permitted at the date of determination to
be dividended to the Company by such Subsidiary without prior governmental
approval (that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its shareholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
shareholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (a) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (b)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments) and (c)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company or a Foreign
Subsidiary, one or more debt facilities (including, without limitation, the
Senior Credit Facility) or commercial paper facilities, in each case with banks
or other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from
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such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time. Indebtedness under Credit Facilities outstanding
on the date on which Notes are first issued and authenticated under the
Indenture shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (i) of the definition of Permitted Debt under the
caption "--Certain Covenants -- Limitation of Indebtedness and Issuance of
Preferred Stock."
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the Notes mature; provided, however, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Certain Covenants -- Restricted Payments."
"Domestic Subsidiary" means, with respect to the Company, any Subsidiary of
the Company that was formed under the laws of the United States of America or
that guarantees or otherwise provides credit support for any Indebtedness of the
Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the date of the Indenture (calculated in the case of contingent
Indebtedness on the basis of the maximum amount due under agreements existing as
of the date of the Indenture), until such Indebtedness is repaid.
"Existing Leases" means (i) that certain Lease effective January 1, 1998 by
and between Sunrise Properties LLC and the Company, covering the premises at 4
Warren Avenue, North Providence, Rhode Island; (ii) that certain Lease effective
January 1, 1998 by and between 299 Carpenter Street Associates, LLC and the
Company, covering the premises located at 299 Carpenter Street, Providence,
Rhode Island; and (iii) that certain Standard Net Commercial Lease dated
December 11, 1996, by and between Foster Grant Group L.P. and OCR Management
Corporation, covering the Texas Property.
"Fantasma Agreement" means and includes that certain Member Agreement dated
as of June 23, 1998 by and among the Company, Roger D. Dreyer and Houdini
Capital LTD and that certain Member Agreement dated as of June 23, 1998 by and
between the Company and Paul Michaels.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Subsidiaries that was capitalized during such period, and (iii)
any interest expense on Indebtedness of another Person that is Guaranteed by
such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely in
Equity Interests of the Company (other than Disqualified Stock) or to the
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Company or a Subsidiary of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means any Subsidiary of the Company that is not a
Domestic Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means (i) each current and future Domestic Subsidiary of the
Company and (ii) any other Subsidiary of the Company that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency exchange rates.
"Indebtedness" means, with respect to any Person, (i) any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes,debentures or similar instruments or letters of credit
(or reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such
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indebtedness is assumed by such Person) and (iii) to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, and (ii) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business and
advances to customers in the ordinary course of business that are recorded as
accounts receivable of the lender), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If the Company or any Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Subsidiary of the Company such that, after giving effect to any such
sale or disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Certain
Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary gain (but not loss), together with any related provision
for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Group" means, at any time prior to an initial public offering of
common stock of the Company, any group of investors that is deemed to be a
"person" (as such term is used in Section 13(d)(3) of the Exchange Act) by
virtue of the Shareholders Agreement, as the same may be amended, modified or
supplemented from time to time; provided that no single Person (together with
its Affiliates), other than the Principals and their Related Parties, is the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is currently exercisable or is exercisable only upon the occurrence
of a subsequent condition, and beneficial ownership shall be determined
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without regard to the Shareholders Agreement, as the same may be amended,
modified or supplemented from time to time), directly or indirectly, of more
than 50% of the Voting Stock of the Company (measured by voting power rather
than number of shares) that is "beneficially owned" (as defined above) by such
Permitted Group.
"Permitted Investments" means (a) any Investment in the Company, in a
Wholly Owned Subsidiary or in a Guarantor; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Guarantor or a Wholly Owned Subsidiary or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Guarantor or a
Wholly Owned Subsidiary; (d) any Investment made as a result of the receipt of
noncash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders -- Asset Sales;" (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
the Company; (f) other Investments in Subsidiaries of the Company that are not
Guarantors having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, not to exceed 10% of the Company's
Consolidated Assets on the date of such Investment; (g) Investments existing on
the date of the Indenture; (h) receivables owing to the Company or any
Subsidiary of the Company if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade terms;
provided that such trade terms may include concessionary terms as the Company of
such Subsidiary deems reasonable under the circumstances; (i) loans or advances
to employees permitted by clause (v) under the caption "--Certain
Covenants -- Transactions with Affiliates;" (j) stock obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any of its Subsidiaries or in satisfaction of judgments;
and (k) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving effect to
subsequent changes in value), when taken together with all other Investments
made pursuant to this clause (k) that are at the time outstanding, not to exceed
$5.0 million.
"Permitted Liens" means (i) Liens on assets of the Company or any of the
Guarantors or Foreign Subsidiaries securing obligations of such persons under
Credit Facilities that were permitted by the terms of the Indenture to be
incurred; (ii) Liens in favor of the Company; (iii) Liens on property of a
Person existing at the time such Person is merged with or into or consolidated
with the Company or any Subsidiary of the Company; provided that such Liens were
in existence prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the Person merged into or
consolidated with the Company; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (iv) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (vii)
Liens existing on the date of the Indenture; (viii) Liens on the Smithfield
Property incurred in connection with a sale and leaseback transaction permitted
under the terms of the Indenture; (ix) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (x)
Liens to secure Permitted Refinancing Indebtedness, provided that such Liens
extend only to the assets that secured the Indebtedness refinanced with the
proceeds of such Permitted Refinancing Indebtedness; (xi) statutory Liens of
landlords and Liens of carriers, warehouseman, mechanics, suppliers,
materialmen, repairmen and other Liens imposed by law incurred in the ordinary
course of business for sums not delinquent or being contested in good faith, if
such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof; (xii) Liens securing Hedging
Obligations; and (xiii) easements, rights-of-way, municipal and zoning
ordinances and similar
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charges, encumbrances, title defects or other irregularities that do not
materially interfere with the ordinary course of business of the Company and its
Subsidiaries; (xiv) Liens on assets of Subsidiaries securing Indebtedness of
such persons that was permitted by the terms of this Indenture to be incurred;
and (xv) Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $5.0
million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary that is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means Gerald F. Cerce, John H. Flynn, Jr., Robert V. Lallo and
Felix A. Porcaro, Jr.
"Related Party" with respect to any Principal means (i) any controlling
shareholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, shareholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restructuring Charges" means any charges or write-offs associated with the
discontinuance of operations at the Company's Texas Property less any tax
benefit received from any such charge being deducted from the taxable income of
the Company or any of its Subsidiaries; provided, however, that such charges or
write-offs are charged within 12 months of the date of the Indenture and the
maximum amount of charges that may be treated as "Restructuring Charges" shall
be $2.6 million.
"Senior Credit Facility" means that certain Amended and Restated Financing
and Security Agreement, dated as of May 9, 1997, by and among the Company,
certain of its Subsidiaries, NationsBank, N.A., as agent, and the other lenders
party thereto, as amended by the Second Amended and Restated Financing and
Security Agreement, dated July 21, 1998, by and among the Company, its existing
Domestic Subsidiaries, NationsBank, N.A., as agent, and the other lenders party
thereto, providing for up to $60.0 million of revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"Shareholders Agreement" means the Tag-Along, Transfer Restriction and
Voting Agreement dated as of December 11, 1996, as amended, among the Company
and the shareholders and option holders party thereto.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
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"Smithfield Property" means the real property and fixtures located at 500
George Washington Highway, Smithfield, Rhode Island, which are used by the
Company as an office and distribution facility.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Texas Property" means the real property and fixtures located at Valley
View Lane, Farmers Branch, Texas, which are leased by the Company.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of: (i) 4,800,000
shares of Common Stock, $.01 par value per share, of which 608,000 shares are
issued and outstanding; and (ii) 200,000 shares of Preferred Stock, $.01 par
value, issuable in one or more series with such voting powers, designations,
preferences and other special rights and such qualifications, limitations or
restrictions as may be stated in the resolution or resolutions adopted by the
Company's Board of Directors providing for the issue of such series and as
permitted by the Rhode Island Business Corporation Act. The Company has created
one series of Preferred Stock designated Series A Preferred Stock. 43,700 shares
of Series A Preferred Stock are designated for issuance, all of which are issued
and outstanding. The Series A Preferred Stock was issued pursuant to a
Securities Purchase Agreement dated May 31, 1996 by and among the Company,
Weston Presidio Capital II, L.P., and certain other investors and a Stock
Purchase Agreement dated as of November 13, 1996 by and among the Company, BEC
Group, Inc., Foster Grant Group, L.P. and FG Holdings.
COMMON STOCK
Each share of Common Stock has the same relative rights and is identical in
all respects to each other share of Common Stock. The holders of Common Stock
are entitled to one vote per share on all matters to be voted upon by them.
Subject to preferences that may be applicable to the holders of Preferred Stock,
if any, the holders of Common Stock are entitled to dividends only when and as
declared by the Board of Directors out of funds legally available therefor.
Holders of Common Stock may not cumulate their votes for election of directors.
Holders of Common Stock do not have preemptive rights to acquire any additional
shares of the Company.
In the event of a dissolution or liquidation of the Company, after payment
has been made to the holders of Preferred Stock for the full amounts to which
such holders are entitled, the holders of Common Stock share ratably in the
remaining assets available for distribution.
SERIES A PREFERRED STOCK
The rights, preferences and privileges of Series A Preferred Stock are
described below.
Conversion. Each share of Series A Preferred Stock is convertible into ten
shares of Common Stock, adjustable for certain dilutive events. Conversion is at
the option of the shareholder, but is automatic upon the consummation of an
initial public offering resulting in gross proceeds to the Company of at least
$20.0 million and at an offering price of at least 137.8% of the Initial
Conversion Price, if such public offering shall be consummated on or before May
31, 1999 and thereafter 175.0% of the Initial Conversion Price, in each case
adjusted for stock splits and dividends (a "Qualified Public Offering").
Redemption. Except as limited by the provisions of Restrictive
Indebtedness (as defined), the holders of Series A Preferred Stock have the
right to require redemption for cash of any unconverted shares, beginning June
30, 2002. The Company will redeem the Series A Preferred Stock equal to 5.0% of
the total number of shares issued and outstanding as of March 31, 2002 on the
last day of each March, June, September and December as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENTAGE
----------------------- ----------
<S> <C>
2002................................................. 15%
2003................................................. 35
2004................................................. 55
2005................................................. 75
2006................................................. 95
2007................................................. 100
</TABLE>
The Series A Preferred Stock will be redeemed at an amount equal to the
original stock price, $526.32 per share, plus any accrued and unpaid dividends,
yielding a 10.0% compounded annually rate of return (the "Redemption Amount").
As of July 4, 1998, cumulative dividends were approximately $5.0 million.
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Except as limited by the provisions of Restrictive Indebtedness, the
holders of the Series A Preferred Stock may require the Company to redeem all or
any portion of the Series A Preferred Stock upon the happening of certain events
including the following: (a) the sale by the Company of all or substantially all
its assets; (b) the merger of the Company with, or the consolidation of the
Company into, any other corporation as a result of which the shareholders of the
Company immediately prior to such merger or consolidation do not own stock
having more than 50% of the outstanding voting power (assuming conversion of all
convertible securities and exercise of all outstanding options and warrants) of
the surviving corporation; (c) the dissolution or liquidation of the Company;
(d) Mr. Cerce ceasing for any reason to be Chairman of, and actively involved in
the executive management of, the Company unless a replacement satisfactory to
the holders of two-thirds of the outstanding Series A Preferred Stock is in
place within 180 days; (e) except in the case of a Qualified Public Offering or
stock passing by death, more than 50% of the outstanding voting stock of the
Company becomes owned by persons or entities other than (i) holders of Series A
Preferred Stock and their transferees and (ii) the shareholders of record on the
date on which the Series A Preferred Stock was first issued by the Company; and
(f) the happening of any of certain events (a "Remedy Event") generally relating
to the financial condition of the Company or its failure to meet material
obligations which Remedy Event continues for thirty days following written
notice of the occurrence.
The Company may voluntarily redeem the Series A Preferred Stock at any time
at the Redemption Amount. If the Company voluntarily redeems the Series A
Preferred Stock, it must issue the holders of Series A Preferred Stock a warrant
to purchase Common Stock equal to the number of shares of Common Stock the
shareholder would have received upon conversion, at a strike price equal to the
redemption price at the time of redemption.
Notwithstanding the foregoing, at any time the Company has outstanding any
Indebtedness the terms of which restrict the Company's ability to redeem, in
whole or in part, the Series A Preferred Stock ("Restrictive Indebtedness"), the
Company's obligations to redeem any shares of Series A Preferred Stock are
suspended until 91 days after the date that such Restrictive Indebtedness is no
longer outstanding. Within ten (10) days after the expiration of 91 days after
the date of the payment of such Restrictive Indebtedness in full, the Company
must redeem such number of shares of Series A Preferred Stock as the Company
would have been obligated to redeem, on or prior to such date, but for the
provisions suspending the Company's redemption obligation. In no event may the
aggregate principal amount of Restrictive Indebtedness at any time exceed $150
million unless approved by the directors designated by the Preferred Holders.
Dividends. Dividends will not be paid on the Common Stock unless the
Series A Preferred Stock receives the same dividends that such shares of Series
A Preferred Stock would have received had they been converted into Common Stock
immediately prior to the record date for such dividend.
Liquidation Preferences. The holders of Series A Preferred Stock have
preference equal to the Redemption Amount in the event of a liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, or a
merger or consolidation of the Company that has not been agreed to in writing by
the holders of two-thirds of the outstanding Series A Preferred Stock. If the
assets of the Company are insufficient to pay the full preferential amounts to
the holders of Series A Preferred Stock, the entire assets of the Company
legally available for distribution will be distributed ratably among the holders
of Series A Preferred Stock in accordance with the aggregate liquidation
preference of the shares of Series A Preferred Stock held by each of them. After
payment has been made to the holders of Series A Preferred Stock for the full
amounts to which they are entitled, the holders of Common Stock are entitled to
share ratably in the remaining assets without participation by the holders of
Series A Preferred Stock.
Voting Rights and Election of Directors. The holders of Series A Preferred
Stock are entitled to vote on all matters based on the number of votes equal to
the number of shares of Common Stock into which the Series A Preferred Stock are
convertible and are entitled to notice of any shareholders' meeting or
solicitation of shareholders' consents in the manner provided in the Bylaws of
the Company. In addition, the holders of a majority of shares of Series A
Preferred Stock, voting separately as a single class, are entitled to elect two
directors. Upon notice of a Remedy Event as described above, the number of
directors of the Company automatically increases to the minimum number
sufficient to permit the election of additional directors so that
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after such election a majority of the directors will have been elected by the
holders of the Series A Preferred Stock. Upon such increase, the directors will
be divided into two classes. One class will consist of a majority of all of the
directors and will be elected solely by the holders of Series A Preferred Stock,
voting separately as a single class, and the other class will consist of the
remaining directors. The holders of Series A Preferred Stock will be entitled to
elect a majority of the directors of the Company until the Remedy Event has been
cured or rectified to the written satisfaction of the holders of Series A
Preferred Stock. At such time, the right of the holders of Series A Preferred
Stock to elect a majority of the Board of Directors will cease, and the maximum
number of directors will be reduced to seven.
Other Rights. At any time when shares of Series A Preferred Stock are
outstanding, in addition to any other vote required by law or by the Articles of
Incorporation without the consent of the holders of two-thirds of the
outstanding Series A Preferred Stock, given in writing or by vote at a meeting,
consenting or voting separately as a class, the Company may not do any of the
following: (i) create or authorize the creation of any additional class or
series of shares of stock, or issue any shares thereof; (ii) increase the
authorized amount of Series A Preferred Stock; (iii) increase the authorized
amount of any additional class or series of stock; or (iv) create or authorize
any instrument or security convertible into shares of Series A Preferred Stock
or into shares of any other class or series of stock, unless, in each case, the
same ranks junior to the Series A Preferred Stock as to the distribution of
assets on the liquidation, dissolution or winding up of the Company.
In addition, without the written consent or affirmative vote of the holders
of two-thirds of the outstanding Series A Preferred Stock, the Company may not
amend, alter or repeal its Articles of Incorporation or Bylaws in a manner that
is adverse to the holders of Series A Preferred Stock or for which the holders
of Series A Preferred Stock did not receive prior written notice; purchase or
set aside sums for the purchase of shares of stock other than Series A Preferred
Stock (with certain exceptions for the purchase of shares of Common Stock from
former employees); redeem or otherwise acquire any shares of Series A Preferred
Stock except as expressly authorized in the Articles of Incorporation, unless
pursuant to a purchase offer made pro rata to all holders of Series A Preferred
Stock; consent to any liquidation, dissolution or winding up of the Company; or
consolidate or merge with any other entity or entities or sell or transfer all
or a substantial portion of its assets. The Company may, however, effect a
merger in which the Company is the surviving corporation and the shareholders of
the Company immediately prior to the merger hold more than 50% of the
outstanding voting power of the surviving corporation (assuming conversion of
all convertible securities and exercise of all outstanding options and
warrants).
Further, the provisions of the Articles of Incorporation relating to the
Series A Preferred Stock may not be amended, modified or waived without the
written consent or affirmative vote the holders of two-thirds of the outstanding
Series A Preferred Stock; except that any amendment reducing or postponing the
payment of dividends or redemptions or postponing or increasing the amount of
the conversion price requires the written consent or the affirmative vote of 90%
of the then outstanding shares of Series A Preferred Stock.
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UNITED STATES FEDERAL TAX CONSIDERATIONS
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as a taxable transaction for federal income tax
purposes because the New Notes do not differ materially in kind or extent from
the Old Notes. Accordingly, no gain or loss should be recognized by a Holder who
exchanges an Old Note for a New Note pursuant to the Exchange Offer, and each
New Note should be viewed as a continuation of the corresponding Old Note. For
purposes of determining gain or loss upon a subsequent sale or exchange of the
New Notes, a Holder's initial basis in the New Notes will be the same as such
Holder's adjusted basis in the Old Notes exchanged therefor, and the holding
period of a Holder for the New Note should include the period during which such
Holder held such corresponding Old Note.
While the Company believes the foregoing description of the federal income
tax consequences of the exchange of the Old Notes for the New Notes is accurate,
the Company has not requested or obtained an opinion of counsel with respect to
such tax consequences. Accordingly, persons considering the exchange of the Old
Notes for the New Notes are urged to consult their tax advisors regarding the
United States federal tax consequences in light of their particular situations,
as well as any tax consequences that may arise under the laws of any foreign,
state, local, or other taxing jurisdiction.
PLAN OF DISTRIBUTION
Each broker-dealer who holds Old Notes that are Transfer Restricted
Securities that were acquired for its own account as a result of market-making
activities or other trading activities (other than Transfer Restricted
Securities acquired directly from the Company) may exchange such Old Notes
pursuant to the Exchange Offer; however, such broker-dealer may be deemed an
"underwriter" within the meaning of the Securities Act and must, therefore,
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer for such purpose. The Company has agreed
that for a period of 180 days after the Exchange Offer is consummated, it will,
upon reasonable request, make this Prospectus, as amended or supplemented,
available promptly to any broker-dealer for use in connection with any such
resale. The Company has agreed to pay the expenses incident to the Exchange
Offer and will indemnify the Holders of the Old Notes against certain
liabilities, including certain liabilities under the Securities Act, in
connection with the Exchange Offer.
The Company will not receive any proceeds from any sale of the New Notes by
broker-dealers. The New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of the New Notes and any
commissions and concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The legality of the New Notes will be passed upon for the Company by
Hinckley, Allen & Snyder, Providence, Rhode Island. Stephen J. Carlotti, a
partner of Hinckley, Allen & Snyder, is a director and Secretary of the Company
and, as trustee, is the holder of 5.9% of the Common Stock. See "Security
Ownership of Management and Certain Beneficial Owners."
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EXPERTS
The Consolidated Financial Statements of AAi as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997, the
Consolidated Statements of Operations and Shareholders' Equity and Cash Flows of
Foster Grant Group L.P. for the eleven months ended November 30, 1996, and the
Financial Statements of Fantasma, LLC as of December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The Consolidated Financial Statements of Foster Grant Group L.P. as of, and
for the year ended December 31, 1995 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Exchange Offer Registration Statement,"
which term shall encompass all amendments, exhibits, annexes and schedules
thereto) pursuant to the Securities Act, and the rules and regulations
promulgated thereunder, covering the New Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to AAi, the
Guarantors and the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Exchange Offer Registration Statement, reference is made to
the exhibit for a more complete description of the document or matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Exchange Offer Registration Statement, including the exhibits
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such Web site is: http://www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Exchange Act, and in accordance therewith will
be required to file periodic reports and other information with the Commission.
