-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R8amCC4W8OCvWrzGRME/jdp0TMp7B6U822+VjxCNqTzlSLaoUy0FwXWoAVy6D6oP KcBI7wG4ba+nhOY60BiPbA== 0000950135-01-001019.txt : 20010330 0000950135-01-001019.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950135-01-001019 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAI FOSTERGRANT INC CENTRAL INDEX KEY: 0001067346 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 050419304 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61119 FILM NUMBER: 1583728 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 10-K405 1 b38115aae10-k405.txt AAI.FOSTERGRANT INC. 1 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 December 30, 2000; or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 From the transition period from ________ to ________. AAI.FOSTERGRANT, INC. (Exact Name of Registrant as Specified in Its Charter) RHODE ISLAND 05-0419304 (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 (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 29, 2001, the aggregate market value of the voting equity held by non-affiliates of the Registrant was none. As of March 29, 2001, 608,000 shares of Common Stock and 43,700 shares of Series A Preferred Stock and 70,870 shares of Series B Preferred Stock of the Registrant were issued and outstanding. 2 TABLE OF CONTENTS PAGE DESCRIPTION NUMBER - ----------- ------ Part I. Item 1 -- Business............................................. 3 Item 2 -- Properties........................................... 8 Item 3 -- Legal Proceedings.................................... 8 Item 4 -- Submission of Matters to a Vote of Security Holders.. 8 Part II. Item 5 -- Market for the Company's Common Equity and Related Stockholder Matters.................................. 9 Item 6 -- Selected Financial Data.............................. 9 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11 Item 7A -- Quantitative and Qualitative Disclosures About Market Risk.......................................... 20 Item 8 -- Financial Statements and Supplementary Data.......... 20 Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 20 Part III. Item 10 -- Directors and Executive Officers of the Company...... 21 Item 11 -- Executive Compensation............................... 25 Item 12 -- Security Ownership of Certain Beneficial Owners and Management....................................... 30 Item 13 -- Certain Relationships and Related Transactions....... 31 Part IV. Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 33 Signatures...................................................... 37 2 3 PART I ITEM 1. BUSINESS GENERAL AAi.FosterGrant, Inc. ("AAi" or the "Company") is a value-added distributor of optical products, costume jewelry, watches, clocks and other accessories to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. The Company sells its products in over 48,000 retail locations. The Company markets its products under its own brand names such as Foster Grant(R) as well as customers' private labels and numerous licensed brand names including Ironman Triathalon(R), Disney(R), Warner Bros.(R) and Revlon(R). The Company outsources all of its manufacturing. The Company's product lines contain a large number of stock keeping units ("SKUs") with low retail price points and typically represent a small percentage of retailers' total sales. As a result, many of AAi's customers have chosen to outsource the merchandising of these products to the Company. AAi's service program provides retailers with customized displays and product packaging and store-level merchandising designed to maximize sales and inventory turnover. In 2000, the Company employed approximately 950 field service representatives who regularly visit program customers' stores to arrange, replenish and restock displays, reorder product and attend to markdowns and allowances. By providing retailers with in-store product management, the Company retains control of its product marketing and pricing, allowing AAi to maximize product sales and increase the floor space allocated to its product lines. In fiscal 2000, sales to customers utilizing the Company's service program accounted for 52.9% of AAi's net sales. AAi was incorporated in Rhode Island in December 1985 and is the successor by merger to a Rhode Island corporation incorporated in 1962. The Company's principal executive offices are located at 500 George Washington Highway, Smithfield, Rhode Island, 02917, and its telephone number is (401) 231-3800. CAUTIONARY STATEMENT This annual report contains statements relating to future results of the Company (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to, changes in economic conditions and competitive product and pricing pressures within the Company's markets, as well as other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission. DISTRIBUTION CHANNELS AND CUSTOMERS AAi sells its products to over 200 customers, primarily in three distribution channels: (1) mass merchandisers, (2) chain drug stores, combo stores (stores combining general merchandise, food and drug items) and supermarkets and (3) variety stores. To a lesser extent, AAi also distributes its products through armed forces' PX stores, boutique stores, gift shops and book stores. The Company customizes its product and service program offerings to meet the distinctive characteristics and requirements of each of these retail distribution channels. Mass Merchandisers. AAi's sales to mass merchandisers accounted for approximately $96.5 million, or 58.3%, of net sales in fiscal 2000. These customers demand a high level of merchandise support as well as national and international distribution capability. Chain Drug Stores, Combo Stores, Supermarkets. AAi's sales to this channel accounted for approximately $37.6 million, or 22.7%, of net sales in fiscal 2000. These stores tend to be smaller than mass merchandisers and attract a broader class of trade, which is often less price sensitive and more convenience-oriented than the mass merchandiser or variety store customer. Variety Stores. AAi's sales to variety stores accounted for approximately $23.6 million, or 14.3%, of net sales in fiscal 2000. The Company's extensive product lines enable it to provide targeted service programs on a cost-effective basis, which affords the Company a significant competitive advantage in this market. 3 4 Department Stores and Others. The Company's sales to armed forces' PX stores, boutique stores, gift shops and book stores accounted for $7.8 million, or 4.7%, of its fiscal 2000 net sales. Each of these channels has different characteristics and product and service requirements and caters to different types of consumers. For example, department stores generally offer higher-end products with higher price points and sales of accessories at such outlets represent a larger percentage of total store sales. Most of the Company's business is based upon annual contracts or open purchase orders which are terminable at will. When establishing or expanding a customer relationship, the Company generally enters into multi-year agreements for the supply of specified product lines to specific customer stores. Such agreements, in addition to identifying the stores and product lines to be supplied, prescribe inventory and service levels and anticipated turnover rates and sales volumes, as well as the amount of any fixed obligation due to the customer in connection with establishing the relationship. The agreements typically do not contain required minimum sales volumes, but may provide for early termination penalties equal to the Company's unamortized cost of product displays provided to the customer. With regard to new customers, many retailers require a new supplier to buy back the retailer's existing inventory as a condition of changing vendors. These inventory costs can be substantial and can serve as a significant barrier to entry for competitors and the Company in obtaining new customers. In fiscal 2000, Wal-Mart accounted for approximately 27.8% of the Company's net sales. The loss of any significant customer, whether through competition or otherwise, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, further industry consolidation could result in the Company's loss of customers that are acquired by retailers serviced by other suppliers as well as further concentration of the Company's credit risks. Such events could have a material adverse effect on the Company's results of operations. PRODUCTS The Company offers sunglasses, reading glasses, costume jewelry, small synthetic leather goods, watches, clocks, and other accessories generally at retail price points below $20. Optical Products. The Company's optical product line includes sunglasses and non-prescription reading glasses which are sold with and without the Company's service program. As a result of its 1996 acquisition of Foster Grant Group L.P. and related entities ("Foster Grant US"), AAi has become a leading seller of popularly priced sunglasses (retail price points of $4 to $20). The Company pursues co-branding opportunities for its Foster Grant name and also sells sunglasses under other licensed brand names. The Company offers a variety of styles as well as color options for both frames and lenses. Sunglasses have a significant fashion component and positive or negative consumer response in any year can impact not only that year's profitability but also sales for the following year, since retailers' orders tend to mirror the prior year's sales. Such sales are also highly seasonal, with initial orders placed in the fourth quarter and, depending on consumer response, restocking orders in the second quarter. The Company also offers a variety of styles of non-prescription reading glasses marketed under Foster Grant, licensed brand names or private labels at price points of $4 to $20. The reading glasses business has a limited fashion component and is typically non-cyclical and non-seasonal. Since magnification strength is the primary purchasing consideration for this product line, proper stocking and restocking is essential to maximizing sales. Costume Jewelry. AAi offers a wide variety of ladies' and children's costume jewelry with low retail price points (between $3 and $20), including earrings, necklaces and bracelets. The Company's jewelry line includes private labeled products and branded products distributed pursuant to arrangements with licensors such as Disney Enterprises, Inc., Warner Bros. and Revlon Consumer Products Corporation. Most of the Company's jewelry line is basic (non-seasonal) and approximately one-third has a fashion or holiday component. Small Synthetic Leather Goods and Other. Through a 1986 acquisition, AAi expanded its product lines to include small synthetic leather goods with retail price points of $6 to $10, such as small backpacks, handbags, wallets and purses. Many of the lines of small accessories are designed to complement AAi's costume jewelry and are likewise often sold under licensed brands. The bulk of these products are sold on a non-program basis and are shipped direct from the Company's suppliers to the customer. In June 1998, through the acquisition of Fantasma, LLC ("Fantasma") the Company added watches and clocks (with average retail price points between $10 and $20) to its product lines. 4 5 DISTRIBUTION During the fourth quarter of 1998, AAi closed its Texas distribution facility and consolidated its distribution operations into its Smithfield, Rhode Island facility. The Company consolidated its distribution facilities in order to optimize supply chain operations, improve customer service, increase inventory turns and lower operating costs. A disruption of the Company's distribution operations for any reason could cause the Company to limit or cease its operations, which would have a material adverse effect on the Company's business, financial condition and results of operations. AAi has purchased and is continuing to implement an Enterprise Resources Planning ("ERP") system that integrates planning, inventory management and financials. Improvement and enhancements to this system will continue through the year 2001. The Company's distribution systems are capable of handling any small package. AAi typically delivers its products to its high volume customers on a weekly basis. A VNA (very narrow aisle) facility configuration serviced by wire guided stock pickers resupplies a rapid response order picking line. After receiving a customer order, the Company's computer system automatically generates a list of the ordered items, also known as a "picking" order, which the distribution staff utilizes in packing the customer's shipment. With the planned improvements to the Company's inventory management computer system, "picking" orders will be arranged according to the location of the ordered items within the Company's distribution center, which AAi anticipates will improve the efficiency of employees in filling orders. The Company continues to invest in electronic data interchange ("EDI") technology that enables customers to order and confirm shipments and allows AAi to invoice electronically. This technology will continue to permit AAi and its partners to reduce the cycle time to go to market, improving replenishment of products to customers and reducing inventory and costs. SERVICE PROGRAM The Company believes that an attractive, well-positioned display is critical to maximizing sales to the ultimate consumer. The SKU-intensive nature of the Company's product line and the low retail price points (ranging from $4 to $20 on costume jewelry and sunglasses) relative to the required display space has led many retailers to outsource the merchandising function to the Company for these product lines. To better serve these customers, the Company provides innovative sales programs through which AAi provides its program customers with store-level management of its products. In fiscal 2000, the sales to customers who utilize the Company's service program accounted for approximately 52.9% of net sales. Program customers select the products to be sold in their stores and, in consultation with AAi's sales and merchant organizations determine the initial order and display requirements. Thereafter, based on point of sale ("POS") information and field service reports, the Company's management adjusts product mix, generates display planograms and determines discounts and markdowns. This information is transmitted to AAi's field service representatives who regularly visit the retailers' stores to replenish and restock displays, reorder product and attend to markdowns and allowances, thereby providing customers with a real-time response to the market. The frequency of service visits is dictated by the size of the store and the number of the Company's products carried by the retailer. In 2000, the Company employed approximately 950 field service representatives. SALES AND MARKETING The sales force is primarily organized by both distribution channel and product line. The product-based sales approach is dictated by customers since most retailers divide their buyers' responsibilities by product. Sales representatives service existing customers and are responsible for increasing product penetration and solving customer problems. The Company markets its products to the retailers by attending trade shows and advertising in industry trade magazines. The Company also maintains showrooms and sales offices domestically in Bentonville, Arkansas as well as internationally in Toronto, Canada, Mexico City, Mexico, Stoke-On-Trent, United Kingdom and Hong Kong. Marketing focuses on designing a customized product and service package for each customer after determining the retailer's specific needs. Often, branded products provide AAi with initial access to a new customer. The Company then leverages the strength of the Company's field service and breadth of its product lines to increase product penetration. 5 6 In addition, since acquiring the Foster Grant brand, the Company has begun to advertise directly to the end-consumer. This includes relaunching the "Who's That Behind Those Foster Grants" campaign, featuring Cindy Crawford, global promotions and public relations efforts aimed at increasing awareness of the Foster Grant brand. Also, in the spring of 1999, the Company launched a co-branded line of Ironman Triathlon(R) sports sunglasses. INTELLECTUAL PROPERTY AND LICENSES Proprietary Trademarks. The Company owns trademarks in the words and designs used on or in connection with many of its products. The Company has registered a variety of trademarks under which it sells a number of its products, including Foster Grant. The level of copyright and trademark protection available to the Company for proprietary words, phrases and designs varies depending on several factors including the degree of originality and the distinctiveness of the associated trademarks and design. Licenses. In 1992, AAi began distributing licensed products pursuant to an agreement with Disney Enterprises, Inc. The Company currently holds numerous non-exclusive licenses from various licensors to market products with classic cartoon characters and other images or under other brand names and trademarks. Many of the Company's license agreements limit sales of products to certain market categories. The Company pays each of these licensors a royalty on sales of licensed products. The Company's licenses generally are for terms ranging from one to ten years. The license agreements generally require minimum annual payments and certain quality control procedures and give the licensor the right to approve products licensed by the Company. Typically, the licensor may terminate the license if specified minimum levels of annual net sales for licensed products are not met or for failure by the Company to comply with the material terms of the license. Certain licenses require minimum advertising expenditures by the Company and also require the Company to make lump-sum payments in the event of a change of ownership. Accordingly, the Company's licensing arrangements are dependent primarily upon maintaining a good relationship between the Company and its licensors. The Company believes it has good relationships with its licensors and has generally been able to obtain renewals of expired licenses and to obtain the required approval for licensed products. Most of the Company's license agreements are non-exclusive, many of them are of short duration and all may be terminated if the Company fails to comply with any material terms thereof. There can be no assurance that any of these relationships with licensors will continue, that such agreements will be renewed or that the Company will be able to obtain licenses for additional brands. If the Company were unable in the future to obtain such licenses on terms it deems reasonable, it would be required to modify its marketing plans and could be forced to rely more heavily on its proprietary brands or generic product sales, which could materially adversely affect its business, financial condition and results of operations. PRODUCT DESIGN, SOURCING AND ASSEMBLY Product Design. AAi's in-house design staff develops new products in line with the current and anticipated trends for each season. For licensed brands, the Company works extensively with the licensor in approving each detail of the new products. The Company believes that its future success will depend, in part, on its ability to enhance its existing product lines and develop new styles and products to meet an expanding range of customer and consumer requirements. Sourcing and Assembly. The Company outsources manufacturing for all of its products, 79.2% of which is sourced to manufacturers in Asia through a joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. The joint venture is co-owned with a Hong Kong investor who provides on-site management. The joint venture monitors production and ensures that products meet the Company's quality standards. The Company also utilizes domestic manufacturers to accommodate short delivery lead times or when otherwise necessary. The Company believes that the quality and cost of the products manufactured by its suppliers provide it with a significant competitive advantage. In addition, sourcing the majority of its products through the joint venture enables the Company to better control costs, monitor product quality, manage inventory and provide efficient order fulfillment. COMPETITION The optical products and accessories industries are highly competitive. There are numerous competitors for each of its product lines both in the retail channels serviced by the Company and in its other channels of distribution. Competitors include numerous accessory vendors, including those with their own retail stores, smaller independent specialty manufacturers, and in the case of costume jewelry and reading glasses, divisions or subsidiaries of large companies with greater financial or other resources than those 6 7 of the Company. Certain of these competitors control licenses for widely recognized images, such as cartoon or movie characters which could provide them with a competitive advantage. The Company may also experience increased competition from suppliers of upscale fashion accessories seeking to enter the mass merchandise market. There are significant costs associated with the design, production and installation of display fixtures for new customers. Furthermore, many retailers require a new supplier to buy back the retailer's existing inventory as a condition to changing vendors. These inventory costs can be substantial and serve as a barrier to entry for both competitors attempting to reach the Company's existing customers as well as for the Company in obtaining new customers. AAi competes on the basis of diversity and quality of its product designs, the breadth of its product lines, product availability, price and reputation as well as customer service and support programs. The Company has many competitors with respect to one or more of its products but believes that there are few competitors that distribute products with the same product diversity and service quality as the Company. EMPLOYEES As of March 14, 2001, the Company had approximately 400 full-time employees and 760 part-time employees, none of whom were represented by a labor union. The Company considers its relationship with its employees to be good. 7 8 ITEM 2. PROPERTIES The Company's principal executive office is located at 500 George Washington Highway, Smithfield, Rhode Island. AAi's primary distribution facilities are adjacent to its headquarters, which together are 180,000 square feet. The following table describes the material properties owned and leased by AAi:
OWNED PROPERTY: USE Smithfield, Rhode Island Warehousing & Distribution, Product Showroom, Sales Office and Office Administration LEASED PROPERTIES: Bentonville, Arkansas Product Showroom and Sales Office Warren Avenue, Providence, Rhode Island (a) Warehousing Carpenter St., Providence, Rhode Island (a) Warehousing Toronto, Canada Product Showroom and Sales Office Stoke-On-Trent, United Kingdom Warehousing & Distribution and Office Administration
(a) Leased to AAi from related parties. See Item 13, "Certain Relationships and Related Transactions." 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth quarter of 2000. 8 9 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS All of the Common Stock of the Company is held by affiliates and certain directors and officers of the Company; thus, no trading market exists for such stock. ITEM 6. SELECTED FINANCIAL DATA The following table contains selected consolidated financial data for the Company and is qualified in its entirety by the more detailed consolidated financial statements of the Company included herein. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere herein.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31 JANUARY 2, JANUARY 1, DECEMBER 30, ---------------------- ---------- ---------- ------------ 1996(a) 1997(a) 1999(a) 2000 2000 -------- --------- --------- --------- ---------- (DOLLARS IN THOUSANDS) Statement of Operations Data: Net sales ............................................ $ 86,336 $ 149,411 $ 160,325 $ 150,680 $ 165,542 Cost of goods sold ................................... 47,871 77,928 88,823 96,973 96,589 -------- --------- --------- --------- --------- Gross profit ......................................... 38,465 71,483 71,502 53,707 68,953 Operating expenses ................................... 37,524 65,323 78,135 72,735 63,210 -------- --------- --------- --------- --------- Income (loss) from operations ........................ 941 6,160 (6,633) (19,028) 5,743 Interest expense(b) .................................. (1,469) (4,214) (7,010) (10,250) (10,929) Other (expense) income, net .......................... (331) 31 490 (111) 192 -------- --------- --------- --------- --------- (Loss) income before taxes ........................... (859) 1,977 (13,153) (29,389) (4,994) Income tax benefit (expense) ......................... 948 (1,162) -- (36) (126) -------- --------- --------- --------- --------- Net income (loss) before extraordinary items ......... 89 815 (13,153) (29,425) (5,120) Extraordinary gain, net of $6.3 million in taxes ..... -- -- -- -- 8,838 -------- --------- --------- --------- --------- Net income (loss) before dividends and accretion on preferred stock ................................... 89 815 (13,153) (29,425) 3,718 Dividends and accretion on preferred stock(c) ........ 1,123 2,496 2,779 3,002 3,283 -------- --------- --------- --------- --------- Net (loss) income applicable to common shareholders .. (1,034) (1,681) (15,932) (32,427) 435 Pro forma income tax adjustment(d) ................... (604) -- -- -- -- -------- --------- --------- --------- --------- Pro forma net (loss) income applicable to common shareholders ......................................... $ (1,638) $ (1,681) $ (15,932) $ (32,427) $ 435 ======== ========= ========= ========= ========= Other Data: Depreciation and amortization ........................ $ 1,868 $ 8,248 $ 12,792 $ 11,489 $ 11,937 Cash flow from operating activities .................. (2,219) 1,600 (3,903) 2,612 (4,669) Cash flow from investing activities .................. (12,473) (9,053) (29,753) (10,603) (9,046) Cash flow from financing activities .................. 16,134 8,755 33,084 8,073 12,048 EBITDA(e) ............................................ 2,478 14,439 6,649 (7,650) 17,872 Capital expenditures(f) .............................. 1,572 7,583 16,882 10,475 8,742
YEAR ENDED DECEMBER 31 YEAR ENDED YEAR ENDED YEAR ENDED ---------------------- JANUARY 2, JANUARY 1, DECEMBER 30, 1996 1997 1999 2000 2000 -------- ------- ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Balance Sheet Data: Working capital......................................... $ 687 $ 5,936 $ 31,346 $ 7,399 $ 599 Total assets............................................ 82,010 93,746 126,498 107,867 108,171 Total debt(g)........................................... 35,588 44,960 78,982 87,322 85,101 Preferred securities(h)................................. 24,338 26,918 29,771 32,864 36,092 Total shareholders' deficit ............................ (5,281) (7,359) (23,502) (55,762) (55,780)
9 10 (a) Includes the results of operations of the acquired businesses from the respective dates of acquisition: Tempo Division of Allison Reed Group, Inc. ("Tempo") in June 1996, Foster Grant US in December 1996, Superior Jewelry Company ("Superior") in July 1997, Eyecare Products UK Ltd. ("Foster Grant UK") in March 1998 and Fantasma, LLC ("Fantasma") in June 1998. (b) Includes amortization of shareholder participation related to the issuance of the term loan and Series B preferred stock. (c) Reflects a reduction from net income for the accretion and noncash dividends on Series A Preferred Stock. See Note 9 of the Notes to the Company's Consolidated Financial Statements. (d) The Company was an S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996. Pro forma income taxes, assuming the Company was subject to C corporation income taxes, have been provided, in the accompanying statement of operations for 1995 and 1996, at an estimated statutory rate of 40%. (e) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry because it is an indicator of the earnings available to meet the Company's debt service obligations. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. The Company recorded an extraordinary gain of $8.8 million, which is excluded from EBITDA in fiscal 2000. (f) Does not include capital assets acquired in connection with the acquisitions of the Tempo, Foster Grant US, Superior, Foster Grant UK and Fantasma. (g) Includes amounts outstanding under a revolving credit facility, various long-term obligations and subordinated promissory notes payable to shareholders at each applicable period. (h) Includes preferred stock of Foster Grant Holdings, Inc. ("FG Holdings") for 1998 and 1999, and Series B Preferred Stock in 2000. 10 11 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 the Company's working capital and capital expenditure requirements and statements regarding the anticipated proportion of revenues to be derived from a limited number of customers, may constitute forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These risks and uncertainties include the substantial leverage of the Company, customer concentration and consolidation, dependence on licensed brands, a single site distribution facility, operating in international economies, unpredictability of discretionary consumer spending, competition, susceptibility to changing consumer preferences and obtaining full benefits from the new information systems. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto included elsewhere. OVERVIEW The Company is a value-added distributor of optical products, costume jewelry, watches, clocks and other accessories primarily to mass merchandisers, chain drug stores/combo stores/supermarkets and variety stores in North America and the United Kingdom. As a value-added distributor, the Company provides customized store displays, merchandising management and a store-level field service force to replenish and restock displays, reorder product and attend to markdowns and allowances. Upon shipment to the customer, the 11 12 Company estimates agreed upon future allowances, returns and discounts, taking into account historical experience, and reflects revenue net of these estimates. When establishing or expanding a customer relationship, the Company generally enters into multi-year agreements for the supply of specified product lines to specific customer stores. The agreements typically do not contain required minimum sales volumes, but may provide for termination penalties equal to the Company's unamortized cost of product displays provided to the customer. The Company believes its relationships with retailers are dependent upon its ability to efficiently utilize allocated floor space to generate satisfactory returns for its customers. To meet this end, the Company strives to consistently deliver competitively priced products and service programs which provide retailers with attractive gross margins and inventory turnover rates. The Company has historically retained customers from year to year, although retailers may drop or add product lines supplied by the Company. Generally, customer loss has been attributable to such customer going out of business or being acquired by a company which does not carry the Company's product line or has prior relationships with a competitor of the Company. Certain segments of the retail industry, particularly mass merchandisers, variety stores, drugstores and supermarkets, are experiencing significant consolidation and in recent years many major retailers have experienced financial difficulties. These industry wide developments may have an impact on the Company's results of operations. In addition, many major retailers have sought to reduce inventory levels in order to reduce their operating costs which has had a negative effect on the Company's results of operations. During the first quarter of 1998, the Company elected to change its fiscal year end from December 31 to the Saturday closest to December 31. On July 21, 1998, the Company sold $75 million of 10-3/4% Senior Notes due 2006 (the "Notes"). The net proceeds of approximately $71 million were used to repay outstanding indebtedness, as described below under "Liquidity and Capital Resources." During 2000, the Company repurchased $23.15 million face amount of the Notes for a purchase price of $7.09 million. The purchase price was financed utilizing a term loan under the Company's Senior Credit Facility. The term loan is subject to the obligation of certain preferred shareholders to purchase participations in the term loan upon the happening of certain events. In conjunction with these commitments to purchase the loan participations, the Company issued 70,870 shares of Series B Preferred Stock, as described below under "Liquidity and Capital Resources". Net Sales. The Company offers optical products, costume jewelry, small synthetic leather goods, watches, clocks and other accessories, generally at retail price points of $20 or less. Net sales of the Company's optical products accounted for approximately 60.8%, 41.0% and 47.3% of the Company's net sales in fiscal 2000, 1999 and 1998, respectively; net sales of the Company's costume jewelry accounted for approximately 34.3%, 38.7% and 40.3% of the Company's net sales in fiscal 2000, 1999 and 1998, respectively. The balance represented sales of synthetic leather goods, watches, clocks and other accessories which the Company has begun to de-emphasize. Cost of Goods Sold. The Company outsources manufacturing for all of its products, 79.2% of which is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. Accordingly, the principal element comprising the Company's cost of goods sold is the price of manufactured goods purchased through the Company's joint venture or from independent manufacturers. The Company believes outsourcing manufacturing allows it to reliably deliver competitively priced products to the retail market while retaining considerable flexibility in its cost structure. Operating Expenses. Operating expenses are comprised primarily of payroll and occupancy costs related to the Company's selling, general and administrative activities as well as depreciation and amortization. The Company incurs various costs in connection with the acquisition of new customers and new stores for existing customers, principally the cost of new product display fixtures and costs related to the purchase of the customer's existing inventory. The Company makes substantial investments in the design, production and installation of display fixtures in connection with establishing and maintaining customer relationships. The Company capitalizes the production cost of these display fixtures as long as it retains ownership of them. These costs are amortized to selling expenses on a straight-line basis over their estimated useful life, which is one to three years. If the Company does not retain title to the displays, the display costs are expensed as shipped. During fiscal 2000, the Company recognized a $2.5 million restructuring charge related to the accrual of severance payments due to three executives, which will be paid over a two-year period. 