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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Under Section 13 of the Securities Exchange Act of 1934
For the fiscal year ended January 2, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 From the transition period from ________ to
________.
AAI.FOSTERGRANT, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Rhode Island 05-0419304
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500 George Washington Highway, Smithfield RI 02917
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(Address of Principal Executive Offices) (Zip Code)
(401) 231-3800
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(Issuer's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 1, 1999, the aggregate market value of the voting equity held
by non-affiliates of the Registrant was none.
As of April 1, 1999, 608,000 shares of Common Stock and 43,700 shares of
Series A Preferred Stock of the Registrant were issued and outstanding.
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Table of Contents
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Description Page Number
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Part I. Item 1 -- Business............................................. 3
Item 2 -- Properties........................................... 10
Item 3 -- Legal Proceedings.................................... 10
Item 4 -- Submission of Matters to a Vote of Security Holders.. 11
Part II. Item 5 -- Market for the Company's Common Equity and
Related Stockholder Matters.......................... 11
Item 6 -- Selected Financial Data.............................. 12
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 14
Item 7A -- Quantitative and Qualitative Disclosures About
Market Risk ......................................... 27
Item 8 -- Financial Statements and Supplementary Data.......... 27
Item 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 27
Part III. Item 10 -- Directors and Executive Officers of the Company...... 28
Item 11 -- Executive Compensation............................... 32
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management....................................... 37
Item 13 -- Certain Relationships and Related Transactions....... 39
Part IV. Item 14 -- Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................. 43
Signatures ..................................................... 45
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PART I
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ITEM 1. BUSINESS
GENERAL
AAi.FosterGrant, Inc. ("AAi" or the "Company") 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. The Company markets its products under its own brand names
such as Foster Grant(R) as well as customers' private labels and numerous
licensed brand names. 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 1,400 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 fiscal 1998, sales
to customers utilizing the Company's service program accounted for 69.0% of
AAi's net sales.
On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Notes due
2006 (the "Notes"). The net proceeds of approximately $71.0 million were used to
repay outstanding indebtedness, as described under Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
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.
CAUTIONARY STATEMENT
This annual report contains statements relating to future results of the
Company (including certain projections and business trends) that are considered
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to,
changes in economic conditions and competitive product and pricing pressures
within the Company's market, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
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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.
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 $101.7 million, or 63.4%, of net sales in fiscal 1998. 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 $22.0 million, or 13.7%, of net sales in fiscal
1998. 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
$13.8 million, or 8.6%, of net sales in fiscal 1998. 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 $22.7 million, or 14.2%, of its fiscal 1998 net sales. 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.
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.
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With regard to new customers, 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 the
Company in obtaining new customers.
In fiscal 1998, Wal-Mart and Kmart accounted for approximately 27.3% and
11.4%, respectively, of the Company's net sales. No other customers accounted
for 10% or more of the Company's total net sales in 1998. 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. In addition, certain segments of the retail industry,
particularly mass merchandisers, variety stores, drug stores and supermarkets,
are experiencing significant consolidation. Further industry consolidation could
result in the Company's loss of customers that are acquired by retailers
serviced by other suppliers as well as further concentration of the Company's
credit risks. Such events could have a material adverse effect on the Company's
results of operations.
PRODUCTS
The Company offers sunglasses, reading glasses, costume jewelry, small
synthetic leather goods, watches, clocks, and other accessories generally at
retail price points of $20 or less.
Optical Products. The Company's optical product line includes sunglasses
and non-prescription reading glasses which are sold with and without the
Company's service program. As a result of its 1996 acquisition of Foster Grant
Group L.P. and related entities ("Foster Grant US"), AAi has become a leading
seller of popularly priced sunglasses (retail price points of $8 to $30). The
Company pursues co-branding opportunities for its Foster Grant name and also
sells sunglasses under other licensed brand names. 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, licensed brand names 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 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(TM) name. Tempo is the
opening retail price point costume jewelry line at J.C. Penney. Most of the
Company's
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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. The bulk of
these products are sold on a non-program basis and are shipped direct from the
Company's suppliers to the customer. In June 1998, through the acquisition of
Fantasma, LLC ("Fantasma") the Company added watches and clocks (with average
retail price points between $10 and $20) to its product lines.
DISTRIBUTION
During the fourth quarter of 1998, AAi closed its Texas distribution
facility and consolidated its distribution operations at its recently expanded
Smithfield, Rhode Island facility. The Company consolidated its distribution
facilities in order to optimize supply chain operations, improve customer
service, increase inventory turns and lower operating costs. A disruption of the
Company's distribution operations for any reason 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.
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.
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. 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, which AAi anticipates will improve the efficiency of
employees in filling orders.
The Company delivers ordered items to customers using unaffiliated delivery
companies, primarily UPS. 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
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UPS may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also 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 Company's joint venture in Hong Kong.
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 these
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 fiscal 1998, the sales to customers
who utilize the Company's service program accounted for approximately 69.0% 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 1,400
field service representatives.
SALES AND MARKETING
The Company's seven sales managers have an average of over 17 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
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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.
In addition, since acquiring the Foster Grant brand, the Company has begun
to advertise directly to the end-consumer. This includes relaunching the "Who's
That Behind Those Foster Grants" campaign, featuring Cindy Crawford, global
promotions and public relations efforts aimed at increasing awareness of the
Foster Grant brand. Also, the Company has launched a co-branded line of Ironman
Triathlon(R) sports sunglasses.
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 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.
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.
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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 and consumer requirements.
Sourcing and Assembly. The Company outsources manufacturing for all of its
products, 75% of which is sourced to manufacturers in Asia through a 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. 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.
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 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.
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EMPLOYEES
As of March 15, 1999, the Company had approximately 700 full-time employees
and 1,400 part-time employees, none of whom were represented by a labor union.
The Company considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal executive office is located at 500 George Washington
Highway, Smithfield, Rhode Island. AAi's primary distribution facilities are
adjacent to its recently expanded headquarters, which together are 180,000
square feet.
The following table describes the material properties owned and leased by
AAi:
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USE
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OWNED PROPERTY:
Warehousing & Distribution, Product Showroom and Sales
Smithfield, Rhode Island Office and Office Administration
LEASED PROPERTIES:
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 (a) Warehousing
Carpenter St., Providence,
Rhode Island (a) Warehousing
Toronto, Canada Product Showroom and Sales Office
Newcastle Under Lyme,
Staffordshire, United Kingdom Warehousing & Distribution and Office Administration
</TABLE>
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(a) Leased to AAi from related parties. See "Certain Relationships and Related
Transactions."
ITEM 3. 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
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not expect these matters to have a material adverse effect on the financial
condition, results of the operation or cash flow of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
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PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the Common Stock of the Company is held by affiliates and certain
directors and officers of the Company; thus, no trading market exits for such
stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected consolidated financial data for
the Company and is qualified in its entirety by the more detailed consolidated
financial statements of the Company included herein. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
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YEAR ENDED DECEMBER 31,
---------------------------------------------------- YEAR ENDED
1994 1995 1996(a) 1997(a) JANUARY 2, 1999(a)
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $76,611 $88,050 $ 86,336 $149,411 $160,325
Cost of goods sold.................. 37,096 43,690 47,871 77,928 88,823
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Gross profit........................ 39,515 44,360 38,465 71,483 71,502
Operating expenses.................. 36,441 34,782 37,524 65,323 78,135
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Income from operations.............. 3,074 9,578 941 6,160 (6,633)
Interest expense.................... (342) (1,031) (1,469) (4,214) (7,010)
Other (expense) income, net......... 88 (80) (331) 31 490
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Income before taxes................. 2,820 8,467 (859) 1,977 (13,153)
Income tax benefit (expense)........ -- (42) 948 (1,162) --
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Net income.......................... 2,820 8,425 89 815 (13,153)
Dividends and accretion
on preferred stock(b)............. -- -- 1,123 2,496 2,779
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Net income (loss) applicable to
common shareholders............... 2,820 8,425 (1,034) (1,681) (15,932)
Pro forma income tax adjustment(c).. (1,128) (3,370) (604) -- --
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Pro forma net income (loss)
applicable to common shareholders $ 1,692 $ 5,055 $ (1,638) $ (1,681) $ (15,932)
======= ======= ======== ======== =========
OTHER DATA:
Depreciation and amortization....... $ 628 $ 783 $ 1,868 $ 8,248 $12,792
Cash flow from operating activities. 2,265 1,818 (1,892) 1,886 (3,903)
Cash flow from investing activities. (1,891) (2,104) (12,825) (9,363) (29,753)
Cash flow from financing activities. (600) 259 16,159 8,779 33,084
EBITDA(d)........................... 3,790 10,281 2,488 14,439 6,649
Capital expenditures(e)............. 1,552 1,555 1,572 7,583 16,882
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------- AS OF
1994 1995 1996 1997 JANUARY 2, 1999
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(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 4,436 $ 7,795 $ 687 $ 5,936 $ 31,346
Total assets........................ 16,773 25,187 82,010 93,746 126,498
Total debt(f)....................... 2,593 5,542 35,588 44,960 78,982
Preferred securities(g)............. -- -- 24,338 26,918 29,771
Total shareholders' equity(deficit). 4,890 11,523 (5,281) (7,359) (23,502)
</TABLE>
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(a) Includes the results of operations of the acquired businesses from the
respective dates of acquisition: Tempo Division of Allison Reed Group, Inc.
("Tempo") in June 1996, Foster Grant US in December 1996, Superior
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Jewelry Company ("Superior") in July 1997, Eyecare Products UK Ltd. ("Foster
Grant UK") in March 1998 and Fantasma, LLC ("Fantasma") in June 1998.
(b) Reflects a reduction from net income for the accretion and noncash dividends
on Series A Preferred Stock. See Note 10 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 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 Tempo, Foster Grant US, Superior, Foster Grant UK and Fantasma.
(f) Includes amounts outstanding under a revolving credit facility, various
long-term obligations and subordinated promissory notes payable to
shareholders at each applicable period.
(g) Includes preferred stock of Foster Grant Holdings, Inc.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain "forward-looking" statements and
are subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet the
Company's working capital and capital expenditure requirements and statements
regarding the anticipated proportion of revenues to be derived from a limited
number of customers, may constitute forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. These risks and uncertainties include the substantial
leverage of the Company, customer concentration and consolidation, dependence on
licensed brands, a single site distribution facility, a limited number of
delivery companies, operating in international economies, unpredictability of
discretionary consumer spending, competition, susceptibility to changing
consumer preferences and successful conversion of computer systems and
implementation of Year 2000 readiness programs, as well as those described in
the Company's Registration Statement on Form S-4 declared effective on November
16, 1998 (SEC File No. 333-61119). The following discussion and analysis of
financial condition and results of operations should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto included
elsewhere.
OVERVIEW
The Company is a value-added distributor of optical products, costume
jewelry, watches, clocks and other accessories primarily to mass merchandisers,
chain drug stores/combo stores/supermarkets and variety stores 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
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<PAGE> 15
not carry the Company'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 which has had a negative effect
on the Company's results of operations.
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.
Net Sales. The Company offers optical products, costume jewelry, small
synthetic leather goods, watches, clocks 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, product lines in which the Company had only minimal sales before the
acquisition. 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 47.3%, 50.7% and 17.4% of the Company's net sales in
fiscal 1998, 1997 and 1996, respectively; net sales of the Company's costume
jewelry accounted for approximately 40.3%, 43.4% and 74.6% of the Company's net
sales in fiscal 1998, 1997 and 1996, respectively, and the balance represented
sales of synthetic leather goods, watches, clocks and other accessories.
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.
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
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<PAGE> 16
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 most of these
agreements. In these situations, the Company values this inventory at its fair
market value, representing the lower of cost or net realizable value, and
records that value as inventory. The Company sells this inventory through
various liquidation channels. Except as provided below, 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 $0.9 million,
$1.6 million and $2.7 million in fiscal 1998, 1997 and 1996, respectively.
The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer and the
estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During
fiscal 1998, the Company capitalized approximately $2.3 million of these costs.
No such costs were capitalized during fiscal 1996 and 1997. Amortization expense
related to these costs was approximately $219,000 for the year ended January 2,
1999.
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 in the Articles of
Incorporation) is outstanding. Net loss applicable to common shareholders
represents net loss less accretion of original issuance costs and cumulative
dividends due on the Series A Preferred Stock.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Although EBITDA is not a measure of performance calculated in accordance with
Generally Accepted Accounting Principles (GAAP), the Company believes that
EBITDA is accepted as a generally recognized measure of performance in the
distribution industry and provides an indicator of the earnings available to
meet the Company's debt service obligations. 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 the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
EBITDA was $6.6 million, $14.4 million and $2.5 million in fiscal 1998, 1997 and
1996, respectively.
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<PAGE> 17
RECENT SIGNIFICANT ACQUISITIONS
The Company has grown rapidly through strategic acquisitions in recent
years. 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 Fantasma. In connection with the
acquisition, Mr. Dreyer and another officer of Fantasma received 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.
Based on fiscal 1998 results of operations, options to acquire 3% of Fantasma
expired resulting in options to acquire an additional 10% membership interest
outstanding at January 2, 1999. 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 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. No adjustment to the purchase price is
required as result of 1998 sales. 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. No adjustment is required as a result of 1998 operating results to the
purchase price. 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
an 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
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<PAGE> 18
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 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 January 2, 1999, net intangible
assets as a result of acquisitions was $20.9 million.
CONSOLIDATION OF DISTRIBUTION OPERATIONS
In the fourth quarter of 1998, the Company closed its Texas distribution
center and consolidated distribution operations at its expanded Rhode Island
facility. AAi expects this restructuring will generate permanent annual
operating expense savings of approximately $2.8 million commencing in 1999. In
1998, the Company incurred $5.0 million of expenses related to the closing of
the Texas distribution center, including a restructuring charge of $2.6 million
for the write-down of disposed assets, the payment of severance benefits and
expenses relating to operating inefficiencies.
