-----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, MGTs9/7oZ/u8y3YRweC6Hve+PXiudT7lMGDa/XOtGo6U+9MivA02aF5R7VE5gYfh mVyOcnMmgXFCjHFxU4nZOQ== 0000950135-01-502500.txt : 20010815 0000950135-01-502500.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950135-01-502500 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAI FOSTERGRANT INC CENTRAL INDEX KEY: 0001067346 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 050419304 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-61119 FILM NUMBER: 1709612 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-Q 1 b39740afe10-q.txt AAI FOSTERGRANT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______ to _______ Commission File Number 333-61119 AAI.FOSTERGRANT, INC. (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0419304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 GEORGE WASHINGTON HIGHWAY SMITHFIELD, RI 02917 (Address of principal executive offices) (Zip code) (401) 231-3800 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: As of August 14, 2001, the aggregate market value of the voting equity held by non-affiliates of the Registrant was none. As of August 14, 2001, 608,000 shares of Common Stock, 43,700 shares of Series A Preferred Stock and 70,870 shares of Series B Preferred Stock of the Registrant were issued and outstanding. 2 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES QUARTERLY REPORT TABLE OF CONTENTS PAGE PART I. - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of December 30, 2000 and June 30, 2001 3 Consolidated Condensed Statements of Operations for the three and six months ended July 1, 2000 and June 30, 2001 4 Consolidated Condensed Statements of Cash Flows for the six months ended July 1, 2000 and June 30, 2001 5 Notes to Consolidated Condensed Financial Statements 6-16 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-22 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22-23 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 24 ITEM 2. Changes in Securities and Use of Proceeds 24 ITEM 3. Defaults Upon Senior Securities 24 ITEM 4. Submission of Matters to a Vote of Security Holders 24 ITEM 5. Other Information 24 ITEM 6. Exhibits and reports on Form 8-K 24 SIGNATURES 25 2 3 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)
ASSETS DECEMBER 30, JUNE 30, 2000 2001 ----------- --------- CURRENT ASSETS: Cash and cash equivalents $ 578 $ 1,497 Accounts receivable less reserves of approximately $9,370 and $10,737 32,839 23,615 Inventories 33,083 24,146 Prepaid expenses and other current assets 1,280 1,154 Deferred tax assets 980 980 --------- --------- Total current assets 68,760 51,392 --------- --------- Property, plant and equipment, net 18,658 18,047 Intangible assets 12,830 12,501 Other assets 5,914 5,467 Deferred tax assets 2,009 2,009 --------- --------- Total assets $ 108,171 $ 89,416 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable $ 25,263 $ 19,623 Current maturities of long-term obligations 1,427 1,780 Deferred compensation - current portion 10 12 Accounts payable 21,380 14,538 Accrued expenses 17,678 15,116 Accrued income taxes 2,403 2,733 --------- --------- Total current liabilities 68,161 53,802 --------- --------- 10 3/4% series B senior notes due 2006 51,850 51,850 Long-term obligations - less current maturities 6,561 5,669 Deferred compensation - less current portion 1,287 1,521 Series A redeemable convertible Preferred stock, $.01 par value -- Designated, issued and outstanding -- 43,700 shares stated at redemption value 35,147 36,895 Series B redeemable Preferred stock, $.01 par value -- Designated -- 75,000 shares Issued and outstanding - 70,870 shares stated at redemption value 945 1,129 SHAREHOLDERS' DEFICIT: Common stock, $.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 loss (575) (1,058) Accumulated deficit (55,481) (60,668) --------- --------- Total shareholders' deficit (55,780) (61,450) --------- --------- Total liabilities and shareholders' deficit $ 108,171 $ 89,416 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JULY 1, JUNE 30, JULY 1, JUNE 30, 2000 2001 2000 2001 ------- ------- ------- ------- NET SALES $45,707 $38,273 $88,235 $68,372 COST OF GOODS SOLD 25,529 21,338 49,111 39,304 ------- ------- ------- ------- Gross profit 20,178 16,935 39,124 29,068 OPERATING EXPENSES: Selling 12,062 9,609 23,505 18,287 General and administrative 4,539 3,728 9,129 8,251 Restructuring charge -- 338 2,500 338 ------- ------- ------- ------- Income from operations 3,577 3,260 3,990 2,192 Interest expense (2,851) (2,489) (5,448) (5,056) Other income (expense), net 94 (59) 145 (14) Equity in losses of investment in affiliates -- (84) -- (98) ------- ------- ------- ------- Income (loss) before income tax expense 820 628 (1,313) (2,976) Income tax expense 43 380 43 462 ------- ------- ------- ------- Net income (loss) before extraordinary items 777 248 (1,356) (3,438) Extraordinary gain, net of $3.2 million in taxes 4,429 -- 4,429 -- ------- ------- ------- ------- Net income (loss) before dividends and accretion on preferred stock 5,206 248 3,073 (3,438) Dividends and accretion on preferred stock 801 885 1,588 1,749 ------- ------- ------- ------- Net income (loss) applicable to common shareholders $ 4,405 $ (637) $ 1,485 $(5,187) ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED ------------------------ JULY 1, JUNE 30, 2000 2001 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) before dividends and accretion on preferred stock $ 3,073 $ (3,438) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 6,039 5,590 Extraordinary gain on early extinguishment of debt (4,429) -- Amortization of interest costs related to debt 272 683 Equity in losses of investments in affiliates -- 98 Changes in assets and liabilities, net of acquisitions - Accounts receivable (6,704) 8,759 Inventories (5,164) 8,484 Prepaid expenses and other current assets 212 120 Deferred costs (230) (83) Accounts payable 6,116 (6,497) Accrued expenses (792) (2,429) Accrued income taxes 26 330 -------- -------- Net cash (used in) provided by operating activities (1,581) 11,617 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (5,534) (4,476) (Increase) decrease in other assets (179) 2 -------- -------- Net cash used in investing activities (5,713) (4,474) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving note payable 8,564 (5,640) Proceeds from issuance of long-term debt 2,750 -- Repurchase of 10 3/4% Series B Senior Notes due 2006 (2,750) -- Payments on long term obligations and deferred compensation (677) (544) Redemption of Preferred Stock of a subsidiary (1,000) -- -------- -------- Net cash provided by (used in) financing activities 6,887 (6,184) -------- --------- Effect of exchange rate changes on cash and cash equivalents (97) (40) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (504) 919 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,289 578 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,785 $ 1,497 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 5,355 $ 5,080 ======== ======== Income taxes $ 40 $ 108 ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Acquisition of equipment under capital lease obligations $ 557 $ -- ======== ======== Issuance of Series B Preferred Stock in connection with debt repurchase $ 367 $ 184 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Significant Accounting Policies (a) Interim Consolidated Condensed Financial Statements The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes of AAi.FosterGrant, Inc. (the "Company" or "AAi") for the year ended December 30, 2000 as reported in the Company's 10-K filed with the SEC on March 29, 2001. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of December 30, 2000 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the period ended June 30, 2001 may not be indicative of the results that may be expected for the year ending December 29, 2001, or for any other future period. (b) Revenue Recognition The Company recognizes revenue from product sales, net of estimated agreed upon future allowances and anticipated returns and discounts, taking into account historical experience, upon shipment to the customer. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following at December 30, 2000 and June 30, 2001 (in thousands): DECEMBER 30, JUNE 30, 2000 2001 ------------ --------- Finished goods............................ $ 26,881 $ 21,156 Work-in-process and raw materials......... 6,202 2,990 -------- --------- $ 33,083 $ 24,146 ======== ========= (d) Customer Acquisition Costs The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expense when incurred. The Company expensed customer acquisition costs of approximately $225,000 and $372,000 for the three and six months ended July 1, 2000 and $31,000 and $44,000 for the three and six months ended June 30, 2001, 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 from which the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. The Company capitalized costs of approximately $230,000 during the three and six months ended July 1, 2000. During the three and six months ended June 30, 2001 the Company capitalized approximately $47,000 and $87,000, respectively, of these costs. Amortization expense related to these costs as well as previously capitalized costs was approximately $339,000 and $659,000 for the three and six months ended July 1, 2000 and $93,000 and $177,000 for the three and six months ended June 30, 2001, respectively. 6 7 Note 2 - Long-Term Obligations On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of approximately $71.3 million received by the Company from the issuance and sale of the Notes were used to repay outstanding indebtedness under the credit facility with a bank and certain subordinated promissory notes to shareholders, net of amounts due the Company from certain of these shareholders. The Company incurred issuance costs of approximately $3.7 million in relation to the Notes. These costs are being amortized over the life of the Notes and are included in other assets in the accompanying consolidated balance sheets. In December 1998, the Notes were exchanged for 10 3/4% Series B Notes due 2006 registered with the SEC. Interest on the Series B Notes is payable semiannually on January 15 and July 15. The Notes are general unsecured obligations of the Company, rank senior in right of payment to all future subordinated indebtedness of the Company and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company including the bank credit facility. Accounts receivable and inventory of the Company and its domestic subsidiaries secure the bank credit facility. Accordingly, the Company's obligations under the bank credit facility will effectively rank senior in right of payment to the Notes to the extent of the assets subject to such security interest. The Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company's current and future Domestic Subsidiaries (as defined) (the Guarantors). The Indenture under which the Notes were issued (the Indenture) imposes certain limitations on the ability of the Company, and its subsidiaries to, among other things, incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with shareholders and affiliates, sell assets and engage in mergers and consolidations. At June 30, 2001 management believes the Company was in compliance with these covenants. The Notes are redeemable at the option of the Company, in whole or in part, on or after July 15, 2002 at various redemption prices, declining from 105.375% of the principal amount to par on and after July 15, 2004. In addition, on or prior to July 15, 2001, the Company may use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 110.750% of the principal amount thereof plus accrued interest to the date of redemption. Upon a change of control, each Note holder has the right to require the Company to repurchase such holder's Notes at a purchase price of 101% of the principal amount plus accrued interest. During the second quarter of fiscal 2000, the Company repurchased $10.75 million face amount of the Notes for a purchase price of $2.75 million. In addition, during the third quarter of fiscal 2000, the Company repurchased an additional $12.4 million face amount of the Notes for a purchase price of $4.34 million. The purchase price was financed utilizing a term loan under its existing senior credit facility (the "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 principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of the second quarter Note repurchase, the Company recognized $4.4 million extraordinary gain, net of $3.2 million in taxes, and wrote off $42,000 of unamortized issuance costs related to the $10.75 million of 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 each six-month participation commitment to interest expense. As the participation commitment is extended for additional six-month periods, the Company is recording additional value to the Series B Preferred Stock and amortizing the related costs over the additional period of the participation commitment as required. During the six months ended June 30, 2001, the Company recorded additional value to the Series B Preferred Stock of $184,000. Note 3 - Senior Credit Facility In May 2001, the Company amended its Senior Credit Facility. 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 (7.75% at June 30, 2001) plus 0.5% or LIBOR (3.77% at June 30, 2001) plus 2.75%. The Company has the option of electing the rate; however, the use of LIBOR is limited. The 7 8 Senior Credit Facility expires July 2003. As of June 30, 2001, the Company had approximately $1.8 million borrowing availability under the Senior Credit Facility. The Senior Credit Facility is subject to certain restrictive covenants, including a fixed charge coverage ratio, leverage ratio and minimum EBITDA. As of June 30, 2001, the Company was not in compliance with certain financial covenants. As of August 13, 2001 the Company received a verbal waiver for such noncompliance from the bank and expects a formal written waiver to be received shortly. The company is currently negotiating its financial covenants going forward so that they reflect performance levels that the Company believes it can attain. Note 4 - Comprehensive Income (Loss) Comprehensive income (loss) for the three and six months ended June 30, 2001 was $0.2 million and ($3.0) million, respectively, as compared to comprehensive income for the three and six months ended July 1, 2000 of $4.7 million and $2.4 million, respectively. Differences between comprehensive income (loss) and income (loss) before dividends and accretion on preferred stock for each period represents the foreign currency translation adjustment for each period. Note 5 - Restructuring Charge In March 2000, the Company recorded a restructuring charge of $2.5 million related to the termination of three executives. The charge consists of an accrual of severance payments due to three executives for a two-year period. The severance will be paid through fiscal 2002. In May 2001, the Company recorded a restructure charge of $0.3 million related to one senior executive. In addition, in July 2001, the Company took steps to realign its organization and reduce operating costs that resulted in a workforce reduction. As a result, the Company will recognize a third quarter charge of approximately $0.3 million.
