<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended April 1, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission File Number 333-61119
AAI.FOSTERGRANT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0419304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 GEORGE WASHINGTON HIGHWAY
SMITHFIELD, RI 02917
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(401) 231-3800
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES: [x] NO: [ ]
As of May 1, 2000, the aggregate market value of the voting equity held by
non-affiliates of the Registrant was none.
As of May 1, 2000, 608,000 shares of Common Stock and 43,700 shares of
Series A Preferred Stock of the Registrant were issued and outstanding.
<PAGE> 2
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
QUARTERLY REPORT
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
January 1, 2000 and April 1, 2000 1
Consolidated Condensed Statements of Operations
for the three months ended April 3, 1999 and
April 1, 2000 2
Consolidated Condensed Statements of Cash
Flows for the three months ended
April 3, 1999 and April 1, 2000 3
Notes to Consolidated Condensed Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and reports on Form 8-K 20
SIGNATURES 21
<PAGE> 3
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS JANUARY 1, APRIL 1,
2000 2000
---------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,289 $ 714
Accounts receivable less reserves of approximately $12,804 and $10,500 22,231 31,171
Inventories 33,025 35,863
Prepaid expenses and other current assets 794 571
Deferred tax assets 3,743 3,743
--------- ---------
Total current assets 62,082 72,062
--------- ---------
Property, plant and equipment, net 19,392 19,953
Intangible assets 13,486 13,322
Other assets 7,588 7,511
Deferred tax assets 5,319 5,319
--------- ---------
Total assets $ 107,867 $ 118,167
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 11,000 $ 18,575
Redeemable preferred stock of a subsidiary 1,000 1,000
Current maturities of long-term obligations 902 913
Deferred compensation - current portion 10 235
Accounts payable 16,414 22,184
Accrued expenses 23,253 21,912
Accrued income taxes 2,104 2,100
--------- ---------
Total current liabilities 54,683 66,919
--------- ---------
10 3/4% series B senior notes due 2006 75,000 75,000
Long-term obligations - less current maturities 420 813
Deferred compensation - less current portion 1,662 1,515
Preferred stock, $.01 par value --
Authorized -- 200,000 shares
Designated, issued and outstanding -- 43,700 shares of Series A
Redeemable Convertible Preferred
Stock, stated at redemption value 31,864 32,650
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value -- authorized --
4,800,000 shares issued and outstanding -- 608,000 shares 6 6
Additional paid-in capital 270 270
Accumulated other comprehensive loss (122) (170)
Accumulated deficit (55,916) (58,836)
--------- ---------
Total shareholders' deficit (55,762) (58,730)
--------- ---------
Total liabilities and shareholders' deficit $ 107,867 $ 118,167
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
1
<PAGE> 4
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
APRIL 3, APRIL 1,
1999 2000
-------- --------
<S> <C> <C>
NET SALES $ 41,481 $ 42,528
COST OF GOODS SOLD 23,814 23,581
-------- --------
Gross profit 17,667 18,947
OPERATING EXPENSES:
Selling 11,704 10,163
General and administrative 4,466 5,870
Restructuring charge -- 2,500
-------- --------
Income from operations 1,497 414
Interest expense (2,342) (2,597)
Other income, net 135 51
-------- --------
Loss before income tax expense and dividends and accretion on
preferred stock (710) (2,132)
Income tax expense -- --
-------- --------
Net loss before dividends and accretion on preferred stock (710) (2,132)
Dividends and accretion on preferred stock 718 787
-------- --------
Net loss applicable to common shareholders $ (1,428) $ (2,919)
======== ========
Basic and diluted net loss per share applicable to common
shareholders $ (2.35) $ (4.80)
Basic and diluted weighted average shares of common stock
outstanding 608,000 608,000
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE> 5
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
APRIL 3, APRIL 1,
1999 2000
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (710) $ (2,132)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 3,203 3,078
Amortization of interest costs related to debt 296 134
Equity in earnings of investments in affiliates (84) --
Minority interest in income of consolidated subsidiary 21 --
Cumulative foreign currency translation adjustment (153) (48)
Changes in assets and liabilities, net of acquisitions -
Accounts receivable (8,615) (8,940)
Inventories (2,168) (2,838)
Prepaid expenses and other current assets (162) 35
Deferred costs (61) --
Accounts payable 7,857 5,770
Accrued expenses (9,868) (1,340)
Accrued income taxes (21) (4)
-------- --------
Net cash used in operating activities (10,465) (6,285)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,135) (2,559)
