<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 October 3, 1998.
[ ] 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 333-61119-05
FANTASMA, LLC
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-3340245
- ------------------------------- ----------------------
(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: [ ] NO: [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at December 21, 1998
- ------------------- --------------------------------
None None
The registrant meets the conditions set forth in General Instruction H(1)(A)
and (B) of Form 10-Q and Form 10-QSB, as modified by grants of non-action relief
to unrelated third parties, and is therefore filing this form with the reduced
disclosure format.
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FANTASMA, LLC
QUARTERLY REPORT
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION PAGE
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1997
and October 3, 1998 3
Condensed Statements of Operations for the three
and nine months ended September 30, 1997
and October 3, 1998 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1997 and October 3, 1998 5
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities and Use of Proceeds 11
ITEM 3. Defaults Upon Senior Securities 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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FANTASMA, LLC
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, OCTOBER 3,
1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 238 $ 183
Accounts receivable less reserves of approximately
$402 and $432, in 1997 and 1998, respectively 5,108 2,978
Inventories 1,908 2,019
Prepaid expenses and other current assets 72 143
------ ------
Total current assets 7,326 5,323
------ ------
Property, plant and equipment, net 66 24
Intangible assets 3 4,499
------ ------
Total assets $7,395 $9,846
====== ======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $5,425 $5,153
Accounts payable and accrued liabilities 1,657 1,028
------ ------
Total current liabilities 7,082 6,181
Members' equity 313 3,665
------ ------
Total liabilities and members' equity $7,395 $9,846
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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FANTASMA, LLC
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
NET SALES $4,347 $3,614 $8,441 $8,455
COST OF GOODS SOLD 2,897 2,448 6,028 5,624
------ ------ ------ ------
Gross profit 1,450 1,166 2,413 2,831
OPERATING EXPENSES:
Selling 492 826 1,280 1,730
General and administrative 600 605 1,511 1,543
------ ------ ------ ------
Income (loss) from operations 358 (265) (378) (442)
INTEREST EXPENSE (103) (134) (267) (302)
------ ------ ------ ------
NET INCOME (LOSS) $ 255 $ (399) $ (645) $ (744)
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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FANTASMA, LLC
Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 3,
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (645) $ (744)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization 5 135
Write-off of property and equipment -- 49
Deferred interest on note payable to member -- 134
Changes in assets and liabilities -
Accounts receivable (165) 2,130
Inventories (754) (111)
Prepaid expenses and other current assets (105) (71)
Accounts payable and accrued expenses 299 (629)
------- -------
Net cash (used in) provided by operating activities (1,365) 893
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20) (14)
Decrease in other assets -- 3
------- -------
Net cash used in investing activities (20) (11)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under note payable to member -- 5,019
Advances payable to member 1,196 (1,661)
Repayments of note payable to member -- (3,764)
Member distributions -- (531)
------- -------
Net cash provided by (used in) financing activities 1,196 (937)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (189) (55)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 189 238
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 183
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 360 $ --
======= =======
Taxes $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Pushdown of purchase price related to AAi.FosterGrant's
investment in Fantasma, LLC $ -- $ 4,627
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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FANTASMA, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
(a) Interim Condensed Financial Statements
The accompanying unaudited interim condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission 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 condensed financial
statements and related notes of AAi.FosterGrant, Inc. (the Company) and
Fantasma, LLC (Fantasma) for the year ended December 31, 1997 as reported in the
Company's S-4 Registration Statement (SEC File No. 333-61119) which was declared
effective on November 16, 1998. 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 condensed balance
sheet presented as of December 31, 1997 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 October 3, 1998 may
not be indicative of the results that may be expected for the year ending
January 2, 1999, or for any other future period.
(b) Organization and Business Activity
Fantasma was organized under the laws of the State of Delaware on
August 22, 1996 and began business operations on September 1, 1996. Fantasma
imports and wholesales licensed watches, clocks and other novelties to customers
located throughout the United States, Europe and Japan.
Prior to September 1, 1996, Fantasma operated as a division of
Overdrive Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital
Corp. (Overdrive) sold the division's operating assets to Fantasma in exchange
for a two-year, $3,764,366 note. Overdrive maintained a 67% ownership interest
in Fantasma, with a former stockholder of Overdrive holding a 33% ownership
interest.
