<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 3, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission File Number 333-61119
AAI.FOSTERGRANT, INC.
---------------------
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0419304
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 GEORGE WASHINGTON HIGHWAY
SMITHFIELD, RI 02917
-----------------------------
(Address of principal executive offices) (Zip code)
(401) 231-3800
--------------
(Registrant's telephone number, including area code)
Indicate by checkmark 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: [ ]
As of May 18, 1999, there were 608,000 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
<PAGE> 2
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of January 2, 1999
and April 3, 1999 3
Consolidated Condensed Statements of Operations for the three
months ended April 4, 1998 and April 3, 1999 4
Consolidated Condensed Statements of Cash Flows for the three
months ended April 4, 1998 and April 3, 1999 5
Notes to Consolidated Condensed Financial Statements 7
FINANCIAL STATEMENTS FOR FANTASMA, LLC A MOSTLY-OWNED SUBSIDIARY OF
AAI.FOSTERGRANT, INC
Condensed Balance Sheets as of January 2, 1999 and April 3, 1999 20
Condensed Statements of Operations for the three months ended
April 4, 1998 and April 3, 1999 21
Condensed Statement of Cash Flows for the three months ended April 4,
1998 and April 3, 1999 22
Notes to Financial Statements 23
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 36
ITEM 2. Changes in Securities and Use of Proceeds 36
ITEM 3. Defaults Upon Senior Securities 36
ITEM 4. Submission of Matters to a Vote of Security Holders 36
ITEM 5. Other Information 36
ITEM 6. Exhibits and reports on Form 8-K 36
SIGNATURES 37
</TABLE>
2
<PAGE> 3
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
JANUARY 2, APRIL 3,
1999 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,207 $ 1,717
Accounts receivable less reserves of approximately $9,975 and $8,498 29,317 37,932
Inventories 37,162 39,330
Prepaid expenses and other current assets 1,918 2,080
Deferred tax assets 3,743 3,743
--------- ---------
Total current assets 74,347 84,802
--------- ---------
Property, plant and equipment, net 17,543 17,158
---------
Intangible assets 20,874 20,590
Other assets 8,415 8,327
Deferred tax assets 5,319 5,319
--------- ---------
Total assets $ 126,498 $ 136,196
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 2,576 $ 15,161
Current maturities of long-term obligations 626 622
Deferred compensation - current portion 30 15
Accounts payable 14,899 22,756
Accrued expenses 22,740 12,962
Accrued income taxes 2,130 2,109
--------- ---------
Total current liabilities 43,001 53,625
--------- ---------
10 3/4% series B senior notes due 2006 75,000 75,000
Long-term obligations, less current maturities 780 616
Deferred compensation - less current portion 1,448 1,527
Redeemable preferred stock of a subsidiary 909 930
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 28,862 29,579
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 (289) (442)
Accumulated Deficit (23,489) (24,915)
--------- ---------
Total shareholders' deficit (23,502) (25,081)
--------- ---------
Total liabilities and shareholders' deficit $ 126,498 $ 136,196
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE> 4
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
(Unaudited)
<S> <C> <C>
NET SALES $ 42,703 $ 41,481
COST OF GOODS SOLD 23,431 23,814
--------- ---------
Gross profit 19,272 17,667
OPERATING EXPENSES:
Selling 11,493 11,704
General and administrative 5,956 4,466
--------- ---------
Income from operations 1,823 1,497
Interest expense (1,178) (2,342)
Other income, net 76 135
--------- ---------
Income (loss) before income tax
expense and dividends
and accretion on preferred stock 721 (710)
Income tax expense (317) --
--------- ---------
Net income (loss) before dividends and
accretion on preferred stock 404 (710)
Dividends and accretion on
preferred stock 683 718
--------- ---------
Net loss applicable to common
shareholders $ (279) $ (1,428)
========= =========
Basic and diluted net loss per share
applicable to common shareholders $ (0.46) $ (2.35)
========= =========
Basic and diluted weighted average shares
of Common stock outstanding 608,000 608,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE> 5
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net income (loss) $ 404 $ (710)
Adjustments to reconcile net income (loss) to net cash used in operating
activities-
Depreciation and amortization 2,470 3,203
Amortization of interest costs related to debt -- 296
Equity in earnings of investments in affiliates (60) (84)
Minority interest in income of consolidated subsidiary 13 21
Cumulative foreign currency translation adjustment 23 (153)
Deferred interest on subordinated promissory notes payable 88 --
Deferred taxes 317 --
Changes in assets and liabilities, net of acquisitions -
Accounts receivable (14,920) (8,615)
Inventories 1,221 (2,168)
Prepaid expenses and other current assets 272 (162)
Deferred Costs -- (61)
Accounts payable 6,942 7,857
Accrued expenses (2,020) (9,868)
Accrued income taxes (6) (21)
-------- --------
Net cash used in operating activities (5,256) (10,465)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received (5,487) --
Purchases of property, plant and equipment (9,073) (2,135)
Advances to officers/shareholders (2,162) --
Increase in investment in affiliates (60) --
Increase in other assets (2) (301)
-------- --------
Net cash used in investing activities (16,784) (2,436)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable 17,443 12,585
Proceeds from term note payable 2,737 --
Payments on long term obligations and deferred compensation (480) (174)
-------- --------
Net cash provided by financing activities 19,700 12,411
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,340) (490)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 2,207
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 439 $ 1,717
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
<PAGE> 6
