<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 September 30, 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 November 13, 2000, the aggregate market value of the voting equity
held by non-affiliates of the Registrant was none.
As of November 13, 2000, 608,000 shares of Common Stock, 43,700 shares of
Series A Preferred Stock and 70,870 shares of Series B Preferred Stock of the
Registrant were issued and outstanding.
<PAGE> 2
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I.-- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
January 1, 2000 and September 30, 2000 3
Consolidated Condensed Statements of Operations
for the three and nine months ended October 2, 1999
and September 30, 2000 4
Consolidated Condensed Statements of Cash Flows for
the nine months ended October 2, 1999 and September 30, 2000 5
Notes to Consolidated Condensed Financial Statements 6-15
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 3. Defaults Upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and reports on Form 8-K 22
SIGNATURES 24
2
<PAGE> 3
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS JANUARY 1, SEPTEMBER 30,
2000 2000
---------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,289 $ 1,880
Accounts receivable less reserves of approximately
$12,804 and $10,208 22,231 27,831
Inventories 33,025 37,012
Prepaid expenses and other current assets 794 866
Deferred tax assets 3,743 930
--------- ---------
Total current assets 62,082 68,519
--------- ---------
Property, plant and equipment, net 19,392 18,987
Intangible assets 13,486 12,994
Other assets 7,588 6,350
Deferred tax assets 5,319 1,959
--------- ---------
Total assets $ 107,867 $ 108,809
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 11,000 $ 27,953
Redeemable preferred stock of a subsidiary 1,000 --
Current maturities of long-term obligations 902 425
Deferred compensation - current portion 10 11
Accounts payable 16,414 17,300
Accrued expenses 23,253 18,654
Accrued income taxes 2,104 2,304
--------- ---------
Total current liabilities 54,683 66,647
--------- ---------
10 3/4% series B senior notes due 2006 75,000 51,850
Long-term obligations - less current maturities 420 7,709
Deferred compensation - less current portion 1,662 1,394
Series A redeemable convertible Preferred stock, $.01 par value --
Designated, issued and outstanding -- 43,700 shares stated at
redemption value 31,864 34,299
Series B redeemable Preferred stock, $.01 par value--
Designated -- 75,000 shares
Issued and outstanding -- 70,870 shares stated at -- 945
redemption value
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value--
Authorized -- 4,800,000 shares 6 6
Issued and outstanding -- 608,000 shares
Additional paid-in capital 270 270
Accumulated other comprehensive loss (122) (589)
Accumulated deficit (55,916) (53,722)
--------- ---------
Total shareholders' deficit (55,762) (54,035)
--------- ---------
Total liabilities and shareholders' deficit $ 107,867 $ 108,809
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE> 4
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -----------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
NET SALES $ 38,496 $ 35,750 $ 125,593 $ 123,985
COST OF GOODS SOLD 24,155 21,600 74,900 70,711
--------- --------- --------- ---------
Gross profit 14,341 14,150 50,693 53,274
OPERATING EXPENSES:
Selling 12,155 9,702 36,951 33,208
General and administrative 4,572 4,346 13,610 13,474
Restructuring charge -- -- -- 2,500
--------- --------- --------- ---------
(Loss) Income from operations (2,386) 102 132 4,092
Interest expense (2,657) (3,041) (7,679) (8,422)
Other income, net 60 53 44 198
--------- --------- --------- ---------
Loss before income tax expense (4,983) (2,886) (7,503) (4,132)
Income tax expense (37) (35) (37) (78)
--------- --------- --------- ---------
Net loss before extraordinary items (5,020) (2,921) (7,540) (4,210)
Extraordinary gain, net of $3.2 million and $6.3 million in
taxes, respectively -- 4,409 -- 8,838
--------- --------- --------- ---------
Net (loss) income before dividends and accretion on
preferred stock (5,020) 1,488 (7,540) 4,628
Dividends and accretion on preferred stock 773 847 2,228 2,435
--------- --------- --------- ---------
Net (loss) income applicable to common shareholders $ (5,793) $ 641 $ (9,768) $ 2,193
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE> 5
AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 2, SEPTEMBER 30,
1999 2000
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before dividends and accretion on preferred stock $ (7,540) $ 4,628
Adjustments to reconcile net loss to net cash used in operating
Activities --
Depreciation and amortization 8,431 9,106
Extraordinary gain on early extinguishment of debt -- (8,838)
Amortization of interest costs related to debt 242 593
Equity in earnings of investments in affiliates (84) --
Minority interest in income of consolidated subsidiary 63 --
Cumulative foreign currency translation adjustment 50 --
Changes in assets and liabilities, net of acquisitions--