AAi has agreed that, whether or not it is required to do so by the rules and
regulations of the Commission, for so long as any of the Notes remain
outstanding, AAi will furnish (excluding exhibits and schedules) to the Trustee
and the holders of the Notes and will file with the Commission (unless the
Commission will not accept such a filing) as specified in the Commission's rules
and regulations: (i) all quarterly and annual financial information that would
be required to be contained in a filing with the Commission if AAi were required
to file such information, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
financial information only, a report thereon by AAi's independent public
accountants and (ii) any other information, documents and other reports which
are otherwise required pursuant to Section 13 and 15(d) of the Exchange Act. In
addition, for so long as any of the Notes remain outstanding, AAi has agreed to
make available upon request to any prospective purchaser of the Notes or
beneficial owner of the Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act other than
during any period in which AAi is subject to Section 13 to 15(d) of the Exchange
Act and in compliance with the requirements thereof. Any such request should be
directed to the Assistant Secretary of AAi at 500 George Washington Highway,
Smithfield, Rhode Island 02917.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AAi.FOSTERGRANT, INC.:
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997
and July 4, 1998 (unaudited).............................. F-2
Consolidated Statements of Operations for the Three Years
Ended December 31, 1995, 1996 and 1997 and the Six Months
Ended June 30, 1997 (unaudited) and July 4, 1998
(unaudited)............................................... F-4
Consolidated Statements of Redeemable Preferred Stock and
Shareholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997 and for the Six Months
Ended July 4, 1998 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1997 (unaudited) and July 4, 1998 (unaudited).... F-6
Notes to Consolidated Financial Statements.................. F-8
FOSTER GRANT GROUP L.P.:
Report of Independent Public Accountants.................... F-30
Consolidated Statement of Operations and Shareholder's
Equity Eleven Month Period Ended November 30, 1996........ F-31
Consolidated Statement of Cash Flows for the Eleven Month
Period Ended November 30, 1996............................ F-32
Notes to Consolidated Financial Statements.................. F-33
Report of Independent Accountants........................... F-37
Consolidated Balance Sheet as of December 31, 1995.......... F-38
Consolidated Statement of Operations for the year ended
December 31, 1995......................................... F-39
Consolidated Statement of Shareholder's Equity for the year
ended December 31, 1995................................... F-40
Consolidated Statement of Cash Flows for the year ended
December 31, 1995......................................... F-41
Notes to Consolidated Financial Statements.................. F-42
FANTASMA, LLC:
Report of Independent Public Accountants.................... F-48
Balance Sheets as of December 31, 1996 and 1997 and July 4,
1998 (unaudited).......................................... F-49
Statements of Operations for the Three Years Ended December
31, 1995, 1996 and 1997 and the Six Months Ended June 30,
1997 (unaudited) and July 4, 1998 (unaudited)............. F-50
Statements of Members' Equity for the Years Ended December
31, 1995, 1996 and 1997 and for the Six Months Ended July
4, 1998 (unaudited)....................................... F-51
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Six Months Ended June 30, 1997
(unaudited) and July 4, 1998 (unaudited).................. F-52
Notes to Financial Statements............................... F-53
</TABLE>
100
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
AAi.FosterGrant, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
AAi.FosterGrant, Inc. (a Rhode Island corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, redeemable preferred stock and shareholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
AAi.FosterGrant, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 2, 1998, except with respect to
matters discussed in Notes 5, 6 and 18 as to
which the date is July 21, 1998
F-1
<PAGE> 108
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JULY 4,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,477 $ 2,779 $ 2,373
Accounts receivable, less reserves of approximately
$13,082, $10,338 and $11,889 in 1996, 1997 and 1998,
respectively........................................... 14,245 18,323 39,416
Inventories............................................... 36,460 32,795 30,922
Prepaid expenses and other current assets................. 1,575 734 808
Deferred tax assets....................................... 1,470 9,707 10,041
------- ------- --------
Total current assets.............................. 55,227 64,338 83,560
------- ------- --------
Property and equipment, at cost:
Land...................................................... -- -- 1,233
Building and improvements................................. -- -- 4,358
Display fixtures.......................................... 5,695 11,009 16,749
Furniture, fixtures and equipment......................... 6,519 7,427 7,649
Leasehold improvements.................................... 2,759 2,819 1,431
Equipment under capital leases............................ 196 361 361
------- ------- --------
15,169 21,616 31,781
Less -- Accumulated depreciation and amortization......... 5,533 11,431 14,483
------- ------- --------
9,636 10,185 17,298
------- ------- --------
Other assets:
Advances to officers/shareholders......................... 52 53 2,470
Deferred tax assets....................................... 225 -- --
Investments in affiliates................................. 1,949 1,426 1,351
Intangible assets, net of accumulated amortization of
$237, $1,306 and $1,787 in 1996, 1997 and 1998,
respectively........................................... 14,251 16,600 21,432
Other assets.............................................. 670 1,144 1,644
------- ------- --------
17,147 19,223 26,897
------- ------- --------
Total assets...................................... $82,010 $93,746 $127,755
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 109
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JULY 4,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Borrowings under revolving note payable................... $25,873 $27,598 $ --
Current maturities of long-term obligations............... 2,155 3,361 543
Accounts payable.......................................... 16,903 14,117 21,242
Accrued expenses.......................................... 8,985 11,221 11,527
Accrued income taxes...................................... 624 2,105 2,197
------- ------- --------
Total current liabilities......................... 54,540 58,402 35,509
------- ------- --------
Long-term obligations, less current maturities.............. 3,208 9,653 66,974
Deferred tax liabilities.................................... -- 645 645
Subordinated promissory notes payable to shareholders....... 5,205 5,487 5,593
Commitments and Contingencies
(Notes 7 and 16)
Redeemable preferred stock of a subsidiary.................. 751 835 903
Preferred stock, $.01 par value --
Authorized -- 200,000 shares
Designated, issued and outstanding -- 43,700 shares of
Series A Redeemable Convertible Preferred Stock, stated
at redemption value.................................... 23,587 26,083 27,440
------- ------- --------
Shareholders' deficit:
Common stock, $.01 par value --
Authorized -- 4,800,000 shares
Issued and outstanding -- 608,000 shares............... 6 6 6
Additional paid-in capital................................ 270 270 270
Accumulated other comprehensive income (loss)............. 8 (78) (241)
Accumulated deficit....................................... (5,565) (7,557) (9,344)
------- ------- --------
Total shareholders' deficit....................... (5,281) (7,359) (9,309)
------- ------- --------
Total liabilities and shareholders' deficit............... $82,010 $93,746 $127,755
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 110
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------- ---------------------
JUNE 30, JULY 4,
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 88,050 $ 86,336 $149,411 $ 75,885 $ 88,631
Cost of goods sold.................. 43,690 47,871 77,928 41,198 47,543
-------- -------- -------- -------- --------
Gross profit.............. 44,360 38,465 71,483 34,687 41,088
Selling expenses.................... 22,264 26,613 43,589 20,155 23,483
General and administrative
expenses.......................... 12,518 10,911 21,734 10,528 13,125
Restructuring charge................ -- -- -- -- 2,600
-------- -------- -------- -------- --------
Income from operations............ 9,578 941 6,160 4,004 1,880
Equity in earnings (losses) of
investments in affiliates......... 275 (345) (63) (98) (46)
Minority interest in income of
consolidated subsidiary........... -- -- (83) (34) (68)
Interest expense.................... (1,031) (1,469) (4,214) (2,071) (2,638)
Other (expense) income, net......... (355) 14 177 91 104
-------- -------- -------- -------- --------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred
stock.......................... 8,467 (859) 1,977 1,892 (768)
Income tax (expense) benefit........ (42) 948 (1,162) (1,102) 338
-------- -------- -------- -------- --------
Net income before dividends and
accretion on preferred stock... 8,425 89 815 790 (430)
Dividends and accretion on preferred
stock............................. -- 1,123 2,496 1,210 1,357
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders............ $ 8,425 $ (1,034) $ (1,681) $ (420) $ (1,787)
======== ======== ======== ======== ========
Pro forma income tax adjustment..... (3,370) (604) -- -- --
-------- -------- -------- -------- --------
Pro forma net income (loss)
applicable to common
shareholders...................... $ 5,055 $ (1,638) $ (1,681) $ (420) $ (1,787)
======== ======== ======== ======== ========
Basic and diluted net income (loss)
per share applicable to common
shareholders...................... $ 14.78 $ (1.75) $ (2.76) $ (.69) $ (2.94)
======== ======== ======== ======== ========
Basic and diluted pro forma net
income (loss) per share applicable
to common shareholders............ $ 8.87 $ (2.77)
======== ========
Basic and diluted weighted average
shares outstanding................ 570,000 591,000 608,000 608,000 608,000
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 111
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK SHAREHOLDERS' EQUITY (DEFICIT)
------------------- ---------------------------------------------------------------
ACCUMULATED OTHER
SERIES A REDEEMABLE COMPREHENSIVE
CONVERTIBLE INCOME (LOSS)
PREFERRED STOCK COMMON STOCK (ALL FOREIGN RETAINED
------------------- --------------- ADDITIONAL CURRENCY EARNINGS
REDEMPTION PAR PAID-IN TRANSLATION (ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL ADJUSTMENT) DEFICIT)
------ ---------- ------- ----- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........ -- $ -- 570,000 $6 $112 $ -- $ 4,897
Payment for previously issued
common stock................... -- -- -- -- 3 -- --
Foreign currency translation
adjustment (not tax
effected)...................... -- -- -- -- -- 7 --
Distributions to shareholders.... -- -- -- -- -- -- (1,802)
Net income....................... -- -- -- -- -- -- 8,425
Comprehensive net income for the
year ended December 31, 1995...
------ ------- ------- -- ---- ----- -------
Balance, December 31, 1995........ -- -- 570,000 6 115 7 11,520
Issuance of Series A Preferred
Stock, net of issuance costs of
$536,000....................... 43,700 22,464 -- -- -- -- --
Dividends and accretion on Series
A Preferred Stock.............. -- 1,123 -- -- -- -- (1,123)
Issuance of common stock......... -- -- 38,000 -- 100 -- --
Retirement of treasury stock..... -- -- -- -- (2) -- (123)
Proceeds from previously issued
common stock................... -- -- -- -- 57 -- --
Foreign currency translation
adjustment (not tax
effected)...................... -- -- -- -- -- 1 --
Distributions to shareholders.... -- -- -- -- -- -- (15,928)
Net income....................... -- -- -- -- -- -- 89
Comprehensive net income for the
year ended December 31, 1996...
------ ------- ------- -- ---- ----- -------
Balance, December 31, 1996........ 43,700 23,587 608,000 6 270 8 (5,565)
Dividends and accretion on Series
A Preferred Stock.............. -- 2,496 -- -- -- -- (2,496)
Foreign currency translation
adjustment (not tax
effected)...................... -- -- -- -- -- (86) --
Distributions to shareholders.... -- -- -- -- -- -- (311)
Net income....................... -- -- -- -- -- -- 815
Comprehensive net income for the
year ended December 31, 1997...
------ ------- ------- -- ---- ----- -------
Balance, December 31, 1997........ 43,700 26,083 608,000 6 270 (78) (7,557)
Dividends and accretion on Series
A Preferred Stock.............. -- 1,357 -- -- -- -- (1,357)
Foreign currency translation
adjustment (not tax
effected)...................... -- -- -- -- -- (163) --
Net loss......................... -- -- -- -- -- -- (430)
Comprehensive net loss for the
six months ended July 4,
1998...........................
------ ------- ------- -- ---- ----- -------
Balance, July 4, 1998
(unaudited)...................... 43,700 $27,440 608,000 $6 $270 $(241) $(9,344)
====== ======= ======= == ==== ===== =======
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------
TREASURY STOCK
--------------- TOTAL
SHAREHOLDERS' COMPREHENSIVE
SHARES COST EQUITY (DEFICIT) NET INCOME
------- ----- ---------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994........ 47,538 $(125) $ 4,890 $ --
Payment for previously issued
common stock................... -- -- 3
Foreign currency translation
adjustment (not tax
effected)...................... -- -- 7 7
Distributions to shareholders.... -- -- (1,802)
Net income....................... -- -- 8,425 8,425
------
Comprehensive net income for the
year ended December 31, 1995... $8,432
------- ----- -------- ======
Balance, December 31, 1995........ 47,538 (125) 11,523
Issuance of Series A Preferred
Stock, net of issuance costs of
$536,000....................... -- -- --
Dividends and accretion on Series
A Preferred Stock.............. -- (1,123)
Issuance of common stock......... -- -- 100
Retirement of treasury stock..... (47,538) 125 --
Proceeds from previously issued
common stock................... -- -- 57
Foreign currency translation
adjustment (not tax
effected)...................... -- -- 1 1
Distributions to shareholders.... -- -- (15,928)
Net income....................... -- -- 89 89
------
Comprehensive net income for the
year ended December 31, 1996... $ 90
------- ----- -------- ======
Balance, December 31, 1996........ -- -- (5,281)
Dividends and accretion on Series
A Preferred Stock.............. -- -- (2,496) --
Foreign currency translation
adjustment (not tax
effected)...................... -- -- (86) (86)
Distributions to shareholders.... -- -- (311)
Net income....................... -- -- 815 815
------
Comprehensive net income for the
year ended December 31, 1997... $ 729
------- ----- -------- ======
Balance, December 31, 1997........ -- -- (7,359)
Dividends and accretion on Series
A Preferred Stock.............. -- -- (1,357)
Foreign currency translation
adjustment (not tax
effected)...................... -- -- (163) (163)
Net loss......................... -- -- (430) (430)
------
Comprehensive net loss for the
six months ended July 4,
1998........................... $ (593)
------- ----- -------- ======
Balance, July 4, 1998
(unaudited)...................... -- $ -- $ (9,309)
======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 112
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED,
----------------------------- -------------------
JUNE 30, JULY 4,
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 8,425 $ 89 $ 815 $ 790 $ (430)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, net of
acquisitions --
Depreciation and amortization........................... 783 1,868 8,248 3,911 5,479
Equity in (losses) earnings of investments in
affiliates............................................ (275) 345 63 98 46
Minority interest in income of consolidated
subsidiary............................................ -- -- 83 20 68
Cumulative foreign currency translation adjustment...... 8 1 (86) (21) (163)
Deferred compensation................................... 279 327 286 -- 204
Deferred interest on subordinated promissory notes
payable............................................... -- 205 282 106 106
Deferred taxes.......................................... -- (1,695) (339) 441 (338)
Changes in assets and liabilities, net of effect of
acquisitions --
Accounts receivable................................... (858) (5,087) (7,410) (15,984) (17,593)
Inventories........................................... (5,580) (463) 3,797 6,585 7,175
Prepaid expenses and other current assets............. 215 (477) 912 857 236
Accounts payable...................................... 1,187 3,502 (5,323) (5,382) 2,499
Accrued expenses...................................... (2,366) (1,097) (923) 2,329 (1,097)
Accrued income taxes.................................. -- 590 1,481 16 (87)
------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities....................................... 1,818 (1,892) 1,886 (6,234) (3,895)
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received........................ -- (9,844) (1,835) -- (9,464)
Purchase of property and equipment........................ (1,555) (1,572) (7,583) (4,366) (10,863)
Advances to officers/shareholders......................... 23 (32) (1) (14) (2,417)
Increase (decrease) in investments in affiliates.......... 109 (761) 460 93 29
Increase in other assets.................................. (681) (616) (404) (1,511) (497)
------- -------- -------- -------- --------
Net cash used in investing activities.............. (2,104) (12,825) (9,363) (5,798) (23,212)
------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 113
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED,
---------------------------- -------------------
JUNE 30, JULY 4,
1995 1996 1997 1997 1998
------- -------- ------- --------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable............... 3,275 3,311 7,697 14,090 14,908
Proceeds from term note payable........................... -- -- -- -- 13,222
Proceeds from issuance of subordinated promissory notes
payable to shareholders................................. -- 2,000 -- -- --
Proceeds from issuance of long-term obligations........... 319 3,445 8,943 -- --
Payments on long-term obligations......................... (1,535) (2,292) (7,551) -- (1,429)
Distributions to shareholders............................. (1,803) (12,927) (310) -- --
Proceeds from issuance of common stock.................... -- 100 -- -- --
Proceeds from issuance of preferred stock, net of issuance
costs................................................... -- 22,464 -- -- --
Proceeds from previously issued common stock.............. 3 58 -- -- --
------- -------- ------- ------- -------
Net cash provided by financing activities.......... 259 16,159 8,779 14,090 26,701
------- -------- ------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (27) 1,442 1,302 2,058 (406)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 62 35 1,477 1,477 2,779
------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 35 $ 1,477 $ 2,779 $ 3,535 $ 2,373
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Conversion of leasehold improvements to building
improvements............................................ $ -- $ -- $ -- $ -- $ 1,393
======= ======== ======= ======= =======
Acquisition of equipment under capital lease
obligations............................................. $ -- $ -- $ 362 $ -- $ --
======= ======== ======= ======= =======
Acquisition of inventory in exchange for issuance of note
payable................................................. $ 622 $ -- $ -- $ -- $ --
======= ======== ======= ======= =======
Distribution of notes payable to shareholders............. $ -- $ 3,000 $ -- $ -- $ --
======= ======== ======= ======= =======
Repayment of revolving note payable with term loan........ $ -- $ -- $ 5,972 $ -- $ --
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest................................................ $ 1,015 $ 1,042 $ 4,074 $ 2,045 $ 2,411
======= ======== ======= ======= =======
Income taxes............................................ $ 12 $ 57 $ 50 $ 44 $ 112
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO
ACQUISITIONS:
During 1996, 1997 and 1998, the Company acquired Tempo,
Foster Grant US, Superior, Foster Grant UK and Fantasma
as described in Note 2.
These acquisitions are summarized as follows --
Fair value of assets acquired, excluding cash............. $ -- $ 48,635 $ 5,950 $ -- $15,672
Payments in connection with the acquisitions, net of cash
acquired................................................ -- (9,844) (1,835) -- (9,464)
------- -------- ------- ------- -------
Liabilities assumed and notes issued............... $ -- $ 38,791 $ 4,115 $ -- $ 6,208
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 114
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a distributor of
optical products, costume jewelry and other accessories to mass merchandisers,
variety stores, chain drug stores and supermarkets in North America and the
United Kingdom.
In April 1998, the Company adopted a formal plan to close its Texas
distribution center. The Company recorded a restructuring charge of $2.6 million
during the quarter ended July 4, 1998 in connection with this plant closing. The
components of this charge, which is included in operating expenses in the
accompanying statement of operations, are as follows (in thousands):
<TABLE>
<S> <C>
Severance accrual........................................... $1,084
Write down of assets to be disposed......................... 1,516
------
$2,600
======
</TABLE>
The severance accrual represents severance payments due to 40 office and
distribution employees. Through July 4, 1998, two of these 40 employees were
terminated and severance benefits of $131,000 were paid.
On July 21, 1998, the Company issued $75.0 million of 10 3/4% Senior Series
A Notes (the Notes) through a Rule 144A offering (see Note 18). The Company used
the proceeds from the offering of the Notes to repay its indebtedness under its
credit facilities with a bank and other obligations. The Company has agreed to
file and use its best efforts to have declared effective under the Securities
Act of 1933, as amended, a registration statement relating to an exchange offer
for the Notes, or in lieu thereof, or in certain circumstances, in addition
thereto, to file and use its best efforts to cause to be declared effective a
shelf registration statement for the Notes. The Company has reclassified the
short-term obligations which were repaid with the proceeds of these Notes as
long-term obligations as of July 4, 1998.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to consolidated financial statements. 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 and disclosure of contingent 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.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the results
of operations of the Company and its majority-owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
(b) Interim Financial Statements
The accompanying consolidated financial statements as of July 4, 1998
and for the six-month periods ended June 30, 1997 and July 4, 1998 are
unaudited, but in the opinion of management, include all adjustments
consisting of normal recurring adjustments necessary for a fair
presentation of results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted,
although the Company believes that the disclosures included are adequate to
make the information presented not misleading. Results for the six months
ended July 4, 1998 are not necessarily indicative of the results that may
be expected for the year ending January 2, 1999.
