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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 3, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission File Number 333-61119-05
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)
(410)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: [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
TITLE OF EACH CLASS AUGUST 17, 1999
------------------- ---------------
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
the registrant and unrelated third parties, and is therefore filing this form
with the reduced disclosure format.
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FANTASMA, LLC
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
Condensed Balance Sheets as of January 2, 1999 and July 3, 1999 3
Condensed Statements of Operations for the three and six
months ended July 4, 1998 and July 3, 1999 4
Condensed Statements of Cash Flows for the six months ended
July 4, 1998 and July 3, 1999 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 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 10
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
</TABLE>
2
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FANTASMA, LLC
(A MOSTLY OWNED SUBSIDIARY OF AAI.FOSTERGRANT, INC.)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, JULY 3,
1999 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 104 $ 17
Accounts receivable less reserves of
approximately $373 and $206 5,088 1,817
Inventories 3,878 3,338
Prepaid expenses and other current assets 203 262
------- -------
Total current assets 9,273 5,434
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Property and equipment, net 24 19
Other assets, net 4,357 4,138
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Total assets $13,654 $ 9,591
======= =======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $ 7,088 $ 7,108
Accounts payable and accrued liabilities 1,960 521
------- -------
Total current liabilities 9,048 7,629
Members' Equity 4,606 1,962
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Total liabilities and members' equity $13,654 $ 9,591
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
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FANTASMA, LLC
(A MOSTLY OWNED SUBSIDIARY OF AAI.FOSTERGRANT, INC.)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales $1,810 $ 1,167 $ 4,841 $ 2,844
Cost of goods sold 1,682 1,478 3,354 3,010
------ ------- ------- -------
Gross profit (loss) 128 (311) 1,487 (166)
Operating Expenses:
Selling 59 502 707 862
General and administrative 366 754 957 1,440
------ ------- ------- -------
Loss from operations (297) (1,567) (177) (2,468)
Interest expense (65) (69) (168) (153)
Other expense, net -- (54) -- (24)
------ ------- ------- -------
Net loss $ (362) $(1,690) $ (345) $(2,645)
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
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FANTASMA, LLC
(A MOSTLY OWNED SUBSIDIARY OF AAI.FOSTERGRANT, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 4, JULY 3,
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (345) $(2,645)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Depreciation and amortization 21 236
Write off of property and equipment 49 --
Changes in assets and liabilities -
Accounts receivable 3,482 3,271
Inventories (469) 540
Prepaid expenses and other current assets (98) (59)
Advance payable to member (1,661) 21
Accounts payable and accrued expenses (215) (1,439)
------- -------
Net cash provided by (used in) operating
activities 764 (75)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets 3 (12)
Purchases of property and equipment (2) --
------- -------
Net cash provided by (used in) investing activities 1 (12)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable to member 3,712 --
Repayments under note payable to member (3,764) --
Member distributions (531) --
------- -------
Net cash used in financing activities (583) --
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 182 (87)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 238 104
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 420 $ 17
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ -- $ --
======= =======
Income taxes $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Pushdown of purchase price related to
Aai.FosterGrant's investment in Fantasma $ 4,627 $
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
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FANTASMA, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
(a) Interim Consolidated Condensed Financial Statements
The accompanying unaudited interim consolidated condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for reporting on
Form 10-Q. Accordingly, certain information and footnote disclosure required for
complete financial statements are not included herein. It is recommended that
these financial statements be read in conjunction with the consolidated
financial statements and related notes of AAi.FosterGrant, Inc. ("AAi" or the
"Company") and Fantasma LLC for the year ended January 2, 1999 as reported in
the Company's Form 10-K filed with the SEC on April 2, 1999. In the opinion of
management, all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. The consolidated condensed balance sheet presented as of January 2,
1999 has been derived from the consolidated financial statements that have been
audited by the Company's independent public accountants. The results of
operations for the period ended July 3, 1999 may not be indicative of the
results that may be expected for the year ending January 1, 2000 or for any
other future period.
(b) Organization and Business Activity
Fantasma LLC (Fantasma) was organized under the laws of the State of
Delaware on August 22, 1996 and began business operations on September 1, 1996.
Fantasma imports and wholesales licensed watches, clocks, and other novelties;
and grants credit to customers located throughout the United States.
