<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 July 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 August 17, 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
PART I. - FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
January 2, 1999 and July 3, 1999 3
Consolidated Condensed Statements of Operations
for the three and six months ended July 4, 1998
and July 3, 1999 4
Consolidated Condensed Statements of Cash Flows
for the six months ended July 4, 1998 and
July 3, 1999 5
Notes to Consolidated Condensed Financial
Statements 7
CONDENSED FINANCIAL STATEMENTS FOR FANTASMA, LLC
A MOSTLY-OWNED SUBSIDIARY OF AAI.FOSTERGRANT, INC
Condensed Balance Sheets as of January 2, 1999 and
July 3, 1999 21
Condensed Statements of Operations for the three
and six months Ended July 4, 1998 and July 3, 1999 22
Condensed Statement of Cash Flows for the six
months ended July 4, 1998 and July 3, 1999 23
Notes to Condensed Financial Statements 24
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 37
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 38
ITEM 2. Changes in Securities and Use of Proceeds 38
ITEM 3. Defaults Upon Senior Securities 38
ITEM 4. Submission of Matters to a Vote of Security Holders 38
ITEM 5. Other Information 38
ITEM 6. Exhibits and reports on Form 8-K 38
SIGNATURES 39
2
<PAGE> 3
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
JANUARY 2, JULY 3,
1999 1999
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,207 $ 1,557
Accounts receivable less reserves of approximately
$9,975 and $8,108 29,317 42,342
Inventories 37,162 35,111
Prepaid expenses and other current assets 1,918 1,700
Deferred tax assets 3,743 3,743
-------- --------
Total current assets 74,347 84,453
-------- --------
Property, plant and equipment, net 17,543 17,918
Intangible assets 20,874 20,226
Other assets 8,415 7,999
Deferred tax assets 5,319 5,319
-------- --------
Total assets $126,498 $135,915
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 2,576 $ 17,303
Redeemable preferred stock of a subsidiary -- 951
Current maturities of long-term obligations 626 614
Deferred compensation, current portion 30 10
Accounts payable 14,899 17,870
Accrued expenses 22,740 17,109
Accrued income taxes 2,130 2,110
-------- --------
Total current liabilities 43,001 55,967
-------- --------
10 3/4% series B senior notes due 2006 75,000 75,000
Long-term obligations, less current maturities 780 466
Deferred compensation, less current portion 1,448 1,599
Redeemable preferred stock of a subsidiary 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 28,862 30,317
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) (247)
Accumulated deficit (23,489) (27,463)
-------- --------
Total shareholders' deficit (23,502) (27,434)
-------- --------
Total liabilities and shareholders' deficit $126,498 $135,915
======== ========
</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 SIX MONTHS ENDED
-------------------- --------------------
JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 45,928 $ 45,616 $ 88,631 $ 87,097
COST OF GOODS SOLD 24,112 26,757 47,543 50,745
-------- -------- -------- --------
Gross profit 21,816 18,859 41,088 36,352
OPERATING EXPENSES:
Selling 11,990 13,267 23,483 24,796
General and administrative 7,169 4,571 13,125 9,038
Restructuring charge 2,600 -- 2,600 --
-------- -------- -------- --------
Income from operations 57 1,021 1,880 2,518
Interest expense (1,460) (2,679) (2,638) (5,021)
Other expense, net (86) (152) (10) (17)
-------- -------- -------- --------
Loss before income tax benefit and dividends
and accretion on preferred stock (1,489) (1,810) (768) (2,520)
Income tax benefit 655 -- 338 --
-------- -------- -------- --------
Net loss before dividends and accretion
on preferred stock (834) (1,810) (430) (2,520)
Dividends and accretion on preferred stock 674 737 1,357 1,455
-------- -------- -------- --------
Net loss applicable to common shareholders $ (1,508) $ (2,547) $ (1,787) $ (3,975)
======== ======== ======== ========
Basic and diluted net loss per share
applicable to common shareholders $ (2.48) $ (4.19) $ (2.94) $ (6.54)
======== ======== ======== ========
Basic and diluted weighted average shares
of common stock outstanding 608,000 608,000 608,000 608,000
======== ======== ======== ========
</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>
SIX MONTHS ENDED
---------------------
JULY 4, JULY 3,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (430) $ (2,520)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 5,479 5,878
Amortization of interest costs related to debt -- 360
Equity in losses (earnings) of investments in affiliates 46 (84)
Minority interest in income of consolidated subsidiary 68 42
Cumulative foreign currency translation adjustment (163) 42
Deferred interest on subordinated promissory notes payable 106 --
Deferred taxes (338) --
Changes in assets and liabilities, net of acquisitions -
Accounts receivable (17,593) (13,025)
Inventories 7,175 2,051
Prepaid expenses and other current assets 236 218
Deferred costs -- (106)
Accounts payable 2,499 2,563
Accrued expenses (1,097) (5,311)
Accrued income taxes (87) (21)
-------- --------
Net cash used in operating activities (4,099) (9,913)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received (9,464) --
Purchases of property, plant and equipment (10,863) (4,892)
Advances to officers/shareholders (2,417) --
Decrease in investment in affiliates 29 --
Increase in other assets (281) (237)
-------- --------
Net cash used in investing activities (22,996) (5,129)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable 14,908 14,728
Proceeds from term note payable 13,222 --
Payments on long term obligations and deferred compensation (1,441) (336)
-------- --------
Net cash provided by financing activities 26,689 14,392
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (406) (650)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 2,207
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,373 $ 1,557
======== ========
</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>
SIX MONTHS ENDED
-------------------
JULY 4, JULY 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 $ 2,411 4,532
======== ======
Income Taxes $ 112 $ 6
======== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
RELATED TO ACQUISITIONS:
During the three and six months ended
July 4, 1998, the Company Acquired Fantasma, LLC
and Foster Grant UK, as described in Note 2
This acquisition is summarized as follows-
Fair value of assets acquired, excluding cash $ 15,672 $ --
======== ======
Payments in connection with the
acquisitions, net of cash acquired (9,464) --
-------- ------
Liabilities assumed and notes issued $ 6,208 $ --
======== ======
</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 July 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) Revenue Recognition
The Company recognizes revenue from product sales, net of estimated
agreed upon future allowances and anticipated returns and discounts, taken into
account historical experience, upon shipment to the customer.
(c) 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 July 3, 1999 (in
thousands):
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
--------- -------
<S> <C> <C>
Finished goods ..................................... $31,037 $31,149
Work-in-process and raw materials .................. 6,125 3,962
------- -------
$37,162 $35,111
======= =======
</TABLE>
7
<PAGE> 8
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
(d) 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 customer acquisition costs of approximately $123,000 and
$500,000, and $225,000 and $372,000 for the three and six months ended July 4,
1998 and July 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 and six months ended July 3, 1999, the Company capitalized approximately
$45,000 and $106,000 of these costs, respectively in the accompanying
consolidated balance sheet. Amortization expense for the three months and six
months ended July 3, 1999 related to these costs as well as previously
capitalized costs was approximately $300,000 and $596,000, respectively. No such
cost were capitalized or amortized during the first six months ended July 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 a 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 (based on the
Company's calculations). This previous member has filed a lawsuit asserting that
his termination was wrongful and the Company has asserted counterclaims related
to the Fantasma acquisition. The Company does not believe this litigation is
material to it's results of operations or financial condition. 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 July 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.
8
<PAGE> 9
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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 based
on Foster Grant UK performance in 1998 and 1999. 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. 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>
Six Months Ended
July 4, 1998
----------------
<S> <C>
Net sales ....................................................... $94,853
Net loss applicable to common shareholders ...................... (2,140)
Basic and diluted net loss per share applicable
to common shareholders ...................................... (3.52)
</TABLE>
9
<PAGE> 10
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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 $71.3 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 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 July 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.
10
<PAGE> 11
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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 July 4, 1998 and July 3, 1999 as their effect
would be anti-dilutive.
Note 5 - Comprehensive Loss
Comprehensive loss for the three and six months ended July 3, 1999 was
$1.6 million and $2.5 million, respectively, as compared to comprehensive loss
for the three and six months ended July 4, 1998 of $974,000 and $593,000,
respectively. Differences between comprehensive loss and 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 write down of assets to be disposed (which
were all disposed of during fiscal 1998) and a severance accrual of
approximately $1.1 million, which represents severance payments due to 40 office
and distribution employees. Through July 3, 1999, all of these 40 employees were
terminated and severance benefits of approximately $854,000 were paid. The
remaining severance accrual will be paid by the end of fiscal 2000.
