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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Under Section 13 of the Securities Exchange Act of 1934
For the fiscal year ended January 2, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
From the transition period from ________ to ________.
FANTASMA, LLC
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-3340245
- ------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
500 George Washington Highway, SmithfielD RI 02917
- -------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(401) 231-3800
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(Issuer's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting equity
held by non-affiliates of the Registrant was none.
The Registrant meets the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K (as modified by prior no-action release) and is
therefore filing this form with the reduced disclosure format.
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PART I
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ITEM 1. BUSINESS
Fantasma, LLC, a Delaware limited liability company, (the "Company" or
"Fantasma"), is a mostly-owned subsidiary of AAi.FosterGrant, Inc., a Rhode
Island corporation (the "Parent").
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 51.6% of total sales are
generated from three 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.FosterGrant, Inc. acquired an 80% interest in
Fantasma. The operating agreement under which Fantasma is managed provides
AAi.FosterGrant, Inc. with sole voting rights on numerous significant matters.
ITEM 2. PROPERTIES
The Company's principal executive office is located at 500 George
Washington Highway, Smithfield, Rhode Island 02917, which is owned by the
Parent. The Company also leases an office at 307 5th Avenue, 4th Floor, New
York, New York 10016. The Company believes that its facilities are suitable and
adequate for its intended purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings in the ordinary course of
business. While the outcome of law suits or other proceedings cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial condition, results of the operation or
cash flow of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
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PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's equity securities are not publicly traded. The Parent
owns 80% of the Company's membership interests and the remaining minority
interests are held by an officer of the Company. Thus, no trading market exists
for such stock.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain "forward-looking" statements and
are subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet
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. These
risks and uncertainties include dependence on licensed brands, customer
concentration and consolidation, a single site distribution facility, a limited
number of delivery companies, unpredictability of discretionary consumer
spending, competition, susceptibility to changing consumer preferences and
uncertainties relating to the Year 2000 computer issue. The following discussion
and analysis of financial condition and results of operations should be read in
conjunction with the Financial Statements and related Notes thereto included
elsewhere herein.
RESULTS OF OPERATION
Year Ended January 2, 1999 compared to December 31, 1997
Net Sales. Net sales were $14.7 million for the year ended January 2,
1999 as compared to $17.2 million for the year ended December 31, 1997, a
decrease of 14.7% or $2.5 million. The
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decrease is attributable to decreased sales of certain licensed analog watches
in 1998 as compared to 1997.
Gross Profit. Gross profit was $4.5 million for the year ended January
2, 1999 compared to $4.6 million for the year ended December 31, 1997 a decrease
of $142,000. Gross profit as a percentage of net sales increased to 30.4% from
26.8% due to a shift in product mix from low margin analog watches to higher
margin digital watches.
Operating Expenses. Operating expenses were $3.8 million for the years
ended January 2, 1999 and December 31, 1997. Operating expenses were impacted by
the 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. These costs were offset by decreased
variable costs associated with the decrease in net sales.
Interest Expense. Interest expense was $453,000 for the year ended
January 2, 1999 compared to $480,000 for the year ended December 31, 1997, a
decrease of 5.6% or $27,000.
Net Income. As a result of the factors discussed above, net income was
$197,000 for the year ended January 2, 1999 compared to net income of $303,000
for the year ended December 31, 1997, a decrease of $106,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not believe that the adoption of SFAS No.
133 will have a material impact on its financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 Reporting on the Costs of Start Up Activities
(SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start up
activities and organization costs to be expensed as incurred. The Company does
not believe that the adoption of SOP 98-5 will have a material impact on its
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Financial Statements is included on page F-1 this Annual
Report and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting
and financial disclosure as defined by Item 304 of Regulation S-K.
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Omitted pursuant to General Instruction I to Form 10-K.
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ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The Financial Statements are listed in the index on page F-1 of this
Annual Report.
(2) FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts is included in the Notes to the
Financial Statement on Page F-12 of this Annual Report.
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(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* Certificate of Formation of Fantasma, LLC
3.2* Amended and Restated Operating Agreement of Fantasma, LLC
4.1* Indenture dated as of July 21, 1998, by and among AAi.FOSTERGRANT,
Inc. ("AAi"), its domestic subsidiaries named therein (the
"Guarantors") and IBJ Schroder Bank & Trust Company, as Trustee, with
respect to the Series A and Series B 103/4% Senior Notes due 2006.
4.2* Purchase Agreement dated as of July 16, 1998, by and among AAi, the
Guarantors and NationsBanc Montgomery Securities LLC, Prudential
Securities Incorporated and BancBoston Securities Inc. (the "Initial
Purchasers").
10.1* Second Amended and Restated Financing and Security Agreement by and
among AAi, certain of its Subsidiaries, NationsBank, N.A., as agent,
and other lenders party thereto, dated July 21, 1998.
10.2* Fantasma, LLC Member Agreement by and among AAi, Roger D. Dreyer and
Houdini Capital LTD dated as of June 23, 1998.+
10.3.1* Fantasma, LLC Member Agreement by and among AAi and Paul Michaels
dated as of June 23, 1998.
10.3.2 Amendment to Fantasma, LLC Member Agreement by and among AAi and
Paul Michaels dated as of March 26, 1999.+
10.4 Employment Agreement between Fantasma and Roger D. Dreyer dated June
23, 1998.+
10.5 Employment Agreement between Fantasma and Paul Michaels dated as of
June 23, 1998.+
24.1 Power of Attorney
27.1 Financial Data Schedule for the year ended January 2, 1999.
- ----------
* Previously filed as an exhibit to the Company's Registration Statement No.
333-61119 on Form S-4 and by this reference is incorporated herein.
+ Management or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
None.
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FANTASMA, LLC
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FANTASMA, LLC
Date: April 2, 1999 By: /s/ Duane M. DeSisto
----------------------------------
Duane M. DeSisto
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
* /s/ Duane M. DeSisto
- --------------------------------- --------------------------------------
Roger D. Dreyer Duane M. DeSisto
President Treasurer
(Principal Executive Officer) (Principal Financial Officer)
Date: ______________, 1999 Date: April 2, 1999
/s/ Stephen J. Korotsky
- ---------------------------------
Stephen J. Korotsky, Controller
(Principal Accounting Officer)
Date: April 2, 1999
AAi.FosterGrant, Inc. Houdini Capital Ltd.
