-----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, D/XcKqbO1hDTdF227LUT44m5/mAQqgg0tVnXpEH4dRGJtq+HB0uqPr3pISttUpey DJuzXR3OmALqCx613EiGZg== 0000950135-99-004136.txt : 19990818 0000950135-99-004136.hdr.sgml : 19990818 ACCESSION NUMBER: 0000950135-99-004136 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAI FOSTERGRANT INC CENTRAL INDEX KEY: 0001067346 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-61119 FILM NUMBER: 99694748 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 AAI.FOSTERGRANT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended July 3, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______ to _______ Commission File Number 333-61119 AAI.FOSTERGRANT, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0419304 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 GEORGE WASHINGTON HIGHWAY SMITHFIELD, RI 02917 --------------------------------------------------- (Address of principal executive offices) (Zip code) (401)231-3800 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: [ ] As of August 17, 1999, there were 608,000 shares of the Registrant's Common Stock, $.01 par value, outstanding. 2 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES QUARTERLY REPORT TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION PAGE ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of January 2, 1999 and July 3, 1999 3 Consolidated Condensed Statements of Operations for the three and six months ended July 4, 1998 and July 3, 1999 4 Consolidated Condensed Statements of Cash Flows for the six months ended July 4, 1998 and July 3, 1999 5 Notes to Consolidated Condensed Financial Statements 7 CONDENSED FINANCIAL STATEMENTS FOR FANTASMA, LLC A MOSTLY-OWNED SUBSIDIARY OF AAI.FOSTERGRANT, INC Condensed Balance Sheets as of January 2, 1999 and July 3, 1999 21 Condensed Statements of Operations for the three and six months Ended July 4, 1998 and July 3, 1999 22 Condensed Statement of Cash Flows for the six months ended July 4, 1998 and July 3, 1999 23 Notes to Condensed Financial Statements 24 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 37 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 38 ITEM 2. Changes in Securities and Use of Proceeds 38 ITEM 3. Defaults Upon Senior Securities 38 ITEM 4. Submission of Matters to a Vote of Security Holders 38 ITEM 5. Other Information 38 ITEM 6. Exhibits and reports on Form 8-K 38 SIGNATURES 39 2 3 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share and per share data)
ASSETS JANUARY 2, JULY 3, 1999 1999 --------- -------- CURRENT ASSETS: Cash and cash equivalents $ 2,207 $ 1,557 Accounts receivable less reserves of approximately $9,975 and $8,108 29,317 42,342 Inventories 37,162 35,111 Prepaid expenses and other current assets 1,918 1,700 Deferred tax assets 3,743 3,743 -------- -------- Total current assets 74,347 84,453 -------- -------- Property, plant and equipment, net 17,543 17,918 Intangible assets 20,874 20,226 Other assets 8,415 7,999 Deferred tax assets 5,319 5,319 -------- -------- Total assets $126,498 $135,915 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable $ 2,576 $ 17,303 Redeemable preferred stock of a subsidiary -- 951 Current maturities of long-term obligations 626 614 Deferred compensation, current portion 30 10 Accounts payable 14,899 17,870 Accrued expenses 22,740 17,109 Accrued income taxes 2,130 2,110 -------- -------- Total current liabilities 43,001 55,967 -------- -------- 10 3/4% series B senior notes due 2006 75,000 75,000 Long-term obligations, less current maturities 780 466 Deferred compensation, less current portion 1,448 1,599 Redeemable preferred stock of a subsidiary 909 -- Preferred stock, $.01 par value -- Authorized -- 200,000 shares Designated, issued and outstanding -- 43,700 shares of Series A Redeemable Convertible Preferred Stock, stated at redemption value 28,862 30,317 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 (289) (247) Accumulated deficit (23,489) (27,463) -------- -------- Total shareholders' deficit (23,502) (27,434) -------- -------- Total liabilities and shareholders' deficit $126,498 $135,915 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- -------------------- JULY 4, JULY 3, JULY 4, JULY 3, 1998 1999 1998 1999 -------- -------- -------- -------- NET SALES $ 45,928 $ 45,616 $ 88,631 $ 87,097 COST OF GOODS SOLD 24,112 26,757 47,543 50,745 -------- -------- -------- -------- Gross profit 21,816 18,859 41,088 36,352 OPERATING EXPENSES: Selling 11,990 13,267 23,483 24,796 General and administrative 7,169 4,571 13,125 9,038 Restructuring charge 2,600 -- 2,600 -- -------- -------- -------- -------- Income from operations 57 1,021 1,880 2,518 Interest expense (1,460) (2,679) (2,638) (5,021) Other expense, net (86) (152) (10) (17) -------- -------- -------- -------- Loss before income tax benefit and dividends and accretion on preferred stock (1,489) (1,810) (768) (2,520) Income tax benefit 655 -- 338 -- -------- -------- -------- -------- Net loss before dividends and accretion on preferred stock (834) (1,810) (430) (2,520) Dividends and accretion on preferred stock 674 737 1,357 1,455 -------- -------- -------- -------- Net loss applicable to common shareholders $ (1,508) $ (2,547) $ (1,787) $ (3,975) ======== ======== ======== ======== Basic and diluted net loss per share applicable to common shareholders $ (2.48) $ (4.19) $ (2.94) $ (6.54) ======== ======== ======== ======== Basic and diluted weighted average shares of common stock outstanding 608,000 608,000 608,000 608,000 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED --------------------- JULY 4, JULY 3, 1998 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (430) $ (2,520) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 5,479 5,878 Amortization of interest costs related to debt -- 360 Equity in losses (earnings) of investments in affiliates 46 (84) Minority interest in income of consolidated subsidiary 68 42 Cumulative foreign currency translation adjustment (163) 42 Deferred interest on subordinated promissory notes payable 106 -- Deferred taxes (338) -- Changes in assets and liabilities, net of acquisitions - Accounts receivable (17,593) (13,025) Inventories 7,175 2,051 Prepaid expenses and other current assets 236 218 Deferred costs -- (106) Accounts payable 2,499 2,563 Accrued expenses (1,097) (5,311) Accrued income taxes (87) (21) -------- -------- Net cash used in operating activities (4,099) (9,913) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash received (9,464) -- Purchases of property, plant and equipment (10,863) (4,892) Advances to officers/shareholders (2,417) -- Decrease in investment in affiliates 29 -- Increase in other assets (281) (237) -------- -------- Net cash used in investing activities (22,996) (5,129) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable 14,908 14,728 Proceeds from term note payable 13,222 -- Payments on long term obligations and deferred compensation (1,441) (336) -------- -------- Net cash provided by financing activities 26,689 14,392 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (406) (650) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 2,207 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,373 $ 1,557 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands)
SIX MONTHS ENDED ------------------- JULY 4, JULY 3, 1998 1999 -------- ------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Conversion of leasehold improvements to building improvements $ 1,393 $ -- ======== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 2,411 4,532 ======== ====== Income Taxes $ 112 $ 6 ======== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS: During the three and six months ended July 4, 1998, the Company Acquired Fantasma, LLC and Foster Grant UK, as described in Note 2 This acquisition is summarized as follows- Fair value of assets acquired, excluding cash $ 15,672 $ -- ======== ====== Payments in connection with the acquisitions, net of cash acquired (9,464) -- -------- ------ Liabilities assumed and notes issued $ 6,208 $ -- ======== ======
The accompanying notes are an integral part of these consolidated condensed financial statements. 6 7 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 January 2, 1999 as reported in the Company's 10-K filed with the SEC on April 2, 1999. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of January 2, 1999 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the period ended July 3, 1999 may not be indicative of the results that may be expected for the year ending January 1, 2000, or for any other future period. (b) Revenue Recognition The Company recognizes revenue from product sales, net of estimated agreed upon future allowances and anticipated returns and discounts, taken 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 January 2, 1999 and July 3, 1999 (in thousands):
January 2, July 3, 1999 1999 --------- ------- Finished goods ..................................... $31,037 $31,149 Work-in-process and raw materials .................. 6,125 3,962 ------- ------- $37,162 $35,111 ======= =======
7 8 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (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 $123,000 and $500,000, and $225,000 and $372,000 for the three and six months ended July 4, 1998 and July 3, 1999, respectively. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer from which the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. During the three and six months ended July 3, 1999, the Company capitalized approximately $45,000 and $106,000 of these costs, respectively in the accompanying consolidated balance sheet. Amortization expense for the three months and six months ended July 3, 1999 related to these costs as well as previously capitalized costs was approximately $300,000 and $596,000, respectively. No such cost were capitalized or amortized during the first six months ended July 4, 1998. Note 2 - Acquisitions In June 1998, the Company acquired an 80% interest in Fantasma, LLC (Fantasma) for approximately $4.1 million in cash. The remaining 20% interest in Fantasma is held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company has the obligation to repurchase this interest for nominal consideration (based on the Company's calculations). This previous member has filed a lawsuit asserting that his termination was wrongful and the Company has asserted counterclaims related to the Fantasma acquisition. The Company does not believe this litigation is material to it's results of operations or financial condition. Another employee of Fantasma has options to acquire up to a 2% interest in Fantasma and up to an additional 2% interest if certain earnings targets for Fantasma are met in 1999 and 2000. As of July 3, 1999, the exercise price of the options to purchase member interests of Fantasma was equal to or greater than the fair market value; therefore no expense was recorded. Fantasma is a marketer and distributor of watches and clocks. 