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<PAGE> 19
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>
YEAR ENDED YEAR ENDED DECEMBER 31,
JANUARY 2, 1999 1997 1996
--------------- ---- ----
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
Cost of goods sold.................................... 55.4 52.2 55.4
------- ------- -------
Gross profit.......................................... 44.6 47.8 44.6
Operating expenses.................................... 47.1 43.7 43.5
Restructuring Charge.................................. 1.6 -- --
------- ------- -------
(Loss) income from operations......................... (4.1) 4.1 1.1
Interest expense...................................... 4.4 2.8 1.7
Other income (expense), net........................... 0.3 -- (0.4)
------- ------- -------
(Loss) income before taxes and dividends and
accretion on preferred stock........................ (8.2) 1.3 (1.0)
Income tax (expense) benefit.......................... -- (0.7) 1.1
------- ------- -------
Net (loss) income before dividends and
accretion on preferred stock........................ (8.2) 0.6 0.1
Dividends and accretion on preferred
stock............................................... 1.7 1.7 1.3
------- ------- -------
Net loss applicable to
common shareholders................................. (9.9) (1.1) (1.2)
======= ======= =======
Pro forma tax expense................................. -- -- (0.7)
------- ------- -------
Pro forma net loss applicable to
common shareholders................................. (9.9)% (1.1)% (1.9)%
======= ======= =======
</TABLE>
YEAR ENDED JANUARY 2, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Consolidated net sales were $160.3 million for the year ended
January 2, 1999 as compared to $149.4 million for the year ended December 31,
1997, an increase of 7.3% or $10.9 million. The $10.9 million increase in net
sales relates to the 1998 acquisitions of Fantasma and Foster Grant UK which
contributed $18.0 million of net sales. This increase was partially offset by a
decline of $7.1 million of net sales with chain drug stores/combo
stores/supermarkets, primarily related to sales of optical products which were
adversely impacted by disruptions associated with the relocation of optical
distribution activities to the Company's expanded Smithfield, Rhode Island
facility.
Gross Profit. Gross profit was $71.5 million for the year ended January 2,
1999 which was the same as for the year ended December 31, 1997. Gross profit
from the aforementioned acquisitions accounted for an $8.0 million increase
offset by a decline in net sales in chain drug
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<PAGE> 20
stores/combo stores/supermarkets, primarily related to optical products. Gross
profit as a percentage of net sales decreased to 44.6% from 47.8% due to the
decline in sales of optical products (which carry higher margins) and increased
shipments of lower margin seasonal and promotional products as well as from the
lower margins on Fantasma products.
Operating Expenses. Operating expenses were $78.1 million for the year
ended January 2, 1999 as compared to $65.3 million for the year ended December
31, 1997, an increase of 19.6% or $12.8 million. The increase is attributable to
$6.9 million of operating expenses associated with the acquired entities and
$5.0 million of expenses related to the closing of the Texas distribution center
including the write-down of disposed assets, the payment of severance benefits
and operating inefficiencies incurred subsequent to the announcement of the
planned closure.
Interest Expense. Interest expense was $7.0 million for the year ended
January 2, 1999 as compared to $4.2 million for the year ended December 31,
1997, an increase of 66.4% or $2.8 million. This resulted from additional
borrowings under the Company's credit facilities to fund acquisitions and
expanded operations and a higher effective interest rate related to the Notes.
Income Tax Benefit (Expense). No income tax benefit was recorded for the
year ended January 2, 1999 as compared to $1.2 million of expense for the year
ended December 31, 1997. During 1998, based on actual and anticipated results,
the Company determined that a greater valuation reserve was required.
Accordingly, the Company increased the valuation allowance by approximately $3.7
million which offset any benefit that was recognized.
Net Income (Loss). As a result of the factors discussed above, net loss
before dividends and accretion on preferred stock was $13.2 million for the year
ended January 2, 1999 as compared to net income before dividends and accretion
on preferred stock of $815,000 for the year ended December 31, 1997, a decrease
of $14.0 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $15.9 million for the year ended January 2, 1999 as compared to
a loss of $1.7 million for the year ended December 31, 1997, an increase of
$14.2 million. The increase was attributable to the $14.0 million decrease in
earnings and an increase of $283,000 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.
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<PAGE> 21
Gross Profit. Gross profit was $71.5 million for the 1997 as compared to
$38.5 million for 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 consolidating
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 Benefit (Expense). 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 intangilble 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 (Loss). As a result of the factors discussed above, net income
before dividends and accretion on preferred stock was $815,000 in 1997 as
compared to net income before dividends and accretion on preferred stock of
$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
$647,000. The increase was primarily attributable to the $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 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.
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<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
At January 2, 1999 the Company had cash and cash equivalents of $2.2
million and working capital of $36.1 million. To date, the Company has funded
its operations through credit facilities, issuance of equity and debt
securities, and cash generated from operations.
The Company used $3.9 million of cash for operations during fiscal 1998
compared to generating $1.6 million of cash from operations in fiscal 1997. The
cash used in operations in fiscal 1998 was used primarily to fund losses from
operations and increases in accounts receivable.
The Company used $29.8 million in investing activities during fiscal 1998,
compared to $9.1 million in 1997. Cash used in investing activities increased in
fiscal 1998 as compared to 1997 as a result of cash used in acquisitions and
additional expenditures for property and equipment. The cash used in investing
activities in fiscal 1998 included $6.4 million for the purchase and expansion
of the Company's Smithfield, Rhode Island headquarters, $9.4 million for display
fixtures, $5.5 million to acquire certain assets of Foster Grant UK and the
Foster Grant trademark for the United Kingdom and Europe, and $4.1 million to
acquire an 80% interest in Fantasma. The Company expects its capital expenditure
level (excluding cost of display fixtures) to be approximately $1.5 million for
fiscal 1999.
The Company generated $33.1 million from financing activities during fiscal
1998, compared to $8.8 million in 1997. Cash generated from financing activities
increased in fiscal 1998 compared to 1997 primarily as a result of the Company's
sale of the Notes. On July 21, 1998, substantially all of the net proceeds from
the sale of $75.0 million of 10 3/4% Senior Notes were used to pay existing
debt.
The 43,700 shares of Series A Preferred Stock has a redemption value of
$28.9 million at January 2, 1999. Shares of Series A Preferred Stock are
convertible into Common Stock at a rate of 10 to 1, adjustable for certain
dilutive events. Conversion is at the option of the shareholder, but is
automatic upon consummation of a qualified public offering. The holders of the
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 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.
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 the Company, and upon the
total transaction value.
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<PAGE> 23
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
Company's senior credit facility with NationsBank, N.A., as agent and lender
(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 that the Company finds acceptable.
The Company has substantial indebtedness and significant debt service
obligations. As of January 2, 1999, the Company had total indebtedness,
including borrowings under the Senior Credit Facility, in the aggregate
principal amount of $79.0 million. The Company had current liabilities of
approximately $43.0 million. In addition, the Company has significant annual
obligations that include interest on the Notes of approximately $8.1 million,
minimum royalty obligations over the next two years of approximately $2.7
million and minimum payments under its operating leases of approximately $1.9
million. The Indenture permits the Company to incur additional indebtedness,
including secured indebtedness, subject to certain limitations.
The Company had up to $47.3 million available for borrowings under the
Senior Credit Facility as of January 2, 1999. 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 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. As of January 2, 1999, the Company was not in compliance
with certain financial covenants under the Senior Credit Facility. The Company
received a waiver of such non-compliance from its lenders and is currently
negotiating an amendment to the Senior Credit Facility which will modify the
financial covenants going forward. If the Company does not successfully
negotiate an amendment to the Senior Credit Facility, the Company expects that
it will not be in compliance with certain financial covenants in the Senior
Credit Facility for fiscal 1999. The Company has received a letter from the
Bank stating that it intends to modify the covenants so they are amounts which
the Company believes it can attain. The Company believes it will successfully
negotiate the amendment, however, there can be no assurance that it will be
able to do so.
The Company's ability to make scheduled payments of principal of, or to
pay the interest 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
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<PAGE> 24
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.
24
<PAGE> 25
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.
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.
As a result of the Company's growth, AAi is implementing a new information
management system which is expected to be Year 2000 compliant. The new system is
scheduled for completion by mid-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. The Company
will evaluate the need for contingency planning in the second 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.
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<PAGE> 26
The Company has engaged in formal communications with its major
customers and most significant vendors to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. These 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. While there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted and will not have an adverse effect on the Company's systems,
the Company does not believe that its operations are materially vulnerable to
the failure of any vendor or customer to properly address the Year 2000 issue.
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.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The aforementioned steps being
undertaken by the Company are expected to significantly reduce the Company's
level of uncertainty about the Year 2000 problem and, in particular, about the
Year 2000 compliance and readiness of its material customers and vendors. The
Company believes that, with the implementation of its new information management
system and the other steps being taken, the possibility of significant
interruptions of normal operations should be reduced.
RECENT ACCOUNTING PRONOUNCEMENTS
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> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about the Company's market risk disclosures
includes forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE RISK. The Company is exposed to market risk from changes in
interest rates primarily through its borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. At January 2,
1999, approximately 99% of the carrying values of the Company's long-term debt
was at fixed interest rates.
FOREIGN CURRENCY RISK. The Company's results of operations are affected by
fluctuations in the value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in the British Pound,
the Canadian Dollar, the Mexican Peso and the Hong Kong Dollar. In fiscal 1998,
the net impact of foreign currency changes was not material to the Company's
financial condition or results of operations. The Company manages its exposure
to foreign currency exchange risk by trying to minimize the Company's net
investment in its foreign subsidiaries. At January 2, 1999, the Company's net
investment in foreign assets was approximately $6.2 million. The Company
generally does not enter into derivative financial instruments to manage foreign
currency exposure.
The Company's operations in Europe are not significant and, therefore, the
Company does not expect to be materially impacted by the introduction of the
Euro dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to financial statements is included on page F-1 of this Annual
Report and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosure as defined by Item 304 of Regulation S-K.
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<PAGE> 28
================================================================================
PART III
================================================================================
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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," or individually, a "Preferred Holder")
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. In addition, AAi's Articles of Incorporation
provide that, in addition to other events, if the Company is in default of any
of its covenants thereunder, the Preferred Holders shall have the right to elect
a majority of the members of the Board of Directors. The Company is currently in
default of one such covenant. However, the Preferred Holders have not exercised
their right to elect a majority of the members of the Board of Directors.
The Company's shareholders have entered into an agreement that requires
them, subject to the rights of Preferred Holders to elect additional directors
in the event of default, 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 Relationships and Related Transactions --
Shareholders Agreement." Officers are elected by and serve at the discretion of
the Board of Directors.
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<PAGE> 29
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 .............. 66 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 ......... 64 Executive Vice President - International
Duane M. DeSisto ............ 44 Chief Financial Officer, Treasurer, and
Assistant Secretary
</TABLE>
- ----------
* Designated by the Preferred Holders. All other directors were designated by
certain management shareholders pursuant to the Shareholders Agreement. See
"Certain Relationships and Related 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 at least 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
29
<PAGE> 30
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.
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. (an
integrated waste management company), Tekni Plex, Inc. (a manufacturer of
packaging materials), Tweeter Home Entertainment Group, Inc. (a retailer of
audio and video consumer electronics products) and several other private growth
companies. Since 1991, Mr. Cronin has been the Managing General Partner of
Weston Presidio Capital, a venture capital investment firm. He is a graduate of
Harvard College and Harvard Business School.
Martin E. Franklin has been a Director of the Company since 1996. Mr.
Franklin has been Chairman and Chief Executive Officer of Marlin Holdings, Inc.,
the general partner of Marlin Capital, L.P., a private investment partnership,
since October 1996. He also serves as Chairman of the Board of Directors of
Bolle Inc., a NASDAQ listed company, and as a Director of Specialty Catalog
Corp. From May 1996 until March 1998, Mr. Franklin served as Chairman and Chief
Executive Officer of Lumen Technologies, Inc., a NYSE company, and served as
Executive Chairman from March 1998 until December 1998. Mr. Franklin was
Chairman of the Board and Chief Executive Officer of Lumen's predecessor, Benson
Eyecare Corporation from October 1992 to May 1996 and President from November
1993 until May 1996. Mr. Franklin was non-executive Chairman and a Director of
Eyecare Products plc, a London Stock Exchange company, from December 1993 until
February 1999. Mr. Franklin also serves on the boards of a number of privately
held companies and charitable organizations. Mr. Franklin received a B.A. in
political science from the University of Pennsylvania in 1986.
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.
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<PAGE> 31
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 1978 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 AAi 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> 32
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Management. The following table summarizes the
compensation paid or accrued by the Company to its Chief Executive Officer and
each of its most highly compensated executive officers who earned more than
$100,000 in salary and bonus in fiscal 1998 (together, the "NAMED EXECUTIVE
OFFICERS") for the years ended December 31, 1997 and January 2, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(a) LONG TERM
FISCAL ---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS OPTIONS(#) COMPENSATION(b)
--------------------------- ---- --------- ----- ---------- ---------------
<S> <C> <C> <C> <C>
Gerald F. Cerce,......................... 1998 $651,342 $145,000 -- $245,576
Chairman, President and Chief 1997 661,024 -- -- 211,988
Executive Officer
John H. Flynn, Jr.,...................... 1998 309,236 75,000 -- 12,905
Executive Vice President-Sales and 1997 299,898 -- -- 11,151
Felix A. Porcaro, Jr.,................... 1998 211,673 50,000 -- 13,138
Executive Vice President-Product 1997 204,213 -- -- 14,695
Development and Marketing
Robert V. Lallo.......................... 1998 165,229 45,000 -- 6,069
Executive Vice President-Distribution 1997 161,131 -- -- 4,988
Duane M. DeSisto......................... 1998 164,495 45,000 -- 4,460
Chief Financial Officer, Treasurer and 1997 160,118 -- 2,000 3,709
Assistant Secretary
</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 paid in fiscal 1998 represent the following: (1) medical payments
reimbursed by the Company to Mr. Cerce ($2,950), Mr. Flynn ($5,225), Mr.
Porcaro ($9,270) and Mr. Lallo ($475); (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 ($9,662), Mr.
Flynn ($6,090), Mr. Porcaro ($2,500), Mr. Lallo ($4,141) and Mr. DeSisto
($3,206); (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 $230,000 paid with respect to life insurance
purchased by the Company in connection with Mr. Cerce's Supplemental
Executive Retirement Plan.
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<PAGE> 33
STOCK PLAN
The Company has established the 1996 Incentive Stock Plan (the "1996 Plan")
which provides for the grant of awards covering a maximum of 150,000 shares of
Common Stock to officers and other key employees of the Company and
non-employees who provide services to the Company or its subsidiaries. Awards
under the 1996 Plan may be granted in the form of incentive stock options,
non-qualified stock options, shares of common stock that are restricted, units
to acquire shares of Common Stock that are restricted, or in the form of stock
appreciation rights or limited stock appreciation rights.
No options were granted to the Named Executed Officers in fiscal 1998. The
following table contains information with respect to aggregate stock options
held by the Named Executive Officers as of January 2, 1999. Messrs. Cerce,
Flynn, Porcaro and Lallo do not hold any stock options. All such options were
exercisable as of such date. No stock options were exercised by any Named
Executive Officers during fiscal 1998.
