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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] Annual Report Under Section 13 of the Securities Exchange Act of 1934 For
the fiscal year ended January 1, 2000; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 From the transition period from ________ to ________.
AAI.FOSTERGRANT, INC.
(Exact Name of Registrant as Specified in Its Charter)
RHODE ISLAND 05-0419304
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500 GEORGE WASHINGTON HIGHWAY, SMITHFIELD RI 02917
(Address of Principal Executive Offices) (Zip Code)
(401) 231-3800
(Issuer's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 1, 2000, the aggregate market value of the voting equity held by
non-affiliates of the Registrant was none.
As of April 1, 2000, 608,000 shares of Common Stock and 43,700 shares of
Series A Preferred Stock of the Registrant were issued and outstanding.
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TABLE OF CONTENTS
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DESCRIPTION PAGE NUMBER
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Part I. Item 1 -- Business ............................................................................ 3
Item 2 -- Properties .......................................................................... 8
Item 3 -- Legal Proceedings ................................................................... 8
Item 4 -- Submission of Matters to a Vote of Security Holders ................................. 8
Part II. Item 5 -- Market for the Company's Common Equity and Related Stockholder Matters .............. 9
Item 6 -- Selected Financial Data ............................................................. 9
Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A -- Quantitative and Qualitative Disclosures About Market Risk ......................... 18
Item 8 -- Financial Statements and Supplementary Data ......................................... 18
Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18
Part III. Item 10 -- Directors and Executive Officers of the Company .................................... 19
Item 11 -- Executive Compensation ............................................................. 22
Item 12 -- Security Ownership of Certain Beneficial Owners and Management ..................... 26
Item 13 -- Certain Relationships and Related Transactions ..................................... 27
Part IV. Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K .................... 29
Signatures .................................................................................... 30
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PART I
ITEM 1. BUSINESS
GENERAL
AAi.FosterGrant, Inc. ("AAi" or the "Company") is a value-added distributor
of optical products, costume jewelry, watches, clocks and other accessories to
mass merchandisers, variety stores, chain drug stores and supermarkets in North
America and the United Kingdom. The Company sells its products in over 40,000
retail locations. The Company markets its products under its own brand names
such as Foster Grant(R) as well as customers' private labels and numerous
licensed brand names including Ironman Triathalon(R), Disney(R), Warner Bros.(R)
and Revlon(R). The Company outsources all of its manufacturing.
The Company's product lines contain a large number of stock keeping units
("SKUs") with low retail price points and typically represent a small percentage
of retailers' total sales. As a result, many of AAi's customers have chosen to
outsource the merchandising of these products to the Company. AAi's service
program provides retailers with customized displays and product packaging and
store-level merchandising designed to maximize sales and inventory turnover. In
1999, the Company employed approximately 1,400 field service representatives who
regularly visit program customers' stores to arrange, replenish and restock
displays, reorder product and attend to markdowns and allowances. By providing
retailers with in-store product management, the Company retains control of its
product marketing and pricing, allowing AAi to maximize product sales and
increase the floor space allocated to its product lines. In fiscal 1999, sales
to customers utilizing the Company's service program accounted for 83.6 % of
AAi's net sales.
AAi was incorporated in Rhode Island in December 1985 and is the successor
by merger to a Rhode Island corporation incorporated in 1962. The Company's
principal executive offices are located at 500 George Washington Highway,
Smithfield, Rhode Island, 02917, and its telephone number is (401) 231-3800.
CAUTIONARY STATEMENT
This annual report contains statements relating to future results of the
Company (including certain projections and business trends) that are considered
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to,
changes in economic conditions and competitive product and pricing pressures
within the Company's markets, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
DISTRIBUTION CHANNELS AND CUSTOMERS
AAi sells its products to over 200 customers, primarily in three
distribution channels: (1) mass merchandisers, (2) chain drug stores, combo
stores (stores combining general merchandise, food and drug items) and
supermarkets and (3) variety stores. To a lesser extent, AAi also distributes
its products through department stores, armed forces' PX stores, boutique
stores, gift shops, book stores and catalogues.
The Company customizes its product and service program offerings to meet the
distinctive characteristics and requirements of each of these retail
distribution channels.
Mass Merchandisers. AAi's sales to mass merchandisers accounted for
approximately $94.4 million, or 62.6%, of net sales in fiscal 1999. These
customers demand a high level of merchandise support as well as national and
international distribution capability.
Chain Drug Stores, Combo Stores, Supermarkets. AAi's sales to this channel
accounted for approximately $28.8 million, or 19.1%, of net sales in fiscal
1999. These stores tend to be smaller than mass merchandisers and attract a
broader class of trade, which is often less price sensitive and more
convenience-oriented than the mass merchandiser or variety store customer.
Variety Stores. AAi's sales to variety stores accounted for approximately
$17.1 million, or 11.4%, of net sales in fiscal 1999. The Company's extensive
product lines enable it to provide targeted service programs on a cost-effective
basis, which affords the Company a significant competitive advantage in this
market.
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Department Stores and Others. The Company's sales to department stores,
armed forces' PX stores, boutique stores, gift shops, book stores and catalogue
sales accounted for $10.4 million, or 6.9%, of its fiscal 1999 net sales. Each
of these channels has different characteristics and product and service
requirements and caters to different types of consumers. For example, department
stores generally offer higher-end products with higher price points and sales of
accessories at such outlets represent a larger percentage of total store sales.
Most of the Company's business is based upon annual contracts or open
purchase orders which are terminable at will. When establishing or expanding a
customer relationship, the Company generally enters into multi-year agreements
for the supply of specified product lines to specific customer stores. Such
agreements, in addition to identifying the stores and product lines to be
supplied, prescribe inventory and service levels and anticipated turnover rates
and sales volumes, as well as the amount of any fixed obligation due to the
customer in connection with establishing the relationship. The agreements
typically do not contain required minimum sales volumes, but may provide for
early termination penalties equal to the Company's unamortized cost of product
displays provided to the customer.
With regard to new customers, many retailers require a new supplier to buy
back the retailer's existing inventory as a condition of changing vendors. These
inventory costs can be substantial and can serve as a significant barrier to
entry for competitors and the Company in obtaining new customers.
In fiscal 1999, Wal-Mart accounted for approximately 35.6% of the Company's
net sales. No other customers accounted for 10% or more of the Company's total
net sales in 1999. The loss of any significant customer, whether through
competition or otherwise, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, certain
segments of the retail industry, particularly mass merchandisers, variety
stores, drug stores and supermarkets, are experiencing significant
consolidation. Further industry consolidation could result in the Company's loss
of customers that are acquired by retailers serviced by other suppliers as well
as further concentration of the Company's credit risks. Such events could have a
material adverse effect on the Company's results of operations.
PRODUCTS
The Company offers sunglasses, reading glasses, costume jewelry, small
synthetic leather goods, watches, clocks, and other accessories generally at
retail price points below $30.
Optical Products. The Company's optical product line includes sunglasses and
non-prescription reading glasses which are sold with and without the Company's
service program. As a result of its 1996 acquisition of Foster Grant Group L.P.
and related entities ("Foster Grant US"), AAi has become a leading seller of
popularly priced sunglasses (retail price points of $5 to $30). The Company
pursues co-branding opportunities for its Foster Grant name and also sells
sunglasses under other licensed brand names. The Company offers a variety of
styles as well as color options for both frames and lenses. Sunglasses have a
significant fashion component and positive or negative consumer response in any
year can impact not only that year's profitability but also sales for the
following year, since retailers' orders tend to mirror the prior year's sales.
Such sales are also highly seasonal, with initial orders placed in the first
quarter and, depending on consumer response, restocking orders in the second
quarter.
The Company also offers a variety of styles of non-prescription reading
glasses marketed under Foster Grant, licensed brand names or private labels at
price points of $6 to $20. The reading glasses business has a limited fashion
component and is typically non-cyclical and non-seasonal. Since magnification
strength is the primary purchasing consideration for this product line, proper
stocking and restocking is essential to maximizing sales. As a result, reading
glasses are typically marketed through the Company's service program.
Costume Jewelry. AAi offers a wide variety of ladies' and children's costume
jewelry with low retail price points (between $3 and $20), including earrings,
necklaces and bracelets. The Company's jewelry line includes private labeled
products and branded products distributed pursuant to arrangements with
licensors such as Disney Enterprises, Inc., Warner Bros. and Revlon Consumer
Products Corporation as well as under the Company's Tempo(TM) name. Most of the
Company's jewelry line is basic (non-seasonal) and approximately one-third has a
fashion or holiday component. The Company's costume jewelry line is typically
sold through its service program.
Small Synthetic Leather Goods and Other. Through a 1986 acquisition, AAi
expanded its product lines to include small synthetic leather goods with retail
price points of $6 to $10, such as small backpacks, handbags, wallets and
purses. Many of the lines of small accessories are designed to complement AAi's
costume jewelry and are likewise often sold under licensed brands. The bulk of
these
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products are sold on a non-program basis and are shipped direct from the
Company's suppliers to the customer. In June 1998, through the acquisition of
Fantasma, LLC ("Fantasma") the Company added watches and clocks (with average
retail price points between $10 and $20) to its product lines.
DISTRIBUTION
During the fourth quarter of 1998, AAi closed its Texas distribution
facility and consolidated its distribution operations at its recently expanded
Smithfield, Rhode Island facility. The Company consolidated its distribution
facilities in order to optimize supply chain operations, improve customer
service, increase inventory turns and lower operating costs. A disruption of the
Company's distribution operations for any reason could cause the Company to
limit or cease its operations, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
AAi has purchased and is continuing to implement an Enterprise Resources
Planning ("ERP") system that integrates planning, inventory management and
financials. Improvement and enhancements will continue through the year 2000.
The Company's distribution systems are capable of handling any small
package. AAi typically delivers its products to its high volume customers on a
bi-weekly basis. A VNA (very narrow aisle) facility configuration serviced by
wire guided stock pickers resupplies a rapid response order picking line. After
receiving a customer order, the Company's computer system automatically
generates a list of the ordered items, also known as a "picking" order, which
the distribution staff utilizes in packing the customer's shipment. With the
planned improvements to the Company's inventory management computer system,
"picking" orders will be arranged according to the location of the ordered items
within the Company's distribution center, which AAi anticipates will improve the
efficiency of employees in filling orders.
The Company continues to invest in an electronic data interchange ("EDI")
system that enables customers to order and confirm shipments and allows AAi to
invoice electronically. This technology will continue to permit AAi and its
partners to reduce the cycle time to go to market, improving replenishment of
products to customers and reducing inventory and costs.
SERVICE PROGRAM
The Company believes that an attractive, well-positioned display is critical
to maximizing sales to the ultimate consumer. The SKU-intensive nature of the
Company's product line and the low retail price points (ranging from $3 to $20
on costume jewelry) relative to the required display space has led many
retailers to outsource the merchandising function to the Company for these
product lines. To better serve these customers, in 1982 the Company initiated an
innovative sales program through which AAi provides its program customers with
store-level management of its products. In fiscal 1999, the sales to customers
who utilize the Company's service program accounted for approximately 83.6% of
net sales.
Program customers select the products to be sold in their stores and, in
consultation with AAi sales and service personnel, determine the initial order
and display requirements. Thereafter, based on point of sale ("POS") information
and field service reports, the Company's management adjusts product mix,
generates display planograms and determines discounts and markdowns. This
information is transmitted to AAi's field service representatives who regularly
visit the retailers' stores to replenish and restock displays, reorder product
and attend to markdowns and allowances, thereby providing customers with a
real-time response to the market. The frequency of service visits is dictated by
the size of the store and the number of the Company's products carried by the
retailer. In 1999, the Company employed approximately 1,400 field service
representatives.
SALES AND MARKETING
The Company's six sales managers have an average of approximately 17 years
of industry experience. The sales force is organized by both distribution
channel and product line. The product-based sales approach is dictated by
customers since most retailers divide their buyers' responsibilities by product.
Sales representatives service existing customers and are responsible for
increasing product penetration and solving customer problems.
The Company markets its products to the retailers by attending trade shows
and advertising in industry trade magazines. The Company also maintains
showrooms and sales offices domestically in New York, New York, and Bentonville,
Arkansas as well as internationally in Toronto, Canada, Mexico City, Mexico,
Stoke-On-Trent, United Kingdom and Hong Kong. The marketing staff is responsible
for sales and marketing efforts directed at new customers and for negotiating
contract terms for existing and prospective customers. Marketing focuses on
designing a customized product and service package for each customer after
determining the
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retailer's specific needs. Often, branded products provide AAi with initial
access to a new customer. The Company then leverages the strength of the
Company's field service and breadth of its product lines to increase product
penetration.
In addition, since acquiring the Foster Grant brand, the Company has begun
to advertise directly to the end-consumer. This includes relaunching the "Who's
That Behind Those Foster Grants" campaign, featuring Cindy Crawford, global
promotions and public relations efforts aimed at increasing awareness of the
Foster Grant brand. Also, in the spring of 1999, the Company launched a
co-branded line of Ironman Triathlon(R) sports sunglasses.
INTELLECTUAL PROPERTY AND LICENSES
Proprietary Trademarks. The Company owns trademarks in the words and designs
used on or in connection with many of its products. The Company has registered a
variety of trademarks under which it sells a number of its products, including
Foster Grant. The level of copyright and trademark protection available to the
Company for proprietary words, phrases and designs varies depending on several
factors including the degree of originality and the distinctiveness of the
associated trademarks and design.
Licenses. In 1992, AAi began distributing licensed products pursuant to an
agreement with Disney Enterprises, Inc. The Company currently holds numerous
non-exclusive licenses from various licensors to market products with classic
cartoon characters and other images or under other brand names and trademarks.
Many of the Company's license agreements limit sales of products to certain
market categories. The Company pays each of these licensors a royalty on sales
of licensed products. The Company's licenses generally are for terms of one to
three years. The license agreements generally require minimum annual payments
and certain quality control procedures and give the licensor the right to
approve products licensed by the Company. Typically, the licensor may terminate
the license if specified minimum levels of annual net sales for licensed
products are not met or for failure by the Company to comply with the material
terms of the license. Certain licenses require minimum advertising expenditures
by the Company and also require the Company to make lump-sum payments in the
event of a change of ownership. Accordingly, the Company's licensing
arrangements are dependent primarily upon maintaining a good relationship
between the Company and its licensors. The Company believes it has good
relationships with its licensors and has generally been able to obtain renewals
of expired licenses and to obtain the required approval for licensed products.
Most of the Company's license agreements are non-exclusive, of short
duration and may be terminated if the Company fails to comply with any material
terms thereof. There can be no assurance that any of these relationships with
licensors will continue, that such agreements will be renewed or that the
Company will be able to obtain licenses for additional brands. If the Company
were unable in the future to obtain such licenses on terms it deems reasonable,
it would be required to modify its marketing plans and could be forced to rely
more heavily on its proprietary brands or generic product sales, which could
materially adversely affect its business, financial condition and results of
operations.
PRODUCT DESIGN, SOURCING AND ASSEMBLY
Product Design. AAi's in-house design staff develops new products in line
with the current and anticipated trends for each season. For licensed brands,
the Company works extensively with the licensor in approving each detail of the
new products. The Company believes that its future success will depend, in part,
on its ability to enhance its existing product lines and develop new styles and
products to meet an expanding range of customer and consumer requirements.
Sourcing and Assembly. The Company outsources manufacturing for all of its
products, 77.6% of which is sourced to manufacturers in Asia through a joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. The joint venture is co-owned with a Hong Kong investor who
provides on-site management. The joint venture monitors production and ensures
that products meet the Company's quality standards. The Company also utilizes
domestic manufacturers to accommodate short delivery lead times or when
otherwise necessary. The Company believes that the quality and cost of the
products manufactured by its suppliers provide it with a significant competitive
advantage. In addition, sourcing the majority of its products through the joint
venture enables the Company to better control costs, monitor product quality,
manage inventory and provide efficient order fulfillment.
COMPETITION
The optical products and accessories industries are highly competitive.
There are numerous competitors for each of its product lines both in the retail
channels serviced by the Company and in its other channels of distribution.
Competitors include numerous accessory vendors, including those with their own
retail stores, smaller independent specialty manufacturers, and in the case of
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costume jewelry and reading glasses, divisions or subsidiaries of large
companies with greater financial or other resources than those of the Company.
Certain of these competitors control licenses for widely recognized images, such
as cartoon or movie characters which could provide them with a competitive
advantage. The Company may also experience increased competition from suppliers
of upscale fashion accessories seeking to enter the mass merchandise market.
There are significant costs associated with the design, production and
installation of display fixtures for new customers. Furthermore, many retailers
require a new supplier to buy back the retailer's existing inventory as a
condition to changing vendors. These inventory costs can be substantial and
serve as a barrier to entry for both competitors attempting to reach the
Company's existing customers as well as for the Company in obtaining new
customers.
AAi competes on the basis of diversity and quality of its product designs,
the breadth of its product lines, product availability, price and reputation as
well as customer service and support programs. The Company has many competitors
with respect to one or more of its products but believes that there are few
competitors that distribute products with the same product diversity and service
quality as the Company.
EMPLOYEES
As of March 28, 2000, the Company had approximately 540 full-time employees
and 1,080 part-time employees, none of whom were represented by a labor union.
The Company considers its relationship with its employees to be good.
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ITEM 2. PROPERTIES
The Company's principal executive office is located at 500 George Washington
Highway, Smithfield, Rhode Island. AAi's primary distribution facilities are
adjacent to its recently expanded headquarters, which together are 180,000
square feet.
The following table describes the material properties owned and leased by
AAi:
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USE
OWNED PROPERTY:
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Warehousing & Distribution, Product Showroom and Sales
Smithfield, Rhode Island Office and Office Administration
LEASED PROPERTIES:
New York, New York Product Showroom and Sales Office
Bentonville, Arkansas Product Showroom and Sales Office
Warren Avenue, Providence,
Rhode Island (a) Warehousing
Carpenter St., Providence,
Rhode Island (a) Warehousing
Toronto, Canada Product Showroom and Sales Office
Stoke-On-Trent, United Kingdom Warehousing & Distribution and Office Administration
</TABLE>
(a) Leased to AAi from related parties. See Item 13, "Certain Relationships and
Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings in the ordinary course of
business. While the outcome of law suits or other proceedings cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial condition, results of the operation or
cash flow of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the Common Stock of the Company is held by affiliates and certain
directors and officers of the Company; thus, no trading market exits for such
stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected consolidated financial data for the
Company and is qualified in its entirety by the more detailed consolidated
financial statements of the Company included herein. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
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YEAR ENDED DECEMBER 31
---------------------------------------
YEAR ENDED YEAR ENDED
JANUARY 2, JANUARY 1,
1995 1996(a) 1997(a) 1999(a) 2000
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(DOLLARS IN THOUSANDS)
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STATEMENT OF OPERATIONS DATA:
Net sales ................................... $ 88,050 $ 86,336 $ 149,411 $ 160,325 $ 150,680
Cost of goods sold .......................... 43,690 47,871 77,928 88,823 96,973
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Gross profit ................................ 44,360 38,465 71,483 71,502 53,707
Operating expenses .......................... 34,782 37,524 65,323 78,135 72,735
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Income(loss) from operations ................ 9,578 941 6,160 (6,633) (19,028)
Interest expense ............................ (1,031) (1,469) (4,214) (7,010) (10,250)
Other (expense) income, net ................. (80) (331) 31 490 (111)
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Income(loss) before taxes ................... 8,467 (859) 1,977 (13,153) (29,389)
Income tax benefit (expense) ................ (42) 948 (1,162) -- (36)
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Net income(loss) ............................ 8,425 89 815 (13,153) (29,425)
Dividends and accretion on preferred stock(b) -- 1,123 2,496 2,779 3,002
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Net income (loss) applicable to common
shareholders .................................. 8,425 (1,034) (1,681) (15,932) (32,427)
Pro forma income tax adjustment(c) .......... (3,370) (604) -- -- --
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Pro forma net income (loss)
applicable to common shareholders ......... $ 5,055 $ (1,638) $ (1,681) $ (15,932) $ (32,427)
========= ========= ========= ========= =========
OTHER DATA:
Depreciation and amortization ............... $ 783 $ 1,868 $ 8,248 $ 12,792 $ 11,489
Cash flow from operating activities ......... 1,818 (2,219) 1,600 (3,903) 2,612
Cash flow from investing activities ......... (2,104) (12,473) (9,053) (29,753) (10,603)
Cash flow from financing activities ......... 259 16,134 8,755 33,084 8,073
EBITDA(d) ................................... 10,281 2,478 14,439 6,649 (1,632)
Capital expenditures(e) ..................... 1,555 1,572 7,583 16,882 10,475
</TABLE>
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YEAR ENDED DECEMBER 31
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YEAR ENDED YEAR ENDED
JANUARY 2, JANUARY 1,
1995 1996 1997 1999 2000
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(DOLLARS IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital ................... $ 7,795 $ 687 $ 5,936 $ 31,346 $ 7,399
Total assets ...................... 25,187 82,010 93,746 126,498 107,867
Total debt(f) ..................... 5,542 35,588 44,960 78,982 87,322
Preferred securities(g) ........... -- 24,338 26,918 29,771 32,864
Total shareholders' equity(deficit) 11,523 (5,281) (7,359) (23,502) (55,762)
</TABLE>
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(a) Includes the results of operations of the acquired businesses from the
respective dates of acquisition: Tempo Division of Allison Reed Group, Inc.
("Tempo") in June 1996, Foster Grant US in December 1996, Superior Jewelry
Company ("Superior") in July 1997, Eyecare Products UK Ltd. ("Foster Grant
UK") in March 1998 and Fantasma, LLC ("Fantasma") in June 1998.
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(b) Reflects a reduction from net income for the accretion and noncash
dividends on Series A Preferred Stock. See Note 9 of the Notes to the
Company's Consolidated Financial Statements.
(c) The Company was an S corporation under Section 1362 of the Internal Revenue
Code until May 31, 1996. Pro forma income taxes, assuming the Company was
subject to C corporation income taxes, have been provided, in the
accompanying statement of operations for 1995 and 1996, at an estimated
statutory rate of 40%.
(d) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, AAi believes that EBITDA is accepted as a generally
recognized measure of performance in the distribution industry because it
is an indicator of the earnings available to meet the Company's debt
service obligations. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining AAi's
operating performance or liquidity which is calculated in accordance with
GAAP. During 1999, the Company determined that the remaining Fantasma and
Tempo goodwill related to these acquisitions was impaired based on the
Company's projections of future cash flows related to these assets.
Accordingly, the Company has recorded a goodwill impairment loss of
approximately $6.0 million, which is added back to calculate EBITDA for
fiscal 1999.
(e) Does not include capital assets acquired in connection with the
acquisitions of the Tempo, Foster Grant US, Superior, Foster Grant UK and
Fantasma.
(f) Includes amounts outstanding under a revolving credit facility, various
long-term obligations and subordinated promissory notes payable to
shareholders at each applicable period.
(g) Includes preferred stock of Foster Grant Holdings, Inc. ("FG Holdings")
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain "forward-looking" statements and are
subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet the
Company's working capital and capital expenditure requirements and statements
regarding the anticipated proportion of revenues to be derived from a limited
number of customers, may constitute forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. These risks and uncertainties include the substantial
leverage of the Company, customer concentration and consolidation, dependence on
licensed brands, a single site distribution facility, operating in international
economies, unpredictability of discretionary consumer spending, competition,
susceptibility to changing consumer preferences and obtaining full benefits from
the new information systems. The following discussion and analysis of financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere.
OVERVIEW
The Company is a value-added distributor of optical products, costume
jewelry, watches, clocks and other accessories primarily to mass merchandisers,
chain drug stores/combo stores/supermarkets and variety stores in North America
and the United Kingdom. As a value-added distributor, the Company provides
customized store displays, merchandising management and a store-level field
service force to replenish and restock displays, reorder product and attend to
markdowns and allowances. Upon shipment to the customer, the Company estimates
agreed upon future allowances, returns and discounts, taking into account
historical experience, and reflects revenue net of these estimates.
When establishing or expanding a customer relationship, the Company
generally enters into multi-year agreements for the supply of specified product
lines to specific customer stores. The agreements typically do not contain
required minimum sales volumes, but may provide for termination penalties equal
to the Company's unamortized cost of product displays provided to the customer.
The Company believes its relationships with retailers are dependent upon its
ability to efficiently utilize allocated floor space to generate satisfactory
returns for its customers. To meet this end, the Company strives to consistently
deliver competitively priced products and service programs which provide
retailers with attractive gross margins and inventory turnover rates. The
Company has historically retained customers from year to year, although
retailers may drop or add product lines supplied by the Company. Generally,
customer loss has been attributable to such customer going out of business or
being acquired by a company which does not carry the Company's product line or
has prior relationships with a competitor of the Company.
Certain segments of the retail industry, particularly mass merchandisers,
variety stores, drugstores and supermarkets, are experiencing significant
consolidation and in recent years many major retailers have experienced
financial difficulties. These industry wide developments may have an impact on
the Company's results of operations. In addition, many major retailers have
sought to reduce inventory levels in order to reduce their operating costs which
has had a negative effect on the Company's results of operations.
During the first quarter of 1998, the Company elected to change its fiscal
year end from December 31 to the Saturday closest to December 31.
On July 21, 1998, the Company sold $75 million of 10 -3/4% Senior Notes due
2006 (the "Notes"). The net proceeds of approximately $71 million were used to
repay outstanding indebtedness, as described below under "Liquidity and Capital
Resources."
Net Sales. The Company offers optical products, costume jewelry, small
synthetic leather goods, watches, clocks and other accessories, generally at
retail price points of $30 or less. Net sales of the Company's optical products
accounted for approximately 41.0%, 47.3% and 50.7% of the Company's net sales in
fiscal 1999, 1998 and 1997, respectively; net sales of the Company's costume
jewelry accounted for approximately 38.7%, 40.3% and 43.4% of the Company's net
sales in fiscal 1999, 1998 and 1997, respectively, and the balance represented
sales of synthetic leather goods, watches, clocks and other accessories.
Cost of Goods Sold. The Company outsources manufacturing for all of its
products, 77.6% 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
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<PAGE> 12
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.
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with most of these
agreements. In these situations, the Company values this inventory at its fair
market value, representing the lower of cost or net realizable value, and
records that value as inventory. The Company sells this inventory through
various liquidation channels. Except as provided below, the excess costs over
the fair market value of the inventory received is charged to selling expenses
when incurred. The Company expensed customer acquisition costs of $0.6 million,
$0.9 million and $1.6 million in fiscal 1999, 1998 and 1997, respectively.
The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer and the
estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During
fiscal 1999 and 1998, the Company capitalized approximately $251,000 and $2.3
million of these costs. No such costs were capitalized during fiscal 1997.
Amortization expense related to these costs was approximately $1.2 million and
$219,000 for the years ended January 1, 2000 and January 2, 1999, respectively.
Dividends and Accretion on Preferred Stock. The Company has 43,700 shares of
Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock")
outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0
million, and an additional 9,500 shares were issued for gross proceeds of $5.0
million in connection with the December 1996 acquisition of Foster Grant US.