F-8
<PAGE> 115
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(c) Change in Fiscal Year-End
During the first quarter of 1998, the Company elected to change its
fiscal year-end from December 31, to the Saturday closest to December 31.
The Company has also applied this change to its quarterly periods during
1998 whereby each interim period will end on the last Saturday of the 13
week period.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following in 1996, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------ JULY 4,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Finished goods........................................ $30,564 $28,229 $28,821
Work-in-process and raw materials..................... 5,896 4,566 2,101
------- ------- -------
$36,460 $32,795 $30,922
======= ======= =======
</TABLE>
Finished goods inventory consists of material, labor and manufacturing
overhead.
(f) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of these assets on a
straight-line basis over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------------- ---------------------
<S> <C>
Building and improvements................................... 20 years
Display fixtures............................................ 1-3 years
Furniture, fixtures and equipment........................... 3-10 years
Leasehold improvements...................................... Term of lease
Equipment under capital leases.............................. Term of lease
</TABLE>
The Company has adopted the provisions of Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. The adoption of this pronouncement did not have a
material effect on the Company's financial position or financial results.
(g) Revenue Recognition
The Company recognizes revenue from product sales, net of estimated
agreed-upon future allowances and anticipated returns and discounts, taking
into account historical experience, upon shipment to the customer.
(h) Customer Acquisition Costs
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may receive the previous
vendor's merchandise from the customer in connection with these agreements.
F-9
<PAGE> 116
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In these situations, the Company values this inventory at its fair market
value and records that value as inventory. The excess costs over the fair
market value of the inventory received is charged to selling expenses when
incurred. The Company expensed customer-acquisition costs of approximately
$1.2 million, $2.7 million, $1.6 million, $0.2 million and $0.5 million for
the years ended December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1997 and July 4, 1998, respectively.
(i) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally accounts receivable. A
significant portion of its business activity is with domestic mass
merchandisers whose ability to meet their financial obligations is
dependent on economic conditions germane to the retail industry. During
recent years, many major retailers have experienced significant financial
difficulties and some have filed for bankruptcy protection; other retailers
have begun to consolidate within the industry. The Company sells to certain
customers in bankruptcy as well as those consolidating within the industry.
To reduce credit risk, the Company routinely assesses the financial
strength of its customers and purchases credit insurance as it deems
appropriate.
(j) Intangible and other long-lived assets
Intangible assets consist of goodwill and trademarks, which are being
amortized on a straight-line basis over estimated useful lives of 10 to 40
years. Intangible assets primarily relate to the Company's acquisitions of
various businesses as discussed in Note 2 to these Consolidated Financial
Statements. In determining the estimated lives of these intangible assets,
the Company evaluates various factors including but not limited to: nature
of business, existing distribution channels, brand recognition of acquired
products, customer base and length of time in which an acquired business
has been in existence. Amortization expense was approximately $0.2 million,
$1.1 million, $0.5 million and $0.6 million for the years ended December
31, 1996 and 1997 and the six months ended June 30, 1997 and July 4, 1998,
respectively. There was no amortization expense related to intangible
assets in 1995.
In accordance with Statement of Financial Accounting Standards No.
121, Accounting for Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed of, the Company reviews its long-lived assets (which
include intangible assets, deferred costs and property and equipment) for
impairment as events and circumstances indicate the carrying amount of an
asset may not be recoverable. The Company evaluates the realizability of
its long-lived assets based on profitability and cash flow expectations for
the related asset or subsidiary. Management believes that, as of each of
the balance sheet dates presented, none of the Company's long-lived assets
were impaired.
(k) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and debt. The carrying
amounts of the Company's financial instruments approximate fair value.
(l) Net Income (Loss) Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. This statement established standards for computing and presenting
net income (loss) per share. This statement is effective for fiscal years
ending after December 15, 1997.
F-10
<PAGE> 117
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Basic net income (loss) per share applicable to common shareholders
was determined by dividing net income (loss) attributable to common
shareholders by the weighted average common shares outstanding during the
period. Diluted net income (loss) per share applicable to common
shareholders was determined by dividing net income (loss) applicable to
common shareholders by diluted weighted average shares outstanding. Diluted
weighted average shares reflects the dilutive effect, if any, of common
equivalent shares, which includes common stock options and convertible
preferred stock. Based on the treasury stock method, the common stock
options have no dilutive effect on earnings per share as the exercise price
for all options equals the fair market value of the Company's common stock
at the end of each applicable period. Accordingly, options to purchase a
total of 8,000, 14,000 and 12,000 common shares have been excluded from the
computation of diluted weighted average shares outstanding. The 437,000
shares of common stock issuable upon the conversion of the 43,700 share of
Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock)
has also been excluded for all periods presented as they are antidilutive.
Accordingly, there is no difference between basic and diluted weighted
average shares outstanding for all periods presented.
Pro forma net income (loss) per share applicable to common
shareholders which reflects the effects of the pro forma tax provision (see
Note 3), was determined by dividing pro forma net income (loss) applicable
to common shareholders by the basic and diluted weighted average shares
outstanding.
(m) Advertising Costs
Advertising costs, which are included in selling expense, are expensed
when the advertisement first takes place. Advertising expense was
approximately $1,599,000, $364,000 and $873,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and $657,000 and $816,000
for the six months ended June 30, 1997 and July 4, 1998, respectively. The
Company had no prepaid advertising production costs reported as assets at
December 31, 1996 and 1997 and July 4, 1998.
(n) New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior period
information upon adoption. The Company will adopt this statement in their
fiscal year end 1998 financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does
not believe that the adoption of SFAS No. 133 will have a material impact
on its financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-up
Activities, (SOP-98-5). SOP 98-5 provides guidance on the financial
reporting of start-up activities and organization costs to be expensed as
incurred. The Company does not believe that the adoption of SOP 98-5 will
have a material impact on its financial statements.
F-11
<PAGE> 118
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) ACQUISITIONS
In June 1998, the Company acquired an 80% interest in Fantasma, LLC
(Fantasma) for approximately $4.1 million in cash. The remaining 20% interest in
Fantasma is held by a previous member of Fantasma. This member and an employee
of Fantasma have options to acquire up to an additional 13% interest if certain
earnings targets for Fantasma are met in 1998, 1999 and 2000.
The acquisition was accounted for using the purchase method; accordingly,
the results of operations of Fantasma from the date of acquisition are included
in the Company's consolidated statements of operations. The purchase price was
allocated based on estimated fair market value of assets and liabilities at the
date of acquisition. In connection with the purchase price allocation, the
Company recorded approximately $4.6 million of goodwill, which is being
amortized ratably over 10 years.
On March 5, 1998, the Company acquired certain assets and liabilities of
Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant trademark
in territories not previously owned, for approximately $5.5 million in cash.
Foster Grant UK is a marketer and distributor of sunglasses and reading glasses
in Europe. The purchase price may be increased by approximately $0.7 million in
1998 and 1999 based on Foster Grant UK performance.
The acquisition has been accounted for using the purchase method of
accounting; accordingly, the results of operations of Foster Grant UK from the
date of the acquisition are included in the accompanying consolidated statements
of operations. The purchase price was allocated based on estimated fair values
of assets and liabilities at the date of acquisition. In connection with the
purchase price allocation, the Company recorded goodwill of approximately $1.1
million, which is being amortized on a straight-line basis over 20 years.
In July 1997, the Company acquired the assets of Superior Jewelry Company
(Superior), a distributor of costume jewelry to retail drug stores and discount
mass merchandisers in the United States. The Company paid approximately $1.8
million in cash and assumed certain liabilities in the amount of approximately
$4.0 million. The purchase price may be increased by up to an additional $3.0
million based on Superior's annual earnings during 1997 and 1998. Any increase
in purchase price will be recorded as goodwill when paid. Based on 1997
activity, the purchase price increased $0.9 million and is subject to an
additional $2.0 million upward adjustment based on 1998 annual earnings. This
amount has been accrued as of December 31, 1997.
The acquisition was accounted for using the purchase method of accounting;
accordingly, the results of operations of Superior from the date of the
acquisition are included in the accompanying consolidated statements of
operations. The purchase price was allocated based on estimated fair values of
assets and liabilities at the date of acquisition. In connection with the
purchase price allocation, the Company recorded goodwill of approximately $3.5
million, adjusted to include the additional purchase price for 1997 activity,
which is being amortized on a straight-line basis over 10 years.
In December 1996, the Company's subsidiary, Foster Grant Holdings, Inc. (FG
Holdings), acquired Foster Grant Group, L.P. (Foster Grant US), a subsidiary of
BEC Group, Inc. (BEC), and related entities. Foster Grant US is a marketer and
distributor of sunglasses, reading glasses and eyewear accessories located in
Dallas, Texas. The Company paid $10.0 million in cash and assumed certain
liabilities in the amount of approximately $34.0 million. In addition, FG
Holdings issued 100 shares of Series A redeemable nonvoting preferred stock (FG
Preferred Stock) initially valued at approximately $0.8 million. As discussed in
Note 8, the redemption value of this preferred stock is subject to upward
adjustment based on annual sales of the FG Holdings operations, as defined,
through the years ending January 1, 2000 or upon the occurrence of certain
specified capital transactions based upon the transaction value. The maximum
redemption amount, as amended, is $4.0 million. Any increase in the redemption
amount may be recorded as goodwill when paid. The $10.0 million cash investment
was financed by $5.0 million of borrowings through the Company's credit
F-12
<PAGE> 119
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
facility and a $5.0 million equity investment in the Company by an investment
group led by Marlin Capital, L.P., a related party to BEC (see Note 8).
The acquisition was accounted for using the purchase method of accounting;
accordingly, the results of operations of Foster Grant US from the date of the
acquisition are included in the accompanying consolidated statements of
operations. The original purchase price was allocated based on the preliminary
estimated fair values of assets and liabilities at the date of acquisition. In
connection with the purchase price allocation, the Company recorded intangible
assets of approximately $11.0 million, which are being amortized on a straight-
line basis over 40 years. During 1997, the preliminary purchase price allocation
was finalized. This resulted in (i) a reduction of certain asset carrying
amounts of approximately $4.9 million, (ii) an increase in certain liabilities
of approximately $2.2 million and (iii) a decrease in the valuation reserve
related to the deferred tax assets of approximately $7.0 million (see Note 3)
resulting in an immaterial increase in goodwill.
In June 1996, the Company acquired certain assets of the Tempo Division
(Tempo) of Allison Reed Group, Inc. The Company paid $1.0 million in cash,
assumed certain liabilities in the amount of $0.6 million and issued a $2.0
million non-interest-bearing term note payable to Allison Reed Group, Inc (see
Note 6). The payments on this note are subject to potential future downward
adjustments based on sales of Tempo; no such adjustment was made in 1996 or
1997.
The acquisition was accounted for using the purchase method of accounting;
accordingly, the results of operation of Tempo from the date of the acquisition
are included in the accompanying consolidated statements of operations. The
purchase price was allocated entirely to intangible assets and is being
amortized on a straight-line basis over 10 years.
The following unaudited pro forma summary information presents the combined
results of operations of the Company, Foster Grant US, Tempo, Superior, Foster
Grant UK and Fantasma as if the acquisitions had occurred at the beginning of
1996, 1997 and 1998. This unaudited pro forma financial information is presented
for informational purposes only and may not be indicative of the results of
operations as they would have been if the Company, Foster Grant US, Tempo,
Superior and Foster Grant UK had been a single entity, nor is it necessarily
indicative of the results of operations that may occur in the future.
Anticipated efficiencies from the consolidation of the Company, Foster Grant US,
Tempo, Superior, Foster Grant UK and Fantasma have been excluded from the
amounts included in the unaudited pro forma summary presented below.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, -------------------
-------------------- JUNE 30, JULY 4,
1996 1997 1997 1998
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales......................................... $195,231 $181,992 $42,346 $94,853
Net loss applicable to common shareholders........ (14,683) (1,794) (665) (2,140)
Basic and diluted net loss per share applicable to
common shareholders............................. (24.84) (2.95) (1.09) (3.52)
</TABLE>
(3) INCOME TAXES
Income taxes, including pro forma computations, are provided using the
liability method of accounting in accordance with SFAS No. 109. A deferred tax
asset or liability is recorded for all temporary differences between financial
and tax reporting. Deferred tax expense (benefit) results from the net change
during the year of the deferred tax asset and liability.
The Company was an S corporation under Section 1362 of the Internal Revenue
Code until May 31, 1996 when it issued Series A Preferred Stock. As an S
corporation, the taxable income or loss of the Company was passed through to the
shareholders and reported on their individual federal and certain state tax
returns.
F-13
<PAGE> 120
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Dividend distributions of approximately $1.8 million and $2.9 million in 1995
and 1996, respectively, were made to the shareholders primarily to fund payment
of the taxes related to the Company's income. In addition, $10.3 million of cash
and $3.0 million of subordinated notes payable (See Note 7) were distributed to
the shareholders in 1996 to distribute the previously undistributed after-tax
earnings. During 1997, a cash distribution of $0.3 million was made to the S
corporation shareholders to distribute a portion of the remaining undistributed
after-tax earnings.
During 1998, the Company made advances to the S Corporation shareholders to
pay a portion of the income tax owed by them with respect to the Company's S
Corporation earnings resulting from an income tax audit. The Company agreed to
make advances to these shareholders to pay their tax liabilities, the aggregate
amount of which will not exceed $3.4 million. As of July 4, 1998, the Company
had advanced approximately $2.5 million against these notes. These advances are
evidenced by promissory notes and bear interest at an annual rate equal to the
Applicable Federal Rate (5.26% at July 4, 1998). Principal and accrued interest
are payable on demand. These amounts have been included in long-term other
assets in the accompanying consolidated balance sheet as the Company expects
these advances to be repaid upon payment of its subordinated notes payable to
shareholders (see Note 7).
Pro forma income taxes, assuming the Company was subject to C corporation
income taxes, have been provided in the accompanying statements of operations
for 1995 and 1996 at an estimated statutory rate of 40%.
Upon termination of the S corporation election, deferred income taxes were
recorded for the tax effect of cumulative temporary differences between the
financial reporting and tax bases of certain assets and liabilities, primarily
deferred costs, accrued expenses and depreciation. These temporary differences
resulted in a net deferred income tax asset of approximately $1.9 million. The
Company recorded this tax asset as a deferred tax benefit in the tax provision.
The components of the income tax (expense) benefit are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Current --
Federal................................................ $ -- $ -- $ (700)
State.................................................. (42) (51) (124)
---- ------- -------
(42) (51) (824)
Deferred --
Federal................................................ -- (766) (286)
State.................................................. -- (130) (52)
---- ------- -------
-- (896) (338)
---- ------- -------
Effect of change in tax status........................... -- 1,895 --
---- ------- -------
$(42) $ 948 $(1,162)
==== ======= =======
</TABLE>
F-14
<PAGE> 121
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ----
<S> <C> <C> <C>
Income tax provision at federal statutory rate.............. --% (34.0)% 34.0%
Increase (decrease) in tax resulting from --
State tax provision, net of federal benefit............... 0.5 (6.0) 6.0
Nondeductible expenses.................................... -- -- 18.7
Effect of change in tax status............................ -- 70.3 --
---- ------ ----
Actual effective tax rate expense (benefit)....... 0.5% (110.3)% 58.7%
==== ====== ====
Pro forma adjustment........................................ 39.5 70.3
---- ------
Pro forma effective tax rate................................ 40.0% (40.0)%
==== ======
</TABLE>
Deferred income taxes as of December 31, 1996 and 1997 related to the
following temporary differences (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Nondeductible reserves...................................... $ 6,960 $6,633
Nondeductible accruals...................................... 1,424 2,207
Customer acquisition costs.................................. (35) 714
Net operating loss carryforwards............................ -- 703
Other....................................................... 197 402
------- ------
Gross deferred tax assets......................... 8,546 9,945
Less -- Valuation allowance................................. (7,076) (952)
------- ------
Net current deferred tax assets................... $ 1,470 $9,707
======= ======
Tax basis of property and equipment......................... $ 396 $ (740)
Other....................................................... (171) 95
------- ------
Net long term deferred tax assets (liabilities)... $ 225 $ (645)
======= ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be recognized. In connection
with the acquisition of Foster Grant US, the Company acquired various tax
attributes that resulted in deferred tax assets. In the initial purchase price
allocation, the Company provided a valuation allowance for a significant portion
of these assets due to the uncertainty of their realization. During 1997, based
on the actual and anticipated results, the Company determined that a significant
portion of the valuation reserve was not required. Accordingly, the Company
reduced the valuation allowance by approximately $7.0 million, resulting in an
equal decrease in goodwill. The Company has provided a valuation allowance for
certain tax assets which may be limited in their use. The Company has $1.8
million of net operating loss carryforwards which expire through 2012.
The Company has entered into an indemnification agreement with the
shareholders of the Company prior to its conversion to a C corporation relating
to potential income tax liabilities resulting from adjustments to reported S
corporation taxable income. The shareholders will continue to be liable for
personal income taxes on the Company's income for all periods prior to the time
the Company ceased to be an S corporation, while the Company will be liable for
all income taxes subsequent to the time it ceased to be an S corporation. The
indemnification agreement provides that the Company shall distribute to the
individual shareholders 40% of the amount of additional deductions permitted to
be taken by the Company after its conversion to a
F-15
<PAGE> 122
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
C corporation for expenditures made prior to becoming a C corporation, which
result from adjustments in the form of a final determination by tax authorities.
(4) REDEEMABLE NONVOTING PREFERRED STOCK OF A SUBSIDIARY
In connection with the purchase of Foster Grant US, the Company's wholly
owned subsidiary, FG Holdings, issued 100 shares of FG Preferred Stock, which
represents all of the issued and outstanding shares of FG Preferred Stock. The
FG Preferred Stock, as amended in June 1998 (Note 2), must be redeemed on
February 28, 2000 (the FG Redemption Date) by payment of an amount ranging from
$1.0 million to $4.0 million (the FG Redemption Amount), determined based on the
combined net sales of sunglasses, reading glasses and accessories by Foster
Grant US and the Company for the year ending January 1, 2000, excluding an
amount equal to the net sales by the Company for such items for the year ended
December 31, 1996. These increases in the redemption amount will be recorded as
goodwill when the final redemption amount is settled.
The FG Preferred Stock also provides for early redemption of the FG
Preferred Stock if the Company completes (i) an initial public offering where
the pre-money valuation of the Company equals or exceeds $75.0 million, (ii) a
merger or similar transaction where the transaction value equals or exceeds
$75.0 million, or (iii) a private placement of equity securities representing
more than 50% of the outstanding capital stock for consideration of not less
than $37.5 million (each a "Redemption Event") prior to the FG Redemption Date.
Upon completion of a Redemption Event, in lieu of the FG Redemption Amount,
holders of FG Preferred Stock will receive a payment ranging from $3.5 million
to $4.0 million (the Redemption Event Amount), to be determined with reference
to, as the case may be, either the pre-money valuation of the Company
immediately prior to the initial public offering or the proceeds of the merger
or similar transaction or private equity placement. If a Redemption Event occurs
after the FG Redemption Date, in addition to the FG Redemption Amount, holders
of FG Preferred Stock will receive a supplemental payment equal to the
difference, if any, between the FG Redemption Amount paid to such holders on the
FG Redemption Date and Redemption Event Amount that would have been received had
the Redemption Event occurred on or prior to the FG Redemption Date.
The value of FG Preferred Stock has been recorded as part of the initial
purchase of Foster Grant US and was based on the present value of management's
best estimate of the expected payment of $1.0 million upon redemption. The
accretion of the original value to the $1.0 million estimated redemption value
is being recorded as a charge to minority interest in income of subsidiaries in
the accompanying consolidated statements of operations. Accretion of this
discount for the year ended December 31, 1997 and the six months ended June 30,
1997 and July 4, 1998 was approximately $75,000, $34,000 and $68,000,
respectively.
(5) CREDIT FACILITIES WITH A BANK
In March 1998, the Company amended its credit facility with a bank (the
Bank Agreement). The amended facility provides for (i) a $60.0 million revolving
credit facility, including a $3.0 million letter of credit facility and a $5.0
million multi-currency facility, and (ii) a term loan of $10.0 million. Use of
the proceeds from the facility are limited to refinancing existing term debt,
support letters of credit, fund working capital and finance permitted
acquisitions and tax distributions, as defined. In connection with this
amendment, the Company refinanced $5,972,000 of its borrowing outstanding under
the revolving letter of credit facility with the term loan.