12 13 The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with most of these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expenses when incurred. The Company expensed customer acquisition costs of $0.3 million, $0.6 million and $0.9 million in fiscal 2000, 1999 and 1998, respectively. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer and the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. During fiscal 2000, 1999 and 1998, the Company capitalized approximately $0.5 million, $0.3 million and $2.3 million of these costs, respectively. Amortization expense related to these costs was approximately $1.2 million, $1.2 million and $0.2 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. Dividends and Accretion on Preferred Stock. The Company has 43,700 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0 million, and an additional 9,500 shares were issued for gross proceeds of $5.0 million in connection with the December 1996 acquisition of Foster Grant US. Beginning on June 30, 2002, shares of the Series A Preferred Stock are redeemable at the option of the holder for an amount equal to the original issue price plus accrued and unpaid dividends yielding a 10% compounded annual rate of return, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined in the Articles of Incorporation) is outstanding. Net loss applicable to common shareholders represents net loss less accretion of original issuance costs and cumulative dividends due on the Series A Preferred Stock. Extraordinary Gain. During 2000, the Company repurchased $23.15 million face value of the Notes for a purchase price of $7.09 million. As a result of this transaction, the Company recognized an $8.8 million extraordinary gain, net of $6.3 million in taxes. See further discussion in "Liquidity and Capital Resources". Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Although EBITDA is not a measure of performance calculated in accordance with Generally Accepted Accounting Principles (GAAP), the Company believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry and provides an indicator of the earnings available to meet the Company's debt service obligations. EBITDA should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with GAAP. Actual EBITDA before extraordinary gain was $17.9 million, ($7.7) million and $6.6 million in fiscal 2000, 1999 and 1998, respectively. EBITDA, excluding the restructuring charge of $2.5 million (fiscal 2000), the extraordinary gain of $8.8 million (fiscal 2000), the goodwill impairment loss of $6.0 million (fiscal 1999) and the $2.6 million in restructuring charges (fiscal 1998) was approximately $20.4 million, ($1.6) million and $9.2 million in fiscal 2000, 1999 and 1998 respectively. EBITDA, including the restructuring charge and extraordinary gain was $26.7 million for the year ended December 30, 2000. ACQUISITIONS During the 1990's, the Company grew rapidly through strategic acquisitions. In June 1998, the Company acquired 80% of the membership interests of Fantasma for $4.1 million in cash. The remaining 20% membership interest of Fantasma was held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company acquired this 20% interest effective September 1, 1999. Accordingly, the Company currently holds 100% of the Fantasma member interests. Fantasma is a marketer and distributor of watches and clocks. The acquisition was accounted for using the purchase method; accordingly, the results of operations of Fantasma from the date of acquisition are included in the Company's consolidated statements of operations. The purchase price was allocated based on estimated fair market value of the assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $4.6 million, which was being amortized over 10 years. During 1999, the Company determined that the remaining goodwill related to this acquisition was impaired based on the Company's projections of future cash flows related to this asset. Accordingly, the Company recorded an impairment loss of approximately $3.9 million. 13 14 In March 1998, the Company acquired certain assets of Foster Grant UK for the aggregate book value of certain acquired assets, including inventory items of $3.3 million and accounts receivable of $1.7 million, less the aggregate amount of trade payables assumed of $1.1 million and bank debt assumed of $1.7 million. In addition, the Company acquired the Foster Grant trademark in the United Kingdom and Europe for $0.7 million, which amount was subject to upward adjustment at the end of 1998 and 1999 based on annual sales, up to a maximum additional payment of $0.7 million. No adjustment to the purchase price was required as result of 1999 and 1998 sales. As a result of this acquisition, the Company recorded approximately $1.1 million of intangible assets which are being amortized over 20 years. EFFECTS OF ACQUISITIONS Historically, the Company has selected acquisition candidates based, in part, on the opportunity to improve their operating results. The Company seeks to leverage its purchasing power, distribution capabilities and lower operating costs to improve the financial performance of its acquired businesses. Results of operations reported herein for each period only include the results of operations for acquired businesses from their respective dates of acquisition. Full year operating results, therefore, could differ materially from those presented. The Company has accounted for its acquisitions using the purchase method of accounting. As a result, these acquisitions have affected, and will prospectively affect, the Company's results of operations in certain significant respects. The aggregate acquisition costs are allocated to the tangible and intangible assets acquired and liabilities assumed by the Company based upon their respective fair values as of the acquisition date. The cost of such assets are then amortized according to the classes of assets and the estimated useful lives thereof. The acquisitions necessitating payment of purchase price in excess of the fair value of the net assets acquired results in intangible assets consisting of goodwill and trademarks which are being amortized on a straight-line basis over a period of 10 to 40 years. Similar future acquisitions or additional consideration paid for existing acquisitions may result in additional amortization expense. In addition, due to the effects of the increased borrowing to finance any future acquisitions, the Company's interest expense may increase in future periods. In December 1999, the Company determined that the potential future cash flows related to the intangible assets of the watches and clocks and certain jewelry product lines were less than carrying value. As a result, the Company recorded an impairment loss of approximately $6.0 million relating to these intangibles. As of December 30, 2000, net intangible assets as a result of acquisitions were $12.8 million. CONSOLIDATION OF DISTRIBUTION OPERATIONS In the fourth quarter of 1998, the Company closed its Texas distribution center and consolidated distribution operations at its Rhode Island facility. This restructuring contributed to operating expense savings of approximately $8.0 million in fiscal 1999. In 1998, the Company incurred approximately $5.0 million of expenses related to the closing of the Texas distribution center, including a restructuring charge of $2.6 million for the write-down of disposed assets, the payment of severance benefits and expenses relating to operating inefficiencies. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's Statement of Operations:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 30, 2000 JANUARY 1, 2000 JANUARY 2, 1999 ----------------- ---------------- --------------- Net sales .......................................................... 100.0% 100.0% 100.0% Cost of goods sold ................................................. 58.3 64.4 55.4 ----- ----- ----- Gross profit ....................................................... 41.7 35.6 44.6 Operating expenses ................................................. 36.7 44.2 47.1 Restructuring charge/Goodwill impairment loss ...................... 1.5 4.0 1.6 ----- ----- ----- Income (loss) from operations ...................................... 3.5 (12.6) (4.1) Interest expense ................................................... 6.6 6.8 4.4 Other income (expense), net ........................................ 0.1 (0.1) 0.3 ----- ----- -----
14 15 Net loss before taxes and dividends and accretion on preferred stock .. (3.0) (19.5) (8.2) Income tax expense .................................................... (0.1) -- -- ----- ----- ----- Net loss before extraordinary items, dividends and accretion on preferred stock ..................................................... (3.1) (19.5) (8.2) Extraordinary gain, net ............................................... 5.3 -- -- Net income (loss) before dividends and accretion on preferred stock.... 2.2 (19.5) (8.2) Dividends and accretion on preferred stock ............................ 2.0 2.0 1.7 ----- ----- ----- Net income (loss) applicable to common shareholders ................... 0.3% (21.5)% (9.9)% ===== ===== =====
YEAR ENDED DECEMBER 30, 2000 COMPARED TO YEAR ENDED JANUARY 1, 2000 Net Sales. Consolidated net sales were $165.5 million for the year ended December 30, 2000 as compared to $150.7 million for the year ended January 1, 2000, an increase of 9.8% or $14.8 million. The increase in net sales is primarily attributable to increased volume in the Mass Merchandisers and Chain Drug Stores, Combo, Supermarkets segments. The Company continually evaluates its sales-allowance and return reserves. As a result of this, during the third and fourth quarter of 2000, the Company decreased its reserves related to specific customers by $1.7 million and $2.9 million, respectively, which resulted in an increase in net sales. Fourth quarter 2000 sales also benefited from improved inventory management which resulted in higher order fulfillment than in the fourth quarter of fiscal 1999. These increased sales were partially offset by the planned restructuring in the relationship of a major customer which reduced selling space, and increased competition in the jewelry product line. Gross Profit. Gross profit was $69.0 million for the year ended December 30, 2000 as compared to $53.7 million for the year ended January 1, 2000. Gross profit as a percentage of net sales increased to 41.7% from 35.6% primarily due to the shift in mix to higher margin optical products and lower royalty expense related to the planned de-emphasis of branded watches, clocks and other accessories. Also, in 1999, a significant promotion was conducted with a major customer, which resulted in lower than expected margin. Operating Expenses. Operating expenses before the restructuring charge of $2.5 million were $60.7 million for the year ended December 30, 2000 as compared to $72.7 million for the year ended January 1, 2000, a decrease of 16.5% or $12.0 million. The decrease is primarily attributable to the goodwill impairment loss of $6.0 million that was recognized during 1999 and the realignment of territories within the field service organization. In addition, selling and design expenses were significantly reduced due to the planned de-emphasis of branded watches, clocks, and other accessories. Interest Expense. Interest expense was $10.9 million for the year ended December 30, 2000 as compared to $10.3 million for the year ended January 1, 2000, an increase of 5.8% or $0.6 million. This resulted from additional borrowing under the Company's credit facilities to fund operations during 1999 as well as to fund increased purchases of optical products related to increased shipments as compared to the prior year. This increase was partially offset by the interest savings incurred as a result of the repurchase of $23.15 million in face amount of the Notes which occurred during the second and third quarters of 2000, net of additional interest accrued associated with the term loan and Series B Preferred Stock. Income Tax Expense. Income tax expense of $126,000 for fiscal 2000 represents a provision for income taxes related to foreign operations that do not have net operating losses. In addition, the Company has provided a $6.3 million provision for income taxes related to the extraordinary gain from debt extinguishment. During 2000 and 1999, the Company did not record an additional tax benefit related to its losses. This decision was based on historical and anticipated results. The effect of this decision was to increase its valuation reserve for its deferred tax assets. The Company's valuation allowance as of December 30, 2000 is approximately $16.3 million. Net Income (Loss). As a result of the factors discussed above, net income (loss) before dividends and accretion on preferred stock was $3.7 million and ($29.4) million for the years ended December 30, 2000 and January 1, 2000, respectively. Net loss before dividends and accretion on preferred stock, excluding the extraordinary gain of $8.8 million and the restructure charge of $2.5 million, was $2.6 million for the year ended December 30, 2000 as compared to a net loss before dividends and accretion on preferred stock, excluding the goodwill impairment charge of $6.0 million was $23.4 million for the year ended January 1, 2000, a decrease of $20.8 million. Net Income (Loss) Applicable to Common Shareholders. Net income (loss) applicable to common shareholders was $0.4 million and ($32.4) million for the years ended December 30, 2000 and January 1, 2000, respectively. Net income (loss) applicable to common shareholders, excluding extraordinary gain and the restructuring charge was $5.9 million for the year ended December 30, 2000, as compared to a loss, excluding the goodwill impairment charge of $6.0 million was $26.4 million for the year ended January 1, 2000, a decrease of $20.5 million. This decrease is attributable to the $27.3 million increase in earnings offset by the increase in interest expense. 15 16 YEAR ENDED JANUARY 1, 2000 COMPARED TO YEAR ENDED JANUARY 2, 1999 Net Sales. Consolidated net sales were $150.7 million for the year ended January 1, 2000 as compared to $160.3 million for the year ended January 2, 1999, a decrease of 6.0% or $9.6 million. The decrease in net sales relates primarily to a $9.2 million decline within the Mass Merchandiser channel. This decrease in net sales is primarily attributable to a combination of retail pricing pressure and softness in demand during fiscal 1999. Gross Profit. Gross profit was $53.7 million for the year ended January 1, 2000 as compared to $71.5 million for the year ended January 2, 1999. Gross profit as a percentage of net sales decreased to 35.6% from 44.6% due to: (i) a decline in net sales related to higher returns and markdowns as mentioned above, (ii) increased shipments of lower margin items in an effort to reduce inventory, and (iii) higher cost of goods sold due to an increase in labor and freight charges after the consolidation of the distribution operations due to past consolidation inefficiencies. Operating Expenses. Operating expenses were $72.7 million for the year ended January 1, 2000 as compared to $78.1 million for the year ended January 2, 1999, a decrease of 6.9% or $5.4 million. The decrease of $5.4 million is primarily attributable to approximately $6.4 million in savings from the consolidation and closing of the Texas distribution center into the Company's newly expanded Rhode Island facility. During 1999, the Company also recognized a goodwill impairment loss of approximately $6.0 million, the comparative effect of which is largely offset by a $2.6 million restructuring charge and a one time charge of approximately $2.4 million related to the closing of the Texas distribution center which were incurred in 1998. Interest Expense. Interest expense was $10.3 million for the year ended January 1, 2000 as compared to $7.0 million for the year ended January 2, 1999, an increase of 46.2% or $3.2 million. This was caused by both a higher average balance outstanding on our line of credit throughout fiscal 1999 as well as a higher interest rate on the Notes which were outstanding for the full year. Income Tax Expense. Income tax expense of $36,000 for fiscal 1999 represents a provision for foreign income taxes related to our foreign operations. During 1999 and 1998, the Company did not record a tax benefit related to its losses. This decision was based on historical and anticipated results. The effect of this decision was to increase its valuation reserve for its deferred tax assets. The Company's valuation allowance as of January 1, 2000 was approximately $15.0 million. Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock was $29.4 million for the year ended January 1, 2000 as compared to net loss before dividends and accretion on preferred stock of $13.2 million for the year ended January 2, 1999, an increased loss of $16.3 million. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders was $32.4 million for the year ended January 1, 2000 as compared to a loss of $15.9 million for the period ending January 2, 1999, an increased loss of $16.5 million. The increase was attributable to the $16.3 million decrease in earnings and an increase of $223,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. LIQUIDITY AND CAPITAL RESOURCES At December 30, 2000, the Company had cash and cash equivalents of $0.6 million and working capital of $0.6 million as compared to $2.3 million and $7.4 million, respectively at January 1, 2000. The decline in cash and cash equivalents is due to the Company's enhanced focus on utilizing worldwide cash reserves to fund payments on its Senior Credit Facility. The decline in working capital was driven by increased borrowings under the revolving note payable partially offset by an increase in trade receivables that resulted from the timing of the rollout of the 2001 optical line in the fourth quarter of 2000, as compared to the 2000 optical rollout in the first quarter of 2000. The Company used $4.7 million of cash in operations during 2000 as compared to generating cash of $2.6 million in 1999 and a use of cash of $3.9 million in 1998. The decrease is primarily due to the increased trade receivables in 2000 partially offset by the timing of payments in accrued expenses in 1999. The Company used $9.0 million of cash in investing activities during fiscal 2000, compared to $10.6 million in 1999 and $29.8 million in 1998. Cash used in investing activities decreased in fiscal 2000 as compared to fiscal 1999 as a result of a $1.8 million decrease in property, plant and equipment expenditures. 16 17 The Company generated $12.0 million from financing activities during fiscal 2000, compared to $8.1 million in 1999 and $33.1 million in 1998. Cash generated from financing activities is primarily attributable to increased borrowings under the revolving note payable partially offset by the redemption payment on the FG Holdings preferred stock and higher payments on capital lease obligations. In connection with the purchase of Foster Grant US, the Company's wholly-owned subsidiary, FG Holdings issued 100 shares of preferred stock ("FG Preferred Stock"), which were redeemable on February 28, 2000. The redemption price which was determined with reference to the combined net sales of sunglasses, reading glasses and accessories by FG Holdings and the Company totaled $1.0 million. The Company funded the redemption in April 2000 from its Senior Credit Facility (the "Senior Credit Facility"). In addition, upon the occurrence of certain specified capital transactions, the holders of FG Preferred Stock are entitled to receive a supplemental payment of up to $3.0 million depending upon the transaction value. See Item 13, "Certain Relationships and Related Transactions." On July 21, 1998, the Company sold $75 million of 10-3/4% Senior Series A Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of approximately $71.0 million received by the Company from the issuance and sale of the Notes were used to repay outstanding indebtedness under the credit facility with a bank and the Subordinated Promissory Notes to shareholders, net of amounts due the Company from certain of these shareholders. The Company incurred issuance costs of approximately $3.7 million in relation to these Notes. These costs are being amortized over the life of the Notes and are included in other assets in the accompanying consolidated balance sheets. In December 1998, the Notes were exchanged for 10-3/4% Series B Notes due 2006 registered with the SEC. Interest on the Notes is payable semiannually on January 15 and July 15, commencing January 15, 1999. During 2000, the Company repurchased $23.15 million face amount of the Notes for a purchase price of $7.09 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI facility and subject to the obligation of certain preferred shareholders to purchase participations in the term loan, upon the happening of certain events. The term loan is being amortized over 60 months commencing April 1, 2001, with the remaining principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of this transaction, the Company recognized an $8.8 million extraordinary gain, net of $6.3 million of income taxes, and wrote off $90,000 of unamortized issuance costs related to the Notes that were repurchased. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with the commitment to purchase participations in the term loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders of Series B Preferred Stock are entitled to receive, prior and in preference to any distribution with respect to any other capital stock of the Company, an amount per share equal to $6.67 multiplied by the number of six month periods and fractions thereof in the period during which the participation commitment was outstanding. The Company is amortizing the value related to the two six month periods (approximately $945,000) in the year ended December 30, 2000. This amount is being amortized over the one-year period as interest expense. If the participation commitment is outstanding for a period beyond twelve months, the Company will record additional value to the Series B Preferred Stock and amortize the related costs over the additional period of the participation commitment as required. The Company has 43,700 shares of Series A Preferred Stock outstanding which have an aggregate redemption value of $35.1 million at December 30, 2000. Each share of Series A Preferred Stock is convertible into 10 shares of Common Stock at a rate of 10 to 1, adjustable for certain dilutive events. Conversion is at the option of the shareholder, but is automatic upon consummation of a qualified public offering of equity securities. The holders of the Series A Preferred Stock have the right to require redemption for cash for any unconverted shares, beginning June 30, 2002, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness is outstanding. The Notes constitute Restrictive Indebtedness. The redemption price of the Series A Preferred Stock is an amount equal to the original issue price, $526.32 per share, plus any accrued and unpaid dividends yielding a 10% compounded annual rate of return. The Company had up to $5.5 million available for additional borrowings under the Senior Credit Facility as of December 30, 2000. Interest rates on the revolving loans under the Senior Credit Facility are based, at the Company's option, on the Base Rate (as defined) or LIBOR plus an applicable margin. The Senior Credit Facility contains certain restrictions and limitations, including financial covenants that require the Company to maintain and achieve certain levels of financial performance and limit the payment of cash dividends and similar restricted payments. As of December 30, 2000, the Company was not in compliance with certain financial covenants under the Senior Credit Facility. As of March 27, 2001, the Company received a waiver of such non-compliance from its lenders and amended its Senior Credit Facility. The Company expects to be in compliance with the modified financial covenants in 17 18 the Senior Credit Facility throughout 2001. The Company incurred a fee of $75,000 payable to the lenders in connection with the amendment which was expensed in 2000. In November 1999, Foster Grant UK entered into a credit facility with a different bank. The facility provides for a pound sterling 1.5 million (approximately $2.2 million at December 30, 2000) overdraft line to finance working capital. Repayments under this facility fluctuate with interest at the bank's base rate (6.0% at December 30, 2000) plus 1.25% if below the facility limit of pound sterling 1.5 million and 2.25% if in excess of the agreed limit. The facility expires in December 2001. The Company had no borrowings outstanding under this facility at December 30, 2000 and, therefore, the related covenants were not in effect, as they only become effective when the Company has borrowings outstanding. The Company has substantial indebtedness and significant debt service obligations. As of December 30, 2000, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $85.1 million. The Company had current liabilities of approximately $68.2 million. In addition, the Company has significant annual obligations that include interest on the Notes of approximately $5.6 million, minimum royalty obligations over the next two years of approximately $2.7 million and minimum payments under its operating leases of approximately $391,000. The Indenture governing the Notes permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, the Company believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Facility, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated cost savings and revenue growth will be realized or that future borrowings will be available under the Senior Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. IMPACT OF INFLATION The Company believes that inflation has not had a material effect on its results of operations or financial condition during the past three years. SEASONALITY AND QUARTERLY INFORMATION Significant portions of the Company's business are seasonal. Sunglasses are shipped primarily during the fourth quarter of the fiscal year, with replenishment during the second quarter, as retailers build inventory for the spring and summer selling seasons, while costume jewelry and other accessories are shipped primarily during the second half of the fiscal year as retailers build inventory for the holiday season. Reading glasses sales are generally uniform throughout the year. As a result of these shipping trends, the Company's working capital requirements grow through the first half of the year to fund purchases and accounts receivable. In the second half of the year, the Company's working capital requirements decrease as accounts receivable are collected. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, issued in June 1998, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not expect adoption of this statement to have a significant impact on its consolidated financial position or results of operations. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", in December 1999. The Company was required to adopt this new accounting guidance through a cumulative charge to operations, in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, no later than the fourth quarter of fiscal 2000. Adoption of the guidance provided in SAB No. 101 did not have a material impact on operating results. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." The interpretation clarifies the application of APB Opinion No. 25 in certain situations, as 18 19 defined. The Interpretation was effective July 1, 2000, but covers certain events occurring during the period after December 15, 1998. The adoption of this interpretation did not have an impact on the accompanying financial statements. 19 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about the Company's market risk disclosures includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk. The Company is exposed to market risk from changes in interest rates primarily through its borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. Foreign Currency Risk. The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of currencies in foreign markets primarily related to changes in the British Pound, the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar. In fiscal 1999 and 2000, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk by trying to minimize the Company's net investment in its foreign subsidiaries. At December 30, 2000, the Company's net investment in foreign assets was approximately $7.3 million. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. The Company's operations in Europe are not significant and, therefore, the Company has not been materially impacted by fluctuations in the Euro exchange rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to financial statements is included on page F-1 of 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. 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS AND EXECUTIVE OFFICERS Each director of the Company is elected for a period of one year at the Company's annual meeting of shareholders and serves until his successor is duly elected by the shareholders. Vacancies and newly created directorships resulting from any increase in the number of authorized directors may be filled by a majority vote of directors then remaining in office. The holders of the Series A Preferred Stock (the "Preferred Holders," or individually, a "Preferred Holder") have the right, at their option, to designate up to two directors to the Board of Directors, as well as the right to vote on the election of directors at the annual meeting of shareholders. In addition, AAi's Articles of Incorporation provide that, in addition to other events, if the Company is in default of any of its covenants thereunder, the Preferred Holders shall have the right to elect a majority of the members of the Board of Directors. The Company is currently in default of certain such covenants. However, the Preferred Holders have not exercised their right to elect a majority of the members of the Board of Directors, but have elected one additional director. 21 22 The Company's shareholders have entered into an agreement that requires them, subject to the rights of Preferred Holders to elect additional directors in the event of default, to vote to fix the number of directors of the Company at seven and elect as directors two persons designated by the Preferred Holders and five persons designated by certain management shareholders. In addition, Weston Presidio Capital II, L.P., the record holder of 17,100 shares (39.1%) of the Series A Preferred Stock, has agreed to vote in favor of Martin E. Franklin (or in the event of his death or disability, the designee of Marlin Capital, L.P.) as a director. See Item 13, "Certain Relationships and Related Transactions -- Shareholders Agreement." Officers are elected by and serve at the discretion of the Board of Directors. The following table sets forth information with respect to each person who is currently a director or executive officer of the Company.