March 2000 Fiscal 2000 May 2001 Fiscal 2001 Restructuring Balance Description Restructuring Charge Payments Restructuring Charge Payments At June 30, 2001 - ----------- -------------------- -------- -------------------- -------- ---------------- Severance benefits $2,500 $896 $338 $1,062 $880 ====== ==== ==== ====== ====
Note 6 - New Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. The Company does not expect the adoption of this statement to have a material impact on their operations. In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company will adopt this statement at the beginning of fiscal year 2002. The Company is currently assessing the impact of this pronouncement. Note 7 - Segment Reporting The Company has determined it has three reportable segments: mass merchandisers, chain drug stores/combo stores/supermarkets, and variety stores. The Company distributes accessories such as, costume jewelry, optical products, watches, clocks and other accessories. The Company's reportable segments are strategic business units that sell the Company's products to distinct distribution channels. They are managed separately because each business requires different marketing strategies. The Company's approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. 8 9
CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ JULY 1, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ----------------------- ------------- ------------ ------- ------ -------- Net sales $ 27,492 $ 10,023 $5,447 $2,745 $ 45,707 ======== ======== ====== ====== ======== Segment profit $ 467 $ 187 $ 47 $ 24 $ 725 ======== ======== ====== ====== ========
CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ JUNE 30, 2001 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ----------------------- ------------- ------------ ------- ------ -------- Net sales $ 24,377 $ 8,181 $4,498 $1,217 $ 38,273 ======== ======== ====== ====== ======== Segment profit $ 1,119 $ 387 $ (466) $ (254) $ 786 ======== ======== ======= ======= ========
CHAIN DRUG SIX MONTHS STORES/COMBO ENDED MASS STORES/ JULY 1, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ----------------------- ------------- ------------ -------- ------ -------- Net sales $ 51,147 $ 20,066 $ 12,750 $4,272 $ 88,235 ======== ======== ======== ====== ======== Segment profit (loss) $ 1,402 $ 910 $ (687) $ (582) $ 1,043 ======== ======== ======== ====== ========
CHAIN DRUG SIX MONTHS STORES/COMBO ENDED MASS STORES/ JUNE 30, 2001 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ----------------------- ------------- ------------ -------- ------ -------- Net sales $ 40,491 $ 16,904 $ 8,595 $2,382 $ 68,372 ======== ======== ======== ====== ======== Segment profit (loss) $ 688 $ 883 $ (1,198) $ (669) $ (296) ======== ======== ========= ====== ========
Revenues from segments below the quantitative thresholds are attributable to five operating segments of the Company. Those segments include department stores, armed forces' PX stores, boutique stores, gift shops, bookstores and catalogues. None of these segments have ever met any of the quantitative thresholds for determining reportable segments and their combined results are presented as Other. Segment profit (loss) differs from the profit (loss) before income tax expense and dividends and accretion on preferred stock by the amount of other income, restructure charge and extraordinary items which are not allocated by segment. The chief operating decision-maker does not review segment assets. Total assets specifically identifiable with each reportable segment are as follows: DECEMBER 30, JUNE 30, 2000 2001 ------------- ---------- Mass merchandisers $ 22,497 $ 19,058 Chain drug stores/combo stores/supermarkets 7,795 8,487 Variety 4,631 2,081 Other 2,701 3,523 Unassigned assets 70,547 56,267 ---------- ---------- $ 108,171 $ 89,416 ========== ========== Note 8 - Sale of Fantasma Product Lines On April 6, 2001, the Company sold the majority of its remaining inventory related to the Fantasma product lines (watches and clocks) and related licenses to sell the product lines. The sales price of approximately $344,000 consisted of approximately $294,000 of cash and $50,000 to be placed in escrow to fund future customer credits taken on sales made by the Company prior to the transaction date. The Buyer did not assume trade receivables and remaining liabilities related to Fantasma. Note 9 - Supplemental Consolidating Financial Information The following is summarized consolidating financial information for the Company, segregating the Company, wholly owned guarantor subsidiaries and non-guarantor subsidiaries as they relate to the Notes. The wholly owned guarantor subsidiaries are 9 10 domestic subsidiaries of the Company and they guarantee the Notes on a full, unconditional and joint and several basis. Separate financial statements of the guarantor subsidiaries have not been included because management believes that they are not material to investors. 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. 10 11 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
DECEMBER 30, 2000 ---------------------------------------------------------------------- GUARANTOR NON-GUARANTOR 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 -- 62,760 PROPERTY, PLANT AND EQUIPMENT, NET 16,887 6 1,765 -- 18,658 OTHER ASSETS 38,356 -- 2,729 (20,332) 20,753 --------- --------- --------- --------- --------- Total assets $ 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 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) --------- --------- --------- --------- --------- Total liabilities and shareholders' equity (deficit) $ 113,092 $ 2,191 $ 13,220 $ (20,332) $ 108,171 ========= ========= ========= ========= =========
11 12 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
JUNE 30, 2001 ----------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents $ 19 $ -- $ 1,478 $ -- $ 1,497 Accounts receivable, net 18,763 714 4,138 -- 23,615 Inventories 20,459 -- 3,687 -- 24,146 Prepaid expenses and other current assets 614 4 536 -- 1,154 Deferred tax assets 980 -- -- -- 980 -------- -------- -------- -------- -------- Total current assets 40,835 718 9,839 -- 51,392 PROPERTY, PLANT AND EQUIPMENT, NET 16,317 -- 1,730 -- 18,047 OTHER ASSETS 35,649 -- 333 (16,005) 19,977 -------- -------- -------- -------- -------- TOTAL ASSETS $ 92,801 $ 718 $ 11,902 $(16,005) $ 89,416 ======== ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable $ 19,623 $ -- $ -- $ -- $ 19,623 Current maturities of long-term obligations 1,749 -- 43 -- 1,792 Accounts payable 12,559 11 1,968 -- 14,538 Accrued expenses 15,025 211 2,613 -- 17,849 Due (from) to affiliate (847) 7,499 5,081 (11,733) -- -------- -------- -------- -------- -------- Total current liabilities 48,109 7,721 9,705 (11,733) 53,802 10 3/4% SENIOR NOTES 51,850 -- -- -- 51,850 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 7,021 -- 169 -- 7,190 Preferred stock 38,024 -- -- -- 38,024 Shareholders' (deficit) equity (52,203) (7,003) 2,028 (4,272) (61,450) -------- -------- -------- -------- -------- Total liabilities and shareholders' equity (deficit) $ 92,801 $ 718 $ 11,902 $(16,005) $ 89,416 ======== ======== ======== ======== ========
