-----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, JWcti8MJyBfr3petg3nNkAIe3gQYdi9C6fBloXoEdvdIN+Vxo0EynKbS5aGsIK+B AdTO+38m+/ex3AKkI/XHyw== 0000950135-01-503481.txt : 20020410 0000950135-01-503481.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950135-01-503481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 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: 1783756 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 b40558aae10-q.txt AAI.FOSTERGRANT INC. 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 September 29, 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 November 13, 2001, the aggregate market value of the voting equity held by non-affiliates of the Registrant was none. As of November 13, 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. 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 September 29, 2001 3 Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2000 and September 29, 2001 4 Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2000 and September 29, 2001 5 Notes to Consolidated Condensed Financial Statements 6-16 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-23 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II - OTHER INFORMATION 24 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 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 30, SEPTEMBER 29, 2000 2001 ------------ ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 578 $ 359 Accounts receivable less reserves of approximately $9,370 and $11,898 32,839 17,759 Inventories 33,083 24,257 Prepaid expenses and other current assets 1,280 1,018 Deferred tax assets 980 980 --------- --------- Total current assets 68,760 44,373 --------- --------- Property, plant and equipment, net 18,658 16,601 Intangible assets 12,830 12,343 Other assets 5,914 5,211 Deferred tax assets 2,009 2,009 --------- --------- Total assets $ 108,171 $ 80,537 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable $ 25,263 $ 18,229 Current maturities of long-term obligations 1,427 1,768 Deferred compensation - current portion 10 12 Accounts payable 21,380 15,299 Accrued expenses 17,678 13,737 Accrued income taxes 2,403 2,415 --------- --------- Total current liabilities 68,161 51,460 --------- --------- 10 3/4% series B senior notes due 2006 51,850 51,850 Long-term obligations - less current maturities 6,561 5,206 Deferred compensation - less current portion 1,287 1,346 Series A redeemable convertible preferred stock, $.01 par value -- Designated, issued and outstanding -- 43,700 shares stated at redemption value 35,147 37,824 Series B redeemable preferred stock, $.01 par value -- Designated -- 75,000 shares Issued and outstanding -- 70,870 shares stated at redemption value 945 1,418 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) (940) Accumulated deficit (55,481) (67,902) --------- --------- Total shareholders' deficit (55,780) (68,567) --------- --------- Total liabilities and shareholders' deficit $ 108,171 $ 80,537 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- NET SALES $ 35,750 $ 23,407 $ 123,985 $ 91,779 COST OF GOODS SOLD 21,600 15,495 70,711 54,799 --------- --------- --------- --------- Gross profit 14,150 7,912 53,274 36,980 OPERATING EXPENSES: Selling 9,702 7,155 33,208 25,443 General and administrative 4,346 4,233 13,474 12,484 Restructuring charge -- 394 2,500 732 --------- --------- --------- --------- Income (loss) from operations 102 (3,870) 4,092 (1,679) Interest expense (3,041) (2,405) (8,422) (7,461) Other income (expense), net 53 (106) 198 (217) --------- --------- --------- --------- Loss before income tax (expense) benefit (2,886) (6,381) (4,132) (9,357) Income tax (expense) benefit (35) 76 (78) (386) --------- --------- --------- --------- Net loss before extraordinary items (2,921) (6,305) (4,210) (9,743) Extraordinary gain, net of $3.2 million and $6.3 million in taxes, respectively 4,409 -- 8,838 -- --------- --------- --------- --------- Net income (loss) before dividends and accretion on preferred stock 1,488 (6,305) 4,628 (9,743) Dividends and accretion on preferred stock 847 929 2,435 2,678 --------- --------- --------- --------- Net income (loss) applicable to common shareholders $ 641 $ (7,234) $ 2,193 $ (12,421) ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED ---------------------------- SEPTEMBER 30, SEPTEMBER 29, 2000 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) before dividends and accretion on preferred stock $ 4,628 $ (9,743) Adjustments to reconcile net loss to net (cash used) provided by in operating activities -- Depreciation and amortization 9,106 7,765 Extraordinary gain on early extinguishment of debt (8,838) -- Amortization of interest costs related to debt 593 935 Equity in losses of investments in affiliates -- 147 Changes in assets and liabilities -- Accounts receivable (5,715) 14,687 Inventories (4,073) 8,596 Prepaid expenses and other current assets 158 255 Deferred costs (450) (88) Accounts payable 784 (5,922) Accrued expenses (4,611) (3,838) Accrued income taxes 27 12 -------- -------- Net cash (used in) provided by operating activities (8,392) 12,806 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (6,568) (4,949) Increase in other assets (191) (20) -------- -------- Net cash used in investing activities (6,759) (4,969) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable 16,953 (7,034) Proceeds from issuance of long-term debt 7,087 -- Repurchase of 10 3/4% Series B Senior Notes due 2006 (7,087) -- Payments on long term obligations and deferred compensation (1,067) (1,022) Redemption of Preferred Stock of a subsidiary (1,000) -- -------- -------- Net cash provided by (used in) financing activities 14,886 (8,056) -------- -------- Effect of exchange rate changes on cash and cash equivalents (144) -- NET DECREASE IN CASH AND CASH EQUIVALENTS (409) (219) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,289 578 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,880 $ 359 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for -- Interest $ 8,257 $ 7,537 ======== ======== Income taxes $ 40 $ 373 ======== ======== 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 $ 945 $ 473 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 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 September 29, 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 September 29, 2001 (in thousands): DECEMBER 30, SEPTEMBER 29, 2000 2001 ------------ ------------- Finished goods $26,881 $21,599 Work-in-process and raw materials 6,202 2,658 ------- ------- $33,083 $24,257 ======= ======= (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 $48,000 and $269,000 for the three and nine months ended September 30, 2000 and $44,000 for the nine months ended September 29, 2001. There were no customer acquisition costs expensed for the three months ended September 29, 2001. 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. During the three and nine months ended September 30, 2000 the Company capitalized approximately $220,000 and $449,000, respectively, of these costs. The Company capitalized costs of approximately $3,000 and $90,000 during the three and nine months ended September 29, 2001, respectively. Amortization expense related to these costs as well as previously capitalized costs was approximately $382,000 and $1.0 million for the three and nine months ended September 30, 2000 and $91,000 and $268,000 for the three and nine months ended September 29, 2001. 6 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 a 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 September 29, 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 2000, the Company repurchased $23.15 million face value of the Notes for a purchase price of $7.09 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI facility and the agreements of certain preferred shareholders to purchase participations in the term loan. (In September 2001, certain preferred shareholders agreed to subordinate their first mortgage interest to the Company's senior lenders in connection with an amendment to the Senior Credit Facility that increased the Company's borrowing base. See Note 3- Senior Credit Facility.) 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 this transaction, the Company recognized a $8.8 million extraordinary gain, net of $6.3 million in taxes, and wrote off $0.9 million of unamortized issuance costs related to the Notes that were repurchased. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with the commitment to purchase participations in the term loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders of Series B Preferred Stock are entitled to receive, prior and in preference to any 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 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 nine months ended September 29, 2001, the Company recorded additional value to the Series B Preferred Stock of $473,000. Note 3 - Senior Credit Facility In September 2001, the Company amended its Senior Credit Facility. Borrowings under the Senior Credit Facility are limited to the lesser of $40.0 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 (7.875% at September 29, 2001) plus 0.5% or LIBOR (3.55% at September 29, 2001) plus 3.625%. The Company has the option of electing the rate; however, the use of LIBOR is 7 limited. The Senior Credit Facility expires July 2003. As of September 29, 2001, the Company had approximately $0.2 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 September 29, 2001, the Company was not in compliance with certain financial covenants. As of November 13, 2001, the Company received a written waiver for such noncompliance from the Bank. 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 loss for the three and nine months ended September 29, 2001 was $6.4 million and $9.4 million, respectively, as compared to comprehensive income for the three and nine months ended September 30, 2000 of $1.4 million and $5.1 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 restructuring charge of $0.3 million related to one senior executive, which will be paid over a twelve-month period. In addition, in July 2001, the Company adopted a plan to realign its organization and reduce operating costs that resulted in a workforce reduction. As a result, the Company recognized a third quarter restructuring charge of $0.4 million related to severance payments due to 27 employees. As of September 29, 2001 all of these employees were terminated and severance payments of $0.1 million were paid. The remaining severance will be paid through July 2002.