AGGREGATE YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
NAME AT FISCAL YEAR 1998 OPTION/SARS($)(a)
- ---- ------------------- -----------------
<S> <C> <C>
Duane M. DeSisto.................. 4,000 0
</TABLE>
- ----------
(a) Based on the January 2, 1999, price of the Common Stock being equal to the
exercise price of $50.
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
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<PAGE> 34
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 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.
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<PAGE> 35
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, all 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 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 includable in the
income of the executive until paid and, accordingly, the Company is not entitled
to a deduction for any liabilities
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<PAGE> 36
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> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND DIRECTORS AND OFFICERS
The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of March 15, 1999, 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)..................... -- -- 305,906 50.3% 305,906 29.3%
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
Robert V. Lallo ........................ -- -- 28,500 4.7 28,500 2.7
Duane M. DeSisto (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 3.0
All executive officers and directors
as a group (10 persons) (p)........... 21,850 50.0 597,000 96.9 815,500 78.0
</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.
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<PAGE> 38
(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, 21st 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, 21st
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., Brahman Institutional
Partners, 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, subject to the right of the Preferred Holders to elect
additional directors in the event of the Company's default on certain covenants,
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 Relationships and
Related Transactions -- Shareholders Agreement."
38
<PAGE> 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTES PAYABLE TO PREFERRED HOLDERS
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 holders of its Series A
Preferred Stock (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. and one of the initial purchasers of the Notes, 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 Notes in 1998.
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 Notes in 1998.
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 Notes, the
shareholders repaid these advances.
39
<PAGE> 40
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 $114,000 as of March 15, 1999. The mortgage note has a remaining
maturity of three years, and bears interest at a rate of 9.5% annually.
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 Lumen Technologies, Inc. (formerly
named BEC Group, Inc.) ("Lumen"), the former owner of the Foster Grant US office
and distribution center. Martin E. Franklin, a director of the Company, is the
chairman of Lumen and Bolle, Inc. The aggregate rental expense for this property
was approximately $494,000 per year in both 1997 and 1998. In March 1998, Lumen
transferred the Texas property to Bolle, Inc., an affiliated corporation at the
time of transfer. In May 1998, Bolle, Inc. sold the Texas property to an
independent third party. The Company terminated this 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, subject to the right of the Preferred Holders to elect additional
directors in the event of the Company's default on certain covenants, 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
40
<PAGE> 41
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 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 FOSTER GRANT US BY LUMEN
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, issued Lumen 100 shares of Preferred Stock of Foster
Grant US (the "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 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 ending December 31, 1996.
The Certificate of Incorporation of Foster Grant US 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-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
41
<PAGE> 42
Amount that would have been received had the Redemption Event occurred on or
prior to the FG Redemption Date.
INITIAL PURCHASERS OF THE 10 3/4% SENIOR NOTES DUE 2006
BancBoston Ventures, Inc., an affiliate of BancBoston Securities Inc. and
one of the initial purchasers of the Notes, is the beneficial owner of 15.7% of
the Company's Series A Preferred Stock and 1.3% of the Common Stock.
NationsBank, N.A., an agent and lender under the Company's Senior Credit
Facility, is an affiliate of NationsBanc Montgomery Securities LLC, one of the
initial purchasers of the Notes. The Company used a portion of the net proceeds
from the sale of the Notes to repay all of the outstanding indebtedness under a
$400,000 subordinated note due to BancBoston Ventures, Inc. and under the senior
credit facility and certain term loans due to NationsBank, N.A.
LEGAL SERVICES
Stephen J. Carlotti, a partner of Hinckley, Allen & Snyder, is a director
and the secretary of the Company and, as trustee, is the holder of 5.9% of the
Common Stock. Hinckley, Allen & Snyder provides legal services to the Company.
42
<PAGE> 43
================================================================================
PART IV
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Financial Statements are listed in the index on Page F-1 of this Annual
Report.
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. 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.
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..
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.
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
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.
10.4.1* Securities Purchase Agreement among AAi, Weston Presidio Capital
II, L.P. and certain other investors, dated May 31, 1996.
10.4.2 First Amendment to Securities Purchase Agreement among AAi, Weston
Presidio Capital II, L.P. and certain other investors, dated
October 1, 1998.
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* Incentive Stock Plan of AAi.+
10.7* Employment Agreement between AAi and Gerald F. Cerce dated May 31,
1996.+
10.8* Employment Agreement between AAi and Duane M. DeSisto dated May 31,
1996.+
10.9* Employment Agreement between AAi and John H. Flynn, Jr. dated
May 31, 1996.+
10.10* Employment Agreement between AAi and Robert V. Lallo dated May 31,
1996.+
10.11* Employment Agreement between AAi and Felix A. Porcaro, Jr. dated
May 31, 1996.+
10.12* Supplemental Executive Retirement Plan between AAi and Gerald F.
Cerce dated September 29, 1994, as amended on December 29, 1995 and
May 31, 1996.+
10.13 Executive Bonus Plan.+
10.14 Non-Qualified Excess 401(k) Plan.+
21.1* Subsidiaries of AAi.
27.1 Financial Data Schedule for the fiscal year ended January 2, 1999.
</TABLE>
- ----------
* Previously filed as an exhibit to the Company's Registration Statement No.
333-61119 on Form S-4 and by this reference is incorporated herein.
+ Management or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None.
44
<PAGE> 45
AAI.FOSTERGRANT, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAI.FOSTERGRANT, INC.
/s/ Gerald F. Cerce
Date: April 2 , 1999 By:_______________________________
Gerald F. Cerce
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Gerald F. Cerce /s/ Duane M. DeSisto
_____________________________ ___________________________
Gerald F. Cerce Duane M. DeSisto
President, Chief Executive Officer Chief Financial Officer
and Chairman of the Board (Principal Financial Officer)
(Principal Executive Officer) Date: April 2, 1999
Date: April 2, 1999
/s/ Stephen J. Korotsky /s/ Stephen J. Carlotti
_____________________________ _____________________________
Stephen J. Korotsky, Controller Stephen J. Carlotti, Director
(Principal Accounting Officer) Date: April 2, 1999
Date: April 2, 1999
/s/ Michael F. Cronin /s/ John H. Flynn, Jr.
_____________________________ ___________________________
Michael F. Cronin, Director John H. Flynn, Jr., Director
Date: April 2, 1999 Date: April 2, 1999
/s/ Martin E. Franklin /s/ George Graboys
_____________________________ ___________________________
Martin E. Franklin, Director George Graboys, Director
Date: April 2, 1999 Date: April 2, 1999
45
<PAGE> 46
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND JANUARY 2, 1999
TOGETHER WITH AUDITORS' REPORT
<PAGE> 47
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
AAI.FOSTERGRANT, INC.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997
AND JANUARY 2, 1999 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-3
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE NET INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
FANTASMA, LLC:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-39
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND JANUARY 2, 1999 F-40
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-41
STATEMENTS OF MEMBERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-42
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND JANUARY 2, 1999 F-43
NOTES TO FINANCIAL STATEMENTS F-44
</TABLE>
<PAGE> 48
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, 1997 and
January 2, 1999, and the related consolidated statements of operations,
redeemable preferred stock, shareholders' equity (deficit) and comprehensive net
income (loss) and cash flows for each of the three years in the period ended
January 2, 1999. 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, 1997 and January 2
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended January 2, 1999, in conformity with
generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999
F-1
<PAGE> 49
AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,779 $ 2,207
Accounts receivable, less reserves of approximately $10,338 and $9,975 18,323 29,317
Inventories 32,795 37,162
Prepaid expenses and other current assets 734 1,918
Deferred tax assets 9,707 3,743
--------------- ---------------
Total current assets 64,338 74,347
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land - 1,233
Building and improvements - 5,211
Display fixtures 11,009 18,755
Furniture, fixtures and equipment 7,427 8,209
Leasehold improvements 2,819 2,824
Equipment under capital leases 361 918
--------------- ---------------
21,616 37,150
LESS--ACCUMULATED DEPRECIATION AND AMORTIZATION 11,431 19,607
--------------- ---------------
10,185 17,543
--------------- ---------------
OTHER ASSETS:
Advances to officers/shareholders 53 69
Deferred costs - 2,090
Deferred tax assets - 5,319
Investments in affiliates 1,426 1,337
Intangible assets, net of accumulated amortization of $1,306 and $2,725 16,600 20,874
Other assets, net of accumulated amortization of $0 and $219 1,144 4,919
--------------- ---------------
19,223 34,608
--------------- ---------------
Total assets $ 93,746 $ 126,498
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 27,598 $ 2,576
Current maturities of long-term obligations 3,331 626
Deferred compensation-Current portion 30 30
Accounts payable 14,117 14,899
Accrued expenses 11,221 22,740
Accrued income taxes 2,105 2,130
--------------- ---------------
Total current liabilities 58,402 43,001
--------------- ---------------
10 3/4% SERIES B SENIOR NOTES DUE 2006 - 75,000
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 8,544 780
DEFERRED COMPENSATION, LESS CURRENT PORTION 1,109 1,448
DEFERRED TAX LIABILITIES 645 -
SUBORDINATED PROMISSORY NOTES PAYABLE TO SHAREHOLDERS 5,487 -
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 15)
REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY 835 909
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 26,083 28,862
--------------- ---------------
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value
Authorized--4,800,000 shares
Issued and outstanding--608,000 shares 6 6
Additional paid-in capital 270 270
Accumulated other comprehensive loss (78) (289)
Accumulated deficit (7,557) (23,489)
--------------- ---------------
Total shareholders' deficit (7,359) (23,502)
--------------- ---------------
Total liabilities and shareholders' deficit $ 93,746 $ 126,498
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 50
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
--------------------YEARS ENDED-------------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
NET SALES $ 86,336 $ 149,411 $ 160,325
COST OF GOODS SOLD 47,871 77,928 88,823
--------------- --------------- ---------------
Gross profit 38,465 71,483 71,502
SELLING EXPENSES 26,613 43,589 49,315
GENERAL AND ADMINISTRATIVE EXPENSES 10,911 21,734 26,220
RESTRUCTURING CHARGE - - 2,600
--------------- --------------- ---------------
Income (loss) from operations 941 6,160 (6,633)
EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES (345) (63) (76)
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY - (83) (187)
INTEREST EXPENSE (1,469) (4,214) (7,010)
OTHER INCOME, NET 14 177 753
--------------- --------------- ---------------
(Loss) income before income tax benefit (expense) and
dividends and accretion on preferred stock (859) 1,977 (13,153)
INCOME TAX BENEFIT (EXPENSE) 948 (1,162) -
--------------- --------------- ---------------
Net income (loss) before dividends and accretion on
preferred stock 89 815 (13,153)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 1,123 2,496 2,779
--------------- --------------- ---------------
Net loss applicable to common shareholders $ (1,034) $ (1,681) $ (15,932)
=============== =============== ===============
PRO FORMA INCOME TAX ADJUSTMENT $ (604) $ - $ -
=============== =============== ===============
PRO FORMA NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,638) $ (1,681) $ (15,932)
=============== =============== ===============
BASIC AND DILUTED NET LOSS PER SHARE APPLICABLE TO COMMON
SHAREHOLDERS $ (1.75) $ (2.76) $ (26.20)
=============== =============== ===============
BASIC AND DILUTED PRO FORMA NET LOSS PER SHARE APPLICABLE TO
COMMON SHAREHOLDERS $ (2.77) $ (2.76) $ (26.20)
=============== =============== ===============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 591,000 608,000 608,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 51
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE NET INCOME (LOSS),
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SERIES A REDEEMABLE CONVERTIBLE COMPREHENSIVE
PREFERRED STOCK INCOME (LOSS)
(ALL FOREIGN
REDEMPTION ADDITIONAL CURRENCY
SHARES VALUE COMMON STOCK PAID-IN TRANSLATION
SHARES PAR VALUE CAPITAL ADJUSTMENT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 - $ - 570,000 $ 6 $ 115 $ 7
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 - - - -
Issuance of common stock - - 38,000 - 100 -
Retirement of treasury stock - - - - (2) -
Proceeds from previously issued common
stock - - - - 57 -
Foreign currency translation adjustment
(not tax effected) - - - - - 1
Distributions to shareholders - - - - - -
Net income - - - - - -
Comprehensive net income for the year
ended December 31, 1996
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 43,700 23,587 608,000 6 270 8
Dividends and accretion on Series A
Preferred Stock - 2,496 - - - -
Foreign currency translation adjustment
(not tax effected) - - - - - (86)
Distributions to shareholders - - - - - -
Net income - - - - - -
Comprehensive net income for the year
ended December 31, 1997
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 43,700 26,083 608,000 6 270 (78)
Dividends and accretion on Series A
Preferred Stock - 2,779 - - - -
Foreign currency translation adjustment
(not tax effected) - - - - - (211)
Net loss - - - - - -
Comprehensive net loss for the year ended
January 2,1999
--------- --------- --------- --------- --------- ---------
BALANCE, JANUARY 2, 1999 43,700 $ 28,862 608,000 $ 6 $ 270 $ (289)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS SHAREHOLDERS COMPREHENSIVE
(ACCUMULATED TREASURY STOCK EQUITY NET INCOME
DEFICIT) SHARES COST (DEFICIT) (LOSS)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 11,520 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) - (1,123) -
Issuance of common stock - - - 100 -
Retirement of treasury stock (123) (47,538) 125 - -
Proceeds from previously issued common
stock - - - 57 -
Foreign currency translation adjustment
(not tax effected) - - - 1 1
Distributions to shareholders (15,928) - - (15,928) -
Net income 89 - - 89 89
---------
Comprehensive net income for the year
ended December 31, 1996 $ 90
--------- --------- --------- --------- =========
BALANCE, DECEMBER 31, 1996 (5,565) - - (5,281) $ -
Dividends and accretion on Series A
Preferred Stock (2,496) - - (2,496) -
Foreign currency translation adjustment
(not tax effected) - - - (86) (86)
Distributions to shareholders (311) - - (311) -
Net income 815 - - 815 815
---------
Comprehensive net income for the year
ended December 31, 1997 $ 729
--------- --------- --------- --------- =========
BALANCE, DECEMBER 31, 1997 (7,557) - - (7,359) $ -
Dividends and accretion on Series A
Preferred Stock (2,779) - - (2,779) -
Foreign currency translation adjustment
(not tax effected) - - - (211) (211)
Net loss (13,153) - - (13,153) (13,153)
---------
Comprehensive net loss for the year ended
January 2,1999 $ (13,364)
--------- --------- --------- --------- =========
BALANCE, JANUARY 2, 1999 $ (23,489) - $ - $ (23,502)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 52
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------YEAR ENDED----------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 89 $ 815 $ (13,153)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities, net of acquisitions--
Depreciation and amortization 1,868 8,248 12,792
Equity in losses of investments in affiliates 345 63 76
Minority interest in income of consolidated subsidiary - 83 187
Loss on barter transaction - - 187
Cumulative foreign currency translation adjustment 1 (86) (211)
Amortization of interest costs related to issuance of 10 3/4%
senior notes due 2006 - - 212
Deferred interest on subordinated promissory notes payable 205 282 140
Deferred taxes (1,695) (339) -
Changes in assets and liabilities, net of effect of
acquisitions-
Accounts receivable (5,087) (7,410) (7,706)
Inventories (463) 3,797 (199)
Prepaid expenses and other current assets (477) 912 73
Deferred costs - - (2,309)
Accounts payable 3,502 (5,323) (3,844)
Accrued expenses (1,097) (923) 10,006
Accrued income taxes 590 1,481 (154)
--------------- --------------- ---------------
Net cash (used in) provided by operating activities (2,219) 1,600 (3,903)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received (9,842) (1,834) (9,464)
Purchase of property, plant and equipment (1,572) (7,583) (16,882)
Advances to officers/shareholders (32) (1) (3,511)
(Increase) decrease in investments in affiliates (761) 460 13
(Increase) decrease in other assets (266) (95) 91
--------------- --------------- ---------------
Net cash used in investing activities (12,473) (9,053) (29,753)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving note payable 3,311 7,697 (25,022)
Proceeds from term note payable - - 13,222
Payments on term note payable - - (13,222)
Proceeds from issuance of subordinated promissory notes
payable to shareholders 2,000 - -
Payments on subordinated notes - - (2,132)
Proceeds from 10 3/4% senior notes due 2006 - - 75,000
Costs related to issuance of 10 3/4% senior notes due 2006 - - (3,713)
Proceeds from issuance of long-term obligations 3,445 8,943 -
Payments on long-term obligations (2,292) (7,551) (11,026)
Payments on deferred compensation (23) (23) (23)
Distributions to shareholders (12,928) (311) -
Proceeds from issuance of preferred stock, net of issuance
costs 22,464 - -
Proceeds from issuance of common stock 100 - -
Proceeds from previously issued common stock 57 - -
--------------- --------------- ---------------
Net cash provided by financing activities 16,134 8,755 33,084
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,442 1,302 (572)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35 1,477 2,779
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,477 $ 2,779 $ 2,207
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 1,042 $ 4,074 $ 3,936
=============== =============== ===============
Income taxes $ 57 $ 50 $ 597
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Conversion of leasehold improvements to building improvements $ - $ - $ 1,393
=============== =============== ===============
Acquisition of equipment under capital lease obligations $ - $ 361 $ 557
=============== =============== ===============
Offset of advances to officers/shareholders against
subordinated promissory notes payable to
officers/shareholders $ - $ - $ 3,495
=============== =============== ===============
Increase in cash surrender value of officers life insurance
policy $ 304 $ 263 $ 361
=============== =============== ===============
Exchange of inventory for barter credits $ - $ - $ 947
=============== =============== ===============
Distribution of notes payable to shareholders $ 3,000 $ - $ -
=============== =============== ===============
Repayment of revolving note payable with term loan $ - $ 5,972 $ -
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During fiscal 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 (9,842) (1,834) (9,464)
--------------- --------------- ---------------
Liabilities assumed and notes issued $ 38,793 $ 4,116 $ 6,208
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 53
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a value added
distributor of accessories such as; 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.