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Conversion of leasehold improvements to building improvements $ 1,393 $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 1,040 $ 3,841
======= =======
Taxes $ 98 $ 6
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During the three months ended April 4, 1998, the Company Acquired Foster
Grant UK as described in Note 2
This acquisition is summarized as follows-
Fair value of assets acquired, excluding cash $ 7,260 $ --
Payments in connection with the acquisitions, net of cash acquired (5,487) --
------- -------
Liabilities assumed and notes issued $ 1,773 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
6
\
<PAGE> 7
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
(a) Interim Consolidated Condensed Financial Statements
The accompanying unaudited interim consolidated condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for reporting on
Form 10-Q. Accordingly, certain information and footnote disclosure required for
complete financial statements are not included herein. It is recommended that
these financial statements be read in conjunction with the consolidated
financial statements and related notes of AAi.FosterGrant, Inc. (the "Company"
or "AAi") for the year ended January 2, 1999 as reported in the Company's 10-K
filed with the SEC on April 2, 1999. In the opinion of management, all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included. The
consolidated condensed balance sheet presented as of January 2, 1999 has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The results of operations for the
period ended April 3, 1999 may not be indicative of the results that may be
expected for the year ending January 1, 2000, or for any other future period.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following at January 2, 1999 and April 3, 1999 (in
thousands):
<TABLE>
<CAPTION>
January 2, April 3,
1999 1999
<S> <C> <C>
Finished goods................................ $ 31,037 $ 34,929
Work-in-process and raw materials............. 6,125 4,401
-------- --------
$ 37,162 $ 39,330
======== ========
</TABLE>
(c) 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 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 expense when incurred. The
Company expensed
7
<PAGE> 8
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
customer acquisition costs of approximately $377,000 and $147,000 for the three
months ended April 4, 1998 and April 3, 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 from which
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 the
three months ended April 3, 1999, the Company capitalized approximately $61,000
of these costs in the accompanying consolidated balance sheet. Amortization
expense related to these costs as well as previously capitalized costs was
approximately $296,000 for the three months ended April 3, 1999. No such costs
were capitalized or amortized during the three months ended April 4, 1998.
Note 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. As the result of the
termination of the employment of this member, in April 1999, the Company has the
obligation to repurchase this interest for nominal consideration. Another
employee of Fantasma has options to acquire up to a 2% interest in Fantasma and
up to an additional 2% interest if certain earnings targets for Fantasma are met
in 1999 and 2000. As of April 3, 1999, the exercise price of the options to
purchase member interests of Fantasma was equal to or greater than the fair
market value; therefore no expense was recorded. Fantasma is a marketer and
distributor of watches and clocks.
The acquisition was accounted for using the purchase method; accordingly,
the results of operations of Fantasma from the date of acquisition are included
in the Company's consolidated statements of operations. The purchase price was
allocated based on estimated fair market value of assets and liabilities at the
date of acquisition. In connection with the purchase price allocation, the
Company recorded goodwill of approximately $4.6 million, which is being
amortized ratably over 10 years.
In March 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 $700,000 in 1998
and 1999 based on Foster Grant UK performance. Based on activity to date, there
has been no increase in the purchase price.
The acquisition has been accounted for using the purchase method of
accounting; accordingly, the results of operation of Foster Grant UK from the
date of acquisition are included in the Company's consolidated statements of
operations. The purchase price was allocated based on estimated fair values of
assets and liabilities at the date of acquisition.
8
<PAGE> 9
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
In connection with the purchase price allocation, the Company recorded goodwill
of approximately $1.1 million, which is being amortized on a straight-line basis
over 20 years.
The following unaudited proforma summary information presents the combined
results of operations of the Company, Fantasma and Foster Grant UK as if the
acquisitions had occurred at the beginning of 1998. This unaudited proforma
financial information is presented for informational purposes only and may not
be indicative of the results of operations as they would have been if the
Company, Fantasma and Foster Grant UK had been a single entity nor is it
necessarily indicative of the results of operations that may occur in the
future. Anticipated efficiencies from the consolidation of the Company, Fantasma
and Foster Grant UK have been excluded from the amounts in the unaudited pro
forma summary presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, 1998
------------------
<S> <C>
Net sales ..................................................... $ 47,527
Net loss applicable to common
shareholders .............................................. (758)
Basic and diluted net loss per share applicable
to common shareholders .................................... (1.25)
</TABLE>
Note 3 - Long-Term Obligations
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.