Increase in other assets (301) (161)
-------- --------
Net cash used in investing activities (2,436) (2,720)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable 12,585 7,575
Payments on long term obligations and deferred compensation (174) (145)
-------- --------
Net cash provided by financing activities 12,411 7,430
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (490) (1,575)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,207 2,289
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,717 $ 714
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Cash paid during the period for-
Interest $ 3,841 $ 4,436
======== =======
Income taxes $ 6 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE> 6
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
(a) Interim Consolidated Condensed Financial Statements
The accompanying unaudited interim consolidated condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for reporting on
Form 10-Q. Accordingly, certain information and footnote disclosure required for
complete financial statements are not included herein. It is recommended that
these financial statements be read in conjunction with the consolidated
financial statements and related notes of AAi.FosterGrant, Inc. (the "Company"
or "AAi") for the year ended January 1, 2000 as reported in the Company's 10-K
filed with the SEC on March 31, 2000. In the opinion of management, all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included. The
consolidated condensed balance sheet presented as of January 1, 2000 has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The results of operations for the
period ended April 1, 2000 may not be indicative of the results that may be
expected for the year ending December 30, 2000, or for any other future period.
(b) Revenue Recognition
The Company recognizes revenue from product sales, net of estimated agreed
upon future allowances and anticipated returns and discounts, taking into
account historical experience, upon shipment to the customer.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following at January 1, 2000 and April 1, 2000 (in
thousands):
<TABLE>
<CAPTION>
JANUARY 1, APRIL 1,
2000 2000
--------- --------
<S> <C> <C>
Finished goods............................ $ 29,695 $ 30,591
Work-in-process and raw materials......... 3,330 5,272
-------- --------
$ 33,025 $ 35,863
======== ========
</TABLE>
(d) Customer Acquisition Costs
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with these agreements. In
these situations, the Company values this inventory at its fair market value,
representing the lower of cost or net realizable value, and records that value
as inventory. The Company sells this inventory through various liquidation
channels. Except as provided below, the excess costs over the fair market value
of the inventory received is charged to selling expense when incurred. The
Company expensed customer acquisition costs of approximately $147,000 and
$88,000 for the three months ended April 3, 1999 and April 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 from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three months ended April 1, 2000, the Company did not capitalized any of these
costs. Amortization expense for the three months ended April 3, 1999 and April
1, 2000 related to previously capitalized costs was approximately $296,000 and
$320,000, respectively.
4
<PAGE> 7
Note 2 - Long-Term Obligations
On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A
Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of
approximately $71.3 million received by the Company from the issuance and sale
of the Notes were used to repay outstanding indebtedness under the credit
facility with a bank and certain 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 Series B Notes is payable semiannually on January 15 and
July 15.
The Notes are general unsecured obligations of the Company, rank senior in
right of payment to all future subordinated indebtedness of the Company and rank
pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Company including the bank credit facility. The bank credit
facility is secured by accounts receivable and inventory of the Company and its
domestic subsidiaries. Accordingly, the Company's obligations under the bank
credit facility will effectively rank senior in right of payment to the Notes to
the extent of the assets subject to such security interest. The Notes are fully
and unconditionally guaranteed, on a joint and several basis, by each of the
Company's current and future Domestic Subsidiaries (as defined) (the
Guarantors). The Indenture under which the Notes were issued (the Indenture)
imposes certain limitations on the ability of the Company, and its subsidiaries
to, among other things, incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens, engage
in transactions with shareholders and affiliates, sell assets and engage in
mergers and consolidations. At April 1, 2000 management believes the Company was
in compliance with these covenants.