NAME AGE POSITION WITH THE COMPANY Michael F. Cronin *............ 47 Chairman of the Board (a), (b) John R. Ranelli................ 54 Director, President and Chief Executive Officer John H. Flynn, Jr.............. 50 Director and Executive Vice President - Sales Stephen J. Carlotti............ 58 Director and Secretary (a) Gerald F. Cerce................ 53 Director Martin E. Franklin *........... 36 Director (b) George Graboys................. 68 Director (a), (b) David B. Jenkins *............. 70 Director (b) Mark D. Kost................... 39 Chief Financial Officer and Treasurer John R. Agre................... 37 Executive Director - International Joseph T. Barrell.............. 49 Executive Director - Operations Howard Collins................. 54 Executive Director - Product Development Babette Lienhard............... 50 Executive Director - Merchandising
* Designated by the Preferred Holders. All other directors were designated by certain management shareholders pursuant to the Shareholders Agreement. See Item 13, "Certain Relationships and Related Transactions -- Shareholders Agreement." (a) Member of the Compensation Committee. (b) Member of the Audit Committee. The following is a brief summary of the background of each director and executive officer. Unless otherwise indicated, each individual has served in his current position for at least the past five years. Gerald F. Cerce co-founded the Company in 1985 with Mr. Porcaro and has served as the Company's Chairman of the Board from its founding until February 2001. Mr. Cerce served as Chief Executive Officer from the Company's founding until February 2000. Mr. Cerce also served as Chairman of the Board of AAi's predecessor company, Femic, Inc., a Rhode Island jewelry manufacturer which Mr. Cerce and Mr. Porcaro acquired in 1972. Mr. Cerce serves on the Board of Trustees of Bryant College and is a former member of the Advisory Board of Citizens Savings Bank. John R. Ranelli has been a Director of the Company since July 1999 when he joined AAi as President and Chief Operating Officer. In February 2000, Mr. Ranelli became President and Chief Executive Officer. Prior to joining AAi, Mr. Ranelli served as Executive Vice President of Stride Rite Corporation (a multi-brand footwear company) from 1996 through 1998. Mr. Ranelli served as Chief Operating Officer for Deckers Outdoor Corporation (a footwear and apparel manufacturer) from 1995 to 1996. Mr. Ranelli is a graduate of the College of the Holy Cross and received his M.B.A. from the Amos Tuck School, Dartmouth College. John H. Flynn, Jr. joined AAi's predecessor company in 1981 as Vice President. He served as President and Chief Executive Officer of the Company from 1985 to 1998 and has been a Director since 1985. As Executive Vice President of Sales, Mr. Flynn directly manages all sales and service operations for the Company in the U.S. Prior to joining the Company, Mr. Flynn was a service director for K&M Associates, a costume jewelry distributor, and also served as Vice President of Puccini Accessories where he supervised all sales and service operations. 22 23 Stephen J. Carlotti has been a Director of the Company since June 1996. He is an attorney and has been a partner of the firm Hinckley, Allen & Snyder LLP, since 1992 and from 1972 to 1989. He is a graduate of Dartmouth College and Yale University Law School. Michael F. Cronin has been a Director of the Company since June 1996. Mr. Cronin also serves on the boards of directors of Casella Waste System, Inc. (an integrated waste management company), Tekni Plex, Inc. (a manufacturer of packaging materials), Tweeter Home Entertainment Group, Inc. (a retailer of audio and video consumer electronics products) and several other private growth companies. Since 1991, Mr. Cronin has been the Managing General Partner of Weston Presidio Capital, a venture capital investment firm. He is a graduate of Harvard College and Harvard Business School. Martin E. Franklin has been a Director of the Company since 1996. Mr. Franklin has been Chairman and Chief Executive Officer of Marlin Holdings, Inc., the general partner of Marlin Capital, L.P., a private investment partnership, since October 1996. He also serves as Chairman of the Board of Directors of Bolle Inc., a NASDAQ listed company, and as a Director of Specialty Catalog Corp. From May 1996 until March 1998, Mr. Franklin served as Chairman and Chief Executive Officer of Lumen Technologies, Inc., a NYSE company, and served as Executive Chairman from March 1998 until December 1998. Mr. Franklin was Chairman of the Board and Chief Executive Officer of Lumen's predecessor, Benson Eyecare Corporation from October 1992 to May 1996 and President from November 1993 until May 1996. Mr. Franklin was non-executive Chairman and a Director of Eyecare Products plc, a London Stock Exchange company, from December 1993 until February 1999. Mr. Franklin also serves on the boards of a number of privately held companies and charitable organizations. Mr. Franklin received a B.A. in political science from the University of Pennsylvania in 1986. George Graboys has served as a Director of the Company since 1996. Mr. Graboys served as Chief Executive Officer of Citizens Bank and Citizens Financial Group, Inc. until he retired in October 1992. From January 1993 to June 1995, Mr. Graboys was Adjunct Professor and Executive-in-Residence at the University of Rhode Island School of Business. From March 1995 to June 1998, Mr. Graboys served as Chairman of the Board of Governors for Higher Education. The Board oversees the state's three institutions of higher education with operations conducted on eight campuses throughout the state. David B. Jenkins became a Director of the Company in May 1999. Mr. Jenkins serves on the board of directors of the Nabisco Holding Corp., Citizens Financial Group, and The Foreside Company, Inc. Mr. Jenkins is a trustee of Bridgewater State College and Milton Academy, a director of Relationship Marketing and chairman of Kabloom. Mr. Jenkins received his B.A. from Wesleyan University and his M.B.A. from the Harvard Business School. Mark Kost joined AAi as Chief Financial Officer in January 2000. Mr. Kost was Senior Director of Finance, Global Sales, Marketing and Product Development for the Polaroid Corporation from 1997 through 1999. Mr. Kost also served in numerous capacities for Pepsico from 1991 to 1997. Mr. Kost received his B.A. in accounting from Michigan State University and his M.B.A. from the University of Chicago. John R. Agre joined AAi as Executive Director - International in November 1999. Prior to joining AAi, Mr. Agre served as General Manager of Stride Rite International Corporation responsible for managing Stride Rite's brands in all international markets from 1992 through 1999. Mr. Agre received his B.A. in economics from Northwestern University and his M.B.A. from Cornell University's Johnson Graduate School of Management. Joseph T. Barrell joined AAi as Executive Director - Operations in October 1999. Prior to joining AAi, Mr. Barrell was Senior Vice President of Operations at Stride Rite Corporation responsible for three distribution centers, customer service, logistics and information technology. Mr. Barrell served as the Vice President of Distribution for The Timberland Company from 1991 through 1995 and Director of Physical Distribution of Melville Corporation from 1976 through 1991. Mr. Barrell received his B.S. degree from Worcester State College and his M.B.A from Anna Maria College. Howard B. Collins, Jr. joined AAi as Executive Director - Product Development in April 2000. Mr. Collins was a Division President of The Stride Rite Corporation, responsible for product design, engineering and production from 1997 to 2000. Mr. Collins also held senior level positions at The Timberland Company from 1991 through 1997, first running the apparel business, then the manufacturing and sourcing Divisions. Mr. Collins received his B.S. degree from the University of Utah. 23 24 Babette A. Lienhard joined AAi as Executive Director - Merchandising in December 2000. Most recently Ms. Lienhard was the Senior Vice President for Juniors, Accessories and Shoes for Cherry & Webb, Inc. Prior to that, Ms. Lienhard was President for New World Consulting where she developed programs for Universal Studios, Warner Brothers and Disney as well as other companies. She was Vice President of Merchandising for Accessories and Dresses at Ann Taylor. Ms. Lienhard served in numerous capacities from 1972-1992 at the Macy Corporation moving from Assistant Buyer to Group Vice President of Fashion Accessories. Ms. Lienhard received her B.S. in Business Administration and Retail Management from Simmons College in Boston. DIRECTOR COMPENSATION Directors who are not employees of AAi receive an annual fee of $10,000 and $500 for each committee meeting attended, as well as reimbursement for their reasonable expenses. Messrs. Ranelli and Flynn do not receive any directors' fees. 24 25 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued by the Company to those individuals who served as its Chief Executive Officer at any time during fiscal 2000, each of its four most highly compensated executive officers who earned more than $100,000 in salary and bonus in fiscal 2000 and were employed by the Company on December 30, 2000 and each of two individuals who would have been one of the four most highly compensated executive officers but for the fact that they retired prior to December 30, 2000 (together, the "NAMED EXECUTIVE OFFICERS") for the three fiscal years ended December 30, 2000, in each case, for services rendered in all capacities to the Company during fiscal 2000: SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION(a) COMPENSATION FISCAL ---------------------- ------------ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(b) --------------------------- ------ -------- -------- ------------ --------------- Gerald F. Cerce(c)..................................... 2000 $346,380 $162,500 -- $616,616 Chief Executive Officer and Chairman of the Board 1999 651,738 -- -- 18,291 1998 651,342 145,000 -- 245,576 John R. Ranelli (d).................................... 2000 379,519 185,225 -- 8,325 President and Chief Executive Officer 1999 148,077 -- 31,350 3,600 1998 -- -- -- -- John H. Flynn, Jr...................................... 2000 335,408 187,937 -- 15,545 Executive Vice President-Sales 1999 309,563 -- -- 13,129 1998 309,236 75,000 -- 12,905 Felix A. Porcaro, Jr.(e)............................... 2000 119,170 52,367 -- 136,454 Executive Vice President-Product Development 1999 211,928 -- -- 16,907 and Marketing 1998 211,673 50,000 -- 13,138 Robert V. Lallo(e)..................................... 2000 146,797 71,194 -- 63,650 Executive Vice President-Distribution 1999 174,488 -- -- 5,482 1998 165,229 45,000 -- 6,069 John R. Agre(f)........................................ 2000 202,000 60,438 6,000 650 Executive Director - International Operations 1999 21,539 -- -- -- 1998 -- -- -- -- Joseph T. Barrell(g)................................... 2000 249,124 73,422 13,500 1,263 Executive Director - Operations 1999 50,769 -- -- -- 1998 -- -- -- -- Mark D. Kost(h)........................................ 2000 232,405 86,678 11,224 730 Chief Financial Officer 1999 -- -- -- -- 1998 -- -- -- --
(a) The aggregate amount of perquisites and other personal benefits received from the Company by each of the Named Executive Officers was less than the lesser of $50,000 or 10% of the total of annual salary and bonus reported. 25 26 (b) Amounts paid in fiscal 2000 represent the following: (1) severance payments made by the Company to Mr. Cerce ($324,631), Mr. Porcaro ($120,838) and Mr. Lallo ($58,812); (2) medical payments reimbursed by the Company to Mr. Cerce ($7,437), Mr. Flynn ($3,908), and Mr. Porcaro ($5,680); (3) the Company's matching contributions under its Qualified 401(k) Plan and Non-Qualified 401(k) Excess Plan for Named Executive Officers as follows: Mr. Cerce ($13,494), Mr. Ranelli ($13,500), Mr. Flynn ($10,696), Mr. Porcaro ($6,049), Mr. Lallo ($4,764), Mr. Agre ($600), Mr. Barrell ($1,200) and Mr. Kost ($705); (4) premiums paid by the Company for term life insurance purchased for Named Executive Officers and not made available generally to salaried employees are as follows: Mr. Cerce ($21,054), Mr. Ranelli ($75), Mr. Flynn ($941), Mr. Porcaro ($3,887), Mr. Lallo ($75), Mr. Agre ($50), Mr. Barrell ($63) and Mr. Kost ($25); and (5) premium of $250,000 paid with respect to life insurance purchased by Company in connection with Mr. Cerce's Supplemental Executive Retirement Plan. (c) Mr. Cerce served as Chief Executive Officer until February 2000 and terminated his employment with the Company effective June 30, 2000. (d) Mr. Ranelli's employment with the Company commenced on July 26, 1999; he assumed the position as Chief Executive Officer in February 2000. (e) Messrs. Porcaro and Lallo terminated their employment with the Company effective June 30, 2000 and August 31, 2000, respectively. (f) Mr. Agre's employment with the Company commenced in November 1999. (g) Mr. Barrell's employment with the Company commenced in October 1999. (h) Mr. Kost's employment with the Company commenced in January 2000. STOCK PLAN The Company has established the 1996 Incentive Stock Plan (the "1996 Plan") which provides for the grant of awards covering a maximum of 88,000 shares of Common Stock, to officers and other key employees of the Company and non-employees who provide services to the Company or its subsidiaries. Awards under the 1996 Plan may be granted in the form of incentive stock options, non-qualified stock options, shares of common stock that are restricted, units to acquire shares of Common Stock that are restricted, or in the form of stock appreciation rights or limited stock appreciation rights. The following table sets forth certain information concerning the grant of stock options under the 1996 Plan to the Named Executive Officers during fiscal 2000. No options were granted to any other Named Executives in fiscal 2000. OPTION GRANTS IN THE LAST FISCAL YEAR
NUMBER OF SECURITIES UNDERLYING % OF TOTAL OPTIONS OPTIONS GRANTED TO EMPLOYEES EXERCISE OR BASE PRICE GRANT DATE NAME GRANTED(a) IN FISCAL YEAR ($/SH) EXPIRATION DATE VALUE - ---- ---------- -------------------- ---------------------- --------------- ---------- John R. Agre 6,000 12.73% $ 32.00 3/14/2010 $ 81,660 Joseph T. Barrell 13,500 28.65% $ 32.00 3/14/2010 $183,735 Mark D. Kost 11,224 23.82% $ 32.00 3/14/2010 $152,759
(a) Options vest in three equal annual installments commencing on the first anniversary of the grant date; vesting accelerates (i) upon an initial public offering, (ii) change of control of the Company or (iii) the Company attaining annual EBIT of at least $20 million. (b) Represents the fair value of the option granted and was estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility of 35.53%; expected life of five years; and risk-free interest rate of 6.5%. No dividends on Common Stock were assumed for purposes of this estimate. 26 27 The following table contains information with respect to aggregate stock options held by the Named Executive Officers as of December 30, 2000. Messrs. Cerce, Flynn, Porcaro and Lallo do not hold any stock options. No stock options were exercised by any Named Executive Officers during fiscal 2000. AGGREGATE YEAR-END OPTION VALUES VALUE OF UNEXERCISED IN-THE-MONEY OPTION/ NUMBER OF SECURITIES UNDERLYING SARs AT FISCAL END($)(a) UNEXERCISED OPTIONS AT FISCAL YEAR-END($)(a) YEAR-END (EXERCISABLE/ NAME EXERCISABLE/UNEXERCISABLE UNEXERCISABLE) - ---- -------------------------------- ----------------------- John R. Ranelli...... 15,675/15,675 $6,740/$6,740 John R. Agre......... 0/6,000 0 Joseph T. Barrell.... 0/13,500 0 Mark D. Kost......... 0/11,224 0 (a) Based on the December 30, 2000, price of the Common Stock being equal to $32.00, the exercise price of options granted in fiscal 2000. EMPLOYMENT AGREEMENTS The Company entered into employment agreements, dated as of May 31, 1996, with certain of its executive officers, including Messrs. Cerce, Flynn, Porcaro and Lallo and dated as of July 19, 1999 with Mr. Ranelli (collectively, the "Executives," each an "Executive"). Each employment agreement provides that during the term of the contract the Executive's base salary will not be reduced, will be increased on each anniversary date of the agreement based upon the consumer price index and may be increased based on the Company's performance and the Executive's particular contributions. The employment agreements also stipulate that the Executives will remain eligible for participation in the Company's Executive Bonus Plan and other benefit programs, and that the Company will provide each Executive with an automobile consistent with past practice or, in the case of Mr. Ranelli, a car allowance. The employment agreement of Mr. Cerce further provides for the reimbursement of certain membership and service fees as well as reasonable expenses associated with the performance of his duties in New York City and specifies that the Company will make all annual payments for his Supplemental Employment Retirement Plan. Mr. Cerce's agreement provides for an initial ten year term expiring on May 31, 2006, and the employment agreements of Messrs. Flynn, Porcaro and Lallo each stipulate an initial three year term expiring on May 31, 1999, with automatic renewals for successive one year terms thereafter. Mr. Ranelli's agreement provides for a rolling two year term. Upon prior written notice to the Executive, the Company may terminate the agreement "with cause" for (a) the conviction of the Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or its subsidiaries; or, (c) except under certain circumstances as specified in the agreement, the Executive's refusal to follow the reasonable and lawful written instructions of the Board of Directors with respect to the services to be rendered and the manner of rendering such services by the Executive. In addition, an Executive may terminate his agreement at any time by providing written notice to the Company, and the Company may terminate the agreement at any time "without cause" by providing written notice to the Executive. Mr. Cerce's agreement provides that the Company must provide such written notice at least six months prior to termination. Termination "without cause" means termination for any reason other than "cause" as defined and specifically includes the disability of the Executive or the Executive's death and, in the case of Mr. Ranelli, the Company's material reduction of the Executive's duties or authority. Mr. Ranelli may also terminate his employment for "good reason", which is defined as (i) an assignment of duties materially inconsistent with his status with the Company or material alteration in the nature or status of his responsibilities or titles or offices or his removal from any such positions, (ii) a reduction in his salary, (iii) the Company's failure to provide current fringe benefits to him, except if such action applies to all executive officers, (iv) a relocation of the Company's principal executive offices to a location more than 50 miles from their current location, (v) any material breach, incurred after reasonable notice, by the Company of any provisions of the agreement or (vi) a "change of control", provided that in such event Mr. Ranelli may exercise his right to terminate his employment only within the 12-month period following such change in control. 27 28 Under the employment agreements, if the Company terminates an agreement "without cause," and, in the case with Mr. Ranelli, if he terminates his employment for "good reason", the Company is obligated to provide the Executive monthly severance benefits consisting of one-twelfth of the sum of Executive's then current annual base salary and the Executive's most recent bonus and to continue coverage under the Company's insurance programs and any ERISA benefit plans. Such payments, insurance coverage and plan participation will continue for at least two years from the date of the Executive's termination, and, except in the case of Mr. Ranelli, may be extended for a longer period depending on the Executive's "Non-compete Period" as described below. For Messrs. Cerce and Flynn, the maximum period for severance benefits is five years, for Mr. Lallo the comparable maximum period is four years, and for Mr. Porcaro, the comparable maximum period is three years. The employment agreements contain confidentiality provisions and provide that during the employment period and after termination of the agreement, the Company may restrict the Executive's subsequent involvement in Restricted Business Activities for two years following the date of the termination (the "Non-compete Period"). As used in the agreements, "Restricted Business Activities" means the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during the Executive's employment with the Company. Other than with the written approval of the Company, the Executive may not enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company held by the Executive, and (b) no more than five percent of the securities of any other company which is publicly held. The Non-compete Period may be extended, at the Company's option, by three years for Messrs. Cerce and Flynn, by two years for Mr. Lallo and by one year for Mr. Porcaro, provided that the Company continues to make the payments and provide the benefits described in the preceding paragraph. In accordance with the terms of their respective employment agreements, each of Messrs. Cerce, Porcaro and Lallo will receive monthly severance payments for the 24 month period following the effective date of his termination of employment, which payments for fiscal 2000 are reflected under "All Other Compensation" in the Summary Compensation Table. In addition, Messrs. Cerce, Porcaro and Lallo were entitled to participate on a pro-rata basis in the Company's fiscal 2000 Executive Bonus Plan, based upon the effective date of the Executive's respective termination of employment. To date, the Company has not elected to extend the Non-compete Period as permitted under the employment agreements. The Company has entered into letter agreements with Messrs. Agre, Barrell and Kost. The letter agreements establish the executive's base salary and stipulate that the executive will be eligible for participation in the Company's Executive Bonus Plan and other benefit programs. Mr. Agre's letter agreement further provides for a $30,000 payment as reimbursement for relocation expenses. Under the letter agreements, if the Company terminates the executive's employment other than for cause, the Company is obligated to provide the executive monthly severance payments equal to one-twelfth of the executive's base salary for a twelve month period. For this purpose, "cause" constitutes (a) permanent disability under Company's long-term disability insurance coverage; (b) failure to devote full time and reasonable best efforts to the performance of the executive's duties; (c) commission of an act of gross negligence, dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or breach of trust in the performance of the executive's duties; (d) failure to observe the confidentiality and non-competition provisions of the agreement; (e) commission of a felony or act which, in the judgment of the Board of Directors of Company, subjects the executive or the Company to public disrespect, scandal or ridicule so as to materially and adversely affect the utility of executive's services to the Company; or (f) refusal to perform duties assigned to executive in good faith or violation of or failure to observe any lawful business instruction or lawful business policy established by the Company with respect to the operation of its business and affairs or the failure or refusal to substantially perform the executive's duties. Mr. Barrell's agreement also obligates the Company to pay him twelve months of severance if he resigns following a change of control and his duties or authority's have been materially reduced. The letter agreements contain confidentiality provisions and provide that during his employment and the twelve month period following termination of employment, the executive will not engage in or carry on, directly or indirectly, any business similar to or competing with any business carried on by the Company or directly or indirectly related to the business of providing jewelry, small leather goods, sunglasses, reading glasses and other accessories sales and services. EXECUTIVE BONUS PLAN The Company maintains an Executive Bonus Plan for the purpose of providing incentives in the form of an annual cash bonus to officers and other key employees. Awards are equal to a percentage of base salaries specified in an annual plan by reference to the Company's target for EBITDA, as well as specified personal goals. Bonuses awarded to senior executives range from 30% to 50% of 28 29 compensation if the targets are met. If the targets are not met, the amount of the bonuses, if any, is subject to the discretion of the Board of Directors. QUALIFIED 401(k) PLAN The Company has a qualified 401(k) plan (the "Qualified Plan") that permits all employees to defer, on an elective basis, up to 15% of their salary or wages. Presently, the Company matches 25% of the first 6% of compensation that an employee defers under the Qualified Plan. The amount of elective deferrals for any one employee under the Qualified Plan is limited by the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the amount that an executive employee may defer is subject to nondiscrimination rules which may prevent the executive from deferring the maximum amount. Further, the Qualified Plan may not take into account compensation in excess of specified amounts for any employee in computing contributions under the Qualified Plan. If an employee's elective contributions are reduced or capped under the Qualified Plan, the amount of matching employer contribution also is restricted. NON-QUALIFIED EXCESS 401(k) PLAN In May 1997, the Company established the Non-Qualified Excess 401(k) Plan (the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the Non-Qualified Plan is to provide deferred compensation to a select group of management or highly compensated employees of the Company as designated by the Board of Directors. Presently, all the Named Executive Officers participate in the Non-Qualified Plan. Under the Non-Qualified Plan, a participant may elect to defer up to 15% of his or her compensation on an annual basis. This amount is credited to the employee's deferred compensation account (the "Deferred Amount"). Under the Non-Qualified Plan, the Company also credits the participant's deferred compensation account for the amount of the matching contribution the Company would have made under the Qualified Plan with respect to the Deferred Amount. All amounts contributed by the employee and by the Company under the Non-Qualified Plan are immediately vested. A participant under the Non-Qualified Plan is entitled to receive a distribution of his or her account upon retirement, death, disability or termination of employment. An executive also is eligible to withdraw funds credited to the executive's deferred compensation account in the event of unforeseeable financial hardship. This policy is consistent with the ability of an employee to obtain hardship withdrawals under the Qualified Plan. The amount deferred under the Non-Qualified Plan is not included in the income of the executive until paid and, accordingly, the Company is not entitled to a deduction for any liabilities established under the Non-Qualified Plan until the amount credited to the participant's deferred compensation account is paid to him or her. The Company has established a grantor trust effective June 1, 1997 to hold assets to be used for payment of benefits under the Non-Qualified Plan. In the event of the Company's insolvency, any assets held by the trust are subject to claims of general creditors of the Company under federal and state law. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has entered into a Supplemental Executive Retirement Plan (the "Supplemental Plan") with Mr. Cerce the purpose of which is to provide supplemental retirement, death, disability and severance benefits to Mr. Cerce in consideration for his performance of services as a key executive of the Company. In order to fund the Company's obligations under the Supplemental Plan, the Company has purchased an insurance policy insuring the life of Mr. Cerce (the "Policy"). With the consent of Mr. Cerce, the Company made no contribution to the Supplemental Plan in fiscal 1999. The Company made a $250,000 contribution to the Supplemental Plan in fiscal 2000. Under the terms and subject to the conditions contained in the Supplemental Plan, upon Mr. Cerce's voluntary termination of employment for any reason on or after age 60 ("Retirement") or by reason of disability, the Company will pay to Mr. Cerce the existing cash surrender value of the Policy. At the discretion of the Board of Directors of the Company, payment may be made either in a single lump sum or in monthly installments over a ten year period; provided, however, in the event that Retirement occurs within one year after a change of control, the retirement benefit will be paid in a single lump sum. 29 30 In the event that Mr. Cerce dies while employed by the Company, the Company will pay a death benefit to Mr. Cerce's surviving spouse or designated beneficiary equal to the death benefit payable under the Policy. The death benefit will be paid in monthly installments over a fifteen year period unless Mr. Cerce's death occurs within one year after a change of control, in which event, the death benefit will be paid in a single lump sum no later than ninety days after his death. In the event that Mr. Cerce's employment with the Company is terminated for any reason other than Retirement, death or disability, Mr. Cerce will be entitled to receive the existing cash surrender value of the Policy, payable at the discretion of the Board of Directors of the Company in a single lump sum or in monthly installments over a ten year period. However, if Mr. Cerce's termination occurs within one year after a change of control, the severance benefit will be paid in a single lump sum. By agreement, the Company will continue to make contributions to the Supplemental Plan during the 24 month severance period. Mr. Cerce's employment shall be deemed terminated for purposes of triggering the Company's payment obligations under the Supplemental Plan as of the end of the 24 month severance period. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND DIRECTORS AND OFFICERS The following table sets forth certain information regarding beneficial ownership of the Company's capital stock as of March 28, 2000, by (i) each person who is known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, Series A Preferred Stock or Series B Preferred Stock; (ii) each of the Company's directors and Named Executive Officers; and (iii) all directors and current executive officers of the Company as a group:
SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK DILUTED (b) ------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF NUMBER OF SHARES SHARES SHARES SHARES BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT BENEFICIALLY PERCENT NAME AND ADDRESS (a) OWNED CLASS OWNED CLASS OWNED OF CLASS OWNED OF CLASS - -------------------- ------------ ------------ ------------ ----------- ------------ -------- ------------ -------- Gerald F. Cerce ................... -- -- -- -- 305,906 50.3% 305,906 29.3% John R. Ranelli (c)................ -- -- -- -- 15,675 2.5 15,675 1.5 Felix A. Porcaro, Jr. ............. -- -- -- -- 171,000 28.1 171,000 16.4 John H. Flynn, Jr.................. -- -- -- -- 28,500 4.7 28,500 2.7 Stephen J. Carlotti (d)(e)......... -- -- -- -- 36,094 5.9 36,094 3.5 Michael F. Cronin (f).............. 17,100 39.1% 39,939 56.4% 19,000 3.1 190,000 18.2 Martin E. Franklin (g)............. 4,750 10.9 7,488 10.6 -- -- 47,500 4.5 George Graboys..................... -- -- -- -- -- -- -- -- David B. Jenkins................... -- -- -- -- -- -- -- -- David J. Syner (e)(h).............. -- -- -- -- 36,094 5.9 36,094 3.5 Robert V. Lallo.................... -- -- -- -- 28,500 4.7 28,500 2.7 John R. Agre (c)................... -- -- -- -- 2,000 * 2,000 * Joseph T. Barrell (c).............. -- -- -- -- 4,500 * 4,500 * Mark D. Kost (c)................... -- -- -- -- 2,000 * 2,000 * Weston Presidio Capital II, L.P. (i)........................ 17,100 39.1 39,939 56.4 19,000 3.1 190,000 18.2 St. Paul Fire and Marine Insurance Company, St. Paul Venture Capital V, LLC(j)....................... 6,840 15.7 11,719 16.5 7,600 1.3 76,000 7.3 BancBoston Ventures, Inc. (k)...... 6,840 15.7 5,860 8.3 7,600 1.3 76,000 7.3 Marlin Capital, L.P. (l)........... 4,750 10.9 7,488 10.6 -- -- 47,500 4.5 National City Capital Corporation (m)................. 3,420 7.8 5,864 8.3 3,800 * 38,000 3.6 Brahman Group (n).................. 3,117 7.1 -- -- -- -- 31,170 3.0 All executive officers and directors as a group (13 persons) (o).................... 21,850 50.0 47,427 66.9 419,583 65.76 638,083 59.35
* Less than one percent (a) If applicable, beneficially owned shares include shares owned by the spouse, children and certain other relatives of the director or officer, as well as shares held by trusts of which the person is a trustee or in which he has a beneficial interest. All information with respect to beneficial ownership has been furnished by the respective directors and officers. (b) Includes full conversion of all outstanding shares of Series A Preferred Stock into Common Stock at the current ratio of 1 for 10. (c) Represents shares that may be acquired pursuant to presently exercisable options. 30 31 (d) Mr. Carlotti's business address is 1500 Fleet Center, Providence, Rhode Island 02903. (e) Represents shares of Common Stock held by Mr. Carlotti and David J. Syner, as trustees of the benefit of Mr. Cerce's children. (f) Mr. Cronin's business address is 1 Federal Street, 21st Floor, Boston, Massachusetts 02110. Includes 19,000 shares of Common Stock, 39,939 shares of Series B Preferred Stock and 17,100 shares of Series A Preferred Stock held in the name of Weston Presidio Capital II, L.P. of which Mr. Cronin is a general partner. (g) Mr. Franklin's business address is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. Includes 7,488 shares of Preferred Series B Preferred Stock and 4,750 shares of Series A Preferred Stock held in the name of Marlin Capital, L.P., of which Mr. Franklin's majority-owned company is the sole general partner. (h) Mr. Syner's business address is 35 Sockanesset Crossroads, Cranston, Rhode Island 02920. (i) The address of Weston Presidio Capital II, L.P. is 1 Federal Street, 21st Floor, Boston, Massachusetts 02110. (j) The address of St. Paul Fire and Marine Insurance Company is c/o St. Paul Venture Capital, Inc., 8500 Normandale Lake Boulevard, Suite 1940, Bloomington, Minnesota 55437. (k) The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110. (l) The address of Marlin Capital, L.P. is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. (m) The address of National City Capital Corporation is 1965 E. 6th Street, Suite 1010, Cleveland, Ohio 44114. (n) The Brahman Group includes Brahman Partners II, L.P., Brahman Institutional Partners, L.P., B.Y. Partners, L.P. and Brahman Partners II Offshore Ltd., which are a "group" as that term is used in Section 13(d)(3) of the Exchange Act of 1934, as amended (the "Exchange Act"). The address for these shareholders is c/o Brahman Capital Corp., 277 Park Avenue, New York, New York 10172. (o) Includes 30,083 shares that may be acquired pursuant to options which are or will become exercisable within 60 days. All of the Company's shareholders are party to an agreement that requires the parties thereto, subject to the right of the Preferred Holders to elect additional directors in the event of the Company's default on certain covenants, to vote to fix the number of directors of the Company at seven and elect as directors two persons designated by the Preferred Holders and five persons designated by certain management shareholders. See Item 13, "Certain Relationships and Related Transactions -- Shareholders Agreement." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LEASES OF RHODE ISLAND WAREHOUSE SITES The Company has an operating lease agreement for warehouse facilities with Sunrise Properties, LLC ("Sunrise Properties"), a Rhode Island limited liability company, of which Mr. Porcaro and Linda Cerce, wife of Mr. Cerce and sister of Mr. Porcaro, are members. The Company also has an operating lease agreement for warehouse facilities with 299 Carpenter Street Associates, LLC, a Rhode Island limited liability company of which Sunrise Properties and Messrs. Lallo and Flynn are members. The leased properties are located at 4 Warren Avenue, North Providence, Rhode Island and at 299 Carpenter Street, Providence, Rhode Island. The present annual rental rates for the Warren Avenue and Carpenter Street properties are $161,412 and $40,920, respectively. The Company is responsible for real estate taxes and utilities. Each lease has a three year term ending on December 31, 2001, and grants the Company an option to extend the lease for an additional three year term at the greater of the then fair market rent or the current rent adjusted for the cumulative increase in the consumer price index. 31 32 GUARANTY OF MORTGAGE NOTE The Company has guaranteed a mortgage note payable by Sunrise Properties in the aggregate amount of $200,000, the outstanding balance of which was paid in full during 2000. SHAREHOLDERS AGREEMENT The Company and the current shareholders are parties to a Tag-along, Transfer Restriction and Voting Agreement (the "Shareholders Agreement") which requires the parties thereto, subject to the right of the Preferred Holders to elect additional directors in the event of the Company's default on certain covenants, to vote to fix the number of directors at seven and to elect as directors two persons nominated by the Preferred Holders and five persons nominated by the other parties to the Shareholders Agreement (the "Management Shareholders"). In a related Letter Agreement, Weston Presidio Capital II, L.P., a Preferred Holder, has agreed to use its best efforts to cause the nomination of and to vote all of its shares of Series A Preferred Stock for the election of Martin E. Franklin (or, in the event of his death or incapacity, the designee of Marlin Capital, L.P.) as a director of the Company, for so long as the Preferred Holders, in the aggregate, own at least 10% or 4,750 shares of Series A Preferred Stock. The Shareholders Agreement also provides that upon the death of a Management Shareholder, the Company will purchase, at an appraised value determined by an independent investment banker, all or a portion of the shares owned by the Management Shareholder at his death. The Company has funded its obligations under the Shareholders Agreement with life insurance policies on the lives of the Management Shareholders in the aggregate amount of $27 million. The Company's obligation to purchase shares upon the death of a Management Shareholder is limited to the life insurance proceeds received upon the death of such Management Shareholder. The Company may not decrease the amount of life insurance coverage without the prior written consent of the affected Management Shareholder. The Shareholders Agreement terminates on the earlier of the following: (i) the time immediately prior to the consummation of a Qualified Public Offering as defined in the Articles of Incorporation or (ii) when no shares of the Series A Preferred Stock and no warrants issuable to the Preferred Holders are outstanding, except as a result of the conversion, exchange or exercise of the Series A Preferred Stock or warrants. OWNERSHIP OF PREFERRED SHARES OF FOSTER GRANT US BY LUMEN In connection with the purchase of Foster Grant US, the Company's wholly-owned subsidiary, issued Lumen 100 shares of Preferred Stock of Foster Grant US (the "FG Preferred Stock") which represents all of the issued and outstanding shares of FG Preferred Stock. By its terms, the FG Preferred Stock was redeemable on February 28, 2000 (the "FG Redemption Date") by payment of an amount ranging from $10,000 to $40,000 per share (the "FG Redemption Amount"), determined with reference to the combined net sales of sunglasses, reading glasses and accessories by Foster Grant US and the Company for the year ended January 1, 2000, excluding an amount equal to the net sales by the Company for such items for the year ended December 31, 1996. The Company redeemed these securities during the second quarter of fiscal 2000 for $1.0 million. The Certificate of Incorporation of Foster Grant US also provides for supplemental payment to the holders of the FG Preferred Stock if the Company completes either (i) an initial public offering where the pre-money equity valuation of the Company equals or exceeds $75.0 million, (ii) a merger or similar transaction where the transaction value equals or exceeds $75.0 million or (iii) a private placement of equity securities representing more than 50% of the outstanding capital stock for consideration of not less than $37.5 million (each a "Redemption Event") subsequent to the FG Redemption Date. Upon completion of a Redemption Event, holders of FG Preferred Stock are entitled receive a payment ranging from $25,000 to $30,000 per share (the "Redemption Event Amount"), to be determined with reference to, as the case may be, either the pre-money valuation of the Company immediately prior to the initial public offering or the proceeds of the merger or similar transaction or private equity placement. If the transaction value does not equal or exceed the threshold amounts, no supplemental payment is due. LEGAL SERVICES Stephen J. Carlotti, a partner of Hinckley, Allen & Snyder LLP, is a director and the secretary of the Company and, as trustee, is the holder of 5.9% of the Common Stock. Hinckley, Allen & Snyder LLP, provides legal services to the Company. 32 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements Financial Statements are listed in the index of this Annual Report. 33 34 (2) Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1.1(1) Restated Articles of Incorporation of AAi.FOSTERGRANT, Inc. 3.1.2(5) Articles of Amendment to Articles of Incorporation of AAi.FOSTERGRANT, Inc. filed on June 9, 2000. 3.1.3(6) Articles of Amendment to Articles of Incorporation of AAi.FOSTERGRANT, Inc. filed on August 11, 2000. 3.2(1) Amended and Restated By-laws of AAi.FOSTERGRANT, Inc. 4.1(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 10 3/4% Senior Notes due 2006. 4.2(1) 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. 9.1(1) Letter Agreement of Weston Presidio Capital II, L.P. regarding voting of the Preferred Stock of AAi dated December 9, 1996. 9.2(1) Tag-Along Transfer Restriction and Voting Agreement among AAi, Weston Presidio Capital, II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996, as amended on December 11, 1996. 10.1(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. 10.1.1(2) First Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 7, 1999. 10.1.2(3) Second Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 24, 2000. 10.1.3(5) Third Amendment to Second Amended and Restated Financing and Security Agreement dated as of June 12, 2000. 10.1.4(6) Fourth Amendment to Second Amended and Restated Financing and Security Agreement dated as of August 14, 2000. 10.1.5 Fifth Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 27, 2001. 10.2(1) Agreement of Amendment, Termination & Modification between AAi, Bolle, Inc., Foster Grant Group, LP and Foster Grant Holdings, Inc. dated June 1998. 10.3(1) Stock Purchase Agreement by and among AAi, BEC Group, Inc., Foster Grant Group, L.P. and Foster Grant Holdings, Inc., dated May 31, 1996, as amended by a side letter dated December 11, 1996. 34 35 10.4.1(1) Securities Purchase Agreement among AAi, Weston Presidio Capital II, L.P. and certain other investors, dated May 31, 1996. 10.4.2(1) First Amendment to Securities Purchase Agreement among AAi, Weston Presidio Capital II, L.P. and certain other investors, dated October 1, 1998. 10.5(1) Registration Rights Agreement among AAi, Weston Presidio Capital II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996, as amended on December 11, 1996. 10.6(1) Incentive Stock Plan of AAi.+ 10.6.1(3) Amendment to Incentive Stock Plan.+ 10.7(1) Employment Agreement between AAi and Gerald F. Cerce dated May 31, 1996.+ 10.8(2) Employment Agreement between AAi and John R. Ranelli dated July 19, 1999.+ 10.9(1) Employment Agreement between AAi and John H. Flynn, Jr. dated May 31, 1996.+ 10.10(1) Employment Agreement between AAi and Robert V. Lallo dated May 31, 1996.+ 10.11(1) Employment Agreement between AAi and Felix A. Porcaro, Jr. dated May 31, 1996.+ 10.12(1) Supplemental Executive Retirement Plan between AAi and Gerald F. Cerce dated September 29, 1994, as amended on December 29, 1995 and May 31, 1996.+ 10.13(1) Executive Bonus Plan.+ 10.14(1) Non-Qualified Excess 401(k) Plan.+ 10.15(3) Employment Agreement between AAi and Mark D. Kost dated December 15, 1999.+ 10.16(3) Employment Agreement between AAi and John R. Agre dated November 3, 1999.+ 10.17(3) Employment Agreement between AAi and Joseph T. Barrell dated September 15, 1999.+ 10.18(5) Employment Agreement between AAi and Howard Collins dated March 24, 2000.+ 10.19 Employment Agreement between AAi and Babette Lienhard dated December 22, 2000.+ 21.1 Subsidiaries of AAi. (1) 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. (2) Previously filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended July 3, 1999 and by this reference incorporated herein. (3) Previously filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended October 1, 1999 and by this reference incorporated herein. 35 36 (4) Previously filed as an exhibit to the Company's Form 10-K for the fiscal year ended January 1, 2000 and by this reference incorporated herein. (5) Previously filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended July 1, 2000 and by this reference incorporated herein. (6) Previously filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended September 30, 2000 and by this reference incorporated herein. + Management or compensatory plan or arrangement. (b) Reports On Form 8-K None. 36 37 AAI.FOSTERGRANT, INC. 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. AAI.FOSTERGRANT, INC. Date: March 29, 2001 By: /s/ John R. Ranelli ------------------------------------- John R. Ranelli President and Chief Executive Officer 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/ John R. Ranelli /s/ Mark D. Kost.. - ---------------------------------------- -------------------------------------------- John R. Ranelli Mark D. Kost Director, President, and Chief Financial Officer Chief Executive Officer (Principal Financial and Accounting Officer) (Principal Executive Officer) Date: March 29, 2001 Date: March 29, 2001 /s/ Gerald F. Cerce /s/ Stephen J. Carlotti - ---------------------------------------- -------------------------------------------- Gerald F. Cerce, Director Stephen J. Carlotti, Director Date: March 29, 2001 Date: March 29, 2001 /s/ Michael F. Cronin /s/ John H. Flynn, Jr. - ---------------------------------------- -------------------------------------------- Michael F. Cronin, Chairman of the Board John H. Flynn, Jr., Director Date: March 29, 2001 Date: March 29, 2001 /s/ Martin E. Franklin /s/ George Graboys - ---------------------------------------- -------------------------------------------- Martin E. Franklin, Director George Graboys, Director Date: March 29, 2001 Date: March 29, 2001
37 38 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS AS OF JANUARY 1, 2000 AND DECEMBER 30, 2000 TOGETHER WITH AUDITORS' REPORT INDEX
PAGE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1 CONSOLIDATED BALANCE SHEETS AS OF JANUARY 1, 2000 AND DECEMBER 30, 2000 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED JANUARY 2, 1999, JANUARY 1, 2000 AND DECEMBER 30, 2000 F-3 CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 1, 2000 AND DECEMBER 30, 2000 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 1, 2000 AND DECEMBER 30, 2000 F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
39 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of AAi.FosterGrant, Inc. (a Rhode Island corporation) and subsidiaries as of January 1, 2000 and December 30, 2000 and the related consolidated statements of operations, redeemable preferred stock, shareholders' deficit and comprehensive income (loss) and cash flows for each of the three years in the period ended December 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 AAi.FosterGrant, Inc. and subsidiaries as of January 1, 2000 and December 30, 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts March 27, 2001 F-1 40 AAI. FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ CURRENT ASSETS: Cash and cash equivalents........................................ $ 2,289 $ 578 Accounts receivable, less reserves of approximately $12,804 and $9,370........................................................... 22,231 32,839 Inventories...................................................... 33,025 33,083 Prepaid expenses and other current assets........................ 794 1,280 Deferred tax assets.............................................. 3,743 980 -------- -------- Total current assets........................................... 62,082 68,760 -------- -------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Land............................................................. 1,233 1,233 Building and improvements........................................ 5,386 5,760 Display fixtures................................................. 14,857 14,056 Furniture, fixtures and equipment................................ 11,166 13,183 Leasehold improvements........................................... 2,834 2,815 Equipment under capital leases................................... 1,604 1,903 -------- -------- 37,080 38,950 LESS -- ACCUMULATED DEPRECIATION AND AMORTIZATION................... 17,688 20,292 -------- -------- 19,392 18,658 -------- -------- OTHER ASSETS: Advances to officers/shareholders................................ 74 68 Deferred costs................................................... 1,143 411 Deferred tax assets.............................................. 5,319 2,009 Investments in affiliates........................................ 1,291 1,220 Intangible assets, net of accumulated amortization of $4,095 and $2,497....................................................... 13,486 12,830 Other assets, net of accumulated amortization of $878 and $1,758. 5,080 4,215 -------- -------- 26,393 20,753 -------- -------- Total assets................................................... $107,867 $108,171 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable.......................... $ 11,000 $ 25,263 Redeemable preferred stock of a subsidiary....................... 1,000 -- Current maturities of long-term obligations...................... 902 1,427 Deferred compensation-- current portion.......................... 10 10 Accounts payable................................................. 16,414 21,380 Accrued expenses................................................. 23,253 17,678 Accrued income taxes............................................. 2,104 2,403 -------- -------- Total current liabilities...................................... 54,683 68,161 -------- -------- 10 3/4% Series B Senior Notes Due 2006.............................. 75,000 51,850 Long-term obligations, less current maturities...................... 420 6,561 Deferred compensation, less current portion......................... 1,662 1,287 Commitments and contingencies (Note 14) Redeemable Preferred Stock of a Subsidiary.......................... -- -- Authorized -- 200,000 shares Series A redeemable convertible Preferred stock, $.01 par value -- Designated, issued and outstanding -- 43,700 shares stated at redemption value................................ 31,864 35,147 Series B redeemable Preferred stock, $.01 par value -- Designated - 75,000 shares Issued and outstanding -- 70,870 shares stated at redemption value......................... -- 945 SHAREHOLDERS' DEFICIT: Common stock, $0.01 par value Authorized -- 4,800,000 shares Issued and outstanding-- 608,000 shares........................ 6 6 Additional paid-in capital....................................... 270 270 Accumulated other comprehensive items............................ (122) (575) Accumulated deficit.............................................. (55,916) (55,481) -------- -------- Total shareholders' deficit.................................... (55,762) (55,780) -------- -------- Total liabilities and shareholders' deficit.................... $107,867 $108,171 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 41 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED ------------------------------------ JANUARY 2, JANUARY 1, DECEMBER 30, 1999 2000 2000 ---------- ---------- ------------ NET SALES............................................................. $ 160,325 $150,680 $165,542 COST OF GOODS SOLD.................................................... 88,823 96,973 96,589 --------- -------- -------- Gross profit..................................................... 71,502 53,707 68,953 SELLING EXPENSES...................................................... 49,315 41,645 42,928 GENERAL AND ADMINISTRATIVE EXPENSES................................... 26,220 25,072 17,726 RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT LOSS.................... 2,600 6,018 2,500 --------- -------- -------- (Loss) income from operations.................................... (6,633) (19,028) 5,799 EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES......................... (76) -- -- MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY................ (187) (91) (56) INTEREST EXPENSE...................................................... (7,010) (10,250) (10,929) OTHER INCOME (EXPENSE), NET........................................... 753 (20) 192 --------- -------- -------- Loss before income tax........................................... (13,153) (29,389) (4,994) INCOME TAX EXPENSE.................................................... -- (36) (126) --------- -------- -------- Net loss before extraordinary items.............................. (13,153) (29,425) (5,120) Extraordinary gain, net of $6.3 million in taxes...................... -- -- 8,838 --------- -------- -------- Net (loss) income before dividends and accretion on preferred stock................................................ (13,153) (29,425) 3,718 DIVIDENDS AND ACCRETION ON PREFERRED STOCK............................ 2,779 3,002 3,283 --------- -------- -------- Net (loss) income applicable to common shareholders.............. $ (15,932) $(32,427) $ 435 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 42 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A REDEEMABLE CONVERTIBLE SERIES B REDEEMABLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL -------------------- ------------------- ---------------- ---------- REDEMPTION REDEMPTION PAR PAID-IN SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL ------- ---------- ------ ---------- ------- ----- --------- BALANCE, DECEMBER 31, 1997 ............. 43,700 26,083 -- -- 608,000 6 270 Dividends and accretion on Series A Preferred Stock ....................................... -- 2,779 -- -- -- - -- Foreign currency translation adjustment (not tax effected) ............................... -- -- -- -- -- - -- Net loss ...................................... -- -- -- -- -- - -- Comprehensive loss for the year ended -- -- -- -- -- - -- January 2, 1999 ------ ------- ------ ---- ------- -- ---- BALANCE, JANUARY 2, 1999 ............... 43,700 28,862 -- -- 608,000 6 270 Dividends and accretion on Series A Preferred Stock ............................. -- 3,002 -- -- -- - -- Foreign currency translation adjustment (not tax effected) .......................... -- -- -- -- -- - -- Net loss ...................................... -- -- -- -- -- - -- Comprehensive loss for the year ended January 1, 2000 ............................. -- -- -- -- -- - -- ------ ------- ------ ---- ------- -- ---- BALANCE, JANUARY 1, 2000 ............... 43,700 31,864 -- -- 608,000 6 270 Issuance of Series B Redeemable Preferred Stock in connection with term loans ......... -- -- 70,870 945 -- -- Dividends and accretion on Series A Preferred Stock ............................. -- 3,283 -- -- -- - -- Foreign currency translation adjustment (not tax effected) .......................... -- -- -- -- -- - -- Net income .................................... -- -- -- -- -- - -- Comprehensive income for the year ended December 30, 2000 ........................... -- -- -- -- -- - -- ------ ------- ------ ---- ------- -- ---- BALANCE, DECEMBER 30, 2000 ............. 43,700 $35,147 70,870 $945 608,000 $6 $270 ====== ======= ====== ==== ======= == ====