Borrowings under the revolving credit arrangement are limited to the lesser
of $60.0 million or the borrowing base, which is defined as a percentage of
eligible accounts receivable and inventories, reduced by outstanding letters of
credit and amounts outstanding under the multi-currency facility. Revolving
credit borrowings bear interest at the bank's prime rate (8.5% at July 4, 1998)
plus .5% or LIBOR (5.66% at July 4, 1998) plus 2.25%. The Company has the option
of electing the rate; however, the use of the LIBOR is limited.
F-16
<PAGE> 123
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The revolving credit facility expires in January 2003. As of July 4, 1998, the
Company had approximately $8.0 million available under this revolving credit
facility.
If the Bank Agreement is terminated by the Company earlier than the
expiration date, the Company will be required to pay a termination fee of $0.5
million in the first year, $0.3 million in the second year and $0.1 million
thereafter. The termination fee will be waived if the debt is refinanced with
the bank or after the first year if it relates to an initial public offering of
the Company's stock. The Bank Agreement also requires an annual reduction in
outstanding principal equal to 50% of excess cash flow up to $2.0 million.
The three year term loan bears interest at the bank's prime rate (8.5% at
July 4, 1998) plus .5% or LIBOR (5.66% at July 4, 1998) plus 2.5%. The Company
has the option of electing the rate. The term loan agreement requires quarterly
principal payments of approximately $0.6 million in the first year, $0.9 million
in the second year and $1.0 million in the final year.
The credit facility is subject to certain restrictive covenants, including
minimum tangible net worth and limitations of capital expenditures. Amounts due
under this credit facility are secured by substantially all assets of the
Company.
On February 10, 1998, the Company entered into a new term loan facility
with the same bank for the purchase of the Company's building and related
improvements. In June 1998, the Company amended this facility to include an
increase in the borrowing limit to $7,250,000. Borrowings under this amended
facility bear interest at the bank's prime rate (8.5% at July 4, 1998) plus .75%
or LIBOR (5.66% at July 4, 1998) plus 2.75% and are secured by substantially all
assets of the Company. At July 4, 1998, approximately $7,250,000 was outstanding
under this facility. This facility expires on the earlier of August 3, 1998 or
the expiration date of the revolving credit facility. The June 1998 amendment
extended the expiration date to October 15, 1998.
On July 21, 1998 the Company paid off all amounts outstanding under the
above credit facilities with the proceeds from the issuance of the Notes (see
Notes 1 and 18). Due to this subsequent refinancing, the Company has
reclassified the short-term obligations that were repaid with the proceeds of
the Notes, to long term obligations as of July 4, 1998.
F-17
<PAGE> 124
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31, 1996 and
1997 and July 4, 1998 (in thousands):
<TABLE>
<CAPTION>
1996 1997 JULY 4, 1998
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Debt refinanced subsequent to July 4, 1998.................. $2,333 $10,000 $65,024
Financing lease obligation, payable in monthly installments
of principal and interest of $6,500 through September
2000, interest at 8.75% per annum, secured by certain
office equipment.......................................... 244 190 159
Capital lease obligation, payable in monthly installments of
principal and interest of $10,903 through November 2000,
interest at 9.0% per annum................................ -- 335 283
Promissory notes, payable in monthly installments of
principal and interest through February 2000, interest at
7.07% to 9.9% per annum, secured by certain factory
equipment................................................. 247 159 108
Financing lease obligations, payable in monthly installments
of principal and interest through December 2001, interest
at 8.98% to 10.12% per annum, secured by certain factory
and office equipment...................................... 445 -- --
Financing lease obligations, payable in monthly installments
of principal and interest through January 2001, interest
at 8.76% to 8.82% per annum, secured by certain factory
and office equipment...................................... -- 604 536
Term loan payable in connection with Tempo acquisition...... 887 331 38
Deferred compensation....................................... 853 1,139 1,330
Other....................................................... 354 256 39
------ ------- -------
5,363 13,014 67,517
Less -- Current maturities.................................. 2,155 3,361 543
------ ------- -------
$3,208 $ 9,653 $66,974
====== ======= =======
</TABLE>
In connection with the acquisition of Tempo (see Note 2), the Company
entered into a note payable agreement with Allison Reed Group, Inc. whereby the
Company is obligated to pay $55,555 a month for 36 months. The present value of
this note, $1.8 million, was recorded as part of the initial purchase price
allocation. Payments under this note were subject to potential downward
adjustments based on sales of the Tempo division, as defined.
The Company has deferred compensation agreements with several key
employees. The agreements provide for deferred compensation based on increases
in net book value, as defined, and for one executive, the cash surrender value
of a life insurance policy owned by the Company. The amounts due under these
agreements are payable in a lump sum or in annual installments upon certain
defined events. During 1995, the Company charged to general and administrative
expenses approximately $0.2 million of expenses, relating to these agreements.
No amount was charged to expense during 1996, 1997 or the six months ended July
4, 1998. All amounts are payable subsequent to January 2, 1999 and thus have
been classified as long-term obligations. At July 4, 1998, the cash surrender
value of the life insurance policy was approximately $1.0 million and is
included in other assets.
The Company has an obligation to four former employees under a nonqualified
deferred compensation plan. Payments of principal and interest are to be made
monthly through August 2007. The obligation at December 31, 1997 was $123,783,
of which $29,661 is due prior to January 2, 1999. These amounts are included as
deferred compensation in the table above.
F-18
<PAGE> 125
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future maturities of the Company's long-term obligations as of July 4, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1999........................................................ $ 543
2000........................................................ 458
2001........................................................ 206
2002........................................................ 12
2003........................................................ 12
Thereafter.................................................. 66,286
-------
$67,517
=======
</TABLE>
(7) SUBORDINATED PROMISSORY NOTES PAYABLE TO SHAREHOLDERS
Coincident with the sale of Series A Preferred Stock (Note 8) and the
concurrent change in the Company's tax status (Note 3), the Company issued $2.0
million of subordinated notes payable to the preferred shareholders and made a
distribution of $3.0 million in subordinated notes payable to the original
common shareholders. These notes bear interest at an annual rate of 7.04%.
Approximately 50% of this interest is payable annually and the remaining balance
is deferred and is due with the principal on June 1, 2002 for the preferred
shareholders and June 1, 2006 for the original common shareholders, subject to
acceleration on the closing of an initial public offering. These amounts were
paid upon the closing of the offering of the Notes.
(8) PREFERRED STOCK
The Company has 200,000 shares of preferred stock, $.01 par value,
authorized and issuable in one or more series with such voting powers,
designations, preferences and other special rights and such qualifications,
limitations or restrictions, as may be stated in the resolution or resolutions
adopted by the Company's Board of Directors providing for the issue of such
series and as permitted by the Rhode Island Business Corporation Act. The
Company has created one series of preferred stock designated Series A Redeemable
Convertible Preferred Stock (Series A Preferred Stock). A total of 43,700 shares
of Series A Preferred Stock are designated for issuance, all of which are issued
and outstanding.
In May 1996, the Company sold 34,200 shares of Series A Preferred Stock for
gross proceeds of $18.0 million. In connection with the acquisition of Foster
Grant US (see Note 2) in December 1996, the Company issued an additional 9,500
shares of the Series A Preferred Stock for gross proceeds of $5.0 million.
The rights, preferences and privileges of Series A Preferred Stock, as
amended in June 1998, are as follows:
Conversion
Shares of the Series A Preferred Stock are convertible into common stock at
a rate of 10 shares of common stock for each share of Series A Preferred Stock,
adjustable for certain dilutive events. As amended by the Company's shareholders
in June 1998, conversion is at the option of the shareholder, but is automatic
upon the consummation of an initial public offering resulting in gross proceeds
to the Company of at least $20.0 million and at an offering price of at least
137.8% of the original conversion price if the offering is consummated on or
before May 31, 1999 and at least 175% of the original conversion price of the
offering is consummated after May 31, 1999.
F-19
<PAGE> 126
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Redemption
The holders of the Series A Preferred Stock have the right to require
redemption for cash of any unconverted shares, beginning June 30, 2002. The
Company will redeem the Series A Preferred Stock equal to 5% of the total number
of shares issued and outstanding as of March 31, 2002 on the last day of each
March, June, September and December as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERCENTAGE
- ----------- ----------
<S> <C>
2002........................................................ 15%
2003........................................................ 35
2004........................................................ 55
2005........................................................ 75
2006........................................................ 95
2007........................................................ 100
</TABLE>
The Series A Preferred Stock will be redeemed at an amount equal to the
original stock price, $526.32 per share, plus accrued and unpaid dividends
yielding a 10% compounded annual rate of return (the Redemption Amount).
Accordingly, the Series A Preferred Stock has been recorded at its redemption
value in the accompanying consolidated balance sheets.
The holders of the Series A Preferred Stock may require the Company to
redeem all or any portion of the Series A Preferred Stock upon certain events
such as the sale, merger or dissolution of the Company. In addition, the Company
may voluntarily redeem the Series A Preferred Stock at the Redemption Amount as
defined above. If the Company voluntarily redeems the Series A Preferred Stock,
it must issue the holders of Series A Preferred Stock a warrant to purchase
common stock equal to the number of shares the shareholder would have received
upon conversion, at a strike price equal to the redemption price at the time of
redemption.
In connection with the proposed issuance of the Notes the preferred
shareholders agreed, in June 1998, to suspend their redemption rights until 91
days after the date that any Restrictive Indebtedness, as defined, is no longer
outstanding. Restrictive Indebtedness is defined as indebtedness the terms of
which restrict the Company's ability to redeem, in whole or part, the Series A
Preferred Stock. Restrictive Indebtedness can not exceed $150.0 million or such
greater amount as may be approved by the directors designated by the preferred
shareholders.
Liquidation Preferences
The holders of Series A Preferred Stock have preference in the event of a
liquidation, dissolution or winding up of the corporation equal to the
Redemption Amount. If the assets of the Company are insufficient to pay the full
preferential amounts to the holders of Series A Preferred Stock, the assets
shall be distributed ratably among such shareholders in proportion to their
aggregate liquidation preference amounts.
Voting Rights and Dividends
The holders of the Series A Preferred Stock shall be entitled to vote on
all matters based on the number of votes equal to the number of shares into
which the shares of Series A Preferred Stock are convertible after December 1,
1996. The holders of a majority of the Series A Preferred Stock shares are
entitled to elect two directors. In certain events, defined as Remedy Events,
the number of directors of the Company automatically increases to the minimum
number sufficient to allow the holders of Series A Preferred Stock to elect a
majority of the directors. In June 1998, the preferred shareholders agreed to
change the definition of Remedy
F-20
<PAGE> 127
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Events to reduce the minimum amount of consolidated shareholders' equity which
the Company is required to maintain dollar for dollar by any payments of certain
subordinated notes payable to shareholders (see Note 7).
Dividends will not be paid on the common stock unless the Series A
Preferred Stock receives the same dividends that such shares would have received
had they been converted into common stock immediately prior to the record date
for such dividend.
(9) COMMON STOCK
In connection with the issuance of Series A Preferred Stock in May 1996
(see Note 8), the Board of Directors and shareholders voted to amend the
Company's Articles of Incorporation and Bylaws to increase the number of
authorized shares of common stock to 4,800,000 and change the no par value
common stock to $.01 par value common stock. In addition, the Company effected a
57-for-1 stock split for the shares then outstanding. The accompanying
consolidated financial statements have been retroactively adjusted to reflect
this stock split and the establishment of a par value.
(10) 1996 INCENTIVE STOCK PLAN
In May 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan)
under which it may grant incentive stock options (ISOs), nonqualified stock
options (NSOs), restricted stock and other stock rights to purchase up to 50,000
shares of common stock. In May 1998, the Company increased the number of shares
of common stock authorized for issuance under the Plan to 150,000. Under the
Plan, ISOs may not be granted at less than fair market value on the date of
grant and generally vest in a method determined by the Board of Directors, over
a term not to exceed 10 years. All options have been granted with exercise
prices equal to the fair market value of the Company's common shares as
determined by the Board of Directors. Stock option activity for each of the
three years in the period ended December 31, 1997 and the six-month period ended
July 4, 1998, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF WEIGHTED AVERAGE REMAINING
SHARE EXERCISE PRICE CONTRACTUAL LIFE
--------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding, December 31, 1995............ -- $-- --
Granted................................. 8,000 50 10
------ --- ----
Outstanding, December 31, 1996............ 8,000 50 10
Granted................................. 6,000 50 10
------ --- ----
Outstanding, December 31, 1997............ 14,000 50 9.5
Canceled................................ (2,000) 50 --
------ --- ----
Outstanding, July 4, 1998................. 12,000 $50 9.25
====== === ====
Exercisable, July 4, 1998................. 12,000 $50 9.25
====== === ====
</TABLE>
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of operations or disclosed in the notes
to financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the
disclosure-only alternative under SFAS No. 123.
Had compensation cost for the Company's stock plans been determined based
on the fair value at the grant dates, as prescribed in SFAS No. 123, the
Company's net income and net income per share applicable to
F-21
<PAGE> 128
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
common shareholders for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1997 and July 4, 1998 would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, ------------------
----------------- JUNE 30, JULY 4,
1996 1997 1997 1998
------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shareholders (in
thousands)
As reported............................................. $(1,034) $(1,681) $(420) $(1,787)
Pro forma............................................... $(1,201) $(1,806) $(483) $(1,787)
Net income (loss) per share applicable to common
shareholders
As reported............................................. $ 1.75 $ (2.76) $(.69) $ (2.94)
Pro forma............................................... $ 2.03 $ (2.97) $(.79) $ (2.94)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: dividend yield of 0.0% for all periods;
volatility of 35.53% for all periods; risk-free interest rates of 6.07% for
options granted during 1996 and 5.77% for all options granted during 1997 and a
weighted average expected option term of 5 years for all periods. The weighted
average fair value per share of options granted during the years ended December
31, 1996 and 1997 was $20.87 and $20.60, respectively. No options were granted
during the six months ended June 30, 1997 and July 4, 1998.
(11) OPTIONS IN SUBSIDIARY
In connection with the acquisition of Fantasma the Company issued options
to two employees of Fantasma. The options provide that the employees may
purchase up to 13% of Fantasma at the fair market value based upon the purchase
price. Certain of these options contain performance criteria and, therefore,
will be accounted for as variable options. The Company will record any increase
in the value of these options as compensation expense as they are earned.
(12) INVESTMENTS
(a) Hong Kong
The Company has an ownership interest in four entities in Hong Kong. These
entities provide various services to the Company and each other in connection
with purchasing and distributing products. The Company accounts for these
investments using the equity method. The net investment in these entities is
recorded as investment in affiliates in the accompanying consolidated balance
sheets. The following table summarizes certain financial information for these
entities (in thousands):
<TABLE>
<CAPTION>
EQUITY IN
OWNERSHIP EARNINGS INVESTMENT
INTEREST SALES TO AAI (LOSSES)(1) BALANCE
--------- ------------ ----------- ----------
1995
------------------------------------------------------
<S> <C> <C> <C> <C>
AAi Hong Kong Limited......................... 49% $12,372 $275 $741
Honest Lion Limited........................... 50 -- -- 551
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------
<S> <C> <C> <C> <C>
AAi Hong Kong Limited......................... 49% $11,407 $ -- $741
Milagros (Far East) Limited................... 49 254 (94) (29)
Honest Lion Limited........................... 50 -- (69) 743
</TABLE>
F-22
<PAGE> 129
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1997
------------------------------------------------------
<S> <C> <C> <C> <C>
AAi Hong Kong Limited......................... 49% $ 2,969 $(70) $671
Milagros (Far East) Limited................... 49 324 (10) (40)
Honest Lion Limited........................... 50 -- (50) 692
Milagros AAi Asia Limited..................... 49 11,878 67 100
</TABLE>
- ---------------
(1) Amounts relate only to Hong Kong entities and do not include other
investments accounted for under the equity method.
The following table summarizes certain consolidated financial
information of the four Hong Kong entities (in thousands):
<TABLE>
<CAPTION>
1996 1997 JUNE 30, 1998
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets.................................... $ 4,407 $ 5,687 $ 6,398
Noncurrent assets................................. 6,608 2,187 6,583
Current liabilities............................... 8,421 9,978 10,839
Noncurrent liabilities............................ 1,557 1,563 1,561
Net sales......................................... 24,454 37,037 16,614
Gross profit...................................... 4,847 1,876 2,468
Income (loss) from operations..................... (406) (64) (138)
Net income........................................ (406) (64) (94)
</TABLE>
(b) Mexico
In 1996, the Company acquired a 50% ownership in AAi Joske's S.A. de R.L.
De CV (Joske's), an entity engaged in the purchasing and distribution of
accessories in Mexico for $0.5 million of inventory. This investment was
accounted for under the equity method. In January 1997, the Company acquired an
additional 5% ownership interest in Joske's and accordingly has consolidated its
financial results in the Company's financial statements subsequent to December
31, 1996.
(13) EMPLOYEE BENEFIT PLANS
(a) Qualified 401(k) Plan
The Company has a defined contribution profit sharing plan covering
substantially all employees. Under the terms of the profit sharing plan,
contributions are made at the discretion of the Company.
The Company made contributions of $100,000 for the year ended December 31,
1995. No contributions were made for the years ended December 31, 1996 and 1997.
The profit sharing plan also allows eligible participants to make contributions
in accordance with Internal Revenue Code Section 401(k). The Company matches
employee contributions equal to 25% of the first 6% of compensation that an
employee defers. These matching contributions totaled approximately $79,000,
$87,000 and $95,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) Non-Qualified Excess 401(k) Plan
In May 1997, the Company established the Non-Qualified Excess 401(k) Plan
(the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the
Non-Qualified Plan is to provide deferred compensation to a select group of
management or highly compensated employees of the Company as designated by the
Board of Directors. Under the Non-Qualified Plan, a participant may elect to
defer up to
F-23
<PAGE> 130
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15% of his or her compensation on an annual basis. This amount is credited to
the employee's deferred compensation account (the Deferred Amount). Under the
Non-Qualified Plan, the Company also credits the participant's deferred
compensation account for the amount of the matching contribution the Company
would have made under the qualified 401(k) Plan with respect to the Deferred
Amount. The matching contributions totaled approximately $10,000 for the year
ended December 31, 1997. All amounts contributed by the employee and by the
Company under the Non-Qualified Plan are immediately vested. A participant under
the Non-Qualified Plan is entitled to receive a distribution of his or her
account upon retirement, death, disability or termination of employment.
(14) RELATED PARTY TRANSACTIONS
The Company has operating lease agreements with Sunrise Properties, LLC and
299 Carpenter Street Associates, LLC, of which certain officers and shareholders
of the Company are partners. The related rental expense charged to operations
was approximately $500,500, $554,000, $471,000, $299,000 and $251,000 in the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and July 4, 1998, respectively.
The Company has guaranteed a mortgage note payable by Sunrise Properties,
LLC aggregating $200,000. As of December 31, 1997, the outstanding balance of
this note was approximately $130,000.
During 1984, the Company sold 5% of its shares to an officer in exchange
for a $100,000 non-interest-bearing promissory note. The proceeds from the note
are credited to the common stock account as received. During 1996, the remaining
balance under this promissory note was paid to the Company.
In conjunction with the purchase of Foster Grant US, the Company entered
into a lease of the building from which FG Holdings operates with BEC, the
former owners of Foster Grant US. A member of the Marlin Capital, L.P. (see Note
2) is the chief executive officer of BEC and a director of the Company. The
lease was established in December 1996 and extends for one year with automatic
renewal for successive one-year periods unless either party provides notice.
Rent expense was approximately $494,000, $247,000 and $247,000 in the year ended
December 31, 1997 and the six months ended June 30, 1997 and July 4, 1998,
respectively.
On May 31, 1996, the Company, and its shareholders, including the
management shareholders (Management Shareholders), entered into a tag-along,
transfer restriction and voting agreement (the Shareholders Agreement). The
Shareholders Agreement requires that any Management Shareholder wishing to
transfer or sell common stock of the Company to provide right of first refusal
and tag-along rights, on a pro rata basis, as defined, to all other
shareholders' party to the Shareholders Agreement upon receipt of a third party
offer to purchase the applicable restricted shares.
Upon the death of a Management Shareholder, the personal representative of
such Management Shareholder shall sell to the Company such Management
Shareholder's shares based on an appraisal value, as defined, provided that the
Company's obligation to purchase shares is limited to the amount of any proceeds
paid to the Company under insurance policies insuring the life of the Management
Shareholder.