Prior to September 1, 1996, Fantasma operated as a division of
Overdrive Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital
Corp. (Overdrive) sold the division's operating assets to Fantasma LLC in
exchange for a two-year, $3,764,366 note. Overdrive maintained a 67% ownership
interest in Fantasma, with a former stockholder of Overdrive holding a 33%
ownership interest.
In June 1998, AAi acquired an 80% interest in Fantasma for
approximately $4.1 million in cash. The remaining 20% interest in Fantasma is
held by a previous member of Fantasma. As a result of the termination of the
employment of this member, in April 1999, the Company has the obligation to
repurchase this interest for nominal consideration (based on the Company's
calculations). This previous member has filed a lawsuit against the Company and
fantasma asserting that his termination was wrongful and the Company has
asserted counterclaims related to the Fantasma acquisition. See Part II, Item 1
- - Legal Proceedings. Another employee of Fantasma has options to acquire up to a
2% interest in Fantasma and up to an additional 2% interest if certain earnings
targets for Fantasma are met in 1999 and 2000. As of July 3, 1999,
6
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
the exercise price of the options to purchase member interests of Fantasma was
equal to or greater than the fair market value; therefore no expense was
recorded.
(c) Inventory
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of finished goods for all years presented. Finished goods
inventory consists of material and overhead.
(d) Income Taxes
Fantasma is treated as a partnership for federal and state income tax
purposes, whereby the membership owners are taxed on their proportionate share
of Fantasma's income. As a result, Fantasma has not provided for Federal income
taxes.
Note 2 - Comprehensive Loss
Comprehensive loss was the same as net loss for the periods presented.
NOTE 3 - Segment Reporting
Fantasma has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the 1998 fiscal year. SFAS No. 131
establishes standards for reporting information regarding operating segments in
annual financial statements and requires selected information for those segments
to be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. To date, Fantasma has viewed its operations and manages its
business as principally one segment.
7
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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 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
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 in Fantasma's Form 10-K filed
with the SEC on April 2, 1999.
OVERVIEW
Fantasma designs, imports and wholesales licensed watches, clocks and other
novelties to customers located primarily throughout the United States. 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 58% of total net sales are generated from seven
mass merchandisers.
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.
In June 1998, AAi acquired an 80% interest in Fantasma. The remaining 20%
interest in Fantasma is held by a previous member of Fantasma. As a result of
the termination of the employment of this member, in April 1999, the Company has
the obligation to repurchase this interest for nominal consideration (based on
the Company's calculations). This previous member has filed a lawsuit against
the Company and Fantasma as more fully described in Part II, Item 1 - Legal
Proceedings. Another employee of Fantasma has options to acquire up to a 2%
interest in Fantasma and up to an additional 2% interest if certain earnings
targets for Fantasma are met in 1999 and 2000. As of July 3, 1999, the exercise
price of the options to purchase member interests of Fantasma was equal to or
greater than the fair market value; therefore no expense was recorded. The
operating agreement under which Fantasma is managed provides AAi with sole
voting rights on numerous significant matters.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in Fantasma's Condensed
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 92.9 126.7 69.3 105.8
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Gross profit (loss) 7.1 (26.7) 30.7 (5.8)
Operating expenses 23.5 (107.6) 34.4 81.0
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Loss from operations (16.4) (134.3) (3.7) (86.8)
Interest expense (3.6) (5.9) (3.4) (5.4)
Other expense, net -- (4.6) -- (0.8)
----- ----- ----- -----
Net Loss (20.0) (144.8) (7.1) (93.0)
</TABLE>
THREE MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998
Net Sales. Net sales were $1.2 million for the three months ended July
3, 1999 as compared to $1.8 million for the three months ended July 4, 1998, a
decrease of 35.5% or $643,000. The decrease is attributable to decreased sales
of watches and clocks as a result of a general trend away from character
merchandise.
Gross Profit (Loss). Gross loss was $311,000 for the three months ended
July 3, 1999 as compared to gross profit of $128,000 for the three months ended
July 4, 1998 a decrease of $439,000. The Company incurred a loss primarily due
to increased promotional sales and closeout sales in an effort to reduce
inventory levels. The Company has evaluated the remaining inventory and has
provided reserves to ensure it is stated at its net realizable value.