Beginning on June 30, 2002, shares of the Series A Preferred Stock are
redeemable at the option of the holder for an amount equal to the original issue
price plus accrued and unpaid dividends yielding a 10% compounded annual rate of
return, provided, however, that the right to require redemption is suspended as
long as any Restrictive Indebtedness (as defined in the Articles of
Incorporation) is outstanding. Net loss applicable to common shareholders
represents net loss less accretion of original issuance costs and cumulative
dividends due on the Series A Preferred Stock.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Although EBITDA is not a measure of performance calculated in accordance with
Generally Accepted Accounting Principles (GAAP), the Company believes that
EBITDA is accepted as a generally recognized measure of performance in the
distribution industry and provides an indicator of the earnings available to
meet the Company's debt service obligations. EBITDA should not be considered in
isolation or as a substitute for operating income, net income, net cash provided
by operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
EBITDA was $(1.6) million, $6.6 million and $14.4 million in fiscal 1999, 1998
and 1997, respectively.
ACQUISITIONS
The Company has grown rapidly through strategic acquisitions in recent
years. In June 1998, the Company acquired 80% of the membership interests of
Fantasma for $4.1 million in cash. The remaining 20% membership interest of
Fantasma was held by a previous member of Fantasma. As a result of the
termination of the employment of this member, in April 1999, the Company
acquired this 20% interest effective September 1, 1999. Accordingly, the Company
currently holds 100% of the Fantasma member interests. 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 operations or financial
condition. Another employee of Fantasma has an option to acquire a 1% interest
if certain earnings targets for Fantasma are met in 2000. As of January 1, 2000,
the exercise price of the option 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.
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<PAGE> 13
The acquisition was accounted for using the purchase methods; 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 the 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 was being
amortized over 10 years. During 1999, the Company determined that the remaining
goodwill related to this acquisition was impaired based on the Company's
projections of future cash flows related to this asset. Accordingly, the Company
has recorded an impairment loss of approximately $3.9 million.
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 was 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 was
required as result of 1999 and 1998 sales. As a result of this acquisition, the
Company recorded approximately $1.1 million of intangible assets which are being
amortized over 20 years.
In July 1997, the Company acquired the assets of Superior, a distributor of
costume jewelry to chain drug stores and mass merchandisers in the United
States. The Company paid $2.7 million in cash, including a contingent cash
payment of $875,000 and assumed certain liabilities in the amount of $4.1
million. The purchase price was subject to upward adjustment based on 1998
earnings attributable to Superior operations, up to a maximum amount of $2.0
million. No adjustment was required as a result of 1998 operating results to the
purchase price. As a result of this acquisition, the Company recorded
approximately $3.5 million of goodwill which is being amortized over 10 years.
EFFECTS OF ACQUISITIONS
Historically, the Company has selected acquisition candidates based, in
part, on the opportunity to improve their operating results. The Company seeks
to leverage its purchasing power, distribution capabilities and lower operating
costs to improve the financial performance of its acquired businesses. Results
of operations reported herein for each period only include the results of
operations for acquired businesses from their respective dates of acquisition.
Full year operating results, therefore, could differ materially from those
presented.
The Company has accounted for its acquisitions using the purchase method of
accounting. As a result, these acquisitions have affected, and will
prospectively affect, the Company's results of operations in certain significant
respects. The aggregate acquisition costs are allocated to the tangible and
intangible assets acquired and liabilities assumed by the Company based upon
their respective fair values as of the acquisition date. The cost of such assets
are then amortized according to the classes of assets and the estimated useful
lives thereof. The acquisitions necessitating payment of purchase price in
excess of the fair value of the net assets acquired results in intangible assets
consisting of goodwill and trademarks which are being amortized on a
straight-line basis over a period of 10 to 40 years. Similar future acquisitions
or additional consideration paid for existing acquisitions may result in
additional amortization expense. In addition, due to the effects of the
increased borrowing to finance any future acquisitions, the Company's interest
expense may increase in future periods.
In December 1999, the Company determined that the potential future cash
flows related to the intangible assets of the watches and clocks and certain
jewelry product lines were less than carrying value. As a result, the Company
recorded an impairment loss of approximately $6.0 million relating to these
intangibles.
As of January 1, 2000, net intangible assets as a result of acquisitions
were $13.5 million.
CONSOLIDATION OF DISTRIBUTION OPERATIONS
In the fourth quarter of 1998, the Company closed its Texas distribution
center and consolidated distribution operations at its expanded Rhode Island
facility. This restructuring contributed to operating expense savings of
approximately $8.0 million in fiscal 1999. In 1998, the Company incurred
approximately $5.0 million of expenses related to the closing of the Texas
distribution center, including a restructuring charge of $2.6 million for the
write-down of disposed assets, the payment of severance benefits and expenses
relating to operating inefficiencies.
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<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in the Company's Statement
of Operations:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, 2000 JANUARY 2, 1999 DECEMBER 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Net sales ............................................................... 100.0% 100.0% 100.0%
Cost of goods sold ...................................................... 64.4 55.4 52.2
----- ----- -----
Gross profit ............................................................ 35.6 44.6 47.8
Operating expenses ...................................................... 44.2 47.1 43.7
Restructuring charge/Goodwill impairment loss ........................... 4.0 1.6 --
----- ----- -----
(Loss) income from operations ........................................... (12.6) (4.1) 4.1
Interest expense ........................................................ 6.8 4.4 2.8
Other income (expense), net ............................................. (0.1) 0.3 --
----- ----- -----
(Loss) income before taxes and dividends and accretion on preferred stock (19.5) (8.2) 1.3
Income tax (expense) benefit ............................................ -- -- (0.7)
----- ----- -----
Net (loss) income before dividends and accretion on preferred stock ..... (19.5) (8.2) 0.6
Dividends and accretion on preferred stock .............................. 2.0 1.7 1.7
----- ----- -----
Net loss applicable to common shareholders .............................. (21.5)% (9.9)% (1.1)%
===== ===== =====
</TABLE>
YEAR ENDED JANUARY 1, 2000 COMPARED TO YEAR ENDED JANUARY 2, 1999
Net Sales. Consolidated net sales were $150.7 million for the year ended
January 1, 2000 as compared to $160.3 million for the year ended January 2,
1999, a decrease of 6.0% or $9.6 million. The decrease in net sales relates
primarily to a $9.2 million decline within the mass merchandiser channel. This
decrease in net sales is primarily attributable to a combination of retail
pricing pressure and softness in demand during fiscal 1999.
Gross Profit. Gross profit was $53.7 million for the year ended January 1,
2000 as compared to $ 71.5 million for the year ended January 2, 1999. Gross
profit as a percentage of net sales decreased to 35.6% from 44.6% due to: (i) a
decline in net sales related to higher returns and markdowns as mentioned above,
(ii) increased shipments of lower margin items in an effort to reduce inventory,
and (iii) higher cost of goods sold due to an increase in labor and freight
charges after the consolidation of the distribution operations due to past
consolidation inefficiencies.
Operating Expenses. Operating expenses were $72.7 million for the year ended
January 1, 2000 as compared to $78.1 million for the year ended January 2, 1999,
a decrease of 6.9% or $5.4 million. The decrease of $5.4 million is primarily
attributable to approximately $6.4 million in savings from the consolidation and
closing of the Texas distribution center into the Company's newly expanded Rhode
Island facility. During 1999, the Company also recognized a goodwill impairment
loss of approximately $6.0 million. The comparative effect of which is largely
offset by a $2.6 million restructuring charge and a one time charge of
approximately $2.4 million related to the closing of the Texas distribution
center which were incurred in 1998.
Interest Expense. Interest expense was $10.3 million for the year ended
January 1, 2000 as compared to $7.0 million for the year ended January 2, 1999,
an increase of 46.2% or $3.2 million. This was caused by both a higher average
balance outstanding on our line of credit throughout the year as well as a
higher interest rate on the Notes which were outstanding for the full year.
Income Tax Expense. Income tax expense of $36,000 for fiscal 1999 represents
a provision for foreign income taxes related to our foreign operations. During
1999 and 1998, the Company did not record a tax benefit related to its losses.
This decision was based on historical and anticipated results. The effect of
this decision was to increase its valuation reserve for its deferred tax assets.
The Company's valuation allowance as of January 1, 2000 is approximately $15.0
million.
Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock was $29.4 million for the year ended
January 1, 2000 as compared to net loss before dividends and accretion on
preferred stock of $13.2 million for the year ended January 2, 1999, an
increased loss of $16.3 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $32.4 million for the year ended January 1, 2000 as compared to
a loss of $15.9 million for the period ending January 2, 1999, an increased loss
of $16.5 million. The increase was attributable to the $16.3 million decrease in
earnings and an increase of $223,000 in dividends and accretion on Series A
Preferred Stock due to the compounding of accrued dividends.
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<PAGE> 15
YEAR ENDED JANUARY 2, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Consolidated net sales were $160.3 million for the year ended
January 2, 1999 as compared to $149.4 million for the year ended December 31,
1997, an increase of 7.3% or $10.9 million. The $10.9 million increase in net
sales relates to the 1998 acquisitions of Fantasma and Foster Grant UK which
contributed $18.0 million of net sales. This increase was partially offset by a
decline of $7.1 million of net sales with chain drug stores/combo
stores/supermarkets, primarily related to sales of optical products which were
adversely impacted by disruptions associated with the relocation of optical
distribution activities to the Company's expanded Smithfield, Rhode Island
facility.
Gross Profit. Gross profit was $71.5 million for the year ended January 2,
1999 which was the same as for the year ended December 31, 1997. Gross profit
from the aforementioned acquisitions accounted for an $8.0 million increase
offset by a decline in net sales in chain drug stores, combo stores,
supermarkets, primarily related to optical products. Gross profit as a
percentage of net sales decreased to 44.6% from 47.8% due to the decline in
sales of optical products (which carry higher margins) and increased shipments
of lower margin seasonal and promotional products as well as from the lower
margins on Fantasma products.
Operating Expenses. Operating expenses were $78.1 million for the year ended
January 2, 1999 as compared to $65.3 million for the year ended December 31,
1997, an increase of 19.6% or $12.8 million. The increase is attributable to
$6.9 million of operating expenses associated with the acquired entities and
$5.0 million of expenses related to the closing of the Texas distribution center
including the write-down of disposed assets, the payment of severance benefits
and operating inefficiencies incurred subsequent to the announcement of the
planned closure.
Interest Expense. Interest expense was $7.0 million for the year ended
January 2, 1999 as compared to $4.2 million for the year ended December 31,
1997, an increase of 66.4% or $2.8 million. This resulted from additional
borrowings under the Company's credit facilities to fund acquisitions and
expanded operations and a higher effective interest rate related to the Notes.
Income Tax Benefit (Expense). No income tax benefit was recorded for the
year ended January 2, 1999 as compared to $1.2 million of expense for the year
ended December 31, 1997. During 1998, based on actual and anticipated results,
the Company determined that a greater valuation reserve was required.
Accordingly, the Company increased the valuation allowance by approximately $3.7
million which offset any benefit that was recognized.
Net Income (Loss). As a result of the factors discussed above, net loss
before dividends and accretion on preferred stock was $13.2 million for the year
ended January 2, 1999 as compared to net income before dividends and accretion
on preferred stock of $815,000 for the year ended December 31, 1997, a decrease
of $14.0 million.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $15.9 million for the year ended January 2, 1999 as compared to
a loss of $1.7 million for the year ended December 31, 1997, an increase of
$14.2 million. The increase was attributable to the $14.0 million decrease in
earnings and an increase of $283,000 in dividends and accretion on Series A
Preferred Stock due to the compounding of accrued dividends.
LIQUIDITY AND CAPITAL RESOURCES
At January 1, 2000 the Company had cash and cash equivalents of $2.3 million
and working capital of $7.4 million. During fiscal 1999, the Company funded its
operations through credit facilities and cash generated from operations.
The Company generated $2.6 million of cash from operations during fiscal
1999 compared to using $3.9 million of cash for operations in fiscal 1998. The
cash provided by operations in fiscal 1999 was generated primarily from a $7.1
million and $4.1 million decrease in accounts receivable and inventory,
respectively.
The Company used $10.6 million in investing activities during fiscal 1999,
compared to $29.8 million in 1998. Cash used in investing activities decreased
in fiscal 1999 as compared to 1998 as a result of a $6.4 million decrease in
property, plant and equipment expenditures and no acquisitions in fiscal 1999.
The Company generated $8.1 million from financing activities during fiscal
1999, compared to $33.1 million in 1998. Cash generated from financing
activities is primarily attributable to $8.4 million of increased borrowings
under the revolving note payable.
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<PAGE> 16
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, FG Holdings issued 100 shares of preferred stock ("FG
Preferred Stock"), which are redeemable on February 28, 2000. The redemption
price which is determined with reference to the combined net sales of
sunglasses, reading glasses and accessories by FG Holdings and the Company will
total $1.0 million. In addition, upon the occurrence of certain specified
capital transactions, the holders of FG Preferred Stock are entitled to receive
a supplemental payment ranging between $2.5 million to $3.0 million depending
upon the transaction value. See Item 13, "Certain Relationships and Related
Transactions." The Company expects to redeem these securities during the second
quarter of fiscal 2000 and anticipates funding its redemption from its senior
credit facility (the "Senior Credit Facility").
In addition, the Company has 43,700 shares of Series A Preferred Stock
outstanding which have an aggregate redemption value of $31.9 million at January
1, 2000. Each share of Series A Preferred Stock is convertible into 10 shares of
Common Stock at a rate of 10 to 1, adjustable for certain dilutive events.
Conversion is at the option of the shareholder, but is automatic upon
consummation of a qualified public offering of equity securities. The holders of
the Series A Preferred Stock have the right to require redemption for cash for
any unconverted shares, beginning June 30, 2002, provided, however, that the
right to require redemption is suspended as long as any Restrictive Indebtedness
is outstanding. The Notes constitute Restrictive Indebtedness. The redemption
price of the Series A Preferred Stock is an amount equal to the original issue
price, $526.32 per share, plus any accrued and unpaid dividends yielding a 10%
compounded annual rate of return.
The Company had up to $13.8 million available for additional borrowings
under the Senior Credit Facility as of January 1, 2000. Interest rates on the
revolving loans under the Senior Credit Facility are based, at the Company's
option, on the Base Rate (as defined) or LIBOR plus an applicable margin. The
Senior Credit Facility contains certain restrictions and limitations, including
financial covenants that require the Company to maintain and achieve certain
levels of financial performance and limit the payment of cash dividends and
similar restricted payments. As of January 1, 2000, the Company was not in
compliance with certain financial covenants under the Senior Credit Facility. On
March 24, 2000, the Company received a waiver of such non-compliance from its
lenders and amended its Senior Credit Facility. The Company expects that it will
be in compliance with the modified financial covenants in the Senior Credit
Facility. The Company incurred a fee of $150,000 payable to the lenders in
connection with the amendment which was expensed in 1999.
On July 21, 1998, the Company sold $75 million of 10 -3/4% Senior Series A
Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of
approximately $71.0 million received by the Company from the issuance and sale
of the Notes were used to repay outstanding indebtedness under the credit
facility with a bank and the Subordinated Promissory Notes to shareholders, net
of amounts due the Company from certain of these shareholders. The Company
incurred issuance costs of approximately $3.7 million in relation to these
notes. These costs are being amortized over the life of the Notes and are
included in other assets in the accompanying consolidated balance sheets. In
December 1998, the Notes were exchanged for 10 -3/4% Series B Notes due 2006
registered with the SEC. Interest on the Notes is payable semiannually on
January 15 and July 15, commencing January 15, 1999.
The Company has substantial indebtedness and significant debt service
obligations. As of January 1, 2000, the Company had total indebtedness,
including borrowings under the Senior Credit Facility, in the aggregate
principal amount of $87.3 million. The Company had current liabilities of
approximately $54.7 million. In addition, the Company has significant annual
obligations that include interest on the Notes of approximately $8.1 million,
minimum royalty obligations over the next two years of approximately $2.4
million and minimum payments under its operating leases of approximately
$626,000. The Indenture governing the Notes permits the Company to incur
additional indebtedness, including secured indebtedness, subject to certain
limitations.
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Notes), or to
fund planned capital expenditures will depend on its future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. Based
upon the current level of operations and anticipated cost savings and revenue
growth, the Company believes that cash flow from operations and available cash,
together with available borrowings under the Senior Credit Facility, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. The Company may, however, need to refinance all or a portion of
the principal of the Notes on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations,
that anticipated cost savings and revenue growth will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
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<PAGE> 17
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during the past three years.
SEASONALITY AND QUARTERLY INFORMATION
Significant portions of the Company's business are seasonal. Sunglasses are
shipped primarily during the first half of the fiscal year as retailers build
inventory for the spring and summer selling seasons, while costume jewelry and
other accessories are shipped primarily during the second half of the fiscal
year as retailers build inventory for the holiday season. Reading glasses sales
are generally uniform throughout the year. As a result of these shipping trends,
the Company's working capital requirements grow through the first half of the
year to fund purchases and accounts receivable. In the second half of the year,
the Company's working capital requirements decrease as accounts receivable are
collected.
YEAR 2000
Prior to January 1, 2000, many computer experts had predicted wide-spread
problems related to computer programs' inability to process dates after December
31, 1999. During fiscal 1999, to accommodate the Company's growth, AAi
implemented a new information management system which is Year 2000 compliant.
The Company does not expect to incur any significant further expenses
specifically related to the Year 2000 issue. The Company anticipates that
additional expenditures will be necessary to achieve the full benefit of its
information system unrelated to the Year 2000 issue, but cannot quantify those
costs at this time. To date, the Company has not experienced any significant
operating problems or product failures as a result of Year 2000 issues with its
vendors, service providers or customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB No. 133, which
defers the effective date of SFAS No. 133 to all fiscal quarters of the fiscal
years beginning after June 15, 2000. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, issued in June 1998, establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, and hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company does not expect adoption of this statement to have a significant impact
on its consolidated financial position or results of operations.
The Securities and Exchange Commission issued SAB No. 101, Revenue Recognition,
in December 1999. The Company is required to adopt this new accounting guidance
through a cumulative charge to operations, in accordance with Accounting
Principles Board Opinion (APB) No. 20, Accounting Changes, no later than the
second quarter of fiscal 2000. The Company believes that the adoption of the
guidance provided in SAB No. 101 will not have a material impact on the future
operating results.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about the Company's market risk disclosures
includes forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Risk. The Company is exposed to market risk from changes in
interest rates primarily through its borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. At January 1,
2000, approximately 99% of the carrying values of the Company's long-term debt
was at fixed interest rates.
Foreign Currency Risk. The Company's results of operations are affected by
fluctuations in the value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in the British Pound,
the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar.
In fiscal 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. At January 1, 2000, the
Company's net investment in foreign assets was approximately $5.6 million. The
Company generally does not enter into derivative financial instruments to manage
foreign currency exposure.
The Company's operations in Europe are not significant and, therefore, the
Company has not been materially impacted by the introduction of the Euro Dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to financial statements is included on page F-1 of this Annual
Report and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosure as defined by Item 304 of Regulation S-K.
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<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Each director of the Company is elected for a period of one year at the
Company's annual meeting of shareholders and serves until his successor is duly
elected by the shareholders. Vacancies and newly created directorships resulting
from any increase in the number of authorized directors may be filled by a
majority vote of directors then remaining in office. The holders of the Series A
Preferred Stock (the "Preferred Holders," or individually, a "Preferred Holder")
have the right, at their option, to designate up to two directors to the Board
of Directors, as well as the right to vote on the election of directors at the
annual meeting of shareholders. In addition, AAi's Articles of Incorporation
provide that, in addition to other events, if the Company is in default of any
of its covenants thereunder, the Preferred Holders shall have the right to elect
a majority of the members of the Board of Directors. The Company is currently in
default of one such covenant. However, the Preferred Holders have not exercised
their right to elect a majority of the members of the Board of Directors, but
have elected one additional director.
The Company's shareholders have entered into an agreement that requires
them, subject to the rights of Preferred Holders to elect additional directors
in the event of default, to vote to fix the number of directors of the Company
at seven and elect as directors two persons designated by the Preferred Holders
and five persons designated by certain management shareholders. In addition,
Weston Presidio Capital II, L.P., the record holder of 17,100 shares (39.1%) of
the Series A Preferred Stock, has agreed to vote in favor of Martin E. Franklin
(or in the event of his death or disability, the designee of Marlin Capital,
L.P.) as a director. See Item 13, "Certain Relationships and Related
Transactions -- Shareholders Agreement." Officers are elected by and serve at
the discretion of the Board of Directors.
The following table sets forth information with respect to each person who
is currently a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Gerald F. Cerce........................... 52 Chairman of the Board
John R. Ranelli........................... 53 Director, President and Chief Executive Officer
John H. Flynn, Jr......................... 49 Director and Executive Vice President - Sales
Stephen J. Carlotti....................... 57 Director and Secretary (a)
Michael F. Cronin *....................... 46 Director (a), (b)
Martin E. Franklin *...................... 35 Director
George Graboys............................ 67 Director (a), (b)
David B. Jenkins *........................ 69 Director (b)
Felix A. Porcaro, Jr...................... 44 Executive Vice President - Marketing and Product Development
Robert V. Lallo........................... 59 Executive Vice President - Distribution
Mark D. Kost.............................. 38 Chief Financial Officer and Treasurer
John R. Agre.............................. 36 Executive Director - International
Joseph T. Barrell......................... 48 Executive Director - Operations
</TABLE>
* Designated by the Preferred Holders. All other directors were designated by
certain management shareholders pursuant to the Shareholders Agreement. See
Item 13, "Certain Relationships and Related Transactions -- Shareholders
Agreement."
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
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<PAGE> 20
The following is a brief summary of the background of each director and
executive officer. Unless otherwise indicated, each individual has served in his
current position for at least the past five years.
Gerald F. Cerce co-founded the Company in 1985 with Mr. Porcaro and has
served as the Company's Chairman of the Board since that time. Mr. Cerce served
as Chief Executive Officer from the Company's founding until February 2000. Mr.
Cerce also served as Chairman of the Board of AAi's predecessor company, Femic,
Inc., a Rhode Island jewelry manufacturer which Mr. Cerce and Mr. Porcaro
acquired in 1972. Mr. Cerce serves on the Board of Trustees of Bryant College
and is a former member of the Advisory Board of Citizens Savings Bank.
John R. Ranelli has been a Director of the Company since July 1999 when he
joined AAi as President and Chief Operating Officer. In February of 2000, Mr.
Ranelli became President and Chief Executive Officer. Prior to joining AAi, Mr.
Ranelli served as Executive Vice President of Stride Rite Corporation (a
multi-brand footwear company) from 1996 through 1998. Mr. Ranelli served as
Chief Operating Officer for Deckers Outdoor Corporation (a footwear and apparel
manufacturer) from 1995 to 1996. Mr. Ranelli is a graduate of the College of the
Holy Cross and received his M.B.A. from the Amos Tuck School, Dartmouth College.
John H. Flynn, Jr. joined AAi's predecessor company in 1981 as Vice
President. He served as President and Chief Executive Officer of the Company
from 1985 to 1998 and has been a Director since 1985. As Executive Vice
President of Sales, Mr. Flynn directly manages all sales and service operations
for the Company in the U.S. Prior to joining the Company, Mr. Flynn was a
service director for K&M Associates, a costume jewelry distributor, and also
served as Vice President of Puccini Accessories where he supervised all sales
and service operations.
Stephen J. Carlotti has been a Director of the Company since June 1996. He
is an attorney and has been a partner of the firm Hinckley, Allen & Snyder, LLP,
since 1992 and from 1972 to 1989. He is also a director of WPI Group, Inc. (a
manufacturer of hand held computers and electronic components). He is a graduate
of Dartmouth College and Yale University Law School.
Michael F. Cronin has been a Director of the Company since June 1996. Mr.
Cronin also serves on the boards of directors of Casella Waste System, Inc. (an
integrated waste management company), Tekni Plex, Inc. (a manufacturer of
packaging materials), Tweeter Home Entertainment Group, Inc. (a retailer of
audio and video consumer electronics products) and several other private growth
companies. Since 1991, Mr. Cronin has been the Managing General Partner of
Weston Presidio Capital, a venture capital investment firm. He is a graduate of
Harvard College and Harvard Business School.
Martin E. Franklin has been a Director of the Company since 1996. Mr.
Franklin has been Chairman and Chief Executive Officer of Marlin Holdings, Inc.,
the general partner of Marlin Capital, L.P., a private investment partnership,
since October 1996. He also serves as Chairman of the Board of Directors of
Bolle Inc., a NASDAQ listed company, and as a Director of Specialty Catalog
Corp. From May 1996 until March 1998, Mr. Franklin served as Chairman and Chief
Executive Officer of Lumen Technologies, Inc., a NYSE company, and served as
Executive Chairman from March 1998 until December 1998. Mr. Franklin was
Chairman of the Board and Chief Executive Officer of Lumen's predecessor, Benson
Eyecare Corporation from October 1992 to May 1996 and President from November
1993 until May 1996. Mr. Franklin was non-executive Chairman and a Director of
Eyecare Products plc, a London Stock Exchange company, from December 1993 until
February 1999. Mr. Franklin also serves on the boards of a number of privately
held companies and charitable organizations. Mr. Franklin received a B.A. in
political science from the University of Pennsylvania in 1986.
George Graboys has served as a Director of the Company since 1996. Mr.
Graboys served as Chief Executive Officer of Citizens Bank and Citizens
Financial Group, Inc. until he retired in October 1992. From January 1993 to
June 1995, Mr. Graboys was Adjunct Professor and Executive-in-Residence at the
University of Rhode Island School of Business. From March 1995 to June 1998, Mr.
Graboys served as Chairman of the Board of Governors for Higher Education. The
Board oversees the state's three institutions of higher education conducted on
eight campuses throughout the state.
David B. Jenkins became a Director of the Company in May 1999. Mr. Jenkins
serves on the board of directors of the Nabisco Holding Corp., Citizens
Financial Group, and The Foreside Company, Inc. Mr. Jenkins is a trustee of
Bridgewater State College and Milton Academy, a director of Relationship
Marketing and chairman of Kabloom. Mr. Jenkins received his B.A. from Wesleyan
University and his M.B.A. from the Harvard Business School.
20
<PAGE> 21
Felix A. Porcaro, Jr. co-founded the Company with Mr. Cerce (his
brother-in-law) in 1985, and served as its Vice Chairman of the Board of
Directors until 1996. Mr. Porcaro is now the Executive Vice President of
Marketing and Product Development and is responsible for the design department
and all advertising and public relations activities.
Robert V. Lallo joined AAi's predecessor company in 1978 as Vice President.
He served as the Company's Chief Operating Officer from 1985 to 1998. As
Executive Vice President -- Distribution, Mr. Lallo is responsible for all
manufacturing, distribution and internal operations of the Company's facilities.
Prior to his association with AAi and its predecessor company, Mr. Lallo was
Production and Inventory Control Manager, Materials Manager and Director of
Operations for Uncas Manufacturing Company.
Mark Kost joined AAi as Chief Financial Officer in January 2000. Mr. Kost
was Senior Director of Finance, Global Sales, Marketing and Product Development
for the Polaroid Corporation from 1997 through 1999. Mr. Kost also served in
numerous capacities for Pepsico from 1991 to 1997. Mr. Kost received his B.A. in
accounting from Michigan State University and his M.B.A. from the University of
Chicago.