March 2000 May 2001 July 2001 Restructuring Fiscal 2000 Restructuring Restructuring Fiscal 2001 Reserve Balance Description Charge Payments Charge Charge Payments September 29, 2001 - ----------- ------------- ----------- ------------- ------------- ----------- ------------------ Severance benefits $2,500 $(896) $338 $394 $(1,483) $853 ====== ===== ==== ==== ======= ====
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 its 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. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Under this statement it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the ultimate impact of this statement on its results of operations or financial position until such time as its provisions are applied. 8 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.
CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ SEPTEMBER 30, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------------ ------------- ------------ ------- ------ ------- Net sales $21,994 $7,056 $ 4,226 $2,474 $35,750 ======= ====== ======= ====== ======= Segment loss $ (619) $ (720) $ (927) $ (674) $(2,940) ======= ====== ======= ====== ======= CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ SEPTEMBER 29, 2001 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------------ ------------- ------------ ------- ------ ------- Net sales $17,013 $ 2,368 $ 2,883 $1,143 $23,407 ======= ======= ======= ====== ======= Segment loss $(3,666) $(1,382) $(1,029) $ (198) $(6,275) ======= ======= ======= ====== ======= CHAIN DRUG NINE MONTHS STORES/COMBO ENDED MASS STORES/ SEPTEMBER 30, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------------ ------------- ------------ ------- ------- -------- Net sales $73,141 $ 27,122 $ 16,976 $ 6,746 $123,985 ======= ======== ======== ======= ======== Segment profit (loss) $ 1,389 $ (378) $ (1,606) $(1,231) $ (1,826) ======= ======== ======== ======= ======== CHAIN DRUG NINE MONTHS STORES/COMBO ENDED MASS STORES/ SEPTEMBER 29, 2001 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------------ ------------- ------------ ------- ------- -------- Net sales $57,504 $ 19,272 $ 11,478 $ 3,525 $ 91,779 ======= ======== ======== ======== ======== Segment loss $(2,978) $ (499) $ (2,227) $ (867) $ (6,571) ======= ======== ======== ======= ========
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, restructuring 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, SEPTEMBER 29, 2000 2001 ------------ ------------- Mass merchandisers $ 22,497 $ 16,851 Chain drug stores/combo stores/supermarkets 7,795 5,093 Variety 4,631 1,888 Other 2,701 2,120 Unassigned assets 70,547 54,585 -------- -------- $108,171 $ 80,537 ======== ======== 9 Note 8 - 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 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 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 -- 68,760 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 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SEPTEMBER 29, 2001 ------------------------------------------------------------------ GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents $ 64 $ -- $ 295 $ -- $ 359 Accounts receivable, net 15,001 616 2,142 -- 17,759 Inventories 20,724 -- 3,533 -- 24,257 Prepaid expenses and other current assets 434 -- 584 -- 1,018 Deferred tax assets 980 -- -- -- 980 -------- -------- -------- -------- -------- Total current assets 37,203 616 6,554 -- 44,373 PROPERTY, PLANT AND EQUIPMENT, NET 15,071 -- 1,530 -- 16,601 OTHER ASSETS 32,786 -- 333 (13,556) 19,563 -------- -------- -------- -------- -------- Total Assets $ 85,060 $ 616 $ 8,417 $(13,556) $ 80,537 ======== ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable $ 17,837 $ -- $ 392 $ -- $ 18,229 Current maturities of long-term obligations 1,733 -- 47 -- 1,780 Accounts payable 13,944 -- 1,355 -- 15,299 Accrued expenses 13,798 211 2,143 -- 16,152 Due (from) to affiliate (702) 7,446 2,492 (9,236) -- -------- -------- -------- -------- -------- Total current liabilities 46,610 7,657 6,429 (9,236) 51,460 10 3/4% SENIOR NOTES 51,850 -- -- -- 51,850 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 6,397 -- 155 -- 6,552 Preferred stock 39,242 -- -- -- 39,242 Shareholders' (deficit) equity (59,039) (7,041) 1,833 (4,320) (68,567) -------- -------- -------- -------- -------- Total liabilities and shareholders' equity (deficit) $ 85,060 $ 616 $ 8,417 $(13,556) $ 80,537 ======== ======== ======== ======== ========
12 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 ---------------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 102,134 $ 4,217 $ 17,634 $ -- $ 123,985 Cost of goods sold 59,199 3,325 8,187 -- 70,711 --------- --------- --------- --------- --------- Gross profit 42,935 892 9,447 -- 53,274 Operating expenses 37,200 1,900 7,582 -- 46,682 Restructuring charge 2,500 -- -- -- 2,500 --------- --------- --------- --------- --------- Income (loss) from operations 3,235 (1,008) 1,865 -- 4,092 Interest expense (7,976) (30) (416) -- (8,422) Other income (expense), net 1,112 44 (958) -- 198 Equity in (losses) earnings of consolidated subsidiaries (504) -- -- 504 -- --------- --------- --------- --------- --------- (Loss) income before income tax expense and dividends and accretion on preferred stock (4,133) (994) 491 504 (4,132) Income tax expense (77) (1) -- -- (78) --------- --------- --------- --------- --------- Net (loss) income before extraordinary (4,210) (995) 491 504 (4,210) gain Extraordinary gain, net of tax 8,838 -- -- -- 8,838 --------- --------- --------- --------- --------- Net income (loss) before dividends and accretion on preferred stock 4,628 (995) 491 504 4,628 Dividends and accretion on preferred stock 2,435 -- -- -- 2,435 --------- --------- --------- --------- --------- Net income (loss) applicable to common shareholders $ 2,193 $ (995) $ 491 $ 504 $ 2,193 ========= ========= ========= ========= =========
13 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED SEPTEMBER 29, 2001 -------------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 74,208 $ (17) $ 17,588 $ -- $ 91,779 Cost of goods sold 46,735 253 7,811 -- 54,799 -------- -------- -------- -------- -------- Gross profit 27,473 (270) 9,777 -- 36,980 Operating expenses 30,563 30 7,334 -- 37,927 Restructuring charge 732 -- -- -- 732 -------- -------- -------- -------- -------- (Loss) income from operations (3,822) (300) 2,443 -- (1,679) Interest expense (7,143) -- (318) -- (7,461) Other income (expense), net 1,071 -- (1,141) -- (70) Equity in income (losses) earnings of consolidated subsidiaries 174 -- -- (321) (147) -------- -------- -------- -------- -------- (Loss) income before income tax expense and dividends and accretion and preferred stock (9,720) (300) 984 (321) (9,357) Income tax expense (23) (2) (361) -- (386) -------- -------- -------- -------- -------- Net (loss) income before dividends and accretion on preferred stock (9,743) (302) 623 (321) (9,743) Dividends and accretion on preferred Stock 2,678 -- -- -- 2,678 -------- -------- -------- -------- -------- Net (loss) income applicable to common shareholders $(12,421) $ (302) $ 623 $ (321) $(12,421) ======== ======== ======== ======== ========