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.
11
<PAGE> 12
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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
THREE MONTHS DRUG STORES/
ENDED MASS COMBO STORES/
JULY 4, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
- ------------ ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $24,026 $11,283 $ 4,715 $5,904 $45,928
======= ======= ======= ====== =======
Segment (loss) profit $(1,697) $ 1,116 $ (774) $ (48) $(1,403)
======= ======= ======= ====== =======
<CAPTION>
CHAIN
THREE MONTHS DRUG STORES/
ENDED MASS COMBO STORES/
JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
- ------------ ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $24,527 $11,849 $ 5,312 $3,928 $45,616
======= ======= ======= ====== =======
Segment (loss) profit $(1,235) $ 1,143 $ (1,159) $ (407) $(1,658)
======= ======= ======= ====== =======
<CAPTION>
CHAIN
SIX MONTHS DRUG STORES/
ENDED MASS COMBO STORES/
JULY 4, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
- ------------ ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $46,392 $21,350 $ 9,425 $11,464 $88,631
======= ======= ======= ======= =======
Segment (loss) profit $(1,193) $ 2,644 $(2,062) $ (147) $ (758)
======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 13
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
CHAIN
SIX MONTHS DRUG STORES/
ENDED MASS COMBO STORES/
JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
- ------------ ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $50,782 $19,722 $10,725 $ 5,868 $87,097
======= ======= ======= ======= =======
Segment (loss) profit $ (177) $ 874 $(1,941) $(1,259) $(2,503)
======= ======= ======= ======= =======
</TABLE>
Revenues 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.
Total assets specifically identifiable with each reportable segment are
as follows:
<TABLE>
<CAPTION>
JANUARY 2, JULY 3,
1999 1999
--------- --------
<S> <C> <C>
Mass merchandisers $ 25,248 $ 34,238
Chain drug stores/combo stores/supermarkets 6,368 11,256
Variety 1,246 5,541
Other 5,068 5,009
Unassigned assets 88,568 79,871
-------- --------
$126,498 $135,915
======== ========
</TABLE>
13
<PAGE> 14
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
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.
14
<PAGE> 15
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JULY 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 32 $ -- $ 17 $ 1,508 $ -- $ 1,557
Accounts receivable, net 34,472 -- 1,817 6,053 -- 42,342
Inventories 28,294 -- 3,338 3,479 -- 35,111
Prepaid expenses and other current assets 1,075 -- 262 362 -- 1,699
Deferred tax assets 3,744 -- -- -- -- 3,744
-------- ---- ------ ------- -------- --------
Total current assets 67,617 -- 5,434 11,402 -- 84,453
Property, plant and equipment, net 16,527 -- 19 1,372 -- 17,918
Other assets 49,655 -- 4,138 975 (21,224) 33,544
-------- ---- ------ ------- -------- --------
Total assets $133,799 $ -- $9,591 $13,749 $(21,224) $135,915
======== ==== ====== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Borrowings under revolving note payable $ 17,021 $ -- $ -- $ 282 $ -- $ 17,303
Redeemable preferred stock of a subsidiary 951 -- -- -- -- 951
Current maturities of long-term obligations
and deferred compensation 624 -- -- -- -- 624
Accounts payable 15,497 -- 264 2,109 -- 17,870
Accrued expenses 17,877 -- 257 1,085 -- 19,219
Due to affiliate -- -- 7,108 3,454 (10,562) --
-------- ---- ------ ------- -------- --------
Total current liabilities 51,970 -- 7,629 6,930 (10,562) 55,967
10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000
Long-term obligations and deferred compensation,
less current maturities 2,065 -- -- -- -- 2,065
Preferred Stock 30,317 -- -- -- -- 30,317
Shareholders' (deficit) equity (25,553) -- 1,962 6,819 (10,662) (27,434)
-------- ---- ------ ------- -------- --------
Total liabilities and shareholders'
(deficit) equity $133,799 $ -- $9,591 $13,749 $(21,224) $135,915
======== ==== ====== ======= ======== ========
</TABLE>
15
<PAGE> 16
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
-------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
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 compensation 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
10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000
Long-term obligations and deferred compensation,
less current maturities 2,228 -- -- -- -- 2,228
Redeemable preferred stock of a subsidiary 909 -- -- -- -- 909
Preferred Stock 27,936 926 -- -- -- 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>
16
<PAGE> 17
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------
JULY 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
Net sales $71,687 $ -- $ 2,844 $12,566 $ -- $87,097
Cost of goods sold 41,906 -- 3,010 5,829 -- 50,745
------- ---- ------- ------- ------- -------
Gross profit (loss) 29,781 -- (166) 6,737 -- 36,352
Operating expenses 26,056 -- 2,302 5,476 -- 33,834
------- ---- ------- ------- ------- -------
Income (loss) income from operations 3,725 -- (2,468) 1,261 -- 2,518
Interest expense (4,731) -- (153) (137) -- (5,021)
Other income (expense), net 421 -- (24) (498) -- (101)
Equity in earnings of consolidated subsidiaries 2,072 -- -- -- (1,988) 84
------- ---- ------- ------- ------- -------
Income (loss) before income tax expense and
dividends and accretion on preferred stock 1,487 -- (2,645) 626 (1,988) (2,520)
Income tax expense -- -- -- -- -- --
------- ---- ------- ------- ------- -------
Net income (loss) before dividends and accretion
on preferred stock 1,487 -- (2,645) 626 (1,988) (2,520)
Dividends and accretion on preferred stock 1,455 -- -- -- 1,455
------- ---- ------- ------- ------- -------
Net income (loss) applicable to common
shareholders $ 32 $ -- $(2,645) $ 626 $(1,988) $(3,975)
======= ==== ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------
JULY 4, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
Net sales $35,690 $42,697 $ 501 $9,743 $ -- $88,631
Cost of goods sold 20,347 22,496 301 4,399 -- 47,543
------- ------- ----- ------ ------- -------
Gross profit 15,343 20,201 200 5,344 -- 41,088
Operating expenses 23,984 11,422 300 3,502 -- 39,208
------- ------- ----- ------ ------- -------
(Loss) income from operations (8,641) 8,779 (100) 1,842 -- 1,880
Interest expense (1,986) (613) (8) (31) -- (2,638)
Other income (expense), net 7 12 -- (29) -- (10)
Equity in earnings of consolidated subsidiaries 5,604 -- -- -- (5,604) --
------- ------- ----- ------ ------- -------
(Loss) income before income tax benefit (expense)
and dividends and accretion on preferred stock (5,016) 8,178 (108) 1,782 (5,604) (768)
Income tax benefit (expense) 4,663 (3,725) -- (600) -- 338
------- ------- ----- ------ ------- -------
Net (loss) income before dividends and accretion
on preferred stock (353) 4,453 (108) 1,182 (5,604) (430)
Dividends and accretion on preferred stock 1,357 -- -- -- -- 1,357
------- ------- ----- ------ ------- -------
Net (loss) income applicable to common
shareholders $(1,710) $ 4,453 $(108) $1,182 $(5,604) $(1,787)
======= ======= ===== ====== ======= =======
</TABLE>
18
<PAGE> 19
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------
JULY 3, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities $(9,701) $ -- $(75) $ (137) $ -- $(9,913)
Cash flows from Investing activities: --
Purchase of property, plant and equipment (3,863) -- -- (1,029) -- (4,892)
Advance to affiliates (328) -- -- -- 328 --
Other investing activities (460) -- (12) 235 -- (237)
------- ---- ---- ------- ----- -------
Net cash used in investing activities (4,651) -- (12) (794) 328 (5,129)
------- ---- ---- ------- ----- -------
Cash flows from financing activities:
Net borrowings under revolving note payable 14,446 -- -- 282 -- 14,728
Payments on long-term obligations and
deferred compensation (196) -- -- (140) -- (336)
Due to (from) affiliates -- -- -- 328 (328) --
------- ---- ---- ------- ----- -------
Net cash provided by financing activities 14,250 -- -- 470 (328) 14,392
------- ---- ---- ------- ----- -------
Net (decrease) increase in cash (102) -- (87) (461) -- (650)
Cash and cash equivalents, beginning of period 134 -- 104 1,969 -- 2,207
------- ---- ---- ------- ----- -------
Cash and cash equivalents, end of period $ 32 $ -- $ 17 $ 1,508 $ -- $ 1,557
======= ==== ==== ======= ===== =======
</TABLE>
19
<PAGE> 20
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------
JULY 4, 1999
-------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities $(10,817) $ 7,250 $(66) $ (466) $ -- $ (4,099)
Cash flows from Investing activities:
Purchase of property, plant and equipment (6,485) (3,872) -- (506) -- (10,863)
Acquisitions, net of cash received (9,464) -- -- -- -- (9,464)
Advance to affiliates (3,724) -- -- -- 3,724 --
Other investing activities (5,694) 3,023 -- 2 -- (2,669)
-------- ------- ---- ------ ------- --------
Net cash (used in) provided by investing
activities (25,367) (849) -- (504) 3,724 (22,996)
-------- ------- ---- ------ ------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable 23,857 (8,949) -- -- -- 14,908
Proceeds from term note payable 13,222 -- -- -- -- 13,222
Payments on long-term obligations and
deferred compensation (1,441) -- -- -- -- (1,441)
Due (from) to affiliates (1,602) 2,471 486 2,369 (3,724) --
-------- ------- ---- ------ ------- --------
Net cash provided by (used in) financing
activities 34,036 (6,478) 486 2,369 (3,724) 26,689
-------- ------- ---- ------ ------- --------
Net (decrease) increase in cash (2,148) (77) 420 1,399 -- (406)
Cash and cash equivalents, beginning of period 2,354 183 -- 242 -- 2,779
-------- ------- ---- ------ ------- --------
Cash and cash equivalents, end of period $ 206 $ 106 $420 $1,641 $ -- $ 2,373
======== ======= ==== ====== ======= ========
</TABLE>
20
<PAGE> 21
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
Fantasma, LLC
(A Mostly Owned Subsidiary of AAi.FosterGrant, Inc.)