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. 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
9
<PAGE> 10
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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. At April 3, 1999, management believes the Company was in
compliance with these covenants
The Notes are redeemable at the option of the Company, in whole or in part,
on or after July 15, 2002 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.
Note 4 - Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share was determined by
dividing net loss by the weighted average common shares outstanding during the
period. Diluted earnings per share was determined by dividing net loss by
diluted weighted average shares outstanding. Diluted weighted average shares
reflect the dilutive effect, if any, of common stock options based on the
treasury stock method. Diluted weighted average shares outstanding excludes all
12,000 common equivalent shares at April 4, 1998 and April 3, 1999 as their
effect would be anti-dilutive.
10
<PAGE> 11
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Note 5 - Comprehensive Income (loss)
Comprehensive net loss for the three months ended April 3, 1999 was
$515,000 as compared to net income of $381,000 for the three months ended April
4, 1998. Differences between comprehensive net income (loss) and net income
(loss) before dividends and accretion on preferred stock for each period
represents the foreign currency translation adjustment for each period.
Note 6 - Restructuring Charge
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
charge included $1.5 million for the writedown of assets to be disposed (which
were all disposed during fiscal 1998) and a severance accrual of approximately
$1.1 million, which represents severance payments due to 40 office and
distribution employees. Through April 3, 1999, all of these 40 employees were
terminated and severance benefits of $728,000 were paid. The remaining severance
accrual will be paid during the balance of fiscal 1999.
Note 7 - 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.
11
<PAGE> 12
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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/
THREE MONTHS COMBO
ENDED MASS STORES/
APRIL 4, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $22,366 $10,067 $ 4,710 $ 5,560 $42,703
======= ======= ======= ======= =======
Segment profit (loss) $ 504 $ 1,528 $(1,288) $ (99) $ 645
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/
THREE MONTHS COMBO
ENDED MASS STORES/
APRIL 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 26,255 $ 7,873 $ 5,413 $ 1,940 $ 41,481
======== ======== ======== ======== ========
Segment profit
(loss) $ 1,058 $ (269) $ (782) $ (852) $ (845)
======== ======== ======== ======== ========
</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.
The chief operating decision-maker does not review segment assets.
12
<PAGE> 13
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Total assets specifically identifiable with each reportable segment are as
follows:
<TABLE>
<CAPTION>
JANUARY 2, APRIL 3,
1999 1999
<S> <C> <C>
Mass merchandisers $ 25,248 $ 28,695
Chain drug stores/combo stores/supermarkets 6,368 10,511
Variety 1,246 4,618
Other 5,068 3,643
Unassigned assets 88,568 88,729
-------- --------
$126,498 $136,196
======== ========
</TABLE>
Note 8 - 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 subsidiary's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.
Effective January 1, 1999, the assets of the Company's wholly owned
guarantor subsidiaries were transferred to the Company. Accordingly, all
operations previously performed by these wholly owned guarantor subsidiaries are
now performed by the Company.
13
<PAGE> 14
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
APRIL 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
Current assets
Cash and cash equivalents $ 311 $ -- $ 12 $ 1,394 $ -- $ 1,717
Accounts receivable, net 30,376 -- 1,896 5,660 -- 37,932
Inventories 32,586 -- 3,599 3,145 -- 39,330
Prepaid expenses and other current assets 1,613 -- 267 200 -- 2,080
Deferred tax assets 3,743 -- -- -- -- 3,743
-------- ---- ------- ------- -------- --------
Total current assets 68,629 -- 5,774 10,399 -- 84,802
Property, plant and equipment, net 15,643 -- 21 1,494 -- 17,158
Other assets 46,356 -- 4,254 375 (16,749) 34,236
-------- ---- ------- ------- -------- --------
Total assets $130,628 $ -- $10,049 $12,268 $(16,749) $136,196
======== ==== ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Borrowings under revolving note payable $ 15,161 $ -- $ -- $ -- -- $ 15,161
Current maturities of long-term
obligations and deferred costs 637 -- -- -- -- 637
Accounts payable 20,069 -- 80 2,607 -- 22,756
Accrued expenses 14,149 -- 372 550 -- 15,071
Due to affiliate -- -- 5,946 2,814 (8,760) --
-------- ---- ------- ------- -------- --------
Total current liabilities 50,016 -- 6,398 5,971 (8,760) 53,625
Long-term obligations and deferred costs,
less current maturities 2,143 -- -- -- -- 2,143
10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000
Redeemable preferred stock of a subsidiary 930 -- -- -- -- 930
Preferred Stock 29,579 -- -- -- -- 29,579
Shareholders' (deficit) equity (27,040) -- 3,651 6,297 (7,989) (25,081)