John R. Agre joined AAi as Executive Director - International in November
1999. Prior to joining AAi, Mr. Agre served as General Manager of Stride Rite
International Corporation responsible for managing Stride Rite's brands in all
international markets from 1992 through 1999. Mr. Agre received his B.A. in
economics from Northwestern University and his M.B.A. from Cornell University's
Johnson Graduate School of Management.
Joseph T. Barrell joined AAi as Executive Director - Operations in October
1999. Prior to joining AAi, Mr. Barrell was Senior Vice President of Operations
at Stride Rite Corporation responsible for three distribution centers, customer
service, logistics and information technology. Mr. Barrell served as the Vice
President of Distribution for The Timberland Company from 1991 through 1995 and
Director of Physical Distribution of Melville Corporation from 1976 through
1991. Mr. Barrell received his B.S. degree from Worcester State College and his
M.B.A from Anna Maria College.
DIRECTOR COMPENSATION
Directors who are not employees of AAi receive an annual fee of $10,000 and
$500 for each committee meeting attended, as well as reimbursement for their
reasonable expenses. Messrs. Cerce, Ranelli and Flynn do not receive any
directors' fees.
21
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the
Company to its Chief Executive Officer and each of its four most highly
compensated executive officers who earned more than $100,000 in salary and bonus
in fiscal 1999 and were employed by the Company on January 1, 2000 and one
individual who would have been one of the four most highly compensated executive
officers but for the fact that he retired prior to January 1, 2000 (together,
the "NAMED EXECUTIVE OFFICERS") for the three fiscal years ended January 1,
2000, in each case, for services rendered in all capacities to the Company
during fiscal 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(a) COMPENSATION
FISCAL ----------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(b)
--------------------------- ---- ------ ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Gerald F. Cerce, ............................................. 1999 $651,738 -- -- $ 18,291
Chairman, Chief Executive Officer 1998 651,342 $145,000 -- 245,576
1997 661,024 211,988
John R. Ranelli (c) .......................................... 1999 148,077 -- 31,350 3,600
President and Chief Operating Officer 1998 -- -- -- --
1997 -- -- -- --
John H. Flynn, Jr., .......................................... 1999 309,563 -- -- 13,129
Executive Vice President-Sales 1998 309,236 75,000 -- 12,905
1997 299,898 11,151
Felix A. Porcaro, Jr., ....................................... 1999 211,928 -- -- 16,907
Executive Vice President-Product Development and Marketing 1998 211,673 50,000 -- 13,138
1997 204,213 14,695
Robert V. Lallo .............................................. 1999 174,488 -- -- 5,482
Executive Vice President-Distribution 1998 165,229 45,000 -- 6,069
1997 161,131 4,988
Daniel A. Triangolo (d) ...................................... 1999 174,730 29,840 -- 1,022
Executive Director - International Operations 1998 174,605 16,950 -- 2,500
1997 162,162 -- 2,000 2,375
</TABLE>
(a) The aggregate amount of perquisites and other personal benefits received
from the Company by each of the Named Executive Officers was less than the
lesser of $50,000 or 10% of the total of annual salary and bonus reported.
(b) Amounts paid in fiscal 1999 represent the following: (1) medical payments
reimbursed by the Company to Mr. Cerce ($13,163), Mr. Flynn ($8,951), Mr.
Porcaro ($6,125) and Mr. Lallo ($4,358); (2) the Company's matching
contributions under its Qualified 401(k) Plan and Non-Qualified 401(k)
Excess Plan for Named Executive Officers as follows: Mr. Cerce ($2,500),
Mr. Flynn ($2,500), Mr. Porcaro ($3,357), Mr. Lallo ($2,500) and Mr.
Ranelli ($3,600); (3) premiums paid by the Company for term life insurance
purchased for the Named Executive Officers and not made available generally
to salaried employees in the amount of $150 for each of Messrs. Cerce,
Flynn and Porcaro.
(c) Mr. Ranelli's employment with the Company commenced on July 26, 1999.
(d) Mr. Triangolo retired from the Company effective December 24, 1999.
STOCK PLAN
The Company has established the 1996 Incentive Stock Plan (the "1996 Plan")
which provides for the grant of awards covering a maximum of 88,000 shares of
Common Stock, increasing to 150,000 shares immediately prior to an initial
public offering, to officers and other key employees of the Company and
non-employees who provide services to the Company or its subsidiaries. Awards
under the 1996 Plan may be granted in the form of incentive stock options,
non-qualified stock options, shares of common stock that are restricted, units
to acquire shares of Common Stock that are restricted, or in the form of stock
appreciation rights or limited stock appreciation rights.
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<PAGE> 23
The following table sets forth certain information concerning the grant of
stock options under the 1996 Plan to the Named Executive Officers during fiscal
1999. No options were granted to Messrs. Cerce, Flynn, Porcaro or Lallo in
fiscal 1999.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total Options
Options Granted to Employees Exercise or Base Price Grant Date
Name Granted in Fiscal Year ($/Sh) (a) Expiration Date Value (a)
- ---- ------- -------------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
John R. Ranelli 31,350 (b) 100% $31.57 7/29/2009 $405,982.50
</TABLE>
(a) Represents the fair value of the option granted and was estimated as of the
date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions: expected volatility of 35.53%;
expected life of five years; and risk-free interest rate of 5.68%. No
dividends on Common Stock were assumed for purposes of this estimate.
(b) Options for 10,450 shares vested on grant; options for 10,450 shares vest
in equal installments on the first and second anniversaries of the grant
date and the balance vest upon the Company achieving a $90.0 million equity
value in connection with certain enumerated liquidity events, such as
initial public offering, sale or merger.
The following table contains information with respect to aggregate stock
options held by the Named Executive Officers as of January 1, 2000. Messrs.
Cerce, Flynn, Porcaro and Lallo do not hold any stock options. All such options
were exercisable as of such date. No stock options were exercised by any Named
Executive Officers during fiscal 1999.
AGGREGATE YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL YEAR IN-THE-MONEY
NAME 1999 OPTION/SARS ($)(a)
- ---- ---- ------------------
<S> <C> <C>
John R. Ranelli................................... 10,450/20,900 0
Daniel A. Triangolo (b)........................... 4,000/0 0
</TABLE>
(a) Based on the January 1, 2000, price of the Common Stock being equal to the
exercise price of $31.57.
(b) Mr. Triangolo's options expired during the first quarter of fiscal 2000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, dated as of May 31,
1996, with certain of its executive officers, including Messrs. Cerce, Flynn,
Porcaro and Lallo and dated as of July 19, 1999 with Mr. Ranelli (collectively,
the "Executives," each an "Executive").
Each employment agreement provides that during the term of the contract the
Executive's base salary will not be reduced, will be increased on each
anniversary date of the agreement based upon the consumer price index and may be
increased based on the Company's performance and the Executive's particular
contributions. The employment agreements also stipulate that the Executives will
remain eligible for participation in the Company's Executive Bonus Plan and
other benefit programs, and that the Company will provide each Executive with an
automobile consistent with past practice or, in the case of Mr. Ranelli, a car
allowance. The employment agreement of Mr. Cerce further provides for the
reimbursement of certain membership and service fees as well as reasonable
expenses associated with the performance of his duties in New York City and
specifies that the Company will make all annual payments for his Supplemental
Employment Retirement Plan.
Mr. Cerce's agreement provides for an initial ten year term expiring on May
31, 2006, and the employment agreements of Messrs. Flynn, Porcaro and Lallo each
stipulate an initial three year term expiring on May 31, 1999, with automatic
renewals for successive one year terms thereafter. Mr. Ranelli's agreement
provides for a rolling two year term. Upon prior written notice to the
Executive, the Company may terminate the agreement "with cause" for (a) the
conviction of the Executive for a crime involving fraud or moral turpitude; (b)
deliberate dishonesty of the Executive with respect to the Company or its
subsidiaries; or, (c) except under certain
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<PAGE> 24
circumstances as specified in the agreement, the Executive's refusal to follow
the reasonable and lawful written instructions of the Board of Directors with
respect to the services to be rendered and the manner of rendering such services
by the Executive. In addition, an Executive may terminate his agreement at any
time by providing written notice to the Company, and the Company may terminate
the agreement at any time "without cause" by providing written notice to the
Executive. Mr. Cerce's agreement provides that the Company must provide such
written notice at least six months prior to termination. Termination "without
cause" means termination for any reason other than "cause" as defined and
specifically includes the disability of the Executive or the Executive's death
and, in the case of Mr. Ranelli, the Company's material reduction of the
Executive's duties or authority.
Mr. Ranelli may also terminate his employment for "good reason", which is
defined as (i) an assignment of duties materially inconsistent with his status
with the Company or material alteration in the nature or status of his
responsibilities or titles or offices or his removal from any such positions,
(ii) a reduction in his salary, (iii) the Company's failure to provide current
fringe benefits to him, except if such action applies to all executive officers,
(iv) a relocation of the Company's principal executive offices to a location
more than 50 miles from their current location, (v) any material breach,
incurred after reasonable notice, by the Company of any provisions of the
agreement or (vi) a "change of control", provided that in such event Mr. Ranelli
may exercise his right to terminate his employment only within the 12-month
period following such change in control.
Under the employment agreements, if the Company terminates an agreement
"without cause," and, in the case with Mr. Ranelli, if he terminates his
employment for "good reason", the Company is obligated to provide the Executive
monthly severance benefits consisting of one-twelfth of the sum of Executive's
then current annual base salary and the Executive's most recent bonus and to
continue coverage under the Company's insurance programs and any ERISA benefit
plans. Such payments, insurance coverage and plan participation will continue
for at least two years from the date of the Executive's termination, and, except
in the case of Mr. Ranelli, may be extended for a longer period depending on the
Executive's "Non-compete Period" as described below. For Messrs. Cerce and
Flynn, the maximum period for severance benefits is five years, for Mr. Lallo
the comparable maximum period is four years, and for Mr. Porcaro, the comparable
maximum period is three years.
The employment agreements contain confidentiality provisions and provide
that during the employment period and after termination of the agreement, the
Company may restrict the Executive's subsequent involvement in Restricted
Business Activities for two years following the date of the termination (the
"Non-compete Period"). As used in the agreements, "Restricted Business
Activities" means the marketing and sale of ladies' and men's consumer soft
lines to retail stores, which the Company sold and marketed during the
Executive's employment with the Company. Other than with the written approval of
the Company, the Executive may not enter into or engage in or have a proprietary
interest in the Restricted Business Activities other than the ownership of (a)
the stock of the Company held by the Executive, and (b) no more than five
percent of the securities of any other company which is publicly held. The
Non-compete Period may be extended, at the Company's option, by three years for
Messrs. Cerce and Flynn, by two years for Mr. Lallo and by one year for Mr.
Pocaro, provided that the Company continues to make the payments and provide the
benefits described in the preceding paragraph.
EXECUTIVE BONUS PLAN
The Company maintains an Executive Bonus Plan for the purpose of providing
incentives in the form of an annual cash bonus to officers and other key
employees. Awards are equal to a percentage of base salaries specified in an
annual plan by reference to the Company's target for sales and net income.
Bonuses awarded to senior executives are equal to 50% of compensation if the
sales and income targets are met. If the targets are not met, the amount of the
bonuses, if any, is subject to the discretion of the Board of Directors.
QUALIFIED 401(k) PLAN
The Company has a qualified 401(k) plan (the "Qualified Plan") that permits
all employees to defer, on an elective basis, up to 15% of their salary or
wages. Presently, the Company matches 25% of the first 6% of compensation that
an employee defers under the Qualified Plan. The amount of elective deferrals
for any one employee under the Qualified Plan is limited by the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, the amount that an executive
employee may defer is subject to nondiscrimination rules which may prevent the
executive from deferring the maximum amount. Further, the Qualified Plan may not
take into account compensation in excess of specified amounts for any employee
in computing contributions under the Qualified Plan. If an employee's elective
contributions are reduced or capped under the Qualified Plan, the amount of
matching employer contribution also is restricted.
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<PAGE> 25
NON-QUALIFIED EXCESS 401(k) PLAN
In May 1997, the Company established the Non-Qualified Excess 401(k) Plan
(the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the
Non-Qualified Plan is to provide deferred compensation to a select group of
management or highly compensated employees of the Company as designated by the
Board of Directors. Presently, all the Named Executive Officers participate in
the Non-Qualified Plan. Under the Non-Qualified Plan, a participant may elect to
defer up to 15% of his or her compensation on an annual basis. This amount is
credited to the employee's deferred compensation account (the "Deferred
Amount"). Under the Non-Qualified Plan, the Company also credits the
participant's deferred compensation account for the amount of the matching
contribution the Company would have made under the Qualified Plan with respect
to the Deferred Amount. All amounts contributed by the employee and by the
Company under the Non-Qualified Plan are immediately vested.
A participant under the Non-Qualified Plan is entitled to receive a
distribution of his or her account upon retirement, death, disability or
termination of employment. An executive also is eligible to withdraw funds
credited to the executive's deferred compensation account in the event of
unforeseeable financial hardship. This policy is consistent with the ability of
an employee to obtain hardship withdrawals under the Qualified Plan.
The amount deferred under the Non-Qualified Plan is not included in the
income of the executive until paid and, accordingly, the Company is not entitled
to a deduction for any liabilities established under the Non-Qualified Plan
until the amount credited to the participant's deferred compensation account is
paid to him or her.
The Company has established a grantor trust effective June 1, 1997 to hold
assets to be used for payment of benefits under the Non-Qualified Plan. In the
event of the Company's insolvency, any assets held by the trust are subject to
claims of general creditors of the Company under federal and state law.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has entered into a Supplemental Executive Retirement Plan (the
"Supplemental Plan") with Mr. Cerce the purpose of which is to provide
supplemental retirement, death, disability and severance benefits to Mr. Cerce
in consideration for his performance of services as a key executive of the
Company. In order to fund the Company's obligations under the Supplemental Plan,
the Company has purchased an insurance policy insuring the life of Mr. Cerce
(the "Policy"). With the consent of Mr. Cerce, the Company made no contribution
to the Supplemental Plan in fiscal 1999.
Under the terms and subject to the conditions contained in the Supplemental
Plan, upon Mr. Cerce's voluntary termination of employment for any reason on or
after age 60 ("Retirement") or by reason of disability, the Company will pay to
Mr. Cerce the existing cash surrender value of the Policy. At the discretion of
the Board of Directors of the Company, payment may be made either in a single
lump sum or in monthly installments over a ten year period; provided, however,
in the event that Retirement occurs within one year after a change of control,
the retirement benefit will be paid in a single lump sum.
In the event that Mr. Cerce dies while employed by the Company, the Company
will pay a death benefit to Mr. Cerce's surviving spouse or designated
beneficiary equal to the death benefit payable under the Policy. The death
benefit will be paid in monthly installments over a fifteen year period unless
Mr. Cerce's death occurs within one year after a change of control, in which
event, the death benefit will be paid in a single lump sum no later than ninety
days after his death.
In the event that Mr. Cerce's employment with the Company is terminated for
any reason other than Retirement, death or disability, Mr. Cerce will be
entitled to receive the existing cash surrender value of the Policy, payable at
the discretion of the Board of Directors of the Company in a single lump sum or
in monthly installments over a ten year period. However, if Mr. Cerce's
termination occurs within one year after a change of control, the severance
benefit will be paid in a single lump sum.
25
<PAGE> 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND DIRECTORS AND OFFICERS
The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of March 28, 2000, by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock or Series A Preferred Stock; (ii) each of the
Company's directors and Named Executive Officers; and (iii) all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK COMMON STOCK DILUTED (b)
-----------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES
BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME AND ADDRESS (A) OWNED CLASS OWNED OF CLASS OWNED OF CLASS
- -------------------- ----- ----- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Gerald F. Cerce (c) ............................... -- -- 305,906 50.3% 305,906 29.3%
John R. Ranelli (d) ............................... -- -- 10,450 1.7 10,450 1.0
Felix A. Porcaro, Jr. (c) ......................... -- -- 171,000 28.1 171,000 16.4
John H. Flynn, Jr ................................. -- -- 28,500 4.7 28,500 2.7
Stephen J. Carlotti (e)(f) ........................ -- -- 36,094 5.9 36,094 3.5
Michael F. Cronin (g) ............................. 17,100 39.1% 19,000 3.1 190,000 18.2
Martin E. Franklin (h) ............................ 4,750 10.9 -- -- 47,500 4.5
George Graboys .................................... -- -- -- -- -- --
David J. Syner (f)(i) ............................. -- -- 36,094 5.9 36,094 3.5
Robert V. Lallo ................................... -- -- 28,500 4.7 28,500 2.7
Daniel A. Triangolo ............................... -- -- -- -- -- --
Weston Presidio Capital II, L.P. (j) .............. 17,100 39.1 19,000 3.1 190,000 18.2
St. Paul Fire and Marine Insurance Company(k) ..... 6,840 15.7 7,600 1.3 76,000 7.3
BancBoston Ventures, Inc. (l) ..................... 6,840 15.7 7,600 1.3 76,000 7.3
Marlin Capital, L.P. (m) .......................... 4,750 10.9 -- -- 47,500 4.5
National City Capital Corporation (n) ............. 3,420 7.8 3,800 * 38,000 3.6
Brahman Group (o) ................................. 3,117 7.1 -- -- 31,170 3.0
All executive officers and directors as a group (12
persons) (p) .................................... 21,850 50.0 599,450 96.9 817,950 77.4
</TABLE>
* Less than one percent
(a) If applicable, beneficially owned shares include shares owned by the
spouse, children and certain other relatives of the director or officer, as
well as shares held by trusts of which the person is a trustee or in which
he has a beneficial interest. All information with respect to beneficial
ownership has been furnished by the respective directors and officers.
(b) Includes full conversion of all outstanding shares of Series A Preferred
Stock into Common Stock at the current ratio of 1 for 10.
(c) Messrs. Cerce's and Porcaro's business address is 500 George Washington
Highway, Smithfield, Rhode Island 02917.
(d) Represents shares that may be acquired pursuant to presently exercisable
options.
(e) Mr. Carlotti's business address is 1500 Fleet Center, Providence, Rhode
Island 02903.
(f) Represents shares of Common Stock held by Mr. Carlotti and David J. Syner,
as trustees of the benefit of Mr. Cerce's children.
(g) Mr. Cronin's business address is 1 Federal Street, 21st Floor, Boston,
Massachusetts 02110. Includes 19,000 shares of Common Stock and 17,100
shares of Series A Preferred Stock held in the name of Weston Presidio
Capital II, L.P. of which Mr. Cronin is a general partner.
(h) Mr. Franklin's business address is 555 Theodore Fremd Avenue, Suite B-302,
Rye, New York 10580. Includes 4,750 shares of Series A Preferred Stock held
in the name of Marlin Capital, L.P., of which Mr. Franklin's majority-owned
company is the sole general partner.
26
<PAGE> 27
(i) Mr. Syner's business address is 35 Sockanesset Crossroads, Cranston, Rhode
Island 02920.
(j) The address of Weston Presidio Capital II, L.P. is 1 Federal Street, 21st
Floor, Boston, Massachusetts 02110.
(k) The address of St. Paul Fire and Marine Insurance Company is c/o St. Paul
Venture Capital, Inc., 8500 Normandale Lake Boulevard, Suite 1940,
Bloomington, Minnesota 55437.
(l) The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor,
Boston, Massachusetts 02110.
(m) The address of Marlin Capital, L.P. is 555 Theodore Fremd Avenue, Suite
B-302, Rye, New York 10580.
(n) The address of National City Capital Corporation is 1965 E. 6th Street,
Suite 1010, Cleveland, Ohio 44114.
(o) The Brahman Group includes Brahman Partners II, L.P., Brahman Institutional
Partners, L.P., B.Y. Partners, L.P. and Brahman Partners II Offshore Ltd.,
which are a "group" as that term is used in Section 13(d)(3) of the
Exchange Act of 1934, as amended (the "Exchange Act"). The address for
these shareholders is c/o Brahman Capital Corp., 277 Park Avenue, New York,
New York 10172.
(p) Includes 10,450 shares that may be acquired pursuant to options which are
or will become exercisable within 60 days.
All of the Company's shareholders are party to an agreement that requires
the parties thereto, subject to the right of the Preferred Holders to elect
additional directors in the event of the Company's default on certain covenants,
to vote to fix the number of directors of the Company at seven and elect as
directors two persons designated by the Preferred Holders and five persons
designated by certain management shareholders. See Item 13, "Certain
Relationships and Related Transactions -- Shareholders Agreement."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES OF RHODE ISLAND WAREHOUSE SITES
The Company has an operating lease agreement for warehouse facilities with
Sunrise Properties, LLC ("Sunrise Properties"), a Rhode Island limited liability
company, of which Mr. Porcaro and Linda Cerce, wife of Mr. Cerce and sister of
Mr. Porcaro, are members. The Company also has an operating lease agreement for
warehouse facilities with 299 Carpenter Street Associates, LLC, a Rhode Island
limited liability company of which Sunrise Properties and Messrs. Lallo and
Flynn are members. The leased properties are located at 4 Warren Avenue, North
Providence, Rhode Island and at 299 Carpenter Street, Providence, Rhode Island.
The present annual rental rates for the Warren Avenue and Carpenter Street
properties are $191,412 and $137,825, respectively. The Company is responsible
for real estate taxes and utilities. Each lease has a three year term ending on
December 31, 2001, and grants the Company an option to extend the lease for an
additional three year term at the greater of the then fair market rent or the
current rent adjusted for the cumulative increase in the consumer price index.
GUARANTY OF MORTGAGE NOTE
The Company has guaranteed a mortgage note payable by Sunrise Properties in
the aggregate amount of $200,000, the outstanding balance of which was
approximately $99,400 as of March 15, 2000. The mortgage note has a remaining
maturity of three years, and bears interest at a rate of 9.5% annually.
SHAREHOLDERS AGREEMENT
The Company, the current shareholders and Thomas McCarthy are parties to a
Tag-along, Transfer Restriction and Voting Agreement (the "Shareholders
Agreement") which requires the parties thereto, subject to the right of the
Preferred Holders to elect additional directors in the event of the Company's
default on certain covenants, to vote to fix the number of directors at seven
and to elect as directors two persons nominated by the Preferred Holders and
five persons nominated by the other parties to the Shareholders Agreement (the
"Management Shareholders"). In a related Letter Agreement, Weston Presidio
Capital II, L.P., a Preferred Holder, has agreed to use its best efforts to
cause the nomination of and to vote all of its shares of Series A Preferred
Stock for the election of Martin E. Franklin (or, in the event of his death or
incapacity, the designee of Marlin Capital, L.P.) as a director of the Company,
for so long as the Preferred Holders, in the aggregate, own at least 10% or
4,750 shares of Series A Preferred Stock.
27
<PAGE> 28
The Shareholders Agreement also provides that upon the death of a Management
Shareholder, the Company will purchase, at an appraised value determined by an
independent investment banker, all or a portion of the shares owned by the
Management Shareholder at his death. The Company has funded its obligations
under the Shareholders Agreement with life insurance policies on the lives of
the Management Shareholders in the aggregate amount of $27 million. The
Company's obligation to purchase shares upon the death of a Management
Shareholder is limited to the life insurance proceeds received upon the death of
such Management Shareholder. The Company may not decrease the amount of life
insurance coverage without the prior written consent of the affected Management
Shareholder.
The Shareholders Agreement terminates on the earlier of the following: (i)
the time immediately prior to the consummation of a Qualified Public Offering as
defined in the Articles of Incorporation or (ii) when no shares of the Series A
Preferred Stock and no warrants issuable to the Preferred Holders are
outstanding, except as a result of the conversion, exchange or exercise of the
Series A Preferred Stock or warrants.
OWNERSHIP OF PREFERRED SHARES OF FOSTER GRANT US BY LUMEN
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, issued Lumen 100 shares of Preferred Stock of Foster
Grant US (the "FG Preferred Stock") which represents all of the issued and
outstanding shares of FG Preferred Stock. By its terms, the FG Preferred Stock
is redeemable on February 28, 2000 (the "FG Redemption Date") by payment of an
amount ranging from $10,000 to $40,000 per share (the "FG Redemption Amount"),
determined with reference to the combined net sales of sunglasses, reading
glasses and accessories by Foster Grant US and the Company for the year ended
January 1, 2000, excluding an amount equal to the net sales by the Company for
such items for the year end December 31, 1996. The Company expects to redeem
these securities during the second quarter of fiscal 2000.
The Certificate of Incorporation of Foster Grant US also provides for early
redemption of the FG Preferred Stock if the Company completes either (i) an
initial public offering where the pre-money valuation of the Company equals or
exceeds $75.0 million, (ii) a merger or similar transaction where the
transaction value equals or exceeds $75.0 million or (iii) a private placement
of equity securities representing more than 50% of the outstanding capital stock
for consideration of not less than $37.5 million (each a "Redemption Event")
prior to the FG Redemption Date. Upon completion of a Redemption Event, in lieu
of the FG Redemption Amount, holders of FG Preferred Stock will receive a
payment ranging from $35,000 to $40,000 per share (the "Redemption Event
Amount"), to be determined with reference to, as the case may be, either the
pre-money valuation of the Company immediately prior to the initial public
offering or the proceeds of the merger or similar transaction or private equity
placement. If a Redemption Event occurs after the FG Redemption Date, in
addition to the FG Redemption Amount, holders of FG Preferred Stock will receive
a supplemental payment equal to the difference, if any, between the FG
Redemption Amount paid to such holders on the FG Redemption Date and Redemption
Event Amount that would have been received had the Redemption Event occurred on
or prior to the FG Redemption Date.
LEGAL SERVICES
Stephen J. Carlotti, a partner of Hinckley, Allen & Snyder, LLP, is a
director and the secretary of the Company and, as trustee, is the holder of 5.9%
of the Common Stock. Hinckley, Allen & Snyder, LLP, provides legal services to
the Company.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Financial Statements are listed in the index on Page F-1 of this Annual
Report.
(2) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1.1* Restated Articles of Incorporation of AAi.FOSTERGRANT, Inc.
3.1.2* Amended and Restated By-laws of AAi.FOSTERGRANT, Inc.
4.1* Indenture dated as of July 21, 1998, by and among
AAi.FOSTERGRANT, Inc. ("AAi"), its domestic subsidiaries named
therein (the "Guarantors") and IBJ Schroder Bank & Trust Company,
as Trustee, with respect to the Series A and Series B 10 3/4%
Senior Notes due 2006.
4.2* Purchase Agreement dated as of July 16, 1998, by and among AAi,
the Guarantors and NationsBanc Montgomery Securities LLC,
Prudential Securities Incorporated and BancBoston Securities Inc
9.1* Letter Agreement of Weston Presidio Capital II, L.P. regarding
voting of the Preferred Stock of AAi dated December 9, 1996.
9.2* Tag-Along Transfer Restriction and Voting Agreement among AAi,
Weston Presidio Capital, II, L.P. and certain other investors and
certain shareholders of the Company dated May 31, 1996, as
amended on December 11, 1996.