The Notes are redeemable at the option of the Company, in whole or in part,
on or after July 15, 2002 at various redemption prices, declining from 105.375%
of the principal amount to par on and after July 15, 2004. In addition, on or
prior to July 15, 2001, the Company may use the net cash proceeds of one or more
equity offerings to redeem up to 35% of the aggregate principal amount of the
Notes originally issued at a redemption price of 110.750% of the principal
amount thereof plus accrued interest to the date of redemption. Upon a change of
control, each Note holder has the right to require the Company to repurchase
such holder's Notes at a purchase price of 101% of the principal amount plus
accrued interest.
Note 3 - Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share was determined by
dividing net loss applicable to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share was
determined by dividing net loss by diluted weighted average shares outstanding.
Diluted weighted average shares reflect the dilutive effect, if any, of common
stock options based on the treasury stock method. Diluted weighted average
shares outstanding excludes all 12,000 and 72,074 common equivalent shares at
April 3, 1999 and April 1, 2000, respectively, as their effect would be
anti-dilutive.
Note 4 - Comprehensive Loss
Comprehensive loss for the three months ended April 3, 1999 and April 1,
2000 was $515,000 and $2.2 million, respectively. Differences between
comprehensive loss and loss before dividends and accretion on preferred stock
for each period represents the foreign currency translation adjustment for each
period.
Note 5 - Restructuring Charge
In March 2000, the Company recorded a restructuring charge of $2.5 million
related to the termination of three executives. The charge consists of an
accrual of severance payments due to three executives for a two-year period. The
severance will be paid through fiscal 2002.
Note 6 - New Accounting Standards
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
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,
5
<PAGE> 8
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 first 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.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25." The interpretation clarifies the application of APB Opinion No.
25 in certain situations, as defined. The Interpretation is effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 15, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (a) no adjustments would be made to the
financial statements for periods before the effective date and (b) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. We expect that the adoption
of this interpretation would not have any effect on the accompanying financial
statements.
Note 7 - Segment Reporting
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.
6
<PAGE> 9
<TABLE>
<CAPTION>
CHAIN DRUG
THREE MONTHS STORES/COMBO
ENDED MASS STORES/
APRIL 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
------------- ------------- ------------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 26,255 $ 7,873 $ 5,413 $ 1,940 $ 41,481
======== ======= ======= ======= ========
Segment profit (loss) $ 1,058 $ (269) $ (782) $ (852) $ (845)
======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
THREE MONTHS STORES/COMBO
ENDED MASS STORES/
APRIL 1, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
------------- ------------- ------------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 23,656 $ 10,042 $ 7,303 $ 1,527 $ 42,528
======== ======== ======= ======= ========
Segment profit (loss) $ 117 $ (402) $(1,204) $ (694) $ (2,183)
======== ======== ======= ======= ========
</TABLE>
Revenues from segments below the quantitative thresholds are attributable to
five operating segments of the Company. Those segments include department
stores, armed forces' PX stores, boutique stores, gift shops, bookstores and
catalogues. None of these segments have ever met any of the quantitative
thresholds for determining reportable segments and their combined results are
presented as Other.
Segment profit (loss) differs from the loss before income tax expense and
dividends and accretion on preferred stock by the amount of other income, which
is not allocated by segment. The chief operating decision-maker does not review
segment assets.
Total assets specifically identifiable with each reportable segment are as
follows:
<TABLE>
<CAPTION>
JANUARY 1, APRIL 1,
2000 2000
---------- --------
<S> <C> <C>
Mass merchandisers $ 19,730 $ 22,193
Chain drug stores/combo stores/supermarkets 3,495 7,281
Variety 2,708 4,811
Other 2,454 2,553
Unassigned assets 79,480 81,329
-------- --------
$107,867 $118,167
======== ========
</TABLE>
Note 7 - Supplemental Consolidating Financial Information
The following is summarized consolidating financial information for the
Company, segregating the Company, wholly owned guarantor subsidiaries, mostly
owned guarantor subsidiaries and non-guarantor subsidiaries as they relate to
the Notes. The guarantor subsidiaries, both mostly and wholly owned, are
domestic subsidiaries of the Company and they guarantee the Notes on a full,
unconditional and joint and several basis. Separate financial statements of the
wholly owned guarantor subsidiaries have not been included because management
believes that they are not material to investors. 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 then 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.