Accounts receivable (12,885) (5,715)
Inventories 5,024 (4,073)
Prepaid expenses and other current assets 911 158
Deferred costs (155) (450)
Accounts payable 328 784
Accrued expenses (7,098) (4,611)
Accrued income taxes (23) 27
-------- --------
Net cash used in operating activities (12,736) (8,392)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,031) (6,568)
Increase in other assets (447) (191)
-------- --------
Net cash used in investing activities (7,478) (6,759)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving note payable 21,192 16,953
Proceeds from issuance of long-term debt -- 7,087
Repurchase of 10 3/4% Series B Senior Notes due 2006 -- (7,087)
Payments on long term obligations and deferred compensation (246) (1,067)
Redemption of Preferred Stock of a subsidiary -- (1,000)
-------- --------
Net cash provided by financing activities 20,946 14,886
-------- --------
Effect of exchange rate changes on cash and cash equivalents -- (144)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 732 (409)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,207 2,289
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,939 $ 1,880
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest $ 9,183 $ 8,257
======== ========
Income taxes $ 8 $ 40
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Acquisition of equipment under capital lease obligations $ -- $ 557
======== ========
Issuance of Series B Preferred Stock in connection with debt
repurchase $ -- 945
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
<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 September 30, 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 September 30, 2000 (in
thousands):
JANUARY 1, SEPTEMBER 30,
2000 2000
---------- -------------
Finished goods..................................... $29,695 $ 34,155
Work-in-process and raw materials.................. 3,330 2,857
------- --------
$33,025 $ 37,012
======= ========
(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 $48,000 and
$269,000 for the three and nine months ended September 30, 2000 and $92,000 and
$464,000 for the three and nine months ended October 2, 1999.
The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three and nine months ended October 2, 1999 the Company capitalized
approximately $49,000 and $155,000 of these costs. The Company capitalized costs
of approximately $220,000 and $449,000 during the three and nine months ended
September 30, 2000, respectively. Amortization expense related to these costs as
well as previously capitalized costs was approximately $306,000 and $903,000 for
the three and nine months ended October 2, 1999 and $382,000 and $1.0 million
for the three and nine months ended September 30, 2000.
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 a 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
6
<PAGE> 7
bank credit facility. Accounts receivable and inventory of the Company and its
domestic subsidiaries secure the bank credit facility. 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 September
30, 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.
During 2000, the Company has repurchased $23.15 million face value of the
Notes for a purchase price of $7.09 million. The purchase price was financed
utilizing a term loan under its existing Senior Credit Facility. The term loan
is secured by a mortgage on its Smithfield, RI facility and the agreements of
certain preferred shareholders to purchase participations in the term loan. The
term loan is being amortized over 60 months commencing April 1, 2001, with the
principal balance due at the expiration of the Senior Credit Facility on July
31, 2003. As a result of this transaction, the Company recognized a $8.8 million
extraordinary gain, net of $6.3 million in taxes, and wrote off $0.9 million of
unamortized issuance costs related to the Notes that were repurchased. These
purchases resulted from inquiries from holders of the Notes. The Company does
not solicit offers to tender Notes for repurchase, but may, from time to time,
consider requests to repurchase Notes, subject to the availability of
appropriate financing.
In conjunction with the commitment to purchase participations in the term
loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders
of Series B Preferred Stock are entitled to receive, prior and in preference to
any other capital stock of the Company, an amount per share equal to $6.67
multiplied by the number of six month periods and fractions thereof during which
the participation commitment was outstanding. The Company has calculated the
value of the Series B Preferred Stock to be $945,000 based on the assumption
that the participation commitment will be outstanding for one year. This amount
is being amortized over the one-year period as interest expense. If the
participation commitment is outstanding for a period beyond twelve months, the
Company will assign additional value to the stock and amortize the related costs
over the additional period of the participation commitment.