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS
JANUARY 2, JULY 3,
1999 1999
-------- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 104 $ 17
Accounts receivable less reserves of
approximately $373 and $206 5,088 1,817
Inventories 3,878 3,338
Prepaid expenses and other current assets 203 262
------- ------
Total current assets 9,273 5,434
------- ------
Property and equipment, net 24 19
Other assets, net 4,357 4,138
------- ------
Total assets $13,654 $9,591
======= ======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $ 7,088 $7,108
Accounts payable and accrued liabilities 1,960 521
------- ------
Total current liabilities 9,048 7,629
Members' Equity 4,606 1,962
------- ------
Total liabilities and members' equity $13,654 $9,591
======= ======
</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 Operations
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales $1,810 $ 1,167 $4,841 $ 2,844
Cost of goods sold 1,682 1,478 3,354 3,010
------ ------- ------ -------
Gross profit (loss) 128 (311) 1,487 (166)
Operating Expenses:
Selling 59 502 707 862
General and administrative 366 754 957 1,440
------ ------- ------ -------
Loss from operations (297) (1,567) (177) (2,468)
Interest expense (65) (69) (168) (153)
Other expense, net -- (54) -- (24)
------ ------- ------ -------
Net loss $ (362) $(1,690) $ (345) $(2,645)
====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
22
<PAGE> 23
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
Fantasma, LLC
(A Mostly Owned Subsidiary of AAi.FosterGrant, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JULY 4, JULY 3,
1998 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (345) $(2,645)
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization 21 236
Write off of property and equipment 49 --
Changes in assets and liabilities -
Accounts receivable 3,482 3,271
Inventories (469) 540
Prepaid expenses and other current assets (98) (59)
Advance payable to member (1,661) 21
Accounts payable and accrued expenses (215) (1,439)
------- -------
Net cash provided by (used in) operating activities 764 (75)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets 3 (12)
Purchases of property and equipment (2) --
------- -------
Net cash provided by (used in) investing activities 1 (12)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable to member 3,712 --
Repayments under note payable to member (3,764) --
Member contributions (distributions) (531) --
------- -------
Net cash used in financing activities (583) --
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 182 (87)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 238 104
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 420 $ 17
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ -- $ --
======= =======
Income taxes $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Pushdown of purchase price related to
Aai.FosterGrant's investment In Fantasma, LLC $ 4,627 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
23
<PAGE> 24
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
FANTASMA, LLC
NOTES TO 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. ("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 July 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 a 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 (based on the Company's
calculations). This previous member has filed a lawsuit asserting that his
termination was wrongful and the Company has asserted counterclaims related to
the Fantasma acquisition. The Company does not believe this litigation is
material to its results of
24
<PAGE> 25
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
operations or financial condition. 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 July 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.
(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 Loss
Comprehensive loss 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 how to allocate resources and assess
performance. To date, Fantasma has viewed its operations and manages its
business as principally one segment.
25
<PAGE> 26
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.
26
<PAGE> 27
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 54.9% and 55.3% of the Company's net sales for the
six months ended July 3, 1999 and July 4, 1998, respectively; net sales of the
Company's costume jewelry accounted for approximately 36.7% and 42.5% of the
Company's net sales for the six months ended July 3, 1999 and July 4, 1998,
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, approximately 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.
27
<PAGE> 28
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 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 expense
when incurred. The Company expensed customer acquisition costs of approximately
$372,000 and $500,000 for the six months ended July 3, 1999 and July 4, 1998,
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 and six months ended July 3, 1999, the Company capitalized approximately
$45,000 and $106,000 of these costs, respectively in the accompanying
consolidated balance sheet. Amortization expense for the three months and six
months ended July 3, 1999 related to these costs as well as previously
capitalized costs was approximately $300,000 and $596,000, respectively. No such
cost were capitalized or amortized during the first six months ended July 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.
28
<PAGE> 29
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 $3.5 million and $8.4 million for the three
and six months ended July 3, 1999, respectively as compared to $3.0 million and
$7.3 million for the three and six months ended July 4, 1998, respectively.
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 a 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 (based on the
Company's calculations). This previous member has filed a lawsuit asserting that
his termination was wrongful and the Company has asserted counterclaims related
to the Fantasma acquisition. The Company does not believe this litigation is
material to it's results of operations or financial condition. 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 July 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. 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 the Foster Grant UK
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 was $1.8
million and $2.5 million for the three and six months ended July 3, 1999 as
compared to a net loss before dividends and accretion on preferred stock of
$834,000 and $430,000 for the three and six months ended July 4, 1998.
29
<PAGE> 30
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 SIX MONTHS ENDED
------------------ -----------------
JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 52.5 58.7 53.7 58.3
----- ----- ----- -----
Gross profit 47.5 41.3 46.3 41.7
Operating expenses 47.4 39.1 44.2 38.8
----- ----- ----- -----
Income from operations 0.1 2.2 2.1 2.9
Interest expense (3.2) (5.9) (3.0) (5.8)
Other expense, net (0.1) (0.3) -- --
----- ----- ----- -----
Loss before taxes and dividends and
accretion on preferred Stock (3.2) (4.0) (0.9) (2.9)
Income tax benefit 1.4 -- 0.4 --
----- ----- ----- -----
Net loss before dividends and
accretion on preferred stock (1.8) (4.0) (0.5) (2.9)
Dividends and accretion on
preferred stock 1.5 1.6 1.5 1.7
----- ----- ----- -----
Net loss applicable to common
shareholders (3.3)% (5.6)% (2.0)% (4.6)%
===== ===== ===== =====
</TABLE>
30
<PAGE> 31
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998
Net Sales. Consolidated net sales were $45.6 million for the three
months ended July 3, 1999 as compared to $45.9 million for the three months
ended July 4, 1998, a decrease of $312,000. The decrease in net sales is
attributable to a reduction in sales to non-core segments, primarily department
stores, of $2.0 million partially offset by improved sales with variety stores
of $597,000, chain drug stores/combo stores/supermarkets of $566,000 and mass
merchandisers of $501,000. The general downward trend of department stores is
expected to continue for the remainder of fiscal 1999.