-------- ---- ------- ------- -------- --------
Total liabilities and shareholders'
(deficit) equity $130,628 $ -- $10,049 $12,268 $(16,749) $136,196
======== ==== ======= ======= ======== ========
</TABLE>
14
<PAGE> 15
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JANUARY 2, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
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
-------- ------- ------- ------- -------- --------
Total assets $112,274 $ 7,852 $13,654 $12,033 $(19,315) $126,498
======== ======= ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Borrowings under revolving note payable $ 2,576 $ -- $ -- $ -- $ -- $ 2,576
Current maturities of long-term
obligations and deferred costs 656 -- -- -- -- 656
Accounts payable 10,961 998 406 2,534 -- 14,899
Accrued expenses 16,726 5,622 1,554 968 -- 24,870
Due 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
Long-term obligations and deferred costs,
less current maturities 2,228 -- -- -- -- 2,228
10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000
Redeemable preferred stock of a subsidiary -- -- -- -- 909 909
Preferred Stock 28,845 926 -- -- (909) 28,862
Shareholders' (deficit) equity (24,718) (3,451) 4,606 6,151 (6,090) (23,502)
-------- ------- ------- ------- -------- --------
Total liabilities and shareholders'
(deficit) equity $112,274 $ 7,852 $13,654 $12,033 $(19,315) $126,498
======== ======= ======= ======= ======== ========
</TABLE>
15
<PAGE> 16
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
APRIL 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Net sales $33,738 $ -- $1,677 $6,066 $ -- $41,481
Cost of goods sold 19,448 -- 1,532 2,834 -- 23,814
------- ---- ------ ------ ---- -------
Gross profit 14,290 -- 145 3,232 -- 17,667
Selling general and administrative 12,447 -- 1,046 2,677 -- 16,170
------- ---- ------ ------ ---- -------
Income (loss) from operations 1,843 -- (901) 555 -- 1,497
Interest expense (2,226) -- (84) (32) -- (2,342)
Other income (expense), net 246 -- 30 (226) -- 50
Equity in losses of consolidated subsidiaries (599) -- -- -- 684 85
------- ---- ------ ------ ---- -------
(Loss) income before income tax expense and
dividends on accretion on preferred stock (736) -- (955) 297 684 (710)
Income tax expense -- -- -- -- -- --
------- ---- ------ ------ ---- -------
Net (loss) income before dividends and
accretion on preferred stock (736) -- (955) 297 684 (710)
Dividends and accretion on preferred stock 718 -- -- -- -- 718
------- ---- ------ ------ ---- -------
Net (loss) income applicable to common
shareholders $(1,454) $ -- $ (955) $ 297 $684 $(1,428)
======= ==== ====== ====== ==== =======
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
APRIL 4, 1998
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Net sales $18,844 $19,783 $ -- $4,076 $ -- $42,703
Cost of goods sold 13,212 8,371 -- 1,848 -- $23,431
------- ------- ---- ------ ------- -------
Gross profit 5,632 11,412 -- 2,228 -- 19,272
Selling general and administrative 8,717 7,150 -- 1,582 -- 17,449
------- ------- ---- ------ ------- -------
(Loss) income from operations (3,085) 4,262 -- 646 -- 1,823
Interest expense (797) (313) -- (68) -- (1,178)
Other income (expense), net 79 29 -- (32) -- 76
Equity in losses of consolidated subsidiaries 2,723 -- -- -- (2,723) --
------- ------- ---- ------ ------- -------
(Loss) income before income tax (benefit)
expense and dividends on accretion on
preferred stock (1,080) 3,978 -- 546 (2,723) 721
Income tax (benefit) expense (1,521) 1,747 -- 91 -- 317
------- ------- ---- ------ ------- -------
Net income (loss) before dividends and
accretion on preferred stock 441 2,231 -- 455 (2,723) 404
Dividends and accretion on preferred stock 683 -- -- -- -- 683
------- ------- ---- ------ ------- -------
Net (loss) income applicable to common
shareholders $ (242) $ 2,231 $ -- $ 455 $(2,723) $ (279)
======= ======= ==== ====== ======= =======
</TABLE>
17
<PAGE> 18
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
APRIL 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Cash flows (used in) provided by
operating activities $(11,418) $ -- $ 1,063 $ (110) $ -- $(10,465)
Cash flows from investing activities:
Purchase of property, plant and equipment (1,373) -- -- (762) -- (2,135)
Advance to affiliates 870 -- -- -- (870) --
Other investing activities (313) -- (13) 25 -- (301)
-------- ---- ------- ------ ----- --------
Net cash (used in) provided by
investing activities (816) -- (13) (737) (870) (2,436)
-------- ---- ------- ------ ----- --------
Cash flows from financing activities:
Net borrowings under revolving note payable 12,585 -- -- -- -- 12,585
Payments on long-term obligations (19) -- -- -- -- (19)
Due (from) to affiliates -- -- (1,142) 272 870 --
Other financing activities (155) -- -- -- -- (155)
-------- ---- ------- ------ ----- --------
Net cash provided by (used in)
financing activities 12,411 -- (1,142) 272 870 12,411
-------- ---- ------- ------ ----- --------
Net increase (decrease) in cash and
cash equivalents 177 -- (92) (575) -- (490)
Cash and cash equivalents, beginning of period 134 -- 104 1,969 -- 2,207
-------- ---- ------- ------ ----- --------
Cash and cash equivalents, end of period $ 311 $ -- $ 12 $1,394 $ -- $ 1,717