14 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------- GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $ (8,354) $ (1,839) $ 1,801 $ -- $ (8,392) Cash flows from Investing activities: Purchase of property, plant and equipment (5,133) -- (1,435) -- (6,568) Advance to affiliates (1,286) -- -- 1,286 -- Other investing activities (191) -- -- -- (191) -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities (6,610) -- (1,435) 1,286 (6,759) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings under revolving note payable 16,953 -- -- -- 16,953 Proceeds from issuance of long-term debt 7,087 -- -- -- 7,087 Repurchase of 10 3/4% Series B Senior Notes due 2006 (7,087) -- -- -- (7,087) Payments on long-term obligations and deferred compensation (1,067) -- -- -- (1,067) Redemption of Series A Preferred Stock (1,000) -- -- -- (1,000) Due to (from) affiliates -- 1,860 (574) (1,286) -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 14,886 1,860 (574) -- 14,886 -------- -------- -------- -------- -------- Net (decrease) increase in cash (78) 21 (208) -- (265) Exchange rate effect on cash -- -- (144) -- (144) Cash and cash equivalents, beginning of period 97 8 2,184 -- 2,289 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 19 $ 29 $ 1,832 $ -- $ 1,880 ======== ======== ======== ======== ========
15 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED SEPTEMBER 29, 2001 ------------------------------------------------------------------ NON- GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $ 7,733 $ 694 $ 4,379 $ -- $ 12,806 Cash flows from Investing activities: Purchase of property, plant and equipment (3,719) -- (1,230) -- (4,949) Advance to affiliates 69 -- (349) 280 -- Other investing activities (20) -- -- -- (20) -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities (3,670) -- (1,579) 280 (4,969) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings under revolving note payable (7,426) -- 392 -- (7,034) Payments on long-term obligations and Deferred compensation (982) -- (40) -- (1,022) Due to (from) affiliates 4,409 (694) (3,435) (280) -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities (3,999) (694) (3,083) (280) (8,056) -------- -------- -------- -------- -------- Net (decrease) increase in cash 64 -- (283) -- (219) Cash and cash equivalents, beginning of period -- -- 578 -- 578 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 64 $ -- $ 295 $ -- $ 359 ======== ======== ======== ======== ========
16 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, susceptibility to changing consumer preferences and obtaining full benefits from the new information system. 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 that does not carry the Company's product line or has prior relationships with a competitor of the Company. Certain segments of the retail industry, particulary 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 have had and may continue to 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 69.6% and 62.2% of the Company's net sales for the nine months ended September 29, 2001 and September 30, 2000 respectively. Net sales of the Company's costume jewelry accounted for approximately 30.3% and 32.7% of the Company's net sales for the nine months ended September 29, 2001 and September 30, 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 83.5% 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 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 are 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 $48,000 and $269,000, respectively for the three and nine months ended September 30, 2000 and $44,000 for the nine months ended September 29, 2001. There were no customer acquisition costs expensed for the three months ended September 29, 2001. 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. During the three and nine months ended September 30, 2000, the Company capitalized approximately $220,000 and $449,000 of these costs, respectively. The Company capitalized costs of approximately $3,000 and $90,000 during the three and nine months ended September 29, 2001, respectively. Amortization expense related to the costs as well as previously capitalized costs was approximately $91,000 and $268,000, for the three and nine months ended September 29, 2001, respectively and $382,000 and $1.0 million, for the three and nine months ended September 30, 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 is being 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 adopted a plan in July 2001 to realign its organization and reduce operating costs that resulted in a work force reduction. As a result, the Company recognized a third quarter restructuring charge of approximately $0.4 million related to severance payments due to 27 employees. As of September 29, 2001 all of these employees were terminated and severance payments of $0.1 million were paid. The remaining severance will be paid through July 2002. 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. During 2000, the Company repurchased $23.15 million face value of the Notes for a purchase price of $7.09 million. As a result of this transaction, the Company recognized a $8.8 million extraordinary gain, net of $6.3 million in taxes. See further discussion in "Liquidity and Capital Resources". Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Although EBITDA is not a measure of performance calculated in accordance with Generally Accepted Accounting Principles (GAAP), the Company believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry and provides an indicator of the earnings available to meet the Company's debt service obligations. EBITDA should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with GAAP. EBITDA, before the restructuring charge of $0.4 million and $0.7 million, was ($1.4) million and $6.7 million for the three and nine months ended September 29, 2001, respectively, as compared to EBITDA, before the restructuring charge of $2.5 million and the extraordinary gain of $8.8 million, of approximately $3.2 million and $15.9 million for the three and nine months ended September 30, 2000, respectively. The year-to-date decrease, before the restructuring charge and extraordinary gain, of $9.2 million or 58% is principally due to the decrease in operating income. EBITDA, after the restructuring charge was ($1.7) million and $6.0 million for the three and nine months ended September 29, 2001, respectively. 18 EBITDA, after the restructuring charge and extraordinary gain, was $7.6 million and $22.2 million for the three and nine months ended September 30, 2000, respectively. Net loss before dividends and accretion on preferred stock, before the restructuring charge was $5.9 million and $9.0 million for the three and nine months ended September 29, 2001, respectively, as compared to the net loss before dividends and accretion on preferred stock before the restructuring charge and extraordinary gain, of $2.9 million and $1.7 million for the three and nine months ended September 30, 2000, respectively. Net loss before dividends and accretion on preferred stock, after the restructuring charge, was $6.3 million and $9.7 million for the three and nine months ended September 29, 2001, respectively, as compared to net income before dividends and accretion on preferred stock, after the restructuring charge and extraordinary gain, of $1.5 million and $4.6 million for the three and nine months ended September 30, 2000, respectively. 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 NINE MONTHS ENDED ------------------------------- ------------------------------- SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 60.4 66.2 57.0 59.7 ----- ----- ----- ----- Gross profit 39.6 33.8 43.0 40.3 Operating expenses, excluding restructuring charge 39.3 48.6 37.7 41.3 Restructuring charge -- 1.7 2.0 0.8 ----- ----- ----- ----- Income (loss) from operations 0.3 (16.5) 3.3 (1.8) Interest expense (8.5) (10.3) (6.8) (8.1) Other income (expense), net 0.1 (0.5) 0.2 (0.3) ----- ----- ----- ----- Loss before taxes and dividends and accretion on preferred stock (8.1) (27.3) (3.3) (10.2) Income tax (expense) benefit (0.1) 0.3 (0.1) (0.4) ----- ----- ----- ----- Net loss before extraordinary items, dividends and accretion on preferred stock (8.2) (27.0) (3.4) (10.6) Extraordinary gain, net 12.3 -- 7.1 -- ----- ----- ----- ----- Net income (loss) before dividends and accretion on preferred stock 4.1 (27.0) 3.7 (10.6) Dividend and accretion on preferred stock 2.3 4.0 2.0 2.9 ----- ----- ----- ----- Net income (loss) applicable to common shareholders 1.8% (31.0)% 1.7% (13.5)% ===== ===== ===== =====