Gross Profit. Gross profit was $18.9 million for the three months ended
July 3, 1999 as compared to $21.8 million for the three months ended July 4,
1998. Gross profit as a percentage of net sales decreased to 41.3% for the three
months ended July 3, 1999 from 47.4% for the three months ended July 4, 1998.
The $2.9 million or 13.6% decrease is primarily due to increased closeout sales
in an effort to reduce inventory levels, 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 $17.8 million for the three
months ended July 3, 1999 as compared to $21.8 million for the three months
ended July 4, 1998, a decrease of 18.0% or $4.0 million. The decrease is
primarily attributable the June 1998 restructuring charge of $2.6 million for
the closing of the Texas distribution center and related 1999 payroll and
overhead savings generated from the closing.
Interest Expense. Interest expense was $2.7 million for the three
months ended July 3, 1999 as compared to $1.5 million for the three months ended
July 4, 1998, an increase of 83.5% or $1.2 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% Series B
Senior Notes due 2006.
Income Tax. No income tax benefit was recorded for the three months
ended July 3, 1999 as compared to a benefit of $655,000 for the three months
ended July 4, 1998.
Net Income (Loss). As a result of the factors discussed above, net loss
before dividends and accretion on preferred stock was $1.8 million for the three
months ended July 3, 1999 as compared to net loss before dividends and accretion
on preferred stock of $834,000 for the three months ended July 4, 1998, an
increase of $976,000.
31
<PAGE> 32
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Net Loss Applicable to Common Shareholders. Net loss applicable to
common shareholders was $2.5 million for the three months ended July 3, 1999 as
compared to a loss of $1.5 for the three months ended July 4, 1998, an increase
of $1.0 million. The increase is attributable to the $976,000 decrease in
earnings and an increase of $63,000 in dividends and accretion on Series A
Preferred Stock due to the compounding of accrued dividends.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998
Net Sales. Consolidated net sales were $87.1 million for the six months
ended July 3, 1999 as compared to $88.6 million for the six months ended July 4,
1998, a decrease of 1.7% or $1.5 million. The decrease in net sales is
attributable to a reduction in sales to non-core segments, primarily department
stores, of $5.6 million and chain drug stores/combo stores/supermarkets of $1.6
million partially offset by improved sales with mass merchandisers of $4.4
million and variety stores of $1.3 million. The general downward trend of
department stores is expected to continue for the remainder of fiscal 1999.
Gross Profit. Gross profit was $36.4 million for the six months ended
July 3, 1999 as compared to $41.1 million for the six months ended July 4, 1998.
Gross profit as a percentage of net sales decreased to 41.7% for the six months
ended July 3, 1999 from 46.3% for the six months ended July 4, 1998. The $4.7
million or 11.5% decrease is primarily due to increased closeout sales in an
effort to reduce inventory levels, 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 $33.8 million for the six
months ended July 3, 1999 as compared to $39.2 million for the six months ended
July 4, 1998, a decrease of 13.7% or $5.4 million. The decrease is primarily
attributable the June 1998 restructuring charge of $2.6 million for the closing
of the Texas distribution center and related 1999 payroll and overhead savings
generated from the closing.
Interest Expense. Interest expense was $5.0 million for the six months
ended July 3, 1999 as compared to $2.6 million for the six months ended July 4,
1998, an increase of 90.3% or $2.4 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% Series B Senior Notes
due 2006.
Income Tax. No income tax benefit was recorded for the six months ended
July 3, 1999 as compared to $338,000 of benefit for the six months ended July 4,
1998.
32
<PAGE> 33
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock was $2.5 million for the six months
ended July 3, 1999 as compared to $430,000 for the six months ended July 4,
1998, an increase of $2.1 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to
common shareholders was $4.0 million for the six months ended July 3, 1999 as
compared to a loss of $1.8 million for the six months ended July 4, 1998, an
increase of $2.2 million. The increase as attributable to the $2.1 million
decrease in earnings and an increase of $98,000 in dividends and accretion on
Series A Preferred Stock due to the compounding of accrued dividends.
LIQUIDITY AND CAPITAL RESOURCES
At July 3, 1999 the Company had cash and cash equivalents of $1.6
million and working capital of $28.5 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 $9.9 million of cash in operations during the six
months ended July 3, 1999 compared to a use of $4.1 million during the six
months ended July 4, 1998. Cash used in operating activities increased due to
the funding of higher operating losses, a lower decrease in inventory as a
result of eliminating inventory in 1998 prior to the relocation of Foster Grant
to Rhode Island, and the timing of payments for accruals and accounts payable
partially offset by increases in non-cash depreciation and amortization charges
and a lower increase in accounts receivable.
The Company used $5.1 million in investing activities during the six
months ended July 3, 1999 compared to a use of $23.0 million during the six
months ended July 4, 1998. The uses of funds for investing activities during the
six months ended July 3, 1999 consisted primarily of $4.9 million for the
purchase of display fixtures and the new information management system. The
decrease from the six months ended July 4, 1998 is attributable to lower
spending on display fixtures and the 1998 acquisitions of Fantasma and Foster
Grant UK.
The Company generated $14.4 million from financing activities during
the six months ended July 3, 1999 compared to $26.7 million during the six
months ended July 4, 1998. The funds generated from financing activities
consisted mainly of borrowings under the revolving note payable. The decrease
from the six months ended July 4, 1998 is attributable to proceeds from the term
loan received in fiscal 1998.
33
<PAGE> 34
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has 43,700 shares of Series A Preferred Stock that has a
redemption value at July 3, 1999 of $30.3 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.
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 July 3, 1999, the Company had total indebtedness, including
borrowings under the Senior Credit Facility, in the aggregate principal amount
of $93.4 million. The Company had current liabilities of approximately $56.0
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 $5.1 million and minimum
payments under its operating leases of approximately $1.3 million. The Indenture
permits the Company to incur additional indebtedness, including secured
indebtedness, subject to certain limitations.
The Company has up to $25.3 million available for borrowings under the
Senior Credit Facility as of July 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
34
<PAGE> 35
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
of financial performance and limit the payment of cash dividends and similar
restricted payments. On May 7, 1999, the Company entered into an amendment to
the Senior Credit Facility which modified the financial covenant and waived
non-compliance with the prior covenants. As of July 3, 1999, the Company was not
in compliance with certain financial covenants, as modified. The Company has
received a waiver of such non-compliance from its lenders and is 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
the remainder of fiscal 1999. The Company has received a letter from the bank
stating that it intends to modify the covenants so they are amounts that the
Company believes they will be able to obtain. 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, 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 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.
35
<PAGE> 36
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
As a result of the Company's growth, AAi is implementing a new
information management system that is expected to be Year 2000 compliant. The
design of the new system is substantially complete and ready for implementation.
Full implementation is scheduled for October 1999, since September is
historically one of the heaviest shipping months. 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.
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 that 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 either compliant or are currently addressing
the Year 2000 issue and expect to be Year 2000 compliant by the end of the third
quarter. 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
36
<PAGE> 37
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 July 3,
1999, approximately 99% of the carrying values of the Company's long-term debt
were 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. During the six
months ended July 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.
37
<PAGE> 38
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
At the Annual Meeting of Shareholders held May 13, 1999, shareholders
elected the Company's Board of Directors and increased the numbers of shares of
Common Stock authorized for issuance under the Company's 1996 Incentive Stock
plan.
The vote for the director nominees was:
FOR* WITHHELD
Gerald F. Cerce 1,004,620 0
John H. Flynn, Jr. 1,004,620 0
Stephen J. Carlotti 1,004,620 0
Michael Cronin 1,004,620 0
George Graboys 1,004,620 0
Martin E. Franklin 1,004,620 0
David Jenkins 1,004,620 0
The vote to increase the number of shares of Common Stock authorized for
issuance under the Company's 1996 Incentive Stock Plan by 38,000 shares was:
FOR* AGAINST ABSTAIN
1,004,620 0 0
* Includes the holders of Common Stock and Series A Preferred Stock. Holders
of Series A Preferred Stock are entitled to vote based on the number of
shares of Common Stock into which such shares are convertible, currently 10
to 1.
ITEM 5. OTHER INFORMATION
On July 19, 1999, the Company hired John R. Ranelli as President,
Chief Operating Officer and a member of the Office of the Chief Executive. Mr.