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 year ended January 2, 1999 in connection with this
plant closing. The components of this charge, which is included in
operating expenses in the accompanying fiscal 1998 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 January 2, 1999, all of these 40
employees were terminated and severance benefits of $431,000 were paid.
The remaining severance accrual at January 2,1999 was $654,000, which
will be paid during fiscal 1999.
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 7). The
net proceeds received by the Company from the issuance and sale of the
Notes, approximately $71.0 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 9), net of
amounts due the Company from certain of these shareholders (see Note 3).
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.
F-6
<PAGE> 54
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(b) Change in Fiscal Year-End
During 1998, the Company elected to change its fiscal year-end
from December 31, to the Saturday closest to December 31.
(c) 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.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
Finished goods $ 28,229 $ 31,037
Work-in-process and raw
materials 4,566 6,125
------------- -------------
$ 32,795 $ 37,162
============= =============
</TABLE>
Finished goods inventory consists of material, labor and
manufacturing overhead.
(e) Advertising Costs
Advertising costs, which are included in selling expense, are
expensed when the advertisement first takes place. Advertising
expense was approximately $364,000, $873,000 and $1,061,000 for
the years ended December 31, 1996 and 1997 and January 2, 1999,
respectively. Prepaid advertising production costs were $132,000
at January 2, 1999 and are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets.
The Company had no prepaid advertising production costs reported
as assets at December 31, 1997.
F-7
<PAGE> 55
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(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
the straight-line basis over their estimated useful lives as
follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
ASSET CLASSIFICATION 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) Intangible and Other Long-Lived Assets
Intangible assets consist of goodwill and trademarks, which are
being amortized on the 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 and $1.4 million for the
years ended December 31, 1996 and 1997 and January 2, 1999,
respectively.
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, 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.
F-8
<PAGE> 56
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(h) 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.
(i) 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 also receive the previous vendor's merchandise from the
customer in connection with most of these agreements. In these
situations, the Company values this inventory at its fair market
value, representing the lower of cost or net realizable value, and
records that value as inventory. The Company sells this inventory
through various liquidation channels. Except as provided below,
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 $2.7 million,
$1.6 million, and $0.9 million for the years ended December 31,
1996 and 1997 and January 2, 1999, respectively.
The excess costs over the fair market value of the inventory
received is capitalized as deferred costs and amortized over the
agreement period if the Company enters into a minimum purchase
agreement with the customer and the estimated gross profits from
future minimum sales during the term of the agreement are
sufficient to recover the amount of the deferred costs. During
fiscal 1998, the Company capitalized approximately $2.3 million of
these costs in the accompanying consolidated balance sheet. No
such costs were capitalized during fiscal 1996 and 1997.
Amortization expense related to these costs was approximately
$219,000 for the year ended January 2, 1999.
(j) 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.
F-9
<PAGE> 57
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(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,
excluding the Notes, approximate fair value. The Company's Notes
had a carrying value of approximately $75.0 million at January 2,
1999. The Company has determined the fair value of the Notes based
on the current trading prices to be approximately $66.0 million at
January 2, 1999.
(l) Net Loss Per Share
In March 1997, the Financial Accounting Standards Board (FASB)
issued 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.
Basic net loss per share applicable to common shareholders was
determined by dividing net loss attributable to common
shareholders by the weighted average common shares outstanding
during the period. Diluted net loss per share applicable to common
shareholders is the same as basic net loss per share applicable to
common shareholders as the effects of the Company's potential
common stock equivalents are antidilutive. Accordingly, options to
purchase a total of 8,000, 14,000 and 12,000 common shares for
fiscal 1996, 1997 and 1998, respectively, 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 shares of Series A Redeemable Convertible Preferred
Stock (Series A Preferred Stock) have also been excluded for all
periods presented as they are antidilutive.
Pro forma net 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 loss applicable
to common shareholders by the basic and diluted weighted average
shares outstanding.
(m) New Accounting Standards
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.
F-10
<PAGE> 58
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, (SOP 98-5)
Reporting on the Costs of Start-up Activities. 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.
(n) Reclassifications
Certain balances from prior years consolidated financial
statements have been reclassified to conform with the current
year's presentation.
(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 fiscal 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 the 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 fiscal 1998 and 1999 based on
Foster Grant UK performance. Based on fiscal 1998 activity, there was no
increase in the purchase price.
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 the 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. In addition, the purchase price had
a contingent element based on Superior's earnings during fiscal 1997 and
1998. Based on fiscal 1997 activity, the purchase price increased $0.9
million. This amount was accrued for as of December 31, 1997 and recorded
as additional goodwill. There was no increase in the purchase price based
on fiscal 1998 activity.
F-11
<PAGE> 59
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 fiscal 1997 activity, which is
being amortized on the 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 4,
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 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 10).
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 the straight-line basis over
40 years. During fiscal 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 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 were subject to
potential future downward adjustments based on fiscal 1997 or 1998 sales
of Tempo; no such adjustment was required.
The acquisition was accounted for using the purchase method of
accounting; accordingly, the results of operations 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 the 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
F-12
<PAGE> 60
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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, Foster Grant UK and Fantasma 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>
-----------------------YEARS ENDED------------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 195,231 $ 181,992 $ 166,457
Net loss applicable to common shareholders (14,683) (1,794) (16,285)
Basic and diluted net loss per share applicable to
common shareholders (24.84) (2.95) (26.78)
</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. Dividend distributions of approximately $2.9
million in 1996 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 9) 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 fiscal 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 is approximately
$3.4 million. These advances are evidenced by promissory notes and bear
interest at an annual rate equal to the Applicable Federal Rate (5.21% at
January 2, 1999). Principal and accrued interest are payable on demand.
These advances and their related interest were offset against the
subordinated notes payable to shareholders that were due to these
shareholders of approximately $3.5 million. The remaining amounts have
been included in long-term other assets in the accompanying consolidated
balance sheets.
Pro forma income taxes, assuming the Company was subject to C corporation
income taxes, have been provided in the accompanying statements of
operations for 1996 at an estimated statutory rate of 40%.
F-13
<PAGE> 61
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 1996 tax provision.
The components of the income tax benefit (expense) are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Current-
Federal $ - $ (700) $ -
State (51) (124) (33)
--------------- --------------- ---------------
(51) (824) (33)
Deferred-
Federal (766) (286) (3,054)
State (130) (52) (625)
--------------- --------------- ---------------
(896) (338) (3,679)
--------------- --------------- ---------------
Increase in valuation allowance - - 3,712
--------------- --------------- ---------------
Effect of change in tax status 1,895 - -
--------------- --------------- ---------------
$ 948 $ (1,162) $ -
=============== =============== ===============
</TABLE>
F-14
<PAGE> 62
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Income tax provision at federal statutory rate (34.0)% 34.0% (34.0)%
Increase (decrease) in tax resulting from-
State tax provision, net of federal
benefit (6.0) 6.0 (4.1)
Nondeductible expenses - 18.7 1.5
Increase in valuation allowance and other,
net - - 36.6
Effect of change in tax status (70.3) - -
------------ ------------- -------------
Actual effective tax rate (benefit) expense (110.3) 58.7% -%
------------ ------------- -------------
Pro forma adjustment 70.3
Pro forma effective tax rate (40.0)%
============
</TABLE>
Deferred income taxes relate to the following temporary differences (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
Nondeductible reserves $ 6,633 $ 5,486
Nondeductible accruals 2,207 1,107
Customer acquisition costs 714 (1,226)
Net operating loss carryforwards 703 421
Other 402 (119)
--------------- ---------------
Gross deferred tax assets 10,659 5,669
Less--Valuation allowance (952) (1,926)
--------------- ---------------
Net current deferred tax assets $ 9,707 $ 3,743
=============== ===============
Net operating loss carryforwards $ - $ 7,455
Tax basis of property and equipment (740) 382
Other 95 220
--------------- ---------------
Gross long term deferred tax (liabilities) assets (645) 8,057
Less--Valuation allowance - (2,738)
--------------- ---------------
Net long term deferred tax (liabilities) assets $ (645) $ 5,319
=============== ===============
</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.
During 1998, based on the actual and anticipated results, the Company
F-15
<PAGE> 63
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
determined that a greater valuation reserve was required. Accordingly,
the Company increased the valuation allowance by approximately $3.7
million. The Company has approximately $23.4 million of net operating
loss carryforwards which expire through 2018.
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 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.
Any increase in the redemption amount will be recorded as goodwill.
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 years ended
December 31, 1997 and January 2,1999 was approximately $75,000 and
$74,000, respectively.
F-16
<PAGE> 64
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(5) CREDIT FACILITIES WITH A BANK
In July 1998, the Company amended its credit facility with a bank (the
Bank Agreement). The amended facility provides for a $60.0 million
revolving credit facility, including a $3.0 million letter of credit
facility. 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.
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 the lesser of (i)
inventories or (ii) $30.0 million less the interest rate protection
reserve and the foreign exchange exposure, reduced by outstanding letters
of credit. Revolving credit borrowings bear interest at the bank's prime
rate (7.75% at January 2, 1999) plus .5% or LIBOR (5.07% at January 2,
1999) plus 2.25%. The Company has the option of electing the rate;
however, the use of the LIBOR is limited. The revolving credit facility
expires in July 2003. As of January 2, 1999, the Company had
approximately $47.3 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 if terminated within the first year, $0.3 million if
terminated within the second year and $0.1 million thereafter. The
termination fee will be waived if the debt is refinanced with the bank or
if repayment is from proceeds of the Company's initial public offering.
The credit facility is subject to certain restrictive covenants,
including a fixed charge coverage ratio, leverage ratio and minimum
EBITDA. As of January 2, 1999, the Company was not in compliance with the
above financial covenants. The Company received a waiver for such
noncompliance from the Bank and is currently negotiating an amendment to
the Bank Agreement which will modify the financial covenants going
forward. If the Company does not successfully negotiate the amendment,
the Company expects that it will not be in compliance with these
financial covenants for fiscal 1999. The Company has received a letter
from the Bank stating that it intends to modify the covenants so they are
amounts which the Company believes it can attain. Amounts due under this
credit facility are secured by the accounts receivable and inventory of
the Company and its domestic subsidiaries.
In October 1998, Foster Grant UK entered into a credit facility with a
different bank. The facility provides for a (pound)1.5 million
(approximately $2.5 million at January 2, 1999) overdraft line to finance
working capital. Repayments under this facility are fluctuating with
interest at the bank's base rate (6.25% at January 2, 1999) plus 1.25% if
below the facility limit of (pound)1.5 million and 2.25% if in excess of
the agreed limit. The facility expires in September 1999. The Company had
no borrowings outstanding under this facility at January 2, 1999 and was
in compliance with all covenants.
F-17
<PAGE> 65
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(6) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31, 1997 and
January 2, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
Debt refinanced to a three-year term note,
interest at prime rate plus .5% or LIBOR plus
2.5% (paid in full in July 1998) $ 10,000 $ -
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 190 126
Capital lease obligation, payable in monthly
installments of principal and interest of
$10,903 through November 2000, interest at
9.0% per annum 335 230
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 159 55
Capital lease obligation, payable in monthly
installments of principal and interest through
November 2001, interest at 8.0% per annum - 538
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 604 433
Term loan payable in connection with Tempo
acquisition 331 -
Other 256 24
-------------- --------------
11,875 1,406
Less--Current maturities 3,331 626
-------------- --------------
$ 8,544 $ 780
============== ==============
</TABLE>
F-18
<PAGE> 66
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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. This note was settled in full during 1998.