19 THREE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales. Consolidated net sales were $23.4 million for the three months ended September 29, 2001 as compared to $35.8 million for the three months ended September 30, 2000, a decrease of $12.4 million. Sales decreased across all segments and is primarily due to the absence of sales from watches, clocks and certain other accessory lines which the Company discontinued during the first half of 2001 and the Company's efforts to restructure its customer base to eliminate less profitable relationships. The decline is also attributable to several customer bankruptcies and a general softness in sunglasses and jewelry retail sales in all segments as a result of current economic conditions, as well as planned reductions in jewelry principally related to a change in the terms of service with a significant customer in the Mass Merchandiser channel. Gross Profit. Gross profit was $7.9 million for the three months ended September 29, 2001 as compared to $14.2 million for the three months ended September 30, 2000. Gross profit as a percentage of net sales decreased to 33.8% for the three months ended September 29, 2001 from 39.6% for the three months ended September 30, 2000. The percentage decrease is primarily due to a shift in mix of sales to lower margin distribution channels. Operating Expenses. Operating expenses were $11.4 million, before the restructuring of $0.4 million, for the three months ended September 29, 2001 as compared to $14.0 million for the three months ended September 30, 2000, a decrease of 18.9% or $2.6 million. Decreases occurred throughout the Company driven primarily by the restructuring of the field service organization and staffing reductions which reflects management's continued attention to expense control. Operating expenses, after the restructuring charge of $0.4 million, were $11.8 million for the three months ended September 29, 2001. The restructuring charge is a result of the steps the Company took in July 2001 to realign its organization and reduce operating costs. Interest Expense. Interest expense was $2.4 million for the three months ended September 29, 2001 as compared to $3.0 million for the three months ended September 30, 2000, a decrease of 20.9% or $0.6 million. The decrease is primarily attributable to interest savings generated by the bond repurchase during fiscal 2000 and a lower average outstanding balance and interest rate on the revolving note payable versus the prior year. Income Tax. Income tax benefit was $76,000 for the three months ended September 29, 2001 as compared to income tax expense of $35,000 for the three months ended September 30, 2000, and relates to net taxes due on our foreign operations. Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock, before the restructuring charge of $0.4 million was $5.9 million, for the three months ended September 29, 2001 as compared to a net loss before dividends and accretion on preferred stock, before the extraordinary gain, of $2.9 million for the three months ended September 30, 2000, a decrease of $3.0 million in earnings. Net loss before dividends and accretion on preferred stock, after the restructuring charge was $6.3 million for the three months ended September 29, 2001 as compared to net income before dividends and accretion on preferred stock, after the extraordinary gain of $1.5 million for the three months ended September 30, 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, before the restructuring charge of $0.4 million was $6.8 million for the three months ended September 29, 2001, as compared to a net loss applicable to common shareholders, before the extraordinary gain of $3.8 million for the three months ended September 30, 2000, a decrease of $3.0 million in earnings. NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Net Sales. Consolidated net sales were $91.8 million for the nine months ended September 29, 2001 as compared to $124.0 million for the nine months ended September 30, 2000, a decrease of $32.2 million or 26.0%. Sales decreased across all segments and is primarily due to the absence of sales from watches, clocks and certain other accessory lines which the Company discontinued during the first half of 2001 and the Company's efforts to restructure its customer base to eliminate less profitable relationships. The decline is also attributable to several customer bankruptcies and a decline in all segments in optical sales related to weather and in both sunglasses and jewelry retail sales as a result of current 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 $37.0 million for the nine months ended September 29, 2001 as compared to $53.3 million for the nine months ended September 30, 2000. Gross profit as a percentage of net sales decreased to 40.3% for the nine months ended September 29, 2001 from 43.0% for the nine months ended September 30, 2000. The $16.3 million or 30.6% decrease is primarily due to the sales decline and the shift in the sales mix from higher margin segments to lower margin segments. 20 Operating Expenses. Operating expenses were $37.9 million, before the restructuring charge of $0.7 million for the nine months ended September 29, 2001 as compared to operating expenses of $46.7 million, before the restructuring charge of $2.5 million for the nine months ended September 30, 2000, a decrease of $8.8 million or 18.8%. The decrease is primarily attributable to the restructuring of the field service organization and staffing reductions. These decreases reflect management's continued attention to expense control. Operating expenses, after the restructuring charge were $38.7 million for the nine months ended September 29, 2001, as compared to operating expenses, after the restructuring charge of $49.2 million for the nine months ended September 30, 2000. Interest Expense. Interest expense was $7.5 million for the nine months ended September 29, 2001 as compared to $8.4 million for the nine months ended September 30, 2000, a decrease of $0.9 million or 11.4%. The decrease is primarily attributable to interest savings generated by the bond repurchase during fiscal 2000 and a lower average outstanding balance and interest rate on the revolving note payable versus the prior year. Income Tax. Income tax expense was $0.4 million for the nine months ended September 29, 2001 as compared to $78,000 for the nine months ended September 30, 2000, and relates to taxes due on our foreign operations. Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock, before the restructuring charge of $0.7 million, was $9.0 million, for the nine months ended September 29, 2001, as compared to net loss before dividends and accretion on preferred stock, excluding the extraordinary gain of $8.8 million and the restructuring charge of $2.5 million of $1.7 million for the nine months ended September 30, 2000, an increase of $7.3 million. This increase is attributable to a $7.3 million decrease in earnings. Net loss before dividends and accretion on preferred stock, after the restructuring charge, was $9.7 million for the nine months ended September 29, 2001, as compared to net income before dividends and accretion on preferred stock, after the extraordinary gain and the restructuring charge, of $4.6 million for the nine months ended September 30, 2000. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders, before the restructuring charge of $0.7 million, was $11.7 million for the nine months ended September 29, 2001, as compared to a net loss applicable to common shareholders before the extraordinary gain and the restructuring charge, of $4.1 million for the nine months ended September 30, 2000, an increase of $7.6 million. The increase is attributable to the $7.6 million decrease in earnings. Net loss applicable to common shareholders, after the restructuring charge was $12.4 million for the nine months ended September 29, 2001, as compared to net income applicable to common shareholders, after the extraordinary gain and the restructuring charge, of $2.2 million for the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES At September 29, 2001, the Company had cash and cash equivalents of $0.4 million and negative working capital of $7.1 million as compared to $0.6 million of cash and cash equivalents and working capital of $0.6 million, respectively, at December 30, 2000. The decrease in cash and cash equivalents is due to the timing of cash receipts at month end. The decline in working capital was driven by a continued focus on reduction in receivables and inventory offset by the pay down of trade payables, accrued expenses and the revolving note payable. The Company generated $12.8 million of cash in operations during the nine months ended September 29, 2001 compared to a use of $8.4 million during the nine months ended September 30, 2000. The increase in cash generated is principally due to continued collection efforts of accounts receivable and inventory management during the nine months ended September 29, 2001, partially offset by the pay down of trade payables and accrued expenses. The Company used $5.0 million in investing activities during the nine months ended September 29, 2001 compared to a use of $6.8 million during the nine months ended September 30, 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 decrease in the current year is due to the decline in the sales volume. The Company used $8.1 million from financing activities during the nine months ended September 29, 2001 compared to generating $14.9 million during the nine months ended September 30, 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 43,700 shares of Series A Preferred Stock that has a redemption value at September 29, 2001 of $37.8 million. Shares of Series A Preferred Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for certain dilutive events. 21 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 up to $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 2000, the Company has repurchased $23.15 million face value of the Notes for a purchase price of $7.09 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI facility and the agreements of certain preferred shareholders to purchase participations in the term loans. (In September 2001, certain preferred shareholders agreed to subordinate their first mortgage interest to the Company's senior lenders in connection with an amendment to the Senior Credit Facility that increased the Company's borrowing base. See Note 3- Senior Credit Facility.) 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 this transaction, the Company recognized an $8.8 million extraordinary gain, net of $6.3 million in taxes, and wrote off $0.9 million of unamortized issuance costs related to the Notes that were repurchased. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with the commitment to purchase participations in the term loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders of Series B Preferred Stock are entitled to receive, prior and in preference to any distribution with respect to any other capital stock of the Company, an amount per share equal to $6.67 multiplied by the number of six month periods and fractions thereof in the period during which the participation commitment is outstanding. The Company is amortizing the value related to 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 nine month ended September 29, 2001, the Company recorded additional value to the Series B Preferred Stock of $473,000. The Company has substantial indebtedness and significant debt service obligations. As of September 29, 2001, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $78.4 million. The Company had current liabilities of approximately $51.5 million. In addition, the Company has significant annual obligations that include interest on the Notes of approximately $5.6 million, minimum royalty obligations over the next two years of approximately $1.8 million and minimum payments under its operating leases of approximately $0.2 million. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. Effective September 21, 2001, by execution of an amendment to its Senior Credit Facility, the borrowing base for the revolving credit facility was increased through December 31, 2001, by $3.8 million, additional security was pledged to the lenders, and two holders the Company's Series B Preferred Stock agreed to subordinate to the lenders such holders' first mortgage interest in the Company's headquarters building in North Smithfield, Rhode Island. The Company has agreed to pay to each Series B Preferred Stockholder who subordinates its interest in the first mortgage the sum of $25 for each $100 of value subordinated for each six month period that the increase in the borrowing base is outstanding, pro rated for such lesser period. The Company expects that the payment due the holders will be approximately $500,000 which the Company will amortize on a monthly basis to interest expense. The Company has up to $0.2 million available for borrowings under the Senior Credit Facility as of September 29, 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 September 29, 2001, the Company is not in compliance with the financial covenants. As of November 13, 2001, the Company received a written waiver for such noncompliance from the Bank. The Company is currently negotiating its financial covenants going forward so that they reflect performance levels that the Company believes it can attain. 22 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 current level of operations and anticipated cost savings and revenue growth, the Company believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Facility, will be adequate to meet the Company's future liquidity needs for the next twelve months. 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 and inventory purchases decline relative to first half needs. 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. 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 nine months ended September 29, 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 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 10.1.8 Eighth Amendment to the Second Amendment and Restated Financing and Security Agreement dated September 21, 2001. (b) Report on Form 8-K The registrant filed no reports on form 8-K during the quarter ended September 29, 2001. 