The Shareholders Agreement shall terminate upon the earlier of a qualified
public offering as defined or when no shares of Series A Preferred Stock and
warrants are outstanding, except as a result of the conversion, exchange or
exercise of the Series A Preferred Stock or warrants.
(15) COMMITMENTS AND CONTINGENCIES
(a) Letters of Credit
At July 4, 1998, the Company had no irrevocable letters of credit
outstanding for the purchase of inventory.
F-24
<PAGE> 131
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(b) Operating Leases
In addition to the operating leases described in Note 13, the Company
also has operating leases for its other locations. Future minimum rental
payments are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $463
1999........................................................ 128
2000........................................................ 67
2001........................................................ 69
2002........................................................ 72
Thereafter.................................................. 177
----
$976
====
</TABLE>
The Company had an option to purchase its Smithfield, Rhode Island,
facility. This option became exercisable in April 1993, extends throughout
the term of the lease and provides for a purchase price of $2.3 million. On
February 10, 1998, the Company exercised its option to purchase its
Smithfield, Rhode Island facility. The Company is currently expanding this
facility and estimates the total cost of the facility upon completion of
its expansion to be approximately $5.0 million.
(c) Royalties
The Company has several agreements that require royalty payments based
on a percentage of certain net product sales, subject to specified minimum
payments. Minimum royalty obligations relating to these agreements as of
December 31, 1997 totaled $1.9 million, $1.4 million and $0.3 million for
1998, 1999 and 2000, respectively. In addition, certain of these agreements
require the Company pay additional fees based on a percentage of net
product sales. These fees are not subject to minimum payment obligations.
In the event the Company transfers its rights under certain of these
agreements, a transfer fee would be payable. At July 4, 1998, the minimum
aggregate transfer fee due would be no less than $3.1 million.
(d) Supply Agreement
The Company has a supply agreement with a display manufacturer. The
agreement requires that the Company purchase 70% of Foster Grant US's
annual display purchases, as defined, from this supplier through December
2005. If the Company does not purchase 70% of Foster Grant US's displays
from this manufacturer, it is required to make a payment equal to 30% of
the annual shortfall. In addition, the Company and BEC are required to
cumulatively purchase $32.3 million of displays over the term of this
agreement. To the extent that total purchases do not meet this dollar
level, the Company is required to make a payment equal to 30% of $32
million, less the Company's purchases, BEC's purchases and any amounts paid
as a result of the annual shortfall discussed above. As of December 31,
1997, no amounts were due under this agreement as a result of a shortfall.
(16) SIGNIFICANT CUSTOMERS AND SUPPLIERS
During the years ended December 31, 1995, 1996 and 1997, one customer
accounted for approximately 23.8%, 26.8% and 24.7% of net sales, respectively.
This customer's accounts receivable balance represented approximately 17.1% and
23.6% of gross accounts receivable as of December 31, 1996 and 1997,
respectively. During 1995, another customer also accounted for approximately
11.4% of net sales.
The Company currently purchases a significant portion of its inventory from
certain suppliers in Asia. Although there are other suppliers of the inventory
items purchased, and management believes that these suppliers could provide
similar inventory at fairly comparable terms, a change in suppliers could cause
a delay
F-25
<PAGE> 132
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
in the Company's distribution process and a possible loss of sales, which would
adversely affect operating results.
(17) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 and July 4, 1998 consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JULY 4,
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Accrued payroll and payroll related items.............. $1,728 $ 2,010 $ 1,807
Other accrued expenses................................. 7,257 9,211 9,720
------ ------- -------
$8,985 $11,221 $11,527
====== ======= =======
</TABLE>
(18) SUBSEQUENT EVENT -- NOTES OFFERING
On July 21, 1998, the Company sold the Notes (see Note 1) to certain
purchasers. Interest on the Notes is payable semiannually on each January 15 and
July 15, commencing January 15, 1999. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after July 15, 2002, at
105.375% of their principal amount, plus accrued interest and Liquidated Damages
(as defined), if any, with such percentage declining ratably to 100% as of July
15, 2004 and thereafter. At any time on or prior to July 15, 2001 and subject to
certain conditions, up to 35% of the aggregate principal amount of the Notes may
be redeemed, at the option of the Company, with the proceeds of certain equity
offerings of the Company at 110.750% of the principal amount thereof, plus
accrued interest and Liquidated Damages, if any. The Notes are general unsecured
obligations of the Company, rank senior in right of payment to all future
subordinated indebtedness of the Company and rank pari passu in right of payment
to all existing and future unsubordinated indebtedness of the Company including
the bank credit facility described in Note 5. The bank credit facility is
secured by accounts receivable and inventory of the Company and its domestic
subsidiaries. Accordingly, the Company's obligations under the bank credit
facility will effectively rank senior in right of payment to the Notes to the
extent of the assets subject to such security interest. The Notes are fully and
unconditionally guaranteed, on a senior and joint and several basis, by each of
the Company's current and future Domestic Subsidiaries (as defined) (the
"Guarantors"). The net proceeds received by the Company from the issuance and
sale of the Notes, approximately $72.0 million, was used to repay outstanding
indebtedness under the credit facility with a bank (see Note 5) and the
Subordinated Promissory Notes to shareholders (see Note 7), net of amounts due
the Company from certain of these shareholders (see Note 3). The Indenture under
which the Notes were issued (the "Indenture") imposes certain limitations on the
ability of the Company, and its subsidiaries to, among other things, incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, create liens, engage in transactions with
shareholders and affiliates, sell assets and engage in mergers and
consolidations.
F-26
<PAGE> 133
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
(CONTINUED)
(19) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The following is summarized consolidating financial information for the
Company, segregating the Company and Guarantor Subsidiaries from nonguarantor
subsidiaries as they relate to the Notes. The Guarantor Subsidiaries are
domestic, mostly and wholly owned subsidiaries of the Company and the guarantees
are full, unconditional and joint and several. Separate financial statements of
the wholly owned Guarantor Subsidiaries have not been included because
management believes that they are not material to investors. Separate financial
statements of the mostly owned Guarantor Subsidiary, Fantasma LLC, are included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
ASSETS
Current assets
Cash and cash
equivalents.............. $ -- $ 941 $ 536 $ -- $ 1,477
Accounts receivable, net... 5,936 7,990 319 -- 14,245
Inventories................ 17,095 18,941 424 -- 36,460
Prepaid expenses and other
current assets........... 796 765 14 -- 1,575
Deferred tax assets........ 1,470 -- -- -- 1,470
------- ------- ------ -------- -------
Total current assets..... 25,297 28,637 1,293 -- 55,227
Property and equipment,
net........................ 2,956 6,671 9 -- 9,636
Other assets................ 16,584 11,780 110 (11,327) 17,147
------- ------- ------ -------- -------
$44,837 $47,088 $1,412 $(11,327) $82,010
======= ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under revolving
note payable............. $ 7,029 $18,844 $ -- $ -- $25,873
Current maturities of
long-term obligations.... 2,155 -- -- -- 2,155
Accounts payable........... 4,703 12,142 58 -- 16,903
Accrued expenses........... 3,841 5,629 139 -- 9,609
Due (from) to affiliate.... -- -- 1,679 (1,679) --
------- ------- ------ -------- -------
Total current
liabilities............ 17,728 36,615 1,876 (1,679) 54,540
Long-term obligations, less
current maturities......... 3,208 -- -- -- 3,208
Deferred tax liabilities.... -- -- -- -- --
Subordinated promissory
notes payable to
shareholders............... 5,205 -- -- -- 5,205
Redeemable preferred stock
of a Subsidiary............ -- -- -- 751 751
------- ------- ------ -------- -------
Preferred stock............. 23,587 751 -- (751) 23,587
------- ------- ------ -------- -------
Shareholders' equity
(deficit).................. (4,891) 9,722 (464) (9,648) (5,281)
------- ------- ------ -------- -------
$44,837 $47,088 $1,412 $(11,327) $82,010
======= ======= ====== ======== =======
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
ASSETS
Current assets
Cash and cash
equivalents.............. $ 2,354 $ 183 $ 242 $ -- $ 2,779
Accounts receivable, net... 9,756 7,778 789 -- 18,323
Inventories................ 18,922 13,547 326 -- 32,795
Prepaid expenses and other
current assets........... 224 233 277 -- 734
Deferred tax assets........ 4,798 4,908 1 -- 9,707
------- ------- ------ -------- -------
Total current assets..... 36,054 26,649 1,635 -- 64,338
Property and equipment,
net........................ 3,727 6,421 37 -- 10,185
Other assets................ 25,394 10,433 460 (17,064) 19,223
------- ------- ------ -------- -------
$65,175 $43,503 $2,132 $(17,064) $93,746
======= ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under revolving
note payable............. $12,883 $14,715 $ -- $ -- $27,598
Current maturities of
long-term obligations.... 3,361 -- -- -- 3,361
Accounts payable........... 5,253 8,060 804 -- 14,117
Accrued expenses........... 7,651 5,283 392 -- 13,326
Due (from) to affiliate.... 876 2,313 661 (3,850) --
------- ------- ------ -------- -------
Total current
liabilities............ 30,024 30,371 1,857 (3,850) 58,402
Long-term obligations, less
current maturities......... 9,653 -- -- -- 9,653
Deferred tax liabilities.... -- 645 -- -- 645
Subordinated promissory
notes payable to
shareholders............... 5,487 -- -- -- 5,487
Redeemable preferred stock
of a Subsidiary............ -- -- -- 835 835
------- ------- ------ -------- -------
Preferred stock............. 26,083 835 -- (835) 26,083
------- ------- ------ -------- -------
Shareholders' equity
(deficit).................. (6,072) 11,652 275 (13,214) (7,359)
------- ------- ------ -------- -------
$65,175 $43,503 $2,132 $(17,064) $93,746
======= ======= ====== ======== =======
<CAPTION>
JULY 4, 1998
-------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
ASSETS
Current assets
Cash and cash
equivalents.............. $ 206 $ 526 $ 1,641 $ -- $ 2,373
Accounts receivable, net... 15,276 19,163 4,977 -- 39,416
Inventories................ 14,513 13,098 3,311 -- 30,922
Prepaid expenses and other
current assets........... 278 168 362 -- 808
Deferred tax assets........ 9,458 583 -- -- 10,041
------- ------- ------- -------- --------
Total current assets..... 39,731 33,538 10,291 -- 83,560
Property and equipment,
net........................ 8,658 7,414 1,226 -- 17,298
Other assets................ 46,646 14,916 487 (35,152) 26,897
------- ------- ------- -------- --------
$95,035 $55,868 $12,004 $(35,152) $127,755
======= ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under revolving
note payable............. $ -- $ -- $ -- $ -- $ --
Current maturities of
long-term obligations.... 543 -- -- -- 543
Accounts payable........... 3,963 15,507 1,772 -- 21,242
Accrued expenses........... 7,090 6,100 534 -- 13,724
Due (from) to affiliate.... -- 4,379 2,891 (7,270) --
------- ------- ------- -------- --------
Total current
liabilities............ 11,596 25,986 5,197 (7,270) 35,509
Long-term obligations, less
current maturities......... 61,003 5,971 -- -- 66,974
Deferred tax liabilities.... -- 645 -- -- 645
Subordinated promissory
notes payable to
shareholders............... 5,593 -- -- -- 5,593
Redeemable preferred stock
of a Subsidiary............ -- -- -- 903 903
------- ------- ------- -------- --------
Preferred stock............. 27,440 903 -- (903) 27,440
------- ------- ------- -------- --------
Shareholders' equity
(deficit).................. (10,597) 22,363 6,807 (27,882) (9,309)
------- ------- ------- -------- --------
$95,035 $55,868 $12,004 $(35,152) $127,755
======= ======= ======= ======== ========
</TABLE>
<PAGE> 134
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------------------------- -----------------------
NON-GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES ELIMINATIONS CONSOLIDATED COMPANY SUBSIDIARIES
------- ------------- ------------ ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales...................................... $86,786 $1,264 -- $ 88,050 $ 78,740 $ 5,127
Cost of goods sold............................. 42,985 705 -- 43,690 43,920 2,778
------- ------ ----- -------- -------- -------
Gross profit................................... 43,801 559 -- 44,360 34,820 2,349
Selling, general and administrative expense.... 33,866 916 -- 34,782 33,402 2,745
------- ------ ----- -------- -------- -------
Income from operations......................... 9,935 (357) -- 9,578 1,418 (396)
Interest expense............................... (1,008) (23) -- (1,031) (1,324) (52)
Other income (expense), net.................... (80) 0 -- (80) (337) --
Equity in income (loss) of subsidiaries........ (380) 0 380 0 (617) --
------- ------ ----- -------- -------- -------
Income (loss) before income tax (expense)
benefit and dividends and accretion on
preferred stock............................... 8,467 (380) 380 8,467 (860) (448)
Income tax (expense) benefit................... (42) 0 -- (42) 948 --
------- ------ ----- -------- -------- -------
Net income (loss) before dividends and
accretion on preferred stock.................. 8,425 (380) 380 8,425 88 (448)
Dividends and accretion on preferred stock..... -- -- -- -- 1,123 --
------- ------ ----- -------- -------- -------
Net income (loss) applicable to common
shareholders.................................. $ 8,425 $ (380) $ 380 $ 8,425 $ (1,035) $ (448)
======= ====== ===== ======== ======== =======
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities........... $ 2,168 $ (350) -- $ 1,818 $ (2,804) $ 1,283
Cash flows from investing activities:
Purchase of property and equipment............ (1,552) (3) -- (1,555) (1,434) (135)
Acquisitions, net of cash acquired............ -- 0 -- -- (9,844) --
Advances to affiliates........................ (380) 0 380 -- 504 (1,679)
Other investing activities.................... (547) (2) -- (549) (2,688) 1,572
------- ------ ----- -------- -------- -------
Net cash used in investing activities... (2,479) (5) 380 (2,104) (13,462) (242)
------- ------ ----- -------- -------- -------
Cash flows from financing activities:
Net borrowings under revolving note payable... 3,275 -- -- 3,275 3,411 (100)
Proceeds from issuance of subordinated
promissory notes payable to shareholders.... -- -- -- -- 2,000 --
Proceeds from issuance of long-term
obligations................................. 319 319 3,445 --
Payments on long-term obligations............. (1,535) -- -- (1,535) (2,292) --
Proceeds from issuance of preferred stock, net
of issuance costs........................... -- -- -- -- 22,464 --
Due to affiliates............................. -- 380 (380) -- -- --
Other financing activities.................... (1,800) -- -- (1,800) (12,769) --
------- ------ ----- -------- -------- -------
Net cash provided by financing
activities............................. 259 380 (380) 259 16,259 (100)
------- ------ ----- -------- -------- -------
Net (decrease) increase in cash and cash
equivalents................................... (52) 25 0 (27) (7) 941
Cash and cash equivalents, beginning of
period........................................ 59 3 -- 62 7 --
------- ------ ----- -------- -------- -------
Cash and cash equivalents, end of period....... $ 7 $ 28 $ 0 $ 35 $ -- $ 941
======= ====== ===== ======== ======== =======
<CAPTION>
YEARS ENDED
-------------------------------------------
DECEMBER 31, 1996
-------------------------------------------
NON-GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales...................................... $2,461 $ 8 $86,336
Cost of goods sold............................. 1,289 (116) 47,871
------ ------ -------
Gross profit................................... 1,172 124 38,465
Selling, general and administrative expense.... 1,253 124 37,524
------ ------ -------
Income from operations......................... (81) -- 941
Interest expense............................... (93) -- (1,469)
Other income (expense), net.................... 6 -- (331)
Equity in income (loss) of subsidiaries........ -- 617 --
------ ------ -------
Income (loss) before income tax (expense)
benefit and dividends and accretion on
preferred stock............................... (168) 617 (859)
Income tax (expense) benefit................... 0 -- 948
------ ------ -------
Net income (loss) before dividends and
accretion on preferred stock.................. (168) 617 89
Dividends and accretion on preferred stock..... -- -- 1,123
------ ------ -------
Net income (loss) applicable to common
shareholders.................................. $ (168) $ 617 $(1,034)
====== ====== =======
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities........... (371) -- (1,892)
Cash flows from investing activities:
Purchase of property and equipment............ (3) -- (1,572)
Acquisitions, net of cash acquired............ -- -- (9,844)
Advances to affiliates........................ -- 1,175 --
Other investing activities.................... (293) -- (1,409)
------ ------ -------
Net cash used in investing activities... (296) 1,175 (12,825)
------ ------ -------
Cash flows from financing activities:
Net borrowings under revolving note payable... -- -- 3,311
Proceeds from issuance of subordinated
promissory notes payable to shareholders.... -- -- 2,000
Proceeds from issuance of long-term
obligations................................. -- -- 3,445
Payments on long-term obligations............. -- -- (2,292)
Proceeds from issuance of preferred stock, net
of issuance costs........................... -- -- 22,464
Due to affiliates............................. 1,175 (1,175) --
Other financing activities.................... -- -- (12,769)
------ ------ -------
Net cash provided by financing
activities............................. 1,175 (1,175) 16,159
------ ------ -------
Net (decrease) increase in cash and cash
equivalents................................... 508 -- 1,442
Cash and cash equivalents, beginning of
period........................................ 28 -- 35
------ ------ -------
Cash and cash equivalents, end of period....... $ 536 $ -- $ 1,477
====== ====== =======
<CAPTION>
YEARS ENDED
--------------------------------------------------------------------
DECEMBER 31, 1997
--------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales...................................... $78,723 $63,992 $ 6,696 $ -- $149,411
Cost of goods sold............................. 47,323 27,538 3,067 -- 77,928
------- ------- ------- ------- --------
Gross profit................................... 31,400 36,454 3,629 -- 71,483
Selling, general and administrative expense.... 31,432 31,130 2,761 -- 65,323
------- ------- ------- ------- --------
Income from operations......................... (32) 5,324 868 -- 6,160
Interest expense............................... (2,562) (1,613) (39) -- (4,214)
Other income (expense), net.................... 200 (49) (120) -- 31
Equity in income (loss) of subsidiaries........ 2,622 -- -- (2,622) --
------- ------- ------- ------- --------
Income (loss) before income tax (expense)
benefit and dividends and accretion on
preferred stock............................... 228 3,662 709 (2,622) 1,977
Income tax (expense) benefit................... 587 (1,743) (6) -- (1,162)
------- ------- ------- ------- --------
Net income (loss) before dividends and
accretion on preferred stock.................. 815 1,919 703 (2,622) 815
Dividends and accretion on preferred stock..... 2,496 -- -- -- 2,496
------- ------- ------- ------- --------
Net income (loss) applicable to common
shareholders.................................. $(1,681) $ 1,919 $ 703 $(2,622) $ (1,681)
======= ======= ======= ======= ========
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities........... (3,833) 4,697 1,022 -- 1,886
Cash flows from investing activities:
Purchase of property and equipment............ (2,860) (4,686) (37) -- (7,583)
Acquisitions, net of cash acquired............ (1,835) 0 -- -- (1,835)
Advances to affiliates........................ (3,546) 1,594 -- 1,952 --
Other investing activities.................... 643 (545) (43) -- 55
------- ------- ------- ------- --------
Net cash used in investing activities... (7,598) (3,637) (80) 1,952 (9,363)
------- ------- ------- ------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable... 11,826 (4,129) -- -- 7,697
Proceeds from issuance of subordinated
promissory notes payable to shareholders.... -- -- -- -- --
Proceeds from issuance of long-term
obligations................................. 8,943 -- -- -- 8,943
Payments on long-term obligations............. (7,551) -- -- -- (7,551)
Proceeds from issuance of preferred stock, net
of issuance costs........................... -- -- -- -- --
Due to affiliates............................. 877 2,311 (1,236) (1,952) 0
Other financing activities.................... (310) -- -- -- (310)
------- ------- ------- ------- --------
Net cash provided by financing
activities............................. 13,785 (1,818) (1,236) (1,952) 8,779
------- ------- ------- ------- --------
Net (decrease) increase in cash and cash
equivalents................................... 2,354 (758) (294) -- 1,302
Cash and cash equivalents, beginning of
period........................................ -- 941 536 -- 1,477
------- ------- ------- ------- --------
Cash and cash equivalents, end of period....... $ 2,354 $ 183 $ 242 $ -- $ 2,779
======= ======= ======= ======= ========
</TABLE>
F-28
<PAGE> 135
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------------
JUNE 30, 1997
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF
OPERATIONS
Net sales.......................... $30,334 $41,935 $3,616 $ -- $75,885
Cost of goods sold................. 19,190 20,253 1,755 -- 41,198
------- ------- ------ ------- -------
Gross profit....................... 11,144 21,682 1,861 -- 34,687
Selling general and administrative
expense........................... 14,413 14,984 1,286 -- 30,683
------- ------- ------ ------- -------
Income from operations............. (3,269) 6,698 575 -- 4,004
Interest expense................... (1,105) (966) -- -- (2,071)
Other income (expense), net........ (67) -- 26 -- (41)
Equity in income of subsidiaries... 6,099 -- -- (6,099) --
------- ------- ------ ------- -------
Income (loss) before income taxes
and dividends and accretion on
preferred stock................... 1,658 5,732 601 (6,099) 1,892
Income tax (expense) benefit....... (868) -- (234) -- (1,102)
------- ------- ------ ------- -------
Net income (loss) before dividends
and accretion on preferred
stock............................. 790 5,732 367 (6,099) 790
------- ------- ------ ------- -------
Dividends and accretion on
preferred stock................... 1,210 -- -- -- 1,210
------- ------- ------ ------- -------
Net Income (loss) applicable to
common shareholders............... $ (420) $ 5,732 $ 367 $(6,099) (420)
======= ======= ====== ======= =======
CONSOLIDATING STATEMENTS OF CASH
FLOWS
Cash flows from operating
activities........................ $(7,748) $ 1,394 $ 120 $ -- $(6,234)
Cash flows from investing
activities:
Purchase of property and
equipment....................... (878) (3,356) (132) -- (4,366)
Acquisitions, net of cash
received........................ -- -- -- -- --
Advances to affiliates............ (681) -- -- 733 52
Other investing activities........ (1,125) (382) 23 -- (1,484)
------- ------- ------ ------- -------
Net cash (used in) provided
by investing activities.... (2,684) (3,738) (109) 733 (5,798)
------- ------- ------ ------- -------
Cash flows from financing
activities:
Net borrowings under revolving
note payable.................... 10,538 3,552 -- -- 14,090
Proceeds from term note payable...