NOTE 3 - EARNINGS PER SHARE
During the quarter ended July 1, 2000, the Company decided to eliminate its
earning per share disclosure. This decision was based on the fact that the
Company does not have common stock or potential common stock that is traded in a
public market, as required by SFAS No. 128, "Earnings Per Share", and the
Company's common stock does not have a readily ascertainable fair market value.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three and nine months ended September 30, 2000
was $1.4 million and $5.1 million, respectively, as compared to comprehensive
loss for the three and nine months ended October 2, 1999 of $5.0 million and
$7.5 million, respectively. Differences between comprehensive income (loss) and
income (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. Through September 30, 2000 severance
benefits of approximately $533,000 were paid to the three executives.
RESTRUCTURE CHARGE PAYMENTS RESERVE BALANCE
DESCRIPTION APRIL 1,2000 THRU Q3 2000 SEPTEMBER 30, 2000
----------- ------------------ ------------ ------------------
Severance benefits $ 2,500 $ 533 $1,967
======= ====== ======
7
<PAGE> 8
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, 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 fourth quarter of fiscal 2000. The Company does not
expect adoption of the guidance provided in SAB No. 101 to 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. The Company does not expect
the adoption of this interpretation to have a significant impact 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
CHAIN DRUG
THREE MONTHS STORES/COMBO
ENDED MASS STORES/
OCTOBER 2, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
------------------- ------------------- ---------------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $28,727 $ 3,699 $ 3,858 $ 2,212 $ 38,496
======= ======== ======= ======= ========
Segment loss $ (350) $ (1,808) $(1,828) $(1,057) $ (5,043)
======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
THREE MONTHS STORES/COMBO
ENDED MASS STORES/
SEPTEMBER 30, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $21,994 $ 7,056 $ 4,226 $ 2,474 $ 35,750
======= ======== ======= ======= ========
Segment loss $ (619) $ (720) $ (927) $ (674) $ (2,940)
======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
NINE MONTHS STORES/COMBO
ENDED MASS STORES/
OCTOBER 2, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
------------------- ------------------- ---------------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $79,509 $ 23,421 $14,581 $ 8,082 $125,593
======= ======== ======= ======= ========
Segment loss $ (527) $ (937) $(3,769) $(2,314) $ (7,547)
======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHAIN DRUG
NINE MONTHS STORES/COMBO
ENDED MASS STORES/
SEPTEMBER 30, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $73,141 $ 27,122 $16,976 $ 6,746 $123,985
======= ======== ======= ======= ========
Segment profit (loss) $ 1,389 $ (378) $(1,606) $(1,231) $ (1,826)
======= ======== ======= ======= ========
</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 profit (loss) before income tax
expense and dividends and accretion on preferred stock by the amount of other
income, restructure charge and extraordinary items which are not allocated by
segment. The chief operating decision-maker does not review segment assets.
Total assets specifically identifiable with each reportable segment are as
follows:
JANUARY 1, SEPTEMBER 30
2000 2000
----------- ------------
Mass merchandisers $ 19,730 $ 22,352
Chain drug stores/combo stores/supermarkets 3,495 5,594
Variety 2,708 2,014
Other 2,454 2,145
Unassigned assets 79,480 76,704
--------- ------------
$ 107,867 $108,809
========= ========
NOTE 8 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The following is summarized consolidating financial information for the
Company, segregating the Company, wholly owned guarantor subsidiaries, mostly
owned guarantor subsidiaries and non-guarantor subsidiaries as they relate to
the Notes. The guarantor subsidiaries, both mostly and wholly owned, are
domestic subsidiaries of the Company and they guarantee the Notes on a full,
unconditional and joint and several basis. Separate financial statements of the
wholly owned guarantor subsidiaries have not been included because management
believes that they are not material to investors. 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.
9
<PAGE> 10
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 interests of
Fantasma, which is included as a wholly owned subsidiary in the consolidating
financial information for periods ending after such date.