Future maturities of the Company's long-term obligations as of January 2,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1999 $ 626
2000 443
2001 337
--------------
$ 1,406
==============
</TABLE>
(7) 10 3/4% SENIOR NOTES OFFERING DUE 2006
On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series
A Notes due 2006 (the Notes) through a Rule 144A offering. The net
proceeds of approximately $71.0 million received by the Company from the
issuance and sale of the Notes were used to repay outstanding
indebtedness under the credit facility with a bank and the Subordinated
Promissory Notes to shareholders, net of amounts due the Company from
certain of these shareholders. The Company incurred issuance costs of
approximately $3.7 million in relation to the Notes. These costs are
being amortized over the life of the Notes and are included in other
assets in the accompanying consolidated balance sheets. In December 1998
the Notes were exchanged for 10 3/4% Series B Notes due 2006 registered
with the SEC. Interest on the Notes is payable semiannually on January 15
and July 15, commencing January 15, 1999.
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 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.
The Notes are redeemable at the option of the Company on or after July
15, 2002. The Notes will be subject to redemption at the option of the
Company, in whole or in part, at various redemption prices, declining
from 105.375% of the principal amount to par on and after July 15, 2004.
In addition, on or prior to July 15, 2001, the Company may use the net
cash proceeds of one or more equity offerings to redeem up to 35% of the
aggregate principal amount of the Notes originally issued at a redemption
price of 110.750% of the principal amount thereof plus accrued interest
to the date of redemption. Upon a change of control, each Note holder has
the right to require the Company to repurchase such holder's Notes at a
purchase price of 101% of the principal amount plus accrued interest.
(8) DEFERRED COMPENSATION
F-19
<PAGE> 67
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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. The Company incurred
approximately $200,000 in expense related to the insurance policy during
the years ended December 31, 1996 and 1997 and January 2, 1999. At January
2, 1999, the cash surrender value of the life insurance policy was
approximately $1.1 million and is included in other assets in the
accompanying consolidated balance sheet.
The Company also 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
January 2, 1999 was $101,418, of which $29,660 is due prior to January 1,
2000. These amounts are included as deferred compensation in the
accompanying consolidated balance sheets.
(9) SUBORDINATED PROMISSORY NOTES PAYABLE TO SHAREHOLDERS
Coincident with the sale of Series A Preferred Stock (Note 10) 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 bore interest at an annual
rate of 7.04%. Approximately 50% of the interest was payable annually and
the remaining balance was deferred and payable 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. Upon the closing of the Notes offering, the Company paid
the amounts due to the preferred shareholders and offset the amounts due
to the shareholders with the related advances to these
officers/shareholders (see Note 3).
(10) 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
F-20
<PAGE> 68
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 if the offering is
consummated after May 31, 1999.
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 ENDING
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.
F-21
<PAGE> 69
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 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 9).
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.
(11) 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 vest in a method determined by the
F-22
<PAGE> 70
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 January 2,
1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF SHARES 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, January 2, 1999 12,000 $ 50 8.5
============== ============== ==============
Exercisable, December 31, 1996 8,000 $ 50 10
============== ============== ==============
Exercisable, December 31, 1997 14,000 $ 50 9.5
============== ============== ==============
Exercisable, January 2, 1999 12,000 $ 50 8.5
============== ============== ==============
</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 granted to employees 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.
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. Based on fiscal 1998
activity, options to purchase 3% of Fantasma had expired resulting in
options to purchase 10% of Fantasma outstanding at January 2, 1999.
F-23
<PAGE> 71
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
Had compensation cost for the Company's and Fantasma's stock plans been
determined based on the fair value at the grant dates, as prescribed in
SFAS No. 123, the Company's net loss and net loss per share applicable to
common shareholders for the years ended December 31, 1996 and 1997 and
January 2, 1999 would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Net loss applicable to common
shareholders (in thousands)-
As reported $ (1,034) $ (1,681) $ (15,932)
Pro forma (1,201) (1,806) (15,999)
Net loss per share applicable to common
shareholders-
As reported $ (1.75) $ (2.76) $ (26.20)
Pro forma (2.03) (2.97) (26.31)
</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 fiscal 1996, 5.77% for
all options granted during fiscal 1997 and 6.00% for all options granted
during fiscal 1998 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. The weighted average grant date fair value for an
option to purchase a 1% membership interest in Fantasma granted during the
year ended January 2, 1999 was approximately $14,400.
(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
F-24
<PAGE> 72
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
balance sheets. The following table summarizes certain financial
information for these entities (in thousands):
<TABLE>
<CAPTION>
---------------FISCAL YEAR-------------
1996 1997 1998
<S> <C> <C> <C>
Ownership Interest-
AAi Hong Kong Limited 49% 49% 49%
Milagros (Far East) Limited 49 49 49
Honest Lion Limited 49 50 50
Milagros AAi Asia Limited - 49 49
Sales to AAi $ 11,661 $ 15,171 $ 35,270
Equity in losses(1) (163) (63) (76)
Investment balance 1,455 1,426 1,337
</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>
-------------FISCAL YEAR-------------
1996 1997 1998
<S> <C> <C> <C>
Current assets $ 4,407 $ 5,687 $ 5,453
Noncurrent assets 6,608 2,187 6,814
Current liabilities 8,421 9,978 8,165
Noncurrent liabilities 1,557 1,563 3,087
Net sales 24,454 37,037 22,193
Gross profit 4,847 1,876 5,273
Loss from operations (406) (129) (156)
Net loss (406) (129) (156)
</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 consolidated financial statements
subsequent to December 31, 1996.
F-25
<PAGE> 73
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(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. No
contributions were made for the years ended December 31, 1996 and
1997 and January 2, 1999. 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
$87,000, $95,000 and $117,000 for the years ended December 31, 1996
and 1997 and January 2, 1999, 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
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 and $13,000
for the years ended December 31, 1997 and January 2, 1999,
respectively. 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 $554,000, $471,000 and $471,000 in
the years ended December 31, 1996 and 1997 and January 2, 1999,
respectively.
The Company has guaranteed a mortgage note payable by Sunrise Properties,
LLC aggregating $200,000. As of January 2, 1999, the outstanding balance
of this note was approximately $114,000.
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.
F-26
<PAGE> 74
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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, and
$165,000 in the year ended December 31, 1997 and January 2, 1999,
respectively. The Company terminated this lease as of January 2, 1999.
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 January 2, 1999, the Company had irrevocable letters of credit
outstanding for the purchase of inventory of approximately $95,000.
F-27
<PAGE> 75
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(b) Operating Leases
In addition to the operating leases described in Note 14, the
Company also has operating leases for its other locations. Future
minimum rental payments are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 605
2000 549
2001 542
2002 72
2003 74
Thereafter 102
----------
$ 1,944
==========
</TABLE>
The Company had an option to purchase its Smithfield, Rhode Island,
facility for $2.3 million. This option became exercisable in April
1993 and extended throughout the term of the lease. On February 10,
1998, the Company exercised this option. During fiscal 1998, the
Company expanded this facility resulting in costs of the facility
and expansion totaling approximately $6.4 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 January 2, 1999 totaled $2.2 million and $0.5
million for 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 January 2, 1999, the minimum aggregate transfer fee due
would be no less than $2.6 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 $32.3 million, less the
Company's purchases, BEC's purchases and any amounts paid as a
result of the annual shortfall discussed above. As of January 2,
1999, no amounts were due under this agreement as a result of a
shortfall.
F-28
<PAGE> 76
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(e) Litigation
In the ordinary course of business, the Company is party to various
types of litigation for which it has purchased insurance to mitigate
certain of these risks. The Company believes it has meritorious
defenses to all claims, and, in its opinion, all litigation
currently pending or threatened will not have a material effect on
the Company's financial position or results or operations.
In November 1998, the Company reached a favorable settlement with a
customer related to the customer not honoring its purchase
commitments under a 1997 agreement. As a result of this settlement,
the Company received $950,000 for lost revenues. This settlement is
included in other income, net in the accompanying fiscal 1998
consolidated statement of operations.
(16) SIGNIFICANT CUSTOMERS AND SUPPLIERS
During the years ended December 31, 1996 and 1997 and January 2, 1999 one
customer accounted for approximately 26.8%, 24.7%, and 27.3% of net sales,
respectively. This customer's accounts receivable balance represented
approximately 23.6% and 32.4% gross accounts receivable as of December 31,
1997 and January 2, 1999, respectively. In addition, another customer
accounted for approximately 11.4% of the Company's net sales for the year
ended January 2, 1999 and approximately 10.6% of gross accounts receivable
as of January 2, 1999. No other customer accounted for 10% or more of the
Company's net sales or gross accounts receivable in fiscal 1996, 1997 and
1998.
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 in the Company's distribution process and a
possible loss of sales, which would adversely affect operating results.
(17) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
Accrued payroll and payroll related
items $ 2,010 $ 2,164
Accrued interest 140 3,636
Accrued royalties 663 2,190
Accrued intransit inventory 852 3,038
Other accrued expenses 7,556 11,712
--------------- ---------------
$ 11,221 $ 22,740
=============== ===============
</TABLE>
F-29
<PAGE> 77
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(18) SEGMENT REPORTING
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.
The Company has determined it has three reportable segments: mass
merchandisers, chain drug stores/combo stores/supermarkets, and variety
stores. The Company distributes accessories such as, costume jewelry,
optical products, watches, clocks and other accessories.
The Company's reportable segments are strategic business units that sell
the Company's products to distinct distribution channels. They are managed
separately because each business requires different marketing strategies.
The Company's approach is based on the way that management organizes the
segments within the enterprise for making operating decisions and
assessing performance.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes
not including nonrecurring gains and losses.
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/COMBO
MASS STORES/
FISCAL 1996 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 59,055 $ 8,742 $ 10,981 $ 7,558 $ 86,336
============= =============== =============== =============== ===============
Interest expense $ 1,005 $ 149 $ 187 $ 128 $ 1,469
============= =============== =============== =============== ===============
Depreciation and
amortization expense $ 1,478 $ 125 $ 157 $ 108 $ 1,868
============= =============== =============== =============== ===============
Customer acquisition costs $ 2,495 $ - $ - $ 205 $ 2,700
============= =============== =============== =============== ===============
Segment (loss) profit $ (1,172) $ (135) $ (1,546) $ 2,325 $ (528)
============= =============== =============== =============== ===============
</TABLE>
F-30
<PAGE> 78
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/COMBO
STORES/
FISCAL 1997 MASS MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 84,343 $ 39,545 $ 16,243 $ 9,280 $ 149,411
============ =============== =============== =============== ===============
Interest expense $ 2,379 $ 1,115 $ 458 $ 262 $ 4,214
============ =============== =============== =============== ===============
Depreciation and amortization
expense $ 4,775 $ 1,995 $ 1,010 $ 468 $ 8,248
============ =============== =============== =============== ===============
Customer acquisition costs $ 1,043 $ -- $ 552 $ -- $ 1,595
============ =============== =============== =============== ===============
Segment (loss) profit $ (1,953) $ 6,099 $ (2,711) $ 511 $ 1,946
============ =============== =============== =============== ===============
<CAPTION>
CHAIN DRUG
STORES/ COMBO
STORES/
FISCAL 1998 MASS MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 103,559 $ 29,801 $ 13,835 $ 13,130 $ 160,325
============ =============== =============== =============== ===============
Interest expense $ 4,528 $ 1,303 $ 605 $ 574 $ 7,010
============ =============== =============== =============== ===============
Depreciation and amortization
expense $ 8,260 $ 1,777 $ 1,457 $ 1,298 $ 12,792
============ =============== =============== =============== ===============
Customer acquisition costs $ 822 $ -- $ 50 $ -- $ 872
============ =============== =============== =============== ===============
Segment (loss) profit $ (9,013) $ 736 $ (5,603) $ 237 (13,643)
============ =============== =============== =============== ===============
</TABLE>
Revenue from segments below the quantitative thresholds are attributable
to five operating segments of the Company. Those segments include
department stores, armed forces' PX stores, boutique stores, gift shops,
bookstores and catalogues. None of these segments have ever met any of the
quantitative thresholds for determining reportable segments and their
combined results are presented as other.
Segment profit (loss) differs from the income (loss) before income tax
(expense) benefit and dividends and accretion on preferred stock by the
amount of equity in losses of investments in affiliates, minority interest
in income of consolidated subsidiary and other income, which are not
allocated by segment. Segment assets are not reviewed by the chief
operating decision maker.
Total assets specifically identifiable with each reportable segment are as
follows:
F-31
<PAGE> 79
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Mass merchandisers $ 11,339 $ 13,244 $ 25,248
Chain drug stores/combo stores/supermarkets 5,720 6,128 6,368
Variety 991 2,351 1,246
Other 1,560 1,903 5,068
Unassigned assets 62,400 70,120 88,568
------------- ------------- -------------
$ 82,010 $ 93,746 $ 126,498
============= ============= =============
</TABLE>
The following table identifies sales and long-lived assets by geographic
region. Sales are attributed to countries based on location of customer.
Assets are attributed based on location.
<TABLE>
<CAPTION>
-------------------------------------FISCAL------------------------------------
1996 1997 1998
NET SALES NET SALES NET SALES
<S> <C> <C> <C>
United States $ 84,075 $ 142,655 $ 144,540
Canada 2,261 5,310 6,162
Europe - - 7,757
Mexico - 1,446 1,866
-------------- -------------- --------------
Total $ 86,336 $ 149,411 $ 160,325
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
DECEMBER 31, JANUARY 2,
1997 1998
<S> <C> <C>
United States $ 27,423 $ 49,112
Canada 541 192
Europe - 1,492
Asia 1,426 1,337
Mexico 18 18
-------------- --------------
Total $ 29,408 $ 52,151
============== ==============
</TABLE>
F-32
<PAGE> 80
AAi.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(19) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The following is summarized consolidating financial information for the
Company, segregating the Company, wholly owned guarantor subsidiaries,
mostly owned guarantor subsidiaries and non-guarantor subsidiaries as they
relate to the Notes. The guarantor subsidiaries, both mostly and wholly
owned are domestic subsidiaries of the Company and they guarantee the
notes on a full, unconditional and joint and several basis. 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, in which the Company holds an 80% interest, are
included after this supplemental consolidating financial information.