======== ==== ======= ====== ===== ========
</TABLE>
18
<PAGE> 19
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
APRIL 4, 1998
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Cash flows (used in) provided by
operating activities $ (6,488) $ 1,310 $ -- $ (78) $ -- $ (5,256)
Cash flows from investing activities:
Purchase of property, plant and equipment (5,143) (3,633) -- (297) -- (9,073)
Acquisitions, net of cash received (5,487) -- -- -- -- (5,487)
Advance to affiliates (2,856) -- -- -- 2,856 --
Other investing activities (4,244) 2,174 -- (154) -- (2,224)
-------- ------- ---- ----- ------- --------
Net cash (used in) provided by
investing activities (17,730) (1,459) -- (451) 2,856 (16,784)
-------- ------- ---- ----- ------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable 18,880 (1,437) -- -- -- $ 17,443
Proceeds from term note payable 2,737 -- -- -- -- 2,737
Payments on long-term obligations (480) -- -- -- -- (480)
Due to (from) affiliates 823 1,479 -- 554 (2,856) --
-------- ------- ---- ----- ------- --------
Net cash provided by (used in)
financing activities 21,960 42 -- 554 (2,856) 19,700
-------- ------- ---- ----- ------- --------
Net (decrease) increase in cash and
cash equivalents (2,258) (107) -- 25 -- (2,340)
Cash and cash equivalents, beginning of period 2,354 183 -- 242 -- 2,779
-------- ------- ---- ----- ------- --------
Cash and cash equivalents, end of period $ 96 $ 76 $ -- $ 267 $ -- $ 439
======== ======= ==== ===== ======= ========
</TABLE>
19
<PAGE> 20
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
Fantasma, LLC
(A Mostly Owned Subsidiary of AAI.FosterGrant, Inc.)
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
JANUARY 2, APRIL 3,
1999 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 104 $ 12
Accounts receivable less reserves of
approximately $373 and $532 5,088 1,896
Inventories 3,878 3,599
Prepaid expenses and other current assets 203 267
------- -------
Total current assets 9,273 5,774
------- -------
Property and equipment, net 24 21
Other assets, net 4,357 4,254
------- -------
Total assets $13,654 $10,049
======= =======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $ 7,088 $ 5,946
Accounts payable and accrued liabilities 1,960 452
------- -------
Total current liabilities 9,048 6,398
Members' Equity 4,606 3,651
------- -------
Total liabilities and members' equity $13,654 $10,049
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
20
<PAGE> 21
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
Fantasma, LLC
(A Mostly Owned Subsidiary of AAI.FosterGrant, Inc.)
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
(Unaudited)
<S> <C> <C>
NET SALES $ 3,031 $ 1,677
COST OF GOODS SOLD 1,672 1,532
------- -------
Gross profit 1,359 145
OPERATING EXPENSES:
Selling 648 686
General and administrative 591 360
------- -------
Income (loss) from operations 120 (901)
Interest expense (103) (84)
Other income, net -- 30
------- -------
Net income (loss) $ 17 $ (955)
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
21
<PAGE> 22
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
Fantasma, LLC
(A Mostly Owned Subsidiary of AAI.FosterGrant, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17 $ (955)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 4 119
Changes in assets and liabilities -
Accounts receivable 2,469 3,192
Inventories 64 279
Prepaid expenses and other current assets (32) (64)
Accounts payable and accrued expenses (1,070) (1,508)
------- -------
Net cash provided by operating activities 1,452 1,063
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets -- (13)
Purchases of property and equipment (2) --
------- -------
Net cash used in investing activities (2) (13)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under note payable to member (3,764) --
Advances payable to member 2,076 (1,142)
------- -------
Net cash used in financing activities (1,688) (1,142)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (238) (92)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 238 104
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 12
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 360
=======
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
22
<PAGE> 23
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
FANTASMA, LLC
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
(a) Interim Condensed Financial Statements
The accompanying unaudited interim condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosure required for complete
financial statements are not included herein. It is recommended that these
financial statements be read in conjunction with the consolidated financial
statements and related notes of AAi.FosterGrant, Inc. ("AAi" or the "Company")
and Fantasma LLC for the year ended January 2, 1999 as reported in the Company's
Form 10-K filed with the SEC on April 2, 1999. In the opinion of management, all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included. The
consolidated condensed balance sheet presented as of January 2, 1999 has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The results of operations for the
period ended April 3, 1999 may not be indicative of the results that may be
expected for the year ending January 1, 2000 or for any other future period.