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JANUARY 1, 2000
--------------------------------------------------------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
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
--------- --------- --------- --------- ---------
Total assets $ 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
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' (deficit) equity (48,283) (4,363) 5,557 (8,673) (55,762)
--------- --------- --------- --------- ---------
Total liabilities and shareholders'
(deficit) equity $ 110,347 $ 2,409 $ 13,683 $ (18,653) $ 107,867
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
--------------------------------------------------------------------
WHOLLY
OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents $ 19 $ 29 $ 1,832 $ -- $ 1,880
Accounts receivable, net 20,309 3,037 4,485 -- 27,831
Inventories 33,872 -- 3,140 -- 37,012
Prepaid expenses and other current assets 618 42 205 -- 866
Deferred tax assets 930 -- -- -- 930
--------- --------- --------- --------- ---------
Total current assets 55,748 3,108 9,663 -- 68,519
PROPERTY, PLANT AND EQUIPMENT, NET 17,255 8 1,725 -- 18,987
OTHER ASSETS 40,139 -- 2,028 (20,864) 21,303
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 113,141 $ 3,115 $ 13,416 $ (20,864) $ 108,809
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings under revolving note payable $ 27,753 $ -- $ 200 $ -- $ 27,953
Current maturities of long-term
obligations 390 -- 46 -- 436
Accounts payable 15,862 108 1,330 -- 17,300
Accrued expenses 18,483 936 1,539 -- 20,958
Due to (from) affiliate (9,386) 8,417 8,937 (16,418) --
--------- --------- --------- --------- ---------
Total current liabilities 61,552 9,461 12,052 (16,418) 66,647
10 3/4% SENIOR NOTES 51,850 -- -- -- 51,850
LONG-TERM OBLIGATIONS, LESS
CURRENT MATURITIES 8,900 -- 203 -- 9,103
Preferred stock 35,244 -- -- -- 35,244
Shareholders' (deficit) equity (44,404) (6,346) 1,161 (4,446) (54,035)
--------- --------- --------- --------- ---------
Total liabilities and shareholders'
(deficit) equity $ 113,141 $ 3,115 $ 13,416 $ (20,864) $ 108,809
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------------------------------
OCTOBER 2, 1999
-----------------------------------------------------------------------------------
WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales $ 102,177 $ 1,509 $ 5,723 $ 16,184 $ -- $ 125,593
Cost of goods sold 60,181 1,437 5,528 7,754 -- 74,900
--------- --------- --------- --------- --------- ---------
Gross profit 41,996 72 195 8,430 -- 50,693
Operating expenses 38,773 570 3,475 7,743 -- 50,561
Restructuring charge -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from operations 3,223 (498) (3,280) 687 -- 132
Interest expense (7,203) (26) (2,093) (241) -- (7,679)
Other income (expense), net 427 (14) (25) (428) -- (40)
Equity in (losses) earnings of
consolidated subsidiaries (415) -- -- -- 499 84
--------- --------- --------- --------- --------- ---------
(Loss) income before income tax expense
and dividends and accretion and
preferred stock (3,968) (538) (3,514) 18 499 (7,503)
Income tax expense -- -- -- (37) -- (37)
--------- --------- --------- --------- --------- ---------
Net (loss) income before dividends and
accretion on preferred stock (3,968) (538) (3,514) (19) 499 (7,540)
Dividends and accretion on preferred
stock 2,228 -- -- -- -- 2,228
--------- --------- --------- --------- --------- ---------
Net (loss) income applicable to
common shareholders $ (6,196) $ (538) $ (3,514) $ (19) $ 499 $ (9,768)
========= ========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------------------------
SEPTEMBER 30, 2000
---------------------------------------------------------------------
WHOLLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales $ 102,134 $ 4,217 $ 17,634 $ -- $ 123,985
Cost of goods sold 59,199 3,325 8,187 -- 70,711
--------- --------- --------- --------- ---------
Gross profit 42,935 892 9,447 -- 53,274
Operating expenses 37,200 1,900 7,582 -- 46,682
Restructuring charge 2,500 -- -- -- 2,500
--------- --------- --------- --------- ---------
Income (loss) from operations 3,235 (1,008) 1,865 -- 4,092
Interest expense (7,976) (30) (416) -- (8,422)
Other income (expense), net 1,112 44 (958) -- 198
Equity in (losses) earnings of
consolidated subsidiaries (504) -- -- 504 --
--------- --------- --------- --------- ---------
(Loss) income before income tax expense
and dividends and accretion on
preferred stock (4,133) (994) 491 504 (4,132)
Income tax expense (77) (1) -- -- (78)
--------- --------- --------- --------- ---------
Net (loss) income before extraordinary (4,210) (995) 491 504 (4,210)
gain
Extraordinary gain, net of tax 8,838 -- -- -- 8,838
--------- --------- --------- --------- ---------
Net income (loss) before dividends and
accretion on preferred stock 4,628 (995) 491 504 4,628
Dividends and accretion on
preferred stock 2,435 -- -- -- 2,435
--------- --------- --------- --------- ---------