By: /s/ Gerald F. Cerce By: *
------------------------------ -----------------------------------
Gerald F. Cerce Roger D. Dreyer
President President
Date: April 2, 1999 Date: ______________, 1999
By: /s/ Gerald F. Cerce
-----------------------------
(Attorney-in-fact for
individuals indicated by
asterisk)
Date: April 2, 1999
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INDEX
PAGE
FANTASMA, LLC:
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1997 and January 2, 1999 F-3
Statements of Operations for the Years Ended
December 31, 1996 and 1997 and January 2, 1999 F-4
Statements of Members' Equity for the Years Ended
December 31, 1996 and 1997 and January 2, 1999 F-5
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997 and January 2, 1999 F-6
Notes to Financial Statements F-7
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Fantasma LLC:
We have audited the accompanying balance sheets of Fantasma LLC as of December
31, 1997 and January 2, 1999 and the related statements of operations, members'
equity and cash flows for each of the three years in the period ended January 2,
1999. These financial statements are the responsibility of Fantasma LLC's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fantasma LLC as of December 31,
1997 and January 2, 1999 and the results of its operations and its cash flows
for each of the three years in the period ended January 2, 1999, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 19, 1999
F-2
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FANTASMA LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JANUARY 2,
1997 1999
<S> <C> <C>
CURRENT ASSETS:
Cash $ 238 $ 104
Accounts receivable, less reserves of approximately $402 and $373 5,108 5,088
Inventory 1,908 3,878
Prepaids and other current assets 72 203
--------------- ---------------
Total current assets 7,326 9,273
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Equipment 68 29
Furniture and fixtures 11 --
--------------- ---------------
79 29
Less--Accumulated depreciation (13) (5)
--------------- ---------------
66 24
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $0 and $270 3 4,357
--------------- ---------------
Total assets $ 7,395 $ 13,654
=============== ===============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Note payable to member $ 3,764 $ 7,088
Advances payable to member 1,661 --
Accounts payable and accrued expenses 1,657 1,960
--------------- ---------------
Total current liabilities 7,082 9,048
COMMITMENTS AND CONTINGENCIES (NOTE 1)
MEMBERS' EQUITY 313 4,606
--------------- ---------------
Total liabilities and members' equity $ 7,395 $ 13,654
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
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FANTASMA LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------- YEARS ENDED -----------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
NET SALES $ 10,815 $ 17,163 $ 14,645
COST OF GOODS SOLD 8,838 12,562 10,186
--------------- --------------- ---------------
Gross profit 1,977 4,601 4,459
OPERATING EXPENSES:
Selling expenses 643 1,501 2,197
General and administrative expenses 1,023 2,259 1,612
--------------- --------------- ---------------
Income from operations 311 841 650
INTEREST EXPENSE 236 480 453
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 75 361 197
PROVISION FOR INCOME TAXES (17) (58) --
--------------- --------------- ---------------
Net income $ 58 $ 303 $ 197
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
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FANTASMA LLC
STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY MEMBERS'
INVESTMENT EQUITY TOTAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 1,838 $ -- $ 1,838
Capital contribution -- 1 1
Additional parent company investment 807 -- 807
Conversion of parent company investment to note payable to
member (2,498) -- (2,498)
Net (loss) income (147) 205 58
--------------- -------------- ---------------
BALANCE, DECEMBER 31, 1996 -- 206 206
Distribution to members -- (196) (196)
Net income -- 303 303
--------------- -------------- ---------------
BALANCE, DECEMBER 31, 1997 -- 313 313
Distribution to members -- (531) (531)
Pushdown of purchase price related to AAi.FosterGrant's
investment in Fantasma -- 4,627 4,627
Net income -- 197 197
--------------- -------------- ---------------
BALANCE, JANUARY 2, 1999 $ -- $ 4,606 $ 4,606
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
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FANTASMA LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------- YEARS ENDED -----------------
DECEMBER 31, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58 $ 303 $ 197
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 15 11 277
Write-off of property and equipment 20 -- 49
Change in assets and liabilities-
Accounts receivable (1,811) (1,700) 20
Inventory (1,178) 87 (1,970)
Prepaid expenses and other current assets (121) 49 (131)
Advances payable to member 1,078 674 (1,661)
Accounts payable and accrued liabilities 54 861 303
--------------- --------------- ---------------
Net cash (used in) provided by operating activities (1,885) 285 (2,916)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (40) (14)
Decrease in other assets -- -- 3
--------------- --------------- ---------------
Net cash used in investing activities -- (40) (11)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to member 1,266 -- 7,088
Repayments of note payable to member -- -- (3,764)
Parent company investment 807 -- --
Member contributions (distributions) 1 (196) (531)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 2,074 (196) 2,793
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH 189 49 (134)
CASH, BEGINNING OF PERIOD -- 189 238
--------------- --------------- ---------------
CASH, END OF PERIOD $ 189 $ 238 $ 104
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 156 $ 480 $ --
=============== =============== ===============
Taxes paid $ -- $ 27 $ --
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Conversion of parent company investment to note payable to
member $ 2,498 $ -- $ --
=============== =============== ===============
Pushdown of purchase price related to AAi.FosterGrant's
investment in Fantasma $ -- $ -- $ 4,627
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
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FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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 primarily in the United
States.
Prior to September 1, 1996, Fantasma operated as a division (the Fantasma
division) of Overdrive Capital Corp. (formerly known as Good Stuff Corp.).
Overdrive Capital Corp. (Overdrive) sold the Fantasma 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. The assets were
transferred at historical book value and consisted of the following (in
thousands):
Unexpired royalties $ 289
Accounts receivable 798
Inventory 2,600
Prepaid expenses 49
Furniture and equipment 25
Trademarks 3
-----------
Total assets transferred $ 3,764
===========
The accompanying financial statements prior to the formation of Fantasma
LLC represent the financial results of the Fantasma division as included
in the financial statements of Overdrive from January 1, 1995 to August
31, 1996.