12 13 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED JULY 1, 2000 ----------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 73,681 $ 1,396 $ 13,159 $ -- $ 88,235 Cost of goods sold 41,750 1,705 5,656 -- 49,111 -------- -------- -------- -------- -------- Gross profit (loss) 31,931 (309) 7,503 -- 39,124 Operating expenses 26,319 1,176 5,139 -- 32,634 Restructuring charge 2,500 -- -- -- 2,500 -------- -------- -------- -------- -------- Income (loss) from operations 3,111 (1,485) 2,365 -- 3,990 Interest expense (5,144) (30) (274) -- (5,448) Other income (expense), net 785 38 (678) -- 145 Equity in (losses) earnings of consolidated subsidiaries (65) -- -- 65 -- -------- -------- -------- -------- -------- (Loss) income before income tax expense and dividends and accretion on preferred stock (1,313) (1,477) 1,413 65 (1,313) Income tax expense (43) (1) -- -- (43) -------- -------- -------- -------- -------- Net (loss) income before extraordinary gain (1,356) (1,478) 1,413 65 (1,356) Extraordinary gain, net of tax 4,429 -- -- -- 4,429 -------- -------- -------- -------- -------- Net income (loss) before dividends and accretion on preferred stock 3,073 (1,478) 1,413 65 3,073 Dividends and accretion on preferred stock 1,588 -- -- -- 1,588 -------- -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ 1,485 $ (1,478) $ 1,413 $ 65 $ 1,485 ======== ======== ======== ======== ========
13 14 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------------------------------------ GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 54,679 $ 21 $ 13,672 $ -- $ 68,372 Cost of goods sold 33,140 254 5,910 -- 39,304 -------- -------- -------- -------- -------- Gross profit 21,539 (233) 7,762 -- 29,068 Operating expenses 21,167 29 5,342 -- 26,538 Restructuring charge 338 -- -- -- 338 -------- -------- -------- -------- -------- Income (loss) from operations 34 (262) 2,420 -- 2,192 Interest expense (4,816) -- (240) -- (5,056) Other income (expense), net 806 -- (820) -- (14) Equity in (losses) earnings of consolidated subsidiaries (552) -- -- 454 (98) -------- -------- -------- -------- -------- Net (loss) income before income tax expense and dividends and accretion and preferred stock (3,424) (262) 1,360 454 (2,976) Income tax expense (14) (2) (446) -- (462) -------- -------- -------- -------- -------- Net (loss) income before dividends and accretion on preferred stock (3,438) (264) 914 454 (3,438) Dividends and accretion on preferred stock 1,749 -- -- -- 1,749 -------- -------- -------- -------- -------- Net (loss) income applicable to common shareholders $ (5,187) $ (264) $ 914 $ 454 $ (5,187) ======== ======== ======== ======== ========
14 15 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED JULY 1, 2000 --------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $(1,643) $(1,413) $ 1,475 $ -- $(1,581) Cash flows from Investing activities: Purchase of property, plant and equipment (4,775) -- (759) -- (5,534) Advance to affiliates (395) -- -- 395 -- Other investing activities (179) -- -- -- (179) ------- ------- ------- ------- ------- Net cash (used in) provided by investing (5,349) -- (759) 395 (5,713) ------- ------- ------- ------- ------- activities Cash flows from financing activities: Net borrowings under revolving note payable 8,564 -- -- -- 8,564 Proceeds from issuance of long-term debt 2,750 -- -- -- 2,750 Repurchase of 10 3/4% Series B Senior Notes due 2006 (2,750) -- -- -- (2,750) Payments on long-term obligations and deferred compensation (593) -- (84) -- (677) Redemption of Series A Preferred Stock (1,000) -- -- -- (1,000) Due to (from) affiliates -- 1,405 (1,010) (395) -- ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities 6,971 1,405 (1,094) (395) 6,887 ------- ------- ------- ------- ------- Net decrease in cash (21) (8) (475) -- (504) Exchange rate effect on cash -- -- (97) -- (97) Cash and cash equivalents, beginning of period 97 8 2,184 -- 2,289 ------- ------- ------- ------- ------- Cash and cash equivalents, end of period $ 76 $ -- $ 1,709 $ -- $ 1,785 ======= ======= ======= ======= =======
15 16 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------------------------------------ GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $ 7,593 $ 643 $ 3,381 $ -- $ 11,617 Cash flows from Investing activities: Purchase of property, plant and equipment (3,353) -- (1,123) -- (4,476) Advance to affiliates 2,930 -- (2,396) (534) -- Other investing activities 2 -- -- -- 2 -------- -------- -------- -------- -------- Net cash used in investing activities (421) -- (3,519) (534) (4,474) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings under revolving note payable (5,640) -- -- -- (5,640) Payments on long-term obligations and Deferred compensation (540) -- (4) -- (544) Due (from) to affiliates (973) (643) 1,082 534 -- -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (7,153) (643) 1,078 534 (6,184) -------- -------- -------- -------- -------- Net increase in cash 19 -- 900 -- 919 Exchange rate effect on cash -- -- (40) -- (40) Cash and cash equivalents, beginning of period -- -- 578 -- 578 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 19 $ -- $ 1,478 $ -- $ 1,497 ======== ======== ======== ======== ========
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain "forward-looking" statements and are subject to risks and uncertainties that could cause actual results to differ significantly from expectations. In particular, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section which are not historical facts, including, but not limited to, statements regarding the anticipated adequacy of cash resources to meet the Company's working capital and capital expenditure requirements and statements regarding the anticipated proportion of revenues to be derived from a limited number of customers, may constitute forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These risks and uncertainties include the substantial leverage of the Company, customer concentration and consolidation, dependence on licensed brands, a single site distribution facility, operating in international economies, unpredictability of discretionary consumer spending, competition, and susceptibility to changing consumer preferences. The following discussion and analysis of financial condition and results from operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto included elsewhere. OVERVIEW The Company is a value-added distributor of optical products, costume jewelry, watches, clocks and other accessories primarily to mass merchandisers, chain drug stores/combo stores/supermarkets and variety stores in North America and the United Kingdom. As a value-added distributor, the Company provides customized store displays, merchandising management and a store-level field service force to replenish and restock displays, reorder product and attend to markdowns and allowances. Upon shipment to the customer, the Company estimates agreed-upon future allowances, returns and discounts, taking into account historical experience, and reflects revenue net of these estimates. When establishing or expanding a customer relationship, the Company generally enters into multi-year agreements for the supply of specified product lines to specific customer stores. The agreements typically do not contain required minimum sales volumes but may provide for termination penalties equal to the Company's unamortized cost of product displays provided to the customer. The Company believes its relationships with retailers are dependent upon its ability to efficiently utilize allocated floor space to generate satisfactory returns for its customers. To meet this end, the Company strives to consistently deliver competitively priced products and service programs, which provide retailers with attractive gross margins and inventory turnover rates. The Company has historically retained customers from year to year, although retailers may drop