7
<PAGE> 10
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JANUARY 1, 2000
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents $ 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 400 41 353 -- 794
current assets
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
========= ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 11,000 $ -- $ -- $ -- $ 11,000
Redeemable preferred stock of a 1,000 -- -- -- 1,000
subsidiary
Current maturities of long-term 569 -- 343 -- 912
obligations
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 $ 2,409 $ 13,683 $ (18,653) $ 107,867
========= ======== ======== ========= =========
</TABLE>
8
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
APRIL 1, 2000
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents $ 188 $ -- $ 526 $ -- $ 714
Accounts receivable, net 23,904 1,058 6,209 -- 31,171
Inventories 31,975 -- 3,888 -- 35,863
Prepaid expenses and other current assets 250 14 307 -- 571
Deferred tax assets 3,743 -- -- -- 3,743
--------- -------- -------- --------- ---------
Total current assets 60,060 1,072 10,930 -- 72,062
PROPERTY, PLANT AND EQUIPMENT, NET 18,446 12 1,495 -- 19,953
OTHER ASSETS 44,459 -- 2,137 (20,444) 26,152
--------- -------- -------- --------- ---------
$ 122,965 $ 1,084 $ 14,562 $ (20,444) $ 118,167
========= ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 18,575 $ -- $ -- $ -- $ 18,575
Redeemable preferred stock of a 1,000
subsidiary 1,000 -- -- --
Current maturities of long-term
obligations 797 -- 351 -- 1,148
Accounts payable 20,919 64 1,201 -- 22,184
Accrued expenses 21,513 752 1,747 -- 24,012
Due (from) to affiliate -- 6,367 10,075 (16,442) --
--------- -------- -------- --------- ---------
Total current liabilities 62,802 7,183 13,374 (16,442) 66,919
10 3/4% SENIOR NOTES 75,000 -- -- -- 75,000
LONG-TERM OBLIGATIONS, LESS
CURRENT MATURITIES 2,135 -- 193 -- 2,328
Preferred stock 32,650 -- 32,650
Shareholders' equity
(deficit) (49,624) (6,099) 995 (4,002) (58,730)
--------- -------- -------- --------- ---------
$ 122,965 $ 1,804 $ 14,562 $ (20,444) $ 118,167
========= ======== ======== ========= =========
</TABLE>
9
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
APRIL 3, 1999
------------------------------------------------------------------------
MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------- ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C>
Net sales $ 33,738 $ 1,677 $ 6,066 $ -- $ 41,481
Cost of goods sold 19,448 1,532 2,834 -- 23,814
-------- ------- ------- ---- --------
Gross profit 14,290 145 3,232 -- 17,667
Operating expenses 12,447 1,046 2,677 -- 16,170
-------- ------- ------- ---- --------
Loss from operations 1,843 (901) 555 -- 1,497
Interest expense (2,226) (84) (32) -- (2,342)
Other income (expense), net 246 30 (226) -- 50
Equity in (losses) earnings of
consolidated subsidiaries (599) -- -- 684 85
-------- ------- ------- ---- --------
(Loss) income before income tax expense
and dividends and accretion on
preferred stock (736) (955) 297 684 (710)
Income tax expense -- -- -- -- --
-------- ------- ------- ---- --------
Net (loss) income before dividends and
accretion on preferred stock (736) (955) 297 684 (710)
Dividends and accretion on preferred stock 718 -- -- -- 718
-------- ------- ------- ---- --------
Net loss applicable to common $ (1,454) $ (955) $ 297 $684 $ (1,428)
======== ======= ======= ==== ========
shareholders
</TABLE>
10
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 1, 2000
---------------------------------------------------------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales $ 35,734 $ 740 $ 6,054 $ -- $ 42,528
Cost of goods sold 20,105 821 2,655 -- 23,581
-------- ----- ------- ----- --------
Gross profit 15,629 (81) 3,399 -- 18,947
Operating expenses 12,711 680 2,642 -- 16,033
Restructuring charges 2,500 -- -- -- 2,500
-------- ----- ------- ----- --------