In June 1998, AAi.FosterGrant, Inc. (AAi.FosterGrant) acquired an 80%
interest in Fantasma for approximately $4.1 million in cash (the
Acquisition). The operating agreement under which Fantasma is managed
provides AAi.FosterGrant with sole voting rights on numerous significant
matters. The Acquisition was accounted for using the purchase method. The
purchase price was allocated based on estimated fair market value of
assets and liabilities at the date of acquisition, as follows (in
thousands):
Cash $ 73
Accounts receivable 1,603
Inventory 2,002
Other current assets 165
Furniture and equipment 15
Goodwill 4,626
Notes payable (3,500)
Other current liabilities (934)
-----------
Cash paid $ 4,050
===========
F-7
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FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
The book value of Fantasma's assets and liabilities immediately prior to
the Acquisition approximated fair market value. Goodwill is being
amortized ratably over 10 years.
Basis of Accounting
The accompanying financial statements reflect the application of certain
significant accounting policies, as discussed below and elsewhere in the
notes to financial statements. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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.
Property and Equipment
Fantasma provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of these assets on the
straight-line and accelerated bases over their estimated useful lives as
follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
Equipment 5 years
Furniture and fixtures 7 years
Fantasma has adopted the provisions of Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The adoption of this pronouncement did not have a material
effect on Fantasma's financial position or financial results.
Royalties
Fantasma has several agreements that require royalty payments based on a
percentage of certain net product sales, subject to specified minimum
payments. Minimum future royalty obligations relating to these agreements
total $849,000. Royalty expense was approximately $1,049,000, $1,734,000
and $1,477,000 for the years ended December 31, 1996 and 1997 and January
2, 1999, respectively. Accrued royalties, which are included in accounts
payable and accrued expenses on the accompanying balance sheets, totaled
$732,000 and $707,000 at December 31, 1997 and January 2, 1999,
respectively.
Revenue Recognition
Fantasma recognizes revenue from product sales, net of anticipated returns
and discounts, taking into account historical experience, upon shipment to
the customer.
Concentration of Credit Risk
F-8
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FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
Financial instruments that potentially subject Fantasma to concentrations
of credit risk are principally accounts receivable. A significant portion
of its business activity is with domestic mass merchandisers whose ability
to meet their financial obligations is dependent on economic conditions
germane to the retail industry. During recent years, many major retailers
have experienced significant financial difficulties and some have filed
for bankruptcy protection; other retailers have begun to consolidate
within the industry. To reduce credit risk, Fantasma routinely assesses
the financial strength of its customers.
Intangible and Other Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for Impairment of Long-Lived Assets and For Long-Lived
Assets To Be Disposed Of, Fantasma reviews its long-lived assets
(consisting primarily of goodwill) for impairment as events and
circumstances indicate the carrying amount of an asset may not be
recoverable. Fantasma evaluates the realizability of its long-lived assets
based on profitability and cash flow expectations for the related asset.
Management believes that as of each of the balance sheet dates presented
none of Fantasma's long-lived assets were impaired. Amortization expense
was approximately $270,000 for the year ended January 2, 1999.
Disclosure of Fair Value of Financial Instruments
Fantasma's financial instruments consist mainly of cash, accounts
receivable, accounts payable and debt. The carrying amounts of Fantasma's
financial instruments approximate fair value.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS
No. 133 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 instruments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-up
Activities (SOP 98-5). SOP 98-5 provides guidance on the financial
reporting of start-up activities and organization costs to be expensed as
incurred. Fantasma does not believe that the adoption of SOP 98-5 will
have a material impact on its financial statements.
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. The provision for income taxes reflects New York
City Unincorporated Business Tax and New York State filing fees. For the
period from January 1, 1996 to August 31, 1996, Fantasma accounted for
state income taxes on a separate company basis.
(2) NOTE PAYABLE
F-9
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FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
Fantasma issued a note payable to Overdrive as consideration for the asset
purchase on September 1, 1996 (see Note 1), under which it could borrow up
to $5,000,000. At December 31, 1997, approximately $3,764,000 was
outstanding under this note. The note accrued interest at the prime rate
(8.5% at December 31, 1997). Total interest charged on this note was
approximately $107,000, $320,000 and $141,000 in the years ended December
31, 1996 and 1997 and January 2, 1999, respectively. This note was repaid
in June 1998 with the proceeds from a note payable issued to
AAi.FosterGrant.
On June 13, 1998, the Company entered into a $15,000,000 demand revolving
promissory note payable with AAi.FosterGrant. Borrowings under the note
are secured by substantially all of Fantasma's assets and bear interest at
a rate equal to AAi.FosterGrant's borrowing rate. The note is payable on
demand with thirty-days notice. Total interest charged on this note was
approximately $282,000 for the year ended January 2, 1999. At January 2,
1999, $7,088,000 was outstanding under this note payable.
(3) OPTIONS
In connection with AAi.FosterGrant's investment in Fantasma, Fantasma
issued options to two employees. The options provide that the employees
may purchase up to 13% of Fantasma at the fair market value on the date of
grant. Certain of these options contain performance criteria and,
therefore, will be accounted for as variable options. Based on 1998
activity, options to purchase 3% of Fantasma expired during the fiscal
year. As of January 2, 1999 options to purchase 10% of the Company were
outstanding and the exercise price was equal to or greater than the fair
market value, therefore no expense was recorded.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of
stock options granted to employees to be included in the statement of
operations or disclosed in the notes to financial statements. Fantasma has
determined that it will account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and elect the disclosure-only alternative under SFAS
No. 123.
Had compensation cost for Fantasma's options been determined based on the
fair value at the grant dates, as prescribed in SFAS No. 123, Fantasma's
net loss for the fiscal year ended January 2, 1999 would have been
$63,000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants during the applicable period: no dividend;
yield volatility of 35.53%; risk-free interest rates of 6.00% and a
weighted average expected option term of 5 years. The weighted average
grant date fair value for an option to purchase a 1% membership interest
in Fantasma granted during the year ended January 2, 1999 was
approximately $14,400.
(4) RELATED PARTY TRANSACTIONS
Shared Resources
As discussed in Note 1, for the period from January 1, 1995 to August 31,
1996, Fantasma operated as the Fantasma division of Overdrive. During this
period, and for the period from September 1, 1996 to June 10,
F-10
<PAGE> 19
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
1998, general corporate overhead costs related to corporate headquarters
and shared administrative support were allocated by Overdrive to Fantasma
based on a number of factors, including, for example, personnel and space
utilized. In addition, Fantasma has operated as a division of
AAi.FosterGrant since June 10, 1998 and has had similar expenses allocated
to it by AAi.FosterGrant using similar factors. Management believes these
allocations were reasonable and the costs of the services charged to
Fantasma were not materially different from the costs that would have been
incurred had Fantasma performed these functions as a stand-alone entity.