10.1* Second Amended and Restated Financing and Security Agreement by
and among AAi, certain of its Subsidiaries, NationsBank, N.A., as
agent, and other lenders party thereto, dated July 21, 1998.
10.1.1** First Amendment to Second Amended and Restated Financing and
Security Agreement dated as of May 7, 1999.
10.1.2 Second Amendment to Second Amended and Restated Financing and
Security Agreement dated as of March 24, 2000.
10.2* Agreement of Amendment, Termination & Modification between AAi,
Bolle, Inc., Foster Grant Group, LP and Foster Grant Holdings,
Inc. dated June 1998.
10.3* Stock Purchase Agreement by and among AAi, BEC Group, Inc.,
Foster Grant Group, L.P. and Foster Grant Holdings, Inc., dated
May 31, 1996, as amended by a side letter dated December 11,
1996.
10.4.1* Securities Purchase Agreement among AAi, Weston Presidio Capital
II, L.P. and certain other investors, dated May 31, 1996.
10.4.2* First Amendment to Securities Purchase Agreement among AAi,
Weston Presidio Capital II, L.P. and certain other investors,
dated October 1, 1998.
10.5* Registration Rights Agreement among AAi, Weston Presidio Capital
II, L.P. and certain other investors and certain shareholders of
the Company dated May 31, 1996, as amended on December 11, 1996.
10.6* Incentive Stock Plan of AAi.+
10.7* Employment Agreement between AAi and Gerald F. Cerce dated May
31, 1996.+
10.8** Employment Agreement between AAi and John R, Ranelli dated July
19, 1999.+
10.9* Employment Agreement between AAi and John H. Flynn, Jr. dated May
31, 1996.+
10.10* Employment Agreement between AAi and Robert V. Lallo dated May
31, 1996.+
10.11* Employment Agreement between AAi and Felix A. Porcaro, Jr. dated
May 31, 1996.+
10.12* Supplemental Executive Retirement Plan between AAi and Gerald F.
Cerce dated September 29, 1994, as amended on December 29, 1995
and May 31, 1996.+
10.13* Executive Bonus Plan.+
10.14* Non-Qualified Excess 401(k) Plan.+
10.15 Employment Agreement between AAi and Mark D. Kost dated December
15, 1999.+
10.16 Employment Agreement between AAi and John R. Agre dated November
3, 1999.+
10.17 Employment Agreement between AAi and Joseph T. Barrell dated
September 15, 1999.+
21.1 Subsidiaries of AAi.
27.1 Financial Data Schedule for the fiscal year ended January 1,
2000.
</TABLE>
* Previously filed as an exhibit to the Company's Registration Statement No.
333-61119 on Form S-4 and by this reference is incorporated herein.
** Previously filed as an exhibit to the Company's Form 10-Q for the fiscal
quarter ended July 3, 1999 and by this reference incorporated herein.
+ Management or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None.
29
<PAGE> 30
AAI.FOSTERGRANT, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAI.FOSTERGRANT, INC.
Date: March 31, 2000 By: /s/ John R. Ranelli
------------------------------
John R. Ranelli
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ John R. Ranelli /s/ Mark D. Kost
- --------------------------------------- -------------------------------------------
John R. Ranelli Mark D. Kost
Director, President, and Chief Financial Officer
Chief Executive Officer (Principal Financial and Accounting Officer)
(Principal Executive Officer) Date: March 31, 2000
Date: March 31, 2000
/s/ Gerald F. Cerce /s/ Stephen J. Carlotti
- --------------------------------------- -------------------------------------------
Gerald F. Cerce, Chairman of the Board Stephen J. Carlotti, Director
Date: March 31, 2000 Date: March 31, 2000
/s/ Michael F. Cronin /s/ John H. Flynn, Jr.
- --------------------------------------- -------------------------------------------
Michael F. Cronin, Director John H. Flynn, Jr., Director
Date: March 31, 2000 Date: March 31, 2000
s/ Martin E. Franklin /s/ George Graboys
- --------------------------------------- -------------------------------------------
Martin E. Franklin, Director George Graboys, Director
Date: March 31, 2000 Date: March 31, 2000
</TABLE>
30
<PAGE> 31
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF JANUARY 2, 1999 AND JANUARY 1, 2000
TOGETHER WITH AUDITORS' REPORT
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF JANUARY 2, 1999 AND JANUARY 1, 2000 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31,
1997, JANUARY 2, 1999 AND JANUARY 1, 2000 F-3
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, SHAREHOLDERS' DEFICIT
AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1997,
JANUARY 2, 1999 AND JANUARY 1, 2000 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997,
JANUARY 2, 1999 AND JANUARY 1, 2000 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
</TABLE>
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of AAi.FosterGrant,
Inc. (a Rhode Island corporation) and subsidiaries as of January 2, 1999 and
January 1, 2000 and the related consolidated statements of operations,
redeemable preferred stock, shareholders' deficit and comprehensive income
(loss) and cash flows for each of the three years in the period ended January 1,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AAi.FosterGrant, Inc. and
subsidiaries as of January 2, 1999 and January 1, 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
January 1, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 1, 2000 (except with respect to
Matters discussed in Note 5, as to
Which the date is March 24, 2000)
F-1
<PAGE> 33
AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
JANUARY 2, JANUARY 1,
1999 2000
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 2,207 $ 2,289
Accounts receivable, less reserves of approximately $9,975 and $12,804 .... 29,317 22,231
Inventories ............................................................... 37,162 33,025
Prepaid expenses and other current assets ................................. 1,918 794
Deferred tax assets ....................................................... 3,743 3,743
--------- ---------
Total current assets .................................................... 74,347 62,082
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land ...................................................................... 1,233 1,233
Building and improvements ................................................. 5,211 5,386
Display fixtures .......................................................... 18,755 14,857
Furniture, fixtures and equipment ......................................... 8,209 11,166
Leasehold improvements .................................................... 2,824 2,834
Equipment under capital leases ............................................ 918 1,604
--------- ---------
37,150 37,080
LESS -- ACCUMULATED DEPRECIATION AND AMORTIZATION ............................ 19,607 17,688
--------- ---------
17,543 19,392
--------- ---------
OTHER ASSETS:
Advances to officers/shareholders ......................................... 69 74
Deferred costs ............................................................ 2,090 1,143
Deferred tax assets ....................................................... 5,319 5,319
Investments in affiliates ................................................. 1,337 1,291
Intangible assets, net of accumulated amortization of $2,725 and $4,095 ... 20,874 13,486
Other assets, net of accumulated amortization of $219 and $878 ............ 4,919 5,080
--------- ---------
34,608 26,393
--------- ---------
Total assets ............................................................ $ 126,498 $ 107,867
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable ................................... $ 2,576 $ 11,000
Redeemable preferred stock of a subsidiary ................................ -- 1,000
Current maturities of long-term obligations ............................... 626 902
Deferred compensation -- Current portion .................................. 30 10
Accounts payable .......................................................... 17,937 16,414
Accrued expenses .......................................................... 19,702 23,253
Accrued income taxes ...................................................... 2,130 2,104
--------- ---------
Total current liabilities ............................................... 43,001 54,683
--------- ---------
10 3/4% SERIES B SENIOR NOTES DUE 2006 ....................................... 75,000 75,000
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES ............................... 780 420
DEFERRED COMPENSATION, LESS CURRENT PORTION .................................. 1,448 1,662
COMMITMENTS AND CONTINGENCIES (NOTE 14)
REDEEMABLE PREFERRED STOCK OF A SUBSIDIARY ................................... 909 --
PREFERRED STOCK, $0.01 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 31,864
--------- ---------
SHAREHOLDERS' DEFICIT:
Common stock, $0.01 par value
Authorized -- 4,800,000 shares
Issued and outstanding -- 608,000 shares ................................ 6 6
Additional paid-in capital ................................................ 270 270
Accumulated other comprehensive items ..................................... (289) (122)
Accumulated deficit ....................................................... (23,489) (55,916)
--------- ---------
Total shareholders' deficit ............................................. (23,502) (55,762)
--------- ---------
Total liabilities and shareholders' deficit ............................. $ 126,498 $ 107,867
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE> 34
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
-----------
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
<S> <C> <C> <C>
NET SALES ............................................... $ 149,411 $ 160,325 $ 150,680
COST OF GOODS SOLD ...................................... 77,928 88,823 96,973
--------- --------- ---------
Gross profit ....................................... 71,483 71,502 53,707
SELLING EXPENSES ........................................ 43,589 49,315 41,645
GENERAL AND ADMINISTRATIVE EXPENSES ..................... 21,734 26,220 25,072
GOODWILL IMPAIRMENT LOSS ................................ -- -- 6,018
RESTRUCTURING CHARGE .................................... -- 2,600 --
--------- --------- ---------
Income (loss) from operations ...................... 6,160 (6,633) (19,028)
EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES ........... (63) (76) --
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY .. (83) (187) (91)
INTEREST EXPENSE ........................................ (4,214) (7,010) (10,250)
OTHER INCOME (EXPENSE), NET ............................. 177 753 (20)
--------- --------- ---------
Income (loss) before income tax expense and
dividends and accretion on preferred stock ......... 1,977 (13,153) (29,389)
INCOME TAX EXPENSE ...................................... (1,162) -- (36)
--------- --------- ---------
Net income (loss) before dividends and accretion on
preferred stock .................................... 815 (13,153) (29,425)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK .............. 2,496 2,779 3,002
--------- --------- ---------
Net loss applicable to common shareholders ......... $ (1,681) $ (15,932) $ (32,427)
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE APPLICABLE TO COMMON
SHAREHOLDERS ............................................ $ (2.76) $ (26.20) $ (53.33)
========= ========= =========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING ... 608,000 608,000 608,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 35
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A REDEEMABLE
CONVERTIBLE
PREFERRED STOCK
---------------------- COMMON STOCK ADDITIONAL
REDEMPTION ------------ PAID-IN
SHARES VALUE SHARES PAR VALUE CAPITAL
------ ----- ------ --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1996 .............. 43,700 $ 23,587 608,000 $ 6 $ 270
Dividends and accretion on Series A Preferred Stock -- 2,496 -- -- --
Foreign currency translation adjustment (not tax effected) -- -- -- -- --
Distributions to shareholders .............. -- -- -- -- --
Net income ............... -- -- -- -- --
Comprehensive income for the year ended December 31, 1997
-------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1997 ............. 43,700 26,083 608,000 6 270
Dividends and accretion on Series A Preferred Stock -- 2,779 -- -- --
Foreign currency translation adjustment(not tax effected) -- -- -- -- --
Net loss ............... -- -- -- -- --
Comprehensive loss for the year ended January 2, 1999
-------- -------- ------- -------- --------
BALANCE, JANUARY 2, 1999 ............. 43,700 28,862 608,000 6 270
Dividends and accretion on Series A Preferred Stock -- 3,002 -- -- --
Foreign currency translation adjustment (not tax effected) -- -- -- -- --
Net loss ............... -- -- -- -- --
Comprehensive loss for the year ended January 1, 2000
BALANCE, JANUARY 1, 2000 ............. 43,700 $ 31,864 608,000 $ 6 $ 270
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL COMPREHENSIVE
COMPREHENSIVE ACCUMULATED STOCKHOLDERS' NET INCOME
ITEMS DEFICIT DEFICIT (LOSS)
----- ------- ------- ------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31,1996 .............. $ 8 $ (5,565) $ (5,281) $ --
Dividends and accretion on Series A Preferred Stock -- (2,496) (2,496) --
Foreign currency translation adjustment (not tax effected) (86) -- (86) (86)
Distributions to shareholders .............. -- (311) (311) --
Net income ............... -- 815 815 815
--------
Comprehensive income for the year ended December 31, 1997 $ 729
-------- -------- -------- ========
BALANCE, DECEMBER 31, 1997 ............. (78) (7,557) (7,359) $ --
Dividends and accretion on Series A Preferred Stock -- (2,779) (2,779) --
Foreign currency translation adjustment(not tax effected) (211) -- (211) (211)
Net loss ............... -- (13,153) (13,153) (13,153)
--------
Comprehensive loss for the year ended January 2, 1999 $(13,364)
-------- -------- -------- ========
BALANCE, JANUARY 2, 1999 ............. (289) (23,489) (23,502) $ --
--------
Dividends and accretion on Series A Preferred Stock -- (3,002) (3,002) --
Foreign currency translation adjustment (not tax effected) 167 -- 167 167
Net loss ............... -- (29,425) (29,425) (29,425)
--------
Comprehensive loss for the year ended January 1, 2000 $(29,258)
-------- -------- -------- ========
BALANCE, JANUARY 1, 2000 ............. $ (122) $(55,916) $(55,762)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 36
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ......................................................... $ 815 $(13,153) $(29,425)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities, net of acquisitions --
Depreciation and amortization ............................................ 8,248 12,792 11,489
Goodwill impairment loss ................................................. -- -- 6,018
Equity in losses of investments in affiliates ............................ 63 76 --
Minority interest in income of consolidated subsidiary ................... 83 187 91
Loss on barter transaction ............................................... -- 187 --
Cumulative foreign currency translation adjustment ....................... (86) (211) 167
Amortization of deferred costs related to issuance of 10 3/4%
senior notes due 2006 .................................................... -- 212 551
Deferred interest on subordinated promissory notes payable ............... 282 140 --
Deferred taxes ........................................................... (339) -- --
Changes in assets and liabilities, net of acquisitions --
Accounts receivable ..................................................... (7,410) (7,706) 7,086
Inventories ............................................................. 3,797 (199) 4,137
Prepaid expenses and other current assets ............................... 912 73 747
Deferred costs .......................................................... -- (2,309) (251)
Accounts payable ........................................................ (5,323) (3,844) (1,523)
Accrued expenses ........................................................ (923) 10,006 3,551
Accrued income taxes .................................................... 1,481 (154) (26)
-------- -------- --------
Net cash provided by (used in) operating activities .................... 1,600 (3,903) 2,612
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received ........................................ (1,834) (9,464) --
Purchase of property, plant and equipment ................................. (7,583) (16,882) (10,475)
Advances to officers/shareholders ......................................... (1) (3,511) (5)
Decrease in investments in affiliates ..................................... 460 13 --
(Increase) decrease in other assets ....................................... (95) 91 (123)
-------- -------- --------
Net cash used in investing activities .................................. (9,053) (29,753) (10,603)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving note payable .................. 7,697 (25,022) 8,424
Proceeds from term note payable ........................................... -- 13,222 --
Payments on term note payable ............................................. -- (13,222) --
Payments on subordinated notes ............................................ -- (2,132) --
Proceeds from 10 3/4% senior notes due 2006 ............................... -- 75,000 --
Costs related to issuance of 10 3/4% senior notes due 2006 ................ -- (3,713) --
Proceeds from issuance of long-term obligations ........................... 8,943 -- --
Payments on long-term obligations ......................................... (7,551) (11,026) (333)
Payments on deferred compensation ......................................... (23) (23) (18)
Distributions to shareholders ............................................. (311) -- --
-------- -------- --------
Net cash provided by financing activities .............................. 8,755 33,084 8,073
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................... 1,302 (572) 82
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................. 1,477 2,779 2,207
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $ 2,779 $ 2,207 $ 2,289
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest ................................................................. $ 4,074 $ 3,936 $ 8,513
======== ======== ========
Income taxes ............................................................. $ 50 $ 597 $ 17
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Conversion of leasehold improvements to building improvements ............. $ -- $ 1,393 $ --
======== ======== ========
Acquisition of equipment under capital lease obligations .................. $ 361 $ 557 $ 249
======== ======== ========
Offset of advances to officers/shareholders against
subordinated promissory notes payable to officers/shareholders ............ $ -- $ 3,495 $ --
======== ======== ========
Increase in cash surrender value of officers life insurance
policy .................................................................... $ 263 $ 361 $ 213
======== ======== ========
Exchange of inventory for barter credits .................................. $ -- $ 947 $ --
======== ======== ========
Repayment of revolving note payable with term loan ........................ $ 5,972 $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During fiscal 1997 and 1998, the Company acquired Superior, Foster Grant UK
and Fantasma, as described in Note 2. These acquisitions are summarized as
follows -
Fair value of assets acquired, excluding cash ............................ $ 5,950 $ 15,672 $ --
Payments in connection with the acquisitions, net of cash
acquired ................................................................. (1,834) (9,464) --
-------- -------- --------
Liabilities assumed and notes issued ..................................... $ 4,116 $ 6,208 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 37
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a value-added
distributor of accessories, such as optical products, costume jewelry,
watches, clocks and other accessories, to mass merchandisers, variety
stores, chain drug stores and supermarkets in North America and the United
Kingdom.
The Company has incurred substantial losses from operations in the last two
fiscal years. For the year ended January 1, 2000, the Company incurred a
loss from operation of approximately $19.0 million and generated cash flows
from operations of $2.6 million. As of January 1, 2000, the Company had
accumulated deficit of approximately $55.8 million. The Company has not met
the financial covenants related to its Senior Credit Facility for the last
two fiscal years. The covenants under the Senior Credit Facility have been
renegotiated each of the last two years (see Note 5). Management has
initiated plans to reduce its operation losses and increase its cash flow
from operations. Failure to achieve these plans or comply with the revised
covenants under its Senior Credit Facility could have a material adverse
effect on the Company's results of operations and financial condition.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and
elsewhere in the notes to consolidated financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the results
of operations of the Company and its majority-owned subsidiaries. All
material intercompany balances and transactions have been eliminated
in consolidation.
(b) Change in Fiscal Year-End
During 1998, the Company elected to change its fiscal year-end from
December 31, to the Saturday closest to December 31.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---- ----
<S> <C> <C>
Finished goods $31,037 $29,695
Work-in-process and raw materials 6,125 3,330
----- -----
$37,162 $33,025
======= =======
</TABLE>
Finished goods inventory consists of material, labor and manufacturing
overhead.
F-6
<PAGE> 38
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(e) Advertising Costs
Advertising costs, which are included in selling expense, are expensed
when the advertisement first takes place. Advertising expense was
approximately $873,000, $1,061,000 and $2,010,000 for the years ended
December 31, 1997, January 2, 1999 and January 1, 2000, respectively.
Prepaid advertising production costs were $132,000 at January 2, 1999
and are included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. The Company had no prepaid
advertising production costs at January 1, 2000.
(f) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of these assets on the
straight-line basis over their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
ASSET CLASSIFICATION LIFE
<S> <C>
Building and improvements 20 years
Display fixtures 1-3 years
Furniture, fixtures and equipment 3-10 years
Leasehold improvements Term of lease
Equipment under capital leases Term of lease
</TABLE>
The Company has adopted the provisions of Statement of Position (SOP)
No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
(g) Intangible and Other Long-Lived Assets
Intangible assets consist of goodwill and trademarks, which are being
amortized on the straight-line basis over estimated useful lives of 10
to 40 years. Intangible assets primarily relate to the Company's
acquisitions of various businesses, as discussed in Note 2 to these
consolidated financial statements. In determining the estimated lives
of these intangible assets, the Company evaluates various factors
including but not limited to: nature of business, existing
distribution channels, brand recognition of acquired products,
customer base and length of time in which an acquired business has
been in existence. Amortization expense was approximately $1.1
million, $1.4 million and $1.4 million for the years ended December
31, 1997, January 2, 1999 and January 1, 2000, respectively.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for Impairment of Long-Lived Assets and For
Long-Lived Assets to Be Disposed Of, the Company reviews its
long-lived assets (which include intangible assets, deferred costs,
and property and equipment) for impairment as events and circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company evaluates the realizability of its long-lived assets based
on profitability and cash flow expectations for the related asset or
subsidiary. In December 1999, the Company determined that the future
cash flows related to the intangible assets of the watches and clocks
and certain jewelry product lines were less than their carrying value.
As a result, the Company recorded an impairment loss of approximately
$6.0 million relating to these intangibles.
(h) Revenue Recognition
The Company recognizes revenue from product sales, net of estimated
agreed-upon future allowances and anticipated returns and discounts,
taking into account historical experience, upon shipment to the
customer.
F-7
<PAGE> 39
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(i) 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 components of this charge, which is included
in the fiscal 1998 statement of operations, are as follows (in
thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
EXPENSES, EXPENSES,
RESTRUCTURING WRITE-DOWN FISCAL 1998 JANUARY 2, FISCAL 1999 JANUARY 1,
CHARGE OF ASSETS PAYMENTS 1999 PAYMENTS 2000
<S> <C> <C> <C> <C> <C> <C>
Severance accrual $1,084 $ - $430 $654 $649 $5
Write-down of assets to be
disposed 1,516 1,516 - - - -
----- ----- ---- ---- ---- --
$2,600 $1,516 $430 $654 $649 $5
====== ====== ==== ==== ==== ==
</TABLE>
The severance accrual represents severance payments due to 40 office
and distribution employees. Through January 1, 2000, all of these 40
employees were terminated and severance benefits of $1,079,000 were
paid. The remaining severance accrual at January 1, 2000 was $5,000,
which will be paid during fiscal 2000.
(j) 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 multiyear agreements. The Company may also
receive the previous vendor's merchandise from the customer in
connection with most of these agreements. In these situations, the
Company values this inventory at its fair market value, representing
the lower of cost or net realizable value, and records that value as
inventory. The Company sells this inventory through various
liquidation channels. Except as provided below, the excess costs over
the fair market value of the inventory received is charged to selling
expenses when incurred. The Company expensed customer acquisition
costs of approximately $1.6 million, $0.9 million and $0.6 million for
the years ended December 31, 1997, January 2, 1999 and January 1,
2000, respectively.
The excess costs over the fair market value of the inventory received
is capitalized as deferred costs and amortized over the agreement
period if the Company enters into a minimum purchase agreement with
the customer and the estimated gross profits from future minimum sales
during the term of the agreement are sufficient to recover the amount
of the deferred costs. During fiscal 1998 and 1999, the Company
capitalized approximately $2.3 million and $251,000 of these costs in
the accompanying consolidated balance sheets. No such costs were
capitalized during fiscal 1997. Amortization expense related to these
costs was approximately $219,000 and $1.2 million for the years ended
January 2, 1999 and January 1, 2000, respectively, and is included in
selling expenses in the accompanying statements of operations.
(k) Comprehensive Income (Loss)
The Company applies SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during the period from transactions and other
events and circumstances from nonowner sources. Differences between
comprehensive income (loss) and net income (loss) before dividends and
accretion on preferred stock represents the foreign currency
translation for all periods presented.
F-8
<PAGE> 40
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(l) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally accounts receivable. A
significant portion of its business activity is with domestic mass
merchandisers whose ability to meet their financial obligations is
dependent on economic conditions germane to the retail industry. During
recent years, many major retailers have experienced significant
financial difficulties and some have filed for bankruptcy protection;
other retailers have begun to consolidate within the industry. The
Company sells to certain customers in bankruptcy, as well as those
consolidating within the industry. To reduce credit risk, the Company
routinely assesses the financial strength of its customers and
purchases credit insurance as it deems appropriate.
(m) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and debt. The
carrying amounts of the Company's financial instruments, excluding the
10 3/4% Series B Senior Notes due 2006 (the Notes), approximate fair
value. The Company's Notes had a carrying value of approximately $75.0
million at January 2, 1999 and January 1, 2000. The Company has
determined the fair value of the Notes based on the current trading
prices to be approximately $25.5 million at January 1, 2000.
(n) Net Loss per Share
Basic net loss per share applicable to common shareholders was
determined by dividing net loss attributable to common shareholders by
the weighted average common shares outstanding during the period.
Diluted net loss per share applicable to common shareholders is the
same as basic net loss per share applicable to common shareholders, as
the effects of the Company's potential common stock equivalents are
antidilutive. Accordingly, options to purchase a total of 14,000,
12,000 and 39,350 common shares for fiscal 1997, 1998 and 1999,
respectively, have been excluded from the computation of diluted
weighted average shares outstanding. The 437,000 shares of common stock
issuable upon the conversion of the 43,700 shares of Series A
Redeemable Convertible Preferred Stock (Series A Preferred Stock) have
also been excluded for all periods presented, as they are antidilutive.
(o) Reclassifications
Certain balances from prior years have been reclassified to conform
with current year's presentation.
(p) New Accounting Pronouncements
In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of
FASB Statement No. 133, which defers the effective date of SFAS No. 133
to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not expect adoption of this
statement to have a significant impact on its consolidated financial
position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition, in December 1999. The Company is
required to adopt this new accounting guidance through a cumulative
charge to operations, in accordance with Accounting Principles Board
(APB) Opinion No. 20, Accounting Changes, no later than the second
quarter of fiscal 2000. The Company believes that the adoption of the
guidance provided in SAB No. 101 will not have a material impact on
future operating results.
F-9
<PAGE> 41
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(2) ACQUISITIONS
In June 1998, the Company acquired an 80% interest in Fantasma, LLC
(Fantasma) for approximately $4.1 million in cash. The remaining 20%
interest in Fantasma was held by a previous member of Fantasma. As a result
of the termination of the employment of this member, in April 1999, the
Company acquired this 20% interest effective September 1, 1999.
Accordingly, the Company currently holds 100% of the Fantasma member
interests. 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 consolidated results of operations or financial
condition. Another employee of Fantasma has options to acquire up to an
additional 3% interest if certain earnings targets for Fantasma are met in
fiscal 1998, 1999 and 2000.
The acquisition was accounted for using the purchase method; accordingly,
the results of operations of Fantasma from the date of acquisition are
included in the Company's consolidated statements of operations. The
purchase price was allocated based on the estimated fair market value of
assets and liabilities at the date of acquisition. In connection with the
purchase price allocation, the Company recorded approximately $4.6 million
of goodwill, which was being amortized ratably over 10 years. During 1999,
the Company determined that the remaining goodwill related to this
acquisition was impaired based on the Company's projections of future cash
flows related to this product line. Accordingly, the Company has recorded
an impairment of approximately $3.9 million (see Note 1g).
On March 5, 1998, the Company acquired certain assets and liabilities of
Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant
trademark in territories not previously owned, for approximately $5.5
million in cash. Foster Grant UK is a marketer and distributor of
sunglasses and reading glasses in Europe. The purchase price may be
increased by approximately $0.7 million in fiscal 1998 and 1999 based on
Foster Grant UK performance. Based on fiscal 1998 and 1999 activity, there
was no increase in the purchase price.
The acquisition has been accounted for using the purchase method of
accounting; accordingly, the results of operations of Foster Grant UK from
the date of the acquisition are included in the accompanying consolidated
statements of operations. The purchase price was allocated based on
estimated fair values of assets and liabilities at the date of acquisition.
In connection with the purchase price allocation, the Company recorded
goodwill of approximately $1.1 million, which is being amortized on the
straight-line basis over 20 years.
In July 1997, the Company acquired the assets of Superior Jewelry Company
(Superior), a distributor of costume jewelry to retail drug stores and
discount mass merchandisers in the United States. The Company paid
approximately $1.8 million in cash and assumed certain liabilities in the
amount of approximately $4.0 million. In addition, the purchase price had a
contingent element based on Superior's earnings during fiscal 1997 and
1998. Based on fiscal 1997 activity, the purchase price increased $0.9
million. This amount was accrued for as of December 31, 1997 and recorded
as additional goodwill. There was no increase in the purchase price based
on fiscal 1998 activity.