Operating Expenses. Operating expenses were $1.3 million for the three
months ended July 3, 1999 as compared to $425,000 for the three months ended
July 4, 1998, an increase of $831,000. The increase in operating expenses is
primarily attributable to additional design and selling expenditures for new
non-licensed product development and additional payroll.
Interest Expense. Interest expense was $69,000 for the three months
ended July 3, 1999 as compared to $65,000 for the three months ended July 4,
1998, an increase of 6.2% or $4,000. This increase is a result of higher loan
balances partially offset by a lower effective rate obtained subsequent to the
acquisition.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(CONTINUED)
Net Loss. As a result of the factors discussed above, net loss was $1.7
million for the six months ended July 3, 1999 as compared to a net loss of
$362,000 for the six months ended July 4, 1998, an increase of $1.3 million.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998
Net Sales. Net sales were $2.8 million for the six months ended July 3,
1999 as compared to $4.8 million for the six months ended July 4, 1998, a
decrease of 41.3% or $2.0 million. The decrease is attributable to decreased
sales of certain licensed analog watches and a general trend away from character
merchandise.
Gross Profit (Loss). Gross loss was $166,000 for the six months ended
July 3, 1999 as compared to gross profit of $1.5 million for the six months
ended July 4, 1998, a decrease of $1.7 million. The Company incurred a loss
primarily due to increased promotional sales and closeout sales in an effort to
reduce inventory levels. The Company has evaluated the remaining inventory and
has provided reserves to ensure it is stated at its net realizable value.
Operating Expenses. Operating expenses were $2.3 million for the six
months ended July 3, 1999 as compared to $1.7 million for the six months ended
July 4, 1998, an increase of $638,000. The increase in operating expenses is
primarily attributable to additional design and selling expenditures for new
non-licensed product development and additional payroll.
Interest Expense. Interest expense was $153,000 for the six months
ended July 3, 1999 as compared to $168,000 for the six months ended July 4,
1998, a decrease of 8.9% or $15,000. This increase is a result of a favorable
rate obtained subsequent to the acquisition partially offset by a slightly
higher loan balance.
Net Loss. As a result of the factors discussed above, net loss was $2.6
million for the six months ended July 3, 1999 as compared to a net loss of
$345,000 for the six months ended July 4, 1998, an increase of $2.3 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q (the
Instructions).
10
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OTHER INFORMATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 1999, Roger D. Dreyer and Houdini Capital Corporation filed
a complaint in United States District Court for the District of Rhode Island
against the Company and Fantasma, claiming $600,000 in damages for breach of Mr.
Dreyer's employment contract, $350,000 as the balance of purchase price to Mr.
Dreyer for the sale of his 13% interest in Fantasma, $13,500 as wages, damages
for retention of artwork and to Mr. Dreyer's reputation, the value of Houdini's
20% interest in Fantasma, punitive damages and attorney's fees. On July 22, 1999
the Company and Fantasma answered the complaint by denying all claims (including
the breach of employment contract claim), and by asserting defenses. In the
answer, the Company also asserted counterclaims for $563,000 and for the
transfer of Houdini's 20% interest in Fantasma.
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 July 3, 1999
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: AUGUST 17, 1999 /s/ Duane M. DeSisto
-------------------------------------
Duane M. DeSisto
Assistant Secretary and
Chief Financial Officer
(Principal Financial Officer)
12
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF JULY 3, 1999 (UNAUDITED) AND THE CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 3, 1999 (UNAUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED
IN FORM 10-K FOR THE TWELVE MONTHS ENDED JANUARY 2, 1999.
</LEGEND>
<CIK> 0001067354
<NAME> FANTASMA, LLC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> JUL-03-1999
<EXCHANGE-RATE> 1
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 2,023
<ALLOWANCES> 206
<INVENTORY> 3,338
<CURRENT-ASSETS> 5,434
<PP&E> 29
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<TOTAL-ASSETS> 9,591
<CURRENT-LIABILITIES> 7,629
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 9,591
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<CGS> 3,010
<TOTAL-COSTS> 2,302
<OTHER-EXPENSES> 24
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<INTEREST-EXPENSE> 153
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