(b) Organization and Business Activity
Fantasma LLC (Fantasma) was organized under the laws of the State of
Delaware on August 22, 1996 and began business operations on September 1, 1996.
Fantasma imports and wholesales licensed watches, clocks, and other novelties;
and grants credit to customers located throughout the United States.
Prior to September 1, 1996, Fantasma operated as a division of Overdrive
Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital Corp.
(Overdrive) sold the division's operating assets to Fantasma LLC in exchange for
a two-year, $3,764,366 note. Overdrive maintained a 67% ownership interest in
Fantasma, with a former stockholder of Overdrive holding a 33% ownership
interest.
In June 1998, AAi acquired an 80% interest in Fantasma for approximately
$4.1 million in cash. The remaining 20% interest in Fantasma is held by a
previous member of Fantasma. As the result of the termination of the employment
of this member, in April 1999, the Company has the obligation to repurchase this
interest for nominal consideration. Another employee of Fantasma has options to
acquire up to a 2% interest in Fantasma and up to an additional 2% interest if
certain earnings targets for Fantasma are met in 1999 and 2000. As of April
23
<PAGE> 24
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
3, 1999, the exercise price of options to purchase membership interests of
Fantasma was equal to or greater than the fair market value.
(c) 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.
(d) 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.
Note 2 - Comprehensive Income
Comprehensive net income was the same as net income for the periods
presented.
NOTE 3 - Segment Reporting
Fantasma 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, Fantasma has viewed its operations and manages its
business as principally one segment.
24
<PAGE> 25
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
ITEM 2. 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. Important factors, which could cause actual results to differ
materially from such expectations, are disclosed in the Company's Form 10-K
filed with the SEC on April 2, 1999.
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 may contain required minimum
sales volumes or termination penalties equal to the Company's unamortized cost
of product displays provided to the customer. The Company believes its
relationships with retailers are dependent upon its ability to efficiently
utilize allocated floor space to generate satisfactory returns for its
customers. To meet this end, the Company strives to consistently deliver
competitively priced products and service programs which provide retailers with
attractive gross margins and inventory turnover rates. The Company has
historically retained customers from year to year, although retailers may drop
or add product lines supplied by the Company. Generally, customer loss has been
attributable to such customer going out of business or being acquired by a
company which does not carry AAi's product line or has prior relationships with
a competitor of the Company.
25
<PAGE> 26
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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. In addition,
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.
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. Net sales of the Company's optical products
accounted for approximately 59.0% and 45.3% of the Company's net sales for the
three months ended April 4, 1998 and April 3, 1999, respectively; net sales of
the Company's costume jewelry accounted for approximately 29.4% and 34.0% of the
Company's net sales for the three months ended April 4, 1998 and April 3, 1999,
respectively, and the balance represented sales of synthetic leather goods,
watches, clocks and other accessories. Optical products generally have higher
gross margins than the Company's other product lines.
Cost of Goods Sold. The Company outsources manufacturing for all of its
products, 75% of which is sourced to manufacturers in Asia through its joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. Accordingly, the principal element comprising the Company's cost
of goods sold is the price of manufactured goods purchased through the Company's
joint venture or from independent manufacturers. The Company believes
outsourcing manufacturing allows it to reliably deliver competitively priced
products to the retail market while retaining considerable flexibility in its
cost structure.
Operating Expenses. Operating expenses are comprised primarily of payroll
and occupancy costs related to the Company's selling, general and administrative
activities as well as depreciation and amortization. The Company incurs various
costs in connection with the acquisition of new customers and new stores for
existing customers, principally the cost of new product display fixtures and
costs related to the purchase of the customer's existing inventory. The Company
makes substantial investments in the design, production and installation of
display fixtures in connection with establishing and maintaining customer
relationships. The Company capitalizes the production cost of these display
fixtures as long as it retains ownership of them. These costs are amortized to
selling expenses on a straight-line basis over their estimated useful life,
which is one to three years. If the Company does not retain title to the
displays, the display costs are expensed as shipped.