The Company and guarantor subsidiaries account for investments in
subsidiaries on the equity method for the purposes of the consolidating
financial data. Earnings of subsidiaries are therefore reflected in the
Company's and guarantor subsidiary's investment accounts and earnings. The
principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
F-33
<PAGE> 81
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
-----------------------------DECEMBER 31, 1997---------------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------(IN THOUSANDS)----------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE
SHEETS
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 - - 9,707
----------- ----------- ---------- ----------- -----------
Total
current
assets 36,054 26,649 1,635 - 64,338
PROPERTY, PLANT 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
10 3/4% SENIOR NOTES - - - - -
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>
----------------------------------------JANUARY 2, 1999--------------------------------------
WHOLLY
OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------(IN THOUSANDS)--------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE
SHEETS
CURRENT ASSETS:
Cash and cash
equivalents $ 68 $ 66 $ 104 $ 1,969 $ - $ 2,207
Accounts
receivable, net 20,699 2 5,088 3,528 - 29,317
Inventories 28,643 - 3,878 4,641 - 37,162
Prepaid expenses
and other current
assets 1,403 132 203 180 - 1,918
Deferred tax assets 3,743 - - - - 3,743
----------- ----------- ----------- ----------- ----------- -----------
Total
current
assets 54,556 200 9,273 10,318 - 74,347
PROPERTY, PLANT AND
EQUIPMENT,
NET 16,206 - 24 1,313 - 17,543
OTHER ASSETS 41,512 7,652 4,357 402 (19,315) 34,608
----------- ----------- ----------- ----------- ----------- -----------
$ 112,274 $ 7,852 $ 13,654 $ 12,033 $ (19,315) $ 126,498
=========== =========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings under
revolving note
payable $ 2,576 $ - $ - $ - $ - $ 2,576
Current maturities
of long-term
obligations 656 - - - - 656
Accounts payable 10,961 998 406 2,534 - 14,899
Accrued expenses 16,726 5,622 1,554 968 - 24,870
Due (from) to
affiliate - 3,757 7,088 2,380 (13,225) -
----------- ----------- ----------- ----------- ----------- -----------
Total
current
liabilities 30,919 10,377 9,048 5,882 (13,225) 43,001
10 3/4% SENIOR NOTES 75,000 - - - - 75,000
LONG-TERM
OBLIGATIONS, LESS
CURRENT MATURITIES 2,228 - - - - 2,228
DEFERRED TAX
LIABILITIES - - - - - -
SUBORDINATED
PROMISSORY NOTES
PAYABLE TO
SHAREHOLDERS - - - - - -
REDEEMABLE PREFERRED
STOCK OF A SUBSIDIARY - - - - 909 909
----------- ----------- ----------- ----------- ----------- -----------
Preferred
stock 28,845 926 - - (909) 28,862
----------- ----------- ----------- ----------- ----------- -----------
Shareholders'
equity
(deficit) (24,718) (3,451) 4,606 6,151 (6,090) (23,502)
----------- ----------- ----------- ----------- ----------- -----------
$ 112,274 $ 7,852 $ 13,654 $ 12,033 $ (19,315) $ 126,498
=========== =========== =========== =========== =========== ===========
</TABLE>
F-34
<PAGE> 82
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
---------------------------DECEMBER 31, 1996-----------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------(IN THOUSANDS)--------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES $ 78,740 $ 5,127 $ 2,461 $ 8 $ 86,336
COST OF GOODS SOLD 43,920 2,778 1,289 (116) 47,871
----------- ----------- ----------- ----------- -----------
Gross profit 34,820 2,349 1,172 124 38,465
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 33,402 2,745 1,253 124 37,524
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 1,418 (396) (81) - 941
INTEREST EXPENSE (1,324) (52) (93) - (1,469)
OTHER INCOME (EXPENSE), NET (337) - 6 - (331)
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES (617) - - 617 -
----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred stock (860) (448) (168) 617 (859)
INCOME TAX (EXPENSE) BENEFIT 948 - - - 948
----------- ----------- ----------- ----------- -----------
Net income (loss) before
dividends and accretion on
preferred stock 88 (448) (168) 617 89
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 1,123 - - - 1,123
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to
common shareholders $ (1,035) $ (448) $ (168) $ 617 $ (1,034)
=========== =========== =========== =========== ===========
<CAPTION>
-------------------------DECEMBER 31, 1997-------------------------
WHOLLY
OWNED 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 (loss) 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)
=========== =========== =========== =========== ===========
</TABLE>
F-35
<PAGE> 83
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
----------------------------------JANUARY 2, 1999--------------------------------
WHOLLY MOSTLY
OWNED OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------(IN THOUSANDS)----------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENT OF OPERATIONS
NET SALES $ 89,832 $ 44,140 $ 10,306 $ 16,047 $ - $ 160,325
COST OF GOODS SOLD 54,566 19,887 6,712 7,658 - 88,823
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 35,266 24,253 3,594 8,389 - 71,502
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 40,362 28,235 2,747 6,791 - 78,135
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations (5,096) (3,982) 847 1,598 - (6,633)
INTEREST EXPENSE (5,970) (586) (292) (162) - (7,010)
OTHER INCOME (EXPENSE), NET 612 16 2 (140) - 490
EQUITY IN LOSS OF SUBSIDIARIES (2,583) - - - 2,583 -
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred stock (13,037) (4,552) 557 1,296 2,583 (13,153)
INCOME TAX (EXPENSE) BENEFIT - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before
dividends and accretion on
preferred stock (13,037) (4,552) 557 1,296 2,583 (13,153)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 2,779 - - - - 2,779
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to
common shareholders $ (15,816) $ (4,552) $ 557 $ 1,296 $ 2,583 $ (15,932)
=========== =========== =========== =========== =========== ===========
</TABLE>
F-36
<PAGE> 84
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
---------------------------DECEMBER 31, 1996-----------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------(IN THOUSANDS)--------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES $ (3,131) $ 1,283 $ (371) $ - $ (2,219)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment (1,434) (135) (3) - (1,572)
Acquisitions, net of cash acquired (9,842) - - - (9,842)
Advances to affiliates 504 (1,679) - 1,175 -
Other investing activities (2,338) 1,572 (293) - (1,059)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (13,110) (242) (296) 1,175 (12,473)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note
payable 3,411 (100) - - 3,311
Proceeds from issuance of subordinated
promissory notes payable to
shareholders 2,000 - - - 2,000
Proceeds from issuance of long-term
obligations 3,445 - - - 3,445
Payments on long-term obligations (2,292) - - - (2,292)
Proceeds from issuance of preferred
stock, net of issuance costs 22,464 - - - 22,464
Due to affiliates - - 1,175 (1,175) -
Other financing activities (12,794) - - - (12,794)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 16,234 (100) 1,175 (1,175) 16,134
----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (7) 941 508 - 1,442
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7 - 28 - 35
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 941 $ 536 $ - $ 1,477
=========== =========== =========== =========== ===========
<CAPTION>
-------------------------DECEMBER 31, 1997-------------------------
WHOLLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------(IN THOUSANDS)--------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES $ (4,119) $ 4,697 $ 1,022 $ - $ 1,600
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment (2,860) (4,686) (37) - (7,583)
Acquisitions, net of cash acquired (1,834) - - - (1,834)
Advances to affiliates (3,546) 1,594 - 1,952 -
Other investing activities 952 (545) (43) - 364
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (7,288) (3,637) (80) 1,952 (9,053)
----------- ----------- ----------- ----------- -----------
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) -
Other financing activities (334) - - - (334)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 13,761 (1,818) (1,236) (1,952) 8,755
----------- ----------- ----------- ----------- -----------
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-37
<PAGE> 85
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
<TABLE>
<CAPTION>
----------------------------------JANUARY 2, 1999--------------------------------
WHOLLY MOSTLY
OWNED OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------(IN THOUSANDS)---------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES $ (23,955) $ 19,698 $ (3,527) $ 3,881 $ - $ (3,903)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment (12,479) (792) (15) (3,596) - (16,882)
Acquisitions, net of cash acquired (9,464) - - - - (9,464)
Advances to affiliates (8,117) - - 113 8,004 -
Other investing activities 6,154 (5,752) (15) (3,794) - (3,407)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (23,906) (6,544) (30) (7,277) 8,004 (29,753)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note
payable (10,307) (14,715) - - - (25,022)
Proceeds from term note payable 13,222 - - - - 13,222
Proceeds on term note payable (13,222) - - - - (13,222)
Proceeds from issuance of 10 3/4%
senior notes 75,000 - - - - 75,000
Payments on subordinated notes (5,487) - - 3,355 - (2,132)
Payments on long-term obligations (10,130) - - (896) - (11,026)
Due to affiliates - 1,444 3,588 2,972 (8,004) -
Other financing activities (3,501) - - (235) - (3,736)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities 45,575 (13,271) 3,588 5,196 (8,004) 33,084
----------- ----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,286) (117) 31 1,800 - (572)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 2,354 183 73 169 - 2,779
----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68 $ 66 $ 104 $ 1,969 $ - $ 2,207
=========== =========== =========== =========== =========== ===========
</TABLE>
F-38
<PAGE> 86
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, 1997 and January 2, 1999 and the related statements of operations, members'
equity and cash flows for each of the three years in the period ended January 2,
1999. 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,
1997 and January 2, 1999 and the results of its operations and its cash flows
for each of the three years in the period ended January 2, 1999, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 19, 1999
F-39
<PAGE> 87
FANTASMA LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
CURRENT ASSETS:
Cash $ 238 $ 104
Accounts receivable, less reserves of approximately $402 and $373 5,108 5,088
Inventory 1,908 3,878
Prepaids and other current assets 72 203
--------------- ---------------
Total current assets 7,326 9,273
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Equipment 68 29
Furniture and fixtures 11 --
--------------- ---------------
79 29
Less--Accumulated depreciation (13) (5)
--------------- ---------------
66 24
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $0 and $270 3 4,357
--------------- ---------------
Total assets $ 7,395 $ 13,654
=============== ===============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $ 3,764 $ 7,088
Advances payable to member 1,661 --
Accounts payable and accrued expenses 1,657 1,960
--------------- ---------------
Total current liabilities 7,082 9,048
COMMITMENTS AND CONTINGENCIES (NOTE 1)
MEMBERS' EQUITY 313 4,606
--------------- ---------------
Total liabilities and members' equity $ 7,395 $ 13,654
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 88
FANTASMA LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------- YEARS ENDED -----------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
NET SALES $ 10,815 $ 17,163 $ 14,645
COST OF GOODS SOLD 8,838 12,562 10,186
--------------- --------------- ---------------
Gross profit 1,977 4,601 4,459
OPERATING EXPENSES:
Selling expenses 643 1,501 2,197
General and administrative expenses 1,023 2,259 1,612
--------------- --------------- ---------------
Income from operations 311 841 650
INTEREST EXPENSE 236 480 453
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 75 361 197
PROVISION FOR INCOME TAXES (17) (58) --
--------------- --------------- ---------------
Net income $ 58 $ 303 $ 197
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 89
FANTASMA LLC
STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY MEMBERS'
INVESTMENT EQUITY TOTAL
<S> <C> <C> <C>
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 (loss) income (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 -- 4,627 4,627
Net income -- 197 197
--------------- -------------- ---------------
BALANCE, JANUARY 2, 1999 $ -- $ 4,606 $ 4,606
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 90
FANTASMA LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------- YEARS ENDED -----------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58 $ 303 $ 197
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 15 11 277
Write-off of property and equipment 20 -- 49
Change in assets and liabilities-
Accounts receivable (1,811) (1,700) 20
Inventory (1,178) 87 (1,970)
Prepaid expenses and other current assets (121) 49 (131)
Advances payable to member 1,078 674 (1,661)
Accounts payable and accrued liabilities 54 861 303
--------------- --------------- ---------------
Net cash (used in) provided by operating activities (1,885) 285 (2,916)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (40) (14)
Decrease in other assets -- -- 3
--------------- --------------- ---------------
Net cash used in investing activities -- (40) (11)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to member 1,266 -- 7,088
Repayments of note payable to member -- -- (3,764)
Parent company investment 807 -- --
Member contributions (distributions) 1 (196) (531)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 2,074 (196) 2,793
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH 189 49 (134)
CASH, BEGINNING OF PERIOD -- 189 238
--------------- --------------- ---------------
CASH, END OF PERIOD $ 189 $ 238 $ 104
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 156 $ 480 $ --
=============== =============== ===============
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 $ -- $ -- $ 4,627
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 91
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(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 primarily in the United
States.
Prior to September 1, 1996, Fantasma operated as a division (the Fantasma
division) of Overdrive Capital Corp. (formerly known as Good Stuff Corp.).
Overdrive Capital Corp. (Overdrive) sold the Fantasma 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 the following (in
thousands):
Unexpired royalties $ 289
Accounts receivable 798
Inventory 2,600
Prepaid expenses 49
Furniture and equipment 25
Trademarks 3
-----------
Total assets transferred $ 3,764
===========
The accompanying financial statements prior to the formation of Fantasma
LLC 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
Acquisition). The operating agreement under which Fantasma is managed
provides AAi.FosterGrant with sole voting rights on numerous significant
matters. 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 (in
thousands):
Cash $ 73
Accounts receivable 1,603
Inventory 2,002
Other current assets 165
Furniture and equipment 15
Goodwill 4,626
Notes payable (3,500)
Other current liabilities (934)
-----------
Cash paid $ 4,050
===========
F-44
<PAGE> 92
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 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.
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 the
straight-line and accelerated bases over their estimated useful lives as
follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
Equipment 5 years
Furniture and fixtures 7 years
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 future royalty obligations relating to these agreements
total $849,000. Royalty expense was approximately $1,049,000, $1,734,000
and $1,477,000 for the years ended December 31, 1996 and 1997 and January
2, 1999, respectively. Accrued royalties, which are included in accounts
payable and accrued expenses on the accompanying balance sheets, totaled
$732,000 and $707,000 at December 31, 1997 and January 2, 1999,
respectively.
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
F-45
<PAGE> 93
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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 $270,000 for the year ended January 2, 1999.
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 June 1998, the Financial Accounting Standards Board (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 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, 1996 to August 31, 1996, Fantasma accounted for
state income taxes on a separate company basis.