TOTAL ACCUMULATED OTHER ACCUMULATED SHAREHOLDERS' COMPREHENSIVE NET COMPREHENSIVE ITEMS DEFICIT DEFICIT INCOME (LOSS) ------------------- ----------- ------------- ----------------- BALANCE, DECEMBER 31, 1997 ........ (78) (7,557) (7,359) -- Dividends and accretion on Series A Preferred Stock ........................ -- (2,779) (2,779) -- Foreign currency translation adjustment (not tax effected) ..................... (211) -- (211) (211) Net loss ................................. -- (13,153) (13,153) (13,153) Comprehensive loss for the year ended January 2, 1999 ........................ -- -- (13,364) ----- -------- -------- -------- BALANCE, JANUARY 2, 1999 .......... (289) (23,489) (23,502) -- Dividends and accretion on Series A Preferred Stock ........................ -- (3,002) (3,002) -- Foreign currency translation adjustment (not tax effected) ..................... 167 -- 167 167 Net loss ................................. -- (29,425) (29,425) (29,425) Comprehensive loss for the year ended January 1, 2000 ........................ -- -- -- (29,258) ----- -------- -------- -------- BALANCE, JANUARY 1, 2000 .......... (122) (55,916) (55,762) -- Issuance of Series B Redeemable Preferred Stock in connection with term loans..... -- -- -- -- Dividends and accretion on Series A Preferred Stock ........................ -- (3,283) (3,283) -- Foreign currency translation adjustment (not tax effected) ..................... (453) -- (453) (453) Net income ............................... -- 3,718 3,718 3,718 ----- -------- -------- -------- Comprehensive income for the year ended December 30, 2000 ...................... -- -- -- $ 3,265 ----- -------- -------- ======== BALANCE, DECEMBER 30, 2000 ........ $(575) $(55,481) $(55,780) ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 43 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ----------------------------------------- JANUARY 2, JANUARY 1, DECEMBER 30, 1999 2000 2000 ---------- ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ............................................................. $(13,153) $(29,425) $ 3,718 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating by operating activities, net of acquisitions-- Depreciation and amortization ............................................... 12,792 11,489 11,937 Extraordinary gain on early extinguishments of debt ........................... -- -- (8,838) Goodwill impairment loss ...................................................... -- 6,018 -- Equity in losses of investments in affiliates ................................. 76 -- -- Minority interest in income of consolidated subsidiary ........................ 187 91 -- Loss on barter transaction .................................................... 187 -- -- Cumulative foreign currency translation adjustment ............................ (211) 167 -- Amortization of deferred costs related to issuance of 10 3/4% senior notes due 2006 ............................................................. 212 551 880 Deferred interest on subordinated promissory notes payable .................... 140 -- -- Changes in assets and liabilities, net of acquisitions-- Accounts receivable ......................................................... (7,706) 7,086 (10,814) Inventories ................................................................. (199) 4,137 (64) Prepaid expenses and other current assets ................................... 73 747 (248) Deferred costs .............................................................. (2,309) (251) (459) Accounts payable ............................................................ (3,844) (1,523) 4,877 Accrued expenses ............................................................ 10,006 3,551 (5,684) Accrued income taxes ......................................................... (154) (26) 26 -------- -------- -------- Net cash (used in) provided by operating activities ........................ (3,903) 2,612 (4,669) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash received ............................................ (9,464) -- -- Purchase of property, plant and equipment ..................................... (16,882) (10,475) (8,742) Advances to officers/shareholders ............................................. (3,511) (5) Decrease in investments in affiliates ......................................... 13 -- -- Decrease (increase) in other assets ........................................... 91 (123) (298) -------- -------- -------- Net cash used in investing activities ...................................... (29,753) (10,603) (9,046) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under revolving note payable ...................... (25,022) 8,424 14,263 Proceeds from term note payable ............................................... 13,222 -- -- Payments on term note payable ................................................. (13,222) -- -- Proceeds from issuance of long-term debt ...................................... -- -- 7,087 Repurchase of 10-3/4% Series B Senior Notes due 2006 .......................... -- -- (7,087) Payments on subordinated notes ................................................ (2,132) -- -- Proceeds from 10 3/4% senior notes due 2006 ................................... 75,000 -- -- Costs related to issuance of 10 3/4% senior notes due 2006 .................... (3,713) -- -- Payments on long-term obligations ............................................. (11,026) (333) (979) Payments on deferred compensation ............................................. (23) (18) (236) Redemption of Preferred Stock of a subsidiary ................................. -- -- (1,000) -------- -------- -------- Net cash provided by financing activities .................................. 33,084 8,073 12,048 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents .................. -- -- (44) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................ (572) 82 (1,711) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................. 2,779 2,207 2,289 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................ $ 2,207 $ 2,289 $ 578 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest ................................................................... $ 3,936 $ 8,513 $ 10,719 ======== ======== ======== Income taxes ............................................................... $ 597 $ 17 $ 77 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: Conversion of leasehold improvements to building improvements ................. $ 1,393 $ -- $ -- ======== ======== ======== Acquisition of equipment under capital lease obligations ...................... $ 557 $ 249 $ 557 ======== ======== ======== Offset of advances to officers/shareholders against subordinated promissory notes payable to officers/shareholders .............. $ 3,495 $ -- $ -- ======== ======== ======== Increase in cash surrender value of officers life insurance policy ............ $ 361 $ 213 $ 188 ======== ======== ======== Exchange of inventory for barter credits ...................................... $ 947 $ -- $ -- ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS: During fiscal 1997 and 1998, the Company acquired Superior, Foster Grant UK and Fantasma, as described in Note 2. These acquisitions are summarized as follows - Fair value of assets acquired, excluding cash ..................... $ 15,672 $ -- $ -- Payments in connection with the acquisitions, net of cash acquired ............ (9,464) -- -- -------- -------- -------- Liabilities assumed and notes issued .......................................... $ 6,208 $ -- $ -- ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 44 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a value-added distributor of accessories, such as optical products, costume jewelry, watches, clocks and other accessories, to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. For the year ended December 30, 2000, the Company reported income from operations of approximately $5.8 million and used $4.7 million in cash from operations. As of December 30, 2000, the Company had accumulated deficit of approximately $55.5 million. The Company has not met the financial covenants related to its Senior Credit Facility for the last three fiscal years. The covenants under the Senior Credit Facility have been renegotiated each of the last three years (see Note 5). Management has initiated plans to reduce its operating expenses and increase its cash flow from operations to meet the modified financial covenants under the Senior Credit Facility. Failure to achieve these plans or comply with the revised covenants under its Senior Credit Facility could have a material adverse effect on the Company's results of operations and financial condition. The accompanying consolidated financial statements reflect the application of certain significant accounting policies, as discussed below and elsewhere in the notes to consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the results of operations of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. (b) Change in Fiscal Year-End During 1998, the Company elected to change its fiscal year-end from December 31, to the Saturday closest to December 31. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. (d) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following (in thousands): JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ Finished goods $ 29,695 $ 26,881 Work-in-process and raw materials 3,330 6,202 -------- -------- $ 33,025 $ 33,083 ======== ======== Finished goods inventory consists of material, labor and manufacturing overhead. F-6 45 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (e) Advertising Costs Advertising costs, which are included in selling expense, are expensed when the advertisement first takes place. Advertising expense was approximately $1.1 million, $2.0 million and $1.4 million for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. Prepaid advertising production costs were $132,000 at January 2, 1999 and $49,500 at December 30, 2000 and are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The Company had no prepaid advertising production costs at January 1, 2000. (f) Depreciation and Amortization The Company provides for depreciation and amortization by charges to operations in amounts that allocate the cost of these assets on the straight-line basis over their estimated useful lives, as follows: ESTIMATED USEFUL ASSET CLASSIFICATION LIFE Building and improvements 20 years Display fixtures 1-3 years Furniture, fixtures and equipment 3-10 years Leasehold improvements Term of lease Equipment under capital leases Term of lease The Company has adopted the provisions of Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. (g) Intangible and Other Long-Lived Assets Intangible assets consist of goodwill and trademarks, which are being amortized on the straight-line basis over estimated useful lives of 10 to 40 years. Intangible assets primarily relate to the Company's acquisitions of various businesses, as discussed in Note 2 to these consolidated financial statements. In determining the estimated lives of these intangible assets, the Company evaluates various factors including but not limited to: nature of business, existing distribution channels, brand recognition of acquired products, customer base and length of time in which an acquired business has been in existence. Amortization expense was approximately $1.4 million, $1.4 million and $0.7 million for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. 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, the Company reviews its long-lived assets (which include intangible assets, deferred costs, and property and equipment) for impairment as events and circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates the realizability of its long-lived assets based on profitability and cash flow expectations for the related asset or subsidiary. In December 1999, the Company determined that the future cash flows related to the intangible assets of the watches and clocks and certain jewelry product lines were less than their carrying value. As a result, the Company recorded an impairment loss of approximately $6.0 million relating to these intangibles. (h) Revenue Recognition The Company recognizes revenue from product sales, net of estimated agreed-upon future allowances and anticipated returns and discounts, taking into account historical experience, upon shipment to the customer. F-7 46 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (i) Restructuring Charge In April 1998, the Company adopted a formal plan to close its Texas distribution center. The Company recorded a restructuring charge of $2.6 million during the year ended January 2, 1999 in connection with this plant closing. In March 2000, the Company recorded a restructuring charge of $2.5 million related to the termination of three executives. The charge consists of an accrual of severance payments due to three executives for a two-year period. The severance will be paid through fiscal 2002. Through December 30, 2000, severance benefits of approximately $896,000 were paid to the three executives. Details of the 1998 and 2000 restructuring charge are as follows:
ACCRUED ACCRUED RESERVE 1998 EXPENSES, EXPENSES, 2000 BALANCE RESTRUCTURING WRITE-DOWN FISCAL 1998 JANUARY 2, FISCAL 1999 JANUARY 1, RESTRUCTURING 2000 DECEMBER CHARGE OF ASSETS PAYMENTS 1999 PAYMENTS 2000 CHARGE PAYMENTS 30, 2000 ------------- ---------- ----------- ---------- ----------- ---------- ------------- -------- -------- Severance accrual $ 1,084 $ -- $ 430 $ 654 $ 649 $5 $2,500 $901 $1,604 Write-down of assets to be disposed 1,516 1,516 -- -- -- -- -- -- -- ------- ------- ----- ----- ----- -- ------ ---- ------ $ 2,600 $ 1,516 $ 430 $ 654 $ 649 $5 $2,500 $901 $1,604 ======= ======= ===== ===== ===== == ====== ==== ======
The 1998 severance accrual represents severance payments due to 40 office and distribution employees. Through December 30, 2000, all of these 40 employees were terminated and severance benefits of $1,084,000 were paid. (j) Customer Acquisition Costs The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multiyear agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with most of these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expenses when incurred. The Company expensed customer acquisition costs of approximately $0.9 million, $0.6 million and $0.3 million for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer and the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. During fiscal 1998, 1999 and 2000 the Company capitalized approximately $2.3 million, $0.3 million and $0.5 million of these costs in the accompanying consolidated balance sheets. Amortization expense related to these costs was approximately $0.2 million, $1.2 million and $1.2 million for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively, and is included in selling expenses in the accompanying statements of operations. (k) Comprehensive Income (Loss) The Company applies SFAS No. 130, Reporting Comprehensive Income. Comprehensive income (loss) is defined as the change in equity of a business enterprise during the period from transactions and other events and circumstances from nonowner sources. Differences between comprehensive income (loss) and net income (loss) before dividends and accretion on preferred stock represents the foreign currency translation for all periods presented. (l) Concentration of Credit Risk Financial instruments that potentially subject the Company 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 F-8 47 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) 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. The Company sells to certain customers in bankruptcy, as well as those consolidating within the industry. To reduce credit risk, the Company routinely assesses the financial strength of its customers and purchases credit insurance, as it deems appropriate. (m) Disclosure of Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying amounts of the Company's financial instruments, excluding the 10 3/4% Series B Senior Notes due 2006 (the Notes), approximate fair value. The Company's Notes had a carrying value of approximately $75.0 million at January 2, 1999 and $51.9 million (after the repurchase of $23.15 million) at December 30, 2000. The Company has determined the fair value of the Notes based on the current trading prices to be $18.2 million at December 30, 2000. (n) Net Loss per Share During the year ended December 30, 2000, the Company eliminated its earning per share disclosure. This decision was based on the fact that the Company does not have common stock or potential common stock that is traded in a public market, as required by SFAS No. 128, "Earnings Per Share", and the Company's common stock does not have a readily ascertainable fair market value. (o) Use of Estimates 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. Significant estimates in the Company's financial statements include sales returns and allowances. The Company continually evaluates its sales return and allowance reserves based upon contractual agreements and historical experience. During the third and fourth quarter of 2000, the Company decreased its reserves related to specific customers by $1.7 million and $2.9 million, respectively. (p) New Accounting Pronouncements In June 1999, FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, issued in June 1998, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not expect adoption of this statement to have a significant impact on its consolidated financial position or results of operations. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", in December 1999. The Company was required to adopt this new accounting guidance through a cumulative charge to operations, in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, no later than the fourth quarter of fiscal 2000. Adoption of the guidance provided in SAB No. 101 did not have a material impact on operating results. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." The interpretation clarifies the application of APB Opinion No. 25 in certain situations, as defined. The Interpretation was effective July 1, 2000, but covers certain events occurring during the period after December 15, 1998. The adoption of this interpretation did not have an impact on the accompanying financial statements. F-9 48 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (2) ACQUISITIONS In June 1998, the Company acquired an 80% interest in Fantasma, LLC (Fantasma) for approximately $4.1 million in cash. The remaining 20% interest in Fantasma was held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company acquired this 20% interest effective September 1, 1999. Accordingly, the Company currently holds 100% of the Fantasma member interests. The acquisition was accounted for using the purchase method; accordingly, the results of operations of Fantasma from the date of acquisition are included in the Company's consolidated statements of operations. The purchase price was allocated based on the estimated fair market value of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded approximately $4.6 million of goodwill, which was being amortized ratably over 10 years. During 1999, the Company determined that the remaining goodwill related to this acquisition was impaired based on the Company's projections of future cash flows related to this product line. Accordingly, the Company recorded an impairment of approximately $3.9 million (see Note 1g). On March 5, 1998, the Company acquired certain assets and liabilities of Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant trademark in territories not previously owned, for approximately $5.5 million in cash. Foster Grant UK is a marketer and distributor of sunglasses and reading glasses in Europe. The purchase price may be increased by approximately $0.7 million in fiscal 1998 and 1999 based on Foster Grant UK performance. Based on fiscal 1998 and 1999 activity, there was no increase in the purchase price. The acquisition has been accounted for using the purchase method of accounting; accordingly, the results of operations of Foster Grant UK from the date of the acquisition are included in the accompanying consolidated statements of operations. The purchase price was allocated based on estimated fair values of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $1.1 million, which is being amortized on the straight-line basis over 20 years. (3) INCOME TAXES Income taxes are provided using the liability method of accounting in accordance with SFAS No. 109. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from the net change during the year of the deferred tax asset and liability. The components of the income tax (benefit) expense are as follows (in thousands): FOR THE YEARS ENDED ---------------------------------------- JANUARY 2, JANUARY 1, DECEMBER 30, ---------- ----------- ------------ 1999 2000 2000 Current - Federal.................. $ -- $ -- $ -- State.................... (33) 6 -- Foreign.................. -- 36 126 ------- --------- ------- (33) 42 126 Deferred - Federal.................. (3,054) (9,042) 3,925 State.................... (625) (1,281) 1,064 ------- --------- ------- (3,679) (10,323) 4,989 ------- --------- ------- Increase in valuation allowance 3,712 10,317 1,357 ------- --------- ------- $ -- $ 36 $ 6,472 Less amount attributable to extraordinary gain -- -- (6,346) ------- --------- ------- $ -- $ 36 $ 126 ======= ========= ======= A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
FOR THE YEARS ENDED --------------------------------------- JANUARY 2, JANUARY 1, DECEMBER 30, ---------- ---------- ------------ 1999 2000 2000 Income tax provision at federal statutory rate (34.0)% (34.0)% (34.0)% Decrease in tax resulting from State tax provision, net of federal
F-10 49 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) benefit.................................. (4.1) (2.9) -- Foreign.................................... (1.5) 0.1 1.5 Nondeductible expenses..................... 1.5 1.8 4.8 Increase in valuation allowance and other, net............................... 38.1 35.0 30.2 ----- ----- ----- Actual effective tax rate expense............. --% --% 2.5% ----- ----- -----
Deferred income taxes relate to the following temporary differences (in thousands): JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ Nondeductible reserves.................... $ 7,318 $ 3,489 Nondeductible accruals.................... 2,199 1,683 Customer acquisition costs................ (1,716) (1,904) Other..................................... 21 47 -------- -------- Gross deferred tax assets............ 7,822 3,315 Less-- Valuation allowance................ (4,079) (2,335) -------- -------- Net current deferred tax assets...... $ 3,743 $ 980 ======== ======== Net operating loss carryforwards.......... $ 13,454 $ 13,572 Tax basis of property and equipment....... 414 (236) Goodwill amortization..................... 2,353 2,496 Other..................................... -- 180 -------- -------- Gross long term deferred tax assets 16,221 16,012 Less-- Valuation allowance................ (10,902) (14,003) -------- -------- Net long term deferred tax assets . $ 5,319 $ 2,009 ======== ======== A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The Company has approximately $39.8 million of net operating loss carryforwards, which expire through 2020. The Company was a Subchapter S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996 when it issued Series A Preferred Stock. As a Subchapter S corporation, the taxable income or loss of the Company was passed through to the shareholders and reported on their individual federal and certain state tax returns. Dividend distributions of approximately $2.9 million in 1996 were made to the shareholders primarily to fund payment of the taxes related to the Company's income. In addition, $10.3 million of cash and $3.0 million of subordinated notes payable were distributed to the shareholders in 1996 to distribute the previously undistributed after-tax earnings. During 1997, a cash distribution of $0.3 million was made to the Subchapter S corporation shareholders to distribute a portion of the remaining undistributed after-tax earnings. The Company has entered into an indemnification agreement with the shareholders of the Company prior to its conversion to a Subchapter C corporation relating to potential income tax liabilities resulting from adjustments to reported Subchapter S corporation taxable income. The shareholders will continue to be liable for personal income taxes on the Company's income for all periods prior to the time the Company ceased to be a Subchapter S corporation, while the Company will be liable for all income taxes subsequent to the time it ceased to be a Subchapter S corporation. The indemnification agreement provides that the Company shall distribute to the individual shareholders 40% of the amount of additional deductions permitted to be taken by the Company after its conversion to a Subchapter C corporation for expenditures made prior to becoming a Subchapter C corporation, which result from adjustments in the form of a final determination by tax authorities. During fiscal 1998, the Company made advances to the Subchapter S corporation shareholders to pay a portion of the income tax owed by them with respect to the Company's Subchapter S corporation earnings resulting from an income tax audit. The Company agreed to make advances to these shareholders to pay their tax liabilities, the aggregate amount of which was approximately $3.4 million. These advances are evidenced by promissory notes and bear interest at an annual rate equal to the Applicable Federal Rate (6.1% at December 30, 2000). Principal and accrued interest are payable on demand. These advances and their related interest were offset against the subordinated notes payable to shareholders that were due to these shareholders of approximately $3.5 million. The remaining amounts have been included in long-term other assets in the accompanying consolidated balance sheets. (4) REDEEMABLE NONVOTING PREFERRED STOCK OF A SUBSIDIARY In connection with the purchase of Foster Grant US in December 1996, the Company's wholly owned subsidiary, FG Holdings, issued 100 shares of FG Preferred Stock, which represents all of the issued and outstanding shares of FG Preferred Stock. The FG Preferred Stock was to be redeemed on February 28, 2000 (the FG Redemption Date) by payment of an amount ranging from $1.0 F-11 50 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) million to $4.0 million (the FG Redemption Amount), determined based on the combined net sales of sunglasses, reading glasses and accessories by Foster Grant US and the Company for the year ended January 1, 2000, excluding an amount equal to the net sales by the Company for such items for the year ended December 31, 1996. Any increase in the redemption amount would be recorded as goodwill. Based on the actual net sales for fiscal 1999, the FG Redemption Amount was determined to be $1.0 million. This amount was paid to the FG Preferred Stockholders on April 3, 2000. In addition to the FG Redemption Amount, upon the occurrence of (i) an initial public offering where the pre-money equity valuation of the Company equals or exceeds $75.0 million, (ii) a merger or similar transaction where the transaction value equals or exceeds $75.0 million or (iii) a private placement of equity securities representing more than 50% of the outstanding capital stock for consideration of not less than $37.5 million, the FG Preferred Stockholders are entitled to receive a supplemental payment of up to $3.0 million depending on the transaction value. If the transaction value does not equal or exceed the threshold amounts, no supplemental payment is due. This supplemental payment amount will be recorded as additional goodwill when, and if, the amount is estimatable. The value of FG Preferred Stock was recorded as part of the initial purchase of Foster Grant US and was based on the present value of management's best estimate of the expected payment of $1.0 million upon redemption. The accretion of the original value to the $1.0 million redemption value was recorded as a charge to minority interest in income of subsidiaries in the accompanying consolidated statements of operations. Accretion of this discount for the years ended January 2, 1999 and January 1, 2000 was approximately $74,000 and $91,000, respectively. (5) SENIOR CREDIT FACILITIES WITH A BANK In July 1998, the Company amended its Senior Credit Facility with a bank (the Bank Agreement). The amended Senior Credit Facility provides for a $60.0 million revolving credit facility, including a $3.0 million letter of credit facility. Use of the proceeds from the Senior Credit Facility are limited to refinancing existing term debt, support letters of credit, fund working capital and finance permitted acquisitions and tax distributions, as defined. In August 2000, the Company amended its Senior Credit Facility with the bank. The amended Senior Credit Facility provides for a term loan not to exceed $7,097,875 and reduces the overall $60.0 million maximum level of borrowing under the credit facility. The loan is secured by a mortgage on its Smithfield, RI facility and the agreements of certain preferred shareholders to purchase participations in the term loan upon the happening of certain events. The term loan is being amortized over 60 months commencing April 1, 2001 with the remaining principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. The interest rate on the term loan is the rate on the Senior Credit Facility plus 0.50%. The proceeds from this term loan were used to repurchase $23.15 million face amount of the Company's 10-3/4% Senior Series A Notes. (See Note 7) Borrowings under the Senior Credit Facility are limited to the lesser of $60.0 million or the borrowing base, which is defined as a percentage of eligible accounts receivable and the lesser of (i) inventories or (ii) $30.0 million less the interest rate protection reserve and the foreign exchange exposure, reduced by outstanding letters of credit. Revolving credit borrowings bear interest at the bank's prime rate (9.5% at December 30, 2000) plus 0.5% or LIBOR (6.52% at December 30, 2000) plus 2.25%. The Company has the option of electing the rate; however, the use of LIBOR is limited. The Senior Credit Facility expires in July 2003. As of December 30, 2000, the Company had approximately $5.5 million available under this Senior Credit Facility. If the Bank Agreement is terminated by the Company earlier than the expiration date, the Company will be required to pay a termination fee of $0.1 million. The termination fee will be waived if the debt is refinanced with the bank or if repayment is from proceeds of the Company's initial public offering. The Senior Credit Facility is subject to certain restrictive covenants, including a fixed charge coverage ratio, leverage ratio and minimum EBITDA. As of December 30, 2000, the Company was not in compliance with the above financial covenants. As of March 27, 2001, the Company received a waiver for such noncompliance from the Bank and entered into an amendment with the bank which modifies the covenants going forward so that they reflect performance levels that the Company believes it can attain. Amounts due under the Senior Credit Facility are secured by a mortgage on its Smithfield, RI property, the accounts receivable and inventory of the Company and its domestic subsidiaries. In November 1999, Foster Grant UK entered into a credit facility with a different bank. The facility provides for a pound sterling 1.5 million (approximately $2.2 million at December 30, 2000) overdraft line to finance working capital. Repayments under this facility fluctuate with interest at the bank's base rate (6.0% at December 30, 2000) plus 1.25% if below the facility limit of pound F-12 51 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) sterling 1.5 million and 2.25% if in excess of the agreed limit. The facility expires in December 2001. The Company had no borrowings outstanding under this facility at December 30, 2000 and, therefore, the related covenants were not in effect, as they only become effective when the Company has borrowings outstanding. (6) LONG-TERM OBLIGATIONS Long-term obligations consist of the following at January 1, 2000 and December 30, 2000 (in thousands):
JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ Term loan under existing Senior Credit Facility due July 31, 2003, monthly payments of interest through April 1, 2001, principal payments of $118,117 commencing April 2001, interest at Senior Credit Facility rate plus 0.50%, secured by mortgage on Smithfield, RI property ...... $ -- $7,087 Financing lease obligation, payable in monthly installments of principal and interest of $6,500 through September 2000, interest at 8.75% per annum, secured by certain office equipment .............. 50 -- Capital lease obligation, payable in monthly installments of principal and interest of $10,903 through November 2000, interest at 9.0% per annum ........................................... 115 -- Promissory notes, payable in monthly installments of principal and interest through February 2000, interest at 7.07% to 9.9% per annum, secured by certain factory equipment ..... 5 -- Capital lease obligation, payable in monthly installments of principal and interest through November 2001, interest at 8.0% per annum (refinanced during 2000) ........................... 367 -- Capital lease obligation, payable in monthly installments of principal and interest through December 2002, interest at 13.5% per annum ................................................... -- 641 Financing lease obligations, payable in monthly installments of principal and interest through January 2001, interest at 8.76% to 8.82% per annum, secured by certain factory and office equipment ................................................. 235 10 Capital lease obligation, payable in monthly installments of principal and interest through July 2005, interest at 7.07% per annum, secured by certain equipment ..................... 249 243 Other ................................................................ 301 7 ------ ------ 1,322 7,988 Less -- Current maturities ........................................... 902 1,427 ------ ------ $ 420 $6,561 ====== ======
Future maturities of the Company's long-term obligations as of December 30, 2000 are as follows (in thousands): YEARS AMOUNT ----- ------- 2001 $1,427 2002 1,806 2003 1,468 2004 1,472 Thereafter 1,815 ------ $7,988 ====== (7) 10 3/4% SENIOR NOTES DUE 2006 On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of approximately $71.0 million received by the Company from the issuance and sale of the Notes were used to repay outstanding indebtedness under the Senior Credit Facility with a bank and the Subordinated Promissory Notes to shareholders, net of amounts due the Company from certain of these shareholders. The Company incurred issuance costs of approximately $3.7 million in relation to the Notes. These costs are being amortized over the life of the Notes and are included in other assets in the accompanying consolidated balance sheets. In December 1998, the Notes were exchanged for 10 3/4% Series B Notes due 2006 registered with the SEC. Interest on the Notes is payable semiannually on January 15 and July 15, commencing January 15, 1999. F-13 52 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) The Notes are general unsecured obligations of the Company, rank senior in right of payment to all future subordinated indebtedness of the Company and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company, including the Senior Credit Facility described in Note 5. The Senior Credit Facility is secured by a mortgage on its Smithfield, RI property, accounts receivable and inventory of the Company and its domestic subsidiaries. Accordingly, the Company's obligations under the Senior Credit Facility will effectively rank senior in right of payment to the Notes to the extent of the assets subject to such security interest. The Notes are fully and unconditionally guaranteed, on a senior and joint and several basis, by each of the Company's current and future Domestic Subsidiaries (as defined) (the Guarantors). The Indenture under which the Notes were issued (the Indenture) imposes certain limitations on the ability of the Company and its subsidiaries to, among other things, incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with shareholders and affiliates, sell assets and engage in mergers and consolidations. The Notes are redeemable at the option of the Company on or after July 15, 2002. The Notes will be subject to redemption at the option of the Company, in whole or in part, at various redemption prices, declining from 105.375% of the principal amount to par on and after July 15, 2004. In addition, on or prior to July 15, 2001, the Company may use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 110.750% of the principal amount thereof plus accrued interest to the date of redemption. Upon a change of control, each note holder has the right to require the Company to repurchase such holder's Notes at a purchase price of 101% of the principal amount plus accrued interest. During 2000, the Company repurchased $23.15 million face amount of the Notes for a purchase price of $7.09 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI property and subject to the obligation of certain preferred shareholders to purchase participations in the term loan upon the happening of certain events. The term loan is being amortized over 60 months commencing April 1, 2001, with the remaining principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of this transaction, the Company recognized a $8.8 million extraordinary gain, net of $6.3 million of income taxes, and wrote off $90,000 of unamortized issuance costs related to the Notes that were repurchased. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with the commitment to purchase participations in the term loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders of Series B Preferred Stock are entitled to receive, prior and in preference to any distribution with respect to any other capital stock of the Company, an amount per share equal to $6.67 multiplied by the number of six month periods and fractions thereof in the period during which the participation commitment is outstanding. The Company is amortizing the value related to two six month periods (approximately $945,000) in the year ended December 30, 2000, as interest expense. If the participation commitment is outstanding for a period beyond twelve months, the Company will record additional value to the Series B Preferred Stock and amortize the related costs over the additional period of the participation commitment as required. (8) DEFERRED COMPENSATION The Company has deferred compensation agreements with several key employees. The agreements provide for deferred compensation based on increases in net book value, as defined, and for one executive, the cash surrender value of a life insurance policy owned by the Company. The amounts due under these agreements are payable in a lump sum or in annual installments upon certain defined events. The Company incurred $200,000 and $250,000 of expense related to the insurance policy during the years ended January 2, 1999 and December 30, 2000, respectively. No expense was incurred during the year ended January 1, 2000. At December 30, 2000, the cash surrender value of the life insurance policy was approximately $1.2 million and is included in other assets in the accompanying consolidated balance sheet. The Company also has an obligation to four former employees under a nonqualified deferred compensation plan. Payments of principal and interest are to be made monthly through August 2007. The obligation at December 30, 2000 was $73,000, of which $11,000 is due prior to December 29, 2001. These amounts are included as deferred compensation in the accompanying consolidated balance sheets. F-14 53 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (9) PREFERRED STOCK The Company has 200,000 shares of preferred stock, $0.01 par value, authorized and issuable in one or more series with such voting powers, designations, preferences and other special rights and such qualifications, limitations or restrictions as may be stated in the resolution or resolutions adopted by the Company's Board of Directors providing for the issue of such series and as permitted by the Rhode Island Business Corporation Act. The Company has created two series of preferred stock designated Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock) and Senior Series B Preferred Stock (Series B Preferred Stock). A total of 43,700 shares of Series A Preferred Stock are designated for issuance, all of which are issued and outstanding. A total of 75,000 shares of Series B Preferred Stock are designated for issuance of which 70,870 shares are issued and outstanding. (a) Series A Redeemable Convertible Preferred Stock In May 1996, the Company sold 34,200 shares of Series A Preferred Stock for gross proceeds of $18.0 million. In connection with the acquisition of Foster Grant US in December 1996, the Company issued an additional 9,500 shares of the Series A Preferred Stock for gross proceeds of $5.0 million. The rights and preferences of Series A Redeemable Preferred Stock, as amended in June 1998, are as follows: Conversion. Shares of the Series A Preferred Stock are convertible into common stock at a rate of 10 shares of common stock for each share of Series A Preferred Stock, adjustable for certain dilutive events. As amended by the Company's shareholders in June 1998, conversion is at the option of the shareholder but is automatic upon the consummation of an initial public offering resulting in gross proceeds to the Company of at least $20.0 million and at an offering price of at least 175% of the original conversion price. Redemption. Subject to the restriction described below, the holders of the Series A Preferred Stock have the right to require redemption for cash of any unconverted shares, beginning June 30, 2002. The Company will redeem the Series A Preferred Stock equal to 5% of the total number of shares issued and outstanding as of March 31, 2002 on the last day of each March, June, September and December, as follows: YEARS ENDING DECEMBER 31, PERCENTAGE ------------ ---------- 2002 15% 2003 35 2004 55 2005 75 2006 95 2007 100 Upon redemption, holders of Series A Preferred Stock will be entitled to receive an amount equal to the original stock price, $526.32 per share, plus accrued and unpaid dividends yielding a 10% compounded annual rate of return (the Redemption Amount). Accordingly, the Series A Preferred Stock has been recorded at its redemption value in the accompanying consolidated balance sheets. The holders of the Series A Preferred Stock may require the Company to redeem all or any portion of the Series A Preferred Stock upon certain events such as the sale, merger or dissolution of the Company. In addition, the Company may voluntarily redeem the Series A Preferred Stock at the Redemption Amount, as defined above. If the Company voluntarily redeems the Series A Preferred Stock, it must issue the holders of Series A Preferred Stock a warrant to purchase common stock equal to the number of shares the shareholder would have received upon conversion, at a strike price equal to the redemption price at the time of redemption. In connection with the proposed issuance of the Notes the preferred shareholders agreed, in June 1998, to suspend their redemption rights until 91 days after the date that any Restrictive Indebtedness, as defined, is no longer outstanding. Restrictive Indebtedness is defined as indebtedness whose terms restrict the Company's ability to redeem, in whole or part, the Series A Preferred Stock. Restrictive Indebtedness can not exceed $150.0 million or such greater amount as may be approved by the directors designated by the preferred shareholders. The Notes constitute Restrictive Indebtedness. F-15 54 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) Liquidation Preference. After payment of any preference due the holders of the Series B Preferred Stock, holders of the Series A Preferred Stock are entitled to receive a preference in the event of a liquidation, dissolution or winding up of the Company equal to the Redemption Amount prior to any distribution of any assets of the Company to the holders of any other class of capital stock other than the Series B Preferred Stock. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A Preferred Stock, the assets shall be distributed ratably among such shareholders in proportion to their aggregate liquidation preference amounts. Voting Rights and Dividends. The holders of the Series A Preferred Stock are entitled to vote on all matters based on the number of votes equal to the number of shares of common stock into which the shares of Series A Preferred Stock are convertible after December 1, 1996. In addition, without the vote or consent of the holders of at least two-thirds of outstanding shares of Series A Preferred Stock, voting separately as a class, the Company may not take certain specified actions that could adversely affect the holders of such shares. The holders of a majority of the Series A Preferred Stock shares are entitled to elect two directors. In certain events, defined as Remedy Events, the number of directors of the Company automatically increases to the minimum number sufficient to allow the holders of Series A Preferred Stock to elect a majority of the directors. In June 1998, the holders of the Series A Preferred Stock agreed to change the definition of Remedy Events to reduce the minimum amount of consolidated shareholders' equity that the Company is required to maintain dollar for dollar by any payments of certain subordinated notes payable to shareholders. Dividends will not be paid on the common stock unless the Series A Preferred Stock receives the same dividends that such shares would have received had they been converted into common stock immediately prior to the record date for such dividend. (b) Senior Series B Preferred Stock During 2000, in conjunction with the commitment by certain holders of Series A Preferred Stock to purchase participations in the term loan the Company issued 70,870 shares of Series B Preferred Stock (see Note 5). The rights and preferences of the Series B Preferred Stock are as follows: Liquidation Preference. The holders of Series B Preferred Stock are entitled to receive, prior and in preference to any distribution with respect to any other capital stock of the Company, an amount per share equal to $6.67 multiplied by the number of six month periods and fractions thereof in the period during which the participation commitment was outstanding, provided that if a holder of Series B Preferred Stock purchases a participation or the commitment to purchase the participation remains in effect with respect to any holder for more than two years after the date of the issuance of such shares of Series B Preferred Stock, such preference shall be increased to $13.34 retroactive to date of issuance. Redemption. Pursuant to consent of a majority of the Company's disinterested directors, the Company may redeem the Series B Preferred Stock in whole for the amount of the liquidation preference at any time after the participation commitment is no longer in effect. Voting Rights and Dividends. Without the vote or consent of the holders of two-thirds of the outstanding shares of Series B Preferred Stock, separately as a class, the Company may not take certain actions that could adversely affect the holders of such shares. Except for these express rights and as otherwise required by law, the holders of Series B Preferred Stock are not entitled to vote on any matter. The holders of Series B Preferred Stock are not entitled to any dividends. (10) 1996 INCENTIVE STOCK PLAN In May 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan) under which it may grant incentive stock options (ISOs), nonqualified stock options (NSOs), restricted stock and other stock rights to purchase up to 50,000 shares of common stock. In May 1999, the Company increased the number of shares of common stock authorized for issuance under the Plan to 88,000. Under the Plan, ISOs may not be granted at less than fair market value on the date of grant and vest in a method determined by the Board of Directors, over a term not to exceed 10 years. All options have been granted with exercise prices equal F-16 55 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) to the fair market value of the Company's common shares, as determined by the Board of Directors. Stock option activity for each of the three years in the period ended December 30, 2000 is as follows:
WEIGHTED WEIGHTED AVERAGE AVERAGE REMAINING NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL LIFE ---------------- -------------- ---------------- Outstanding, December 31, 1997 14,000 $ 50.00 9.5 Canceled (2,000) 50.00 -- ------ ------- ---- Outstanding, January 2, 1999 12,000 50.00 8.5 Granted 31,350 31.57 9.5 Canceled (4,000) 50.00 -- ------ ------- ---- Outstanding, January 1, 2000 39,350 $ 35.32 9.1 Granted 47,124 32.00 9.2 Canceled (4,000) 50.00 -- ------ ------- ---- Outstanding, December 30, 2000 82,474 32.71 8.7 ====== ======= ==== Exercisable, January 2, 1999 12,000 $ 50.00 8.5 ====== ======= ==== Exercisable, January 1, 2000 18,450 $ 39.56 8.7 ====== ======= ==== Exercisable, December 30, 2000 19,675 $ 35.32 8.1 ====== ======= ====
During fiscal year 2000, the Board of Directors approved the grant of additional options to purchase 47,124 shares of common stock at an exercise price of $32.00 to certain employees. These options vest in three equal annual installments subject to acceleration if the Company attains annual EBIT of at least $20.0 million. 10,450 of the above options are to vest upon the Company achieving an equity value of $90.0 million in a liquidity event, as defined. These options will be accounted for under variable plan accounting. As of December 30, 2000, there was no charge related to these options. 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 be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to 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. In connection with the acquisition of Fantasma, the Company issued options to two employees of Fantasma. The options provide that the employees may purchase up to 13% of Fantasma at the fair market value based upon the purchase price. Certain of these options contain performance criteria and, therefore, will be accounted for as variable options. Based on fiscal 1998, 1999 and 2000, activity and the termination of one of the employees, options to purchase 3%, 9% and 1%, respectively, of Fantasma had expired. No option to purchase remains outstanding at December 30, 2000. Had compensation cost for the Company's and Fantasma's stock plans been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company's net loss and net loss per share applicable to common shareholders for the years ended January 2, 1999, January 1, 2000 and December 30, 2000 would have been as follows: JANUARY 2, JANUARY 1, DECEMBER 30, 1999 2000 2000 ---------- ---------- ------------ Net loss applicable to common Shareholders (in thousands)- As reported $(15,932) $(32,427) $ 435 Pro forma (15,999) (32,563) 367 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: dividend yield of 0.0% for all periods; volatility of 35.53% for all periods; risk-free interest rates of 6.00% for all options granted during fiscal 1998, 5.68% for all options granted during fiscal 1999, 6.5% for all options granted during 2000 and a weighted average expected option term of five years for all periods. The weighted average fair value per share of options granted during the years ended January 1, 2000 and December 30, 2000 was $12.95 and $13.61, F-17 56 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) respectively. 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. (11) INVESTMENTS (a) Hong Kong The Company has an ownership interest in four entities in Hong Kong. These entities provide various services to the Company and each other in connection with purchasing and distributing products. The Company accounts for these investments using the equity method. The net investment in these entities is recorded as investment in affiliates in the accompanying consolidated balance sheets. The following table summarizes certain financial information for these entities (in thousands): FISCAL YEAR ----------------------------------- 1998 1999 2000 --------- ------- -------- Ownership Interest- AAi Hong Kong Limited 49% 49% 49% Milagros (Far East) Limited 49 49 49 Honest Lion Limited 50 50 50 Milagros AAi Asia Limited 49 49 49 Sales to AAi $ 10,215 $9,982 $11,774 Equity in losses (76) -- 56 Investment balance 1,337 1,291 1,235 The following table summarizes certain consolidated financial information of the four Hong Kong entities (in thousands): FISCAL YEAR ----------------------------- 1998 1999 2000 --------- -------- ------ Current assets $ 5,453 $ 5,911 $ 4,632 Noncurrent assets 6,814 7,235 9,350 Current liabilities 8,165 7,419 9,492 Noncurrent liabilities 3,087 11,105 1,619 Net sales 22,193 30,532 36,529 Gross profit 5,273 4,735 5,327 (Loss) income from operations (156) 204 656 Net loss (156) -- -- (b) Mexico In 1996, the Company acquired a 50% ownership in AAi Joske's S.A. de R.L. De CV (Joske's), an entity engaged in the purchasing and distribution of accessories in Mexico for $0.5 million of inventory. In January 1997, the Company acquired an additional 5% ownership interest in Joske's and accordingly has consolidated its financial results in the Company's consolidated financial statements subsequent to December 31, 1996. In 1999, the Company acquired an additional 20% ownership interest in Joske's for a nominal amount. Based on the value of these transactions and the related net book value of Joske's as of the dates of acquisition, no goodwill was recorded. (12) EMPLOYEE BENEFIT PLANS (a) Qualified 401(k) Plan The Company has a defined contribution profit sharing plan covering substantially all employees. Under the terms of the profit sharing plan, contributions are made at the discretion of the Company. No contributions were made for the years ended January 2, 1999, January 1, 2000 and December 30, 2000. The profit sharing plan also allows eligible participants to make contributions in accordance with Internal Revenue Code Section 401(k). The Company matches employee contributions equal to 25% of the first 6% of compensation that an employee defers. These matching contributions totaled approximately $117,000, $120,000 and $110,000 for the years ended, January 2, 1999 , January 1, 2000 and December 30, 2000, respectively. F-18 57 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (b) Non-Qualified Excess 401(k) Plan In May 1997, the Company established the Non-Qualified Excess 401(k) Plan (the Non-Qualified Plan) effective as of June 1, 1997. The purpose of the Non-Qualified Plan is to provide deferred compensation to a select group of management or highly compensated employees of the Company as designated by the Board of Directors. Under the Non-Qualified Plan, a participant may elect to defer up to 15% of his or her compensation on an annual basis. This amount is credited to the employee's deferred compensation account (the Deferred Amount). Under the Non-Qualified Plan, the Company also credits the participant's deferred compensation account for the amount of the matching contribution the Company would have made under the qualified 401(k) plan with respect to the Deferred Amount. The matching contributions totaled approximately $13,000, $28,000 and $20,500 for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. All amounts contributed by the employee and by the Company under the Non-Qualified Plan are immediately vested. A participant under the Non-Qualified Plan is entitled to receive a distribution of his or her account upon retirement, death, disability or termination of employment. (13) RELATED PARTY TRANSACTIONS The Company has operating lease agreements with Sunrise Properties, LLC and 299 Carpenter Street Associates, LLC, of which certain officers and shareholders of the Company are partners. The related rental expense charged to operations was approximately $471,000, $329,000 and $229,000 in the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. The Company has guaranteed a mortgage note payable by Sunrise Properties, LLC aggregating $200,000. During the year ended December 30, 2000, the balance of this note has been paid in full. On May 31, 1996, the Company and its shareholders, including the management shareholders (Management Shareholders), entered into a tag-along, transfer restriction and voting agreement (the Shareholders Agreement). The Shareholders Agreement requires that any Management Shareholder wishing to transfer or sell common stock of the Company to provide right of first refusal and tag-along rights, on a pro rata basis, as defined, to all other shareholders' party to the Shareholders Agreement upon receipt of a third-party offer to purchase the applicable restricted shares. Upon the death of a Management Shareholder, the personal representative of such Management Shareholder shall sell to the Company such Management Shareholder's shares based on an appraisal value, as defined, provided that the Company's obligation to purchase shares is limited to the amount of any proceeds paid to the Company under insurance policies insuring the life of the Management Shareholder. The Shareholders Agreement shall terminate upon the earlier of a qualified public offering, as defined, or when no shares of Series A Preferred Stock and warrants are outstanding, except as a result of the conversion, exchange or exercise of the Series A Preferred Stock or warrants. (14) COMMITMENTS AND CONTINGENCIES (a) Letters of Credit At December 30, 2000, the Company had irrevocable letters of credit outstanding of approximately $170,000. (b) Operating Leases In addition to the operating leases described in Note 13, the Company also has operating leases for its other locations. Future minimum rental payments are as follows (in thousands): 2001 $ 214 2002 177 2003 147 2004 145 Thereafter 858 ------ $1,541 ====== F-19 58 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) The Company incurred rent expense of $707,000, $250,000 and $280,000 for the years ended January 2, 1999, January 1, 2000 and December 30, 2000, respectively. (c) Royalties The Company has several agreements that require royalty payments based on a percentage of certain net product sales, subject to specified minimum payments. Minimum royalty obligations relating to these agreements as of December 30, 2000 totaled $1.9 million and $0.8 million for fiscal 2001 and fiscal 2002, respectively. In addition, certain of these agreements require the Company pay additional fees based on a percentage of net product sales. These fees are not subject to minimum payment obligations. In the event the Company transfers its rights under certain of these agreements, a transfer fee would be payable. At December 30, 2000, the minimum aggregate transfer fee due would be no less than $750,000. (d) Supply Agreement The Company has a supply agreement with a display manufacturer. The agreement requires that the Company purchase 70% of Foster Grant US's annual display purchases, as defined, from this supplier through December 2005. If the Company does not purchase 70% of Foster Grant US's displays from this manufacturer, it is required to make a payment equal to 30% of the annual shortfall. In addition, the Company and BEC are required to cumulatively purchase $32.3 million of displays over the term of this agreement. To the extent that total purchases do not meet this dollar level, the Company is required to make a payment equal to 30% of $32.3 million, less the Company's purchases, BEC's purchases and any amounts paid as a result of the annual shortfall discussed above. As of December 30, 2000, no amounts were due under this agreement as a result of a shortfall. (e) Litigation In the ordinary course of business, the Company is party to various types of litigation, The Company maintains insurance to mitigate certain of these risks. The Company believes it has meritorious defenses to all claims, and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company's financial position or results of operations. In November 1998, the Company reached a favorable settlement with a customer related to the customer not honoring its purchase commitments under a 1997 agreement. As a result of this settlement, the Company received $950,000 for lost revenues. This settlement is included in other income, net in the accompanying fiscal 1998 consolidated statement of operations. (15) SIGNIFICANT CUSTOMERS AND SUPPLIERS During the years ended January 2, 1999, January 1, 2000 and December 30, 2000, one customer accounted for approximately 27.3%, 35.6% and 27.8% of net sales, respectively. This customer's accounts receivable balance represented approximately 44.2% and 26.6% of gross accounts receivable as of January 1, 2000 and December 30, 2000, respectively. For the year ended January 2, 1999 one additional customer accounted for approximately 10.6% of the Company's net sales and approximately 10.6% of gross accounts receivable. In addition, two customers accounted for 13.3% and 10.9% individually of gross accounts receivable at December 30, 2000. No other customer accounted for 10% or more of the Company's net sales or gross accounts receivable for the above stated years The Company currently purchases a significant portion of its inventory from certain suppliers in Asia. Although there are other suppliers of the inventory items purchased and management believes that these suppliers could provide similar inventory at fairly comparable terms, a change in suppliers could cause a delay in the Company's distribution process and a possible loss of sales, which would adversely affect operating results. F-20 59 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (16) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ Accrued payroll and payroll related items $ 1,388 $ 2,237 Accrued Severance 5 1,604 Accrued interest 3,764 2,750 Accrued royalties 2,242 1,787 Other accrued expenses 15,854 9,300 ------- ------- $23,253 $17,678 ======= ======= (17) SEGMENT REPORTING In July 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has determined it has three reportable segments: mass merchandisers, chain drug stores/combo stores/supermarkets and variety stores. The Company distributes accessories, such as costume jewelry, optical products, watches, clocks and other accessories. The Company's reportable segments are strategic business units that sell the Company's products to distinct distribution channels. They are managed separately because each business requires different marketing strategies. The Company's approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.