Income (loss) from operations 418 (761) 757 -- 414
Interest expense (2,483) (30) (84) -- (2,597)
Other income (expense), net 387 43 (379) -- 51
Equity in income of subsidiaries -- -- -- -- --
-------- ----- ------- ----- --------
Income (loss) before income tax
Expense and dividends and
Accretion on preferred stock (1,678) (748) 294 -- (2,132)
Income tax expense -- -- -- --
-------- ----- ------- ----- --------
Net (loss) income before dividends and
accretion on preferred stock (1,678) (748) 294 -- (2,132)
Dividends and accretion on preferred stock 787 -- -- -- 787
-------- ----- ------- ----- --------
Net income (loss) applicable to
Common shareholders $ (2,465) $(748) $ 294 $ -- $ (2,919)
======== ===== ======= ===== ========
</TABLE>
11
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
APRIL 3, 1999
---------------------------------------------------------------------
MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $(11,418) $ 1,063 $ (110) $ -- $(10,465)
Cash flows from Investing activities:
Purchase of property, plant
and equipment (1,373) -- (762) (2,135)
Advance to affiliates 870 -- -- (870) --
Other investing activities (313) (13) 25 -- (301)
-------- ------- ------- ------- --------
Net cash (used in) provided by
investing activities (816) (13) (737) (870) (2,436)
-------- ------- ------- ------- --------
Cash flows from financing activities:
Net borrowings under revolving
note payable 12,585 -- -- -- 12,585
Payments on long-term obligations
And Deferred compensation (19) -- -- -- (19)
Due to (from) affiliates -- (1,142) 272 870 --
Other financing activities (155) -- -- -- (155)
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities 12,411 (1,142) 272 870 12,411
-------- ------- ------- ------- --------
Net (decrease) increase in cash 177 (92) (575) -- (490)
Cash and cash equivalents,
beginning of period 134 104 1,969 -- 2,207
-------- ------- ------- ------- --------
Cash and cash equivalents,
end of period $ 311 $ 12 $ 1,394 $ -- $ 1,717
======== ======= ======= ======= ========
</TABLE>
12
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
APRIL 1, 2000
----------------------------------------------------------------------
WHOLLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $ 488 $(806) $(5,967) $ -- $(6,285)
Cash flows from Investing activities:
Purchase of property, plant and
equipment (2,161) (398) (2,559)
Advance to affiliates (5,933) -- -- 5,933 --
Other investing activities 264 -- (425) -- (161)
------- ----- ------- ------- -------
Net cash (used in) provided by
investing activities (7,830) -- (823) 5,933 (2,720)
------- ----- ------- ------- -------
Cash flows from financing activities:
Net borrowings under revolving
note payable 7,575 -- -- -- 7,575
Payments on long-term obligations
and Deferred compensation
(142) -- (3) -- (145)
Due to (from) affiliates -- 798 5,135 (5,933) --
------- ----- ------- ------- -------
Net cash provided by (used in)
financing activities 7,433 798 5,132 (5,933) 7,430
------- ----- ------- ------- -------
Net increase (decrease) in cash 91 (8) (1,658) -- (1,575)
Cash and cash equivalents,
beginning of period 97 8 2,184 -- 2,289
------- ----- ------- ------- -------
Cash and cash equivalents,
end of period $ 188 $ -- $ 526 $ -- $ 714
======= ===== ======= ======= =======
</TABLE>
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain "forward-looking" statements and are
subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet the
Company's working capital and capital expenditure requirements and statements
regarding the anticipated proportion of revenues to be derived from a limited
number of customers, may constitute forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. 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 system. The following discussion and analysis of financial
condition and results from 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.