26
<PAGE> 27
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the
previous vendor's merchandise from the customer in connection with these
agreements. In these situations, the Company values this inventory at its fair
market value, 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 expense
when incurred. The Company expensed customer acquisition costs of approximately
$377,000 and $147,000 for the three months ended April 4, 1998 and April 3,
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 the
three months ended April 3, 1999, the Company capitalized approximately $61,000
of these costs in the accompanying consolidated balance sheet. Amortization
expense related to these costs as well as previously capitalized costs was
approximately $296,000 for the three months ended April 3, 1999. No such costs
were capitalized or amortized during the three months ended April 4, 1998.
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 Group
LP and related companies ("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.
27
<PAGE> 28
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 $4.4 million and $4.8 million for the three months ended April 4,
1998 and April 3, 1999, respectively.
In June 1998, the Company acquired 80% of the membership interests of
Fantasma for $4.1 million in cash. A former member of Fantasma holds the
remaining 20% membership interest of Fantasma. As the result of the termination
of the employment of this member, in April 1999, the Company has the obligation
to repurchase this interest for nominal consideration. Another employee of
Fantasma has options to acquire up to a 2% interest in Fantasma and up to an
additional 2% interest if certain earnings targets for Fantasma are met in 1999
and 2000. AAi's acquisition of Fantasma added watches and clocks to AAi's
product lines and Disney and Warner Bros. stores to its customer base. As a
result of this transaction, the Company recorded approximately $4.6 million in
intangible assets, which are being 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 sales to date. As a result of this acquisition, the
Company recorded approximately $1.1 million of intangible assets, which are
being amortized over 20 years.
Net loss before dividends and accretion on preferred stock for the first
quarter of fiscal 1999 was $710,000 as compared to net income before dividends
and accretion on preferred stock of $404,000 in the first quarter of fiscal
1998.
28
<PAGE> 29
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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
Consolidated Condensed Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 4, APRIL 3,
1998 1999
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 54.9 57.4
----- -----
Gross profit 45.1 42.6
Operating expenses 40.9 39.0
----- -----
Income (loss) from operations 4.2 3.6
Interest expense (2.8) (5.6)
Other expense, net 0.2 0.3
----- -----
Income (loss) before taxes and
Dividends and accretion on
Preferred stock 1.6 (1.7)
Income tax (expense) benefit (0.7) --
----- -----
Net income (loss) before
Dividends and accretion on
Preferred stock 0.9 (1.7)
Dividends and accretion on
Preferred stock 1.6 1.7
----- -----
Net loss applicable to common
Shareholders (0.7)% (3.4)%
===== =====
</TABLE>
29
<PAGE> 30
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED APRIL 3, 1999 COMPARED TO APRIL 4, 1998
Net Sales. Consolidated net sales were $41.5 million for the three months
ended April 3, 1999 as compared to $42.7 million for the three months ended
April 4, 1998, a decrease of 2.9% or $1.2 million. The decrease in net sales is
attributable to a reduction in sales to chain drug stores/combo
stores/supermarkets of $2.2 million and a reduction of $3.6 million in other
channels partially offset by improved sales with mass merchandisers of $3.9
million and with variety stores of $0.7 million.
Gross Profit. Gross profit was $17.7 million for the three months ended
April 3, 1999 as compared to $19.3 million for the three months ended April 4,
1998. Gross profit as a percentage of net sales decreased to 42.6% for the three
months ended April 3, 1999 from 45.1% for the three months ended April 4, 1998.
The $1.6 million or 8.3% decrease is primarily due to increased sales of
promotional products, which have lower margins, and a change in product sales
mix from higher margin optical products to lower margin jewelry products.
Operating Expenses. Operating expenses were $16.2 million for the three
months ended April 3, 1999 as compared to $17.5 million for the three months
ended April 4, 1998, a decrease of 7.3% or $1.3 million. The decrease is
primarily attributable to payroll and overhead savings generated from the
closing of the Dallas distribution facility.
Interest Expense. Interest expense was $2.3 million for the three months
ended April 3, 1999 as compared to $1.2 million for the three months ended April
4, 1998, an increase of 99% or $1.1 million. This resulted from additional
borrowings under the Company's credit facilities to fund operations and a higher
effective interest rate related to the Company's 10 3/4% Senior Notes.
Income Tax. No income tax benefit was recorded for the three months ended
April 3, 1999 as compared to $317,000 of expense for the three months ended
April 4, 1998.
Net Income (Loss). As a result of the factors discussed above, net loss
before dividends and accretion on preferred stock was $710,000 for the three
months ended April 3, 1999 as compared to net income before dividends and
accretion on preferred stock of $404,000 for the three months ended April 4,
1998, a decrease of $1.1 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $1.4 million for the three months ended April 3, 1999 as
compared to a loss of $279,000 for the three months ended April 4, 1998, an
increase of $1.1 million. The increase was attributable to the $1.1 million
decrease in earnings and an increase of $35,000
30
<PAGE> 31
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
in dividends and accretion on Series A Preferred Stock due to the compounding of
accrued dividends.