8 9 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) The acquisition was accounted for using the purchase method; accordingly, the results of operations of Fantasma from the date of acquisition are included in the Company's consolidated statements of operations. The purchase price was allocated based on estimated fair market value of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $4.6 million, which is being amortized ratably over 10 years. In March 1998, the Company acquired certain assets and liabilities of Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant trademark in territories not previously owned, for approximately $5.5 million in cash. Foster Grant UK is a marketer and distributor of sunglasses and reading glasses in Europe. The purchase price may be increased by approximately $700,000 based on Foster Grant UK performance in 1998 and 1999. Based on activity to date, there has been no increase in the purchase price. The acquisition has been accounted for using the purchase method of accounting; accordingly, the results of operation of Foster Grant UK from the date of acquisition are included in the Company's consolidated statements of operations. The purchase price was allocated based on estimated fair values of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $1.1 million, which is being amortized on a straight-line basis over 20 years. The following unaudited proforma summary information presents the combined results of operations of the Company, Fantasma and Foster Grant UK as if the acquisitions had occurred at the beginning of 1998. This unaudited proforma financial information is presented for informational purposes only and may not be indicative of the results of operations as they would have been if the Company, Fantasma and Foster Grant UK had been a single entity nor is it necessarily indicative of the results of operations that may occur in the future. Anticipated efficiencies from the consolidation of the Company, Fantasma and Foster Grant UK have been excluded from the amounts in the unaudited pro forma summary presented below.
Six Months Ended July 4, 1998 ---------------- Net sales ....................................................... $94,853 Net loss applicable to common shareholders ...................... (2,140) Basic and diluted net loss per share applicable to common shareholders ...................................... (3.52)
9 10 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) Note 3 - Long-Term Obligations On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of approximately $71.3 million received by the Company from the issuance and sale of the Notes were used to repay outstanding indebtedness under the credit facility with a bank and the Subordinated Promissory Notes to shareholders, net of amounts due the Company from certain of these shareholders. The Company incurred issuance costs of approximately $3.7 million in relation to the Notes. These costs are being amortized over the life of the Notes and are included in other assets in the accompanying consolidated balance sheets. In December 1998 the Notes were exchanged for 10 3/4 % Series B Notes due 2006 registered with the SEC. Interest on the Notes is payable semiannually on January 15 and July 15. 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. The bank credit facility is secured by accounts receivable and inventory of the Company and its domestic subsidiaries. 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 senior and joint and several basis, by each of the Company's current and future Domestic Subsidiaries (as defined) (the Guarantors). The Indenture under which the Notes were issued (the Indenture) imposes certain limitations on the ability of the Company, and its subsidiaries to, among other things, incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with shareholders and affiliates, sell assets and engage in mergers and consolidations. At July 3, 1999, 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. 10 11 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) Note 4 - Earnings Per Share In accordance with SFAS No. 128, Earnings Per Share was determined by dividing net loss by the weighted average common shares outstanding during the period. Diluted earnings per share was determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method. Diluted weighted average shares outstanding excludes all 12,000 common equivalent shares at July 4, 1998 and July 3, 1999 as their effect would be anti-dilutive. Note 5 - Comprehensive Loss Comprehensive loss for the three and six months ended July 3, 1999 was $1.6 million and $2.5 million, respectively, as compared to comprehensive loss for the three and six months ended July 4, 1998 of $974,000 and $593,000, respectively. Differences between comprehensive loss and loss before dividends and accretion on preferred stock for each period represents the foreign currency translation adjustment for each period. Note 6 - Restructuring Charge In April 1998, the Company adopted a formal plan to close its Texas distribution