CHAIN DRUG STORES/COMBO MASS STORES/ FISCAL 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL ----------- ------------- ------------ -------- -------- --------- Net sales $ 103,559 $ 29,801 $ 13,835 $ 13,130 $ 160,325 ========= ======== ======== ======== ========= Interest expense $ 4,528 $ 1,303 $ 605 $ 574 $ 7,010 ========= ======== ======== ======== ========= Depreciation and amortization expense $ 8,260 $ 1,777 $ 1,457 $ 1,298 $ 12,792 ========= ======== ======== ========= ========= Customer acquisition costs $ 822 $ -- $ 50 $ -- $ 872 ========= ======== ======== ======== ========= Segment (loss) profit $ (9,013) $ 736 $ (5,603) $ 237 (13,643) ========= ======== ======== ======== =========
CHAIN DRUG STORES/COMBO MASS STORES/ FISCAL 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL ----------- ------------- ------------ -------- -------- --------- Net sales $ 94,385 $28,762 $ 17,125 $ 10,408 $ 150,680 ======== ======= ======== ======== ========= Interest expense $ 6,386 $ 1,979 $ 1,152 $ 733 $ 10,250 ======== ======= ======== ======== ========= Depreciation and amortization expense $ 6,902 $ 1,955 $ 1,583 $ 1,049 $ 11,489 ======== ======= ======== ======== ========= Customer acquisition costs $ -- $ 251 $ -- $ -- $ 251 ======== ======= ======== ======== ========= Segment (loss) profit $(14,662) $(3,634) $ (6,879) $ (4,103) $ (29,278) ======== ======= ======== ======== =========
F-21 60 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
CHAIN DRUG STORES/COMBO MASS STORES/ FISCAL 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL ----------- -------------- ------------ --------- -------- -------- Net sales $ 96,469 $37,577 $ 23,649 $ 7,847 $ 165,542 ======== ======= ======== ======== ========= Interest expense $ 6,369 $ 2,481 $ 1,561 $ 518 $ 10,929 ======== ======= ======== ======== ========= Depreciation and amortization expense $ 5,343 $ 4,274 $ 1,510 $ 810 $ 11,937 ======== ======= ======== ======== ========= Customer acquisition costs $ 18 $ 180 $ 65 $ 30 $ 293 ======== ======= ======== ======== ========= Segment profit (loss) $ 2,284 $ (58) $ (3,015) $ (1,870) $ (2,659) ======== ======== ========= ======== =========
Revenue from segments below the quantitative thresholds are attributable to five operating segments of the Company. Those segments include department stores, armed forces' PX stores, boutique stores, gift shops, bookstores and catalogues. None of these segments have ever met any of the quantitative thresholds for determining reportable segments and their combined results are presented as other. Segment profit (loss) differs from the income (loss) before income tax (expense) benefit and dividends and accretion on preferred stock by the amount of equity in losses of investments in affiliates, minority interest in income of consolidated subsidiary and other income, which are not allocated by segment. Segment assets are not reviewed by the chief operating decision maker. Total assets specifically identifiable with each reportable segment are as follows: JANUARY 2, JANUARY 1, DECEMBER 30, 1999 2000 2000 ---------- ---------- ------------ Mass merchandisers $ 25,248 $ 19,730 $ 22,497 Chain drug stores/combo stores/supermarkets 6,368 3,495 7,795 Variety 1,246 2,708 4,631 Other 5,068 2,454 2,701 Unassigned assets 88,568 79,480 70,547 --------- -------- --------- $ 126,498 $107,867 $ 108,171 ========= ======== ========= The following table identifies sales and long-lived assets by geographic region. Sales are attributed to countries based on location of customer. Assets are attributed based on location. 1998 1999 2000 NET SALES NET SALES NET SALES --------- --------- ---------- United States $144,540 $ 129,310 $ 143,697 Canada 6,162 8,095 7,043 Europe 7,757 10,379 11,748 Mexico 1,866 2,896 3,054 -------- --------- --------- Total $160,325 $ 150,680 $ 165,542 ======== ========= ========= LONG-LIVED ASSETS JANUARY 1, DECEMBER 30, 2000 2000 ---------- ------------ United States $ 41,132 $ 32,788 Canada 1,608 2,447 Europe 1,726 2,681 Asia 1,291 1,220 Mexico 28 275 -------- -------- Total $ 45,785 $ 39,411 ======== ======== (18) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION The following is summarized consolidating financial information for the Company, segregating the Company, wholly owned guarantor subsidiaries, mostly owned subsidiaries and nonguarantor subsidiaries as they relate to the Notes. The guarantor subsidiaries, both mostly and wholly owned, are domestic subsidiaries of the Company and they guarantee the Notes on a full, unconditional and joint and several basis. Separate financial statements of the wholly owned guarantor subsidiaries have not been included because management believes that they are not material to investors. Prior to September 1, 1999, the Company held an F-22 61 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) 80% interest in Fantasma LLC ("Fantasma") and, accordingly, Fantasma was included as a mostly owned subsidiary in the supplemental consolidating financial information for such periods. The Company and guarantor subsidiaries account for investments in subsidiaries on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the Company's and subsidiary's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Effective January 3, 1999, the assets of the Company's wholly owned guarantor subsidiaries (other than Fantasma) were transferred to the Company. Accordingly, the Company now performs all operations previously performed by these wholly owned guarantor subsidiaries, the results of which are included in the consolidating financial information for periods ending after such date. Effective September 1, 1999, the Company acquired 100% of the interest of Fantasma, which is included as a wholly owned subsidiary in the consolidating financial information for periods ending after such date. F-23 62 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
JANUARY 1, 2000 ------------------------------------------------------------------------ WHOLLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents .................. $ 97 $ 8 $ 2,184 $ -- $ 2,289 Accounts receivable, net ................... 16,303 2,427 3,501 -- 22,231 Inventories ................................ 28,743 -- 4,282 -- 33,025 Prepaid expenses and other current assets ............................. 400 41 353 -- 794 Deferred tax assets ........................ 3,743 -- -- -- 3,743 --------- -------- -------- --------- --------- Total current assets ..................... 49,286 2,476 10,320 -- 62,082 PROPERTY, PLANT AND EQUIPMENT, NET ........... 17,727 14 1,651 -- 19,392 OTHER ASSETS ................................. 43,334 -- 1,712 (18,653) 26,393 --------- -------- -------- --------- --------- $ 110,347 $ 2,490 $ 13,683 $ (18,653) $ 107,867 ========= ======== ======== ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable .................................. $ 11,000 $ -- $ -- $ -- $ 11,000 Redeemable preferred stock of a subsidiary ............................... 1,000 -- -- -- 1,000 Current maturities of long-term obligations .............................. 569 -- 343 -- 912 Accounts payable ........................... 15,364 209 841 -- 16,414 Accrued expenses ........................... 22,545 1,075 1,798 (61) 25,357 Due (from) to affiliate .................... (590) 5,569 4,940 (9,919) -- --------- -------- -------- --------- --------- Total current liabilities ................ 49,888 6,853 7,922 (9,980) 54,683 10 3/4% SENIOR NOTES ......................... 75,000 -- -- -- 75,000 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES ........................... 1,878 -- 204 -- 2,082 PREFERRED STOCK .............................. 31,864 -- -- -- 31,864 SHAREHOLDERS' (DEFICIT) EQUITY ............... (48,283) (4,363) 5,557 (8,673) (55,762) --------- -------- -------- --------- --------- $ 110,347 $ 2,490 $ 13,683 $ (18,653) $ 107,867 ========= ======== ======== ========= =========
F-24 63 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
DECEMBER 30, 2000 ------------------------------------------------------------------ WHOLLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents............... $ -- $ -- $ 578 $ -- $ 578 Accounts receivable, net................ 27,084 2,143 3,612 -- 32,839 Inventories............................. 28,948 -- 4,135 -- 33,083 Prepaid expenses and other current assets.......................... 837 42 401 -- 1,280 Deferred tax assets..................... 980 -- -- -- 980 --------- ------- -------- -------- -------- Total current assets.................. 57,849 2,185 8,726 -- 68,760 PROPERTY, PLANT AND EQUIPMENT, NET......... 16,887 6 1,765 -- 18,658 OTHER ASSETS............................... 38,356 -- 2,729 (20,332) 20,753 --------- ------- -------- -------- -------- $ 113,092 $ 2,191 $ 13,220 $(20,332) $108,171 ========= ======= ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable................................ $ 25,263 $ -- $ -- $ -- $ 25,263 Redeemable preferred stock of a subsidiary............................. -- -- -- -- -- Current maturities of long-term obligations............................ 1,390 -- 47 -- 1,437 Accounts payable........................ 19,813 67 1,500 -- 21,380 Accrued expenses........................ 18,251 722 1,108 -- 20,081 Due (from) to affiliate................. (631) 8,141 8,823 (16,333) -- --------- ------- -------- -------- -------- Total current liabilities............. 64,086 8,930 11,478 (16,333) 68,161 10 3/4% SENIOR NOTES....................... 51,850 -- -- -- 51,850 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES......................... 7,652 -- 196 -- 7,848 PREFERRED STOCK............................ 36,092 -- -- -- 36,092 SHAREHOLDERS' (DEFICIT) EQUITY............. (46,588) (6,739) 1,546 (3,999) (55,780) --------- ------- -------- -------- -------- $ 113,092 $ 2,191 $ 13,220 $(20,332) $108,171 ========= ======= ======== ======== ========
F-25 64 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
JANUARY 2, 1999 ---------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS NET SALES.................................. $ 89,832 $ 44,140 $ 10,306 $ 16,047 $ -- $ 160,325 COST OF GOODS SOLD......................... 54,566 19,887 6,712 7,658 -- 88,823 --------- -------- -------- -------- ------- --------- Gross profit.......................... 35,266 24,253 3,594 8,389 -- 71,502 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.................................... 40,362 28,235 2,747 6,791 -- 78,135 --------- -------- -------- -------- ------- --------- (Loss) income from operations......... (5,096) (3,982) (847) 1,598 -- (6,633) INTEREST EXPENSE........................... (5,970) (586) (292) (162) -- (7,010) OTHER INCOME (EXPENSE), NET................ 688 16 2 (140) -- 566 EQUITY IN (LOSS) INCOME OF SUBSIDIARIES.... (2,659) -- -- -- 2,583 (76) --------- -------- -------- -------- ------- ---------- (Loss) income before income tax (expense) benefit and dividends and accretion on preferred stock...... (13,037) (4,552) 557 1,296 2,583 (13,153) INCOME TAX EXPENSE......................... -- -- -- -- -- -- --------- -------- -------- -------- ------- --------- (Loss) income before dividends and accretion on preferred stock....................... (13,037) (4,552) 557 1,296 2,583 (13,153) DIVIDENDS AND ACCRETION ON PREFERRED STOCK...................................... 2,779 -- -- -- -- 2,779 --------- -------- -------- -------- ------- --------- Net (loss) income applicable to common shareholders................... $ (15,816) $ (4,552) $ 557 $ 1,296 $ 2,583 $ (15,932) ========= ======== ======== ======== ======= =========
F-26 65 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
JANUARY 1, 2000 --------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS NET SALES.................................... $ 119,672 $ 4,665 $ 5,723 $ 20,620 $ -- $ 150,680 COST OF GOODS SOLD........................... 76,809 4,163 5,528 10,473 -- 96,973 --------- ------- ------- -------- ------- --------- Gross profit............................ 42,863 502 195 10,147 -- 53,707 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.. 53,829 5,907 3,475 9,524 -- 72,735 --------- ------- ------- -------- ------- --------- (Loss) income from operations........... (10,966) (5,405) (3,280) 623 -- (19,028) INTEREST EXPENSE............................. (9,718) (92) (209) (231) -- (10,250) OTHER INCOME (EXPENSE), NET.................. 974 (25) (25) (1,035) -- (111) EQUITY IN (LOSS) INCOME OF SUBSIDIARIES...... (9,715) -- -- -- 9,715 -- --------- ------- ------- -------- ------- --------- (Loss) income before income tax expense and dividends and accretion on preferred stock......................... (29,425) (5,522) (3,514) (643) 9,715 (29,389) INCOME TAX EXPENSE........................... -- -- -- (36) -- (36) --------- ------- ------- -------- ------- --------- Net (loss) income before dividends and accretion on preferred stock......................... (29,425) (5,522) (3,514) (679) 9,715 (29,425) DIVIDENDS AND ACCRETION ON PREFERRED STOCK... 3,002 -- -- -- -- 3,002 --------- ------- ------- -------- ------- --------- Net (loss) income applicable to common shareholders..................... $ (32,427) $(5,522) $(3,514) $ (679) $ 9,715 $ (32,427) ========= ======= ======= ======== ======= =========
F-27 66 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
DECEMBER 30, 2000 ----------------------------------------------------------------------------- WHOLLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS NET SALES ................................... $ 137,978 $ 5,719 $ 21,845 $ -- $ 165,542 COST OF GOODS SOLD .......................... 82,166 4,778 9,645 -- 96,589 --------- --------- --------- --------- --------- Gross profit ........................... 55,812 941 12,200 -- 68,953 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE . 49,290 2,341 9,023 -- 60,654 RESTRUCTURE CHARGE .......................... 2,500 -- -- -- 2,500 --------- --------- --------- --------- --------- Income (loss) from operations .......... 4,022 (1,400) 3,177 -- 5,799 INTEREST EXPENSE ............................ (10,353) (30) (546) -- (10,929) OTHER INCOME (EXPENSE), NET ................. 1,324 44 (1,176) -- 192 EQUITY INCOME (LOSS) INCOME OF SUBSIDIARIES . (123) -- -- 67 (56) --------- --------- --------- --------- --------- (Loss) income before income tax (expense) benefit and dividends and accretion on preferred stock ....... (5,130) (1,386) 1,455 67 (4,994) INCOME TAX EXPENSE .......................... (125) (1) -- -- (126) --------- --------- --------- --------- --------- Net (loss) income before Dividends and accretion on Preferred stock ........................ (5,255) (1,387) 1,455 67 (5,120) EXTRAORDIANARY GAIN, NET OF $6.3 MILLION IN TAXES ....................................... 8,838 -- -- -- 8,838 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE DIVIDENDS & ACCRETION ON PREFERRED STOCK ............................. 3,583 (1,387) 1,455 67 3,718 DIVIDENDS AND ACCRETION ON PREFERRED STOCK .. 3,283 -- -- -- 3,283 Net income (loss) applicable to common shareholders .................... $ 300 $ (1,387) $ 1,455 $ 67 $ 435 ========= ========= ========= ========= =========
F-28 67 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
JANUARY 2, 1999 -------------------------------------------------------------------------------- WHOLLY MOSTLY OWNED OWNED NONGUARANTOR COMPANY COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES ............. $(23,955) $ 19,698 $ (3,527) $ 3,881 $ -- $ (3,903) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment ..... (12,479) (792) (15) (3,596) -- (16,882) Acquisitions, net of cash acquired ............ (9,464) -- -- -- -- (9,464) Advances to affiliates ........................ (8,117) -- -- 113 8,004 -- Other investing activities .................... 6,154 (5,752) (15) (3,794) -- (3,407) -------- -------- -------- -------- -------- -------- Net cash (provided by) used in investing activities .................................. (23,906) (6,544) (30) (7,277) 8,004 (29,753) -------- -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable ... (10,307) (14,715) -- -- -- (25,022) Proceeds from term note payable ............... 13,222 -- -- -- -- 13,222 Proceeds on term note payable ................. (13,222) -- -- -- -- (13,222) Proceeds from issuance of 10 3/4% senior notes. 75,000 -- -- -- -- 75,000 Payments on subordinated notes ................ (5,487) -- -- 3,355 -- (2,132) Payments on long-term obligations ............. (10,130) -- -- (896) -- (11,026) Due to affiliates ............................. -- 1,444 3,588 2,972 (8,004) -- Other financing activities .................... (3,501) -- -- (235) -- (3,736) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities .................................. 45,575 (13,271) 3,588 5,196 (8,004) 33,084 -------- -------- -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................................... (2,286) (117) 31 1,800 -- (572) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 2,354 183 73 169 -- 2,779 -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 68 $ 66 $ 104 $ 1,969 $ -- $ 2,207 ======== ======== ======== ======== ======== ========
F-29 68 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
JANUARY 1, 2000 -------------------------------------------------------------------------------- WHOLLY MOSTLY OWNED OWNED NONGUARANTOR COMPANY COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES .......... $ 2,277 $ 2,698 $ (1,275) $ (1,088) $ -- $ 2,612 -------- -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment .. (9,218) -- -- (1,257) -- (10,475) Advances to affiliates ..................... (1,046) -- -- -- 1,041 (5) Other investing activities ................. (123) 12 (12) -- -- (123) -------- -------- -------- -------- -------- -------- Net cash (provided by) used in investing activities ............................... (10,387) 12 (12) (1,257) 1,041 (10,603) -------- -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable. 8,424 -- -- -- -- 8,424 Payments on long-term obligations .......... (351) -- -- -- -- (351) Due to affiliates .......................... -- (2,702) 1,183 2,560 (1,041) -- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities ............................... 8,073 (2,702) 1,183 2,560 (1,041) 8,073 -------- -------- -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................................... (37) 8 (104) 215 -- 82 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. 134 -- 104 1,969 -- 2,207 -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ...... $ 97 $ 8 $ -- $ 2,184 $ -- $ 2,289 ======== ======== ======== ======== ======== ========
F-30 69 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
DECEMBER 30, 2000 ---------------------------------------------------------------------- WHOLLY OWNED NONGUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES ..................... $ (5,255) $ (1,590) $ 2,115 $ 61 $ (4,669) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment ............. (7,022) -- (1,720) -- (8,742) Acquisitions, net of cash acquired .................... -- -- -- -- -- Advances to affiliates ................................ 409 -- 1,271 (1,680) -- Other investing activities ............................ (304) -- -- -- (304) -------- -------- -------- -------- -------- Net cash used in investing activities ............... (6,917) -- (449) (1,680) (9,046) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable ........... 14,263 -- -- -- 14,263 Proceeds from issuance of long-term obligations ....... 7,087 -- -- -- 7,087 Repurchase of 10 3/4% Series B Senior Notes due 2006... (7,087) -- -- -- (7,087) Redemption of Series A Preferred Stock ................ (1,000) -- -- -- (1,000) Payments on long-term obligations ..................... (1,188) -- (27) -- (1,215) Due to affiliates ..................................... -- 1,582 (3,201) 1,619 -- Net cash provided by (used in) financing activities.. 12,075 1,582 (3,228) 1,619 12,048 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents ..................................... -- -- (44) -- (44) NET DECREASE IN CASH AND CASH EQUIVALENTS ................ (97) (8) (1,606) -- (1,711) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 97 8 2,184 -- 2,289 -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $ -- $ -- $ 578 $ -- $ 578 ======== ======== ======== ======== ========
F-31 70 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED) (19) QUARTERLY FINANCIAL INFORMATION The following is quarterly financial information (unaudited) for fiscal 1999 and 2000.
FISCAL 1999 ---------------------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED 4/3/99 7/3/99 10/2/99 1/1/00 FULL YEAR ------------- ------------- ------------- ------------- --------- (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS NET SALES .......................................... $ 41,481 $ 45,616 $ 38,496 $ 25,087 $ 150,680 COST OF GOODS SOLD ................................. 23,814 26,757 24,155 22,247 96,973 --------- --------- --------- --------- --------- Gross profit .................................. 17,667 18,859 14,341 2,840 53,707 SELLING EXPENSES ................................... 11,704 13,267 12,155 4,519 41,645 GENERAL AND ADMINSTRATIVE EXPENSES ................. 4,466 4,571 4,572 11,463 25,072 RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT LOSS .................................... -- -- -- 6,018 6,018 --------- --------- --------- --------- --------- Income (loss) from operations ............... 1,497 1,021 (2,386) (19,160) (19,028) EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES ...... -- -- -- -- -- MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY ......................................... -- -- -- (91) (91) INTEREST EXPENSE ................................... (2,342) (2,679) (2,657) (2,572) (10,250) OTHER INCOME (EXPENSE), NET ........................ 135 (152) 60 (63) (20) --------- --------- --------- --------- --------- Loss before income tax ........................ (710) (1,810) (4,983) (21,886) (29,389) INCOME TAX (BENEFIT) EXPENSE ....................... -- -- (37) 1 (36) --------- --------- --------- --------- --------- Net loss before dividends and accretion on preferred Stock .................................... (710) (1,810) (5,020) (21,885) (29,425) DIVIDENDS AND ACCRETION ON PREFERRED STOCK ......... 718 737 773 774 3,002 --------- --------- --------- --------- --------- Net loss applicable to common shareholders ...................................... $ (1,428) $ (2,547) $ (5,793) $ (22,659) $ (32,427) ========= ========= ========= ========= =========
F-32 71 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 (CONTINUED)
FISCAL 2000 ---------------------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED 4/1/00 7/1/00 9/30/00 12/30/00 FULL YEAR ------------- ------------- ------------- ------------- --------- (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS NET SALES ......................................... $ 42,528 $ 45,707 $ 35,750 $ 41,557 $ 165,542 COST OF GOODS SOLD ................................ 23,581 25,529 21,600 25,879 96,589 --------- --------- --------- --------- --------- Gross profit ................................. 18,947 20,178 14,150 15,678 68,953 SELLING EXPENSES .................................. 10,163 12,062 9,702 11,001 42,928 GENERAL AND ADMINSTRATIVE EXPENSES ................ 5,870 4,539 4,346 2,971 17,726 RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT LOSS ................................... 2,500 -- -- -- 2,500 --------- --------- --------- --------- --------- Income from operations ..................... 414 3,577 102 1,706 5,799 EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES ..... -- -- -- (56) (56) INTEREST EXPENSE .................................. (2,597) (2,851) (3,041) (2,440) (10,929) OTHER INCOME (EXPENSE), NET ....................... 51 94 53 (6) 192 --------- --------- --------- --------- --------- (Loss) income before income tax .............. (2,132) 820 (2,886) (796) (4,994) INCOME TAX EXPENSE ................................ -- (43) (35) (48) (126) --------- --------- --------- --------- --------- Net (loss) income before extraordinary items . (2,132) 777 (2,921) (844) (5,120) Extraordinary gain, net of $6.3 million in taxes .. -- 4,429 4,409 -- 8,838 --------- --------- --------- --------- --------- Net (loss) income before dividends and accretion on preferred Stock ...................... (2,132) 5,206 1,488 (844) 3,718 DIVIDENDS AND ACCRETION ON PREFERRED STOCK ........ 787 801 847 848 3,283 --------- --------- --------- --------- --------- Net (loss) income applicable to common Shareholders ...................................... $ (2,919) $ 4,405 $ 641 $ (1,692) $ 435 ========= ========= ========= ========= =========
F-33 72 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries: Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. This schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Boston, Massachusetts March 27, 2001 F-34 73 SCHEDULE II AAI.FOSTERGRANT, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND DEDUCTIONS FROM BALANCE AT END PERIOD EXPENSES RESERVES(1) OTHER OF PERIOD ------------ ---------- --------------- -------- -------------- Accounts receivable - January 2, 1999 ............... $10,338 $47,048 $48,711 $ 1,300(1) $ 9,975 January 1, 2000 ............... 9,975 50,809 47,980 -- 12,804 December 30, 2000 ............. 12,804 33,153 41,131 4,545(3) 9,371 Restructuring reserve - January 2, 1999 ............... $ -- $ 2,600 $ 1,947 $ -- $ 654 January 1, 2000 ............... 654 -- 649 -- 5 December 30, 2000 ............. 5 2,500 901 -- 1,604
(1) Amounts deemed uncollectible. (2) Reserves related to accounts receivable acquired in acquisitions. (3) Reduction of reserves related to specific customers. EX-10.1.5 2 b38115aaex10-1_5.txt AMENDED & RESTATED FINANCING & SECURITY AGREEMENT 1 Exhibit 10.1.5 FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT AND FIRST AMENDMENT TO NOTE PARTICIPATION AGREEMENTS ------------------------------------------------------------ THIS FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT AND FIRST AMENDMENT TO NOTE PARTICIPATION AGREEMENTS (this "Agreement") is made as of the 27th day of March, 2001, by and among AAi.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.), a corporation organized and existing under the laws of the State of Rhode Island, successor in interest to Foster Grant Group, L.P., F.G.G. Investments, Inc., The Bonneau Company, Bonneau Holdings, Inc., Bonneau General, Inc., Foster Grant Holdings, Inc., and O-Ray Holdings, Inc. (the "Borrower"); FANTASMA, LLC, a limited liability company organized under the laws of the State of Delaware ("Fantasma") (Fantasma together with the Borrower, the "Obligors"); WESTON PRESIDIO CAPITAL II, L.P., a limited partnership organized and existing under the laws of the State of Delaware, BANCBOSTON VENTURES, INC., a corporation organized and existing under the laws of the State of Delaware, ST. PAUL VENTURE CAPITAL V, LLC, a limited liability company organized and existing under the laws of the State of Delaware, NATIONAL CITY CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Delaware, MARLIN CAPITAL, L.P., a limited partnership organized and existing under the laws of the State of Delaware (the "SNR Participants"); BANK OF AMERICA, N.A., a national banking association ("Bank of America"), formerly NationsBank, N.A., and each other financial institution which is party to the Financing Agreement (as that term is defined below) from time to time (collectively, the "Lenders" and individually, a "Lender"); and BANK OF AMERICA, N.A., a national banking association (the "Agent"), formerly NationsBank, N.A., in its capacity as both collateral and administrative agent for each of the Lenders. RECITALS -------- A. The Borrower, the Guarantors, the Lenders and the Agent entered into a Second Amended and Restated Financing and Security Agreement dated July 21, 1998 (as amended by that certain First Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 7, 1999, Second Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 24, 2000, Third Amendment to Second Amended and Restated Financing and Security Agreement dated as of June 12, 2000 (the "Third Amendment"), Fourth Amendment to Second Amended and Restated Financing and Security Agreement dated as of August 14, 2000 (the "Fourth Amendment") and as further amended, restated, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). The Financing Agreement provides for some of the agreements among the 1 2 Borrower, the Guarantors, the Lenders and the Agent with respect to the "Loan" (as defined in the Financing Agreement), including the Revolving Credit Facility (as that term is defined in the Financing Agreement) in an amount not to exceed $60,000,000 and the Letter of Credit Facility which is part of the Revolving Credit Facility. B. Under and subject to the provisions of the Financing Agreement, the SNR Lender (as defined in the Financing Agreement) agreed to make a loan to the Borrower (the "SNR Loan") in a principal amount of $7,097,875. Pursuant to SNR Participation Agreements, the SNR Lender sold, assigned and conveyed to the SNR Participants and the SNR Participants purchased, acquired and took from the SNR Lender an undivided participating interest in the SNR Loan made by the SNR Lender under the Financing Agreement. C. The Borrower has requested that the Agent and Lenders waive certain financial covenant defaults, amend certain financial covenant provisions of the Financing Agreement and amend certain other provisions of the Financing Agreement. D. The Agent and Lenders are willing to agree to the Borrower's request on the condition, among others, that this Agreement be executed. AGREEMENTS ---------- NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower, the Guarantors, the Lenders and Agent agree as follows: 1. The Obligors, the Lenders and the Agent agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. Each of the Borrower and Fantasma represents and warrants to the Lenders and Agent as follows: (a) The Borrower is a corporation duly organized, and validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign corporation in good standing in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (b) Fantasma is a limited liability company duly organized, validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign limited partnership in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (c) Each of the Borrower and Fantasma has the power and authority to execute and deliver this Agreement and perform its obligations hereunder and has taken all necessary and appropriate corporate, partnership or limited liability company action, as applicable, to authorize the execution, delivery and performance of this Agreement. 2 3 (d) The Financing Agreement, as amended by this Agreement, and each of the other Financing Documents remains in full force and effect, and each constitutes the valid and legally binding obligation of the Borrower and Fantasma, enforceable in accordance with its terms. (e) All of the Borrower's and Fantasma's representations and warranties contained in the Financing Agreement and the other Financing Documents are true and correct on and as of the date of the Borrower's and Fantasma's execution of this Agreement. (f) After giving effect to this Agreement, no Event of Default and no event which, with notice, lapse of time or both would constitute an Event of Default, has occurred and is continuing under the Financing Agreement or the other Financing Documents which has not been waived in writing by the Lenders and Agent. 