24 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: November 13, 2001 /s/ Michael F. Cronin ---------------------------------------- Michael F. Cronin Chairman of the Board Dated: November 13, 2001 /s/ John R. Ranelli ---------------------------------------- John R. Ranelli Director, President, and Chief Executive Officer (Principal Executive Officer) Dated: November 13, 2001 /s/ Brian J. Lagarto ---------------------------------------- Brian J. Lagarto Chief Financial Officer (Principal Financial Officer) 25 EX-10.1.8 3 b40558aaex10-1_8.txt AMENDED & RESTORED FINANCING & SECURITY AGREEMENT Exhibit 10.1.8 EIGHTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT AND SECOND AMENDMENT TO NOTE PARTICIPATION AGREEMENTS ----------------------------------------------------- THIS EIGHTH AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT AND SECOND AMENDMENT TO NOTE PARTICIPATION AGREEMENTS (this "Agreement") is made as of the 21st day of September, 2001, by and among AAi.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.), a corporation organized and existing under the laws of the State of Rhode Island, successor in interest to Foster Grant Group, L.P., F.G.G. Investments, Inc., The Bonneau Company, Bonneau Holdings, Inc., Bonneau General, Inc., Foster Grant Holdings, Inc., and O-Ray Holdings, Inc. (the "Borrower"); FANTASMA, LLC, a limited liability company organized under the laws of the State of Delaware ("Fantasma") (Fantasma together with the Borrower, the "Obligors"); WESTON PRESIDIO CAPITAL II, L.P., a limited partnership organized and existing under the laws of the State of Delaware, BANCBOSTON VENTURES, INC., a corporation organized and existing under the laws of the State of Delaware, ST. PAUL VENTURE CAPITAL V, LLC, a limited liability company organized and existing under the laws of the state of Delaware, NATIONAL CITY CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Delaware, MARLIN CAPITAL, L.P., a limited partnership organized and existing under the laws of the State of Delaware (the "SNR Participants"). BANK OF AMERICA, N.A., a national banking association ("Bank of America"), formerly NationsBank, N.A., and each other financial institution which is party to the Financing Agreement (as that term is defined below) from time to time (collectively, the "Lenders" and individually, a "Lender"); and BANK OF AMERICA, N.A., a national banking association (the "Agent"), formerly NationsBank, N.A., in its capacity as both collateral and administrative agent for each of the Lenders. RECITALS A. The Obligors, the Lenders and the Agent entered into a Second Amended and Restated Financing and Security Agreement dated July 21, 1998 (as amended by that certain First Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 7, 1999, Second Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 24, 2000, Third Amendment to Second Amended and Restated Financing and Security Agreement dated as of June 12, 2000 (the "Third Amendment"), Fourth Amendment to Second Amended and Restated Financing and Security Agreement dated as of August 14, 2000 (the "Fourth Amendment"), Fifth Amendment to Second Amended and Restated Financing and Security Agreement and First Amendment to Note Participation Agreements dated as of March 26, 2001, Sixth Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 14, 2001, Seventh Amendment to Second Amended and Restated Financing and Security Agreement dated as of August 13, 2001 and as further amended, restated, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). B. The Borrower, the SNR Lender and each SNR Participant has entered into a Note Participation Agreement, each dated as of August 12, 2000 (as amended by the Fifth Amendment to Second Amended and Restated Financing and Security Agreement and First Amendment to Note Participation Agreements dated as of March 26, 2001 and as further amended, restated, modified, substituted, extended, and renewed from time to time, the "SNR Participation Agreements"). C. Under and subject to the provisions of the Financing Agreement, the SNR Lender (as defined in the Financing Agreement) agreed to make a loan to the Borrower (the "SNR Loan") in a principal amount of $7,097,875. Pursuant to SNR Participation Agreements, the SNR Participants committed to purchase (upon the terms and conditions contained therein) from the SNR Lender an undivided participation interest in the SNR Loan made by the SNR Lender under the Financing Agreement. D. The Obligors have requested that the Agent and Lenders provide an over-advance in the amount of $5,000,000 and amend certain other provisions of the Financing Agreement. E. The Agent and Lenders are willing to agree to the Obligors' request on the condition, among others, that this Agreement be executed. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Obligors, the Agent and the Lenders agree as follows: 1. The Obligors, the Agent and the Lenders agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. Each of the Borrower and Fantasma represents and warrants to the Lenders and Agent as follows: (a) The Borrower is a corporation duly organized, and validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign corporation in good standing in every other state wherein the conduct of its business or the ownership of its property requires such qualification. 2 (b) Fantasma is a limited liability company duly organized, validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign limited partnership in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (c) Each of the Borrower and Fantasma has the power and authority to execute and deliver this Agreement and perform its obligations hereunder and has taken all necessary and appropriate corporate, partnership or limited liability company action, as applicable, to authorize the execution, delivery and performance of this Agreement. (d) The Financing Agreement, as amended by this Agreement, and each of the other Financing Documents remains in full force and effect, and each constitutes the valid and legally binding obligation of the Borrower and Fantasma, enforceable in accordance with its terms. (e) The obligations and undertakings of North American Philips Corporation ("NAPC") pursuant to Section 17.3 of that certain Lease and Option to Purchase made as of April 19, 1993 between NAPC and Borrower's predecessor, Accessories Associates, Inc., remain in full force and effect in accordance with their terms and benefit Borrower. (f) All of the Borrower's and Fantasma's representations and warranties contained in the Financing Agreement and the other Financing Documents are true and correct on and as of the date of the Borrower's and Fantasma's execution of this Agreement. (g) After giving effect to this Agreement, no Event of Default and no event which, with notice, lapse of time or both would constitute an Event of Default, has occurred and is continuing under the Financing Agreement or the other Financing Documents which has not been waived in writing by the Lenders and Agent. 3. Section 1.1 of the Financing Agreement (Certain Defined Terms) is hereby amended by adding the following definitions: "Eighth Amendment" means that certain Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements dated as of September 21, 2001 by and among the Borrower, Fantasma, the Agent, the SNR Participants and the Lenders. "Non-Signing SNR Participant" means any SNR Participant who as of the relevant date of determination has not entered into the Eighth Amendment. "Supplemental Security Agreement" means that certain Supplemental Security Agreement dated September 21, 2001 among the Obligors and the Agent, as amended, restated, supplemented or otherwise modified in writing at any time and from time to time." 3 4. The definition of "Security Documents" contained in Section 1.1 of the Financing Agreement (Certain Defined Terms) is hereby amended by adding the following at the end of such definition: "and the Mortgage and the Supplemental Security Agreement." 