Overdrive allocated expenses through advances. Interest on advances was
charged monthly until June 10, 1998, based on the prime rate applied to
the average outstanding monthly balance. Total interest charged on
advances payable to Overdrive was $129,000, $160,000, and $27,000 in the
years ended December 31, 1996 and 1997 and January 2, 1999, respectively.
Advances from Overdrive were repaid on June 10, 1998. Expenses allocated
by AAi.FosterGrant are funded through the note payable (see Note 2 for
further discussion).
(5) SIGNIFICANT CUSTOMERS
During the year ended January 2, 1999, three customers accounted for
approximately 22%, 17% and 10% of net sales, respectively. These
customers' accounts receivable balances represented approximately 27%, 14%
and 4% of gross accounts receivable as of January 2, 1999.
F-11
<PAGE> 20
FANTASMA LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
(Continued)
(6) SEGMENT REPORTING
The Company 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 now to allocate resources and assess performance. To date, the
Company has viewed its operations and manages its business as principally
one segment.
(7) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND FROM BALANCE AT
PERIOD EXPENSES RESERVES(1) END OF PERIOD
<S> <C> <C> <C> <C>
Accounts receivable-
December 31, 1996 $ 80 $ 171 $ 65 $ 186
December 31, 1997 186 360 144 402
January 2, 1999 402 -- 29 373
</TABLE>
(1) Amounts deemed uncollectible
F-12
<PAGE> 1
Exhibit 10.3.2
AMENDMENT TO MEMBER AGREEMENT
-----------------------------
The undersigned, being parties to the Member Agreement, dated June 19/23,
1998, as previously amended, do agree that Section A.1 is hereby amended by
changing the third line to read as follows: "For the period commencing on the
date hereof and ending June 30, 1999, "First Exercise".
The Member Agreement remains in full force and effect, amended and
unmodified, except to the extent expressly set forth above.
The undersigned have executed this Amendment as of the 26th day of March,
1999.
AAi.FosterGrant, Inc.
By /s/ Duane DeSisto
------------------------------
Chief Financial Officer
/s/ Paul Michaels
------------------------------
Paul Michaels
<PAGE> 1
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of the 23rd day of June, 1998, between Fantasma,
LLC., a Delaware limited liability company with its principal place of business
at 500 George Washington Highway, Smithfield, Rhode Island 02917, ("Employer")
and Roger Dreyer of New York, New York, ("Employee").
WITNESSETH:
----------
WHEREAS, Employee possesses valuable skills, experience and knowledge in
the marketing, distribution and sale of watches and clocks and has heretofore
served as President of Employer; and
WHEREAS, on this date, AAi.FosterGrant, Inc. ("AAi") is acquiring a
majority of the membership interests of Employer, including acquiring of a 13.0%
membership interest from Employee (the "Interest"); and
WHEREAS, Employer has a need for Employee's services and wishes to employ
Employee, and Employee wishes to accept employment on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the undertakings and the payments
provided under the covenants and agreements herein set forth, the parties hereto
mutually agree as follows:
1. EMPLOYMENT.
----------
Employer hereby agrees to employ Employee as President of Employer and/or
in such other capacity of Employer as may be mutually satisfactory to Employer
and Employee or as Employer determines is compatible with Employee's abilities,
and Employee agrees to accept such employment upon the terms and conditions
hereinafter set forth.
2. TERM.
----
The term of employment pursuant to this Agreement shall begin as of the
date hereof, and shall continue for the period ending three (3) years
thereafter, unless terminated prior thereto pursuant to the terms of this
Agreement.
3. DUTIES AND AUTHORITY.
--------------------
a. During the Term, Employee shall devote his full time and best
efforts to the business of Employer and shall perform the duties of his office
of President and exercise such powers, as may from time to time be assigned to
or vested in him, faithfully, diligently and loyally, devoting thereto the whole
of his time, attention and skill to the due performance of his duties hereunder,
and shall follow the lawful directions of the Chairman of Employer.
<PAGE> 2
b. During the Term, Employee shall be a full time employee of
Employer and Employee shall not engage in any other business activity; PROVIDED,
HOWEVER, that the foregoing shall not be construed as preventing Employee from
investing Employee's assets or otherwise conducting Employee's personal affairs,
unless such investment and activity interferes with the due performance of
Employee's duties to Employer hereunder.
c. Employee shall report only to the Chairman of Employer so long as
he is the Chairman of AAi, and if not the same person, then to the Chairman of
AAi, or in the event of the Chairman's absence from the country or other
unavailability, the person designated by the Chairman to fulfill the duties of
the Chairman generally. The scope of said employment as, and the duties and
responsibilities to be performed by Employee hereunder as President of the
Employer shall consist of responsibility for overall operations of Employer.
d. Employee shall work out of Employer's location in Metropolitan
New York City.
4. DEATH, DISABILITY OR INCAPACITY DURING EMPLOYMENT.
-------------------------------------------------
a. If during the Term Employee dies, Employer shall provide to the
estate of Employee the items set forth at SECTION 4.c, below.
b. If during the Term Employee becomes disabled or incapacitated to
such an extent that, in the reasonable opinion of Employer, Employee is unable
to discharge a material portion of Employee's duties as contemplated by this
Agreement or becomes permanently disabled under Employer's long term disability
insurance coverage ("Permanent Disability"), then, at the option of Employer,
Employee's employment hereunder may be terminated upon written notice to
Employee or Employee's personal representative; PROVIDED, HOWEVER, that Employer
shall pay to Employee, as and when otherwise due, the items set forth at SECTION
4.c below.
c. Upon the death or Permanent Disability of Employee, as set forth
in SECTION 4.a or SECTION 4.b, above, the Employer shall provide the following:
i. Basic Salary owing to Employee (x) upon the death of the
Employee through and including the end of the month in which
the Employee dies or (y) upon the Permanent Disability of
Employee, through and including the earlier of (1) the
expiration of the term of this Agreement or (2) the date he
receives payments under Employer's long term disability
insurance coverage;
ii. Incentive Compensation pro rated on a 12 month basis from
the start of the fiscal year through the date of death or
Permanent Disability assuming that financial performance of
Employer for the balance of the year is the same as the
twelve month period preceding his Permanent Disability
through and including the end of the month in which Employee
dies or becomes permanently disabled; and
<PAGE> 3
iii. Any benefits due under any then current benefits program in
which Employee participates.