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 70.0% and 53.6% of the Company's net sales for the
three months ended April 1, 2000 and April 3,1999, respectively. Net sales of
the Company's costume jewelry accounted for approximately 27.2% and 37.0% of the
Company's net sales for the three months ended April 1, 2000 and April 3, 1999,
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, approximately 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 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.
14
<PAGE> 17
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 expense 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. During the three months
ended April 1, 2000, the Company recognized a $2.5 million restructuring charge
related to the accrual of severance payments due to three executives, which
will be paid over a two-year period.
The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with these agreements. In
these situations, the Company values this inventory at its fair market value,
representing the lower of cost or net realizable value, and records that value
as inventory. The Company sells this inventory through various liquidation
channels. Except as provided below, the excess costs over the fair market value
of the inventory received is charged to selling expense when incurred. The
Company expensed customer acquisition costs of approximately $88,000 and
$147,000 for the three months ended April 1, 2000 and April 3, 1999,
respectively.
The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three months ended April 3, 1999, the Company capitalized approximately $61,000
of these costs. The Company did not capitalize any of these costs during the
three months ended April 1, 2000. Amortization expense for the three months
ended April 1, 2000 and April 3, 1999 related to previously capitalized costs
was approximately $320,000 and $296,000, 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 Group
US and related companies. 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, before the restructure charge of $2.5 million, was approximately $6.0
million and $4.8 million for the three months ended April 1, 2000 and April 3,
1999, respectively. The increase before the restructure charge of $1.2 million
or 20% is principally due to the increase in operating income. EBITDA, after the
restructure charge was $3.5 million for the three months ended April 1, 2000.
Net income before dividends and accretion on preferred stock, excluding the
restructure charge was $0.4 million for the three months ended April 1, 2000
as compared to a net loss before dividends and accretion on preferred stock of
$0.7 million for the three months ended April 3, 1999. Net loss before dividends
and accretion on preferred stock, including the restructure charge was $2.1
million for the three months ended April 1, 2000.
15
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in the Company's
Consolidated Condensed Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 3, APRIL 1,
1999 2000
------- --------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 57.4 55.4
----- -----
Gross profit 42.6 44.6
Operating expenses, excluding restructuring charges 39.0 37.7
Restructuring charges -- 5.9
----- -----
Income from operations 3.6 1.0
Interest expense (5.6) (6.1)
Other income, net 0.3 0.1
----- -----
Loss before taxes and dividends and
accretion on preferred Stock (1.7) (5.0)
Income tax expense -- --
----- -----
Net loss before dividends and
accretion on preferred stock (1.7) (5.0)
Dividends and accretion on preferred stock 1.7 1.9
----- -----
Net loss applicable to common shareholders (3.4)% (6.9)%
===== =====
</TABLE>
THREE MONTHS ENDED APRIL 1, 2000 COMPARED TO THREE MONTHS ENDED APRIL 3, 1999
Net Sales. Consolidated net sales were $42.5 million for the three months
ended April 1, 2000 as compared to $41.5 million for the three months ended
April 3, 1999, an increase of $1.0 million. Sales of optical products increased
in all retail segments, partially offset by a planned de-emphasis on watches,
clocks, and certain other accessory lines, as well as planned reductions in
jewelry, principally related to a change in the terms of service with a
significant customer in the mass merchandiser channel.
Gross Profit. Gross profit was $18.9 million for the three months ended
April 1, 2000 as compared to $17.7 million for the three months ended April 3,
1999. Gross profit as a percentage of net sales increased to 44.6% for the three
months ended April 1, 2000 from 42.6% for the three months ended April 3, 1999.
The $1.3 million or 7.2% increase is related primarily to the shift of sales
towards optical and the shift within optical to higher margin products.
Operating Expenses. Operating expenses were $16.0 million, before the
restructure charge of $2.5 million for the three months ended April 1, 2000 as
compared to $16.2 million for the three months ended April 3, 1999, a decrease
of 0.8% or $137,000. Decreases occurred throughout the Company and represent
continued attention to expense control. Operating expenses after the restructure
charge were $18.5 million. This charge reflects an accrual for severance
payments due to three executives, which will be paid over a two-year period
through fiscal 2002.