Ranelli was previously the Executive Vice President of Stride Rite Corporation
(from August 1996 to September 1998) and the Chief Operating Officer (from
February 1995 to July 1996) and a director (from June 1994 to September 1995)
of Deckers Outdoor Corporation, a $125 million footwear and apparel
manufacturer. From June 1994 to January 1995, he served as the Executive Vice
President and Chief Financial Officer of TLC Beatrice, a $2 billion consumer
products manufacturer and retailer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1.1 First Amendment to Second Amended & Restated
Financing and Security Agreement
10.15 Employment Agreement between AAi and John Ranelli
dated July 19, 1999.
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 July 3, 1999.
38
<PAGE> 39
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)
Dated: August 17, 1999 /s/ Gerald F. Cerce
----------------------------------
Gerald F. Cerce
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 17, 1999 /s/ Duane M. DeSisto
----------------------------------
Duane M. DeSisto
Assistant Secretary and Chief
Financial Officer
(Principal Financial Officer)
39
<PAGE> 1
EXHIBIT 10.1.1
FIRST AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND
SECURITY AGREEMENT (this "Agreement") is made as of the 7th day of May, 1999, by
and among
AAi.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.),
a corporation organized and existing under the laws of the State of Rhode Island
(the "Borrower");
FOSTER GRANT GROUP, L.P., a limited partnership organized under the
laws of the State of Delaware ("Foster Grant") and FANTASMA, LLC, a limited
liability company organized under the laws of the State of Delaware
("Fantasma");
F.G.G. INVESTMENTS, INC., a corporation organized and existing under
the laws of the State of Delaware, THE BONNEAU COMPANY, a corporation organized
and existing under the laws of the State of Texas, BONNEAU HOLDINGS, INC., a
corporation organized and existing under the laws of the State of Delaware,
BONNEAU GENERAL, INC., a corporation organized and existing under the laws of
the State of Delaware, FOSTER GRANT HOLDINGS, INC., a corporation organized and
existing under the laws of the State of Delaware, and O-RAY HOLDINGS, INC., a
corporation organized and existing under the laws of the State of Delaware (the
"Corporate Guarantors; the Corporate Guarantors together with Foster Grant and
Fantasma, the "Guarantors"; and the Guarantors together with the Borrower, the
"Obligors");
NATIONSBANK, N.A., a national banking association ("NationsBank") and
each other financial institution which is party to the Financing Agreement (as
that term is defined below) from time to time (collectively, the "Lenders" and
individually, a "Lender"); and
NATIONSBANK, N.A., a national banking association, in its capacity as
both collateral and administrative agent for each of the Lenders (the "Agent").
RECITALS
A. The Borrower, the Guarantors, the Lenders and the Agent
entered into a Second Amended and Restated Financing and Security Agreement
dated July 21, 1998 (as amended, restated, modified, substituted, extended, and
renewed from time to time, the "Financing Agreement.") The Financing Agreement
provides for some of the agreements between the Borrower, the Guarantors, the
Lenders and the Agent with respect to the "Loans" (as defined in the Financing
Agreement), including the Revolving Credit Facility (as that term is defined in
the Financing Agreement) in an amount not to exceed $60,000,000 and the Letter
of Credit Facility which is part of the Revolving Credit Facility.
1
<PAGE> 2
B. The Borrower has requested that the Agent and Lenders waive
certain financial covenant violations and amend certain financial covenants.
C. The Agent and Lenders are willing to agree to the Borrower's
request on the condition, among others, that this Agreement be executed.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, receipt of which is hereby acknowledged, the Borrower,
Lenders and Agent agree as follows:
1. The Obligors, the Lenders and the Agent agree that the
Recitals above are a part of this Agreement. Unless otherwise expressly defined
in this Agreement, terms defined in the Financing Agreement shall have the same
meaning under this Agreement.
2. The Obligors, the Lenders and Agent agree that on the date
hereof the aggregate outstanding principal balance under the Revolving Credit
Note (subject to change for returned items and other adjustments made in the
ordinary course of business) as of the close of the business day of May 6, 1999
is $19,476,060.17.
3. Each of The Borrower, Foster Grant and Fantasma represents and
warrants to the Lenders and Agent as follows:
(a) The Borrower is a corporation duly organized, and
validly existing and in good standing under the laws of the state in which it
was organized and is duly qualified to do business as a foreign corporation in
good standing in every other state wherein the conduct of its business or the
ownership of its property requires such qualification.
(b) Foster Grant is a limited partnership duly organized,
validly existing and in good standing under the laws of the state in which it
was organized and is duly qualified to do business as a foreign limited
partnership in every other state wherein the conduct of its business or the
ownership of its property requires such qualification.
(c) Fantasma is a limited liability company duly
organized, validly existing and in good standing under the laws of the state in
which it was organized and is duly qualified to do business as a foreign limited
partnership in every other state wherein the conduct of its business or the
ownership of its property requires such qualification.
(d) Each of the Borrower, Foster Grant and Fantasma has
the power and authority to execute and deliver this Agreement and perform its
obligations hereunder and has taken all necessary and appropriate corporate,
partnership or limited liability company action, as applicable, to authorize the
execution, delivery and performance of this Agreement.
(e) The Financing Agreement, as amended by this
Agreement, and each of the other Financing Documents remains in full force and
effect, and each constitutes the
2
<PAGE> 3
valid and legally binding obligation of the Borrower, Foster Grant and Fantasma,
enforceable in accordance with its terms.
(f) All of the Borrower's, Foster Grant's and Fantasma's
representations and warranties contained in the Financing Agreement and the
other Financing Documents are true and correct on and as of the date of the
Borrower's, Foster Grant's and Fantasma's execution of this Agreement.
(g) No Event of Default and no event which, with notice,
lapse of time or both would constitute an Event of Default, has occurred and is
continuing under the Financing Agreement or the other Financing Documents which
has not been waived in writing by the Lenders and Agent.
4. As a condition to the Agent' and Lenders' agreement to enter
into this Agreement and the waivers granted herein, the Borrower hereby agrees
to pay to the Lender a fee in the amount of $60,000, which fee shall be due at
the time this Agreement is executed and is fully earned and non-refundable upon
payment.
5. The Financing Agreement is hereby amended as follows:
(a) The definition of "Fixed Charges" is hereby
deleted and amended in its entirety to read as
follows:
1. "Fixed Charges" means for any
period of determination thereof, the scheduled or
required payments (including, without limitation,
principal and interest) made in cash on all
Indebtedness for Borrowed Money of the Borrower and
its Subsidiaries, plus Capital Expenditures made in
cash (and Permitted Acquisitions to the extent not
included in Capital Expenditures) of the Borrower and
its Subsidiaries, plus cash payments of taxes,
provided, however, for the fiscal quarter periods
ending June 30, 1999 and September 30, 1999 "interest
expense" means year-to-date interest expense as
reflected in the consolidated year-to-date income
statement of the Borrower and its Subsidiaries for
the period then ended.
(b) Section 6.1.13(a) is hereby deleted and the
following is substituted in its place:
(c) FIXED CHARGE COVERAGE RATIO. The Borrower
and its Subsidiaries on a consolidated basis will
maintain a Fixed Charge Coverage Ratio, tested on the
last Business Day of each of the Borrower's fiscal
quarters beginning on the last Business Day of the
fiscal quarter ending closest to June 30, 1999, (i)
for the fiscal year-to-date for the periods ending
closest to June 30, 1999 and September 30, 1999 and
(ii) thereafter, for the four (4) quarter period
ending on such date, of not less than the following
3
<PAGE> 4
1.
------------------------------------------------------------
FISCAL QUARTER ENDING CLOSEST TO: RATIO
------------------------------------------------------------
June 30, 1999 through and including .90 to 1.0
September 30, 1999
------------------------------------------------------------
December 31, 1999 through and including 1.0 to 1.0
December 31, 2000
------------------------------------------------------------
March 31, 2001 through and including 1.20 to 1.0
December 31, 2001
------------------------------------------------------------
March 31, 2002 through and including 1.35 to 1.0
December 31, 2002
------------------------------------------------------------
March 31, 2003 and thereafter 1.40 to 1.0
------------------------------------------------------------
2. (b) Section 6.1.13(b) is hereby deleted in its entirety and
the following is substituted in its place:
3. (b) LEVERAGE RATIO. The Borrower and its Subsidiaries on a
consolidated basis will maintain a ratio of Funded Debt to EBITDA, tested on the
last Business Day of each of the Borrower's fiscal quarters beginning on the
last Business Day of the fiscal quarter ending closest to June 30, 1999, (i) for
the fiscal year-to-date for the periods ending closest to June 30, 1999 and
September 30, 1999 and (ii) thereafter, for the four (4) quarter period ending
on such date, so that it is not more than the following,
4
<PAGE> 5
4.