(2) NOTE PAYABLE
F-46
<PAGE> 94
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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, 1997, approximately $3,764,000 was
outstanding under this note. The note accrued interest at the prime rate
(8.5% at December 31, 1997). Total interest charged on this note was
approximately $107,000, $320,000 and $141,000 in the years ended December
31, 1996 and 1997 and January 2, 1999, 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. Total interest charged on this note was
approximately $282,000 for the year ended January 2, 1999. At January 2,
1999, $7,088,000 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 fair market value on the date of
grant. Certain of these options contain performance criteria and,
therefore, will be accounted for as variable options. Based on 1998
activity, options to purchase 3% of Fantasma expired during the fiscal
year. As of January 2, 1999 options to purchase 10% of the Company were
outstanding and the exercise price was equal to or greater than the fair
market value, therefore no expense was recorded.
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 granted to employees 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 fiscal year ended January 2, 1999 would have been
$63,000.
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: no dividend;
yield 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 year ended January 2, 1999 was
approximately $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,
F-47
<PAGE> 95
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
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. In addition, Fantasma has operated as a division of
AAi.FosterGrant since June 10, 1998 and has had similar expenses allocated
to it by AAi.FosterGrant using similar factors. Management believes these
allocations were reasonable and the costs of the 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.
Overdrive allocated expenses through advances. 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 to Overdrive was $129,000, $160,000, and $27,000 in the
years ended December 31, 1996 and 1997 and January 2, 1999, respectively.
Advances from Overdrive were repaid on June 10, 1998. Expenses allocated
by AAi.FosterGrant are funded through the note payable (see Note 2 for
further discussion).
(5) SIGNIFICANT CUSTOMERS
During the year ended January 2, 1999, three customers accounted for
approximately 22%, 17% and 10% of net sales, respectively. These
customers' accounts receivable balances represented approximately 27%, 14%
and 4% of gross accounts receivable as of January 2, 1999.
F-48
<PAGE> 96
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(6) SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the 1998 fiscal year. SFAS No. 131
establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information
for those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making
decisions now to allocate resources and assess performance. To date, the
Company has viewed its operations and manages its business as principally
one segment.
(7) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND FROM BALANCE AT
PERIOD EXPENSES RESERVES(1) END OF PERIOD
<S> <C> <C> <C> <C>
Accounts receivable-
December 31, 1996 $ 80 $ 171 $ 65 $ 186
December 31, 1997 186 360 144 402
January 2, 1999 402 -- 29 373
</TABLE>
(1) Amounts deemed uncollectible
F-49
<PAGE> 97
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 10-K and have issued our report thereon dated February 19,
1999. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This schedule 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 consolidated 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 consolidated financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999
F-50
<PAGE> 98
SCHEDULE II
AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND FROM BALANCE AT
PERIOD EXPENSES RESERVES(1) OTHER (2) END OF PERIOD
<S> <C> <C> <C> <C> <C>
Accounts receivable-
December 31, 1996 $ 728 $ 16,265 $ 13,721 $ 9,810 $ 13,082
December 31, 1997 13,082 27,477 31,130 909 10,338
January 2, 1999 10,338 47,048 48,711 1,300 9,975
Restructuring reserve-
December 31, 1996 $ -- $ -- $ -- $ -- $ --
December 31, 1997 -- -- -- -- --
January 2, 1999 -- 2,600 1,947 -- 654
</TABLE>
(1) Amounts deemed uncollectible
(2) Reserves related to accounts receivable acquired in acquisitions
F-51
<PAGE> 1
Exhibit 10.4.2
First Amendment to Securities Purchase Agreement
This First Amendment to the Securities Purchase Agreement is made and
entered into as of the 1st day of October, 1998 by and among Weston Presidio
Capital II, L.P., a Delaware limited partnership, BancBoston Ventures, Inc., St.
Paul Fire & Marine Insurance Company and National City Capital Corporation (the
"Investors") and AAI.FOSTERGRANT, Inc. (fka Accessories Associates, Inc.) (the
"Company"), a Rhode Island corporation.
R E C I T A L S
On May 31, 1996 the Investors and the Company entered into a Securities
Purchase Agreement (the "Agreement") by which the Investors purchased 34,200
shares of the Company's Series A Convertible Redeemable Preferred Stock, 38,000
shares of the Company's Common Stock, $0.10 par value, and $2,000,000 of the
Company's Subordinated Notes. On July 21, 1998 the Company issued $75,000,000 in
principal face amount of its 10.75% Senior Notes. Pursuant to the Note Purchase
Agreement, the Company is obligated to cause such notes to be registered
pursuant to the Securities Act of 1933.
The Company and the Investors believe that it is in the interest of the
Company and the Investors to amend certain provisions of the Agreement in order
to reflect the fact that the Company will be a public company and certain other
matters.
NOW THEREFORE, in consideration of the promises and agreements herein
contained and for other good and valuable consideration, the receipt and
sufficiency whereof is hereby acknowledged, the Investors and the Company agree
as follows:
1. Effective upon the Company becoming a reporting company under the
Exchange Act of 1934, Section 5.2.5 of the Agreement is deleted in its
entirety.
2. Section 5.2.9 of the Agreement is deleted in its entirety.
3. Section 5.5 of the Agreement is hereby amended to read as follows:
"MERGER, CONSOLIDATION & SALE OF ASSETS. Except with the approval of
the Required Holders, neither the Company nor any of its Subsidiaries
will become a party to, or authorize any merger, consolidation, sell,
lease, sublease, or otherwise transfer or dispose of any assets or
enter into, or authorize any such transaction, or any liquidation or
dissolution, except the following:
5.5.1 The Company and any of its Subsidiaries may sell or otherwise
dispose of any assets in the ordinary course of business consistent
with past practices.
<PAGE> 2
5.5.2 Any wholly owned Subsidiary of the Company may be merged or be
liquidated into the Company or with any other wholly owned Subsidiary
of the Company so long as after giving effect to any such merger to
which the Company is a party, the Company shall be the surviving or
resulting person.
5.5.3 Mergers constituting Investments permitted by Section 5.9.
5.5.4 Assets having an aggregate fair market value of less than 25% of
the total assets of the Company or its Subsidiaries as of the Balance
Sheet Date on an aggregate basis since the date hereof."
4. Section 5.6.4 of the Agreement is hereby amended to read as follows:
"5.6.4 Other indebtedness, not to exceed the amounts permitted under
the Indenture with respect to the Company's 10.75% Senior Notes as in
effect on July 21, 1998 without giving effect to any subsequent
modification or amendment."
5. Section 5.7 of the Agreement is hereby amended by adding a Section
5.7.5 as follows:
"5.7.5 Guaranties permitted under the Indenture with respect to the
Company's 10.75% Senior Notes as in effect on July 21, 1998 without
giving effect to any subsequent modification or amendment."
6. Section 5.8 of the Agreement is hereby amended by adding a Section
5.8.6 as follows:
"5.8.6 Liens permitted under the Indenture with respect to the
Company's 10.75% Senior Notes as in effect on July 21, 1998 without
giving effect to any subsequent modification or amendment.
7. Section 5.9.2 of the Agreement is hereby amended to read as follows:
"5.9.2 Investments of the Company to acquire Subsidiaries or make
other acquisitions only with the approval of the Preferred Directors."
8. The fourth sentence of Section 5.13 of the Agreement is hereby amended
to read as follows:
"5.13 Except with the approval of the Compensation Committee, the
Company and its Subsidiaries shall not enter into employment or
management contracts."
9. The last sentence of Section 5.14 of the Agreement is hereby amended
to read as follows:
<PAGE> 3
"5.14 Except as approved by the Preferred Directors, the Company shall
not, or shall not subject itself to any obligation to, repurchase or
otherwise acquire or retire any shares of the capital stock of the
Company or any securities convertible into or exchangeable for any of
the capital stock of the Company."
10. Except as modified herein, the Agreement is hereby ratified,
confirmed and approved.
WITNESS WHEREOF, the parties have executed this First Amendment to the
Securities Purchase Agreement as of the date first above written.
AAi.FOSTERGRANT, Inc.
By:/s/ Duane M. DeSisto
--------------------
WESTON PRESIDIO CAPITAL II, L.P.
By Weston Presidio Capital Management
II, L.P.
By:/s/ Michael F. Cronin
---------------------
General Partner
BANCBOSTON VENTURES, INC.
By:/s/ Charles Grant
-----------------
ST. PAUL FIRE AND MARINE
INSURANCE COMPANY
By:/s/ Everett V. Cox
------------------
NATIONAL CITY CAPITAL
CORPORATION
By:/s/ Carl E. Baldassarre
-----------------------
<PAGE> 1
Exhibit 10.13
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.
<PAGE> 1
Exhibit 10.14
ACCESSORIES ASSOCIATES, INC.
----------------------------
NON-QUALIFIED EXCESS 401(K) PLAN
--------------------------------
SECTION 1
---------
Definitions
-----------
1.1. "CODE" means the Internal Revenue Code of 1986, as amended from time
to time. Any reference to a section of the Code includes any comparable section
or sections of any future legislation that amends, supplements or supersedes
that section.
1.2. "COMPANY" means Accessories Associates, Inc., a Rhode Island
corporation.
1.3. "COMPENSATION" means total taxable salary, bonuses and commissions
paid to a Participant by the Employer (determined without regard to any amounts
in the Participant's Deferred Compensation Account).
1.4. "DEFERRED COMPENSATION ACCOUNT" means the bookkeeping account
maintained under the Plan in the Participant's name to reflect amounts deferred
under the Plan pursuant to Section 3 and any Company Contributions made on
behalf of the Participant pursuant to Section 3.
1.5. "DEFERRAL ELECTION" means a written notice filed by the Participant
with the Company specifying the Compensation to be deferred by the Participant.
1.6. "DISTRIBUTION DATE" means the date a Participant terminates employment
with the Company for whatever reason.
1.7. "EFFECTIVE DATE" means April 23, 1997.
1.8. "EMPLOYEE" means an employee of the Company who meets the eligibility
criteria set forth in Subsection 3.1 of the Plan and who is a member of a select
group of management or highly compensated employees as defined under ERISA or
the regulations thereunder.
1.9. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time. Any reference to a section of ERISA includes any
comparable section or sections of any future legislation that amends,
supplements or supersedes that section.
<PAGE> 2
1.10. "PARTICIPANT" means an Employee who meets the eligibility criteria set
forth in Subsection 3.1 and who has made a Deferral Election in accordance with
the terms of the Plan.
1.11. "PLAN" means the provisions of the Plan, as set forth herein.
1.12. "PLAN YEAR" means the calendar year.
1.13. "UNFORESEEABLE FINANCIAL EMERGENCY" means a severe financial hardship
of the Participant resulting from:
(a) expenses incurred or necessary for medical care, described in
Code Section 213(d) of the Participant, his or her spouse, children and other
dependents,
(b) the purchase (excluding mortgage payments) of the principal
residence for the Participant,
(c) payment of tuition and related educational expenses for the next
twelve (12) months of post-secondary education for the Participant, his or her
spouse, children or other dependents,
(d) the need to prevent eviction of the Participant from or a
foreclosure on the mortgage of, the Participant's principal residence, or
(e) such other similar extraordinary and unforeseeable circumstances
resulting from events beyond the control of the Participant.
Whether a Participant has an Unforeseeable Financial Emergency shall be
determined in the sole discretion of the Plan Administrator.
1.14. "VALUATION DATE" means the last day of any calendar month.
1.15 "401(K) PLAN" means the Accessories Associates, Inc. 401(k) Plan, as
amended.
SECTION 2
---------
Purpose and Administration
--------------------------
2.1. PURPOSE. The Company has established the Plan primarily for the
purpose of providing deferred compensation to a select group of management or
highly compensated employees of the Company. The Plan is intended to be a
top-hat plan described in Section 201(2) of ERISA. The Company intends that the
Plan (and any Trust under the Plan (as described in Subsection 6.1)) shall be
treated as unfunded for tax purposes and for purposes of Title I of ERISA. The
Company's obligations hereunder, if any, to a Participant (or to a Participant's
beneficiary) shall be unsecured and shall be a mere
2
<PAGE> 3
promise by the Company to make payments hereunder in the future. A Participant
(or the Participant's beneficiary) shall be treated as a general unsecured
creditor of the Company.
2.2. ADMINISTRATION. The Plan shall be administered by the Plan
Administrator. The Plan Administrator shall serve at the pleasure of the
Company's Board of Directors and may be removed by such Board, with or without
cause. The Plan Administrator may resign upon prior written notice to the
Company's Board of Directors.
The Plan Administrator shall have the powers, rights, and duties set forth in
the Plan and shall have the power, in the Plan Administrator's sole and absolute
discretion, to determine all questions arising under the Plan, including the
determination of the rights of all persons with respect to the Plan and to
interpret the provisions of the Plan and remedy any ambiguities,
inconsistencies, or omissions. Any decisions of the Plan Administrator shall be
final and binding on all persons with respect to the Plan and the benefits
provided under the Plan. The Plan Administrator may delegate the Plan
Administrator's authority under the Plan to one or more officers or directors of
the Company; provided, however, that (a) such delegation must be in writing, and
(b) the officers or directors of the Company to whom the Plan Administrator is
delegating authority must accept such delegation in writing.
If a Participant is serving as the Plan Administrator (either individually or as
a member of a committee), the Participant may not decide or determine any matter
or question concerning such Participant's benefits under the Plan that the
Participant would not have the right to decide or determine if the Participant
were not serving as the Plan Administrator.
SECTION 3
---------
Eligibility Participation. Deferral Elections.
---------------------------------------------
and Employer Contributions
--------------------------
3.1. ELIGIBILITY AND PARTICIPATION. Subject to the conditions and
limitations of the Plan, only those Employees of the Company who are designated
as eligible to participate in the Plan by the Board of Directors of the Company
shall be eligible to participate in the Plan:
Any individuals specified above by the Company may be changed by action of the
Company. An Employee shall become a Participant in the Plan upon the execution
and filing with the Plan Administrator of a written election to defer a portion
of the Employee's Compensation. A Participant shall remain a Participant until
the entire balance of the Participant's Deferred Compensation Account has been
distributed.
3.2. RULES FOR DEFERRAL ELECTIONS. Any person identified in Subsection 3.1
may make a Deferral Election to defer receipt of Compensation he or she
otherwise would be entitled to receive for a Plan Year in accordance with the
rules set forth below:
3
<PAGE> 4
(a) All Deferral Elections must be made in writing on the form
prescribed by the Plan Administrator and will be effective only
when filed with the Plan Administrator no later than the date
specified by the Plan Administrator. In no event may a Deferral
Election be made later than the last day of the Plan Year
preceding the Plan Year in which the amount being deferred would
otherwise be made available to the Participant. However, in the
case of a Participant's initial year of employment or association
with the Company, the Participant may make a Deferral Election
with respect to Compensation for services to be performed
subsequent to such Deferral Election, provided such election is
made no later than 30 days after the date the Participant first
becomes eligible for the Plan. Furthermore, in the case of a
short initial Plan Year, each Participant may make a Deferral
Election with respect to Compensation for services to be
performed subsequent to such Deferral Election, provided such
election is made no later than 30 days after the Effective Date.