Net income (loss) applicable to common
shareholders $ 2,193 $ (995) $ 491 $ 504 $ 2,193
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------------------
OCTOBER 2, 1999
--------------------------------------------------------------------------------
NON-
WHOLLY OWNED MOSTLY OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities $(14,305) $ 1,371 $ (1,275) $ 1,473 $ -- $(12,736)
Cash flows from Investing activities:
Purchase of property, plant and equipment (5,988) -- -- (1,043) -- (7,031)
Advance to affiliates (239) -- -- -- 239 --
Other investing activities (408) -- (12) (27) -- (447)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities (6,635) -- (12) (1,070) 239 (7,478)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable 21,192 -- -- -- -- 21,192
Payments on long-term obligations and
Deferred compensation (541) -- -- 295 -- (246)
Due to (from) affiliates 177 (1,360) 1,183 239 (239) --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 20,828 (1,360) 1,183 534 (239) 20,946
-------- -------- -------- -------- -------- --------
Net (decrease) increase in cash (112) 11 (104) 937 -- 732
Cash and cash equivalents, beginning
of period 134 -- 104 1,969 -- 2,207
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 22 $ 11 $ -- $ 2,906 $ -- $ 2,939
======== ======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, 2000
--------------------------------------------------------------------------
WHOLLY OWNED NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities $ (8,354) $ (1,839) $ 1,801 $ -- $ (8,392)
Cash flows from Investing activities:
Purchase of property, plant and
equipment (5,133) -- (1,435) -- (6,568)
Advance to affiliates (1,286) -- -- 1,286 --
Other investing activities (191) -- -- -- (191)
-------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities (6,610) -- (1,435) 1,286 (6,759)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving note
payable 16,953 -- -- -- 16,953
Proceeds from issuance of long-term
debt 7,087 -- -- -- 7,087
Repurchase of 10 3/4% Series B
Senior Notes due 2006 (7,087) -- -- -- (7,087)
Payments on long-term obligations and
deferred compensation (1,067) -- -- -- (1,067)
Redemption of Series A Preferred Stock (1,000) -- -- -- (1,000)
Due to (from) affiliates -- 1,860 (574) (1,286) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 14,886 1,860 (574) -- 14,886
-------- -------- -------- -------- --------
Net (decrease) increase in cash (78) 21 (208) -- (265)
Exchange rate effect on cash -- -- (144) -- (144)
Cash and cash equivalents, beginning of
period 97 8 2,184 -- 2,289
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 19 $ 29 $ 1,832 $ -- $ 1,880
======== ======== ======== ======== ========
</TABLE>
15
<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 62.2% and 47.4% of the Company's net sales for the
nine months ended September 30, 2000 and October 2, 1999, respectively. Net
sales of the Company's costume jewelry accounted for approximately 32.7% and
42.1% of the Company's net sales for the nine months ended September 30, 2000
and October 2, 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 85.6% 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.
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 the estimated useful life of these
fixtures, which are one to three years. If the Company does not retain title to
the displays, the display costs are expensed as shipped. During the nine months
ended September 30, 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.
16
<PAGE> 17
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 $48,000 and
$269,000, respectively for the three and nine months ended September 30, 2000
and $92,000 and $464,000, respectively, for the three and nine months ended
October 2, 1999.
The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three and nine months ended October 2, 1999, the Company capitalized
approximately $49,000 and $155,000 of these costs, respectively. The Company
capitalized costs of approximately $220,000 and $449,000 during the three and
nine months ended September 30, 2000, respectively. Amortization expense related
to the costs as well as previously capitalized costs was approximately $382,000
and $1.0 million, for the three and nine months ended September 30, 2000,
respectively and $306,000 and $903,000, for the three and nine months ended
October 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 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 income (loss) applicable to
common shareholders represents net income (loss) less accretion of original
issuance costs and cumulative dividends due on the Series A Preferred Stock.
Extraordinary Gain. During 2000, the Company repurchased $23.15 million
face value of the Notes for a purchase price of $7.09 million. As a result of
this transaction, the Company recognized a $8.8 million extraordinary gain, net
of $6.3 million in taxes. See further discussion in "Liquidity and Capital
Resources".