Interest Expense. Interest expense was $2.6 million for the three months
ended April 1, 2000 as compared to $2.3 million for the three months ended April
3, 1999, an increase of 10.9% or $255,000. This resulted from additional
borrowings under the Company's credit facilities to fund operations during 1999
as well as to fund increased purchases of optical products related to increased
shipments as compared to the prior year.
Income Tax. No income tax expense or benefit was recorded for the three
months ended April 1, 2000 and April 3, 1999.
Net Income (Loss). As a result of the factors discussed above, net income
before dividends and accretion on preferred stock, excluding the restructure
charge was $0.4 million for the three months ended April 1, 2000 as compared to
net loss before dividends and accretion on preferred stock of $0.7 million for
the three months ended April 3, 1999, an increase of $1.1 million in earnings.
Net loss before dividends and accretion on preferred stock, after the
restructure charge was $2.1 million for the three months ended April 1, 2000.
16
<PAGE> 19
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders excluding the restructure charge was $0.4 million for the three
months ended April 1, 2000 as compared to a loss of $1.4 million for the three
months ended April 3, 1999, a decrease of $1.0 million. The decrease is
attributable to the $1.1 million increase in earnings offset by an increase of
$69,000 in dividends and accretion on Series A Preferred Stock due to the
compounding of accrued dividends. Net loss applicable to common shareholders
after the restructure charge was $2.9 million for the three months ended April
1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2000, the Company had cash and cash equivalents of $0.7 million
and working capital of $5.1 million as compared to $2.3 million and $7.4 million
respectively at January 1, 2000. The decline in cash and cash equivalents is due
to the Company's enhanced focus on utilizing worldwide cash reserves to fund
payments on its Senior Credit Facility. The decline in working capital was
driven by continued focus on reductions in inventory and receivables.
The Company used $6.3 million of cash in operations during the three months
ended April 1, 2000 compared to a use of $10.5 million during the three months
ended April 3, 1999. The decrease in cash used resulted principally from
payments in the quarter ended April 3, 1999 on accounts payable and accrued
expenses related to legal settlements, royalties and the timing of inventory
purchases.
The Company used $2.7 million in investing activities during the three
months ended April 1, 2000 compared to a use of $2.4 million during the three
months ended April 3, 1999. These investments were primarily related to the
purchase of display fixtures used in the merchandising of both optical and
jewelry products and represent normal purchases.
The Company generated $7.4 million from financing activities during the
three months ended April 1, 2000 compared to $12.4 million during the three
months ended April 3, 1999. The funds generated from financing activities
consisted mainly of borrowings under the revolving note payable.
The Company has 43,700 shares of Series A Preferred Stock that has a
redemption value at April 1, 2000 of $32.7 million. Shares of Series A Preferred
Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for
certain dilutive events. Conversion is at the option of the shareholder, but is
automatic upon the consummation of a qualified public offering. The holders of
Series A Preferred Stock have the right to require redemption for cash for any
unconverted shares, beginning June 30, 2002, provided, however, that the right
to require redemption is suspended as long as any Restrictive Indebtedness (as
defined in the Company's Articles of Incorporation) is outstanding. The $75.0
million 10 3/4% Senior Notes due 2006 (the "Notes") constitute Restrictive
Indebtedness. The redemption price of the Series A Preferred Stock is an amount
equal to the original issue price, $526.32 per share, plus any accrued and
unpaid dividends yielding a 10% compounded annual rate of return.
In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, Foster Grant Holdings, Inc. (FG Holdings) issued 100
shares of FG Preferred Stock, which were redeemable for $1.0 million on February
28, 2000. The $1.0 million was paid on April 3, 2000. The former holder of the
FG Preferred Stock is entitled to receive an additional payment of between $2.5
million and $3.0 million, depending upon transaction value, in the event of an
initial public offering, merger or similar transaction, or private placement of
securities representing more than 50% of the Company's capital stock, at a
specified valuation.