------------------------------------------------------------
FISCAL QUARTER ENDING CLOSEST TO: RATIO
------------------------------------------------------------
June 30, 1999 4.50 to 1.0
------------------------------------------------------------
September 30, 1999 5.50 to 1.0
------------------------------------------------------------
December 31, 1999 5.10 to 1.0
------------------------------------------------------------
March 31, 2000 through and including 4.40 to 1.0
December 31, 2000
------------------------------------------------------------
March 31, 2001 through and including 3.90 to 1.0
December 31, 2001
------------------------------------------------------------
March 31, 2002 through and including 3.50 to 1.0
December 31, 2002
------------------------------------------------------------
March 31, 2003 and thereafter 3.10 to 1.0
------------------------------------------------------------
1. For the purposes of the foregoing calculation only,
for the fiscal quarters ending June 30, 1999 through and including
September 30, 1999, EBITDA shall be computed for the fiscal year to
date and then multiplied (x) for the closest to June 30, 1999
calculation, by two (2); and for the closest to September 30, 1999
calculation, by one and one-third (1-1/3).
2. (c) Section 6.1.13(c), is hereby deleted in its
entirety and the following is substituted in its place:
3. (c) EBITDA. The Borrower and its Subsidiaries on a
consolidated basis will maintain EBITDA, tested on the last Business
Day of each of the Borrower's fiscal quarters beginning on the last
Business Day of the fiscal quarter ending closest to June 30, 1999, (i)
for the fiscal year-to-date for the periods ending closest to June 30,
1999 and September 30, 1999 and (ii) thereafter, for the four (4)
quarter period ending on such date, of not less than the following,
5
<PAGE> 6
4.
--------------------------------------------------------------------
FISCAL QUARTER ENDING CLOSEST TO: AMOUNT
--------------------------------------------------------------------
June 30, 1999 $10,900,000
--------------------------------------------------------------------
September 30, 1999 $13,400,000
--------------------------------------------------------------------
December 31, 1999 $19,200,000
--------------------------------------------------------------------
March 31, 2000 through and including $21,100,000
December 31, 2000
--------------------------------------------------------------------
March 31, 2001 through and including $23,200,000
December 31, 2001
--------------------------------------------------------------------
March 31, 2002 through and including $25,500,000
December 31, 2002
--------------------------------------------------------------------
March 31, 2003 and thereafter $28,100,000
--------------------------------------------------------------------
1.
2. The Lenders and the Agent hereby waive defaults under the
following provisions of the Financing Agreement which for the period stated,
existed under the Obligations; provided, however that this Paragraph shall not
be deemed to waive any defaults under the following provisions after the period
stated, or any other defaults arising out of non-compliance by the Borrower with
the Financing Agreement, whether or not the events, facts or circumstances
giving rise to such non-compliance existed on or prior to the date hereof:
Section Default
------- -------
6.1.13(a) As of March 31, 1999
6.1.13(b) As of March 31, 1999
6.1.13(c) As of March 31, 1999
7. The Obligors, as applicable, hereby issue, ratify and confirm
the representations, warranties and covenants contained in the Financing
Agreement, as amended hereby. The Obligors agree that this Agreement is not
intended to and shall not cause a novation with respect to any or all of the
Obligations.:
6
<PAGE> 7
8. The Obligors acknowledge and warrant that the Agent and
Lenders have acted in good faith and have conducted in a commercially reasonable
manner their relationships with the Obligors in connection with this Agreement
and generally in connection with the Financing Agreement and the Obligations,
the Obligors hereby waiving and releasing any claims to the contrary.
9. The Obligors shall pay at the time this Agreement is executed
and delivered all fees, commissions, costs, charges, taxes and other expenses
incurred by the Agent and Lenders and their counsel in connection with this
Agreement, including, but not limited to, reasonable fees and expenses of the
Agent's counsel and all recording fees, taxes and charges.
10. This Agreement may be executed in any number of duplicate
originals or counterparts, each of such duplicate originals or counterparts
shall be deemed to be an original and taken together shall constitute but one
and the same instrument. The parties agree that their respective signatures may
be delivered by facsimile. Any party who chooses to deliver its signature by
facsimile agrees to provide a counterpart of this Agreement with its inked
signature promptly to each other party.
IN WITNESS WHEREOF, the Borrower, the Guarantors, the Lenders and Agent
have executed this Agreement under seal as of the date and year first written
above.
WITNESS AAi.FOSTERGRANT, INC. (formerly known as
Accessories, Associates, Inc.)
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: FOSTER GRANT GROUP, L.P.
By: Bonneau General, Inc.
General Partner
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: FANTASMA, LLC
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Treasurer
7
<PAGE> 8
WITNESS: F.G.G. INVESTMENTS, INC.
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: THE BONNEAU COMPANY
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: BONNEAU GENERAL, INC.
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: BONNEAU HOLDINGS, INC.
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
8
<PAGE> 9
WITNESS: FOSTER GRANT HOLDINGS, INC.
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: O-RAY HOLDINGS, INC.
/s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL)
- ---------------------------- -----------------------------
Duane M. DeSisto
Chief Financial Officer
WITNESS: NATIONSBANK, N.A.
/s/ Richard J. Baldwin By: /s/ Gary W. Bartlett (SEAL)
- ---------------------------- -----------------------------
Gary W. Bartlett
Vice President
WITNESS: NATIONSBANK, N.A.
in its capacity as a Lender
/s/ Richard J. Baldwin By: /s/ Gary W. Bartlett (SEAL)
- ---------------------------- -----------------------------
Gary W. Bartlett
Vice President
<PAGE> 10
WITNESS: LASALLE BUSINESS CREDIT, INC.
/s/ By: /s/ John C. Baier (SEAL)
- ---------------------------- -----------------------------
Name: John C. Baier
Title: Vice President
WITNESS: PNC BUSINESS CREDIT
By: /s/ Rose M. Crump (SEAL)
- ---------------------------- -----------------------------
Name: Rose M. Crump
Title: Vice President
10
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is entered into as of the
19th day of July, 1999, by and between AAi.FosterGrant, Inc., a Rhode Island
corporation with a mailing address of 500 George Washington Highway, Smithfield,
Rhode Island 02917 (the "Company"), and John R. Ranelli, an individual with a
residence address of 223 Giants Neck Road, Niantic, Connecticut 06359
("Executive").
INTRODUCTION
------------
1. The Company is in the business of developing, manufacturing,
distributing and marketing ladies' and men's consumer soft lines sold in retail
stores (the "Accessories Business").
2. The Company desires to employ Executive and Executive desires to
accept such employment on the terms and conditions set forth herein.
AGREEMENT
---------
In consideration of the premises and mutual promises hereinbelow set
forth, the parties hereby agree as follows:
1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment
Period") shall commence on the date hereof and, subject to termination as
hereinafter provided, shall continue for an unlimited number of successive two
(2) year periods, the first of such periods beginning on the date hereof and
each subsequent period beginning on the first day of each month thereafter.
2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth
herein, the Company hereby employs Executive to act as President, Chief
Operating Officer and a member of the office of the Chief Executive Officer of
the Company during the Employment Period, and Executive hereby accepts such
employment. The Company shall recommend to the shareholders the election of
Executive as a director of the Company for the Employment Period. The duties
assigned and authority granted to Executive shall be as set forth in the By-laws
of the Company and as determined by the Chairman and Chief Executive Officer
from time to time. All officers holding the title of Executive Vice President or
above shall report to the Office of the Chief Executive Officer. Executive
agrees to perform his duties for the Company diligently, competently, and in a
good faith manner. The Executive may also engage in civic and charitable
activities to the extent they are not inconsistent with Executive's duties
hereunder. Executive may also be a member of not more than three other company
boards of directors so long as such membership does not conflict with
Executive's performance of his duties under this Agreement. The Executive shall
report to the Chairman.