LIQUIDITY AND CAPITAL RESOURCES
At April 3, 1999 the Company had cash and cash equivalents of $1.7 million
and working capital of $31.2 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 $10.5 million of cash in operations during the three
months ended April 3, 1999 compared to a use of $5.3 million during the three
months ended April 4, 1998. Cash used in operating activities increased due to
lower operating results, increased inventory purchases, higher accounts
receivables and timing of payments for accruals and accounts payable offset by
increases in non-cash depreciation and amortization charges.
The Company used $2.4 million in investing activities during the three
months ended April 3, 1999 compared to a use of $16.9 million during the three
months ended April 4, 1998. The uses of funds for investing activities during
the three months ended April 3, 1999 consisted primarily of $2.1 million for the
purchase of equipment (primarily display fixtures).
The Company generated $12.4 million from financing activities during the
three months ended April 3, 1999 compared to $19.7 million during the three
months ended April 4, 1998. The funds generated from financing activities
consisted mainly of borrowings under the revolving note payable.
The Company has 43,700 shares of Series A Preferred Stock which has a
redemption value at April 3, 1999 of $29.6 million. Shares of Series A Preferred
Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for
certain dilutive events. Conversion is at the option of the shareholder, but is
automatic upon the consummation of a qualified public offering. The holders of
Series A Preferred Stock have the right to require redemption for cash for any
unconverted shares, beginning June 30, 2002, provided, however, that the right
to require redemption is suspended as long as any Restrictive Indebtedness (as
defined in the Company's Articles of Incorporation) 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.
31
<PAGE> 32
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, Foster Grant Holdings, Inc. (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.
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 Bank of America, as an agent and lender,
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 April 3, 1999, the Company had total indebtedness, including
borrowings under the Senior Credit Facility, in the aggregate principal amount
of $91.4 million. The Company had current liabilities of approximately $53.6
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 $3.6 million and minimum
payments under its operating leases of approximately $1.8 million. The Indenture
permits the Company to incur additional indebtedness, including secured
indebtedness, subject to certain limitations.
The Company has up to $36.4 million available for borrowings under the
Senior Credit Facility as of April 3, 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. Subsequent to the end of the first quarter of fiscal 1999,
the Company successfully negotiated an amendment to the Senior Credit Facility
to modify the financial covenants. Covenants for the first quarter of fiscal
1999 have been waived with the new covenants beginning with the six months ended
July 3, 1999.
The Company's ability to make scheduled payments of principal, 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,
32
<PAGE> 33
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
together with available borrowings under the Senior Credit Facility, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. The Company may, however, need to refinance all or a portion of
the principal of the Notes on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations,
that anticipated cost savings and revenue growth will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
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 late-summer 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.
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
33
<PAGE> 34
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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.
ITEM 3. 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 April 3,
1999, approximately 99% of the carrying values of the Company's long-term debt
were at fixed interest rates.
34
<PAGE> 35
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
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. During the three
months ended April 3, 1999, 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. 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.
35
<PAGE> 36
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-27.1 Financial Data Schedule
(b) Report on Form 8-K
The registrant filed no reports on form 8-K during the quarter ended
April 3, 1999.
36
<PAGE> 37
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AAi.FosterGrant, Inc.
(Registrant)
<TABLE>
<S> <C>
Dated: May 18, 1999 /s/ Gerald F. Cerce
-----------------------------------------------
Gerald F. Cerce
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
Dated: May 18, 1999 /s/ Duane M. DeSisto
-----------------------------------------------
Duane M. DeSisto
Assistant Secretary and Chief
Financial Officer (Principal Financial Officer)
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF APRIL 3, 1999 (UNAUDITED) AND THE CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1999 (UNAUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED
IN FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> APR-03-1999
<EXCHANGE-RATE> 1
<CASH> 1,717
<SECURITIES> 0
<RECEIVABLES> 46,430
<ALLOWANCES> 8,498
<INVENTORY> 39,330
<CURRENT-ASSETS> 84,802
<PP&E> 39,268
<DEPRECIATION> 22,110
<TOTAL-ASSETS> 136,196
<CURRENT-LIABILITIES> 53,625
<BONDS> 75,616
0
30,509
<COMMON> 6
<OTHER-SE> (25,087)
<TOTAL-LIABILITY-AND-EQUITY> 136,196
<SALES> 41,481
<TOTAL-REVENUES> 41,481
<CGS> 23,814
<TOTAL-COSTS> 16,170
<OTHER-EXPENSES> (135)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,342
<INCOME-PRETAX> (710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,428)
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> 0
</TABLE>