5. TERMINATION BY EMPLOYER.
-----------------------
a. In the event that Employee shall:
i. fail to devote his full time and best efforts to the
performance of his services during the term of this
Agreement; or
ii. commit an act of gross negligence, dishonesty, fraud, gross
insubordination, gross malfeasance, disloyalty, bad faith or
breach of trust in the performance of his duties and
obligations under this Agreement or otherwise against or
materially adversely affecting the reputation, business or
business relationship of Employer; or
iii. fail to observe the agreements of nondisclosure of
information and not to compete set forth in SECTION 10,
respectively, hereof; or
iv. become the subject of a Bankruptcy as defined at EXHIBIT C,
attached hereto, or be accused of (by the filing of an
accusatory instrument) or be convicted of a felony or an act
involving moral turpitude, fraud, dishonesty or theft which,
in the reasonable judgment of the Chairman of Employer,
subjects Employee or Employer to public disrespect, scandal
or ridicule so as to materially adversely affect the utility
of the services of Employee to Employer; or
v. Be accused of or commit a felony or an act which, in the
reasonable judgment of the Chairman of Employer, subjects
Employee or Employer to public disrespect, scandal or
ridicule so as to materially adversely affect the utility of
the services of Employee to Employer, provided that in such
circumstances the Employer shall have the right to suspend
the Employees employment without compensation and such
suspension shall continue for a reasonable period of time
before it shall constitute cause for termination under this
Paragraph 5, such reasonable period of time to be no less
than (a) the withdrawal of the accusation; (b) six (6)
months and (c) no more than (a) the earlier of the
expiration of this Agreement, (b) the termination of this
Agreement for other reasons as provided in this Agreement,
the conviction of Employee or (c) eighteen (18) months after
the initial suspension by Employer; or
vi. refuse to perform the duties assigned to him in good faith
in accordance with this Agreement; or
<PAGE> 4
vii. violates or fail to observe in a material respect any lawful
business instruction or lawful business policy established
by the Employer that is of a material nature with respect to
the operation of its business and affairs; or
viii.fail to, or refuse to, substantially perform his duties,
responsibilities and obligations as set forth in this
Agreement after a written demand for substantial performance
is delivered by Employer, which specifically identifies the
manner in which Employee has not substantially performed his
duties, responsibilities, and obligations, if the Employee's
failure or refusal is not cured within twenty (20) days
after such written demand;
then Employer shall be deemed to have cause to terminate Employee's employment
and may (after written notice to Employee and a reasonable time (not to exceed
twenty (20) days) to cure with respect to SECTIONS 5.a.i., 5.a.vi and 5.a.vii
only) completely terminate Employee's employment and rights to receive any
future compensation or other benefits hereunder (including but not limited to
Basic Salary under SECTION 7, Incentive Compensation under SECTION 8, benefits
under SECTION 6 and reimbursement of expenses under SECTION 9 incurred after the
date of termination) and Employer shall be relieved of any further obligations
hereunder.
b. In addition to its right to terminate employment of Employee set
forth in SECTION 5.a, above, and in SECTION 2, above, Employer may at any time
terminate its obligations to Employee hereunder if Employer does not meet 75% of
the Target EBIT as set forth in EXHIBIT A for any year; PROVIDED, HOWEVER, that,
in the event of such termination, so long as Employee is in compliance with his
obligations under the Non Competition/Proprietary Rights Agreement between
Employer, AAi and Company, dated this date, Employee shall be entitled to
receive an amount equal to the Basic Salary, as and when otherwise provided for
and payable herein, for the balance of the then unexpired Term, but Employee
shall not be entitled to Incentive Compensation under SECTION 8, benefits under
SECTION 6 or reimbursement of expenses referred to in SECTION 9 hereof incurred
after the date of termination.
c. Notwithstanding the foregoing, after termination, Employer shall
remain obligated to pay Employee Basic Salary and Incentive Compensation, both
as hereinafter defined, fully earned by Employee or accrued prior to such
termination.
6. BENEFITS.
--------
During the Term:
a. Employer shall provide Employee with benefits equivalent to those
offered to Division heads of AAi, as amended from time to time, which currently
includes 401(k), life insurance, health insurance and long term disability
insurance;
<PAGE> 5
b. Employee shall be entitled to participate in AAi's stock option
program;
c. $1,000,000 company paid term life insurance, payable to
Employee's designated beneficiary, provided Employee is insurable at standard
rates.
7. BASIC SALARY.
------------
Employer agrees to pay to Employee the following basic compensation
("Basic Salary"), less normal and customary payroll deductions for local, state
and federal income, employment, excise or similar taxes, fees and deductions,
for all services rendered to Employer at the following annual rate (payable at
Employer's normal pay periods in arrears): $250,000, which shall be increased on
each anniversary of the date of this Agreement to reflect changes in the
Consumer Price Index (CPI-U) for Metropolitan New York from June 1, 1998. Basic
Salary shall be subject to annual review and periodic increases by Employer, in
Employer's absolute discretion.
8. INCENTIVE COMPENSATION.
----------------------
During the Term, Employer shall pay to Employee (a) the incentive
compensation set forth at EXHIBIT A, attached hereto, ("Incentive Compensation")
and (b) a bonus, at the absolute discretion of Employer, of up to 50% of Basic
Salary less normal and customary payroll deductions for local, state and federal
income, employment, excise or similar taxes, fees and deductions.
9. REIMBURSEMENT OF EXPENSES.
-------------------------
Employee is authorized to incur reasonable expenses in connection with
and for the promotion of the business of Employer, including expenses for meals
and lodging, entertainment, and similar items as required from time to time by
Employee's duties which are beneficial to Employer. Employer shall reimburse
Employee for all such expenses, in accordance with Employer's policies in effect
from time to time, upon the presentation of an account therefor, together with
appropriate supporting documentation.
10. SPECIAL PROVISIONS.
------------------
In consideration for the agreements set forth in this Agreement and
AAi's purchase of the Interest, Employee agrees to the provisions set forth at
EXHIBIT B, attached hereto and incorporated herein by reference, which are an
inducement for Employer to enter into this Agreement and AAi to purchase the
Interest, and shall survive the Term along with SECTIONS 11 THROUGH 15.