5. The table in Section 2.1.1 of the Financing Agreement is hereby amended to read as follows: Revolving Credit Revolving Credit Lender Committed Amount Pro Rata Share ------ ---------------- ---------------- Bank of America $18,461,560.00 46.1539% LaSalle $12,307,680.00 30.7692% PNC $ 9,230,760.00 23.0769% Total Revolving Credit Committed Amount $ 40,000,000 100% 6. (a) Section 2.1.3 of the Financing Agreement is hereby amended by deleting the period at the end of clause (c) of such Section and adding the following: ; PLUS (d) from September 21, 2001 through and including December 31, 2001, $3,500,000 plus the following amounts set forth next to each of the SNR Participants whose names are set forth below upon the execution of the Eighth Amendment by each such SNR Participant set forth below: BancBoston Ventures, Inc. $285,000 St. Paul Venture Capital V, LLC $570,000 National City Capital Corporation $285,000 Marlin Capital, L.P. $360,000. (b) Section 2.6.6 of the Financing Agreement is hereby amended by adding after the words "Borrowing Base" the following: "(calculated without giving effect to any amount under clause (d) of Section 2.1.3)" 7. Section 7.2.5(a) of the Financing Agreement is hereby amended in its entirety as follows: (a) (i) Except to the extent clause (ii) of this Section 7.2.5(a) shall apply with respect to the interest of a Non-Signing SNR Participant (in which 4 case this clause (i) shall not apply with respect to such interest), any proceeds of sale or other disposition of the Collateral will be applied by the Agent to the payment first of any and all Agent's Obligations, then to any and all Enforcement Costs, and thereafter proceeds from the Collateral shall be applied first to the Obligations with respect to the Revolving Credit Facility, second to Obligations other than those with respect to the Senior Note Redemption Subfacility, then to any Obligations with respect to the Senior Note Redemption Subfacility. If the sale or other disposition (by foreclosure, liquidation or otherwise) of the Collateral fails to fully satisfy the Obligations, the Borrower shall remain liable to the Agent and the SNR Lenders for any deficiency. (ii) With respect to any interest of a Non-Signing SNR Participant, such interest shall be determined according to this clause (ii). Any proceeds of sale or other disposition of the Collateral will be applied by the Agent to the payment first of any and all Agent's Obligations, then to any and all Enforcement Costs, and thereafter (i) proceeds from the Collateral (other than the Mortgage) shall be applied first to the Obligations with respect to the Revolving Credit Facility, second to Obligations other than those with respect to the Senior Note Redemption Subfacility, then to any Obligations with respect to the Senior Note Redemption Subfacility, and (ii) proceeds from the Mortgage shall be applied first to the Obligations with respect to the Senior Note Redemption Subfacility to the extent of the interest of each Non-Signing SNR Participant and then to any other Obligations. If the sale or other disposition (by foreclosure, liquidation or otherwise) of the Collateral fails to fully satisfy the Obligations, the Borrower shall remain liable to the Agent and the SNR Lenders for any deficiency. 8. Clauses (ii), (iii), (iv) and (v) of Section 7.2.5(b) of the Financing Agreement are hereby amended in their entirety as follows: "(ii) the Agent and the Lenders may take any action under this Agreement, under the Financing Agreement, under the Financing Documents, under applicable Laws (including, without limitation, those actions for which the consent of all Lenders is required under Section 9.2.2 (Circumstances Where Consent of all Lenders is Required) of the Financing Agreement) or otherwise with respect to the Obligations and/or the Collateral (other than the Mortgage (but solely to the extent of the interest of any Non-Signing SNR Participant) and other than to modify the terms of, or to release the Obligors with respect to, the SNR Loan Obligations as provided under the Third Amendment) without the further agreement or consent of the holder of the SNR Loan or any interest therein (including, without limitation, the SNR Participant), (iii) all Liens (other than the Lien of the Mortgage solely to the extent of the interest of any Non-Signing SNR Participant) securing the SNR Loan Obligations shall be and are hereby agreed to be fully subordinate to the Liens of the Agent and the Lenders in the Collateral (other than the Lien of the Mortgage solely to the extent of the interest of any Non-Signing 5 SNR Participant), and the holders of the SNR Loan or any interest therein (including, without limitation, the SNR Participants) shall have no rights of marshalling or otherwise in connection with the disposition of the Collateral, (iv) no proceeds of sale or other disposition of the Collateral (other than the Lien of the Mortgage solely to the extent of the interest of any Non-Signing SNR Participant) shall be applied to any SNR Loan, and (v) the Agent, in the exercise of its sole and absolute discretion may at any time release, terminate, fail to perfect or otherwise deal with or fail to deal with the Collateral (other than the Lien of the Mortgage solely to the extent of the interest of any Non-Signing SNR Participant) as long as such action is not taken by the Agent in bad faith or by willful misconduct, all as if the SNR Loan did not exist, the holders of the SNR Loan and of any interest therein (including, without limitation, the SNR Participants) waiving any claim to the contrary." 9. The following is hereby added as a new Section 7.1.13: 7.1.13 Availability on December 31, 2001. As of the close of business of the Borrower on December 31, 2001, the Borrowing Base (calculated without giving effect to any amount under clause (d) of Section 2.1.3) shall not exceed the Obligations (calculated without giving effect to any outstanding amount under the SNR Loan) then outstanding by $2,000,000 or more, with all accounts payable as of such date being current or within normal trade terms. 10. The SNR Participants (other than a Non-Signing SNR Participant), the SNR Lender and the Borrower agree as follows: (A) the definition of "SNR Purchase Event" contained in Article I of the SNR Participation Agreements (as such term is defined in the Financing Agreement) is hereby amended by adding the following at the end of clause (vii) of paragraph (a) of such definition: "; or (viii) arising under Section 7.1.13 of the Financing Agreement; or (ix) with respect to the due and punctual payment in full (and not merely the collectibility) of any Obligations, whether now existing or hereafter created or arising, direct or indirect, matured or unmatured, and whether absolute or contingent, joint, several or joint and several and howsoever owned, held or acquired." (B) the phrases "(other than the Mortgage)" and "(other than the Lien of the Mortgage)" are hereby deleted from Sections 4.6 and 4.7 of the SNR Participation Agreements in each place in which they appear, 6 (C) the phrase "(other than the Mortgage and other than to modify the terms of, or to release the Obligors with respect to, the SNR Loan Obligations)" contained in Section 4.7 of the SNR Participation Agreements is hereby amended to read in its entirety as follows: "(other than to modify the terms of or to release the Obligors with respect to the SNR Loan Obligations)", and (D) to the amendment of Section 7.2.5 of the Financing Agreement contained in the Eighth Amendment. 