Payments on long-term
obligations.....................
Due to affiliates................. -- 733 -- (733) --
------- ------- ------ ------- -------
Net cash provided by
financing activities....... 10,538 4,285 -- (733) 14,090
------- ------- ------ ------- -------
Net increase (decrease) in
cash....................... 106 1,941 11 -- 2,058
Cash and cash equivalents,
beginning of period............... -- 941 536 -- 1,477
------- ------- ------ ------- -------
Cash and cash equivalents, end of
period............................ $ 106 $ 2,882 $ 547 -- $ 3,535
======= ======= ====== ======= =======
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------------------------------
JULY 4, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF
OPERATIONS
Net sales.......................... $ 35,690 $43,198 $9,743 $ -- $ 88,631
Cost of goods sold................. 20,347 22,797 4,399 -- 47,543
-------- ------- ------ ------- --------
Gross profit....................... 15,343 20,401 5,344 -- 41,088
Selling general and administrative
expense........................... 23,984 11,722 3,502 -- 39,208
-------- ------- ------ ------- --------
Income from operations............. (8,641) 8,679 1,842 -- 1,880
Interest expense................... (1,986) (621) (31) -- (2,638)
Other income (expense), net........ 7 12 (29) -- (10)
Equity in income of subsidiaries... 5,604 -- -- (5,604) --
-------- ------- ------ ------- --------
Income (loss) before income taxes
and dividends and accretion on
preferred stock................... (5,066) 8,070 1,782 (5,604) (768)
Income tax (expense) benefit....... 4,163 (3,725) (600) -- 338
-------- ------- ------ ------- --------
Net income (loss) before dividends
and accretion on preferred
stock............................. (353) 4,345 1,182 (5,604) (430)
-------- ------- ------ ------- --------
Dividends and accretion on
preferred stock................... 1,357 -- -- -- 1,357
-------- ------- ------ ------- --------
Net Income (loss) applicable to
common shareholders............... $ (1,710) $ 4,345 1,182 $(5,604) $ (1,787)
======== ======= ====== ======= ========
CONSOLIDATING STATEMENTS OF CASH
FLOWS
Cash flows from operating
activities........................ $(10,613) $ 7,184 $ (466) $ -- $ (3,895)
Cash flows from investing
activities:
Purchase of property and
equipment....................... (6,485) (3,872) (506) -- (10,863)
Acquisitions, net of cash
received........................ (9,464) -- -- -- (9,464)
Advances to affiliates............ (3,724) -- -- 3,724 --
Other investing activities........ (5,910) 3,023 2 -- (2,885)
-------- ------- ------ ------- --------
Net cash (used in) provided
by investing activities.... (25,583) (849) (504) 3,724 (23,212)
-------- ------- ------ ------- --------
Cash flows from financing
activities:
Net borrowings under revolving
note payable.................... 23,857 (8,949) -- -- 14,908
Proceeds from term note payable... 13,222 -- -- -- 13,222
Payments on long-term
obligations..................... (1,429) -- -- -- (1,429)
Due to affiliates................. (1,602) 2,957 2,369 (3,724) --
-------- ------- ------ ------- --------
Net cash provided by
financing activities....... 34,048 (5,992) 2,369 (3,724) 26,701
-------- ------- ------ ------- --------
Net increase (decrease) in
cash....................... (2,148) 343 1,399 -- (406)
Cash and cash equivalents,
beginning of period............... 2,354 183 242 -- 2,779
-------- ------- ------ ------- --------
Cash and cash equivalents, end of
period............................ $ 206 $ 526 $1,641 $ -- $ 2,373
======== ======= ====== ======= ========
</TABLE>
F-29
<PAGE> 136
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
AAi.FosterGrant, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations and
shareholder's equity and cash flows of Foster Grant Group L.P. (wholly-owned by
BEC Group, Inc.) for the eleven months ended November 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated statements of operations and
shareholder's equity and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of operations and shareholder's equity and cash
flows. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations and shareholder's
equity and cash flows referred to above present fairly, in all material
respects, the consolidated results of operations and cash flows of Foster Grant
Group L.P. for the eleven months ended November 30, 1996 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
June 19, 1998
F-30
<PAGE> 137
FOSTER GRANT GROUP L.P.
CONSOLIDATED STATEMENT OF OPERATIONS AND SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
NOVEMBER 30, 1996
-----------------
<S> <C>
Net sales................................................... $ 72,527
--------
Costs and expenses:
Cost of sales.......................................... 51,771
Selling, general and administrative expenses........... 31,278
Non-recurring charges.................................. 7,412
Interest expense....................................... 2,231
Other income, net...................................... (100)
--------
Total costs and expenses.......................... 92,592
--------
Net loss.................................................... $(20,065)
========
Shareholder's Equity -
Beginning balance...................................... $ 34,095
Net loss............................................... (20,065)
--------
Ending balance......................................... $ 14,030
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 138
FOSTER GRANT GROUP L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
NOVEMBER 30,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(20,065)
Adjustments to reconcile net loss to net cash provided
by operating
activities-
Non-recurring charges, net of payments............ 7,412
Depreciation and amortization..................... 8,488
Changes in current assets and liabilities:
Accounts receivable.................................... 11,538
Inventories............................................ 19,738
Other assets........................................... (1,039)
Accounts payable and accrued expenses.................. (7,558)
--------
Net cash provided by operating activities......... 18,514
--------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures................................... (3,980)
--------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of mortgages................................. (171)
Repayment of advances from parent...................... (13,445)
--------
Net cash used in financing activities............. (13,616)
--------
Net increase in cash.............................. $ 918
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 139
FOSTER GRANT GROUP L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
(a) Business and Basis of Presentation
Foster Grant Group L.P. (the Company) was wholly owned by BEC Group, Inc.,
formerly known as Benson Eyecare Corporation (BEC), a publicly traded company,
until December 1996. The Company was organized as a partnership and its
operations were comprised of three previously separate corporations acquired by
BEC in 1993 and 1994. The accompanying financial statements include the accounts
of these companies and their wholly-owned subsidiaries. All significant
intercompany transactions, profits and accounts have been eliminated in
consolidation. Except for interest expense, no intercorporate charges have been
made since the Company was operated and managed as an autonomous entity.
(b) Subsequent Event
In December 1996, the common stock of the Company was sold to Foster Grant
Holdings, Inc. (FG Holdings), a wholly owned subsidiary of AAi.FosterGrant, Inc.
(AAi). AAi paid $10.0 million in cash and assumed certain liabilities in the
amount of approximately $34.0 million. The purchase price was financed by $5.0
million of borrowings through AAi's credit facility and a $5.0 million equity
investment in AAi by Marlin Group, a related party to BEC. In addition to the
$10.0 million in cash, FG Holdings also issued 100 shares of Series A redeemable
nonvoting preferred stock initially valued at approximately $0.8 million. The
redemption value of this preferred stock is subject to upward adjustment based
on annual sales of the Company, as defined, for the year ending January 1, 2000
or upon the completion of certain specific capital transactions. The maximum
redemption amount was reduced from $6.0 million to $4.0 million in June 1998.
Immediately prior to the sale of the common stock to FG Holdings, the
building in which the main operations of the Company were located and the
related mortgage payable were transferred to BEC. The Company subsequently
leased the building from BEC (Note 4).
The Company, under its new ownership, continues to be a distributor of
value priced sunglasses and reading glasses to mass merchandisers, variety
stores, chain drug stores and supermarkets in North America.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenue is recognized at time of shipment with estimates provided for
returns and allowances based upon historical experience. Certain sales are
subject to warranty against defects in material and workmanship for varying
periods. The Company provides for such potential future costs at the time sales
are recorded.
(b) Cost of Goods Sold
Cost of goods sold includes the cost of material, direct labor and overhead
relating to products sold.
(c) Major Customers
During the eleven months ended November 30, 1996, two customers accounted
for approximately 12% and 11% of net sales, respectively.
(d) Barter Credits
The Company occasionally enters into transactions where it exchanges
certain products for barter credits. These barter credits can then be exchanged
for various goods and services that the Company may require. In these
transactions the Company values the credits, in accordance with Financial
Accounting Standard Board's Emerging Issues Task Force Abstract 93-11, based on
the value of the products exchanged rather than
F-33
<PAGE> 140
FOSTER GRANT GROUP L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the anticipated value of the goods or services to be received. The value of
these credits is recognized as expense as the goods or services are received or
an impairment is identified. (See Note 3).
(e) Depreciation and Amortization
Depreciation of property and equipment is computed on a straight line basis
for financial reporting purposes over the estimated useful lives of the assets.
Useful lives range from three to five years for office equipment to 30 years for
buildings. Displays and fixtures are depreciated over their expected useful
lives, generally one to three years. Depreciation expense recorded for the
eleven months ended November 30, 1996 was $7,599,000.
Goodwill and intangible assets are amortized on a straight line basis over
estimated useful lives; which approximate 30 years for goodwill and 20 years for
trademarks, and from three to five years for other identifiable intangibles. At
each balance sheet date, the Company evaluates the realizability of goodwill and
other intangible assets based upon expectations of undiscounted cash flows.
Should this review indicate that goodwill or other intangible assets will not be
recoverable, the Company's carrying value of the goodwill or intangible assets
will be reduced by the estimated shortfall of discounted cash flows. Based upon
its most recent analysis the Company believes that no material impairment of
goodwill or intangible assets exists. Amortization of goodwill and intangible
assets recorded for the eleven months ended November 30 1996 was approximately
$889,000.
(f) Income Taxes
The Company accounts for income taxes under SFAS No. 109. "Accounting for
Income Taxes." SFAS No. 109 requires an asset and liability approach to
accounting for income taxes. Deferred income taxes are provided on the
difference in basis of assets and liabilities between financial reporting and
tax returns using enacted tax rates. A valuation allowance is recorded when
realization of deferred tax assets is not assured.
The income tax benefit consists of the following for the eleven months
ended November 30, 1996:
<TABLE>
<S> <C>
Current:
Federal................................................... $ --
State and local........................................... --
Deferred.................................................... (7,223)
Change in valuation reserve................................. 7,223
-------
$ --
=======
</TABLE>
The Company's effective tax rate differs from the Federal statutory rate as
follows for the eleven months ended November 30, 1996:
<TABLE>
<S> <C>
Expected tax benefit at statutory rate...................... (35.0)%
State income taxes.......................................... (1.0)%
Change in valuation reserve................................. (36.0)%
-----
Income tax benefit.......................................... --%
-----
-----
</TABLE>
During the eleven months ended November 30, 1996, the income tax provision
was prepared on a separate return basis. Accordingly, the Company provided a
full valuation allowance on the deferred tax assets, consisting of net operating
losses and nondeductible reserves, generated during the period.
F-34
<PAGE> 141
FOSTER GRANT GROUP L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(g) New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, establishes financial accounting and reporting
requirements for stock-based employee compensation plans. The Company adopted
the reporting requirements of SFAS No. 123 in 1996 noting that the
implementation of the new standard did not have a significant impact on its
financial position or results of operations.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, establishes financial accounting standards
for the impairment of long-lived assets. The Company adopted SFAS No. 121 in
1996 (Note 3).
(h) 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 and
disclosure of contingent 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 these estimates.
(3) NON-RECURRING CHARGES
During the eleven months ended November 30, 1996, the Company wrote-off (i)
approximately $4.2 million of display fixtures and (ii) approximately $3.2
million of barter credits for which it was determined during 1996 that the value
of the assets would not be realized.
(4) LEASE COMMITMENTS
The Company leases administrative office and warehouse facilities under
operating leases. Future minimum lease payments are as follows (in thousand):
<TABLE>
<S> <C>
1997........................................................ $468
1998........................................................ 342
1999........................................................ 74
2000........................................................ 3
----
$887
====
</TABLE>
Rent expense, including common area and other charges, during the eleven
months ended November 30, 1996 was approximately $711,000.
(5) RELATED PARTY TRANSACTIONS
During the eleven months ended November 30, 1996, the Company was party to
a revolving intercompany credit arrangement with BEC whereby interest was
charged at a rate of 8.0% on outstanding borrowings. Interest paid in connection
with this arrangement was approximately $2.2 million which is included in
interest expense in the accompanying statement of operations and shareholder's
equity. All income taxes were paid by BEC during 1996.
(6) STOCK OPTIONS
The employees of the Company participate in a stock option plan
administered by BEC.
F-35
<PAGE> 142
FOSTER GRANT GROUP L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
Supply Agreement
The Company has a supply agreement with a display manufacturer. The
agreement requires that the Company purchase 70.0% of its annual display
purchases, as defined, from this supplier through December 2005. If the Company
does not purchase 70.0% of its displays from this manufacturer, it is required
to make a payment equal to 30.0% of the annual shortfall. In addition, the
Company and BEC are required to cumulatively purchase $32.3 million of displays
over the term of this agreement. To the extent that total purchases do not meet
this dollar level, the Company is required to make a payment equal to 30.0% of
$32.3 million less the Company's purchases, BEC's purchases and any amounts paid
as a result of the annual shortfall discussed above. During the eleven months
ended November 30, 1996, the Company purchased $2.4 million of such displays.
Litigation
The Company is subject to various litigation incidental to the business.
Irrespective of any indemnification that may be received, the Company does not
believe that exposure on any matter will result in a significant impact on the
Company.
F-36
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Foster Grant Group L.P. (wholly-owned by BEC Group, Inc.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of Foster Grant
Group L.P. and its subsidiaries (the "Company") at December 31, 1995, and the
results of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, in December 1996, the Company's parent, BEC Group,
Inc. sold the common stock of the Company to Accessories Associates, Inc.
We have not audited the consolidated financial statements of Foster Grant
Group L.P. and its subsidiaries for any period subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Dallas, Texas
December 30, 1997
F-37
<PAGE> 144
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 499
Trade receivables, less allowance for doubtful accounts of
$1,281................................................. 16,585
Inventories, net.......................................... 37,401
Deferred taxes............................................ 10,291
Other current assets...................................... 2,935
--------
Total current assets.............................. 67,711
Property and equipment, net................................. 8,721
Goodwill, net............................................... 5,743
Intangible assets, net...................................... 8,660
Other assets................................................ 11,985
--------
Total assets...................................... $102,820
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt........................................... $ 132
Accounts payable.......................................... 18,431
Accrued compensation...................................... 714
Due to parent............................................. 33,745
Deferred taxes............................................ 6,770
Other accrued expenses.................................... 5,114
--------
Total current liabilities......................... 64,906
Mortgage payable............................................ 3,819
--------
Total liabilities................................. 68,725
--------
Commitments and contingencies
Shareholder's equity:
Investment by BEC......................................... 34,095
--------
Total shareholder's equity........................ 34,095
--------
Total liabilities and shareholder's equity........ $102,820
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 145
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net sales................................................... $ 96,399
Costs and expenses:
Cost of sales............................................. 54,638
Selling, general and administrative....................... 42,178
Special charges........................................... 11,560
Interest expense.......................................... 2,977
Other income, net......................................... (372)
--------
Total costs and expenses.......................... 110,981
--------
Loss before income taxes.................................... (14,582)
Income tax benefit.......................................... (4,869)
--------
Net loss.................................................... $ (9,713)
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 146
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Balance as of December 31, 1994............................. $ 43,036
Common stock issued pursuant to contingency agreement in
connection with acquisition of Foster Grant by BEC..... 833
Net loss.................................................. (9,713)
Cumulative translation adjustment......................... (61)
--------
Balance as of December 31, 1995............................. $ 34,095
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 147
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,713)
Adjustments to reconcile net loss to net cash used by
operating activities:
Special charges, net of payments....................... 6,044
Depreciation and amortization.......................... 7,971
Bad debt expense....................................... 11
Loss on sale of property and equipment................. 46
Deferred tax benefit................................... (4,869)
Change in current assets and liabilities:
Accounts receivable....................................... 255
Inventories............................................... (16,470)
Other assets.............................................. (2,853)
Accounts payable.......................................... 2,265
Accrued expenses and other................................ (1,065)
--------
Net cash used by operating activities.................. (18,378)
--------
Cash flows from investing activities:
Capital expenditures...................................... (16,238)
Proceeds from sale of fixed assets........................ 7
--------
Net cash used by investing activities.................. (16,231)
--------
Cash flows from financing activities:
Proceeds from mortgages................................... 3,945
Advances from parent...................................... 31,020
--------
Net cash provided by financing activities.............. 34,965
--------
Effect on cash of changes in foreign exchange rates......... 26
--------
Net increase in cash........................................ 382
Cash and cash equivalents at beginning of year.............. 117
--------
Cash and cash equivalents at end of year.................... $ 499
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 148
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
1. SUBSEQUENT EVENTS
In December 1996, the common stock of the Company was sold to Foster Grant
Holdings, Inc. ("FG Holdings"), a wholly owned subsidiary of AAi.FosterGrant,
Inc. ("AAi"). AAi paid $10 million in cash and assumed certain liabilities in
the amount of approximately $34.0 million. The purchase price was financed by
$5.0 million of borrowings through AAi's credit facility and a $5.0 million
equity investment in AAi by Marlin Group, a related party to BEC Group, Inc.
("BEC"). In addition to the $10.0 million in cash, FG Holdings also issued 100
shares of Series A redeemable nonvoting preferred stock initially valued at
approximately $.8 million. The redemption value of this preferred stock is
subject to upward adjustment based on annual sales of the Company, as defined,
for the year ending January 1, 2000 or upon the completion of certain specific
capital transactions. The maximum redemption amount was reduced from $6.0
million to $4.0 million in June 1998.
Immediately prior to the sale of the common stock to AAi, the building in
which the main operations of the Company were located (Note 5) and the related
mortgage payable (Note 7) were transferred to BEC. The Company subsequently
leased the building from BEC.
2. BUSINESS AND BASIS OF PRESENTATION
Foster Grant Group L.P. (the "Company") is wholly owned by BEC (formerly
known as Benson Eyecare Corporation), a publicly traded company. The operations
of the Foster Grant Group L.P. are comprised primarily of three previously
separate companies (Opti-Ray Inc., The Bonneau Company, and International
Eyewear & Accessories) acquired by BEC in 1993 and 1994. The accompanying
financial statements include the accounts of these companies and their
wholly-owned subsidiaries. Except for interest expense, no intercorporate
charges have been made since the Company was operated and managed as an
autonomous entity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions,
profits and accounts have been eliminated in consolidation.
Cash Equivalents
Cash equivalents include all temporary cash investments with original
maturities of three months or less. The carrying value is equal to market value.