(b) With respect to Plan Years following the Participant's initial
Plan Year of participation in the Plan, failure to complete a
subsequent Deferral Election shall constitute a waiver of the
Participant's right to elect a different amount of Compensation
to be deferred for each such Plan Year and shall be considered an
affirmation and ratification to continue the Participant's
existing Deferral Election. However, a Participant may, prior to
the beginning of any Plan Year, elect to increase or decrease the
amount of Compensation to be deferred for the next following Plan
Year by filing another Deferral Election with the Plan
Administrator in accordance with paragraph (a) above.
(c) A Deferral Election in effect for a Plan Year may not be modified
during the Plan Year, except that a Participant may terminate the
Participant's Deferral Election during a Plan Year in the event
of an Unforeseeable Financial Emergency.
3.3. AMOUNTS DEFERRED:
DEFERRAL OF A PERCENTAGE OF COMPENSATION. Commencing on the
Effective Date, a Participant may elect to defer up to 15% of the
Participant's Compensation for a Plan Year. The amount of
Compensation deferred by a Participant shall be credited to the
Participant's Deferred Compensation Account as of the Valuation
Date coincident with or immediately following the date such
Compensation would, but for the Participant's Deferral Election,
be payable to the Participant.
3.4. EMPLOYER CONTRIBUTIONS. The Company shall credit to the Deferred
Compensation Account of any Participant the amount of the matching contribution
the Company would have made for the Plan Year under the Company's 401(K) Plan
with respect to any
4
<PAGE> 5
Deferred Election. Any Company Contribution for a Plan Year will be credited to
a Participant's Deferred Compensation Account as of the Valuation Date specified
by the Company.
SECTION 4
---------
Deferred Compensation Accounts
------------------------------
4.1. DEFERRED COMPENSATION ACCOUNTS. All amounts deferred pursuant to one
or more Deferral Elections under the Plan and any Company Contributions shall be
credited to a Participant's Deferred Compensation Account and shall be adjusted
under Subsection 4.2.
4.2. INVESTMENT OF DEFERRAL ACCOUNT. The Participant's Deferred
Compensation Account shall be treated as if it has been invested in insurance
contracts, annuities or other investments the Plan Administrator shall from time
to time select. The Company may, but is not required to, purchase such an
insurance policy. Further, for purposes of determining adjustments to the
Account, the Corporation may, but is not required to, adopt suggestions of the
Employee as to the investment options that are or could be selected under such
policy in accordance with the terms and conditions of the policy. To the extent
that the Company does, in its discretion, purchase or hold the above described
policy, it shall remain the sole property of the Company as owner and
beneficiary (except as permitted by Subsection 6.1) and subject to the claims of
its general creditors and it shall not be deemed to form part of the Account.
Neither Employee nor any of his/her legal representatives nor any beneficiary
designated by the Employee shall have any right, other than the right of an
unsecured general creditor, against the Company in respect to any portion of the
Account. As of each Valuation Date, the Plan Administrator shall adjust amounts
in a Participant's Deferred Compensation Account to reflect earnings
attributable to the Participant's Deferred Compensation Account.
4.3. VESTING. A Participant shall be fully vested in the amounts in the
Participant's Deferred Compensation Account attributable to both the
Participant's Deferral Elections and the Company's Contributions under the Plan.
SECTION 5
---------
Payment of Benefits
-------------------
5.1. TIME AND METHOD OF PAYMENT. Payment of the vested portion of a
Participant's Deferred Compensation Account shall be made as soon as practicable
following the Valuation Date coincident with or next following the Participant's
Distribution Date; Payment of the vested portion of a Participant's Deferred
Compensation Account shall be made in a single, lump sum payment.
5.2. PAYMENT UPON DISABILITY. In the event a Participant becomes disabled
(as defined below) while the Participant is employed by the Company, payment of
the Participant's
5
<PAGE> 6
Deferred Compensation Account shall be made as soon as practicable after the
Valuation Date coincident with or next following the date on which the Plan
Administrator determines that the Participant is disabled. For purposes of this
Subsection 5.2, a Participant shall be considered "Disabled" if the Participant
is unable to engage in any substantially gainful activity by reason of any
medically determined physical or mental impairment that can be expected to
result in death or that has lasted or can be expected to last for a continuous
period of not less than twelve months. Whether a Participant is disabled for
purposes of the Plan shall be determined by the Plan Administrator, and in
making such determination, the Plan Administrator may rely on the opinion of a
physician (or physicians) selected by the Plan Administrator for such purpose.
5.3. PAYMENT UPON DEATH OF A PARTICIPANT. A Participant's Deferred
Compensation Account shall be paid to the Participant's beneficiary (designated
in accordance with Subsection 5.4) in a single lump sum as soon as practicable
following the Valuation Date coincident with or next following the Participant's
death.
5.4. BENEFICIARY. If a Participant is married on the date of the
Participant's death, the Participant's beneficiary shall be the Participant's
spouse, unless the Participant names a beneficiary or beneficiaries (other than
the Participant's spouse) to receive the balance of the Participant's Deferred
Compensation Account in the event of the Participant's death prior to the
payment of the Participant's Deferred Compensation Account. To be effective, any
beneficiary designation must be filed in writing with the Plan Administrator in
accordance with rules and procedures adopted by the Plan Administrator for that
purpose. A Participant may revoke an existing beneficiary designation by filing
another written beneficiary designation with the Plan Administrator. The latest
beneficiary designation received by the Plan Administrator shall be controlling.
If no beneficiary is named by a Participant, or if the Participant survives all
of the Participant's named beneficiaries and does not designate another
beneficiary, the Participant's Deferred Compensation Account shall be paid in
the following order of precedence:
(a) The Participant's spouse;
(b) The Participant's children (including adopted children) per
stirpes; or
(c) The Participant's estate.
5.5. UNFORESEEABLE FINANCIAL EMERGENCY. If the Plan Administrator
determines that a Participant has incurred an Unforeseeable Financial Emergency,
the Participant may receive in cash the portion of the balance of the
Participant's Deferred Compensation Account needed to satisfy the Unforeseeable
Financial Emergency, but only if the Unforeseeable Financial Emergency may not
be relieved (a) through reimbursement or compensation by insurance or otherwise
or (b) by liquidation of the Participant's assets to the extent the liquidation
of such assets would not itself cause severe financial hardship. A payment on
account of an Unforeseeable Financial Emergency shall not be in excess of the
amount needed to relieve such Unforeseeable Financial Emergency and shall be
made as
6
<PAGE> 7
soon as practicable following the date on which the Plan Administrator approves
such payment.
5.6. WITHHOLDING OF TAXES. In connection with the Plan, the Company shall
withhold any applicable Federal, state or local income tax and any employment
taxes, including Social Security taxes, at such time and in such amounts as is
necessary to comply with applicable laws and regulations.
SECTION 6
---------
Miscellaneous
-------------
6.1. FUNDING. The Company may, but shall not be required to establish and
maintain one or more grantor trusts (individually, a "Trust") to hold assets to
be used for payment of benefits under the Plan. A Trust shall conform with the
terms of Internal Revenue Service Revenue Procedure 92-64 (or any subsequent
administrative ruling). The assets of the Trust with respect to benefits payable
to the Participants shall remain the assets of the Company subject to the claims
of its general creditors. Any payments by a Trust of benefits provided to a
Participant under the Plan shall be considered payment by the Company and shall
discharge the Company from any further liability under the Plan for such
payments.
6.2. RIGHTS. Establishment of the Plan shall not be construed to give any
Employee the right to be retained by the Company or to any benefits not
specifically provided by the Plan.
6.3. INTERESTS NOT TRANSFERABLE. Except as to withholding of any tax under
the laws of the United States or any state or locality and the provisions of
Subsection 6.7, no benefit payable at any time under the Plan shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
or any other encumbrance of any kind or to any attachment, garnishment, or other
legal process of any kind. Any attempt by a person (including a Participant or a
Participant's beneficiary) to anticipate, alienate, sell, transfer, assign,
pledge, or otherwise encumber any benefits under the Plan, whether currently or
thereafter payable, shall be void. If any person shall attempt to, or shall
alienate, sell, transfer, assign, pledge or otherwise encumber such person's
benefits under the Plan, or if by any reason of such person' s bankruptcy or
other event happening at any time, such benefits would devolve upon any other
person or would not be enjoyed by the person entitled thereto under the Plan,
then the Plan Administrator, in the Plan Administrator's sole discretion, may
terminate the interest in any such benefits of the person otherwise entitled
thereto under the Plan and may hold or apply such benefits in such manner as the
Plan Administrator may deem proper.
6.4. UNCLAIMED AMOUNTS. Unclaimed amounts shall consist of the amounts in
the Deferred Compensation Account of a Participant that cannot be distributed
because of the Plan Administrator's inability, after a reasonable search, to
locate a Participant or the
7
<PAGE> 8
Participant's beneficiary, as applicable, within a period of two years after the
Distribution Date upon which the payment of benefits became due. Unclaimed
amounts shall be forfeited at the end of such two-year period. These forfeitures
will reduce the obligations of the Company, if any, under the Plan. After an
unclaimed amount has been forfeited, the Participant or beneficiary, as
applicable, shall have no further right to amounts in the Participant's Deferred
Compensation Account.
6.5. CONTROLLING LAW. The law of the state of incorporation of the Company
shall be controlling in all matters relating to the Plan to the extent not
preempted by Federal law.
6.6. ACTION BY THE COMPANY. Except as otherwise specifically provided
herein, any action required of or permitted to be taken by an Company under the
Plan shall be by resolution of its Board of Directors or by resolution of a duly
authorized committee of its Board of Directors or by action of a person or
persons authorized by resolution of such Board of Directors or such committee.
6.7. OFFSET FOR OBLIGATIONS TO COMPANY. If, at such time as a Participant
or a Participant's beneficiary becomes entitled to benefit payments hereunder,
the Participant has any debt, obligation or other liability representing an
amount owing to the Company or an affiliate of the Company, and if such debt,
obligation, or other liability is due and owing at the time benefit payments are
payable hereunder, the Company may offset the amount owing it or an affiliate
against the amount of benefits otherwise distributable hereunder.
6.8. CLAIMS PROCEDURES. Any person (hereinafter referred to as a
"Claimant") who believes that he or she is being denied a benefit to which he or
she may be entitled under the Plan may file a written request for such benefit
with the Plan Administrator. Such written request must set forth the Claimant's
claim and must be addressed to the Plan Administrator, at the Company's
principal place of business. Upon receipt of a claim, the Plan Administrator
shall advise the Claimant that a reply will be forthcoming within ninety days
and shall deliver a reply within ninety days. The Plan Administrator may,
however, extend the reply period for an additional ninety days for reasonable
cause. If the claim is denied in whole or in part, the Plan Administrator shall
issue a written determination, using language calculated to be understood by the
Claimant, setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan upon
which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect the Claimant's claim and an
explanation why such material or such information is necessary;
and
8
<PAGE> 9
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review, and the time
limits for requesting such a review.
Within sixty days after the receipt by the Claimant of the written determination
described above, the Claimant may request in writing, that the Plan
Administrator review the Plan Administrator's determination. The request must be
addressed to the Plan Administrator, at the Company's principal place of
business. The Claimant or the Claimant's duly authorized representative may, but
need not, review the pertinent documents and submit issues and comments in
writing for consideration by the Plan Administrator. If the Claimant does not
request a review of the Plan Administrator's determination within such sixty day
period, the Claimant shall be barred and estopped from challenging the Plan
Administrator's determination. Within sixty days after the Plan Administrator's
receipt of a request for review, the Plan Administrator will review the
determination. After considering all materials presented by the Claimant, the
Plan Administrator will render a written determination, written in a manner
calculated to be understood by the Claimant, setting forth the specific reasons
for the decision and containing specific references to the pertinent provisions
of the Plan on which the decision is based. If special circumstances require
that the sixty day time period be extended, the Plan Administrator will so
notify the Claimant and will render the decision as soon as practicable, but no
later than one hundred twenty days after receipt of the request for review.
6.9. NOTICE. Any notice required or permitted to be given under the
provisions of the Plan shall be in writing, and shall be signed by the party
giving or making the same. If such notice, consent or demand is mailed to a
party hereto, it shall be sent by United States certified mail, postage prepaid,
addressed to such party's last known address as shown on the records of the
Company. Notices to the Plan Administrator should be sent in care of the Company
at the Company's principal place of business. The date of such mailing shall be
deemed the date of notice. Either party may change the address to which notice
is to be sent by giving notice of the change of address in the manner set forth
above.
SECTION 7
---------
Amendment and Termination
-------------------------
7.1. The Company intends the plan to be permanent, but reserves the right
at any time to modify, amend or terminate the Plan; provided however, that
except as provided below, any amendment or termination of the Plan shall not
reduce or eliminate any balance in a Participant's Deferred Compensation Account
accrued through the date of such amendment or termination. Upon termination of
the Plan, the Company may provide that notwithstanding the Participant's
Distribution Date, all Deferred Compensation Account balances will be
distributed on a date selected by the Company.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its
duly authorized officers on this 23rd day of April, 1997.
ACCESSORIES ASSOCIATES, INC.
By: /s/ Duane DeSisto
-------------------------------
Its: Chief Financial Officer
------------------------------
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 2, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE TWELVE MONTHS ENDED JANUARY 2, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-K
FOR THE TWELVE MONTHS ENDED JANUARY 2, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 2,207
<SECURITIES> 0
<RECEIVABLES> 39,361
<ALLOWANCES> 9,975
<INVENTORY> 37,162
<CURRENT-ASSETS> 74,347
<PP&E> 37,150
<DEPRECIATION> 19,607
<TOTAL-ASSETS> 126,498
<CURRENT-LIABILITIES> 43,001
<BONDS> 76,406
29,771
0
<COMMON> 6
<OTHER-SE> (23,508)
<TOTAL-LIABILITY-AND-EQUITY> 126,498
<SALES> 160,325
<TOTAL-REVENUES> 160,325
<CGS> 88,823
<TOTAL-COSTS> 88,823
<OTHER-EXPENSES> 78,135
<LOSS-PROVISION> 47,048
<INTEREST-EXPENSE> 7,010
<INCOME-PRETAX> (13,153)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,932)
<EPS-PRIMARY> (26.20)
<EPS-DILUTED> (26.20)
</TABLE>