<PAGE> 2
3. SALARY AND BONUS.
(a) BASE SALARY. During the first twelve (12) months of the
Employment Period, the Company agrees to pay Executive $350,000 per year,
payable weekly in arrears. During the second twelve (12) months of employment,
the Company agrees to pay Executive $400,000 per year, payable weekly in
arrears. Executive's base salary shall not be decreased, and after the first
twenty-four (24) months shall be increased on each anniversary date of this
Agreement (the "Anniversary Date"), based upon the increase in the Consumer
Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by
the Bureau of Labor Statistics of the United States Department of Labor
(1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an
increase from the base date of July, 2000 (the "Base Date"), then Executive's
annual base salary for the ensuing 12 months shall be the product of (a)
$400,000 and (b) one plus a percentage equal to the percentage increase in the
Index on each such Anniversary Date over the Index on the Base Date. In the
event the Bureau of Labor Statistics no longer publishes the Index the Company
shall use that index then available which most closely replicates the Index. In
addition, after the first twenty-four (24) months, the Chief Executive Officer
of the Company shall review and may increase the Executive's annual base salary
in his discretion, based upon the Company's performance and the Executive's
particular contributions.
(b) BONUS. Executive shall be eligible for and shall receive an
annual cash bonus of up to fifty percent (50%) of his annual base salary under
the Company's Executive Incentive Compensation Plan ("Annual Target Bonus
Amount"), subject to the discretion of the Company's Board of Directors. Sixty
percent (60%) of any such bonus shall be based upon the Company's overall
financial goals and forty percent (40%) shall be based on personal goals for the
Executive established by mutual agreement between Executive and the Chief
Executive Officer.
4. OTHER BENEFITS.
(a) INSURANCE AND OTHER BENEFITS. The Executive shall be
entitled to participate in, and shall receive the maximum benefits available
under, the Company's insurance programs (including health, supplemental health
and life insurance) and any ERISA benefit plans, as the same may be adopted
and/or amended from time to time, and shall receive all other benefits that are
provided by the Company to other senior executives. The Company shall purchase a
disability insurance policy which shall provide Executive with the maximum
monthly benefit available to Executive, based upon Executive's monthly base
salary, after a six-month period of disability. The Company shall contribute the
maximum amount permitted under current law to the Executive's qualified and
non-qualified 401(k) Plan, Supplemental 401(k) Plan, and any other Company
pension or retirement plan during the Employment Period.
(b) VACATION. Executive shall be entitled to an annual vacation
of such duration as may be determined by the Chief Executive Officer, but not
less than that generally established for other executives of Company and in no
event less than four (4) weeks, without interruption of salary offered to senior
executives generally.
-2-
<PAGE> 3
(c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive
with a monthly automobile allowance consistent with the plan adopted or to be
adopted by the Company for other senior executives.
(d) REIMBURSEMENT OF MOVING AND OTHER EXPENSES. The Company
shall reimburse Executive for all reasonable moving expenses incurred in
Executive's move from his present residence to a temporary residence one located
in Rhode Island or nearby Southern Massachusetts, travel, entertainment and
other expenses incurred or paid by the Executive in connection with, or related
to, the performance of his duties or responsibilities under this Agreement,
provided that Executive submits to the Company substantiation of such expenses
sufficient to satisfy the record keeping guidelines promulgated from time to
time by the Internal Revenue Service. Additionally, the Company will pay all
closing costs and moving expenses incurred by Executive (including the federal
and state income taxes payable with respect thereto) in relocating to permanent
residence in the same geographic area.
5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to
Executive, the Company may terminate this Agreement if any of the following
events shall occur:
(a) the conviction of Executive for a crime involving fraud or
moral turpitude;
(b) deliberate dishonesty of the Executive with respect to the
Company or any of its subsidiaries; or
(c) the refusal of the Executive to follow the reasonable and
lawful written instructions of the Chief Executive Officer of the Company with
respect to the services to be rendered and the manner of rendering such services
by Executive, provided such refusal is material and repetitive and is not
justified or excused either by the terms of this Agreement or by actions taken
by the Company in violation of this Agreement, and with respect to the first two
refusals Executive has been given reasonable written notice and explanation
thereof which specifically identifies the manner in which the Chief Executive
Officer believes that Executive has not performed his duties and reasonable
opportunity to cure and no cure has been effected within a reasonable time after
such notice.
6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT
CAUSE.
6.1 NOTICE/EVENTS/DEFINED TERMS.
(a) TERMINATION BY THE EXECUTIVE. Executive may terminate this
Agreement at any time by providing written notice to the Company.
(b) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may
terminate this Agreement at any time, without Cause by providing written notice
to Executive. As used in this Agreement, the term "without Cause" shall mean
termination for any reason not specified in Section 5 hereof, including the
death or disability of Executive.
-3-
<PAGE> 4
(c) CHANGE IN CONTROL. A "Change in Control" will be deemed to
have occurred if: (1) a Takeover Transaction occurs; or (2) any election of
directors of the Company takes place (whether by the directors then in office or
by the stockholders at a meeting or by written consent) and a majority of the
directors in the office following such election are individuals who were not
nominated by a vote of two-thirds of the members of the Board of Directors
immediately preceding such election; or (3) the Company effectuates a complete
liquidation of the Company or a sale or disposition of all or substantially all
of its assets. A "Change in Control" shall not be deemed to include, however, a
merger or sale of stock, assets or business of the Company if the Executive
immediately after such event owns, or in connection with such event immediately
acquires (other than in the Executive's capacity as an equity holder of the
Company or as a beneficiary of its employee stock ownership plan or profit
sharing plan), any stock of the buyer or any affiliate thereof which, at the
time of Executive's initial investment in such stock, had a purchase price or
fair market value greater than $50,000.
(d) TAKEOVER TRANSACTION. A "Takeover Transaction" shall mean
(i) a merger or consolidation of the Company with, or an acquisition of the
Company or all or substantially all of its assets by, any other corporation,
other than a merger, consolidation or acquisition in which the individuals who
were members of the Board of Directors of the Company immediately prior to such
transaction continue to constitute a majority of the Board of Directors of the
surviving corporation (or, in the case of an acquisition involving a holding
company, constitute a majority of the Board of Directors of the holding company)
for a period of not less than twelve (12) months following the closing of such
transaction, or (ii) when any person or entity or group of persons or entities
(other than any trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any one or more of the present stockholders of
the Company or their affiliates) either related or acting in concert becomes
after the date hereof the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of securities of the Company
representing more than fifty percent (50%) of the total number of votes that may
be cast for the election of directors of the Company.
6.2 EXECUTIVE'S RIGHT-TO-TERMINATE. Executive may terminate
Executive's employment for Good Reason at any time during the term of this
Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the
following (without Executive's express written consent):
(a) a Change in Control provided that in such event Executive
may exercise his right only within the twelve month period next following such
Change in Control.
(b) the assignment to Executive by the Company of any duties
materially inconsistent with Executive's status with the Company or a material
alteration in the nature or status of Executive's responsibilities from those in
effect on the date hereof, or a material reduction in Executive's titles or
offices as in effect on the date hereof, or any removal of Executive from, or
any failure to reelect Executive to, any of such positions, except in connection
with the termination of his employment for Disability or Cause or as a result of
Executive's death or by Executive other than for Good Reason;
-4-
<PAGE> 5
(c) a reduction by the Company in Executive's Salary as in
effect on the date hereof or as the same may be increased from time to time
during the term of this Agreement;
(d) except if such action applies to all senior executive
officers of the Company generally, any failure by the Company to continue in
effect its present Executive Incentive Compensation Plan, any fringe benefits,
the taking of any action by the Company which would, directly or indirectly,
materially reduce Executive's benefits or deprive Executive of any fringe
benefits enjoyed by Executive at the date hereof, or the failure by the Company
to provide Executive with the number of paid vacation days to which Executive is
entitled at the date hereof;
(e) a relocation of the Company's principal executive offices to
a location more than 50 miles from their current location in, or the Company's
requiring Executive to be based anywhere other than the Company's principal
executive offices; or
(f) any material breach, uncured after reasonable notice, by the
Company of any provisions of this Agreement.