The acquisition was accounted for using the purchase method of accounting;
accordingly, the results of operations of Superior from the date of the
acquisition are included in the accompanying consolidated statements of
operations. The purchase price was allocated based on estimated fair values
of assets and liabilities at the date of acquisition. In connection with
the purchase price allocation, the Company recorded goodwill of
approximately $3.5 million, adjusted to include the additional purchase
price for fiscal 1997 activity, which is being amortized on the
straight-line basis over 10 years.
F-10
<PAGE> 42
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
The following unaudited pro forma summary information presents the combined
results of operations of the Company, Superior, Foster Grant UK and
Fantasma as if the acquisitions had occurred at the beginning of 1997 and
1998. This unaudited pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company, Superior, Foster Grant
UK and Fantasma had been a single entity, nor is it necessarily indicative
of the results of operations that may occur in the future. Anticipated
efficiencies from the consolidation of the Company, Superior, Foster Grant
UK and Fantasma have been excluded from the amounts included in the
unaudited pro forma summary presented below:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 31, JANUARY 2,
1997 1999
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $181,992 $166,457
Net loss applicable to common shareholders (1,794) (16,285)
Basic and diluted net loss per share
applicable to common shareholders (2.95) (26.78)
</TABLE>
(3) INCOME TAXES
Income taxes are provided using the liability method of accounting in
accordance with SFAS No. 109. A deferred tax asset or liability is recorded
for all temporary differences between financial and tax reporting. Deferred
tax expense (benefit) results from the net change during the year of the
deferred tax asset and liability.
The components of the income tax benefit (expense) are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 1,
-----------------------------------------
1997 1999 2000
<S> <C> <C> <C>
Current -
Federal .................... $ (700) $ -- $ --
State ...................... (124) (33) 6
Foreign .................... -- -- 36
-------- -------- --------
(824) (33) 42
Deferred -
Federal .................... (286) (3,054) (9,042)
State ...................... (52) (625) (1,281)
-------- -------- --------
(338) (3,679) (10,323)
-------- -------- --------
Increase in valuation allowance -- 3,712 10,317
-------- -------- --------
$ (1,162) $ -- $ 36
======== ======== ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 31, JANUARY 2, JANUARY 1,
----------------------------------------
1997 1999 2000
<S> <C> <C> <C>
Income tax provision at federal statutory
rate 34.0% (34.0)% (34.0)%
Increase (decrease) in tax resulting from
State tax provision, net of federal
benefit .............................. 6.0 (4.1) (2.9)
Foreign .............................. -- (1.5) 0.1
Nondeductible expenses ............... 18.7 1.5 1.8
Increase in valuation allowance and
other, net ........................... -- 38.1 35.0
---- ---- ----
Actual effective tax rate expense ....... 58.7% --% --%
---- ---- ----
</TABLE>
F-11
<PAGE> 43
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
Deferred income taxes relate to the following temporary differences (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
<S> <C> <C>
Nondeductible reserves ................. $ 5,486 $ 7,318
Nondeductible accruals ................. 1,107 2,199
Customer acquisition costs ............. (1,226) (1,716)
Net operating loss carryforwards ....... 421 --
Other .................................. (119) 21
-------- --------
Gross deferred tax assets ......... 5,669 7,822
Less -- Valuation allowance ............ (1,926) (4,079)
-------- --------
Net current deferred tax assets ... $ 3,743 $ 3,743
======== ========
Net operating loss carryforwards ....... $ 7,455 $ 13,454
Tax basis of property and equipment .... 382 414
Goodwill amortization .................. 218 2,353
Other .................................. 2 --
-------- --------
Gross long term deferred tax assets 8,057 16,221
Less -- Valuation allowance ............ (2,738) (10,902)
-------- --------
Net long term deferred tax assets . $ 5,319 $ 5,319
======== ========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be recognized. During
1999, based on the actual and anticipated results, the Company determined
that a greater valuation reserve was required. Accordingly, the Company
increased the valuation allowance by approximately $10.3 million. The
Company has approximately $39.6 million of net operating loss
carryforwards, which expire through 2019.
The Company was a Subchapter S corporation under Section 1362 of the
Internal Revenue Code until May 31, 1996 when it issued Series A Preferred
Stock. As a Subchapter S corporation, the taxable income or loss of the
Company was passed through to the shareholders and reported on their
individual federal and certain state tax returns. Dividend distributions of
approximately $2.9 million in 1996 were made to the shareholders primarily
to fund payment of the taxes related to the Company's income. In addition,
$10.3 million of cash and $3.0 million of subordinated notes payable were
distributed to the shareholders in 1996 to distribute the previously
undistributed after-tax earnings. During 1997, a cash distribution of $0.3
million was made to the Subchapter S corporation shareholders to distribute
a portion of the remaining undistributed after-tax earnings.
The Company has entered into an indemnification agreement with the
shareholders of the Company prior to its conversion to a Subchapter C
corporation relating to potential income tax liabilities resulting from
adjustments to reported Subchapter S corporation taxable income. The
shareholders will continue to be liable for personal income taxes on the
Company's income for all periods prior to the time the Company ceased to be
a Subchapter S corporation, while the Company will be liable for all income
taxes subsequent to the time it ceased to be a Subchapter S corporation.
The indemnification agreement provides that the Company shall distribute to
the individual shareholders 40% of the amount of additional deductions
permitted to be taken by the Company after its conversion to a Subchapter C
corporation for expenditures made prior to becoming a Subchapter C
corporation, which result from adjustments in the form of a final
determination by tax authorities.
During fiscal 1998, the Company made advances to the Subchapter S
corporation shareholders to pay a portion of the income tax owed by them
with respect to the Company's Subchapter S corporation earnings resulting
from an income tax audit. The Company agreed to make advances to these
shareholders to pay their tax liabilities, the aggregate amount of which
was approximately $3.4 million. These advances are evidenced by promissory
notes and bear interest at an annual rate equal to the Applicable Federal
Rate (4.94% at January 1, 2000). Principal and accrued interest are payable
on demand. These advances and their related interest were offset against
the subordinated notes payable to shareholders that were due to these
shareholders of approximately $3.5 million. The remaining amounts have been
included in long-term other assets in the accompanying consolidated balance
sheets.
F-12
<PAGE> 44
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(4) REDEEMABLE NONVOTING PREFERRED STOCK OF A SUBSIDIARY
In connection with the purchase of Foster Grant US in December 1996, the
Company's wholly owned subsidiary, FG Holdings, issued 100 shares of FG
Preferred Stock, which represents all of the issued and outstanding shares
of FG Preferred Stock. The FG Preferred Stock was to be redeemed on
February 28, 2000 (the FG Redemption Date) by payment of an amount ranging
from $1.0 million to $4.0 million (the FG Redemption Amount), determined
based on the combined net sales of sunglasses, reading glasses and
accessories by Foster Grant US and the Company for the year ended January
1, 2000, excluding an amount equal to the net sales by the Company for such
items for the year ended December 31, 1996. Any increase in the redemption
amount will be recorded as goodwill. Based on the actual net sales for
fiscal 2000, the FG Redemption Amount has been determined to be $1.0
million. This amount will be paid to the FG Preferred Stockholders during
the second quarter of fiscal 2000. In addition to the FG Redemption Amount,
upon the occurrence of (i) an initial public offering where the pre-money
valuation of the Company equals or exceeds $75.0 million, (ii) a merger or
similar transaction where the transaction value equals or exceeds $75.0
million or (iii) a private placement of equity securities representing more
than 50% of the outstanding capital stock for consideration of not less
than $37.5 million, the FG Preferred Stockholders are entitled to receive a
supplemental payment ranging between $2.5 million to $3.0 million depending
on the transaction value.
The value of FG Preferred Stock was recorded as part of the initial
purchase of Foster Grant US and was based on the present value of
management's best estimate of the expected payment of $1.0 million upon
redemption. The accretion of the original value to the $1.0 million
estimated redemption value is being recorded as a charge to minority
interest in income of subsidiaries in the accompanying consolidated
statements of operations. Accretion of this discount for the years ended
December 31, 1997, January 2,1999 and January 1, 2000 was approximately
$75,000, $74,000 and $91,000, respectively.
(5) CREDIT FACILITIES WITH A BANK
In July 1998, the Company amended its credit facility with a bank (the Bank
Agreement). The amended facility provides for a $60.0 million revolving
credit facility, including a $3.0 million letter of credit facility. Use of
the proceeds from the facility are limited to refinancing existing term
debt, support letters of credit, fund working capital and finance permitted
acquisitions and tax distributions, as defined. In May 1999, the Company
entered into an amendment to its credit facility that modified the
financial covenants and waived noncompliance with the prior covenants.
Borrowings under the revolving credit arrangement are limited to the lesser
of $60.0 million or the borrowing base, which is defined as a percentage of
eligible accounts receivable and the lesser of (i) inventories or (ii)
$30.0 million less the interest rate protection reserve and the foreign
exchange exposure, reduced by outstanding letters of credit. Revolving
credit borrowings bear interest at the bank's prime rate (8.5% at January
1, 2000) plus 0.5% or LIBOR (5.82% at January 1, 2000) plus 2.25%. The
Company has the option of electing the rate; however, the use of LIBOR is
limited. The revolving credit facility expires in July 2003. As of January
1, 2000, the Company had approximately $13.8 million available under this
revolving credit facility.
If the Bank Agreement is terminated by the Company earlier than the
expiration date, the Company will be required to pay a termination fee of
$0.5 million if terminated within the first year, $0.3 million if
terminated within the second year and $0.1 million thereafter. The
termination fee will be waived if the debt is refinanced with the bank or
if repayment is from proceeds of the Company's initial public offering.
The credit facility is subject to certain restrictive covenants, including
a fixed charge coverage ratio, leverage ratio and minimum EBITDA. As of
January 1, 2000, the Company was not in compliance with the above financial
covenants. On March 24, 2000, the Company received a waiver for such
noncompliance from the Bank and has entered into a second amendment with
the Bank which modifies the covenants going forward so that they reflect
performance levels that the Company believes it can attain. Amounts due
under this credit facility are secured by the accounts receivable and
inventory of the Company and its domestic subsidiaries.
In November 1999, Foster Grant UK entered into a credit facility with a
different bank. The facility provides for a pound sterling 2.0 million
(approximately $3.2 million at January 1, 2000) overdraft line to finance
working capital. Repayments under this facility are
F-13
<PAGE> 45
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
fluctuating with interest at the bank's base rate (5.5% at January 1, 2000)
plus 1.25% if below the facility limit of pound sterling 2.0 million and
2.25% if in excess of the agreed limit. The facility expires in November
2000. The Company had no borrowings outstanding under this facility at
January 1, 2000 and, therefore, the related covenants were not in effect,
as they only become effective when the Company has borrowings outstanding.
(6) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at January 2, 1999 and
January 1, 2000 (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
<S> <C> <C>
Financing lease obligation, payable in monthly installments of principal and interest of $6,500
through September 2000, interest at 8.75% per annum, secured by certain office
equipment .......................................................................................... $ 126 $ 50
Capital lease obligation, payable in monthly installments of principal and interest of $10,903
through November 2000, interest at 9.0% per annum .................................................. 230 115
Promissory notes, payable in monthly installments of principal and interest through February 2000,
interest at 7.07% to 9.9% per annum, secured by certain factory equipment
55 5
Capital lease obligation, payable in monthly installments of principal and interest through November
2001, interest at 8.0% per annum ................................................................... 538 367
Financing lease obligations, payable in monthly installments of principal and interest through
January 2001, interest at 8.76% to 8.82% per annum, secured by certain factory
and office equipment ............................................................................... 433 235
Capital lease obligation, payable in monthly installments of principal and interest through November
2004, interest at 7.07% per annum, secured by certain equipment .................................... -- 249
Other .............................................................................................. 24 301
------ ------
1,406 1,322
Less -- Current maturities ......................................................................... 626 902
------ ------
$ 780 $ 420
====== ======
</TABLE>
Future maturities of the Company's long-term obligations as of January 1,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- ------
<S> <C>
2000 $902
2001 262
2002 49
2003 53
2004 56
------
$1,322
======
</TABLE>
(7) 10 3/4% SENIOR NOTES DUE 2006
On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A
Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds
of approximately $71.0 million received by the Company from the issuance
and sale of the Notes were used to repay outstanding indebtedness under the
credit facility with a bank and the Subordinated Promissory Notes to
shareholders, net of amounts due the Company from certain of these
shareholders. The Company incurred issuance costs of approximately $3.7
million in relation to the Notes. These costs are being amortized over the
life of the Notes and are included in other assets in the accompanying
consolidated balance sheets. In December 1998, the Notes were exchanged for
10 3/4% Series B Notes due 2006 registered with the SEC. Interest on the
Notes is payable semiannually on January 15 and July 15, commencing January
15, 1999.
The Notes are general unsecured obligations of the Company, rank senior in
right of payment to all future subordinated indebtedness of the Company and
rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of the Company, including the bank credit
facility described in Note 5. The bank credit facility is secured by
accounts receivable and inventory of the Company and its domestic
subsidiaries. Accordingly, the Company's obligations under the bank credit
facility
F-14
<PAGE> 46
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
will effectively rank senior in right of payment to the Notes to the extent
of the assets subject to such security interest. The Notes are fully and
unconditionally guaranteed, on a senior and joint and several basis, by
each of the Company's current and future Domestic Subsidiaries (as defined)
(the Guarantors). The Indenture under which the Notes were issued (the
Indenture) imposes certain limitations on the ability of the Company and
its subsidiaries to, among other things, incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase capital stock, make
investments, create liens, engage in transactions with shareholders and
affiliates, sell assets and engage in mergers and consolidations.
The Notes are redeemable at the option of the Company on or after July 15,
2002. The Notes will be subject to redemption at the option of the Company,
in whole or in part, at various redemption prices, declining from 105.375%
of the principal amount to par on and after July 15, 2004. In addition, on
or prior to July 15, 2001, the Company may use the net cash proceeds of one
or more equity offerings to redeem up to 35% of the aggregate principal
amount of the Notes originally issued at a redemption price of 110.750% of
the principal amount thereof plus accrued interest to the date of
redemption. Upon a change of control, each note holder has the right to
require the Company to repurchase such holder's Notes at a purchase price
of 101% of the principal amount plus accrued interest.
(8) DEFERRED COMPENSATION
The Company has deferred compensation agreements with several key
employees. The agreements provide for deferred compensation based on
increases in net book value, as defined, and for one executive, the cash
surrender value of a life insurance policy owned by the Company. The
amounts due under these agreements are payable in a lump sum or in annual
installments upon certain defined events. The Company incurred
approximately $200,000 in expense related to the insurance policy during
the years ended December 31, 1997, January 2, 1999 and none during the year
ended January 1, 2000. At January 1, 2000, the cash surrender value of the
life insurance policy was approximately $1.3 million and is included in
other assets in the accompanying consolidated balance sheet.
The Company also has an obligation to four former employees under a
nonqualified deferred compensation plan. Payments of principal and interest
are to be made monthly through August 2007. The obligation at January 1,
2000 was $83,000, of which $10,000 is due prior to December 30, 2000. These
amounts are included as deferred compensation in the accompanying
consolidated balance sheets.
(9) PREFERRED STOCK
The Company has 200,000 shares of preferred stock, $0.01 par value,
authorized and issuable in one or more series with such voting powers,
designations, preferences and other special rights and such qualifications,
limitations or restrictions as may be stated in the resolution or
resolutions adopted by the Company's Board of Directors providing for the
issue of such series and as permitted by the Rhode Island Business
Corporation Act. The Company has created one series of preferred stock
designated Series A Redeemable Convertible Preferred Stock (Series A
Preferred Stock). A total of 43,700 shares of Series A Preferred Stock are
designated for issuance, all of which are issued and outstanding.
In May 1996, the Company sold 34,200 shares of Series A Preferred Stock for
gross proceeds of $18.0 million. In connection with the acquisition of
Foster Grant US in December 1996, the Company issued an additional 9,500
shares of the Series A Preferred Stock for gross proceeds of $5.0 million.
The rights, preferences and privileges of Series A Preferred Stock, as
amended in June 1998, are as follows:
CONVERSION
Shares of the Series A Preferred Stock are convertible into common stock at
a rate of 10 shares of common stock for each share of Series A Preferred
Stock, adjustable for certain dilutive events. As amended by the Company's
shareholders in June 1998, conversion is at the option of the shareholder
but is automatic upon the consummation of an initial public offering
resulting in gross proceeds to the Company of at least $20.0 million and at
an offering price of at least 175% of the original conversion price.
F-15
<PAGE> 47
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
REDEMPTION
The holders of the Series A Preferred Stock have the right to require
redemption for cash of any unconverted shares, beginning June 30, 2002. The
Company will redeem the Series A Preferred Stock equal to 5% of the total
number of shares issued and outstanding as of March 31, 2002 on the last
day of each March, June, September and December, as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, PERCENTAGE
- -------------- ----------
<S> <C>
2002 15%
2003 35
2004 55
2005 75
2006 95
2007 100
</TABLE>
The Series A Preferred Stock will be redeemed at an amount equal to the
original stock price, $526.32 per share, plus accrued and unpaid dividends
yielding a 10% compounded annual rate of return (the Redemption Amount).
Accordingly, the Series A Preferred Stock has been recorded at its
redemption value in the accompanying consolidated balance sheets.
The holders of the Series A Preferred Stock may require the Company to
redeem all or any portion of the Series A Preferred Stock upon certain
events such as the sale, merger or dissolution of the Company. In addition,
the Company may voluntarily redeem the Series A Preferred Stock at the
Redemption Amount, as defined above. If the Company voluntarily redeems the
Series A Preferred Stock, it must issue the holders of Series A Preferred
Stock a warrant to purchase common stock equal to the number of shares the
shareholder would have received upon conversion, at a strike price equal to
the redemption price at the time of redemption.
In connection with the proposed issuance of the Notes the preferred
shareholders agreed, in June 1998, to suspend their redemption rights until
91 days after the date that any Restrictive Indebtedness, as defined, is no
longer outstanding. Restrictive Indebtedness is defined as indebtedness
whose terms restrict the Company's ability to redeem, in whole or part, the
Series A Preferred Stock. Restrictive Indebtedness can not exceed $150.0
million or such greater amount as may be approved by the directors
designated by the preferred shareholders.
LIQUIDATION PREFERENCES
The holders of Series A Preferred Stock have preference in the event of a
liquidation, dissolution or winding up of the corporation equal to the
Redemption Amount. If the assets of the Company are insufficient to pay the
full preferential amounts to the holders of Series A Preferred Stock, the
assets shall be distributed ratably among such shareholders in proportion
to their aggregate liquidation preference amounts.
VOTING RIGHTS AND DIVIDENDS
The holders of the Series A Preferred Stock shall be entitled to vote on
all matters based on the number of votes equal to the number of shares into
which the shares of Series A Preferred Stock are convertible after December
1, 1996. The holders of a majority of the Series A Preferred Stock shares
are entitled to elect two directors. In certain events, defined as Remedy
Events, the number of directors of the Company automatically increases to
the minimum number sufficient to allow the holders of Series A Preferred
Stock to elect a majority of the directors. In June 1998, the preferred
shareholders agreed to change the definition of Remedy Events to reduce the
minimum amount of consolidated shareholders' equity that the Company is
required to maintain dollar for dollar by any payments of certain
subordinated notes payable to shareholders.
Dividends will not be paid on the common stock unless the Series A
Preferred Stock receives the same dividends that such shares would have
received had they been converted into common stock immediately prior to the
record date for such dividend.
F-16
<PAGE> 48
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(10) 1996 INCENTIVE STOCK PLAN
In May 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan)
under which it may grant incentive stock options (ISOs), nonqualified stock
options (NSOs), restricted stock and other stock rights to purchase up to
50,000 shares of common stock. In May 1999, the Company increased the
number of shares of common stock authorized for issuance under the Plan to
88,000. Under the Plan, ISOs may not be granted at less than fair market
value on the date of grant and vest in a method determined by the Board of
Directors, over a term not to exceed 10 years. All options have been
granted with exercise prices equal to the fair market value of the
Company's common shares, as determined by the Board of Directors. Stock
option activity for each of the three years in the period ended January 1,
2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL LIFE
---------------- -------------- ----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 8,000 $50.00 10.0
Granted 6,000 50.00 10.0
----- ----- ----
Outstanding, December 31, 1997 14,000 50.00 9.5
Canceled (2,000) 50.00 --
------ ----- ---
Outstanding, January 2, 1999 12,000 50.00 8.5
Granted 31,350 31.57 9.5
Canceled (4,000) 50.00 --
------ ----- ---
Outstanding, January 1, 2000 39,350 $35.32 9.1
====== ====== ===
Exercisable, December 31, 1997 14,000 $50.00 9.5
====== ====== ===
Exercisable, January 2, 1999 12,000 $50.00 8.5
====== ====== ===
Exercisable, January 1, 2000 18,450 $39.56 8.7
====== ====== ===
</TABLE>
Subsequent to January 1, 2000, the Board of Directors approved the grant of
additional options to purchase 34,624 shares of common stock at an exercise
price of $32.00 to certain employees. These options and 10,450 of the above
options are to vest upon the Company achieving an equity value of $90.0
million in a liquidity event, as defined. These options will be accounted
for under variable plan accounting. As of January 1, 2000, there was no
charge related to these options.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of
stock options granted to employees be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and elect the disclosure-only
alternative under SFAS No. 123.
In connection with the acquisition of Fantasma, the Company issued options
to two employees of Fantasma. The options provide that the employees may
purchase up to 13% of Fantasma at the fair market value based upon the
purchase price. Certain of these options contain performance criteria and,
therefore, will be accounted for as variable options. Based on fiscal 1998
and 1999 activity and the termination of one of the employees, options to
purchase 3% and 9%, respectively, of Fantasma had expired. Options to
purchase 1% of Fantasma remain outstanding at January 1, 2000, the vesting
of which is subject to the employee meeting certain performance criteria.
F-17
<PAGE> 49
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
Had compensation cost for the Company's and Fantasma's stock plans been
determined based on the fair value at the grant dates, as prescribed in
SFAS No. 123, the Company's net loss and net loss per share applicable to
common shareholders for the years ended December 31, 1997, January 2, 1999
and January 1, 2000 would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common
Shareholders (in thousands)-
As reported $(1,681) $(15,932) $(32,427)
Pro forma (1,806) (15,999) (32,563)
Net loss per share applicable to
common shareholders-
As reported $(2.76) $(26.20) $(53.33)
Pro forma (2.97) (26.31) (53.56)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable period: dividend yield of 0.0% for all
periods; volatility of 35.53% for all periods; risk-free interest rates of
5.77% for all options granted during fiscal 1997, 6.00% for all options
granted during fiscal 1998 and 5.68% for all options granted during fiscal
1999 and a weighted average expected option term of five years for all
periods. The weighted average fair value per share of options granted
during the years ended December 31, 1997 and January 1, 2000 was $20.60 and
$12.95, respectively. The weighted average grant date fair value for an
option to purchase a 1% membership interest in Fantasma granted during the
year ended January 2, 1999 was approximately $14,400.
(11) INVESTMENTS
(a) Hong Kong
The Company has an ownership interest in four entities in Hong Kong.
These entities provide various services to the Company and each other
in connection with purchasing and distributing products. The Company
accounts for these investments using the equity method. The net
investment in these entities is recorded as investment in affiliates in
the accompanying consolidated balance sheets. The following table
summarizes certain financial information for these entities (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Ownership Interest-
AAi Hong Kong Limited 49% 49% 49%
Milagros (Far East) Limited 49 49 49
Honest Lion Limited 50 50 50
Milagros AAi Asia Limited 49 49 49
Sales to AAi $15,171 $10,215 $9,982
Equity in losses (63) (76) --
Investment balance 1,426 1,337 1,291
</TABLE>
The following table summarizes certain consolidated financial information
of the four Hong Kong entities (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current assets $5,687 $5,453 $5,911
Noncurrent assets 2,187 6,814 7,235
Current liabilities 9,978 8,165 7,419
Noncurrent liabilities 1,563 3,087 11,105
Net sales 37,037 22,193 30,532
Gross profit 1,876 5,273 4,735
(Loss) income from operations (129) (156) 204
Net loss (129) (156) --
</TABLE>
F-18
<PAGE> 50
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(b) Mexico
In 1996, the Company acquired a 50% ownership in AAi Joske's S.A. de
R.L. De CV (Joske's), an entity engaged in the purchasing and
distribution of accessories in Mexico for $0.5 million of inventory. In
January 1997, the Company acquired an additional 5% ownership interest
in Joske's and accordingly has consolidated its financial results in
the Company's consolidated financial statements subsequent to December
31, 1996. In 1999, the Company acquired an additional 20% ownership
interest in Joske's for a nominal amount. Based on the value of these
transactions and the related net book value of Joske's as of the dates
of acquisition, no goodwill was recorded. This additional 20% ownership
interest in Joske's may be bought back by the original investor based
on Joske's meeting its sales projections for 1999 and 2000, as defined.
If Joske's has not meet their sales projections and the option has not
been exercised by June 30, 2001, then AAi has the option to purchase
the remaining 25% of Joske's.
(12) EMPLOYEE BENEFIT PLANS
(a) Qualified 401(k) Plan
The Company has a defined contribution profit sharing plan covering
substantially all employees. Under the terms of the profit sharing
plan, contributions are made at the discretion of the Company. No
contributions were made for the years ended December 31, 1997, January
2, 1999 and January 1, 2000. The profit sharing plan also allows
eligible participants to make contributions in accordance with Internal
Revenue Code Section 401(k). The Company matches employee contributions
equal to 25% of the first 6% of compensation that an employee defers.
These matching contributions totaled approximately $95,000, $117,000
and $120,000 for the years ended December 31, 1997, January 2, 1999 and
January 1, 2000, respectively.
(b) Non-Qualified Excess 401(k) Plan
In May 1997, the Company established the Non-Qualified Excess 401(k)
Plan (the Non-Qualified Plan) effective as of June 1, 1997. The purpose
of the Non-Qualified Plan is to provide deferred compensation to a
select group of management or highly compensated employees of the
Company as designated by the Board of Directors. Under the
Non-Qualified Plan, a participant may elect to defer up to 15% of his
or her compensation on an annual basis. This amount is credited to the
employee's deferred compensation account (the Deferred Amount). Under
the Non-Qualified Plan, the Company also credits the participant's
deferred compensation account for the amount of the matching
contribution the Company would have made under the qualified 401(k)
plan with respect to the Deferred Amount. The matching contributions
totaled approximately $10,000, $13,000 and $28,000 for the years ended
December 31, 1997, January 2, 1999 and January 1, 2000, respectively.
All amounts contributed by the employee and by the Company under the
Non-Qualified Plan are immediately vested. A participant under the
Non-Qualified Plan is entitled to receive a distribution of his or her
account upon retirement, death, disability or termination of
employment.
(13) RELATED PARTY TRANSACTIONS
The Company has operating lease agreements with Sunrise Properties, LLC and
299 Carpenter Street Associates, LLC, of which certain officers and
shareholders of the Company are partners. The related rental expense
charged to operations was approximately $471,000, $471,000 and $329,000 in
the years ended December 31, 1997, January 2, 1999 and January 1, 2000,
respectively.