The Company has substantial indebtedness and significant debt service
obligations. As of April 1, 2000, the Company had total indebtedness, including
borrowings under the Senior Credit Facility, in the aggregate principal amount
of $97.0 million. The Company had current liabilities of approximately $66.9
million. In addition, the Company has significant annual obligations that
include interest on the Notes of approximately $8.1 million, minimum royalty
obligations over the next two years of approximately $3.3 million and minimum
payments under its operating leases of approximately $626,000. The Indenture
permits the Company to incur additional indebtedness, including secured
indebtedness, subject to certain limitations.
The Company has up to $10.5 million available for borrowings under the
Senior Credit Facility as of April 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. On March 24, 2000, the Company entered into a second
amendment to the Senior Credit Facility which
17
<PAGE> 20
modified the financial covenants and waived non-compliance with the prior
covenants. As of April 1, 2000, the Company is in compliance with the financial
covenants, as modified.
The Company's ability to make scheduled payments of principal, or to pay the
interest on, or to refinance, its indebtedness (including the Notes), or to fund
planned capital expenditures will depend on its future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. Based
upon the current level of operations and anticipated cost savings and revenue
growth, the Company believes that cash flow from operations and available cash,
together with available borrowings under the Senior Credit Facility, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. The Company may, however, need to refinance all or a portion of
the principal of the Notes on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations,
that anticipated cost savings and revenue growth will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
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 throughout 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 and inventory purchases decline relative to first half needs.
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 has not, and does not expect to incur any significant further
expenses 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about the Company's market risk disclosures
includes forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Risk. The Company is exposed to market risk from changes in
interest rates primarily through its borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. At April 1,
2000, 100% of the carrying values of the Company's long-term debt were at fixed
interest rates.
Foreign Currency Risk. The Company's results of operations are affected by
fluctuations in the value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in the British Pound,
the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar.
During the three months ended April 1, 2000, the net impact of foreign currency
changes was not material to the Company's financial condition or results of
operations. The Company manages its exposure to foreign currency exchange risk
by trying to minimize the Company's net investment in its foreign subsidiaries.
The Company generally does not enter into derivative financial instruments to
manage foreign currency exposure.
18
<PAGE> 21
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.
19
<PAGE> 22
AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Report on Form 8-K
The registrant filed no reports on form 8-K during the quarter ended April
1, 2000.
20
<PAGE> 23
AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AAi.FosterGrant, Inc. (Registrant)
Dated: May 15, 2000 /s/ Gerald F. Cerce
--------------------------------
Gerald F. Cerce
Chairman of the Board
Dated: May 15, 2000 /s/ John R. Ranelli
--------------------------------
John R. Ranelli
Director, President, and Chief Executive Officer
(Principal Executive Officer)
Dated: May 15, 2000 /s/ Mark D. Kost
--------------------------------
Mark D. Kost
Chief Financial Officer
(Principal Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF APRIL 1, 2000 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 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> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<EXCHANGE-RATE> 1
<CASH> 714
<SECURITIES> 0
<RECEIVABLES> 41,671
<ALLOWANCES> 10,500
<INVENTORY> 35,863
<CURRENT-ASSETS> 72,062
<PP&E> 39,100
<DEPRECIATION> 19,147
<TOTAL-ASSETS> 118,167
<CURRENT-LIABILITIES> 66,917
<BONDS> 75,813
33,650
0
<COMMON> 6
<OTHER-SE> (55,842)
<TOTAL-LIABILITY-AND-EQUITY> 118,167
<SALES> 42,528
<TOTAL-REVENUES> 42,528
<CGS> 23,581
<TOTAL-COSTS> 23,581
<OTHER-EXPENSES> (51)
<LOSS-PROVISION> 9,781
<INTEREST-EXPENSE> 2,597
<INCOME-PRETAX> (2,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,132)
<EPS-BASIC> (4.80)
<EPS-DILUTED> (4.80)
</TABLE>