6.3 SEVERANCE.
(a) WITHOUT CAUSE. If the Company terminates this Agreement
without Cause, or if Executive has the right to terminate this Agreement
pursuant to Section 6.2 hereof, then commencing on the date of termination of
this Agreement, the Company shall provide Executive with a severance package
which shall consist of the following: (i) for a period equal to two (2) years
after the date of termination (A) payment on the first business day of each
month of an amount equal to one-twelfth of the Executive's then current annual
base salary under Section 3(a) hereof and (B) continuation of all benefits under
Section 4; and (ii) payment on the first business day of each month of an amount
equal to one-twelfth of the Executive's Annual Target Bonus Amount under the
Company's Executive Incentive Compensation Plan for the year of termination.
(b) GENERAL RELEASE. As a condition precedent to receiving any
severance payment, the Executive shall execute a general release of any and all
claims which Executive or his heirs, executors, agents or assigns might have
against the Company, its subsidiaries, affiliates, successors, assigns and its
past, present and future employees, officers, directors, agents and attorneys.
(c) WITHHOLDING. All payments made by the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Employer under applicable law.
7. DEATH OR DISABILITY. In the event of the Executive's death or
disability, the Employment Period will automatically terminate effective as of
the date of such death or disability. As used in this Agreement, the term
"disability" shall mean inability on the part of Executive for a period of more
than six (6) months in the aggregate during any twelve (12) month period to
perform the services contemplated under this Agreement. A determination of
disability shall be made by a physician satisfactory to both the Executive and
the Company, provided that if the Executive and the Company do not agree on a
physician, the Executive and the Company shall
-5-
<PAGE> 6
each select a physician and these two physicians together shall select a third
physician, whose determination as to disability shall be binding on all parties.
8. NON-COMPETITION. During the Employment Period and after termination
of this Agreement by the Executive under Section 6.1(a), or by the Company under
Section 5 or Section 6.1(b), the Company may restrict the Executive's subsequent
involvement in the Restricted Business Activities, as defined below, for the
period ending two (2) years after the date of termination of this Agreement (the
"Non-compete Period") provided that the Company has not otherwise breached its
obligations under the Agreement. As used in this Agreement, the term "Restricted
Business Activities" shall mean the marketing and sale of ladies' and men's
consumer soft lines to retail stores, which the Company sold and marketed during
Executive's employment with the Company. During the Non-compete Period,
Executive shall not, without the written approval of the Company, directly or
indirectly, either as an individual, partner, joint venturer, employee or agent
for any person, company, corporation or association, or as an officer, director
or stockholder of a corporation or otherwise, 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 then held by Executive, and (b) no
more than five percent (5%) of the securities of any other publicly-held
company.
The Executive recognizes and agrees that because a violation by
him of his obligations under this Section 8 will cause irreparable harm to the
Company that would be difficult to quantify and for which money damages would be
inadequate, the Company shall have the right to injunctive relief to prevent or
restrain any such violation, without the necessity of posting a bond.
Executive expressly agrees that the character, duration and
scope of this covenant not to compete are reasonable in light of the
circumstances as they exist at the date upon which this Agreement has been
executed. However, should a determination nonetheless be made by a court of
competent jurisdiction at a later date that the character, duration or
geographical scope of this covenant not to compete is unreasonable in light of
the circumstances as they then exist, then it is the intention of both Executive
and the Company that this covenant not to compete shall be construed by the
court in such a manner as to impose only those restrictions on the conduct of
Executive which are reasonable in light of the circumstances as they then exist
and necessary to assure the Company of the intended benefit of this covenant to
compete.
9. CONFIDENTIALITY COVENANTS.
(a) Executive understands that Company may impart to him
confidential business information including, without limitation, designs,
financial information, personnel information, real estate information, and the
like (collectively "Confidential Information"). Executive hereby acknowledges
Company's exclusive ownership of such Confidential Information.
Executive agrees as follows: (1) only to use the Confidential
Information to provide services to Company; (2) only to communicate the
Confidential Information to fellow employees, agents and representatives on a
need-to-know basis; and (3) not to otherwise disclose or use any
-6-
<PAGE> 7
Confidential Information. Upon demand by Company or upon termination of
Executive's employment, Executive will deliver to Company all manuals,
photographs, recordings, and any other instrument or device by which, through
which, or on which Confidential Information has been recorded and/or preserved,
which are in my Executive's possession, custody or control.
(b) The Company will not disclose the terms and conditions of
Executive's employment, unless it is required by law to do so.
10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and
interpreted and governed in accordance with the laws of the State of Rhode
Island. The parties agree that this Agreement was made and entered into in Rhode
Island and each party hereby consents to the jurisdiction of a competent court
in Rhode Island to hear any dispute arising out of this Agreement.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and thereof
and supersedes any and all previous agreements, written and oral, regarding the
subject matter hereof between the parties hereto. This Agreement shall not be
changed, altered, modified or amended, except by a written agreement signed by
both parties hereto.
12. NOTICES. All notices, requests, demands and other communications
required or permitted to be given or made under this Agreement shall be in
writing and shall be deemed to have been given if delivered by hand, sent by
generally recognized overnight courier service, telex or telecopy, or certified
mail, return receipt requested.
(a) to the Company at:
500 George Washington Highway
Smithfield, Rhode Island 02917
(b) to the Executive at:
223 Giants Neck Road
Niantic, Connecticut 06359
Any such notice or other communication will be considered to
have been given (i) on the date of delivery in person, (ii) on the third day
after mailing by certified mail, provided that receipt of delivery is confirmed
in writing, (iii) on the first business day following delivery to a commercial
overnight courier or (iv) on the date of facsimile transmission (telecopy)
provided that the giver of the notice obtains telephone confirmation of receipt.
Either party may, by notice given to the other party in
accordance with this Section, designate another address or person for receipt of
notices hereunder.
-7-
<PAGE> 8
13. SEVERABILITY. If any term or provision of this Agreement, or the
application thereof to any person or under any circumstance, shall to any extent
be invalid or unenforceable, the remainder of this Agreement, or the application
of such terms to the persons or under circumstances other than those as to which
it is invalid or unenforceable, shall be considered severable and shall not be
affected thereby, and each term of this Agreement shall be valid and enforceable
to the fullest extent permitted by law. The invalid or unenforceable provisions
shall, to the extent permitted by law, be deemed amended and given such
interpretation as to achieve the economic intent of this Agreement.
14. WAIVER. The failure of any party to insist in any one instance or
more upon strict performance of any of the terms and conditions hereof, or to
exercise any right or privilege herein conferred, shall not be construed as a
waiver of such terms, conditions, rights or privileges, but same shall continue
to remain in full force and effect. Any waiver by any party of any violation of,
breach of or default under any provision of this Agreement by the other party
shall not be construed as, or constitute, a continuing waiver of such provision,
or waiver of any other violation of, breach of or default under any other
provision of this Agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and any successors and assigns of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
AAi.FosterGrant, Inc.
By: /s/ Gerald F. Cerce
-----------------------------
Title: Chairman
EXECUTIVE:
/s/ John R. Ranelli
-----------------------------
John R. Ranelli
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF JULY 3, 1999 (UNAUDITED) AND THE CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JULY 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>
<CIK>0001067346
<NAME> AAI.FOSTERGRANT, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> JUL-03-1999
<EXCHANGE-RATE> 1
<CASH> 1,557
<SECURITIES> 0
<RECEIVABLES> 50,450
<ALLOWANCES> 8,108
<INVENTORY> 35,111
<CURRENT-ASSETS> 84,453
<PP&E> 41,847
<DEPRECIATION> 23,929
<TOTAL-ASSETS> 135,915
<CURRENT-LIABILITIES> 55,967
<BONDS> 78,000
0
30,317
<COMMON> 6
<OTHER-SE> (27,440)
<TOTAL-LIABILITY-AND-EQUITY> 135,915
<SALES> 87,097
<TOTAL-REVENUES> 87,097
<CGS> 50,745
<TOTAL-COSTS> 33,834
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,021
<INCOME-PRETAX> (2,520)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,975)
<EPS-BASIC> (6.54)
<EPS-DILUTED> 0
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