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, excluding the restructuring charge of $2.5 million and the extraordinary
gain of $8.8 million, was approximately $3.2 million and $15.9 million for the
three and nine months ended September 30, 2000, respectively, as compared to
$227,000 and $8.6 million for the three and nine months ended October 2, 1999,
respectively. The year-to-date increase, excluding the restructuring charge and
extraordinary gain, of $7.3 million or 85% is principally due to the increase in
operating income. EBITDA, including the restructuring charge and extraordinary
gain, was $7.6 million and $22.2 million for the three and nine months ended
September 30, 2000, respectively.
Net loss before dividends and accretion on preferred stock, excluding the
restructuring charge and extraordinary gain, was $2.9 million and $1.7 million
for the three and nine months ended September 30, 2000 respectively, as compared
to a net loss before dividends and accretion on preferred stock of $5.0 million
and $7.5 million for the three and nine months ended October 2, 1999,
respectively. Net income before dividends and accretion on preferred stock,
including the restructuring charge and extraordinary gain, was $1.5 million and
$4.6 million for the three and nine months ended September 30, 2000,
respectively.
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:
17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 62.7 60.4 59.6 57.0
------- ------- ------- -------
Gross profit 37.3 39.6 40.4 43.0
Operating expenses, excluding restructuring charge 43.5 39.3 40.3 37.7
Restructuring charge -- -- -- 2.0
------- ------- ------- -------
(Loss) income from operations (6.2) 0.3 0.1 3.3
Interest expense (6.9) (8.5) (6.1) (6.8)
Other income, net 0.2 0.1 -- 0.2
------- ------- ------- -------
Loss before taxes and dividends and accretion
on preferred stock (12.9) (8.1) (6.0) (3.3)
Income tax expense (0.1) (0.1) -- (0.1)
------- ------- ------- -------
Net loss before extraordinary items,
dividends and accretion on preferred stock (13.0) (8.2) (6.0) (3.4)
Extraordinary gain, Net -- 12.3 -- 7.1
------- ------- ------- -------
Net (loss) income before dividends and accretion on
preferred stock (13.0) 4.1 (6.0) 3.7
Dividend and accretion on preferred stock 2.0 2.3 1.8 2.0
------- ------- ------- -------
Net (loss) income applicable to common shareholders (15.0)% 1.8% (7.8)% 1.7%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 2,
1999
Net Sales. Consolidated net sales were $35.8 million for the three months
ended September 30, 2000 as compared to $38.5 million for the three months ended
October 2, 1999, a decrease of $2.7 million. The decrease in sales was mainly
due to a reduction in the Mass Merchandisers segment, resulting from a planned
restructuring in the relationship of a major customer which reduced selling
space and increased competition in the jewelry product line. Also, the Company
has continued its de-emphasis on clocks and watches and small leather goods.
These decreases were partially offset by the recognition of income of $1.7
million related to the Company's most recent evaluation of its estimated sales
allowances, which from time to time, the Company reconciles with its contractual
agreements.
Gross Profit. Gross profit was $14.1 million for the three months ended
September 30, 2000 as compared to $14.3 million for the three months ended
October 2, 1999. Gross profit as a percentage of net sales increased to 39.6%
for the three months ended September 30, 2000 from 37.3% for the three months
ended October 2, 1999. The percentage increase is primarily due to a heavy
volume of product returns in 1999, which was the result of an unsuccessful
promotion with a significant customer and a higher level of closeout sales at
low margins in 1999.
Operating Expenses. Operating expenses were $14.0 million for the three
months ended September 30, 2000 as compared to $16.7 million for the three
months ended October 2, 1999, a decrease of 16.2% or $2.7 million. The decrease
is primarily attributable to the realignment of territories within the field
service organization and lower sales related expenses in the distribution
center. The Company has continued its focus on expense control.
Interest Expense. Interest expense was $3.0 million for the three months
ended September 30, 2000 as compared to $2.7 million for the three months ended
October 2, 1999, an increase of 11.1% or $300,000. This resulted primarily from
additional borrowings under the Company's credit facilities to fund increased
purchases of optical products related to anticipated shipments in the fourth
quarter of 2000 and the first quarter of 2001.
Income Tax. Income tax expense was $35,000 for the three months ended
September 30, 2000 as compared to $37,000 for the three months ended October 2,
1999.
Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock, excluding the extraordinary gain was
$2.9 million for the three months ended September 30, 2000 as compared to net
loss before dividends and accretion on preferred stock of $5.0 million for the
three months ended October 2, 1999, an increase of $2.1 million in earnings. Net
income before dividends and accretion on preferred stock, after the
extraordinary gain was $1.5 million for the three months ended September 30,
2000. The extraordinary gain of $4.4 million was recognized as a result of the
early extinguishment of debt.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders excluding the extraordinary gain was $3.8 million for the three
months ended September 30, 2000 as compared to a loss of $5.8 million for the
three months ended October 2, 1999, a decrease of $2.0 million.