The Company has guaranteed a mortgage note payable by Sunrise Properties,
LLC aggregating $200,000. As of January 1, 2000, the outstanding balance of
this note was approximately $101,000.
In conjunction with the purchase of Foster Grant US, the Company entered
into a lease of the building from which FG Holdings operates with BEC, the
former owners of Foster Grant US. A member of the Marlin Capital, L.P. is
the chief executive officer of BEC and a director of the Company. The lease
was established in December 1996 and extends for one year with automatic
renewal for successive one-year periods unless either party provides
notice. Rent expense was approximately $494,000 and
F-19
<PAGE> 51
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
$165,000 in the year ended December 31, 1997 and January 2, 1999,
respectively. The Company terminated this lease as of January 2, 1999.
On May 31, 1996, the Company and its shareholders, including the management
shareholders (Management Shareholders), entered into a tag-along, transfer
restriction and voting agreement (the Shareholders Agreement). The
Shareholders Agreement requires that any Management Shareholder wishing to
transfer or sell common stock of the Company to provide right of first
refusal and tag-along rights, on a pro rata basis, as defined, to all other
shareholders' party to the Shareholders Agreement upon receipt of a
third-party offer to purchase the applicable restricted shares.
Upon the death of a Management Shareholder, the personal representative of
such Management Shareholder shall sell to the Company such Management
Shareholder's shares based on an appraisal value, as defined, provided that
the Company's obligation to purchase shares is limited to the amount of any
proceeds paid to the Company under insurance policies insuring the life of
the Management Shareholder.
The Shareholders Agreement shall terminate upon the earlier of a qualified
public offering, as defined, or when no shares of Series A Preferred Stock
and warrants are outstanding, except as a result of the conversion,
exchange or exercise of the Series A Preferred Stock or warrants.
(14) COMMITMENTS AND CONTINGENCIES
(a) Letters of Credit
At January 1, 2000, the Company had irrevocable letters of credit
outstanding for the purchase of inventory of approximately $43,000.
(b) Operating Leases
In addition to the operating leases described in Note 13, the Company
also has operating leases for its other locations. Future minimum
rental payments are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $306
2001 71
2002 72
2003 74
2004 77
Thereafter 26
----
$626
====
</TABLE>
The Company had an option to purchase its Smithfield, Rhode Island,
facility for $2.3 million. On February 10, 1998, the Company exercised
this option. During fiscal 1998, the Company expanded this facility
resulting in costs of the facility and expansion totaling approximately
$6.4 million.
(c) Royalties
The Company has several agreements that require royalty payments based
on a percentage of certain net product sales, subject to specified
minimum payments. Minimum royalty obligations relating to these
agreements as of January 1, 2000 totaled $ 1.5 million and $856,000 for
fiscal 2000 and fiscal 2001, respectively. In addition, certain of
these agreements require the Company pay additional fees based on a
percentage of net product sales. These fees are not subject to minimum
payment obligations. In the event the Company transfers its rights
under certain of these agreements, a transfer fee would be payable. At
January 1, 2000, the minimum aggregate transfer fee due would be no
less than $550,000.
F-20
<PAGE> 52
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(d) Supply Agreement
The Company has a supply agreement with a display manufacturer. The
agreement requires that the Company purchase 70% of Foster Grant US's
annual display purchases, as defined, from this supplier through
December 2005. If the Company does not purchase 70% of Foster Grant
US's displays from this manufacturer, it is required to make a payment
equal to 30% of the annual shortfall. In addition, the Company and BEC
are required to cumulatively purchase $32.3 million of displays over
the term of this agreement. To the extent that total purchases do not
meet this dollar level, the Company is required to make a payment equal
to 30% of $32.3 million, less the Company's purchases, BEC's purchases
and any amounts paid as a result of the annual shortfall discussed
above. As of January 1, 2000, no amounts were due under this agreement
as a result of a shortfall.
(e) Litigation
In the ordinary course of business, the Company is party to various
types of litigation, The Company maintains insurance to mitigate
certain of these risks. The Company believes it has meritorious
defenses to all claims, and, in its opinion, all litigation currently
pending or threatened will not have a material effect on the Company's
financial position or results of operations.
In November 1998, the Company reached a favorable settlement with a
customer related to the customer not honoring its purchase commitments
under a 1997 agreement. As a result of this settlement, the Company
received $950,000 for lost revenues. This settlement is included in
other income, net in the accompanying fiscal 1998 consolidated
statement of operations.
(15) SIGNIFICANT CUSTOMERS AND SUPPLIERS
During the years ended December 31, 1997, January 2, 1999 and January 1,
2000, one customer accounted for approximately 24.7%, 27.3% and 35.6% of
net sales, respectively. This customer's accounts receivable balance
represented approximately 32.4% and 44.2% gross accounts receivable as of
January 2, 1999 and January 1, 2000, respectively. In addition, another
customer accounted for approximately 11.4% of the Company's net sales for
the year ended January 2, 1999 and approximately 10.6% of gross accounts
receivable as of January 2, 1999. No other customer accounted for 10% or
more of the Company's net sales or gross accounts receivable for the
above-stated years.
The Company currently purchases a significant portion of its inventory from
certain suppliers in Asia. Although there are other suppliers of the
inventory items purchased and management believes that these suppliers
could provide similar inventory at fairly comparable terms, a change in
suppliers could cause a delay in the Company's distribution process and a
possible loss of sales, which would adversely affect operating results.
(16) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
--------- ---------
<S> <C> <C>
Accrued payroll and payroll related
items $2,164 $1,388
Accrued interest 3,636 3,764
Accrued royalties 2,190 2,242
Other accrued expenses 11,712 15,859
------ ------
$19,702 $23,253
======= =======
</TABLE>
F-21
<PAGE> 53
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(17) SEGMENT REPORTING
In July 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997.
The Company has determined it has three reportable segments: mass
merchandisers, chain drug stores/combo stores/supermarkets and variety
stores. The Company distributes accessories, such as costume jewelry,
optical products, watches, clocks and other accessories.
The Company's reportable segments are strategic business units that sell
the Company's products to distinct distribution channels. They are managed
separately because each business requires different marketing strategies.
The Company's approach is based on the way that management organizes the
segments within the enterprise for making operating decisions and assessing
performance.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains and losses.
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/COMBO
MASS STORES/
FISCAL 1997 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
----------- ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $84,343 $39,545 $16,243 $9,280 $149,411
======= ======= ======= ====== ========
Interest expense $2,379 $1,115 $458 $262 $4,214
====== ====== ==== ==== ======
Depreciation and amortization expense $4,775 $1,995 $1,010 $468 $8,248
====== ====== ====== ==== ======
Customer acquisition costs $1,043 $ -- $552 $ -- $1,595
====== ===== ==== ===== ======
Segment (loss) profit $(1,953) $6,099 $(2,711) $511 $1,946
======= ====== ======= ==== ======
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/COMBO
MASS STORES/
FISCAL 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
----------- ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $103,559 $29,801 $13,835 $13,130 $160,325
======== ======= ======= ======= ========
Interest expense $4,528 $1,303 $605 $574 $7,010
====== ====== ==== ==== ======
Depreciation and amortization expense $8,260 $1,777 $1,457 $1,298 $12,792
====== ====== ====== ====== =======
Customer acquisition costs $822 $ -- $50 $ -- $872
==== ===== === ===== ====
Segment (loss) profit $(9,013) $736 $(5,603) $237 (13,643)
======= ==== ======= ==== =======
</TABLE>
F-22
<PAGE> 54
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
CHAIN DRUG
STORES/COMBO
MASS STORES/
FISCAL 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
----------- ------------- ------------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $94,385 $28,762 $17,125 $10,408 $150,680
======= ======= ======= ======= ========
Interest expense $6,386 $1,979 $1,152 $733 $10,250
====== ====== ====== ==== =======
Depreciation and amortization expense $6,902 $1,955 $1,583 $1,049 $11,489
====== ====== ====== ====== =======
Customer acquisition costs $ -- $251 $ -- $ -- $251
===== ==== ===== ===== ====
Segment loss $(14,662) $(3,634) $(6,879) $(4,103) $(29,278)
======== ======= ======= ======= ========
</TABLE>
Revenue from segments below the quantitative thresholds are attributable to
five operating segments of the Company. Those segments include department
stores, armed forces' PX stores, boutique stores, gift shops, bookstores
and catalogues. None of these segments have ever met any of the
quantitative thresholds for determining reportable segments and their
combined results are presented as other.
Segment profit (loss) differs from the income (loss) before income tax
(expense) benefit and dividends and accretion on preferred stock by the
amount of equity in losses of investments in affiliates, minority interest
in income of consolidated subsidiary and other income, which are not
allocated by segment. Segment assets are not reviewed by the chief
operating decision maker.
Total assets specifically identifiable with each reportable segment are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2, JANUARY 1,
1997 1999 2000
---- ---- ----
<S> <C> <C> <C>
Mass merchandisers $13,244 $25,248 $19,730
Chain drug stores/combo
stores/supermarkets 6,128 6,368 3,495
Variety 2,351 1,246 2,708
Other 1,903 5,068 2,454
Unassigned assets 70,120 88,568 79,480
------ ------ ------
$93,746 $126,498 $107,867
======= ======== ========
</TABLE>
The following table identifies sales and long-lived assets by geographic
region. Sales are attributed to countries based on location of customer.
Assets are attributed based on location.
<TABLE>
<CAPTION>
1997 1998 1999
NET SALES NET SALES NET SALES
--------- --------- ---------
<S> <C> <C> <C>
United States $142,655 $144,540 $129,310
Canada 5,310 6,162 8,095
Europe -- 7,757 10,379
Mexico 1,446 1,866 2,896
----- ----- -----
Total $149,411 $160,325 $150,680
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
JANUARY 2, JANUARY 1,
1999 2000
---- ----
<S> <C> <C>
United States $49,112 $41,132
Canada 192 1,608
Europe 1,492 1,726
Asia 1,337 1,291
Mexico 18 28
------- -------
Total $52,151 $45,785
======= =======
</TABLE>
F-23
<PAGE> 55
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
(18) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The following is summarized consolidating financial information for the
Company, segregating the Company, wholly owned guarantor subsidiaries,
mostly owned subsidiaries and nonguarantor 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. Prior to September 1, 1999, the Company held an 80% interest in
Fantasma LLC ("Fantasma") and, accordingly, Fantasma was included as a
mostly owned subsidiary in the supplemental consolidating financial
information for such periods.
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 3, 1999, the assets of the Company's wholly owned
guarantor subsidiaries (other than Fantasma) were transferred to the
Company. Accordingly, the Company now performs all operations previously
performed by these wholly owned guarantor subsidiaries, the results of
which are included in the consolidating financial information for periods
ending after such date. Effective September 1, 1999, the Company acquired
100% of the interest of Fantasma, which is included as a wholly owned
subsidiary in the consolidating financial information for periods ending
after such date.
F-24
<PAGE> 56
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 2, 1999
-------------------------------------------------------------------------------------
WHOLLY
OWNED MOSTLY OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents ..... $ 68 $ 66 $ 104 $ 1,969 $ -- $ 2,207
Accounts receivable, net ...... 20,699 2 5,088 3,528 -- 29,317
Inventories ................... 28,643 -- 3,878 4,641 -- 37,162
Prepaid expenses and other
current assets ................ 1,403 132 203 180 -- 1,918
Deferred tax assets ........... 3,743 -- -- -- -- 3,743
--------- --------- --------- --------- --------- ---------
Total current assets ........ 54,556 200 9,273 10,318 -- 74,347
PROPERTY, PLANT AND EQUIPMENT, NET 16,206 -- 24 1,313 -- 17,543
OTHER ASSETS ..................... 41,512 7,652 4,357 402 (19,315) 34,608
--------- --------- --------- --------- --------- ---------
$ 112,274 $ 7,852 $ 13,654 $ 12,033 $ (19,315) $ 126,498
========= ========= ========= ========= ========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C> <C>
Borrowings under revolving note
payable ........................ $ 2,576 $ -- $ -- $ -- $ -- $ 2,576
Current maturities of long-term
obligations ................... 656 -- -- -- -- 656
Accounts payable ............... 10,961 998 406 2,534 -- 14,899
Accrued expenses ............... 16,726 5,622 1,554 968 -- 24,870
Due (from) to affiliate ........ -- 3,757 7,088 2,380 (13,225) --
--------- --------- --------- --------- --------- ---------
Total current liabilities .... 30,919 10,377 9,048 5,882 (13,225) 43,001
10 3/4% SENIOR NOTES .............. 75,000 -- -- -- -- 75,000
LONG-TERM OBLIGATIONS, LESS CURRENT
MATURITIES ........................ 2,228 -- -- -- -- 2,228
DEFERRED TAX LIABILITIES .......... -- -- -- -- -- --
SUBORDINATED PROMISSORY NOTES
PAYABLE TO SHAREHOLDERS ........... -- -- -- -- -- --
REDEEMABLE PREFERRED STOCK OF A
SUBSIDIARY ........................ -- -- -- -- 909 909
--------- --------- --------- --------- --------- ---------
PREFERRED STOCK ................... 28,845 926 -- -- (909) 28,862
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT) .... (24,718) (3,451) 4,606 6,151 (6,090) (23,502)
--------- --------- --------- --------- --------- ---------
$ 112,274 $ 7,852 $ 13,654 $ 12,033 $ (19,315) $ 126,498
========= ========= ========= ========= ========= =========
</TABLE>
F-25
<PAGE> 57
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 1, 2000
----------------------------------------------------------------------------
WHOLLY
OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents ..... $ 97 $ 8 $ 2,184 $ -- $ 2,289
Accounts receivable, net ...... 16,303 2,427 3,501 -- 22,231
Inventories ................... 28,743 -- 4,282 -- 33,025
Prepaid expenses and other
current assets ................ 400 41 353 -- 794
Deferred tax assets ........... 3,743 -- -- -- 3,743
--------- --------- --------- --------- ---------
Total current assets ........ 49,286 2,476 10,320 -- 62,082
PROPERTY, PLANT AND EQUIPMENT, NET 17,727 14 1,651 -- 19,392
OTHER ASSETS ..................... 43,334 -- 1,712 (18,653) 26,393
--------- --------- --------- --------- ---------
$ 110,347 $ 2,490 $ 13,683 $ (18,653) $ 107,867
========= ========= ========= ========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Borrowings under revolving note
payable ...................... $ 11,000 $ -- $ -- $ -- $ 11,000
Redeemable preferred stock of a
subsidiary ................... 1,000 -- -- -- 1,000
Current maturities of long-term
obligations .................. 569 -- 343 -- 912
Accounts payable .............. 15,364 209 841 -- 16,414
Accrued expenses .............. 22,545 1,075 1,798 (61) 25,357
Due (from) to affiliate ....... (590) 5,569 4,940 (9,919) --
--------- --------- --------- --------- ---------
Total current liabilities ... 49,888 6,853 7,922 (9,980) 54,683
10 3/4% SENIOR NOTES ............. 75,000 -- -- -- 75,000
LONG-TERM OBLIGATIONS, LESS
CURRENT MATURITIES ............... 1,878 -- 204 -- 2,082
PREFERRED STOCK .................. 31,864 -- -- -- 31,864
SHAREHOLDERS' EQUITY (DEFICIT) ... (48,283) (4,363) 5,557 (8,673) (55,762)
--------- --------- --------- --------- ---------
$ 110,347 $ 2,490 $ 13,683 $ (18,653) $ 107,867
========= ========= ========= ========= =========
</TABLE>
F-26
<PAGE> 58
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
WHOLLY
OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES ................................. $ 78,723 $ 63,992 $ 6,696 $ -- $ 149,411
COST OF GOODS SOLD ........................ 47,323 27,538 3,067 -- 77,928
--------- --------- --------- --------- ---------
Gross profit ......................... 31,400 36,454 3,629 -- 71,483
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 31,432 31,130 2,761 -- 65,323
--------- --------- --------- --------- ---------
Income (loss) from operations ........ (32) 5,324 868 -- 6,160
INTEREST EXPENSE .......................... (2,562) (1,613) (39) -- (4,214)
OTHER INCOME (EXPENSE), NET ............... 200 (49) (120) -- 31
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES ... 2,622 -- -- (2,622) --
--------- --------- --------- --------- ---------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred stock ..... 228 3,662 709 (2,622) 1,977
INCOME TAX (EXPENSE) BENEFIT .............. 587 (1,743) (6) -- (1,162)
--------- --------- --------- --------- ---------
Net income (loss) before
dividends and accretion on
preferred stock ...................... 815 1,919 703 (2,622) 815
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 2,496 -- -- -- 2,496
--------- --------- --------- --------- ---------
Net income (loss) applicable to
common shareholders .................. $ (1,681) $ 1,919 $ 703 $ (2,622) $ (1,681)
========= ========= ========= ========= =========
</TABLE>
F-27
<PAGE> 59
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 2, 1999
----------------------------------------------------------------------------------------
WHOLLY
OWNED MOSTLY OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES ............................. $ 89,832 $ 44,140 $ 10,306 $ 16,047 $ -- $ 160,325
COST OF GOODS SOLD .................... 54,566 19,887 6,712 7,658 -- 88,823
--------- --------- --------- --------- --------- ---------
Gross profit ..................... 35,266 24,253 3,594 8,389 -- 71,502
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE ............................... 40,362 28,235 2,747 6,791 -- 78,135
--------- --------- --------- --------- --------- ---------
Income (loss) from operations .... (5,096) (3,982) (847) 1,598 -- (6,633)
INTEREST EXPENSE ...................... (5,970) (586) (292) (162) -- (7,010)
OTHER INCOME (EXPENSE), NET ........... 612 16 2 (140) -- 490
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES (2,583) -- -- -- 2,583 --
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred stock . (13,037) (4,552) 557 1,296 2,583 (13,153)
INCOME TAX (EXPENSE) BENEFIT .......... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) before
dividends and accretion on
preferred stock .................. (13,037) (4,552) 557 1,296 2,583 (13,153)
DIVIDENDS AND ACCRETION ON PREFERRED
STOCK ................................. 2,779 -- -- -- -- 2,779
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to
common shareholders .............. $ (15,816) $ (4,552) $ 557 $ 1,296 $ 2,583 $ (15,932)
========= ========= ========= ========= ========= =========
</TABLE>
F-28
<PAGE> 60
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 1, 2000
-------------------------------------------------------------------------------------
WHOLLY
OWNED MOSTLY OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES ................................. $ 119,672 $ 4,665 $ 5,723 $ 20,620 $ -- $ 150,680
COST OF GOODS SOLD ........................ 76,809 4,163 5,528 10,473 -- 96,973
--------- --------- --------- --------- --------- ---------
Gross profit ......................... 42,863 502 195 10,147 -- 53,707
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 53,829 5,907 3,475 9,524 -- 72,735
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ........ (10,966) (5,405) (3,280) 623 -- (19,028)
INTEREST EXPENSE .......................... (9,718) (92) (209) (231) -- (10,250)
OTHER INCOME (EXPENSE), NET ............... 974 (25) (25) (1,035) -- (111)
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES ... (9,715) -- -- -- 9,715 --
--------- --------- --------- --------- --------- ---------
Income (loss) before income tax
(expense) benefit and dividends
and accretion on preferred stock ..... (29,425) (5,522) (3,514) (643) 9,715 (29,389)
INCOME TAX (EXPENSE) BENEFIT .............. -- -- -- (36) -- (36)
--------- --------- --------- --------- --------- ---------
Net income (loss) before
dividends and accretion on
preferred stock ...................... (29,425) (5,522) (3,514) (679) 9,715 (29,425)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 3,002 -- -- -- -- 3,002
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to
common shareholders .................. $ (32,427) $ (5,522) $ (3,514) $ (679) $ 9,715 $ (32,427)
========= ========= ========= ========= ========= =========
</TABLE>
F-29
<PAGE> 61
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
WHOLLY
OWNED NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES ........................ $ (4,119) $ 4,697 $ 1,022 $ -- $ 1,600
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................ (2,860) (4,686) (37) -- (7,583)
Acquisitions, net of cash acquired ....................... (1,834) -- -- -- (1,834)
Advances to affiliates ................................... (3,546) 1,594 -- 1,952 --
Other investing activities ............................... 952 (545) (43) -- 364
-------- -------- -------- -------- --------
Net cash used in investing activities .................. (7,288) (3,637) (80) 1,952 (9,053)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable .............. 11,826 (4,129) -- -- 7,697
Proceeds from issuance of subordinated promissory notes
payable to shareholders ................................. -- -- -- -- --
Proceeds from issuance of long-term obligations .......... 8,943 -- -- -- 8,943
Payments on long-term obligations ........................ (7,551) -- -- -- (7,551)
Proceeds from issuance of preferred stock, net of issuance
costs ................................................... -- -- -- -- --
Due to affiliates ........................................ 877 2,311 (1,236) (1,952) --
Other financing activities ............................... (334) -- -- -- (334)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities .... 13,761 (1,818) (1,236) (1,952) 8,755
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 2,354 (758) (294) -- 1,302
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. -- 941 536 -- 1,477
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $ 2,354 $ 183 $ 242 $ -- $ 2,779
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 2, 1999
-----------------------------------------------------------------------------
WHOLLY MOSTLY
OWNED OWNED NONGUARANTOR
COMPANY COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES ............ $(23,955) $ 19,698 $ (3,527) $ 3,881 $ -- $ (3,903)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .... (12,479) (792) (15) (3,596) -- (16,882)
Acquisitions, net of cash acquired ........... (9,464) -- -- -- -- (9,464)
Advances to affiliates ....................... (8,117) -- -- 113 8,004 --
Other investing activities ................... 6,154 (5,752) (15) (3,794) -- (3,407)
-------- -------- -------- -------- -------- --------
Net cash used in (provided by) investing
activities................................. (23,906) (6,544) (30) (7,277) 8,004 (29,753)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable .. (10,307) (14,715) -- -- -- (25,022)
Proceeds from term note payable .............. 13,222 -- -- -- -- 13,222
Proceeds on term note payable ................ (13,222) -- -- -- -- (13,222)
Proceeds from issuance of 10 3/4% senior notes 75,000 -- -- -- -- 75,000
Payments on subordinated notes ............... (5,487) -- -- 3,355 -- (2,132)
Payments on long-term obligations ............ (10,130) -- -- (896) -- (11,026)
Due to affiliates ............................ -- 1,444 3,588 2,972 (8,004) --
Other financing activities ................... (3,501) -- -- (235) -- (3,736)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 45,575 (13,271) 3,588 5,196 (8,004) 33,084
-------- -------- -------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS...................................... (2,286) (117) 31 1,800 -- (572)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 2,354 183 73 169 -- 2,779
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 68 $ 66 $ 104 $ 1,969 $ -- $ 2,207
======== ======== ======== ======== ======== ========
</TABLE>
F-30
<PAGE> 62
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 2, 2000
--------------------------------------------------------------------------------
WHOLLY MOSTLY
OWNED OWNED NONGUARANTOR
COMPANY COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES ......... $ 2,277 $ 2,698 $ (1,275) $ (1,088) $ -- $ 2,612
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment . (9,218) -- -- (1,257) -- (10,475)
Advances to affiliates .................... (1,046) -- -- -- 1,041 (5)
Other investing activities ................ (123) 12 (12) -- -- (123)
-------- -------- -------- -------- -------- --------
Net cash used in (provided by) investing
activities............................... (10,387) 12 (12) (1,257) 1,041 (10,603)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable 8,424 -- -- -- -- 8,424
Payments on long-term obligations ......... (351) -- -- -- -- (351)
Due to affiliates ......................... -- (2,702) 1,183 2,560 (1,041) --
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 8,073 (2,702) 1,183 2,560 (1,041) 8,073
-------- -------- -------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... (37) 8 (104) 215 -- 82
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 134 -- 104 1,969 -- 2,207
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..... $ 97 $ 8 $ -- $ 2,184 $ -- $ 2,289
======== ======== ======== ======== ======== ========
</TABLE>
F-31
<PAGE> 63
SCHEDULE II
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS FROM BALANCE AT END
PERIOD EXPENSES RESERVES(1) OTHER(2) OF PERIOD
<S> <C> <C> <C> <C> <C>
Accounts receivable -
December 31, 1997 ... $13,082 $27,477 $31,130 $ 909 $10,338
January 2, 1999 ..... 10,338 47,048 48,711 1,300 9,975
January 1, 2000 ..... 9,975 50,809 47,980 -- 12,804
Restructuring reserve -
December 31, 1997 ... $-- $-- $-- $-- $--
January 2, 1999 ..... -- 2,600 1,947 -- 654
January 1, 2000 ... 654 -- 649 -- 5
</TABLE>
(1) Amounts deemed uncollectible.
(2) Reserves related to accounts receivable acquired in acquisitions.
F-32
<PAGE> 1
Exhibit 10.1.2
SECOND AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND
SECURITY AGREEMENT (this "Agreement") is made as of the 24th day of March, 2000,
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");
BANK OF AMERICA, N.A., a national banking association ("Bank of
America"), formerly NationsBank, N.A., 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
BANK OF AMERICA, N.A., a national banking association (the "Agent"),
formerly NationsBank, N.A., in its capacity as both collateral and
administrative agent for each of the Lenders.
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 by that certain First Amendment to Second Amended and Restated
Financing and Security Agreement dated as of May 7, 1999 and as further 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 March 23, 2000 is
$__________.
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 valid and
2
<PAGE> 3
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's and Lenders' agreement to enter into
this Agreement and to grant the waivers granted herein, the Borrower hereby
agrees to pay to the Lender a fee in the amount of $150,000, which fee shall be
due at the time this Agreement is executed and is fully earned and
non-refundable upon payment.
5. As a condition to the Agent's and Lenders' agreement to enter into
this Agreement and to grant the waivers granted herein, the Borrower hereby
acknowledges that it has warranted to the Agent and the Lenders that on or
before March 31, 2000 the Borrower shall be in compliance with all reporting
requirements under Sections 6.1.1(a) through and including (h) of the Financing
Agreement. Without implying any limitation on the rights and remedies that the
Agent and the Lenders may have, if that warranty is breached on March 31, 2000
or any future reporting period, the Agent requires that the Borrowing Base
Reports reflect accounts receivable balances updated on a weekly basis from that
point forward.
6. The Financing Agreement is hereby amended as follows:
(a) The definition of "EBITDA" is hereby deleted in its entirety
and the following is substituted in its place:
"EBITDA" means for any period, the Consolidated Net
Income of the Borrower and its Subsidiaries for such period
after all expenses except depreciation, interest, amortization,
taxes and, for the fiscal year 2000 only, executive severance
expenses not to exceed the aggregate amount of $2,500,000.
(b) The definition of "Fixed Charges" is hereby deleted in its
entirety and the following is substituted in its place:
"Fixed Charges" means for any period of determination
thereof, the sum of (a) scheduled or required payments
(including, without limitation, principal and interest) on all
Indebtedness for Borrowed Money of the Borrower and its
Subsidiaries, plus (b) Capital Expenditures made in cash (and
Permitted Acquisitions to the extent not included in Capital
Expenditures) of the Borrower and its Subsidiaries, (c) plus
cash payments of taxes, plus (d) without duplication, dividends,
distributions, and repurchases, redemptions and other
transactions regarding equity paid to
3
<PAGE> 4
shareholders including, without limitation, Permitted Affiliate
Distributions, other than Permitted Affiliate Distributions made
by one Borrower to another Borrower.