11. WAIVER.
------
Failure of any party hereto to insist upon strict compliance with any
of the terms, covenants and conditions hereof shall not be deemed a waiver or
relinquishment of any similar right or power hereunder at any subsequent time.
<PAGE> 6
12. NOTICES.
-------
Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by certified mail, return receipt
requested, or by telefacsimile, to the party to whom notice should be given at
the address set forth below:
Employer: Fantasma, LLC
500 George Washington Highway
Smithfield, Rhode Island 02917
Attn: Mr. Gerald F. Cerce
Telefacsimile: 401-231-3212
With a
copy to: Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
Attn: Pasco Gasbarro Jr., Esq.
Telefacsimile: 401-277-9600
Employee: Mr. Roger Dreyer
345 East 69th Street
Apt. 14H
New York, New York 10021
With a
copy to Rosen & Reade, LLP
757 Third Avenue
New York, NY 10017-2049
Attn: Jerry Kowalski, Esq.
Telefacsimile: 212-586-0951
13. ENTIRE AGREEMENT.
----------------
This Agreement (including the Exhibits attached hereto) and the Member
Agreement dated this date contains the entire agreement of the parties with
respect to the subject matter hereof and supersedes and cancels all other
agreements, whether oral or written, including but not limited to any other
employment agreement or terms of employment existing on the date hereof. This
Agreement may not be amended or modified, except by an agreement in writing
signed by the Employee and an executive officer of Employer.
<PAGE> 7
14. REPRESENTATIONS OF EMPLOYEE; INDEMNITY.
--------------------------------------
In order to induce Employer to enter into this Agreement, Employee
represents and warrants to Employer that Employee is free to enter into and
perform this Agreement and that he is not a party to any oral or written
contract, understanding, agreement or restriction which inhibits or which will
be violated by Employee's performance of the duties assigned to Employee
hereunder. In the event any action or proceeding shall be wrongfully commenced
and prosecuted against Employee by reason of Employee's entry into this
Agreement and/or the performance of Employee's duties, Employer shall indemnify
and hold Employee harmless from and against any losses or expenses incurred by
Employee, including reasonable attorneys' fees, provided Employer shall have the
sole right to designate counsel to defend Employee and sole right to approve any
settlements or other resolutions of the matter.
15. ADEQUACY OF REMEDY.
------------------
Employee acknowledges that he remedy at law for Employee's breach of
any of the provisions herein contained relating to non-competition or
confidentiality will be inadequate and that Employer shall be entitled to
injunctive relief, in addition to any other remedies that Employer may have.
16. SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and the successors and assigns of Employer and the heirs,
assigns, executors, administrators and legal representatives of Employee. This
Agreement may not be assigned by either party without the prior written consent
of the other; provided, however, that Employer may assign this Agreement,
without Employee's consent, to any person or entity, controlling, controlled by
or under common control with Employer, or in connection with the merger,
reorganization or consolidation of Employer or sale of all or substantially all
of its assets.
17. GOVERNING LAW.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Rhode Island, without regard to its conflict of laws
rules. Any action, suit or proceeding seeking to enforce any provision of, or
based on any right arising out of, this Agreement shall be brought against any
of the parties in the courts of the State of Rhode Island or, if it has or can
acquire jurisdiction, in the United States District Court for the District of
Rhode Island, and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served by mail on any
party anywhere in the world, in accordance with court rules. Each party hereby
waives trial by jury in any such action, suit or proceeding.
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: EMPLOYER:
FANTASMA, LLC
/s/ Laurie Wilkins By:/s/ Duane DeSisto
- ------------------------------- ---------------------------
Title: Chief Financial
Officer and Treasurer
Witness:
/s/ /s/ Roger Dreyer
- ------------------------------- ---------------------------
EMPLOYEE: Roger Dreyer
<PAGE> 1
Exhibit 10.5
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of the 23rd day of June, 1998, between Fantasma,
LLC., a Delaware limited liability company with its principal place of business
at 500 George Washington Highway, Smithfield, Rhode Island 02917 ("Employer"),
and Paul Michaels of Shoreview, Minnesota ("Employee").
WITNESSETH:
----------
WHEREAS, Employee possesses valuable skills, experience and knowledge in
the marketing, distribution and sale of watches and clocks and has heretofore
served as Executive Vice President of Employer; and
WHEREAS, on this date, AAi.FosterGrant, Inc. ("AAi") is acquiring a
majority of the membership interests of Employer; and
WHEREAS, Employer has a need for Employee's services and wishes to employ
Employee, and Employee wishes to accept employment on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the undertakings and the payments
provided under the covenants and agreements herein set forth, the parties hereto
mutually agree as follows:
1. EMPLOYMENT.
----------
Employer hereby agrees to employ Employee as Executive Vice President
of Employer and/or in such other capacity of Employer as may be mutually
satisfactory to Employer and Employee or as Employer determines is reasonably
commensurate with the Employee's education, experience and skills, and Employee
agrees to accept such employment upon the terms and conditions hereinafter set
forth.
2. TERM.
----
The term of employment pursuant to this Agreement shall begin as of
the date hereof, and shall continue for the period ending three (3) years
thereafter, unless terminated prior thereto pursuant to the terms of this
Agreement.
3. DUTIES AND AUTHORITY.
--------------------
a. During the Term, Employee shall devote his full time and best
efforts to the business of Employer and shall perform the duties of his office
for the time being and exercise such powers, as may from time to time be
assigned to or vested in him, faithfully, diligently and loyally,
<PAGE> 2
devoting thereto the whole of his time, attention and skill to the due
performance of his duties hereunder, and shall follow the lawful directions of
the President of Employer.
b. During the Term, Employee shall be a full time employee of
Employer and Employee shall not engage in any other business activity; PROVIDED,
HOWEVER, that the foregoing shall not be construed as preventing Employee from
investing Employee's assets or otherwise conducting Employee's personal affairs,
unless such investment and activity interferes with the due performance of
Employee's duties to Employer hereunder.
c. Employee shall report only to the President of Employer, or in
the event of the President's absence from the country or other unavailability,
the person designated by the Chairman or the President to fulfill the duties of
the President generally. The scope of said employment as, and the duties and
responsibilities to be performed by Employee hereunder as Executive Vice
President of Employer shall consist of responsibility for handling product
development, marketing, and key accounts worldwide and for sales in the
Minneapolis, Minnesota territory.
d. Employee shall work in the Minneapolis, Minnesota, metropolitan
area out of Employer's office, and Employer shall provide office space and an
assistant at the office.