18
<PAGE> 19
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 2,
1999
Net Sales. Consolidated net sales were $124.0 million for the nine months
ended September 30, 2000 as compared to $125.6 million for the nine months ended
October 2, 1999, a decrease of $1.6 million or 1.3%. The decrease in sales was
mainly due to a reduction in the Mass Merchandisers segment, resulting from a
planned restructuring in the relationship of a major customer which reduced
selling space and increased competition in the jewelry product line. Also, the
Company has continued its de-emphasis on clocks and watches and small leather
goods. These decreases were partially offset by the recognition of income of
$1.7 million related to the Company's most recent evaluation of its estimated
sales allowances, which from time to time, the Company reconciles with its
contractual agreements.
Gross Profit. Gross profit was $53.3 million for the nine months ended
September 30, 2000 as compared to $50.7 million for the nine months ended
October 2, 1999. Gross profit as a percentage of net sales increased to 43.0%
for the nine months ended September 30, 2000 from 40.4% for the nine months
ended October 2, 1999. The $2.6 million or 5.1% increase is primarily due to the
shift in mix to higher margin optical products and lower royalties expense
related to the planned de-emphasis of branded watches, clocks and other
accessories. Also, in 1999, a significant promotion was conducted with a major
customer, which resulted in lower than expected margin.
Operating Expenses. Operating expenses were $46.7 million, before the
restructuring charge of $2.5 million for the nine months ended September 30,
2000 as compared to $50.6 million for the nine months ended October 2, 1999, a
decrease of $3.9 million or 7.7%. The decrease is primarily attributable to the
realignment of territories within the field service organization and lower sales
related expenses in the distribution center. The Company has continued its focus
on expense control.
Interest Expense. Interest expense was $8.4 million for the nine months
ended September 30, 2000 as compared to $7.7 million for the nine months ended
October 2, 1999, an increase of $0.7 million or 9.1%. 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. Income tax expense was $78,000 for the nine months ended
September 30, 2000 as compared to $37,000 for the nine months ended October 2,
1999.
Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock, excluding the extraordinary gain of
$8.8 million and the restructuring charge of $2.5 million was $1.7 million for
the nine months ended September 30, 2000 as compared to a net loss before
dividends and accretion on preferred stock of $7.5 million for the nine months
ended October 2, 1999, an increase of $5.8 million in earnings. Net income
before dividends and accretion on preferred stock, after the extraordinary gain
and the restructuring charge was $4.6 million for the nine months ended
September 30, 2000.
Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders excluding the extraordinary gain and the restructuring charge, was
$4.1 million for the nine months ended September 30, 2000, as compared to a loss
of $9.8 million for the nine months ended October 2, 1999, a decrease of $5.7
million. The decrease is attributable to the $6.5 million increase in earnings
offset by the increase in interest expense. Net income applicable to common
shareholders, including the extraordinary gain and the restructuring charge, was
$2.2 million for the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of $1.9
million and working capital of $1.9 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 increased borrowings under the revolving note payable.
The Company used $8.4 million of cash in operations during the nine months
ended September 30, 2000 compared to a use of $12.7 million during the nine
months ended October 2, 1999. The decrease in cash used is principally due to
significant improvements in receivables' days outstanding and the timing of
payments in accrued expenses in the quarter ended October 2, 1999.
The Company used $6.8 million in investing activities during the nine
months ended September 30, 2000 compared to a use of $7.5 million during the
nine months ended October 2, 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 $14.9 million from financing activities during the
nine months ended September 30, 2000 compared to $20.9 million during the nine
months ended October 2, 1999. The funds generated from financing activities
consisted mainly of borrowings under the revolving note payable.
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The Company has 43,700 shares of Series A Preferred Stock that has a
redemption value at September 30, 2000 of $34.3 million. Shares of Series A
Preferred Stock are convertible into Common Stock at a rate of 10 for 1,
adjustable for certain dilutive events. Conversion is at the option of the
shareholder, but is automatic upon the consummation of a qualified public
offering. The holders of Series A Preferred Stock have the right to require
redemption for cash for any unconverted shares, beginning June 30, 2002,
provided, however, that the right to require redemption is suspended as long as
any Restrictive Indebtedness (as defined in the Company's Articles of
Incorporation) is outstanding. The $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 up to $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.