Revenue Recognition
Revenue is recognized at time of shipment with estimates provided for
returns based upon historical experience.
Concentration of Credit Risk and Major Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable,
primarily to mass merchant customers in the retail industry. Trade receivables
arising from sales to customers are not collateralized and as a result
management continually monitors the financial condition of these customers to
reduce the risk of loss. During the year ended December 31, 1995 two customers
accounted for approximately 12% and 14% of net sales, respectively.
F-42
<PAGE> 149
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
(CONTINUED)
Foreign Currency Translation
All balance sheet accounts of foreign operations are translated at the
current exchange rate as of the end of the period. Results of operations are
translated at average currency exchange rates. The resulting translation
adjustment is recorded as a separate component of shareholders' equity.
Inventories
Inventories, which consist primarily of finished goods held for resale, are
stated at the lower of cost, determined on a first-in first-out basis, or
market. Costs include material, direct labor, and overhead.
Warranties
Certain sales are subject to warranty against defects in material and
workmanship for varying periods. The Company provides for such potential future
costs at the time the sales are recorded.
Property and Equipment
Property and equipment are stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation is
computed on a straight line basis for financial reporting purposes, and on an
accelerated basis for tax purposes, over the estimated useful lives of the
assets. Useful lives range from 3 to 5 years for office equipment to 30 years
for buildings. Asset cost and accumulated depreciation amounts are removed for
dispositions and retirements, with resulting gains and losses reflected in
earnings.
Displays
The Company capitalizes the cost of display fixtures shipped to customers.
The displays are depreciated over the expected useful lives of the displays,
generally one to three years. Depreciation expense recorded for the year ended
December 31, 1995 was $6,418. Displays costs of $9,912, net of depreciation, are
included in "Other Assets".
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of net assets
acquired in business combinations accounted for under the purchase method.
Intangible assets consist principally of trademarks and other identifiable
intangible assets.
Goodwill and intangible assets are amortized on a straight line basis over
estimated useful lives of 30 years for goodwill, 20 years for trademarks, and
from 3 to 5 years for other identifiable intangibles. At each balance sheet
date, the Company evaluates the realizability of goodwill and intangible assets
based upon expectations of undiscounted cash flows. Should this review indicate
that goodwill or intangible assets will not be recoverable, the Company's
carrying value of the goodwill or intangible assets will be reduced by the
estimated shortfall of discounted cash flows. Based upon its most recent
analysis, the Company believes that no material impairment of goodwill or
intangible assets exists. Amortization of goodwill recorded for the year ended
December 31, 1995 was $183.
F-43
<PAGE> 150
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
(CONTINUED)
Income Taxes
Deferred income taxes are provided on the difference in basis of assets and
liabilities between financial reporting and tax returns using enacted tax rates.
A valuation allowance is recorded when realization of deferred tax assets is not
assured.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", establishes financial accounting and reporting
requirements for stock-based employee compensation plans. The Company adopted
the reporting requirements of SFAS 123 in 1996. There was no impact on its
financial position or results of operations as a result of this adoption.
SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed of", establishes financial accounting standards
for the impairment of long lived assets. The Company adopted SFAS No. 121 in
1996. There was no significant effect on the financial statements of the Company
as a result of this adoption.
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 and
disclosure of contingent 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 these estimates.
4. SPECIAL CHARGES
Starting in the third quarter and culminating in the fourth quarter of
1995, the Company took actions to reorganize its distribution operations and
exit the display production business. Special charges of $11,560 for the year
included: (i) a $6,700 provision for realigning the in-house display function in
connection with the sale of the display manufacturing business to HMG Worldwide;
(ii) a $4,200 charge for reorganization and integration of the distribution
operations, including costs to terminate certain employees and close the
California distribution facility, resolution of distribution integration issues,
streamlining new Dallas warehousing operations, and reorganization of the SKU
numbering system; and (iii) $660 of deferred financing costs in connection with
a change in the Company's banking syndicate in September 1995.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Land........................................................ $ 1,005
Buildings (See Note 1)...................................... 5,138
Machinery and equipment..................................... 3,208
Furniture and fixtures...................................... 496
-------
9,847
Less accumulated depreciation............................... (1,126)
-------
Net property and equipment............................. $ 8,721
=======
</TABLE>
Depreciation expense for the year ended December 31, 1995 was $606.
F-44
<PAGE> 151
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
(CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following at
December 31, 1995:
<TABLE>
<S> <C>
Trademarks.................................................. $ 9,358
Other identifiable intangible assets........................ 1,189
Less accumulated amortization............................... (1,887)
-------
Net intangible assets.................................. $ 8,660
=======
</TABLE>
Amortization expense for the year ended December 31, 1995 was $764.
7. MORTGAGE PAYABLE
The Company's mortgage payable is a $3,951 mortgage bearing interest at
LIBOR plus 1.85 basis points, secured by land and buildings in Dallas, Texas,
and guaranteed by BEC, with monthly principal and interest payments of $41 due
through April 2001. See Note 1.
8. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires an asset and liability approach to
accounting for income taxes.
The income tax benefit consists of the following for the year ended
December 31, 1995:
<TABLE>
<S> <C>
Current:
Federal................................................... $ --
State and local........................................... --
Deferred.................................................... (4,869)
-------
$(4,869)
=======
</TABLE>
The Company's effective tax rate differs from the Federal statutory rate as
follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
Expected tax benefit at statutory rate...................... (35.0)%
State income taxes.......................................... (1.0)%
Goodwill amortization....................................... 1.3%
Other, net.................................................. .7%
------
Income tax benefit.......................................... (34.0)%
======
</TABLE>
F-45
<PAGE> 152
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
(CONTINUED)
Significant components of deferred income taxes are as follows at December
31, 1995:
<TABLE>
<S> <C>
Loss carryforward........................................... $ 6,773
Accounts receivable......................................... 1,454
Inventories................................................. 1,138
Other, net.................................................. 926
-------
Deferred tax asset........................................ 10,291
-------
Displays.................................................... 3,843
Fixed assets................................................ 34
Intangible assets........................................... 2,893
-------
Deferred tax liability.................................... 6,770
-------
Net deferred tax asset.................................... $ 3,521
=======
</TABLE>
No valuation allowance has been established against deferred tax assets as
realization is considered to be more likely than not. Net operating loss
carryforwards amount to approximately $20 million at December 31, 1995. The
operating loss carryforwards will expire beginning in the year 2008.
9. LEASE COMMITMENTS
The Company leases administrative office and warehouse facilities under
operating leases. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1996................................................ $ 832
1997................................................ 468
1998................................................ 342
1999................................................ 74
2000................................................ 3
------
$1,719
======
</TABLE>
Rent expense including common area and other charges during 1995 was $739.
10. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, the Company was party to a
revolving intercompany credit arrangement with BEC whereby interest was charged
at a rate of 8%. Interest expense in connection with this arrangement was
approximately $3.0 million for the year ended December 31, 1995. Balances
related to this agreement have been disclosed under the captions "Due to Parent"
and "Interest Expense." All interest and income taxes were paid by BEC during
1995.
11. STOCK OPTIONS
The employees of the Company participate in a stock option plan
administered by BEC.
F-46
<PAGE> 153
FOSTER GRANT GROUP L.P.
(WHOLLY-OWNED BY BEC GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Supply Agreement
The Company has a supply agreement with HMG Worldwide. The agreement
requires that the Company purchase 70% of its annual display purchases, as
defined, from this supplier through December 2005. If the Company does not
purchase 70% of the Company's displays from this manufacturer, it is required to
make a payment equal to 30% of the annual shortfall. In addition, the Company
and BEC are required to cumulatively purchase $32.3 million of displays over the
term of this agreement. To the extent that total purchases do not meet this
dollar level, the Company is required to make a payment equal to 30% of $32.3
million, less the Company's purchases, BEC's purchases and any amounts paid as a
result of the annual shortfall discussed above. As of December 31, 1995, no
amounts were due under this agreement as a result of a shortfall. During the
period from September 30, 1995 through December 31, 1995, the Company purchased
$1.2 million of such displays. During the years ended December 31, 1996 and
1997, the Company purchased $2.4 million and $3.5 million of such displays,
respectively.
Litigation
The Company is subject to various litigation incidental to the business.
Irrespective of any indemnification that may be received, the Company does not
believe that exposure on any matter will result in a significant impact on the
Company.
F-47
<PAGE> 154
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Fantasma LLC:
We have audited the accompanying balance sheets of Fantasma LLC as of
December 31, 1996 and 1997 and the related statements of operations, members'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of Fantasma LLC'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 financial statements referred to above present fairly,
in all material respects, the financial position of Fantasma LLC as of December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 6, 1998
F-48
<PAGE> 155
FANTASMA LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JULY 4,
1996 1997 1998
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 189 $ 238 $ 420
Accounts receivable, less reserves of approximately
$186,000, $402,000 and $434,000 in 1996, 1997 and 1998,
respectively........................................... 3,408 5,108 1,626
Inventory................................................. 1,995 1,908 2,377
Prepaids and other current assets......................... 121 72 170
------ ------ ------
Total current assets.............................. 5,713 7,326 4,593
------ ------ ------
Property and Equipment, at cost:
Equipment................................................. 29 68 15
Furniture and fixtures.................................... 10 11 --
------ ------ ------
39 79 15
Less -- accumulated depreciation.......................... (2) (13) --
------ ------ ------
37 66 15
Other Assets:
Intangible assets, net.................................... 3 3 4,610
------ ------ ------
Total assets...................................... $5,753 $7,395 $9,218
====== ====== ======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Note payable to member.................................... $3,764 $3,764 $3,712
Advances payable to member................................ 987 1,661 --
Accounts payable and accrued expenses..................... 796 1,657 1,442
------ ------ ------
Total current liabilities......................... 5,547 7,082 5,154
Members' Equity............................................. 206 313 4,064
------ ------ ------
Total liabilities and members' equity............. $5,753 $7,395 $9,218
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 156
FANTASMA LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- -----------------------------
1995 1996 1997 JUNE 30, 1997 JULY 4, 1998
------ ------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $5,133 $10,815 $17,163 $4,094 $4,841
Cost of goods sold................... 4,208 8,838 12,562 3,262 3,354
------ ------- ------- ------ ------
Gross profit............... 925 1,977 4,601 832 1,487
Operating expenses:
Selling expenses................... 250 643 1,501 657 707
General and administrative
expenses........................ 672 1,023 2,259 911 957
------ ------- ------- ------ ------
Income (loss) from
operations............... 3 311 841 (736) (177)
Interest expense..................... 106 236 480 164 168
------ ------- ------- ------ ------
Income (loss) before income taxes.... (103) 75 361 (900) (345)
Provision for income taxes........... -- (17) (58) -- --
------ ------- ------- ------ ------
Net income (loss).......... $ (103) $ 58 $ 303 $ (900) $ (345)
====== ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 157
FANTASMA LLC
STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY MEMBERS'
INVESTMENT EQUITY TOTAL
---------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.................................. $ 932 $ -- $ 932
Additional parent company investment...................... 1,009 -- 1,009
Net loss.................................................. (103) -- (103)
------- ------ -------
Balance, December 31, 1995.................................. 1,838 -- 1,838
Capital contribution...................................... -- 1 1
Additional parent company investment...................... 807 -- 807
Conversion of parent company investment to note payable to
member................................................. (2,498) -- (2,498)
Net income (loss)......................................... (147) 205 58
------- ------ -------
Balance, December 31, 1996.................................. -- 206 206
Distribution to members................................... -- (196) (196)
Net income................................................ -- 303 303
------- ------ -------
Balance, December 31, 1997.................................. -- 313 313
Distribution to members................................... -- (531) (531)
Pushdown of purchase price related to AAi.FosterGrant's
investment in Fantasma, LLC............................ -- 4,627 4,627
Net loss.................................................. -- (345) (345)
------- ------ -------
Balance, July 4, 1998 (unaudited)........................... $ -- $4,064 $ 4,064
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 158
FANTASMA LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------
---------------------------- JUNE 30, JULY 4,
1995 1996 1997 1997 1998
------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ (103) $ 58 $ 303 $ (900) $ (345)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........... 20 15 11 3 21
Write-off of property and equipment..... -- 20 -- -- 49
Change in assets and liabilities --
Inventory............................. 42 (1,178) 87 97 (469)
Accounts receivable................... (437) (1,811) (1,700) 2,161 3,482
Prepaid expenses and other current
assets............................. -- (121) 49 (59) (98)
Advances payable to member............ (1,001) 1,078 674 (866) (1,661)
Accounts payable and accrued
liabilities........................ 470 54 861 (610) (215)
------- -------- ------- ------ -------
Net cash provided by (used in)
operating activities............. (1,009) (1,885) 285 (174) 764
------- -------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment...................... -- -- (40) (15) (2)
Increase in other assets................... -- -- -- -- 3
------- -------- ------- ------ -------
Net cash provided by (used in)
investing activities............. -- -- (40) (15) 1
------- -------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under note payable to member..... -- 1,266 -- -- 3,712
Repayments of note payable to member....... -- -- -- -- (3,764)
Parent company investment.................. 1,009 807 -- -- --
Member contributions (distributions)....... -- 1 (196) -- (531)
------- -------- ------- ------ -------
Net cash provided by (used in)
financing activities............. 1,009 2,074 (196) -- (583)
------- -------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH.............. -- 189 49 (189) 182
CASH AT BEGINNING OF PERIOD.................. -- -- 189 189 238
------- -------- ------- ------ -------
CASH AT END OF PERIOD........................ $ -- $ 189 $ 238 $ -- $ 420
======= ======== ======= ====== =======
DISCLOSURES OF INTEREST AND TAXES PAID:
Interest paid.............................. $ -- $ 156 $ 480 $ 240 $ --
======= ======== ======= ====== =======
Taxes paid................................. $ -- $ -- $ 27 $ -- $ --
======= ======== ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Conversion of parent company investment to
note payable to member.................. $ -- $ 2,498 $ -- $ -- $ --
======= ======== ======= ====== =======
Pushdown of purchase price related to
AAi.FosterGrant's investment in
Fantasma, LLC........................... $ -- $ -- $ -- $ -- $ 4,626
======= ======== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 159
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Fantasma LLC (Fantasma) was organized under the laws of the State of
Delaware on August 22, 1996 and began business operations on September 1, 1996.
Fantasma imports and wholesales licensed watches, clocks, and other novelties;
and grants credit to customers located throughout the United States, Europe and
Japan.
Prior to September 1, 1996, Fantasma operated as a division of Overdrive
Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital Corp.
(Overdrive) sold the division's operating assets to Fantasma LLC in exchange for
a two-year, $3,764,366 note. Overdrive maintained a 67% ownership interest in
Fantasma, with a former stockholder of Overdrive holding a 33% ownership
interest. The assets were transferred at historical book value and consisted of:
<TABLE>
<S> <C>
Unexpired royalties......................................... $ 289,055
Accounts receivable......................................... 798,172
Inventory................................................... 2,600,146
Prepaid expenses............................................ 48,614
Furniture and equipment..................................... 25,000
Trademarks.................................................. 3,379
----------
Total assets transferred.......................... $3,764,366
==========
</TABLE>
The accompanying financial statements prior to the formation of Fantasma
represent the financial results of the Fantasma division as included in the
financial statements of Overdrive from January 1, 1995 to August 31, 1996.
In June 1998, AAi.FosterGrant, Inc. (AAi.FosterGrant) acquired an 80%
interest in Fantasma for approximately $4.1 million in cash. The operating
agreement under which Fantasma is managed provides AAi.FosterGrant with sole
voting rights on numerous significant matters. Accordingly, for financial
statement presentation, the acquisition was accounted for using the purchase
method. The purchase price was allocated based on estimated fair market value of
assets and liabilities at the date of acquisition, as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 73,000
Accounts receivable......................................... 1,603,000
Inventory................................................... 2,002,000
Other current assets........................................ 165,000
Furniture and equipment..................................... 15,000
Goodwill.................................................... 4,626,000
Notes payable............................................... (3,500,000)
Other current liabilities................................... (934,000)
-----------
Cash paid......................................... $ 4,050,000
===========
</TABLE>
The book value of Fantasma's assets and liabilities immediately prior to
the acquisition approximated fair market value. Goodwill is being amortized
ratably over 10 years.
Basis of Accounting
The accompanying financial statements reflect the application of certain
significant accounting policies, as discussed below and elsewhere in the notes
to financial statements. The preparation of financial statements
F-53
<PAGE> 160
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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.
Interim Financial Statements
The accompanying financial statements as of July 4, 1998 and for the
six-month periods ended June 30, 1997 and July 4, 1998 are unaudited, but in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepting accounting
principles have been omitted, although Fantasma believes that the disclosures
included are adequate. Results for the six months ended July 4, 1998 are not
necessarily indicative of the results that may be expected for the year ending
January 2, 1999.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of finished goods for all years presented. Finished goods inventory
consists of material and overhead.
Property and Equipment
Fantasma provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of these assets on a straight-line
and accelerated basis over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------------- ---------------------
<S> <C>
Equipment................................................. 5 years
Furniture and fixtures.................................... 7 years
</TABLE>
Fantasma has adopted the provisions of Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The adoption of this pronouncement did not have a material effect on
Fantasma's financial position or financial results.
Royalties
Fantasma has several agreements that require royalty payments based on a
percentage of certain net product sales, subject to specified minimum payments.
Minimum royalty obligations relating to these agreements totaled $1,425,000.
Royalty expense was approximately $330,000, $1,049,000, $1,734,000 and $439,000
for the years ended December 31, 1995, 1996 and 1997 and for the six months
ended July 4, 1998, respectively. Accrued royalties, which are included in
accounts payable and accrued expenses on the accompanying balance sheets,
totaled $732,000 and $220,000 at December 31, 1997 and July 4, 1998,
respectively. There were no accrued royalties at December 31, 1996.
Revenue Recognition
Fantasma recognizes revenue from product sales, net of anticipated returns
and discounts, taking into account historical experience, upon shipment to the
customer.
Concentration of Credit Risk
Fantasma's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. Fantasma places
its cash with high credit quality institutions. At times, such
F-54
<PAGE> 161
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
cash balances may be in excess of the FDIC insurance limit. Fantasma routinely
assesses the financial strength of its customers and, as a consequence, believes
that its trade accounts receivable credit risk exposure is limited.
Financial instruments that potentially subject Fantasma to concentrations
of credit risk are principally accounts receivable. A significant portion of its
business activity is with domestic mass merchandisers whose ability to meet
their financial obligations is dependent on economic conditions germane to the
retail industry. During recent years, many major retailers have experienced
significant financial difficulties and some have filed for bankruptcy
protection; other retailers have begun to consolidate within the industry. To
reduce credit risk, Fantasma routinely assesses the financial strength of its
customers.
Intangible and Other Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of, Fantasma reviews its long-lived assets (consisting primarily of
goodwill) for impairment as events and circumstances indicate the carrying
amount of an asset may not be recoverable. Fantasma evaluates the realizability
of its long-lived assets based on profitability and cash flow expectations for
the related asset. Management believes that as of each of the balance sheet
dates presented none of Fantasma's long-lived assets were impaired. Amortization
expense was approximately $16,000 for the six months ended July 4, 1998.
Disclosure of Fair Value of Financial Instruments
Fantasma's financial instruments consist mainly of cash, accounts
receivable, accounts payable and debt. The carrying amounts of Fantasma's
financial instruments approximate fair value.
New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. Fantasma will
adopt this statement in its financial statements for the year ending January 2,
1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Fantasma does not believe that the adoption of SFAS No. 133
will have a material impact on its financial instruments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities
(SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start-up
activities and organization costs to be expensed as incurred. Fantasma does not
believe that the adoption of SOP 98-5 will have a material impact on its
financial statements.
Income Taxes
Fantasma is treated as a partnership for Federal and State income tax
purposes, whereby the membership owners are taxed on their proportionate share
of Fantasma's income. As a result, Fantasma has not provided
F-55
<PAGE> 162
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
for Federal income taxes. The provision for income taxes reflects New York City
Unincorporated Business Tax and New York State filing fees. For the period from
January 1, 1995 to August 31, 1996, Fantasma accounted for state income taxes on
a separate company basis.
(2) NOTE PAYABLE
Fantasma issued a note payable to Overdrive as consideration for the asset
purchase on September 1, 1996 (see Note 1), under which it could borrow up to
$5,000,000. At December 31, 1996 and 1997, $3,764,000 was outstanding under this
note. The note accrued interest at the prime rate (8.5% at December 31, 1997 and
1996). Total interest charged on this note was approximately $107,000, $320,000,
$160,000 and $141,000 in the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1997 and July 4, 1998, respectively. This note was repaid
in June 1998 with the proceeds from a note payable issued to AAi.FosterGrant.