or add product lines supplied by the Company. Generally, customer loss has been attributable to such customer going out of business or being acquired by a company which does not carry the Company's product line or has prior relationships with a competitor of the Company. Certain segments of the retail industry, particularly mass merchandisers, variety stores, drugstores and supermarkets, are experiencing significant consolidation and in recent years many major retailers have experienced financial difficulties. These industry wide developments may have an impact on the Company's results of operations. In addition, many major retailers have sought to reduce inventory levels in order to reduce their operating costs which has had a negative effect on the Company's results of operations. Net Sales. The Company offers optical products, costume jewelry, small synthetic leather goods and other accessories, generally at retail price points of $30 or less. Until the sale of its Fantasma division in April 2001, the Company also sold watches and clocks. Net sales of the Company's optical products accounted for approximately 77.2% and 71.5% of the Company's net sales for the six months ended June 30, 2001 and July 1,2000, respectively. Net sales of the Company's costume jewelry accounted for approximately 22.6% and 25.4% of the Company's net sales for the six months ended June 30, 2001 and July 1, 2000, respectively, and the balance represented sales of synthetic leather goods, watches, clocks and other accessories. Cost of Goods Sold. The Company outsources manufacturing for all of its products, approximately 80.5% 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 17 18 related to the purchase of the customer's existing inventory. The Company makes substantial investments in the design, production and installation of display fixtures in connection with establishing and maintaining customer relationships. The Company capitalizes the production cost of these display fixtures as long as it retains ownership of them. These costs are amortized to selling expense on a straight-line basis over the estimated useful life of these fixtures, which is one to three years. If the Company does not retain title to the displays, the display costs are expensed as shipped. The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expense when incurred. The Company expensed customer acquisition costs of approximately $31,000 and $44,000, respectively, for the three and six months ended June 30, 2001 and $225,000 and $372,000, respectively, for the three and six months ended July 1, 2000. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer from which the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. The Company capitalized costs of approximately $230,000 during the three and six months ended July 1, 2000. During the three and six months ended June 30, 2001, the Company capitalized approximately $47,000 and $87,000 of these costs, respectively. Amortization expense related to the costs as well as previously capitalized costs was approximately $93,000 and $177,000, for the three and six months ended June 30, 2001, respectively, and $339,000 and $659,000, for the three and six months ended July 1, 2000, respectively. During the six months ended July 1, 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. In May 2001, the Company recorded an additional restructuring charge of $0.3 million related to the accrual of severance payments to one senior executive, which will be paid over a twelve month period. In addition, the Company took steps in July 2001 to realign its organization and reduce operating costs that resulted in a work force reduction. As a result, the Company will recognize a third quarter charge of approximately $0.3 million. Dividends and Accretion on Preferred Stock. The Company has 43,700 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0 million, and an additional 9,500 shares were issued for gross proceeds of $5.0 million in connection with the December 1996 acquisition of Foster Grant Group US and related companies. Beginning on June 30, 2002, shares of the Series A Preferred Stock are redeemable at the option of the holder for an amount equal to the original issue price plus accrued and unpaid dividends yielding a 10% compounded annual rate of return, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined in the Articles of Incorporation) is outstanding. Net income (loss) applicable to common shareholders represents net income (loss) less accretion of original issuance costs and cumulative dividends due on the Series A Preferred Stock. Extraordinary Gain. In June 2000 the Company repurchased $10.75 million face value of the Notes for a purchase price of $2.75 million. As a result of this transaction, the Company recognized a $4.4 million extraordinary gain, net of $3.2 million in taxes. See further discussion in "Liquidity and Capital Resources". Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Although EBITDA is not a measure of performance calculated in accordance with Generally Accepted Accounting Principles (GAAP), the Company believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry and provides an indicator of the earnings available to meet the Company's debt service obligations. EBITDA should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with GAAP. EBITDA, before the restructuring charge of $0.3 million, was $6.2 million and $8.1 million for the three and six months ended June 30, 2001, respectively, as compared to EBITDA, before the restructuring charge of $2.5 million and the extraordinary gain of $4.4 million, of approximately $6.7 million and $12.7 million for the three and six months ended July 1, 2000, respectively. The year-to-date decrease before the restructuring charge and extraordinary gain of $4.7 million or 37% is principally due to the decrease in operating income. Year-to-date EBITDA, after the restructuring charge, was $7.8 million for the six months ended June 30, 2001. Net income before dividends and accretion on preferred stock, excluding the restructuring charge was $0.6 million for the three months ended June 30, 2001 and a loss of $3.1 million for the six months ended June 30, 2001 as compared to net income before 18 19 dividends and accretion on preferred stock, excluding the restructuring charge and extraordinary gain of $0.8 million and $1.1 million for the three and six months ended July 1, 2000, respectively. Net income before dividends and accretion on preferred stock, including the restructuring charge was $0.2 million for the three months ended June 30, 2001 and a loss of $3.4 million for the six months ended June 30, 2001 as compared to net income before dividends and accretion on preferred stock, including the restructure charge and extraordinary gain of $5.2 million and $3.1 million for the three and six months ended July 1, 2000. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's Consolidated Condensed Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ------------------------ JULY 1, JUNE 30, JULY 1, JUNE 30, 2000 2001 2000 2001 -------- ------- ------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 55.9 55.8 55.7 57.5 ----- ----- ----- ----- Gross profit 44.1 44.2 44.3 42.5 Operating expenses, excluding restructuring charge 36.3 34.8 37.0 38.8 Restructuring charge -- 0.9 2.8 0.5 ---- ----- ----- ----- Income from operations 7.8 8.5 4.5 3.2 Interest expense (6.2) (6.5) (6.2) (7.4) Other income (expense), net 0.2 (0.4) 0.2 (0.2) ----- ------ ----- ------ Net income (loss) before taxes and dividends and accretion on preferred stock 1.8 1.6 (1.5) (4.4) Income tax expense (0.1) (1.0) (0.1) (0.7) ----- ----- ----- ----- Net income (loss) before extraordinary items, dividends and accretion on preferred stock 1.7 0.6 (1.6) (5.1) Extraordinary gain, Net 9.7 -- 5.0 -- ----- ---- ----- ---- Net income (loss) before dividends and accretion on preferred stock 11.4 0.6 3.4 (5.1) Dividend and accretion on preferred stock 1.8 2.3 1.7 2.5 ----- ----- ----- ----- Net income (loss) applicable to common shareholders 9.6% (1.7)% 1.7% (7.6)% ===== ====== ===== ======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JULY 1, 2000 Net Sales. Consolidated net sales were $38.3 million for the three months ended June 30, 2001 as compared to $45.7 million for the three months ended July 1, 2000, a decrease of 16.3% or $7.4 million. Sales decreased across all segments due to a general softness in sunglasses and jewelry retail sales, a result of current economic conditions. The decline is also attributable to planned reductions in jewelry principally related to a change in the terms of service with a significant customer in the mass merchandiser channel and the planned de-emphasis on watches, clocks and certain other accessory lines across all segments. Gross Profit. Gross profit was $16.9 million for the three months ended June 30, 2001 as compared to $20.2 million for the three months ended July 1, 2000. Gross profit as a percentage of net sales increased marginally at 44.2% for the three months ended June 30, 2001 as compared to 44.1% for the three months ended July 1, 2000. The $3.2 million or 16.1% decrease in gross profit is primarily due to the sales decline. Operating Expenses. Operating expenses were $13.3 million before the restructuring charge of $0.3 million for the three months ended June 30, 2001 as compared to $16.6 million for the three months ended July 1, 2000, a decrease of 19.7% or $3.3 million. Decreases occurred throughout the Company driven primarily by the restructuring of the field service organization and staffing reductions as well as volume related expenses and the reversal of the current year bonus provision. These decreases reflect management's continued attention to expense control. Operating expenses, after the restructuring charge of $0.3 million, were $13.7 million for the three months ended June 30, 2001. The restructuring charge reflects an accrual for severance payments due to one senior executive, which will be paid over a twelve month period. Interest Expense. Interest expense was $2.5 million for the three months ended June 30, 2001 as compared to $2.9 million for the three months ended July 1, 2000, a decrease of 12.7% or $362,000. The decrease is primarily attributable to interest savings generated by the bond repurchase during fiscal 2000 and a lower average outstanding balance on the revolving note payable versus the prior year. Income Tax. Income tax expense was $0.4 million for the three months ended June 30, 2001 as compared to $43,000 for the three months ended July 1, 2000, and relates to taxes due on our foreign operations. 19 20 Net Income (Loss). As a result of the factors discussed above, net income before dividends and accretion on preferred stock, excluding the restructuring charge of $0.3 million, was $0.6 million for the three months ended June 30, 2001 as compared to net income before dividends and accretion on preferred stock, excluding the extraordinary gain, of $0.8 million for the three months ended July 1, 2000, a decrease of $0.2 million in earnings. Net income before dividends and accretion on preferred stock, after the extraordinary gain was $5.2 million for the three months ended July 1, 2000. The extraordinary gain of $4.4 million was recognized as a result of the early extinguishment of debt. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders excluding the restructuring charge was $0.3 million for the three months ended June 30, 2001 as compared to a loss, excluding the extraordinary gain, of $24,000 for the three months ended July 1, 2000, an increase of $0.3 million. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JULY 1, 2000 Net Sales. Consolidated net sales were $68.4 million for the six months ended June 30, 2001 as compared to $88.2 million for the six months ended July 1, 2000, a decrease of $19.8 million or 22.5%. The decrease in net sales is primarily attributable to a decline in optical sales in all segments related to weather and economic conditions. The decrease in the fiscal 2001 period as compared to the fiscal 2000 period also reflects the timing of initial customer shipments for the 2000 sunglass roll-out, which occurred during the first quarter of 2000 as compared to the orders being shipped in the fourth quarter of fiscal 2000 for the 2001 sunglass season. Gross Profit. Gross profit was $29.1 million for the six months ended June 30, 2001 as compared to $39.1 million for the six months ended July 1, 2000. Gross profit as a percentage of net sales decreased to 42.5% for the six months ended June 30, 2001 from 44.3% for the six months ended July 1, 2000. The $10.0 million or 25.7% decrease in gross profit is primarily due to the sales decline and the shift in the sales mix from higher margin segments to lower margin segments. Operating Expenses. Operating expenses were $26.5 million, before the restructuring charge of $0.3 million for the six months ended June 30, 2001 as compared to $32.6 million, before the restructuring charge for the six months ended July 1, 2000, a decrease of $6.1 million or 18.7%. Decreases occurred throughout the Company driven primarily by the restructuring of the field service organization and staffing reductions as well as volume related expenses and the reversal of the current year bonus provision. These decreases reflect management's continued attention to expense control. Operating expenses, after the restructuring charge were $26.9 million for the six months ended June 30, 2001, as compared to $35.1 million for the six months ended July 1, 2000. Interest Expense. Interest expense was $5.0 million for the six months ended June 30, 2001 as compared to $5.4 million for the six months ended July 1, 2000, a decrease of $0.4 million or 7.2%. The decrease is primarily attributable to interest savings generated by the bond repurchase during fiscal 2000 and a lower average outstanding balance on the revolving note payable versus the prior year. Income Tax. Income tax expense was $0.5 million for the six months ended June 30, 2001 as compared to $43,000 for the six months ended July 1, 2000, and relates to taxes due on foreign operations. Net Income (Loss). As a result of the factors discussed above, net loss before dividends and accretion on preferred stock, excluding the restructuring charge of $0.3 million, was $3.1 million for the six months ended June 30, 2001 as compared to net income before dividends and accretion on preferred stock, excluding the extraordinary gain of $4.4 million and the restructuring charge of $2.5 million, of $1.1 million for the six months ended July 1, 2000, a decrease of $4.2 million in earnings. Net loss before dividends and accretion on preferred stock, after the restructuring charge, was $3.4 million for the six months ended June 30, 2001 as compared to net income before dividends and accretion on preferred stock, after the extraordinary gain and the restructuring charge, of $3.1 million for the six months ended July 1, 2000. Net Income (Loss) Applicable to Common Shareholders. Net loss applicable to common shareholders excluding the restructuring charge was $4.8 million for the six months ended June 30, 2001 as compared to a net loss applicable to common shareholders excluding the extraordinary gain and the restructuring charge of $0.4 million for the six months ended July 1, 2000, an increase of $4.4 million. The increase is attributable to the $4.4 million decrease in earnings. Net loss applicable to common shareholders after the restructuring charge was $5.2 million for the six months ended June 30, 2001 as compared to net income applicable to common shareholders after the extraordinary gain and the restructuring charge of $1.5 million for the six months ended July 1, 2000. 