4. DEATH, DISABILITY OR INCAPACITY DURING EMPLOYMENT.
-------------------------------------------------
a. If during the Term Employee dies, Employer shall provide to the
estate of Employee the items set forth at SECTION 4.c, below.
b. If during the Term Employee becomes Permanently Disabled
("Permanent Disability" meaning permanently disabled under Employer's long term
disability coverage or if no such coverage, his being disabled or incapacitated
to such an extent that he is unable to perform a material portion of his duties
as contemplated by this Agreement for a period of six (6) consecutive months
("Permanently Disabled" or "Permanent Disability"), then, at the option of
Employer, Employee's employment hereunder may be terminated upon written notice
to Employee or Employee's personal representative; PROVIDED, HOWEVER, that
Employer shall pay to Employee, as and when otherwise due, the items set forth
at SECTION 4.c below.
c. Upon the death or Permanent Disability of Employee, as set forth
in SECTION 4.a or SECTION 4.b, above, the Employer shall provide the following:
i. Basic Salary owing to Employee through and including the end
of the month in which the Employee dies or becomes disabled
or incapacitated;
ii. Incentive Compensation pro rated on a 12-month basis from
the start of the fiscal year through the date of death or
Permanent Disability, assuming that financial performance of
Employer for the balance of the year is the same as the
twelve-month period preceding his Permanent
<PAGE> 3
Disability, through and including the end of the month in
which Employee dies or becomes disabled or incapacitated;
and
iii. Any benefits due under any then current benefits program in
which Employee participates.
5. TERMINATION BY EMPLOYER.
-----------------------
a. In the event that Employee shall:
i. fail to devote his full time and best efforts to the
performance of his services during the term of this
Agreement; or
ii. commit an act of gross negligence, dishonesty, fraud, gross
insubordination, gross malfeasance, disloyalty, bad faith or
breach of trust in the performance of his duties and
obligations under this Agreement or otherwise against or
materially adversely affecting the reputation, business or
business relationships of Employer; or
iii. fail to observe the agreements of nondisclosure of
information and not to compete set forth in SECTION 10,
respectively, hereof; or
iv. become the subject of a Bankruptcy as defined at EXHIBIT C,
attached hereto, or be accused of (in the filing of an
accusatory instrument) or be convicted of a felony or an act
involving moral turpitude, fraud, dishonesty or theft which,
in the reasonable judgment of the Chairman of Employer,
subjects Employee or Employer to public disrespect, scandal
or ridicule so as to materially adversely affect the utility
of the services of Employee to Employer; or
v. be accused of or commit a felony or an act which, Employer
to public disrespect, scandal or ridicule so as to
materially adversely affect the utility of the services of
Employee to Employer, and shall continue ninety (90) days
after the Employer's notifying Employee of such
circumstances; provided that in such circumstances, after
the expiration of said ninety (90) day period, the Employer
shall have the right to suspend the Employees employment
with compensation reduced to 50% of Basic Salary during such
suspension and such suspension shall continue for a
reasonable period of time before it shall constitute cause
for termination under this Paragraph 5, such reasonable
period of time to be no less than six (6) months and no more
than the earlier of the expiration of this Agreement, the
termination of this Agreement for other reasons as provided
in this Agreement, the conviction of Employee or eighteen
(18) months after the initial suspension by Employer; or
<PAGE> 4
vi. refuse to perform the duties assigned to him in good faith
in accordance with this Agreement; or
vii. violates or fail to observe in a material respect any lawful
business instruction or lawful business policy established
by the Employer that is of a material nature with respect to
the operation of its business and affairs; or
viii.fail to, or refuse to, substantially perform his duties,
responsibilities and obligations as set forth in this
Agreement after a written demand for substantial performance
is delivered by Employer, which specifically identifies the
manner in which Employee has not substantially performed his
duties, responsibilities, and obligations, if the Employee's
failure or refusal is not cured within twenty (20) days
after such written demand;
then Employer shall be deemed to have cause to terminate Employee's employment
and may (after written notice to Employee and a reasonable time (not to exceed
twenty (20) days) to cure with respect to SECTIONS 5.a.i., 5.a.vi and 5.a.vii
only) completely terminate Employee's employment and rights to receive any
future compensation or other benefits hereunder (including but not limited to
Basic Salary under SECTION 7, Incentive Compensation under SECTION 8, benefits
under SECTION 6 and reimbursement of expenses under SECTION 9 incurred after the
date of termination) and Employer shall be relieved of any further obligations
hereunder.
b. In addition to its right to terminate employment of Employee set
forth in SECTION 5.a, above, and in SECTION 2, above, Employer may at any time,
without cause, terminate its obligations to Employee hereunder if Employer does
not meet 75% of the Target EBIT set forth in EXHIBIT A for any year or 50% of
the Sales Target set forth at EXHIBIT A for any year; PROVIDED, HOWEVER, that,
in the event of such termination, so long as Employee is in compliance with his
obligations under SECTION 10, below, Employee shall be entitled to receive an
amount equal to one hundred percent (100%) the Basic Salary, as and when
otherwise provided for and payable herein, for athe balance of the unexpired
Term, but Employee shall not be entitled to Incentive Compensation under SECTION
8, benefits under SECTION 6 or reimbursement of expenses referred to in SECTION
9 hereof incurred after the date of termination.
c. Notwithstanding the foregoing, after termination, Employer shall
remain obligated to pay Employee Basic Salary, fully earned by Employee prior to
such termination and Incentive Compensation as calculated in accordance with
SECTION 4.c.ii.
d. If at the expiration of the three (3) year term, Employer
terminates the employment of Employee for reasons other than as set forth at
SECTION 5.a, Employer shall pay to Employee as severance for a period of one (1)
year after such expiration, payable at Employer's normal pay periods, an amount
equal to the Basic Salary so long as Employee is in compliance with his
obligations under Section 10, below.
<PAGE> 5
6. BENEFITS.
--------
During the Term:
a. Employer shall provide Employee with benefits equivalent to those
offered to middle management of AAi, as amended from time to time, which
currently includes 401(k), life insurance, health insurance and long term
disability insurance; and
b. Employee shall be entitled to participate in AAi's stock option
program.
c. Employer shall pay to Employee the sum of $267 per month as
reimbursement for additional health insurance coverage.