11. The Obligors hereby issue, ratify and confirm the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Obligors agree that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. 12. The Obligors acknowledge and warrant that the Agent and the Lenders have acted in good faith and have conducted in a commercially reasonable manner their relationships with the Obligors in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Obligors hereby waiving and releasing any claims to the contrary. 13. The Obligors shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Agent, the Lenders and their respective counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of counsel and all recording fees, taxes and charges. 14. As a condition of the Agent's and the Lenders' agreement to enter into this Agreement, the Obligors hereby agree (i) to pay to the Agent for the pro rata benefit of the Lenders an amendment fee equal to $200,000, which fee is (x) fully earned at the time this Agreement is executed, (y) payable in cash, in four equal installments of $50,000 due at the time this Agreement is executed, October 1, November 1 and December 1, 2001, respectively and (z) non-refundable upon payment, (ii) to execute and deliver the Supplemental Security Agreement among the Obligor and the Agent in form and substance satisfactory to the Agent, (iii) to deliver a recorded copy of the Mortgage together with a title insurance policy in form and substance satisfactory to the Agent and issued by a title insurance company satisfactory to the Agent on the Property (as defined in the Mortgage), and (iv) to deliver an opinion of counsel in form and substance acceptable to the Agent. 15. Each SNR Participant (a) hereby issues, ratifies and confirms the representations, warranties and covenants contained in their respective SNR Participation Agreements, as amended hereby, and agrees that the respective SNR Participation Agreements continue in full force and effect in accordance with their terms; (b) hereby acknowledges, ratifies, confirms and agrees to the terms and provisions of the Financing Agreement, as previously amended, restated and modified and as amended hereby; and 7 (c) with the exception of National City Capital Corporation, hereby (i) covenants and agrees to maintain at all times until 90 days after the SNR Termination Date, either cash, the unconditional and available right to call for committed capital from its shareholders, limited partners or members, as the case may be, in an amount not less than its respective Maximum Investment (the "Committed Amount") (as such term is defined such SNR Participant's Participation Agreement) and at the request of the Agent, from time to time, to provide evidence of such, satisfactory to the Agent; and (ii) hereby agrees that the failure of any SNR Participant to maintain a Committed Amount not less than its Maximum Investment shall be a SNR Purchase Event. 16. In the event that the Borrower determines that as of the close of business on December 31, 2001 no Event of Default exists, it shall so notify in writing (such notification is herein called a "No Default Notice" which No Default Notice shall be given by overnight delivery service) the Agent, the Lenders and the SNR Participants no later than January 8, 2002. If the Borrower sends a No Default Notice, unless the Agent or any Lender shall have sent a notice (a "Response Notice") to the Borrower (such Response Notice to be given by overnight delivery service) not later than January 16, 2002 (which Response Notice the Borrower agrees to send to the SNR Participants) stating that an Event of Default existed as of December 31, 2001, then on January 17, 2002, the amendments to the Financing Agreement and the SNR Participation Agreements contained in Sections 7, 8, 9 and 10 of the Eighth Amendment shall revert to the language for such Sections that was in effect immediately prior to the entering into of the Eighth Amendment. In the event that the Borrower does not send a No Default Notice or the Agent or any Lender shall send a Response Notice, then the amendments to the Financing Agreement and the SNR Participation Agreements contained in Sections 7, 8, 9 and 10 of the Eighth Amendment shall continue to be effective. 17. This Agreement is one of the Financing Documents. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and taken together shall constitute but one and the same instrument. The parties agree that their respective signatures may be delivered by fax. Any party who chooses to deliver its signature by fax agrees to provide a counterpart of this Agreement with its inked signature promptly to each other party. Each SNR Participant executing this Agreement agrees that this Agreement shall be binding on such SNR Participant and the SNR Participation Agreement entered into by such SNR Participant without regard as to whether any other SNR Participant has executed this Agreement. Each SNR Participant executing this Agreement after the date hereof agrees that its execution shall be deemed to be effective as of the date hereof. IN WITNESS WHEREOF, the Obligors, the Agent, the Lenders and the SNR Participants have executed this Agreement under seal as of the date and year first written above. 8 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" AAi.FOSTERGRANT, INC. (formerly known as Accessories, Associates, Inc.) By: /s/ Brian J. Lagarto -------------------------------------- Name: Brian J. Lagarto Title: Chief Financial Officer FANTASMA, LLC By: /s/ Brian J. Lagarto -------------------------------------- Name: Brian J. Lagarto Title: Chief Financial Officer 9 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" BANK OF AMERICA, N.A., Agent By: /s/ William J. Wilson -------------------------------------- William J. Wilson Vice President BANK OF AMERICA, N.A. in its capacity as a Lender By: /s/ William J. Wilson -------------------------------------- William J. Wilson Vice President 10 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" LASALLE BUSINESS CREDIT, INC. By: /s/ Thomas A. Buckelew -------------------------------------- Thomas A. Buckelew Vice President 11 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" PNC BANK, NATIONAL ASSOCIATION By: /s/ Peter J. Redington (SEAL) -------------------------------------- Peter J. Redington Vice President 12 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" WESTON PRESIDIO CAPITAL II, L.P. By: /s/ Michael F. Cronin -------------------------------------- Name: Michael F. Cronin Title: Managing Partner 13 Signature Page Eighth Amendment to Second Amended and Restated Financing and Security Agreement and Second Amendment to Note Participation Agreements among AAi.FOSTERGRANT, INC. and certain of its affiliates, the SNR Participants, BANK OF AMERICA, N.A.(in its capacity as "Agent"), and BANK OF AMERICA, N.A. and the other financial institutions which are parties to the Financing Agreement as "Lenders" NATIONAL CITY CAPITAL CORPORATION By: /s/ Todd S. McCuaig -------------------------------------- Name: Todd S. McCuaig Title: Managing Director 14 -----END PRIVACY-ENHANCED MESSAGE-----