(c) Section 2.3.1(d) is hereby deleted in its entirety and the
following is substituted in its place:
(d) Changes in the Applicable Margin shall
be made not more frequently than quarterly based on the
Borrower's Pricing Ratio, determined by the Agent in the
exercise of its sole and absolute discretion from the monthly
reports for months that are also the end of a fiscal quarter
required by Section 6.1.1(c) (Monthly Statements and
Certificates) (the first such determination shall be made
based on the Borrower's financial statements for the last
Business Day of the Borrower's fiscal quarter ending closest
to March 31, 2000) and shall be effective as of the first day
of the first month after the month in which the Agent receives
such statements. The Applicable Margin (expressed as basis
points) shall vary depending upon the Borrower's Pricing
Ratio, as follows:
<TABLE>
<CAPTION>
Applicable Margin for Applicable Margin for
Pricing Ratio LIBOR Revolving Loans Base Rate Revolving Loans
------------- --------------------- -------------------------
<S> <C> <C>
Greater than 1.00 to 1.00 275 100
but less than or equal to
1.05 to 1.00
----------------------------------------------------------------------------------------
Greater than 1.05 to 1.00 250 75
but less than or equal to
1.10 to 1.00
----------------------------------------------------------------------------------------
Greater than 1.10 to 1.00 225 50
but less than or equal to
1.15 to 1.00
----------------------------------------------------------------------------------------
Greater than 1.15 to 1.00 200 25
but less than or equal to
1.60 to 1.00
----------------------------------------------------------------------------------------
Greater than 1.60 to 1.00 175 0
----------------------------------------------------------------------------------------
</TABLE>
(d) Section 2.4.3(a) is hereby deleted in its entirety and the
following is substituted in its place:
(a) Eighteen Thousand Dollars ($18,000), plus
4
<PAGE> 5
(e) Section 6.1.13(a) is hereby deleted in its entirety and the
following is substituted in its place:
(a) 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 March 31, 2000, (i) for
the fiscal year-to-date for the periods ending closest to March
31, 2000, June 30, 2000, and September 30, 2000, and (ii)
thereafter, for the four (4) quarter period ending on such date,
of not less than the following:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Closest To: Ratio
--------------------------------- -----
<S> <C>
March 31, 2000 through and including December 31, 1.00 to 1.00
2000
------------------------------------------------------------------------------
March 31, 2001 through and including December 31, 1.10 to 1.00
2001
------------------------------------------------------------------------------
March 31, 2002 through and including December 31, 1.20 to 1.00
2002
------------------------------------------------------------------------------
March 31, 2003 and thereafter 1.35 to 1.00
------------------------------------------------------------------------------
</TABLE>
(f) Section 6.1.13(b) is hereby deleted in its entirety and the
following is substituted in its place:
(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 March 31, 2000, (i) for
the fiscal year-to-date (based upon annualized year-to-date
EBITDA) for the periods ending closest to March 31, 2000, June
30, 2000 and September 30, 2000 and (ii) thereafter, for the four
(4) quarter period ending on such date, so that it is not more
than the following:
5
<PAGE> 6
<TABLE>
<CAPTION>
Fiscal Quarter Ending Closest To: Ratio
--------------------------------- -----
<S> <C>
March 31, 2000 7.20 to 1.00
----------------------------------------------------------------------------
June 30, 2000 4.60 to 1.00
----------------------------------------------------------------------------
September 30, 2000 4.50 to 1.00
----------------------------------------------------------------------------
December 31, 2000 4.20 to 1.00
----------------------------------------------------------------------------
March 31, 2001 through and including December 31, 3.70 to 1.00
2001
----------------------------------------------------------------------------
March 31, 2002 through and including December 31, 3.30 to 1.00
2002
----------------------------------------------------------------------------
March 31, 2003 and thereafter 2.90 to 1.00
----------------------------------------------------------------------------
</TABLE>
(g) Section 6.1.13(c), is hereby deleted in its entirety and the
following is substituted in its place:
(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
March 31, 2000, (i) for the fiscal year-to-date for the periods
ending closest to March 31, 2000, June 30, 2000 and September 30,
2000 and (ii) thereafter, for the four (4) quarter period ending
on such date, of not less than the following:
6
<PAGE> 7
<TABLE>
<CAPTION>
Fiscal Quarter Ending Closest To: Amount
--------------------------------- ------
<S> <C>
March 31, 2000 $ 3,500,000
---------------------------------------------------------------------------------
June 30, 2000 $10,600,000
---------------------------------------------------------------------------------
September 30, 2000 $15,400,000
---------------------------------------------------------------------------------
December 31, 2000 $20,300,000
---------------------------------------------------------------------------------
March 31, 2001 through and including December 31, 2001 $22,400,000
---------------------------------------------------------------------------------
March 31, 2002 through and including December 31, 2002 $24,600,000
---------------------------------------------------------------------------------
March 31, 2003 and thereafter $27,100,000
---------------------------------------------------------------------------------
</TABLE>
(h) Section 6.2.7 is hereby deleted in its entirety and the
following is substituted in its place:
6.2.7 Capital Expenditures.
The Borrower, Foster Grant and Fantasma will not, directly or
indirectly (by way of the acquisition of the securities of a Person or
otherwise), make any Capital Expenditures (excluding, however, any Buybacks
otherwise included as a Capital Expenditure) in the aggregate for the Borrower,
Foster Grant and Fantasma (taken as a whole) in any fiscal year exceeding
$10,000,000, except the purchase and sale/leaseback of the Headquarters
Property, provided that the prior written consent of the Agent and Lenders is
obtained pursuant to Section 6.2.17 (Sale and Leaseback), which consent may be
conditioned upon the specific application of proceeds.
(i) Section 6.2.17 is hereby deleted in its entirety and the
following is substituted in its place:
6.2.17 Sale and Leaseback.
In the event the Borrower, Foster Grant or Fantasma seek to directly
or indirectly enter into any arrangement to sell or transfer all or any
substantial part of its fixed assets and thereupon or thereafter rent or lease
the assets so sold or transferred, the prior written consent of the Agent and
Lenders shall be obtained, which consent may be conditioned upon the specific
application of proceeds.
7. On the condition that the Borrower agrees by signing below that no
Permitted Senior Subordinated Note Purchases shall be made unless and until the
Lenders and Agent
7
<PAGE> 8
consent, the Lenders and the Agent hereby waive defaults under the following
provisions of the Financing Agreement which through 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 February 28, 2000
6.1.13(b) As of February 28, 2000
6.1.13(c) As of February 28, 2000
8. 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.
9. 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.
10. 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.
11. 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.
SIGNATURES BEGIN ON FOLLOWING PAGE
8
<PAGE> 9
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.)
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: FOSTER GRANT GROUP, L.P.
By: Bonneau General, Inc.
General Partner
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: FANTASMA, LLC
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: F.G.G. INVESTMENTS, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: THE BONNEAU COMPANY
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
9
<PAGE> 10
WITNESS: BONNEAU GENERAL, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: BONNEAU HOLDINGS, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: FOSTER GRANT HOLDINGS, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: O-RAY HOLDINGS, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Mark Kost
Chief Financial Officer
WITNESS: BANK OF AMERICA, N.A.
By:
- ---------------------------- ---------------------------(SEAL)
Gary W. Bartlett
Vice President
10
<PAGE> 11
WITNESS: BANK OF AMERICA, N.A.
in its capacity as a Lender
By:
- ---------------------------- ---------------------------(SEAL)
Gary W. Bartlett
Vice President
WITNESS: LASALLE BUSINESS CREDIT, INC.
By:
- ---------------------------- ---------------------------(SEAL)
Name:
Title:
WITNESS: PNC BUSINESS CREDIT
By:
- ---------------------------- ---------------------------(SEAL)
Name:
Title:
11
<PAGE> 1
EXHIBIT 10.15
December 15, 1999
Mr. Mark Kost
7 Grassy Lane
Westford, MA 01886
Dear Mark:
I am delighted to formally extend to you our offer to join the AAi.FosterGrant
team. As I am sure you heard from all of us, this is an exciting place to work
with lots of challenges and a great opportunity to contribute to the success of
the company!
This letter summarizes the offer of employment made to you by AAi.FosterGrant,
Inc. ("Company") and is valid until December 22, 1999.
1. POSITION: Chief Financial Officer.
2. REPORTING RELATIONSHIP: President & COO.
3. PRIMARY RESPONSIBILITIES: You have full responsibility for the Company's
finance and information services functions on a global basis.
4. BASE SALARY: Your base annual salary will be $217,000 paid in 52 weekly
installments.
5. BENEFITS: As a full time employee of the Company you will become eligible
for our benefits programs including, but not limited to:
- - Medical and Dental insurance
- - Life insurance
- - 401(k) program after one year of service
- - Paid vacation (3 weeks)
A summary of our current benefits is enclosed for your review.
6. ANNUAL BONUS: You will participate in the FY '01 performance bonus plan at
the 30% base salary level based equally on your attainment of personal
goals and the Company's performance against annual corporate business
goals. You will receive a bonus of $20,000 paid in April, 2000.
7. STOCK OPTIONS: Attachment A shall apply.
<PAGE> 2
8. PERFORMANCE REVIEW: In general, performance and salary reviews will be
effective as of one year from the date of hire.
9. SPECIAL PROVISIONS/SEVERANCE. Attachment C shall apply.
10. PROPRIETARY RIGHTS/NON-COMPETITION: Attachment B shall apply.
If you are in agreement with the foregoing, please signify by signing below.
Mark, I believe that you have the skills, experience, intellect and energy level
that will make you a successful team player at AAi.FosterGrant. I look forward
to your participation in this process and to working with you.
Sincerely, Agreed and Accepted:
/s/ John R. Ranelli /s/ Mark Kost
- ----------------------------- ------------------------------
John R. Ranelli Mark Kost
President/COO
Encl: Benefits Summary//I-9 Form
* AAi.Foster Grant verifies the identity and employment authorization of all new
hires, pursuant to the Immigration and Nationality Act. In order to comply with
this legal obligation, we must complete and Employment Eligibility form for your
review within three days of hire. Enclosed is an I-9 form for your review.
Please note that you will need to provide one document from "List A" OR one
document from "List B" AND one document from "List C" of the form. If you
anticipate having difficulty completing the I-9 form, please contact Lori
Gammino, AAi.FOSTER GRANT.
<PAGE> 3
ATTACHMENT A
STOCK OPTIONS
Pursuant to the provisions of the Company's Incentive Common Stock Option
Plan (a copy of which will be provided to you), the Company will grant to you at
the Board of Directors meeting following the commencement of your employment,
but in no event later than six (6) months following the commencement of your
employment, subject to the terms and conditions of the Plan and the Company's
form of Incentive Stock Option Agreement (copy of which will be provided to
you), the right and option to purchase from the Company all or any part of an
aggregate of 11,224 shares of the common stock ($.01 par value) of the Company
at a purchase price equal to $32.00 per share. The option shall vest upon an
initial public offering of the Company's common stock or the achievement by
Company of $20 million EBIT.
<PAGE> 4
ATTACHMENT B
PROPRIETARY RIGHTS/NON-COMPETITION AGREEMENT
For purposes of this Agreement, the following are collectively referred
to as "Company": AAi.FosterGrant, Inc. and any other corporation, entity or
person, now or hereafter controlled by, controlling or under common control
with Company. "I" shall mean Mark Kost.
I acknowledge that (1) Company is in the business of providing jewelry,
small leather goods, reading glasses and sunglasses and other accessories sales
and services to numerous customers, and expends significant resources in
developing, marketing and selling its services and products, and in developing
information which is not generally known to others and which is entitled to
protection from improper disclosure and use; (2) I will occupy a position of
special value to Company and, in the discharge of duties customary to that
position, I will have access to Company's vital and unique business information
which allows Company to gain a competitive edge over competitors; and (3) I will
have close, regular contact and relationships with Company's other employees
and, because of the personal nature thereof, such employees will develop
identification with me, rather than the Company itself, could create the
potential for my appropriation of such relationships developed on Company's
behalf and expense.
I further acknowledge that an essential element of maintaining Company's
relationships with its customers is the development and maintenance of personal
contacts with vendor and customer personnel who are responsible for obtaining
Company services and products and, towards that end, Company (1) encourages
employees, including me, to become personally acquainted with vendor and
customer personnel and (2) provides employees, including me, access to
information gathered by Company about vendors and customers. This policy
represents a significant, costly investment by Company, to the extent additional
manpower is necessary to develop such contacts and relationships and gather such
information. Because of the personal nature of such contacts and relationships,
Company's vendors and customers commonly develop identification with employees,
including me, rather than Company itself. Such identification creates potential
for my appropriation of the benefits of relationships developed with vendors and
customers on Company's behalf and expense.
In this Agreement, Company's information, data and knowledge is known as
Proprietary Materials. It includes such information, data and knowledge
developed or obtained by or on behalf of Company relating to, used in connection
with or reasonably likely to be useful to any of Company's businesses, ventures,
research, investigations or activities, including but not limited to all of
Company's products, discoveries, ideas, inventions, methods, improvements,
concepts, developments, methods, designs, drawings, works, processes, know-how,
computer programs, internal policies and procedures, vendors, customers,
contacts, prospects, financial information, business records, marketing
practices and any papers labeled "secret," "confidential," or "proprietary," as
well as any confidential information of any of Company's customers provided to
Company. I understand that each of the foregoing constitutes Proprietary
Materials even if conceived, made, developed, created or first reduced to
practice by me during my term of employment with Company, and whether or not (1)
I did so at the request or suggestion of Company, (2) they resulted from or were
suggested by any work that I have performed or may perform for Company, (3) I
did the work alone or in conjunction with others, (4) I did the work during
regular hours of work or otherwise, or at Company's place of business or
elsewhere, and (5) the Proprietary Materials are patentable or copyrightable by
me or someone else. Notwithstanding the foregoing, Company and I agree that
Proprietary Materials will not include any information, data or knowledge that I
can establish by written evidence as having been conceived, made or reduced to
practice by me which was created or conceived without use of Company resources,
outside of regular Company business hours and that is unrelated to or reasonably
unlikely to be useful to Company.
In order to provide greater comfort to Company that it can continue to
share its Proprietary Materials with me without fear of appropriation thereof,
and to clarify our common understanding concerning our mutual responsibilities,
I am entering into this Agreement. I have read it carefully so that I may
understand its importance.
<PAGE> 5
As a condition to my employment and continued employment, and in consideration
of the premises and the compensation that I accept in connection with such
employment, I agree as follows:
1. During my employment and thereafter, I shall not, in any way, directly
or indirectly, disclose or appropriate to my own use, or to the use of any party
other than Company, the Proprietary Materials. I shall use my best efforts to
protect the Proprietary Materials from disclosure or misuse, and inform an
executive officer of Company immediately upon learning of any improper
disclosure or misuse of Proprietary Materials by me or by any other employee or
person. I shall not copy or remove from Company's premises any media, papers,
drawings or models relating to or containing any of the Proprietary Materials,
except to the extent necessary in the course of such employment.
2. During the term of such employment and upon termination of my
employment, I shall promptly and fully disclose to an executive officer of
Company any Proprietary Materials of which I have knowledge.
3. The Proprietary Materials shall at all times be the exclusive property
of Company, although I am aware that in the absence of this Agreement I may have
been entitled to rights in some of the Proprietary Materials. Accordingly, I
agree that all Proprietary Materials consisting of writings or works (including
but not limited to computer software program codes) shall be considered works
made for hire under the copyright laws, and therefore owned by Company. So as to
assure Company's exclusive rights in the Proprietary Materials, I hereby assign,
transfer and give to Company my entire right, title and interest in and to the
Proprietary Materials, including but not limited to all rights throughout the
world and any renewals and extensions associated therewith. At the request of
Company, during the term of my employment and forever thereafter, I shall (a)
sign, verify, acknowledge, deliver and file any documents necessary or advisable
for Company to obtain ownership of the Proprietary Materials, including, at
Company's expense, the issuance of patents or copyrights to Company with respect
to the Proprietary Materials, and (b) otherwise assist Company in every
reasonable manner in obtaining any of its rights in the Proprietary Materials
(including but not limited to providing testimony at legal proceedings). I
hereby irrevocably appoint Company as my attorney-in-fact (which appointment
shall be deemed a power coupled with an interest) with full powers of
substitution and delegation, to execute, verify, acknowledge and deliver any
such documents.
4. Upon the termination of my employment for any reason, or if Company
shall request sooner, I shall promptly deliver to an executive officer of
Company all media, papers, drawings, models and other existing material in my
possession or control relating to or containing any of the Proprietary
Materials.
5. I shall not disclose to Company any knowledge, data or information
which, to my knowledge, another company may consider to be its confidential
information, trade secrets or proprietary information. I am not subject to any
other agreements, whether in writing or verbally, with anyone else that would
prohibit, restrict or interfere with my employment or fulfilling my obligations
under this Agreement.
6. Were I to leave the Company's employment and utilize my administrative,
financial, technological, marketing and sales skills in competition with
Company, the results would be materially adverse to Company. Accordingly, during
such employment and during the twelve (12) month period following the
termination of my employment with Company (the "non-competition period"), I
shall not engage in or carry on, in any way, directly or indirectly, either for
myself or as a member of a partnership or as a stockholder or investor (except
for ownership of securities, not exceeding 5% of any class, of a corporation
traded on a national securities exchange) or as an officer, director, employee,
agent, representative, advisor or consultant of any entity (other than Company),
any business similar to or competing with any business carried on by Company or
its successors at the time of the termination of my employment, or directly or
indirectly related to the Business and to which I have been exposed at any time
during such employment, in the United States or any other country in which
Company does business or engages in activities at the time of the termination of
such employment.
7. I shall not, during the non-competition period, in any way, directly or
indirectly (except in the course of such employment), call upon, solicit, advise
or otherwise do or attempt to do, business with any clients, customers or
accounts of Company with whom I had any dealings at any time during the course
of such employment, or take away or interfere or attempt to interfere with any
custom, trade, business or patronage of
<PAGE> 6
Company, or interfere with or attempt to interfere with any officers, employees,
representatives, advisors, consultants or agents of Company, or induce or
attempt to induce any of them to leave the service of Company or violate
agreements with it. At the termination of my employment, Company shall supply to
me a written listing of clients, customers or accounts of Company.
8. The foregoing shall be deemed to be a series of separate covenants, one
for each county of each state or territory of the United States and one for each
and every country in which Company does business or engages in activity. If a
court shall refuse to enforce all of such separate covenants, then such
unenforceable covenants shall be deemed eliminated for the purpose of such
proceedings to the extent necessary to permit the remaining separate covenants
to be enforced. If a court refuses to enforce any one or more of such separate
covenants because the time thereof is deemed to be excessive or unreasonable,
then such covenants, which would otherwise be unenforceable due to such
excessive or unreasonable period of time, shall be enforced for such lesser
period of time as deemed reasonable and not excessive by such court.
9. I shall comply with this Agreement even after the termination of my
employment for any reason, and I shall perform each and every obligation set
forth in this Agreement without any further payment or compensation to me,
except for any reasonable out-of-pocket expenses incurred at the request of
Company.
10. It is understood and agreed that any breach of this Agreement is
likely to result in irreparable injury to Company, and that the remedy at law
alone will be an inadequate remedy for such breach, in that in addition to any
other remedy Company may have, Company shall be entitled to enforce my specific
performance of this Agreement, and to seek both temporary and permanent
injunctive relief (to the extent permitted by law) without the necessity of
proving actual damages.
/s/ Mark Kost
-------------------------------------
Mark Kost
<PAGE> 7
ATTACHMENT C
SPECIAL PROVISIONS/SEVERANCE
1. This letter sets forth the terms of employment, and does not constitute
or promise employment for a specific term. Either you or we can terminate
employment for any reason. Notwithstanding the foregoing, if your employment is
terminated by Company for other than cause, then so long as you are in
compliance with the terms of this letter agreement, including all attachments.
Company shall pay to you a severance consisting of payments on the first
business day of each of the twelve (12) months immediately succeeding the date
of termination of your employment equal to 1/12th of your Base Salary in effect
on the date of termination. For purposes of the prior sentence, "cause" shall
mean: (a) your permanent disability under Company's long-term disability
insurance coverage; (b) failure to devote full time and best efforts to the
performance of your duties; (c) commission of an act of gross negligence,
dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or
breach of trust in the performance of your duties; (d) failure to observe the
agreements set forth in the agreements attached as Attachment B; (e) commit a
felony or act which, in the judgment of the Board of Directors of Company,
subjects you or Company to public disrespect, scandal or ridicule so as to
materially and adversely affect the utility of your services to Company; or (f)
refuse to perform duties assigned to you in good faith or violate or fail to
observe any lawful business instruction or lawful business policy established by
Company with respect to the operation of its business and affairs or fail to, or
refuse to, substantially perform your duties; and with respect to items (b) and
(f), after a written notice is delivered by Company, which specifically
identifies the manner in which you have become subject to termination for cause,
if not cured (if such matter is susceptible of cure) within twenty (20) days
after such written notice.
2. This Agreement shall be governed by and construed in accordance with
the laws of the State of Rhode Island, without regard to its Conflict of Laws
Rules. Employee agrees and consents to personal jurisdiction and service in
venue in any Federal or State Court within Rhode Island having subject matter
jurisdiction, for purposes of any action, suit or proceeding arising out of or
relating to this Agreement. Employee waives trial by jury in any such action,
suit or proceeding.
<PAGE> 1
EXHIBIT 10.16
November 3, 1999
Mr. John R. Agre
36 Highland Street
Weston, MA 02493
Dear John:
We are pleased that you have accepted employment with Aai.FosterGrant,
Inc. (the "Company"), and want to take this opportunity to set forth our
understanding with respect to your employment and compensation:
1. Title and Responsibilities: Executive Director International. To
report to the office of the CEO.
2. Compensation: See Attachment A.
3. Benefits: You shall be entitled to 3 weeks vacation and to participate in the
Company's insurance programs (including life and health insurance) and in any
ERISA benefit plans, all in accordance with Company's employee handbook. You
will be indemnified by the Company as provided in its By Laws, and the Company's
D & O insurance shall be applicable to you in accordance with its terms.
4. Confidentiality and Non-Competition Agreements: As a condition of employment,
you will sign and return to us prior to the first day of employment, the
Proprietary Rights Agreement attached as Attachment B and the Non-Competition
Agreement attached as Attachment C.
5. Special Provisions: See Attachment D.
If these compensation terms and benefits are acceptable, please so signify
by signing below on a copy of this letter and returning it to us. If you have
any questions, please do not hesitate to contact me.
We look forward to your joining the "AAi Team" and sharing in the future
success of the company. Please contact me to arrange for a mutually acceptable
start date.
Sincerely,
AAi.FosterGrant, Inc.
By /s/ John R. Ranelli
-------------------------------------
Title: President & COO
Agreed and Accepted:
/s/ John R. Agre
- ---------------------------------
John R. Agre
<PAGE> 2
ATTACHMENT A
COMPENSATION
1. Base Salary: $200,000/year
2. Bonus: You shall be eligible for and shall receive an annual cash bonus under
the Company's executive incentive compensation plan, subject to the discretion
of the Company's Board of Directors, of up to 30% of your Base Salary.
3. Stock Options: Pursuant to the provisions of the Company's Incentive Common
Stock Option Plan (a copy of which will be provided to you), the Company will
grant to you at the Board of Directors meeting following the commencement of
your employment, but in no event later than six (6) months following the
commencement of your employment, subject to the terms and conditions of the Plan
and the Company's form of Incentive Stock Option Agreement (a copy of which will
be provided to you), the right and option to purchase from the Company all or
any part of an aggregate of 6,000 shares of the common stock ($.01 par value) of
the Company at a purchase price equal to $32.00 per share. The option shall vest
upon an initial public offering of the Company's common stock or the achievement
by Company of $20 million EBIT.
4. Reimbursement: Within ten (10) days of the commencement of your employment
with the Company, you will be paid $30,000 partially on account of relocation
expenses you owe to your former employer (the "AAI Payment"), provided, however,
if your employment is terminated by you within twelve (12) months from the date
hereof, you shall reimburse Company for the AAI Payment as follows:
<TABLE>
<CAPTION>
Termination within Reimburse Company
------------------ -----------------
<S> <C>
3 months 100%
More than 3 months but less than 6 months 80%
More than 6 months but less than 9 months 50%
More than 9 months but less than 12 months 25%
</TABLE>
2
<PAGE> 3
ATTACHMENT B
PROPRIETARY RIGHTS AGREEMENT
For purposes of this Agreement, the following are collectively referred to
as "Company": AAi.FosterGrant, Inc. and any other corporation, entity or person,
now or hereafter controlled by, controlling or under common control with
Company.
I acknowledge that (1) Company is in the business of providing jewelry,
small leather goods, reading glasses and sunglasses and other accessories sales
and services to numerous customers, and has expended and continues to expend
significant resources in developing, marketing and selling its services and
products, and in developing information which is not generally known to others
and which is entitled to protection from improper disclosure and use; (2) I
occupy a position of special value to Company and, in the discharge of duties
customary to that position, have access to Company's vital and unique business
information which allows Company to gain a competitive edge over competitors;
and (3) I have close, regular contact and relationships with Company's other
employees and, because of the personal nature thereof, it is common for such
employees to develop identification with me, rather than the Company itself,
could create the potential for my appropriation of such relationships developed
on Company's behalf and expense.
I further acknowledge that an essential element of maintaining Company's
relationships with its customers is the development and maintenance of personal
contacts with customer personnel who are responsible for obtaining Company
services and products and, towards that end, Company (1) encourages employees,
including me, to become personally acquainted with customer personnel and (2)
provides employees, including me, access to information gathered by Company
about customers. This policy represents a significant, costly investment by
Company, to the extent additional manpower is necessary to develop such contacts
and relationships and gather such information. Because of the personal nature of
such contacts and relationships, Company's customers commonly develop
identification with employees, including me, rather than Company itself. Such
identification creates potential for my appropriation of the benefits of
relationships developed with customers on Company's behalf and expense.
In this Agreement, Company's information, data and knowledge is known as
Proprietary Materials. It includes such information, data and knowledge
developed or obtained by or on behalf of Company relating to, used in connection
with or reasonably likely to be useful to any of Company's businesses, ventures,
research, investigations or activities, including but not limited to all of
Company's products, discoveries, ideas, inventions, methods, improvements,
concepts, developments, methods, designs, drawings, works, processes, know-how,
computer programs, internal policies and procedures, suppliers, customers,
contacts, prospects, financial information, business records, marketing
practices and any papers labeled "secret," "confidential," or "proprietary," as
well as any confidential information of any of Company's customers provided to
Company. I understand that each of the foregoing constitutes Proprietary
Materials even if conceived, made, developed, created or first reduced to
practice by me during my term of employment with Company, and whether or not (1)
I did so at the request or suggestion of Company, (2) they resulted from or were
suggested by any work that I have performed or may
3
<PAGE> 4
perform for Company, (3) I did the work alone or in conjunction with others, (4)
I did the work during regular hours of work or otherwise, or at Company's place
of business or elsewhere, and (5) the Proprietary Materials are patentable or
copyrightable by me or someone else. Notwithstanding the foregoing, Company and
I agree that Proprietary Materials will not include any information, data or
knowledge that I can establish by written evidence as having been conceived,
made or reduced to practice by me and which was created or conceived without use
of Company resources, outside of regular Company business hours and that is
unrelated to or reasonably unlikely to be useful to Company.