On June 13, 1998, the Company entered into a $15,000,000 demand revolving
promissory note payable with AAi.FosterGrant. Borrowings under the note are
secured by substantially all of Fantasma's assets and bear interest at a rate
equal to AAi.FosterGrant's borrowing rate. The note is payable on demand with
thirty-days notice. At July 4, 1998, $3,712,000 was outstanding under this note
payable.
(3) OPTIONS
In connection with AAi.FosterGrant's investment in Fantasma, Fantasma
issued options to two employees. The options provide that the employees may
purchase up to 13% of Fantasma at the then fair market value. Certain of these
options contain performance criteria and, therefore, will be accounted for as
variable options. Fantasma will record any increase in the value of these
options as compensation expense as they are earned.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of operations or disclosed in the notes
to financial statements. Fantasma has determined that it will account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only
alternative under SFAS No. 123.
Had compensation cost for Fantasma's options been determined based on the
fair value at the grant dates, as prescribed in SFAS No. 123, Fantasma's net
loss for the six months ended July 4, 1998 would have been $374,000.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: dividend yield of 0.0%; volatility of
35.53%; risk-free interest rates of 6.00% and a weighted average expected option
term of 5 years. The weighted average grant date fair value for an option to
purchase a 1% membership interest in Fantasma granted during the six months
ended July 4, 1998 was $14,400.
(4) RELATED PARTY TRANSACTIONS
Shared Resources
As discussed in Note 1, for the period from January 1, 1995 to August 31,
1996, Fantasma operated as the Fantasma Division of Overdrive. During this
period, and for the period from September 1, 1996 to June 10, 1998, general
corporate overhead costs related to corporate headquarters and shared
administrative support were allocated by Overdrive to Fantasma based on a number
of factors, including, for example, personnel and space utilized. Management
believes these allocations were reasonable and the costs of the
F-56
<PAGE> 163
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
services charged to Fantasma were not materially different from the costs that
would have been incurred had Fantasma performed these functions as a stand-alone
entity.
Allocated expenses were funded through advances from Overdrive. Interest on
advances was charged monthly until June 10, 1998, based on the prime rate
applied to the average outstanding monthly balance. Total interest charged on
advances payable was $129,000, $160,000, $4,000 and $27,000 in the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1997 and July 4,
1998 respectively. Advances from Overdrive were repaid during the period ended
July 4, 1998, from cash flows from operations.
(5) SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, four customers accounted for
approximately 19.8%, 19.2%, 16.5% and 12.6% of net sales, respectively. These
customers' accounts receivable balance represented approximately 20.4%, 37.4%,
5.8% and 20.8% of gross accounts receivable as of December 31, 1997.
F-57
<PAGE> 164
================================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL IN CONNECTION WITH THE
OFFERING COVERED BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NEW
NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS NOT BEEN A CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................. 1
Risk Factors............................................................ 14
The Company............................................................. 22
Use of Proceeds......................................................... 23
The Exchange Offer...................................................... 24
Capitalization.......................................................... 32
Selected Pro Forma Financial Information................................ 33
Selected Historical Financial Information............................... 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 42
Business................................................................ 51
Management.............................................................. 60
Security Ownership of Management and Certain Beneficial Owners.......... 66
Certain Transactions.................................................... 67
Description of Senior Credit Facility................................... 70
Description of Notes.................................................... 71
Description of Capital Stock............................................ 95
United States Federal Tax Considerations................................ 98
Plan of Distribution.................................................... 98
Legal Matters........................................................... 98
Experts................................................................. 99
Available Information................................................... 99
Index to Consolidated Financial Statements.............................. 100
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
[AAi.FOSTER GRANT LOGO]
OFFER TO EXCHANGE
$75,000,000 OF ITS
10 3/4% SENIOR NOTES
DUE 2006,
WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT, FOR
$75,000,000 OF ITS
OUTSTANDING 10 3/4%
SENIOR NOTES DUE 2006
---------------------
PROSPECTUS
---------------------
, 1998
================================================================================
<PAGE> 165
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SIXTH of the Company's Restated Articles of Incorporation provides
that a director shall not be liable to the Registrant or its shareholders for
breach of fiduciary duty as a director, other than liability for (a) breach of
the director's duty of loyalty to the Company or its shareholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) unlawful payment of a dividend or unlawful stock purchase
or redemption, or (d) any transaction from which the director derived an
improper personal benefit.
Section 4.1 of the Rhode Island Business Corporation Act authorizes
indemnification of directors and officers of Rhode Island corporations. Article
XI of the Company's by-laws (i) authorizes the indemnification of directors and
officers (the "Indemnified Person") under specified circumstances to the fullest
extent authorized, (ii) provides for the advancement of expenses to the
Indemnified Persons for defending any proceedings related to the specified
circumstances and (iii) gives the Indemnified Persons the right to bring suit
against the Company to enforce the foregoing rights to indemnification and
advancement of expenses. The Company currently maintains one or more policies of
insurance under which the directors and officers of the Company are insured,
within the limits and subject to the limitations of the policies, against
certain expenses in connection with the defense of actions, suits, or
proceedings, and certain liabilities which might be imposed as a result of such
action, suits or proceedings, to which they are parties by reason of being or
having been such directors or officers.
The Purchase Agreement filed as Exhibit 4.2 to this Registration Statement
provides for indemnification of the Company, the Guarantors and their respective
directors and officers and certain other persons against certain liabilities,
including liabilities under the Exchange Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
(a) Exhibits.
The Index to Exhibits to this Registration Statement is
incorporated herein by reference.
(b) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
II-1
<PAGE> 166
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) shall not
apply if the registration statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' annual reports pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
AAI.FOSTERGRANT, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President, Chief Executive Officer and
- ----------------------------------------------------- Chairman of the Board
GERALD F. CERCE (Principal Executive Officer)
/s/ DUANE M. DESISTO Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller (Principal Accounting Officer)
- -----------------------------------------------------
STEPHEN J. KOROTSKY
/s/ STEPHEN J. CARLOTTI Director
- -----------------------------------------------------
STEPHEN J. CARLOTTI
* Director
- -----------------------------------------------------
MICHAEL F. CRONIN
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
* Director
- -----------------------------------------------------
MARTIN E. FRANKLIN
* Director
- -----------------------------------------------------
GEORGE GRABOYS
BY: /s/ DUANE M. DESISTO
------------------------------------------------
(Attorney-in-fact for persons indicated by an asterisk)
</TABLE>
II-3
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
THE BONNEAU COMPANY
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-4
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
BONNEAU GENERAL INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-5
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
BONNEAU HOLDINGS, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-6
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
F.G.G. INVESTMENTS, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
* Director
- -----------------------------------------------------
THOMAS M. STRAUSS
BY: /s/ DUANE M. DESISTO
------------------------------------------------
(Attorney-in-fact for persons indicated by an asterisk)
</TABLE>
II-7
<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
FANTASMA, LLC
By: /s/ DUANE M. DESISTO
--------------------------------
DUANE M. DESISTO
TREASURER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President
- ----------------------------------------------------- (Principal Executive Officer)
ROGER D. DREYER
/s/ DUANE M. DESISTO Treasurer
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
AAi.FosterGrant, Inc.
BY: /s/ GERALD F. CERCE Member
------------------------------------------------
GERALD F. CERCE
PRESIDENT
Houdini Capital Ltd.
By: * Member
------------------------------------------------
ROGER D. DREYER
PRESIDENT
BY: /s/ DUANE M. DESISTO
------------------------------------------------
(Attorney-in-fact for persons indicated by an asterisk)
</TABLE>
II-8
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
FOSTER GRANT GROUP, L.P.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
Bonneau General, Inc., General Partner
its General Partner
By: /s/ GERALD F. CERCE
-------------------------------------------------
GERALD F. CERCE
PRESIDENT
</TABLE>
II-9
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
FOSTER GRANT HOLDINGS, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Treasurer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-10
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
OPTI-RAY, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-11
<PAGE> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Smithfield, State of Rhode Island, on November 12,
1998.
O-RAY HOLDINGS, INC.
By: /s/ GERALD F. CERCE
--------------------------------
GERALD F. CERCE
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement on Form S-4 has been signed by
the following persons in the capacities indicated, on November 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERALD F. CERCE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
GERALD F. CERCE
/s/ DUANE M. DESISTO Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial Officer)
DUANE M. DESISTO
/s/ STEPHEN J. KOROTSKY Controller
- ----------------------------------------------------- (Principal Accounting Officer)
STEPHEN J. KOROTSKY
/s/ JOHN H. FLYNN, JR. Director
- -----------------------------------------------------
JOHN H. FLYNN, JR.
</TABLE>
II-12
<PAGE> 177
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders of
AAi.FosterGrant, Inc. and Subsidiaries:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of AAi.FosterGrant, Inc. and Subsidiaries
included in this registration statement and have issued our report thereon dated
February 2, 1998 (except with respect to matters discussed in Notes 6, 7 and 18
as to which the date is July 21, 1998). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
Item 21(b) is the responsibility of the company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1998
<PAGE> 178
SCHEDULE II
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
OF PERIOD EXPENSES RESERVES(1) OTHER(2) PERIOD
----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Reserves:
December 31, 1995.................... $ 900 $12,538 $12,710 $ -- $ 728
December 31, 1996.................... 728 16,265 13,721 9,810 13,082
December 31, 1997.................... 13,082 27,477 31,130 909 10,338
</TABLE>
- ---------------
(1) Amounts deemed uncollectible.
(2) Reserves related to Accounts Receivable acquired in acquisitions.
S-1
<PAGE> 179
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1.1* Restated Articles of Incorporation of AAi.FOSTERGRANT, Inc.
3.1.2* Amended and Restated By-laws of AAi.FOSTERGRANT, Inc.
3.2.1* Restated Articles of Incorporation of The Bonneau Company
3.2.2* By-laws of The Bonneau Company
3.3.1* Certificate of Incorporation of Bonneau General, Inc.
3.3.2* By-laws of Bonneau General, Inc.
3.4.1* Certificate of Incorporation of Bonneau Holdings, Inc.
3.4.2* By-laws of Bonneau Holdings, Inc.
3.5.1* Restated Certificate of Incorporation of F.G.G. Investments,
Inc.
3.5.2* By-laws of F.G.G. Investments, Inc.
3.6.1* Certificate of Formation of Fantasma, LLC
3.6.2* Amended and Restated Operating Agreement of Fantasma, LLC
3.7.1* Certificate of Limited Partnership of Foster Grant Group,
L.P.
3.7.2* Amended and Restated Agreement of Limited Partnership of
Foster Grant Group, L.P.
3.8.1* Restated Certificate of Incorporation of Foster Grant
Holdings, Inc.
3.8.2* Amended and Restated By-laws of Foster Grant Holdings, Inc.
3.9.1* Restated Certificate of Incorporation of Opti-Ray, Inc.
3.9.2* By-laws of Opti-Ray, Inc.
3.10.1* Certificate of Incorporation of O-Ray Holdings, Inc.
3.10.2* By-laws of O-Ray Holdings, Inc.
4.1* Indenture dated as of July 21, 1998, by and among
AAi.FOSTERGRANT, Inc. ("AAi"), its domestic subsidiaries
named therein (the "Guarantors") and IBJ Schroder Bank &
Trust Company, as Trustee, with respect to the Series A and
Series B 10 3/4% Senior Notes due 2006.
4.2* Purchase Agreement dated as of July 16, 1998, by and among
AAi, the Guarantors and NationsBanc Montgomery Securities
LLC, Prudential Securities Incorporated and BancBoston
Securities Inc. (the "Initial Purchasers").
4.3* Registration Rights Agreement dated as of July 21, 1998, by
and among AAi, the Guarantors and the Initial Purchasers.
4.4* Form of New Note (contained in Exhibit 4.1).
5.1* Opinion of Hinckley, Allen & Snyder as to the legality of
the securities registered hereunder.
9.1* Letter Agreement of Weston Presidio Capital II, L.P.
regarding voting of the Preferred Stock of AAi dated
December 9, 1996.
9.2* Tag-Along Transfer Restriction and Voting Agreement among
AAi, Weston Presidio Capital, II, L.P. and certain other
investors and certain shareholders of the Company dated May
31, 1996, as amended on December 11, 1996.
10.1* Second Amended and Restated Financing and Security Agreement
by and among AAi, certain of its Subsidiaries, NationsBank,
N.A., as agent, and other lenders party thereto, dated July
21, 1998.
10.2* Agreement of Amendment, Termination & Modification between
AAi, Bolle, Inc., Foster Grant Group, LP and Foster Grant
Holdings, Inc. dated June 1998.
10.3* Stock Purchase Agreement by and among AAi, BEC Group, Inc.,
Foster Grant Group, L.P. and Foster Grant Holdings, Inc.,
dated May 31, 1996, as amended by a side letter dated
December 11, 1996.
10.4* Securities Purchase Agreement among AAi, Weston Presidio
Capital II, L.P. and certain other investors, dated May 31,
1996.
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.5* Registration Rights Agreement among AAi, Weston Presidio
Capital II, L.P. and certain other investors and certain
shareholders of the Company dated May 31, 1996, as amended
on December 11, 1996.
10.6* Fantasma, LLC Member Agreement by and among AAi, Roger D.
Dreyer and Houdini Capital LTD dated as of June 23, 1998.
10.7* Fantasma, LLC Member Agreement by and among AAi and Paul
Michaels dated as of June 23, 1998.
10.8* Incentive Stock Plan of AAi.
10.9* Employment Agreement between AAi and Gerald F. Cerce dated
May 31, 1996.
10.10* Employment Agreement between AAi and Duane M. DeSisto dated
May 31, 1996.
10.11* Employment Agreement between AAi and John H. Flynn, Jr.
dated May 31, 1996.
10.12* Employment Agreement between AAi and Robert V. Lallo dated
May 31, 1996.
10.13* Employment Agreement between AAi and Felix A. Porcaro, Jr.
dated May 31, 1996.
10.14* Supplemental Executive Retirement Plan between AAi and
Gerald F. Cerce dated September 29, 1994, as amended on
December 29, 1995 and May 31, 1996.
12.1* Computation of ratio of earnings to fixed charges.
21.1* Subsidiaries of AAi.
23.1* Consent of Hinckley, Allen & Snyder (contained in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney of certain directors and officers of the
Company.
24.2* Power of Attorney of certain directors and officers of The
Bonneau Company.
24.3* Power of Attorney of certain directors and officers of
Bonneau General, Inc.
24.4* Power of Attorney of certain directors and officers of
Bonneau Holdings, Inc.
24.5* Power of Attorney of certain directors and officers of
F.G.G. Investments, Inc.
24.6* Power of Attorney of certain directors and officers of
Fantasma, LLC.
24.7* Power of Attorney of certain directors and officers of
Foster Grant Group, L.P.
24.8* Power of Attorney of certain directors and officers of
Foster Grant Holdings, Inc.
24.9* Power of Attorney of certain directors and officers of
Opti-Ray, Inc.
24.10* Power of Attorney of certain directors and officers of O-Ray
Holdings, Inc.
25.1* Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939, as amended, of IBJ Schroder
Bank & Trust Company, as Trustee.
27.1 Financial Data Schedule for the six months ended July 4,
1998.
27.2 Financial Data Schedule for the fiscal year ended December
31, 1997.
27.3 Financial Data Schedule for the three months ended April 4,
1998.
99.1* Form of Letter of Transmittal with respect to the Exchange
Offer.
99.2* Form of Letter of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers.
99.4* Form of Exchange Agency Agreement between AAi and IBJ
Schroder Bank & Trust Company.
</TABLE>
- ---------------
* Previously filed with this Registration Statement.
<PAGE> 1
Exhibit 12.1
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
AAi.FosterGrant, Inc. and Subsidiaries for each of the five years in the period
ended December 31, 1997, the six months ended June 30, 1997 and July 4,
1998 and on a pro forma basis for the year ended December 31, 1997 and the
six months ended July 4, 1998. The ratio of earnings to fixed charges is
computed by dividing net fixed charges (interest expense, amortization of debt
issuance costs, accretion and noncash dividends and the portion of rental
expense that is representative of the interest factor) into earnings before
income taxes and fixed charges.
<TABLE>
<CAPTION>
Six Months Ended,
Year Ended December 31 ------------------------------
---------------------------------------------------------------- June 30, July 4, July 4,
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ---- ------ -------- -------- ------- -------
(Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings before
income taxes
excluding accretion
and non cash
dividends $4,954 $2,820 $8,467 $ (859) $ 1,977 $(1,237) $1,892 $ (768) $(2,635)
Interest expense
including interest
portion of rental
expense 679 506 1,150 1,574 4,316 8,915 2,122 2,862 4,349
Undistributed earnings
of unconsolidated
subsidiaries -- (447) (275) -- -- -- -- -- --
------ ------ ------ ------ ------- ------- ------ ------ -------
Earnings before fixed
charges 5,633 2,879 9,342 715 6,293 7,678 4,014 2,094 1,714
------ ------ ------ ------ ------- ------- ------ ------ -------
Fixed Charges:
Interest expense
including interest
portion of rental
expense 679 506 1,150 1,574 4,316 8,915 2,122 2,862 4,349
Accretion and
noncash dividends -- -- -- 2,808 4,386 4,386 2,137 3,239 3,239
------ ------ ------ ------ ------- ------- ------ ------ ------
Fixed charges 679 506 1,150 4,382 8,702 13,301 4,259 6,101 7,588
------ ------ ------ ------ ------- ------- ------ ------ ------
Ratio of earnings to
fixed charges 8.30x 5.69x 8.12x -- -- -- -- -- --
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statements.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 11, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 4 to Form S-4 of AAi. FosterGrant, Inc.
of our report dated December 30, 1997, relating to the consolidated financial
statements of Foster Grant Group LP, which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
November 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001067346
<NAME> AAI FOSTER GRANT
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-04-1998
<EXCHANGE-RATE> 1
<CASH> 2,373
<SECURITIES> 0
<RECEIVABLES> 53,775
<ALLOWANCES> 11,889
<INVENTORY> 30,922
<CURRENT-ASSETS> 83,560
<PP&E> 31,781
<DEPRECIATION> 14,483
<TOTAL-ASSETS> 127,755
<CURRENT-LIABILITIES> 35,509
<BONDS> 73,110
28,343
0
<COMMON> 6
<OTHER-SE> (9,315)
<TOTAL-LIABILITY-AND-EQUITY> (9,309)
<SALES> 88,631
<TOTAL-REVENUES> 88,631
<CGS> 47,543
<TOTAL-COSTS> 47,543
<OTHER-EXPENSES> 39,208
<LOSS-PROVISION> 224
<INTEREST-EXPENSE> 2,638
<INCOME-PRETAX> (768)
<INCOME-TAX> 338
<INCOME-CONTINUING> (430)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,787)
<EPS-PRIMARY> (2.94)
<EPS-DILUTED> (2.94)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001067346
<NAME> AAI FOSTER GRANT
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,779
<SECURITIES> 0
<RECEIVABLES> 28,714
<ALLOWANCES> 10,338
<INVENTORY> 32,795
<CURRENT-ASSETS> 64,338
<PP&E> 21,616
<DEPRECIATION> 11,431
<TOTAL-ASSETS> 93,746
<CURRENT-LIABILITIES> 58,402
<BONDS> 18,501
26,918
0
<COMMON> 6
<OTHER-SE> (7,365)
<TOTAL-LIABILITY-AND-EQUITY> 93,746
<SALES> 149,411
<TOTAL-REVENUES> 149,411
<CGS> 77,928
<TOTAL-COSTS> 77,928
<OTHER-EXPENSES> 65,323
<LOSS-PROVISION> 28,386
<INTEREST-EXPENSE> 4,214
<INCOME-PRETAX> 1,977
<INCOME-TAX> 1,162
<INCOME-CONTINUING> 815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,681)
<EPS-PRIMARY> (2.76)
<EPS-DILUTED> (2.76)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001067346
<NAME> AAI FOSTER GRANT
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-04-1998
<EXCHANGE-RATE> 1
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<SECURITIES> 0
<RECEIVABLES> 48,223
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27,613
0
<COMMON> 6
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<TOTAL-REVENUES> 42,703
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<INTEREST-EXPENSE> 1,178
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<INCOME-TAX> (317)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (279)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