20 21 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had cash and cash equivalents of $1.5 million and negative working capital of $2.4 million as compared to $0.6 million of cash and cash equalent and working capital of $0.6 million at December 30, 2000. The increase in cash and cash equivalents is due to the timing of cash receipts at the end of the quarter. The decline in working capital was driven by a continued focus on reduction in receivables and inventory offset by the paydown of trade payables and the revolving note payable. The Company generated $11.6 million of cash in operations during the six months ended June 30, 2001 compared to a use of $1.6 million during the six months ended July 1, 2000. The increase in cash generated is principally due to continued collection efforts of accounts receivable and inventory management during the six months ended June 30, 2001 partially offset by the paydown of trade payables and accrued expenses. The Company used $4.5 million in investing activities during the six months ended June 30, 2001 compared to a use of $5.7 million during the six months ended July 1, 2000. These investments were primarily related to the purchase of display fixtures used in the merchandising of both optical and jewelry products and represent normal purchases. The Company used $6.2 million from financing activities during the six months ended June 30, 2001 compared to generating $6.9 million during the six months ended July 1, 2000. The decrease in cash from financing activities is primarily due to an increase in cash provided by operating activities, which was utilized to pay down the revolving note payable. The Company has outstanding 43,700 shares of Series A Preferred Stock that have a redemption value at June 30, 2001 of $36.9 million. Shares of Series A Preferred Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for certain dilutive events. Conversion is at the option of the shareholder, but is automatic upon the consummation of a qualified public offering. The holders of Series A Preferred Stock have the right to require redemption for cash for any unconverted shares, beginning June 30, 2002, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined in the Company's Articles of Incorporation) is outstanding. The $75.0 million 10 3/4% Senior Notes due 2006 (the "Notes") constitute Restrictive Indebtedness. The redemption price of the Series A Preferred Stock is an amount equal to the original issue price, $526.32 per share, plus any accrued and unpaid dividends yielding a 10% compounded annual rate of return. In connection with the purchase of Foster Grant US, the Company's wholly owned subsidiary, Foster Grant Holdings, Inc. (FG Holdings) issued 100 shares of FG Preferred Stock, which were redeemable for $1.0 million on February 28, 2000. The $1.0 million was paid on April 3, 2000. The former holder of the FG Preferred Stock is entitled to receive an additional payment of between $2.5 million and $3.0 million, depending upon transaction value, in the event of an initial public offering, merger or similar transaction, or private placement of securities representing more than 50% of the Company's capital stock, at a specified valuation. During the second quarter of fiscal 2000, the Company repurchased $10.75 million face amount of the Notes for a purchase price of $2.75 million. In addition, during the third quarter of fiscal 2000, the Company repurchased an additional $12.4 million face amount of the Notes for a purchase price of $4.34 million. The purchase price was financed utilizing a term loan under its existing senior credit facility (the "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 principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of the second quarter Note repurchase, the Company recognized $4.4 million extraordinary gain, net of $3.2 million in taxes, and wrote off $42,000 of unamortized issuance costs related to the $10.75 million of 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 each six-month participation commitment to interest expense. As the participation commitment is extended for additional six-month periods, the Company is recording additional value to the Series B Preferred Stock and amortizing the related costs over the additional period of the participation commitment as required. During the six months ended June 30, 2001, the Company recorded additional value to the Series B Preferred Stock of $184,000. 21 22 The Company has substantial indebtedness and significant debt service obligations. As of June 30, 2001, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $80.5 million. The Company had current liabilities of approximately $53.8 million. In addition, the Company has significant annual obligations that include interest on the Notes of approximately $5.7 million, minimum royalty obligations over the next two years of approximately $2.9 million and minimum payments under its operating leases of approximately $0.3 million. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. The Company has up to $1.8 million available for borrowings under the Senior Credit Facility as of June 30, 2001. 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 August 13, 2001 the Company received a verbal waiver for such noncompliance from the bank and expects a formal written waiver to be received shortly. The company is currently negotiating its financial covenants going forward so that they reflect performance levels that the Company believes it can attain. The Company's ability to make scheduled payments of principal, or to pay the interest on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the future level of operations, anticipated cost savings and an increase in seasonal availability under the Senior Credit Facility which the Company is currently negotiating with the bank, 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. 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 as retailers build inventory for the spring and summer selling seasons, while costume jewelry and other accessories are shipped primarily during the second half of the fiscal year as retailers build inventory for the holiday season. Reading glasses sales are generally uniform throughout the year. As a result of these shipping trends, the Company's working capital requirements grow throughout the first half of the year to fund purchases and accounts receivable. In the second half of the year, the Company's working capital requirements decrease as accounts receivable are collected. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. The Company does not expect the adoption of this statement to have a material impact on their operations. In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company will adopt this statement at the beginning of fiscal year 2002. The Company is currently assessing the impact of this pronouncement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about the Company's market risk disclosures includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk. The Company is exposed to market risk from changes in interest rates primarily through its borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. 