In June 1998, the Company acquired an 80% interest in Fantasma for
approximately $4.1 million in cash. The remaining 20% interest in Fantasma is
held by a previous member of Fantasma. This member and an employee of Fantasma
have options to acquire up to an additional 13% interest if certain earnings
targets for Fantasma are met in 1998, 1999 and 2000. The operating agreement
under which Fantasma is managed provides the Company with sole voting rights
except on limited matters affecting the admission of members, capital
contributions or the members' respective rights in profits, cash flow and
distributions. Accordingly, for financial statement presentation, the
acquisition was accounted for using the
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FANTASMA, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
purchase method. The purchase price was allocated based on estimated fair market
value of assets and liabilities at the date of acquisition. In connection with
the purchase price allocation, Fantasma recorded goodwill of approximately $4.6
million, which is being amortized on a straight-line basis over 10 years.
(c) Inventory
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of finished goods for all years presented. Finished goods
inventory consists of material and overhead.
(d) New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and interim
basis for each reportable segment of an enterprise. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior period information upon adoption.
Fantasma will adopt this statement in its fiscal year end 1998 financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Fantasma does not believe that the adoption of SFAS No. 133
will have a material impact on its financial statements.
(e) Income Taxes
Fantasma is treated as a partnership for Federal and certain State
income tax purposes, whereby the membership owners are taxed on their
proportionate share of Fantasma's income. As a result, Fantasma has not provided
for Federal income taxes. The provision for income taxes, if any, reflects
certain state taxes that are paid by Fantasma.
(f) Reclassifications
Certain reclassifications have been made to the condensed financial
statements to conform with the Company's presentation.
7
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FANTASMA, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
Note 2 - Comprehensive Income
Comprehensive net income for the three and nine months ended September
30, 1997 and October 3, 1998 was the same as net income for the three and nine
months then ended.
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
Fantasma's working capital requirements and statements regarding the anticipated
proportion of revenues to be derived from a limited number of customers, may
constitute forward-looking statements. Although Fantasma believes the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors, which could cause actual results to differ materially from
such expectations, are disclosed under the caption "Risk Factors" in the
company's and Fantasma's Prospectus declared effective on November 16, 1998
contained in its Registration Statement on Form S-4 (SEC File No. 333-61119).
OVERVIEW
Fantasma designs, imports and wholesales licensed watches, clocks and
other novelties to customers located throughout the Unites States, Europe and
Japan. Customers include mass merchandisers, department stores, chain drug
stores, theme parks and private labels. Fantasma distributes products under
numerous licensed names, including Winnie the Pooh(R), Sesame Street(R), the
National Football League(R), and Peanuts(R). Approximately 80% of total sales
are generated from nine mass merchandisers or department stores and one private
label customer.
Fantasma outsources manufacturing for virtually all of its products to
manufacturers in Asia with the remainder outsourced to independent domestic
manufacturers. Costs associated with Fantasma's numerous royalty agreements,
based on net sales, are classified in costs of goods sold. Accordingly, the two
principal elements comprising Fantasma's cost of goods sold are the price of
purchased manufactured goods and royalties. Fantasma 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 are comprised primarily of payroll, occupancy costs related
to Fantasma's New York office and showroom, freight, depreciation and
amortization.
8
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FANTASMA, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
In conjunction with the Company, Fantasma has changed its fiscal year
end from December 31 to the Saturday closest to December 31. Fantasma has also
applied this change to its quarterly interim periods during 1998 whereby each
interim period will end on the last Saturday of the thirteen-week period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included in Fantasma's
Condensed Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0 % 100.0 % 100.0 %
Cost of goods sold 66.6 67.7 71.4 66.5
----- ----- ----- -----
Gross profit 33.4 32.3 28.6 33.5
Operating expenses 25.1 39.6 33.1 38.7
----- ----- ----- -----
Income (loss) from operations 8.3 (7.3) (4.5) (5.2)
Interest expense 2.4 3.7 3.2 3.6
----- ----- ----- -----
Net income (loss) 5.9% (11.0)% (7.7)% (8.8)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO SEPTEMBER 30, 1997
Net Sales. Net sales were $3.6 million for the three months ended
October 3, 1998 as compared to $4.3 million for the three months ended September
30, 1997, a decrease of 16.9% or $733,000. The decrease is attributable to
decreased sales of certain licensed analog watches in the third quarter of
fiscal year ended 1998 as compared to the same period of the prior year.