In order to provide greater comfort to Company that it can continue to
share its Proprietary Materials with me without fear of appropriation thereof,
and to clarify our common understanding concerning our mutual responsibilities
in this connection, I am entering into this Agreement. I have read it carefully
so that I may understand its importance. As a condition to my employment and
continued employment, and in consideration of the premises and the compensation
that I accept in connection with such employment, I agree as follows:
1. During my employment and thereafter, I shall not, in any way, directly
or indirectly, disclose or appropriate to my own use, or to the use of any party
other than Company, the Proprietary Materials. I shall use my best efforts to
protect the Proprietary Materials from disclosure or misuse, and inform an
executive officer of Company immediately upon learning of any improper
disclosure or misuse of Proprietary Materials by me or by any other employee or
person. I shall not copy or remove from Company's premises any media, papers,
drawings or models relating to or containing any of the Proprietary Materials,
except to the extent necessary in the course of such employment.
2. During the term of such employment and upon termination of my
employment, I shall promptly and fully disclose to an executive officer of
Company any Proprietary Materials of which I have knowledge.
3. The Proprietary Materials shall at all times be the exclusive property
of Company, although I am aware that in the absence of this Agreement I may have
been entitled to rights in some of the Proprietary Materials. Accordingly, I
agree that all Proprietary Materials consisting of writings or works (including
but not limited to computer software program codes) shall be considered works
made for hire under the copyright laws, and therefore owned by Company.
4. So as to assure Company's exclusive rights in the Proprietary Materials,
I hereby assign, transfer and give to Company my entire right, title and
interest in and to the Proprietary Materials, including but not limited to all
rights throughout the world and any renewals and extensions associated
therewith. At the request of Company, during the term of my employment and
forever thereafter, I shall (a) sign, verify, acknowledge, deliver and file any
documents necessary or advisable for Company to obtain ownership of the
Proprietary Materials, including , at Company's expense, the issuance of patents
or copyrights to Company with respect to the Proprietary Materials, and (b)
otherwise assist Company in every reasonable manner in obtaining any of its
rights in the Proprietary Materials (including but not limited to providing
testimony at legal proceedings). I hereby irrevocably appoint Company as my
attorney-in-fact (which appointment shall be deemed a power coupled with an
interest) with full powers of substitution and delegation, to execute, verify,
acknowledge and deliver any such documents.
4
<PAGE> 5
5. Upon the termination of my employment for any reason, or if Company
shall request sooner, I shall promptly deliver to an executive officer of
Company all media, papers, drawings, models and other existing material in my
possession or control relating to or containing any of the Proprietary
Materials.
6. I shall not disclose to Company any knowledge, data or information
which, to my knowledge, another company may consider to be its confidential
information, trade secrets or proprietary information. I am not subject to any
other agreements, whether in writing or verbally, with anyone else that would
prohibit, restrict or interfere with my employment or fulfilling my obligations
under this Agreement.
7. I shall comply with this Agreement at all times, even after the
termination of my employment for any reason. I shall perform each and every
obligation set forth in this Agreement without any further payment or
compensation to me, except for any reasonable out-of-pocket expenses incurred at
the request of Company.
8. This Agreement shall be governed by and construed in accordance with the
laws of the State of Rhode Island, without regard to its conflict of laws rules.
I agree and consent to personal jurisdiction and service and venue in any
federal or state court within Rhode Island having subject matter jurisdiction,
for purposes of any action, suit or proceeding arising out of or relating to
this Agreement. I waive trial by jury in any such action, suit or proceeding.
/s/ John R. Agre
----------------------------------
John R. Agre
5
<PAGE> 6
ATTACHMENT C
NON-COMPETITION AGREEMENT
For purposes of this Agreement, the following are collectively referred to
as "Company": AAi.FosterGrant, Inc. and any other corporation, entity or person,
now or hereafter controlled by, controlling or under common control with
Company.
I acknowledge that (1) Company is in the business of providing jewelry,
small leather goods, sunglasses, reading glasses and other accessories sales and
services to numerous customers (the "Business"), and has expended and continues
to expend significant resources in developing, marketing and selling its
services and products, and in developing information which is not generally
known to others and which is entitled to protection from improper disclosure and
use; (2) I occupy a position of special value to Company and, in the discharge
of duties customary to that position, have access to Company's vital and unique
business information which allows Company to gain a competitive edge over
competitors; and (3) I have close, regular contact and relationships with
Company's other employees and, because of the personal nature of thereof it is
common for such employees to develop identification with me, rather than Company
itself, creating potential for my appropriation of such relationships developed
on Company's behalf and expense.
I further acknowledge that an essential element of maintaining Company's
relationships with its customers is the development and maintenance of personal
contacts with customer personnel who are responsible for obtaining Company
services and products and, towards that end, Company (1) encourages employees,
including me, to become personally acquainted with customer personnel and (2)
provides employees, including me, access to information gathered by Company
about customers. This policy represents a significant, costly investment by
Company, to the extent additional manpower is necessary to develop such contacts
and relationships and gather such information. Because of the personal nature of
such contacts and relationships, Company's customers commonly develop
identification with employees, including me, rather than Company itself. Such
identification could create the potential for my appropriation of the benefits
of relationships developed with customers on Company's behalf and expense.
In order to clarify our common understanding concerning our mutual
responsibilities in this connection, I am entering into this Agreement. I have
read it carefully so that I may understand its importance. As a condition to my
employment and continued employment, and in consideration of the premises and
compensation that I accept in connection with such employment, I agree as
follows:
1. Were I to leave the Company's employment and utilize my administrative,
technological, marketing and sales skills in competition with Company, the
results could be materially adverse to Company. Accordingly, during such
employment and during (a) the twelve (12) month period following the termination
of such employment by Company for cause pursuant to section 1 of Attachment D,
(b) the twelve (12) month period following the termination of such employment by
me or (c) the period following termination of such employment by Company without
such cause and during which I am receiving severance
6
<PAGE> 7
payments pursuant to section 1 of Attachment D, (collectively, the
"non-competition period"), whether or not such employment is terminated for any
reason, I shall not engage in or carry on, in any way, directly or indirectly,
either for myself or as a member of a partnership or as a stockholder or
investor (except for ownership of securities, not exceeding 5% of any class, of
a corporation traded on a national securities exchange) or as an officer,
director, employee, agent, representative, advisor or consultant of any entity
(other than Company), any business similar to or competing with any business
carried on by Company or its successors at the time of the termination of my
employment, or directly or indirectly related to the Business and to which I
have been exposed at any time during such employment, in the United States or
any other country in which Company does business or engages in activities at the
time of the termination of such employment.
2. I shall not, during the non-competition period, in any way, directly or
indirectly (except in the course of such employment), call upon, solicit, advise
or otherwise do or attempt to do, business with any clients, customers or
accounts of Company with whom I had any dealings at any time during the course
of such employment, or take away or interfere or attempt to interfere with any
custom, trade, business or patronage of Company, or interfere with or attempt to
interfere with any officers, employees, representatives, advisors, consultants
or agents of Company, or induce or attempt to induce any of them to leave the
service of Company or violate agreements with it. At the termination of my
employment, Company shall supply to me a written listing of clients, customers
or accounts of Company.
3. The foregoing shall be deemed to be a series of separate covenants, one
for each county of each state or territory of the United States and one for each
and every country in which Company does business or engages in activity. If a
court shall refuse to enforce all of such separate covenants, then such
unenforceable covenants shall be deemed eliminated for the purpose of such
proceedings to the extent necessary to permit the remaining separate covenants
to be enforced. If a court refuses to enforce any one or more of such separate
covenants because the time thereof is deemed to be excessive or unreasonable,
then such covenants, which would otherwise be unenforceable due to such
excessive or unreasonable period of time, shall be enforced for such lesser
period of time as deemed reasonable and not excessive by such court.
4. I shall comply with this Agreement during the non-competition period,
even after the termination of my employment for any reason, and I shall perform
each and every obligation set forth in this Agreement without any further
payment or compensation to me, except for any reasonable out-of-pocket expenses
incurred at the request of Company.
5. This Agreement shall be governed by and construed in accordance with
the laws of the State of Rhode Island, without regard to its conflict of laws
rules. I agree and consent to personal jurisdiction and service and venue in any
federal or state court within Rhode Island having subject matter jurisdiction,
for purposes of any action, suit or proceeding arising out of or relating to
this Agreement. I waive trial by jury in any such action, suit or proceeding.
/s/ John R. Agre
----------------------------------------
John R. Agre
7
<PAGE> 8
ATTACHMENT D
SPECIAL PROVISIONS
1. This letter sets forth the terms of employment, and does not constitute
or promise employment for a specific term. Either you or we can terminate
employment for any reason. Notwithstanding the foregoing, if your employment is
terminated by Company for other than cause, then so long as you are in
compliance with the terms of the agreements attached at Attachments B and C,
Company shall pay to you a severance consisting of payments on the first
business day of each of the twelve (12) months immediately succeeding the date
of termination of your employment equal to 1/12th of your Base Salary in effect
on the date of termination. For purposes of the prior sentence, "cause" shall
mean: (a) your permanent disability under Company's long-term disability
insurance coverage; (b) failure to devote full time and reasonable best efforts
to the performance of your duties; (c) commission of an act of gross negligence,
dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or
breach of trust in the performance of your duties; (d) failure to observe the
agreements set forth in the agreements attached as Attachments B and C,
respectively; (e) commit a felony or act which, in the judgment of the Board of
Directors of Company, subjects you or Company to public disrespect, scandal or
ridicule so as to materially and adversely affect the utility of your services
to Company; or (f) refuse to perform duties assigned to you in good faith or
violate or fail to observe any lawful business instruction or lawful business
policy established by Company with respect to the operation of its business and
affairs or fail to, or refuse to, substantially perform your duties; and with
respect to items (b) and (f), after a written notice is delivered by Company,
which specifically identifies the manner in which you have become subject to
termination for cause, if not cured (if such matter is susceptible of cure)
within twenty (20) days after such written notice. (For purposes of
clarification, "cause" shall not mean the failure of the international division
to achieve sales/profitability targets, absent the occurrence of any events or
circumstances set forth in items (a) through (f) of this section 1.)
2. This Agreement shall be governed by and construed in accordance with
the laws of the State of Rhode Island, without regard to its conflict of laws
rules. You agree and consent to personal jurisdiction and service and venue in
any federal or state court within Rhode Island having subject matter
jurisdiction, for purposes of any action, suit or proceeding arising out of or
relating to this Agreement. You waive trial by jury in any such action, suit or
proceeding.
8
<PAGE> 1
EXHIBIT 10.17
September 15, 1999
Mr. Joseph T. Barrell
17 Country Way
Shrewsbury, MA 01545
Dear Joe:
We are pleased that you have accepted employment with AAi.FosterGrant,
Inc. (the "Company"), and want to take this opportunity to set forth our
understanding with respect to your employment and compensation:
1. Title and Responsibilities: Executive Director Operations. To report to the
office of the CEO.
2. Compensation: See Attachment A.
3. Benefits: You shall be entitled to 3 weeks vacation and to participate in the
Company's insurance programs (including life and health insurance) and in any
ERISA benefit plans, all in accordance with Company's employee handbook.
4. Confidentiality and Non-Competition Agreements: As a condition of employment,
you will sign and return to us prior to the first day of employment, the
Proprietary Rights Agreement attached as Attachment B and the Non-Competition
Agreement attached as Attachment C .
5. Special Provisions: See Attachment D.
If these compensation terms and benefits are acceptable, please so
signify by signing below on a copy of this letter and returning it to us. If you
have any questions, please do not hesitate to contact me.
We look forward to your joining the "AAi Team" and sharing in the
future success of the the company. Please contact me to arrange for a mutually
acceptable start date.
Sincerely,
AAi.FosterGrant, Inc.
By /s/ John R. Ranelli
------------------------------------
Title: President & COO
Agreed and Accepted:
/s/ Joseph Barrell
- --------------------------------------
Joseph Barrell
<PAGE> 2
ATTACHMENT A
COMPENSATION
1. Base Salary: $240,000/year through 10/1/00
$250,000 (minimum)/year through 10/1/01
2. Bonus: You shall be eligible for and shall receive an annual cash bonus under
the Company's executive incentive compensation plan, subject to achieving
Company and personal objectives, of up to 30% of your Base Salary.
3. Stock Options: Pursuant to the provisions of Company's Incentive Common Stock
Option Plan (a copy of which will be provided to you), the Company will grant to
you, subject to the terms and conditions of the Plan and Company's form of
Incentive Stock Option Agreement (a copy of which will be provided to you), the
right and option to purchase from Company all or any part of an aggregate of
13,500 shares of the common stock ($.01 par value) of the Company at a purchase
price equal to $32.00 per share. The option shall vest upon an initial public
offering of the Company's common stock or the achievement by Company of $20
million EBIT.
3
<PAGE> 3
ATTACHMENT B
PROPRIETARY RIGHTS AGREEMENT
For purposes of this Agreement, the following are collectively referred to
as "Company": Company and any other corporation, entity or person, now or
hereafter controlled by, controlling or under common control with Company.
I acknowledge that (1) Company is in the business of providing jewelry,
small leather goods, reading glasses and sunglasses and other accessories sales
and services to numerous customers, and has expended and continues to expend
significant resources in developing, marketing and selling its services and
products, and in developing information which is not generally known to others
and which is entitled to protection from improper disclosure and use; (2) I
occupy a position of special value to Company and, in the discharge of duties
customary to that position, have access to Company's vital and unique business
information which allows Company to gain a competitive edge over competitors;
and (3) I have close, regular contact and relationships with Company's other
employees and, because of the personal nature thereof, it is common for such
employees to develop identification with me, rather than the Company itself,
creating potential for my appropriation of such relationships developed on
Company's behalf and expense.
I further acknowledge that an essential element of maintaining Company's
relationships with its customers is the development and maintenance of personal
contacts with customer personnel who are responsible for obtaining Company
services and products and, towards that end, Company (1) encourages employees,
including me, to become personally acquainted with customer personnel and (2)
provides employees, including me, access to information gathered by Company
about customers. This policy represents a significant, costly investment by
Company, to the extent additional manpower is necessary to develop such contacts
and relationships and gather such information. Because of the personal nature of
such contacts and relationships, Company's customers commonly develop
identification with employees, including me, rather than Company itself. Such
identification creates potential for my appropriation of the benefits of
relationships developed with customers on Company's behalf and expense.
In this Agreement, Company's information, data and knowledge is known as
Proprietary Materials. It includes such information, data and knowledge
developed or obtained by or on behalf of Company relating to, used in connection
with or useful to any of Company's businesses, ventures, research,
investigations or activities, including but not limited to all of Company's
products, discoveries, ideas, inventions, methods, improvements, concepts,
developments, methods, designs, drawings, works, processes, know-how, computer
programs, internal policies and procedures, suppliers, customers, contacts,
prospects, financial information, business records, marketing practices and any
papers labeled "secret," "confidential," or "proprietary," as well as any
confidential information of any of Company's customers provided to Company. I
understand that each of the foregoing constitutes Proprietary Materials even if
conceived, made, developed, created or first reduced to practice by me during my
term of employment with Company, and whether or not (1) I did so at the request
or suggestion of
4
<PAGE> 4
Company, (2) they resulted from or were suggested by any work that I have
performed or may perform for Company, (3) I did the work alone or in conjunction
with others, (4) I did the work during regular hours of work or otherwise, or at
Company's place of business or elsewhere, and (5) the Proprietary Materials are
patentable or copyrightable by me or someone else.
In order to provide greater comfort to Company that it can continue to
share its Proprietary Materials with me without fear of appropriation thereof,
and to clarify our common understanding concerning our mutual responsibilities
in this connection, I am entering into this Agreement. I have read it carefully
so that I may understand its importance. As a condition to my employment and
continued employment, and in consideration of the premises and the compensation
that I accept in connection with such employment, I agree as follows:
1. During the term of the employment contemplated by the Employment
Agreement to which this Agreement is attached and forever thereafter, I shall
not, in any way, directly or indirectly, disclose or appropriate to my own use,
or to the use of any party other than Company, the Proprietary Materials. I
shall use my best efforts to protect the Proprietary Materials from disclosure
or misuse, and inform an executive officer of Company immediately upon learning
of any improper disclosure or misuse of Proprietary Materials by me or by any
other employee or person. I shall not copy or remove from Company's premises any
media, papers, drawings or models relating to or containing any of the
Proprietary Materials, except to the extent necessary in the course of such
employment.
2. During the term of such employment and for one (1) year thereafter, I
shall promptly and fully disclose to an executive officer of Company any
Proprietary Materials of which I have knowledge.
3. The Proprietary Materials shall at all times be the exclusive property
of Company, although I am aware that in the absence of this Agreement I may have
been entitled to rights in some of the Proprietary Materials. Accordingly, I
agree that all Proprietary Materials consisting of writings or works (including
but not limited to computer software program codes) shall be considered works
made for hire under the copyright laws, and therefore owned by Company.
4. So as to assure Company's exclusive rights in the Proprietary Materials,
I hereby assign, transfer and give to Company my entire right, title and
interest in and to the Proprietary Materials, including but not limited to all
rights throughout the world and any renewals and extensions associated
therewith. At the request of Company, during the term of my employment and
forever thereafter, I shall (a) sign, verify, acknowledge, deliver and file any
documents necessary or advisable for Company to obtain ownership of the
Proprietary Materials, (b) cause the issuance of patents or copyrights to
Company with respect to the Proprietary Materials and (c) assist Company in
every reasonable manner in obtaining any of its rights in the Proprietary
Materials (including but not limited to providing testimony at legal
proceedings). I hereby irrevocably appoint Company as my attorney-in-fact (which
appointment shall be deemed a power coupled with an interest) with full powers
of substitution and delegation, to execute, verify, acknowledge and deliver any
such documents.
5
<PAGE> 5
5. Upon the termination of my employment for any reason, or if Company
shall request sooner, I shall promptly deliver to an executive officer of
Company all media, papers, drawings, models and other existing material in my
possession or control relating to or containing any of the Proprietary
Materials.
6. I shall not disclose to Company any knowledge, data or information which
another company may consider to be its confidential information, trade secrets
or proprietary information. I am not subject to any other agreements, whether in
writing or verbally, with anyone else that would prohibit or interfere with
fulfilling my obligations under this Agreement, or would have a bearing on my
employment.
7. I shall comply with this Agreement at all times, even after the
termination of my employment for any reason. I shall perform each and every
obligation set forth in this Agreement without any further payment or
compensation to me, except for any reasonable out-of-pocket expenses incurred at
the request of Company.
/s/ Joseph Barrell
------------------------------------
Joseph Barrell
6
<PAGE> 6
ATTACHMENT C
NON-COMPETITION AGREEMENT
For purposes of this Agreement, the following are collectively referred to
as "Company": Company and any other corporation, entity or person, now or
hereafter controlled by, controlling or under common control with Company.
I acknowledge that (1) Company is in the business of providing jewelry,
small leather goods, sunglasses, reading glasses and other accessories sales and
services to numerous customers (the "Business"), and has expended and continues
to expend significant resources in developing, marketing and selling its
services and products, and in developing information which is not generally
known to others and which is entitled to protection from improper disclosure and
use; (2) I occupy a position of special value to Company and, in the discharge
of duties customary to that position, have access to Company's vital and unique
business information which allows Company to gain a competitive edge over
competitors; and (3) I have close, regular contact and relationships with
Company's other employees and, because of the personal nature of thereof it is
common for such employees to develop identification with me, rather than Company
itself, creating potential for my appropriation of such relationships developed
on Company's behalf and expense.
I further acknowledge that an essential element of maintaining Company's
relationships with its customers is the development and maintenance of personal
contacts with customer personnel who are responsible for obtaining Company
services and products and, towards that end, Company (1) encourages employees,
including me, to become personally acquainted with customer personnel and (2)
provides employees, including me, access to information gathered by Company
about customers. This policy represents a significant, costly investment by
Company, to the extent additional manpower is necessary to develop such contacts
and relationships and gather such information. Because of the personal nature of
such contacts and relationships, Company's customers commonly develop
identification with employees, including me, rather than Company itself. Such
identification creates potential for my appropriation of the benefits of
relationships developed with customers on Company's behalf and expense.
In order to clarify our common understanding concerning our mutual
responsibilities in this connection, I am entering into this Agreement. I have
read it carefully so that I may understand its importance. As a condition to my
employment and continued employment, and in consideration of the premises and
compensation that I accept in connection with such employment, I agree as
follows:
1. Were I to leave the employment contemplated by the Employment Agreement
to which this Agreement is attached and utilize my administrative,
technological, marketing and sales skills in competition with Company, the
results would be materially adverse to Company. Accordingly, during such
employment and during the twelve (12) month period following the termination of
such employment (the "non-competition period"), whether or not such
7
<PAGE> 7
employment is terminated for any reason, I shall not engage in or carry on, in
any way, directly or indirectly, either for myself or as a member of a
partnership or as a stockholder or investor (except for ownership of securities,
not exceeding 5% of any class, of a corporation traded on a national securities
exchange) or as an officer, director, employee, agent, representative, advisor
or consultant of any entity (other than Company), any business similar to or
competing with any business carried on by Company or its successors, or directly
or indirectly related to the Business or to which I have been exposed at any
time during such employment, in the United States or any other country in which
Company does business or engages in activities at the time of the termination of
such employment.
2. I shall not, during the non-competition period, in any way, directly or
indirectly (except in the course of such employment), call upon, solicit, advise
or otherwise do or attempt to do, business with any clients, customers or
accounts of Company with whom I had any dealings at any time during the course
of such employment, or take away or interfere or attempt to interfere with any
custom, trade, business or patronage of Company, or interfere with or attempt to
interfere with any officers, employees, representatives, advisors, consultants
or agents of Company, or induce or attempt to induce any of them to leave the
service of Company or violate agreements with it.
3. The foregoing shall be deemed to be a series of separate covenants, one
for each county of each state or territory of the United States and one for each
and every country in which Company does business or engages in activity. If a
court shall refuse to enforce all of such separate covenants, then such
unenforceable covenants shall be deemed eliminated for the purpose of such
proceedings to the extent necessary to permit the remaining separate covenants
to be enforced. If a court refuses to enforce any one or more of such separate
covenants because the time thereof is deemed to be excessive or unreasonable,
then such covenants, which would otherwise be unenforceable due to such
excessive or unreasonable period of time, shall be enforced for such lesser
period of time as deemed reasonable and not excessive by such court.
4. I shall comply with this Agreement at all times, even after the
termination of my employment for any reason, and I shall perform each and every
obligation set forth in this Agreement without any further payment or
compensation to me, except for any reasonable out-of-pocket expenses incurred at
the request of Company.
/s/ Joseph Barrell
-------------------------------
Joseph Barrell
8
<PAGE> 8
ATTACHMENT D
SPECIAL PROVISIONS
This letter sets forth the terms of employment,
and does not constitute or promise employment for a specific term. Either you or
we can terminate employment for any reason. Notwithstanding the foregoing, if
(a) there shall occur a "change in control" (as such term is defined at Section
7(a) of the Company's Common Stock Incentive Stock Option Plan referred on
Attachment A) prior to an initial public offering of the common stock of
Company, and your duties or authority are materially reduced and you resign from
Company's employment or (b) your employment is terminated by Company for other
than cause, then so long as you are in compliance with the terms of the
agreements attached at Attachments B and C, Company shall pay to you a severance
consisting of payments on the first business day of each of the twelve (12)
months immediately succeeding the date of termination of your employment equal
to 1/12th of your Base Salary in effect on the date of termination. For purposes
of the prior sentence, "cause" shall mean: your permanent disability under
Company's long term disability insurance coverage; failure to devote full time
and best efforts to the performance of your duties; commission of an act of
gross negligence, dishonesty, fraud, gross insubordination, malfeasance,
disloyalty, bad faith or breach of trust in the performance of your duties;
failure to observe the agreements set forth in the agreements attached as
Attachments B and C, respectively; be accused of or commit a felony or act
which, in the judgment of the Board of Directors of Company, subjects you or
Company to public disrespect, scandal or ridicule so as to materially and
adversely affect the utility of your services to Company; or refuse to perform
duties assigned to you in good faith or violate or fail to observe any lawful
business instruction or lawful business policy established by Company with
respect to the operation of its business and affairs or fail to, or refuse to,
substantially perform your duties, after a written demand for substantial
performance is delivered by Company, which specifically identifies the manner in
which you have not substantially performed, if not cured within twenty (20) days
after such written demand.
9
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AAi.FOSTERGRANT, INC. ("AAI")
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Organization Shareholder
- ------------------ ---------------------------- -----------
<S> <C> <C>
Foster Grant Holdings, Inc.
("Holdings") Delaware Common - AAi
Preferred - Bolle, Inc.
The Bonneau Company Texas Holdings
Bonneau General, Inc. Delaware The Bonneau Company
Bonneau Holdings, Inc. Delaware The Bonneau Company
F.G.G. Investments, Inc. Delaware The Bonneau Company
O-Ray Holdings, Inc. Delaware Holdings
Foster Grant Group, L.P. Delaware 1% G.P. - Bonneau General Inc.
64% L.P. - Bonneau Holdings, Inc.
35% L.P. - O-Ray Holdings, Inc.
Fantasma, LLC Delaware AAi
Aai.FosterGrant of Canada Co. Nova Scotia AAi
Canada
Vendome Accessories Limited Nova Scotia 51% - Aai.FosterGrant of Canada Co.
Canada 49% - Place Vendome Accessories, Inc.
AAi.Foster Grant Limited United Kingdom AAi
AAi/JOSKE'S, S. de R.L. de C.V. Mexico 75% - AAi
25% - Joske's de Mexico, S.A. de C.V.
</TABLE>
#246831v3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 1, 2000 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE TWELVE MONTHS ENDED JANUARY 1, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE FORM
10-K FOR THE TWELVE MONTHS ENDED JANUARY 1, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<EXCHANGE-RATE> 1
<CASH> 2,289
<SECURITIES> 0
<RECEIVABLES> 35,035
<ALLOWANCES> 12,804
<INVENTORY> 33,025
<CURRENT-ASSETS> 62,082
<PP&E> 37,080
<DEPRECIATION> 17,688
<TOTAL-ASSETS> 107,867
<CURRENT-LIABILITIES> 54,683
<BONDS> 76,322
32,864
0
<COMMON> 6
<OTHER-SE> (55,768)
<TOTAL-LIABILITY-AND-EQUITY> 107,867
<SALES> 150,680
<TOTAL-REVENUES> 150,680
<CGS> 96,973
<TOTAL-COSTS> 96,973
<OTHER-EXPENSES> 72,735
<LOSS-PROVISION> 50,809
<INTEREST-EXPENSE> 10,250
<INCOME-PRETAX> (29,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,427)
<EPS-BASIC> (53.33)
<EPS-DILUTED> (53.33)
</TABLE>