22 23 Foreign Currency Risk. The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of currencies in foreign markets primarily related to changes in the British Pound, the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar. During the six months ended June 30, 2001, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk by trying to minimize the Company's net investment in its foreign subsidiaries. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. The Company's operations in Europe are not significant and, therefore, the Company has not been materially impacted by the fluctuations in the Euro dollar. 23 24 AAI. FOSTERGRANT, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.20 Employment Agreement between AAi and Brian J. Lagarto dated May 9, 2001 10.21 Employment Agreement between AAi and Edward J. Seibolt dated July 3, 2001 (b) Report on Form 8-K The registrant filed no reports on Form 8-K during the quarter ended June 30, 2001. 24 25 AAI. FOSTERGRANT, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AAi.FosterGrant, Inc. (Registrant) Dated: August 14, 2001 /s/ Michael F. Cronin -------------------------------------- Michael F. Cronin Chairman of the Board Dated: August 14, 2001 /s/ John R. Ranelli -------------------------------------- John R. Ranelli Director, President, and Chief Executive Officer (Principal Executive Officer) Dated: August 14, 2001 /s/ Brian J. Lagarto -------------------------------------- Brian J. Lagarto Chief Financial Officer (Principal Financial Officer) 25 EX-10.20 3 b39740afex10-20.txt EMPLOYMENT AGREEMENT BRIAN LAGARTO 1 EXHIBIT 10.20 AAI.FOSTER GRANT May 9, 2001 Brian Lagarto Dear Brian, This letter summarizes the changes in your Duties, Salary and Benefits 1. POSITION: Chief Financial Officer 2. REPORTING RELATIONSHIP: John Ranelli CEO 3. PRIMARY RESPONSIBILITIES: Overall responsibility for the financial operations of the company including: Accounting, Cost Accounting, Treasury, Accounts Payable, Budget/Analysis and Accounts Receivable. In addition you will be responsible for all aspects of the relationships with our Financial Institutions. 4. BASE SALARY: Your base annual salary will be $165,000 commencing April 23, 2001 5. BONUS: You will participate in the Management Incentive Award Program and will be eligible to receive a 30% bonus based set objectives to be discussed and agreed upon at a later date 6. BENEFITS: You will be eligible for all Executive level Benefits that the company offers. 7. PERFORMANCE REVIEW: In accordance with company policy you will be given a ninety (90) day non-financial review. As agreed upon you will also receive a six(6) month performance and salary review will be given on or about six(6) months from April 23, 2001 8. PROPRIETARY RIGHTS/NON-COMPETITION: Attachment A shall apply 9. SPECIAL PROVISION/SEVERANCE: Attachment B shall appy 2 AAI.FOSTER GRANT Brian Lagarto May 9, 2001 Page 2 If you are in agreement with the foregoing, please signify by signing below and Attachment A and B. Brian, I believe that you have the skills, experience, intellect and energy level that will make you a successful team member. I am excited about our opportunity and look forward to your participation in this process as well as working with you to build our team and achieving common objectives. Sincerely, Agreed and Accepted /s/ John Ranelli /s/ Brian J. Lagarto - -------------------------------- ----------------------------------- John Ranelli Brian J. Lagarto Chief Executive Officer AAi.FosterGrant, Inc. Date: 5/24/01 Date: 5/24/01 --------------------------- ------------------------------ 3 AAI.FOSTER GRANT 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 Brian Lagarto 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. 4 AAI.FOSTER GRANT 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. 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, 5 AAI.FOSTER GRANT 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, 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/ Brian J. Lagarto ------------------------------- Brian Lagarto 5/24/01 ------------------------------- Date 6 AAI.FOSTER GRANT ATTACHMENT B 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 By: /s/ Brian J. Lagarto ------------------------------ -------------------------------- John R. Ranelli Brian J. Lagarto EX-10.21 4 b39740afex10-21.txt EMPLOYMENT AGREEMENT EDWARD J SEIBOLT 1 Exhibit 10.21 July 3, 2001 Mr. Edward J. Seibolt 8 Beauclaire Lane Fairport, New York 14450 Dear Ed: 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 Wednesday, July 11, 2001. 1. POSITION: Vice President - Sales 2. REPORTING RELATIONSHIP: President & CEO. a.) BASE SALARY: Your base salary will be $4038.46 weekly ($210,000 annualized) 3. BENEFITS: As a full time employee of the Company you will become eligible for our ERISA 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 - 3 Weeks Vacation per year A summary of our current benefits will be forwarded under separate cover. 4. ANNUAL BONUS: You will participate in the FY `01 performance bonus plan at the 30% (pro rata) base salary level based equally on your attainment of personal goals and the Company's performance against annual corporate business goals. 5. STOCK OPTIONS: As a corporate executive you will be eligible to participate in a future Long Term Incentive plan, if implemented by the Company. 2 6. 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. 7. PROPRIETARY RIGHTS/NON-COMPETITION: Attachment A shall apply. 8. RELOCATION: TBD. If you resign or are terminated by the Company for cause within six (6) months of your start date, you shall repay the Company any relocation payments made, as follows: Total x (6 - number of months employed) x 16.67%. 9. START DATE: Monday, July 30, 2001 with a reporting date of Monday, July 30, 2001 If you are in agreement with the foregoing, please signify by signing below and at Attachment B. Ed, we believe that you have the skills, experience, intellect and energy level that will lead us to revenue growth. We look forward to your joining our team. Sincerely, AAi.FosterGrant, Inc. Agreed and Accepted: By /s/ John R. Ranelli By /s/ Edward J. Seibolt -------------------------------- --------------------------------- John R. Ranelli Edward J. Seibolt President/CEO Includes: Attachment A: Proprietary Rights/Non-Competition Agreement Attachment B: Special Provision/Severance * 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 Sandra DaRocha, 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 Edward J. Seibolt. 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 trade secrets, 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/ Edward J. Seibolt ------------------------------- Edward J. Seibolt 6 ATTACHMENT B 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 the Company for other than cause terminates your employment, 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, reduced by any compensation for services earned or received by you from third parties during the severance period. 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. 2. 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. AAi.FosterGrant, Inc. By /s/ John R. Ranelli /s/ Edward J. Seibolt ------------------------------ ---------------------------- John R. Ranelli Edward J. Seibolt President/CEO -----END PRIVACY-ENHANCED MESSAGE-----