7. BASIC SALARY.
------------
Employer agrees to pay to Employee the following basic compensation
("Basic Salary"), less normal and customary payroll deductions for local, state
and federal income, employment, excise or similar taxes, fees and deductions,
for all services rendered to Employer at the following annual rate ( payable at
Employer's normal pay periods in arrears): $200,000. Basic Salary shall be
subject to annual review and adjustment by Employer, in Employer's absolute
discretion.
8. INCENTIVE COMPENSATION.
----------------------
During the Term, Employer shall pay to Employee the incentive
compensation set forth at EXHIBIT A, attached hereto, ("Incentive Compensation")
less normal and customary payroll deductions for local, state and federal
income, employment, excise or similar taxes, fees and deductions.
9. REIMBURSEMENT OF EXPENSES.
-------------------------
Employee is authorized to incur reasonable expenses in connection with
and for the promotion of the business of Employer, including expenses for meals
and lodging, entertainment, and similar items as required from time to time by
Employee's duties which are beneficial to Employer. Employer shall reimburse
Employee for all such expenses, in accordance with Employer's policies in effect
from time to time, upon the presentation of an account therefor, together with
appropriate supporting documentation.
10. SPECIAL PROVISIONS.
------------------
In consideration for the agreements set forth in this Agreement and
AAi's purchase of the membership interests in Employer, Employee agrees to the
provisions set forth at EXHIBIT B, attached hereto and incorporated herein by
reference, which are an inducement for Employer to enter into this Agreement and
AAi to purchase membership interests in Employer, and shall survive the Term
along with SECTIONS 11 THROUGH 15.
11. WAIVER.
------
<PAGE> 6
Failure of any party hereto to insist upon strict compliance with any
of the terms, covenants and conditions hereof shall not be deemed a waiver or
relinquishment of any similar right or power hereunder at any subsequent time.
12. NOTICES.
-------
Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by certified mail, return receipt
requested, or by telefacsimile, to the party to whom notice should be given at
the address set forth below:
Employer: Fantasma, LLC
500 George Washington Highway
Smithfield, Rhode Island 02917
Attn: Mr. Gerald F. Cerce
Telefacsimile: 401-231-3212
With a
copy to: Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
Attn: Pasco Gasbarro Jr., Esq.
Telefacsimile: 401-277-9600
Employee: Mr. Paul Michaels
5983 Highview Place
Minneapolis, Minnesota 55126
Telefacsimile: 612-481-0561
13. ENTIRE AGREEMENT.
----------------
This Agreement (including the Exhibits attached hereto) and the Member
Agreement dated this date contains the entire agreement of the parties with
respect to the subject matter hereof and supersedes and cancels all other
agreements, whether oral or written, including but not limited to any other
employment agreement or terms of employment existing on the date hereof. This
Agreement may not be amended or modified, except by an agreement in writing
signed by the Employee and an executive officer of Employer.
14. REPRESENTATIONS OF EMPLOYEE; INDEMNITY.
--------------------------------------
In order to induce Employer to enter into this Agreement, Employee
represents and warrants to Employer that Employee is free to enter into and
perform this Agreement and that he is not a party to any oral or written
contract, understanding, agreement or restriction which inhibits or which will
be violated by Employee's performance of the duties assigned to Employee
hereunder. In the event any action or proceeding shall be wrongfully commenced
and prosecuted against Employee by reason
<PAGE> 7
of Employee's entry into this Agreement and/or the performance of Employee's
duties, Employer shall indemnify and hold Employee harmless from and against any
losses or expenses incurred by Employee, including reasonable attorneys' fees,
provided Employer shall have the sole right to designate counsel to defend
Employee and sole right to approve any settlements or other resolutions of the
matter.
15. ADEQUACY OF REMEDY.
------------------
Employee acknowledges that he remedy at law for Employee's breach of
any of the provisions herein contained relating to non-competition or
confidentiality will be inadequate and that Employer shall be entitled to
injunctive relief, in addition to any other remedies that Employer may have.
16. SUCCESSORS AND ASSIGNS.
----------------------
[Signatures Appear On Next Page]
<PAGE> 8
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and the successors and assigns of Employer and the heirs,
assigns, executors, administrators and legal representatives of Employee. This
Agreement may not be assigned by either party without the prior written consent
of the other; provided, however, that Employer may assign this Agreement,
without Employee's consent, to any person or entity, controlling, controlled by
or under common control with Employer, or in connection with the merger,
reorganization or consolidation of Employer or sale of all or substantially all
of its assets.
17. GOVERNING LAW.
-------------
This Agreement shall be governed by and construed in accordance
with the laws of the State of Rhode Island, without regard to its conflict of
laws rules. Any action, suit or proceeding seeking to enforce any provision of,
or based on any right arising out of, this Agreement shall be brought against
any of the parties in the courts of the State of Rhode Island or, if it has or
can acquire jurisdiction, in the United States District Court for the District
of Rhode Island, and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served by mail on any
party anywhere in the world, in accordance with court rules. Each party hereby
waives trial by jury in any such action, suit or proceeding.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: EMPLOYER:
FANTASMA, LLC
/s/ Laurie Wilkins By: /s/ Duane DeSisto
- ----------------------------- ------------------------------
Title: Treasurer
Witness:
/s/ Ramona M. Michaels /s/ Paul Michaels
- ----------------------------- ------------------------------
EMPLOYEE: Paul Michaels
<PAGE> 1
Exhibit 24.1
FANTASMA, LLC
POWER OF ATTORNEY TO SIGN ANNUAL REPORT ON FORM 10-K
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby
constitute and appoint Gerald F. Cerce and Duane M. DeSisto, and each of them,
with full power of substitution and full power to act without the other, as his
true and lawful attorney-in-fact and agent to act in his name, place and stead
and to execute in the name and on behalf of the undersigned, individually and in
each capacity stated below, a Annual Report on Form 10-K for the year ended
January 2, 1999 of Fantasma, LLC (the "Company"), and any and all amendments
(including post-effective amendments) thereto, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause to
be done by virtue hereof.
This Power of Attorney has been signed by the following persons in the
capacities and on the date or dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roger D. Dreyer President March 30, 1999
- ------------------------------- (Principal Executive Officer)
Roger D. Dreyer
Houdini Capital Ltd. Member March 30, 1999
By: /s/ Roger D. Dreyer
---------------------------
Roger D. Dreyer, President
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