3. Section 1.1 of the Financing Agreement (Certain Defined Terms) is hereby amended by deleting the definition of "Fixed Charges" in its entirety and substituting the following: "FIXED CHARGES" MEANS FOR ANY PERIOD OF DETERMINATION THEREOF, THE SUM OF (a) SCHEDULED OR REQUIRED PAYMENTS (INCLUDING, WITHOUT LIMITATION, PRINCIPAL AND INTEREST) ON ALL INDEBTEDNESS FOR BORROWED MONEY OF THE BORROWER AND ITS SUBSIDIARIES, PLUS (b) CAPITAL EXPENDITURES MADE IN CASH (AND PERMITTED ACQUISITIONS TO THE EXTENT NOT INCLUDED IN CAPITAL EXPENDITURES) OF THE BORROWER AND ITS SUBSIDIARIES, (c) PLUS CASH PAYMENTS OF TAXES, PLUS (d) WITHOUT DUPLICATION, DIVIDENDS, DISTRIBUTIONS, AND REPURCHASES, REDEMPTIONS (EXCLUDING THE $1,000,000 PAYMENT MADE ON APRIL 3, 2000 IN CONNECTION WITH THE REDEMPTION OF THE PREFERRED SHARES RELATING TO THE ACQUISITION OF FOSTER GRANT) AND OTHER TRANSACTIONS REGARDING EQUITY PAID TO SHAREHOLDERS INCLUDING, WITHOUT LIMITATION, PERMITTED AFFILIATE DISTRIBUTIONS, OTHER THAN PERMITTED AFFILIATE DISTRIBUTIONS MADE BY ONE BORROWER TO ANOTHER BORROWER. 4. Section 6.1.13 of the Financing Agreement (Financial Covenants) is hereby deleted in its entirety and the following is substituted in its place: 6.1.13 FINANCIAL COVENANTS. (a) FIXED CHARGE COVERAGE RATIO. THE BORROWER AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS WILL MAINTAIN, TESTED ON THE LAST BUSINESS DAY OF EACH OF THE BORROWER'S FISCAL QUARTERS BEGINNING ON THE LAST BUSINESS DAY OF THE FISCAL QUARTER ENDING CLOSEST TO MARCH 31, 2001, FOR THE FOUR (4) QUARTER PERIOD ENDING ON SUCH DATE, A FIXED CHARGE COVERAGE RATIO OF NOT LESS THAN THE FOLLOWING: 3 4 - ------------------------------------------------ ------------------------------ FISCAL QUARTER ENDING CLOSEST TO: RATIO - ------------------------------------------------ ------------------------------ MARCH 31, 2001 .90 TO 1.0 - ------------------------------------------------ ------------------------------ JUNE 30, 2001 1.00 TO 1.0 - ------------------------------------------------ ------------------------------ SEPTEMBER 30, 2001 1.00 TO 1.0 - ------------------------------------------------ ------------------------------ DECEMBER 31, 2001 1.00 TO 1.0 - ------------------------------------------------ ------------------------------ MARCH 31, 2002 THROUGH AND 1.05 TO 1.0 INCLUDING DECEMBER 31, 2002 - ------------------------------------------------ ------------------------------ MARCH 31, 2003 THROUGH AND 1.10 TO 1.0 INCLUDING DECEMBER 31, 2003 AND THEREAFTER - ------------------------------------------------ ------------------------------ (b) LEVERAGE RATIO. THE BORROWER AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS WILL AT ALL TIMES MAINTAIN, TESTED AS OF THE LAST BUSINESS DAY OF EACH OF BORROWER'S FISCAL QUARTERS BEGINNING WITH THE FISCAL QUARTER ENDING CLOSEST TO MARCH 31, 2001, AS OF THE LAST DAY OF EACH OF THE BORROWER'S FISCAL QUARTERS FOR THE FOUR (4) QUARTER PERIOD ENDING ON SUCH DATE, A RATIO OF FUNDED DEBT TO EBITDA SO THAT IT IS NOT MORE THAN THE FOLLOWING: - ------------------------------------------------- ------------------------------ FISCAL QUARTER ENDING CLOSEST TO: RATIO - ------------------------------------------------- ------------------------------ MARCH 31, 2001 5.20 TO 1.0 - ------------------------------------------------- ------------------------------ JUNE 30, 2001 4.50 TO 1.0 - ------------------------------------------------- ------------------------------ SEPTEMBER 30, 2001 4.50 TO 1.0 - ------------------------------------------------- ------------------------------ DECEMBER 31, 2001 4.20 TO 1.0 - ------------------------------------------------- ------------------------------ MARCH 31, 2002 AND THEREAFTER 4.00 TO 1.0 - ------------------------------------------------- ------------------------------ (c) EBITDA. THE BORROWER AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS WILL MAINTAIN, TESTED ON THE LAST BUSINESS DAY OF EACH OF THE BORROWER'S FISCAL QUARTERS BEGINNING ON THE LAST BUSINESS DAY OF THE FISCAL QUARTER ENDING CLOSEST TO MARCH 31, 2001 FOR THE FOUR 4 5 (4) QUARTER PERIOD ENDING ON SUCH DATE, EBITDA OF NOT LESS THAN THE FOLLOWING: ================================================================================ FISCAL QUARTER ENDING CLOSEST TO: AMOUNT - -------------------------------------------------------------------------------- MARCH 31, 2001 $17,000,000 - -------------------------------------------------------------------------------- JUNE 30, 2001 $19,500,000 - -------------------------------------------------------------------------------- SEPTEMBER 30, 2001 $18,000,000 - -------------------------------------------------------------------------------- DECEMBER 31, 2001 $18,600,000 - -------------------------------------------------------------------------------- MARCH 31, 2002 THROUGH AND $19,500,000 INCLUDING DECEMBER 31, 2002 - -------------------------------------------------------------------------------- MARCH 31, 2003 AND THEREAFTER $20,500,000 ================================================================================ 5. Section 6.2.7 of the Financing Agreement (Capital Expenditures) is hereby deleted in its entirety and the following is substituted in its place: THE BORROWER AND FANTASMA WILL NOT, DIRECTLY OR INDIRECTLY (BY WAY OF THE ACQUISITION OF THE SECURITIES OF A PERSON OR OTHERWISE), MAKE ANY CAPITAL EXPENDITURES (EXCLUDING, HOWEVER, ANY BUYBACKS OTHERWISE INCLUDED AS A CAPITAL EXPENDITURE) IN THE AGGREGATE FOR THE BORROWER, FOSTER GRANT AND FANTASMA (TAKEN AS A WHOLE) FOR (i) FISCAL YEAR ENDING DECEMBER 31, 2001, EXCEEDING $8,500,000, EXCEPT THE PURCHASE AND SALE/LEASEBACK OF THE HEADQUARTER'S PROPERTY AND FOR (ii) FISCAL YEAR ENDING DECEMBER 31, 2002 AND FOR ANY FISCAL YEAR THEREAFTER, EXCEEDING $9,000,000, EXCEPT THE PURCHASE AND SALE/LEASEBACK OF THE HEADQUARTER'S PROPERTY. 6. Section 8(a) of the Fourth Amendment is hereby amended to change the reference to "After February 28, 2001 and before April 15, 2001" to "After February 28, 2002 and before April 15, 2002." 7. The SNR Participants, the SNR Lender and the Borrower agree that Section 2.3(a) of the SNR Participation Agreements (as that term is defined in the Loan Agreement) is hereby amended to change the reference to "After February 28, 2001 and before April 15, 2001" to "After February 28, 2002 and before April 15, 2002." The SNR Participants, respectively, hereby issue, ratify and confirm the representations, warranties and covenants contained in the respective SNR Participation Agreements, as amended hereby, and agree that the respective SNR Participation Agreements continue in full force and effect. 5 6 8. The Agent and the Lenders hereby acknowledge and permit the release of the Lenders' lien on and security interest in certain collateral that is being sold pursuant to Purchase Agreement by and between Fantasma, LLC, as seller, and M.Z. Berger & Co., Inc. to be dated as of March 29, 2001 (the "Purchase Agreement"). The Obligors hereby agree that the proceeds received under the Purchase Agreement will be applied to the Revolving Credit Facility. 9. The Obligors, as applicable, hereby issue, ratify and confirm the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Obligors agree that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. 10. On the condition that the Obligors shall have complied with the terms and conditions of this Agreement, the Agent and Lenders hereby waive defaults under the following provisions of the Financing Agreement which, prior to the execution of this Agreement or for the period stated, existed under the Obligations; provided, however that this Paragraph shall not be deemed to waive any defaults under the following provisions after the date of this Agreement or after the period stated, or any other defaults arising as a result of non-compliance by the Borrower with the Financing Agreement, whether or not the events, facts or circumstances giving rise to such non-compliance existed on or prior to the date hereof: SECTION DEFAULT ------- ------- 6.1.13(b) Failure of Borrower to maintain the Leverage Ratio required by Section 6.1.13(b) for Fiscal Year period ending December 31, 2000 6.1.13(c) Failure of Borrower to maintain EBITDA as required by Section 6.1.13(c) for Fiscal Year period ending December 31, 2000 11. The Obligors acknowledge and warrant that the Agent and Lenders have acted in good faith and have conducted in a commercially reasonable manner their relationships with the Obligors in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Obligors hereby waiving and releasing any claims to the contrary. 12. The Obligors shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Agent and Lenders and their counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Agent's counsel and all recording fees, taxes and charges. 13. As a condition of the Agent's and the Lenders' agreement to enter into this Agreement, the Obligors hereby agree to pay to the Agent and the Lenders an amendment fee equal to $75,000, which fee shall be due and payable at the time this Agreement is executed and is fully earned and non-refundable upon payment. 14. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original 6 7 and taken together shall constitute but one and the same instrument. The parties agree that their respective signatures may be delivered by facsimile. Any party who chooses to deliver its signature by facsimile agrees to provide a counterpart of this Agreement with its inked signature promptly to each other party. IN WITNESS WHEREOF, the Obligors, the SNR Participants, the Lenders and the Agent have executed this Agreement under seal as of the date and year first written above on the pages that follow. [SIGNATURES TO APPEAR ON THE FOLLOWING PAGES] 7 8 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" AAi.FOSTERGRANT, INC. (formerly known as Accessories, Associates, Inc.) By: /s/ Mark Kost (SEAL) ------------------------------------ Mark Kost Chief Financial Officer FANTASMA, LLC By: /s/ Mark Kost (SEAL) ------------------------------------ Mark Kost Chief Financial Officer S-1 9 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" WESTON PRESIDIO CAPITAL II, L.P. By: /s/ Michael Cronin ----------------------------- Name: Title: S-2 10 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" BANCBOSTON VENTURES, INC. By: /s/ Charles Grant ------------------------------ Name: Title: S-3 11 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" ST. PAUL VENTURE CAPITAL V, LLC By: /s/ Everett Cox ---------------------------- Name: Title: S-4 12 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" NATIONAL CITY CAPITAL CORPORATION By: /s/ Tod McQuaig ------------------------------ Name: Title: S-5 13 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" MARLIN CAPITAL, L.P. By: /s/ Martin Franklin ---------------------------- Name: Title: S-6 14 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" BANK OF AMERICA, N.A., Agent By: /s/ Gary W. Bartlett (SEAL) -------------------------------- Gary W. Bartlett Vice President BANK OF AMERICA, N.A. in its capacity as a Lender By: /s/ Gary W. Bartlett (SEAL) -------------------------------- Gary W. Bartlett Vice President S-7 15 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" LASALLE BUSINESS CREDIT, INC. By: /s/ Thomas A. Buckelew (SEAL) -------------------------------- Thomas A. Buckelew Vice President S-8 16 Signature Page Fifth Amendment to Second Amended and Restated Financing and Security Agreement among AAi.FOSTERGRANT, INC. and certain of its affiliates, BANK OF AMERICA, N.A. (in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" PNC BANK, NATIONAL ASSOCIATION By: /s/ Rose Crump (SEAL) ----------------------------- Rose Crump Vice President S-9 EX-10.19 3 b38115aaex10-19.txt EMPLOYMENT AGREEMENT WITH BABETTE LIEN HARD 1 Exhibit 10.19 December 22, 2000 Ms. Babette Lienhard 23 Riverbank Ct. Weston, CT 06883 Dear Babette: I am delighted to formally extend to you our offer to join the AAi.FosterGrant team. Everyone on our team enjoyed meeting you and is excited about your joining us. You are the last piece in the puzzle to growth and prosperity. As I am sure you heard from all of us, this is an exciting place to work with lots of challenges and a great opportunity to contribute to the success of the company! This letter summarizes the offer of employment made to you by AAi.FosterGrant, Inc. ("Company") and is valid until December 22, 2000. 1. POSITION: Executive Director - Merchandising 2. REPORTING RELATIONSHIP: President & CEO. 3. PRIMARY RESPONSIBILITIES: You have full responsibility for the Company's Merchandising, including sell thru, markdowns, gross margins and inventory. 4. BASE SALARY: Your base salary will be $3846.15 weekly ($200,000 annualized) 5. BENEFITS: As a full time employee of the Company you will become eligible for our RISA benefits programs as are in effect from time to time, including, but not limited to: - Medical and Dental insurance - Life insurance - 401(k) program after one year of service - PTO program accruing at a rate of 20 days per year A summary of our current benefits is enclosed for your review. 6. ANNUAL BONUS: You will participate in the FY `01 performance bonus plan at the 30% base salary level based equally on your attainment of personal goals and the Company's performance against annual corporate business goals. 7. STOCK OPTIONS: As a corporate executive you will be eligible to participate in a future Long Term Incentive plan, which as discussed, is currently under discussion. 2 8. PERFORMANCE REVIEW: In accordance with company policy you will be given a ninety (90) day non-financial review. A one (1) year performance and salary review will be given on or about one (1) year from your date of hire and every year thereafter. 9. PROPRIETARY RIGHTS/NON-COMPETITION: Attachment A shall apply. 10. RELOCATION: AAi.FosterGrant will reimburse up to $25,000 gross for relocation expenses. 11. ANTICIPATED START DATE: December 29, 2000 with a reporting date of January 2, 2001 If you are in agreement with the foregoing, please signify by signing below and at Attachment B. Babette, I believe that you have the skills, experience, intellect and energy level that will make you a successful team player at AAi.FosterGrant. I look forward to your participation in this process and to working with you. Sincerely, AAi.FosterGrant, Inc. Agreed and Accepted: By /s/ John R. Ranelli /s/ Babette A. Lienhard -------------------------------- ---------------------------- John R. Ranelli Babette A. Lienhard President/CEO Encl: Benefits Summary//I-9 Form - -------------------------------------------------------------------------------- * AAi.Foster Grant, Inc. Verifies the identity and employment authorization of all new hires, pursuant to the Immigration and Nationality Act. In order to comply with this legal obligation, we must complete and Employment Eligibility form for your review within three days of hire. Enclosed is an I-9 form for your review. Please note that you will need to provide one document from "List A" OR one document from "List B" AND one document from "List C" of the form. If you have any questions, please contact Mike Cassani, AAi.FosterGrant, Inc. - -------------------------------------------------------------------------------- 3 ATTACHMENT A PROPRIETARY RIGHTS/NON-COMPETITION AGREEMENT For purposes of this Agreement, the following are collectively referred to as "Company": AAi.FosterGrant, Inc. and any other corporation, entity or person, now or hereafter controlled by, controlling or under common control with Company. "I" shall mean Babette Lienhard. I acknowledge that (1) Company is in the business of providing jewelry, small leather goods, reading glasses and sunglasses and other accessories sales and services to numerous customers, and expends significant resources in developing, marketing and selling its services and products, and in developing information which is not generally known to others and which is entitled to protection from improper disclosure and use; (2) I will occupy a position of special value to Company and, in the discharge of duties customary to that position, I will have access to Company's vital and unique business information which allows Company to gain a competitive edge over competitors; and (3) I will have close, regular contact and relationships with Company's other employees and, because of the personal nature thereof, such employees will develop identification with me, rather than the Company itself, could create the potential for my appropriation of such relationships developed on Company's behalf and expense. I further acknowledge that an essential element of maintaining Company's relationships with its customers is the development and maintenance of personal contacts with vendor and customer personnel who are responsible for obtaining Company services and products and, towards that end, Company (1) encourages employees, including me, to become personally acquainted with vendor and customer personnel and (2) provides employees, including me, access to information gathered by Company about vendors and customers. This policy represents a significant, costly investment by Company, to the extent additional manpower is necessary to develop such contacts and relationships and gather such information. Because of the personal nature of such contacts and relationships, Company's vendors and customers commonly develop identification with employees, including me, rather than Company itself. Such identification creates potential for my appropriation of the benefits of relationships developed with vendors and customers on Company's behalf and expense. In this Agreement, Company's information, data and knowledge is known as Proprietary Materials. It includes such information, data and knowledge developed or obtained by or on behalf of Company relating to, used in connection with or reasonably likely to be useful to any of Company's businesses, ventures, research, investigations or activities, including but not limited to all of Company's products, discoveries, ideas, inventions, methods, improvements, concepts, developments, methods, designs, drawings, works, processes, know-how, computer programs, internal policies and procedures, vendors, customers, contacts, prospects, financial information, business records, marketing practices and any papers labeled "secret," "confidential," or "proprietary," as well as any confidential information of any of Company's customers provided to Company. I understand that each of the foregoing constitutes Proprietary Materials even if conceived, made, developed, created or first reduced to practice by me during my term of employment with Company, and whether or not (1) I did so at the request or suggestion of Company, (2) they resulted from or were suggested by any work that I have performed or may perform for Company, (3) I did the work alone or in conjunction with others, (4) I did the work during regular hours of work or otherwise, or at Company's place of business or elsewhere, and (5) the Proprietary Materials are patentable or copyrightable by me or someone else. Notwithstanding the foregoing, Company and I agree that Proprietary Materials will not include any information, data or knowledge that I can establish by written evidence as having been conceived, made or reduced to practice by me which was created or conceived without use of Company resources, outside of regular Company business hours and that is unrelated to or reasonably unlikely to be useful to Company. In order to provide greater comfort to Company that it can continue to share its Proprietary Materials with me without fear of appropriation thereof, and to clarify our common understanding concerning our mutual responsibilities, I am entering into this Agreement. I have read it carefully so that I may understand its importance. 4 As a condition to my employment and continued employment, and in consideration of the premises and the compensation that I accept in connection with such employment, I agree as follows: 1. During my employment and thereafter, I shall not, in any way, directly or indirectly, disclose or appropriate to my own use, or to the use of any party other than Company, the Proprietary Materials. I shall use my best efforts to protect the Proprietary Materials from disclosure or misuse, and inform an executive officer of Company immediately upon learning of any improper disclosure or misuse of Proprietary Materials by me or by any other employee or person. I shall not copy or remove from Company's premises any media, papers, drawings or models relating to or containing any of the Proprietary Materials, except to the extent necessary in the course of such employment. 2. During the term of such employment and upon termination of my employment, I shall promptly and fully disclose to an executive officer of Company any Proprietary Materials of which I have knowledge. 3. The Proprietary Materials shall at all times be the exclusive property of Company, although I am aware that in the absence of this Agreement I may have been entitled to rights in some of the Proprietary Materials. Accordingly, I agree that all Proprietary Materials consisting of writings or works (including but not limited to computer software program codes) shall be considered works made for hire under the copyright laws, and therefore owned by Company. So as to assure Company's exclusive rights in the Proprietary Materials, I hereby assign, transfer and give to Company my entire right, title and interest in and to the Proprietary Materials, including but not limited to all rights throughout the world and any renewals and extensions associated therewith. At the request of Company, during the term of my employment and forever thereafter, I shall (a) sign, verify, acknowledge, deliver and file any documents necessary or advisable for Company to obtain ownership of the Proprietary Materials, including, at Company's expense, the issuance of patents or copyrights to Company with respect to the Proprietary Materials, and (b) otherwise assist Company in every reasonable manner in obtaining any of its rights in the Proprietary Materials (including but not limited to providing testimony at legal proceedings). I hereby irrevocably appoint Company as my attorney-in-fact (which appointment shall be deemed a power coupled with an interest) with full powers of substitution and delegation, to execute, verify, acknowledge and deliver any such documents. 4. Upon the termination of my employment for any reason, or if Company shall request sooner, I shall promptly deliver to an executive officer of Company all media, papers, drawings, models and other existing material in my possession or control relating to or containing any of the Proprietary Materials. 5. I shall not disclose to Company any knowledge, data or information which, to my knowledge, another company may consider to be its confidential information, trade secrets or proprietary information. I am not subject to any other agreements, whether in writing or verbally, with anyone else that would prohibit, restrict or interfere with my employment or fulfilling my obligations under this Agreement. 6. Were I to leave the Company's employment and utilize my administrative, merchandise, financial, technological, marketing and sales skills in competition with the Company, the results would be materially adverse to Company. Accordingly, during such employment and during the twelve (12) month period following the termination of my employment with Company (the "non-competition period"), I shall not engage in or carry on, in any way, directly or indirectly, either for myself or as a member of a partnership or as a stockholder or investor (except for ownership of securities, not exceeding 5% of any class, of a corporation traded on a national securities exchange) or as an officer, director, employee, agent, representative, advisor or consultant of any entity (other than Company), any business similar to or competing with any business carried on by Company or its successors at the time of the termination of my employment, or directly or indirectly related to the Business and to which I have been exposed at any time during such employment, in the United States or any other country in which Company does business or engages in activities at the time of the termination of such employment. This agreement does not include any retail operation that does not currently or, in the 5 years prior to execution of this agreement, conduct business with the Company or one of it's Subsidiaries. 7. I shall not, during the non-competition period, in any way, directly or indirectly (except in the course of such employment), call upon, solicit, advise or otherwise do or attempt to do, business with any clients, 5 customers or accounts of Company with whom I had any dealings at any time during the course of such employment, or take away or interfere or attempt to interfere with any custom, trade, business or patronage of Company, or interfere with or attempt to interfere with any officers, employees, representatives, advisors, consultants or agents of Company, or induce or attempt to induce any of them to leave the service of Company or violate agreements with it. At the termination of my employment, Company shall supply to me a written listing of clients, customers or accounts of Company. 8. The foregoing shall be deemed to be a series of separate covenants, one for each county of each state or territory of the United States and one for each and every country in which Company does business or engages in activity. If a court shall refuse to enforce all of such separate covenants, then such unenforceable covenants shall be deemed eliminated for the purpose of such proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If a court refuses to enforce any one or more of such separate covenants because the time thereof is deemed to be excessive or unreasonable, then such covenants, which would otherwise be unenforceable due to such excessive or unreasonable period of time, shall be enforced for such lesser period of time as deemed reasonable and not excessive by such court. 9. I shall comply with this Agreement even after the termination of my employment for any reason, and I shall perform each and every obligation set forth in this Agreement without any further payment or compensation to me, except for any reasonable out-of-pocket expenses incurred at the request of Company. 10. It is understood and agreed that any breach of this Agreement is likely to result in irreparable injury to Company, and that the remedy at law alone will be an inadequate remedy for such breach, in that in addition to any other remedy Company may have, Company shall be entitled to enforce my specific performance of this Agreement, and to seek both temporary and permanent injunctive relief (to the extent permitted by law) without the necessity of proving actual damages. /s/ Babette Lienhard ------------------------------- Babette Lienhard 6 ATTACHMENT C SPECIAL PROVISIONS/SEVERANCE 1. This letter sets forth the terms of employment, and does not constitute or promise employment for a specific term. Either you or we can terminate employment for any reason. Notwithstanding the foregoing, if your employment is terminated by Company for other than cause, then so long as you are in compliance with the terms of this letter agreement, including all attachments. Company shall pay to you a severance consisting of payments on the first business day of each of the six (6) months immediately succeeding the date of termination of your employment equal to 1/12th of your Base Salary in effect on the date of termination. The severance program will also provide benefit continuation for the entire severance period. For purposes of the prior sentence, "cause" shall mean: (a) your permanent disability under Company's long-term disability insurance coverage; (b) failure to devote full time and best efforts to the performance of your duties; (c) commission of an act of gross negligence, dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or breach of trust in the performance of your duties; (d) failure to observe the agreements set forth in the agreements attached as ATTACHMENT A; (e) commit a felony or act which, in the judgment of the Board of Directors of Company, subjects you or Company to public disrespect, scandal or ridicule so as to materially and adversely affect the utility of your services to Company; or (f) refuse to perform duties assigned to you in good faith or violate or fail to observe any lawful business instruction or lawful business policy established by Company with respect to the operation of its business and affairs or fail to, or refuse to, substantially perform your duties; and with respect to items (b) and (f), after a written notice is delivered by Company, which specifically identifies the manner in which you have become subject to termination for cause, if not cured (if such matter is susceptible of cure) within twenty (20) days after such written notice. 1. 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. Employee agrees and consents to personal jurisdiction and service in venue in any Federal or State Court within Rhode Island having subject matter jurisdiction, for purposes of any action, suit or proceeding arising out of or relating to this Agreement. Employee waives trial by jury in any such action, suit or proceeding. By /s/ John R. Ranelli /s/ Babette A. Lienhard ---------------------------------- ------------------------------- John R. Ranelli Babette A. Lienhard President/CEO EX-21.1 4 b38115aaex21-1.txt SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF AAi.FOSTERGRANT, INC. ("AAI")
- ---------------------------------------------------------------------------------------------------------------------- NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION SHAREHOLDER - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Foster Grant Holdings, Inc. ("Holdings") Delaware Common - AAi/Preferred - Bolle, Inc. - ---------------------------------------------------------------------------------------------------------------------- Fantasma, LLC Delaware AAi - ---------------------------------------------------------------------------------------------------------------------- AAi.FosterGrant of Canada Co. Nova Scotia, Canada AAi - ---------------------------------------------------------------------------------------------------------------------- Vendome Accessories Limited Nova Scotia, Canada 51% -- AAi.FosterGrant of Canada, Co. 49% -- Place Vendome Accessories, Inc. - ---------------------------------------------------------------------------------------------------------------------- AAi.FosterGrant Limited United Kingdom AAi - ---------------------------------------------------------------------------------------------------------------------- AAi/JOSKE's, S. de R.L. de C.V. Mexico 75% -- AAi 25% -- Joske's de Mexico, S.A. de C.V. - ----------------------------------------------------------------------------------------------------------------------
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