In July 1998, the Company issued, under an Indenture, $75.0 million of
10.75% Senior Notes due 2006 (the "Notes"). The Notes are unsecured obligations
of the Company. The Notes are redeemable at the option of the Company, in whole
and 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. Upon a
"Change of Control" (as defined in the Indenture), 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. The Indenture
contains certain affirmative and negative covenants and restrictions. As of
September 30, 2000, the Company is in compliance with the various covenants of
the Indenture.
During 2000, the Company has repurchased $23.15 million face value of the
Notes for a purchase price of $7.09 million. The purchase price was financed
utilizing a term loan under its existing Senior Credit Facility. The term loan
is secured by a mortgage on its Smithfield, RI facility and the agreements of
certain preferred shareholders to purchase participations in the term loans. The
term loan is being amortized over 60 months commencing April 1, 2001, with the
principal balance due at the expiration of the Senior Credit Facility on July
31, 2003. As a result of this transaction, the Company recognized a $8.8 million
extraordinary gain, net of $6.3 million in taxes, and wrote off $0.9 million of
unamortized issuance costs related to the Notes that were repurchased. These
purchases resulted from inquiries from holders of the Notes. The Company does
not solicit offers to tender Notes for repurchase, but may, from time to time,
consider requests to repurchase Notes, subject to the availability of
appropriate financing.
In conjunction with the commitment to purchase participations in the term
loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders
of Series B Preferred Stock are entitled to receive, prior and in preference to
any distribution with respect to any other capital stock of the Company, an
amount per share equal to $6.67 multiplied by the number of six month periods
and fractions thereof during which the participation commitment was outstanding.
The Company has calculated the value of the Series B Preferred Stock to be
$945,000 based on the assumption that the participation commitment will be
outstanding for one year. This amount is being amortized over the one-year
period as interest expense. If the participation commitment is outstanding for a
period beyond twelve months, the Company will assign additional value to the
stock and amortize the related costs over the additional period of the
participation commitment.
The Company has substantial indebtedness and significant debt service
obligations. As of September 30, 2000, the Company had total indebtedness,
including borrowings under the Senior Credit Facility, in the aggregate
principal amount of $89.3 million. The Company had current liabilities of
approximately $66.6 million. In addition, the Company has significant annual
obligations that include interest on the Notes of approximately $5.6 million,
minimum royalty obligations over the next two years of approximately $2.6
million and minimum payments under its operating leases of approximately
$620,000. The Indenture permits the Company to incur additional indebtedness,
including secured indebtedness, subject to certain limitations.
The Company has up to $4.2 million available for borrowings under the
Senior Credit Facility as of September 30, 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 that modified the financial covenants
and waived non-compliance with the prior covenants. As of September 30, 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
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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 the next twelve months. 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 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.
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 September 30,
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 nine months ended September 30, 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.
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.
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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
By written consent dated as of August 10, 2000, the Shareholders approved
an Amendment to the Company's Articles of Incorporation authorizing an increase
in the number of and modifying the terms of Senior Series B Preferred Stock. The
vote was:
FOR* AGAINST ABSTAIN
Common 517,753 0 0
Series A 32,822 0 0
Series B 27,500 0 0
* The holders of the Series A Preferred Stock are entitled to vote separately
as a class and together with the Common Stock based on the number of shares
of Common Stock into which such shares are convertible, currently 10 to 1.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1.1(b) Articles of Amendment to Articles of Incorporation filed on
August 11, 2000
10.1.4 Fourth Amendment to Second Amended and restated Financing
and Security Agreement dated as of August 14, 2000
27.1 Financial Data Schedule
(b) Report on Form 8-K
The registrant filed no reports on form 8-K during the quarter ended
September 30, 2000.
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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: November 13, 2000 /s/ Gerald F. Cerce
---------------------------------------------
Gerald F. Cerce
Chairman of the Board
Dated: November 13, 2000 /s/ John R. Ranelli
-----------------------------------------
John R. Ranelli
Director, President, and Chief
Executive Officer
(Principal Executive Officer)
Dated: November 13, 2000 /s/ Mark D. Kost
-----------------------------------------
Mark D. Kost
Chief Financial Officer
(Principal Financial Officer)
23