Gross Profit. Gross profit was $1.2 million for the three months ended
October 3, 1998 as compared to $1.5 million for the three months ended September
30, 1997 a decrease of $284,000. Gross profit as a percentage of net sales
decreased to 32.3% for the three months ended October 3, 1998 from 33.4% for the
three months ended September 30, 1997. The decrease is primarily due to a shift
in product mix from licensed product requiring low royalties to products
requiring a higher royalty as a percentage of sales.
9
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FANTASMA, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Operating Expenses. Operating expenses were $1.4 million for the three
months ended October 3, 1998 as compared to $1.1 million for the three months
ended September 30, 1997, an increase of 31.0% or $339,000. The increase is
primarily attributable to costs associated with moving Fantasma's sales office
to New York City and moving warehouse operations from a New Jersey facility to
the Company's distribution facility in Rhode Island.
Interest Expense. Interest expense was $134,000 for the three months
ended October 3, 1998 as compared to $103,000 for the three months ended
September 30, 1997, an increase of 30.1% or $31,000. This increase is a result
of additional advances to Fantasma from the Company.
Net Income (Loss). As a result of the factors discussed above, net loss
was $399,000 for the three months ended October 3, 1998 as compared to net
income of $255,000 for the three months ended September 30, 1997, a decrease of
$654,000.
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO SEPTEMBER 30, 1997
Net Sales. Net sales were $8.5 million for the nine months ended
October 3, 1998 compared to $8.4 million for the nine months ended September 30,
1997. Increased sales of licensed clocks were partially offset by decreased
sales of licensed analog watches.
Gross Profit. Gross profit was $2.8 million for the three months ended
October 3, 1998 as compared to $2.4 million for the three months ended September
30, 1997. Gross profit as a percentage of net sales increased to 33.5% for the
three months ended October 3, 1998 from 28.6% for the three months ended
September 30, 1997. The increase is primarily due to a shift in product mix from
low margin analog watches to higher margin digital watches partially offset by a
shift in product mix from licensed product requiring low royalties to products
requiring a higher royalty as a percentage of sales.
Operating Expenses. Operating expenses were $3.3 million for the nine
months ended October 3, 1998 as compared to $2.8 million for the nine months
ended September 30, 1997, an increase of 17.3% or $482,000. The increase is
primarily attributable to costs associated with moving Fantasma's sales office
to New York City and moving warehouse operations from a New Jersey facility to
the Company's distribution facility in Rhode Island.
Interest Expense. Interest expense was $302,000 for the nine months
ended October 3, 1998 as compared to $267,000 for the nine months ended
September 30, 1997, an increase of 13.1% or $35,000. This increase is a result
of additional advances to Fantasma from the Company.
10
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FANTASMA, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Net Income (Loss). As a result of the factors discussed above, net loss
was $744,000 for the nine months ended October 3, 1998 as compared to net loss
of $645,000 for the nine months ended September 30, 1997, an increase of
$99,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q (the
Instructions).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Omitted pursuant to the Instructions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Omitted pursuant to the Instructions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to the Instructions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-27.1 Financial Data Schedule
(b) Reports on Form 8-K
The registrant filed no reports on form 8-K during the quarter
ended October 3, 1998
11
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FANTASMA, LLC
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.
Fantasma, LLC
(Registrant)
Dated: December 30, 1998 /s/ Duane M. DeSisto
-----------------------------------------
Duane M. DeSisto
Treasurer, Assistant Secretary and
Chief Financial Officer (Principal
Financial Officer)
Dated: December 30, 1998 /s/ Stephen J. Korotsky
-----------------------------------------
Stephen J. Korotsky
Controller (Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF OCTOBER 3, 1998 (UNAUDITED) AND THE CONDENSED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
CONTAINED IN FORM 10-Q FOR THE NINE MONTHS ENDED OCTOBER 3, 1998.
</LEGEND>
<CIK> 0001067354
<NAME> FANTASMA, LLC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1
<CASH> 183
<SECURITIES> 0
<RECEIVABLES> 3,410
<ALLOWANCES> 432
<INVENTORY> 2,019
<CURRENT-ASSETS> 5,323
<PP&E> 27
<DEPRECIATION> 3
<TOTAL-ASSETS> 9,846
<CURRENT-LIABILITIES> 6,181
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,665
<TOTAL-LIABILITY-AND-EQUITY> 9,846
<SALES> 8,455
<TOTAL-REVENUES> 8,455
<CGS> 5,624
<TOTAL-COSTS> 5,624
<OTHER-EXPENSES> 3,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> (744)
<INCOME-TAX> 0
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<CHANGES> 0
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</TABLE>