center. The Company recorded a restructuring charge of $2.6 million during the year ended January 2, 1999 in connection with this plant closing. The charge included $1.5 million for the write down of assets to be disposed (which were all disposed of during fiscal 1998) and a severance accrual of approximately $1.1 million, which represents severance payments due to 40 office and distribution employees. Through July 3, 1999, all of these 40 employees were terminated and severance benefits of approximately $854,000 were paid. The remaining severance accrual will be paid by the end of fiscal 2000. Note 7 - Segment Reporting In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has determined it has three reportable segments: mass merchandisers, chain drug stores/combo stores/supermarkets, and variety stores. The Company distributes accessories such as, costume jewelry, optical products, watches, clocks and other accessories. 11 12 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 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 THREE MONTHS DRUG STORES/ ENDED MASS COMBO STORES/ JULY 4, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------ ------------- ------------ ------- ----- ----- Net sales $24,026 $11,283 $ 4,715 $5,904 $45,928 ======= ======= ======= ====== ======= Segment (loss) profit $(1,697) $ 1,116 $ (774) $ (48) $(1,403) ======= ======= ======= ====== ======= CHAIN THREE MONTHS DRUG STORES/ ENDED MASS COMBO STORES/ JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------ ------------- ------------ ------- ----- ----- Net sales $24,527 $11,849 $ 5,312 $3,928 $45,616 ======= ======= ======= ====== ======= Segment (loss) profit $(1,235) $ 1,143 $ (1,159) $ (407) $(1,658) ======= ======= ======= ====== ======= CHAIN SIX MONTHS DRUG STORES/ ENDED MASS COMBO STORES/ JULY 4, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------ ------------- ------------ ------- ----- ----- Net sales $46,392 $21,350 $ 9,425 $11,464 $88,631 ======= ======= ======= ======= ======= Segment (loss) profit $(1,193) $ 2,644 $(2,062) $ (147) $ (758) ======= ======= ======= ======= =======
12 13 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CHAIN SIX MONTHS DRUG STORES/ ENDED MASS COMBO STORES/ JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - ------------ ------------- ------------ ------- ----- ----- Net sales $50,782 $19,722 $10,725 $ 5,868 $87,097 ======= ======= ======= ======= ======= Segment (loss) profit $ (177) $ 874 $(1,941) $(1,259) $(2,503) ======= ======= ======= ======= =======
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 income (loss) before income tax (expense) benefit and dividends and accretion on preferred stock by the amount of equity in losses of investments in affiliates, minority interest in income of consolidated subsidiary and other income, which are not allocated by segment. The chief operating decision-maker does not review segment assets. Total assets specifically identifiable with each reportable segment are as follows:
JANUARY 2, JULY 3, 1999 1999 --------- -------- Mass merchandisers $ 25,248 $ 34,238 Chain drug stores/combo stores/supermarkets 6,368 11,256 Variety 1,246 5,541 Other 5,068 5,009 Unassigned assets 88,568 79,871 -------- -------- $126,498 $135,915 ======== ========
13 14 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) Note 8 - Supplemental Consolidating Financial Information The following is summarized consolidating financial information for the Company, segregating the Company, wholly owned guarantor subsidiaries, mostly owned guarantor subsidiaries and non-guarantor subsidiaries as they relate to the Notes. The guarantor subsidiaries, both mostly and wholly owned, are domestic subsidiaries of the Company and they guarantee the Notes on a full, unconditional and joint and several basis. Separate financial statements of the wholly owned guarantor subsidiaries have not been included because management believes that they are not material to investors. Separate financial statements of the mostly owned guarantor subsidiary, Fantasma LLC, in which the Company holds an 80% interest, are included after this supplemental consolidating financial information. The Company and guarantor subsidiaries account for investments in subsidiaries on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the Company's and subsidiary's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Effective January 1, 1999, the assets of the Company's wholly owned guarantor subsidiaries were transferred to the Company. Accordingly, all operations previously performed by these wholly owned guarantor subsidiaries are now performed by the Company. 14 15 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
JULY 3, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS ASSETS Current assets Cash and cash equivalents $ 32 $ -- $ 17 $ 1,508 $ -- $ 1,557 Accounts receivable, net 34,472 -- 1,817 6,053 -- 42,342 Inventories 28,294 -- 3,338 3,479 -- 35,111 Prepaid expenses and other current assets 1,075 -- 262 362 -- 1,699 Deferred tax assets 3,744 -- -- -- -- 3,744 -------- ---- ------ ------- -------- -------- Total current assets 67,617 -- 5,434 11,402 -- 84,453 Property, plant and equipment, net 16,527 -- 19 1,372 -- 17,918 Other assets 49,655 -- 4,138 975 (21,224) 33,544 -------- ---- ------ ------- -------- -------- Total assets $133,799 $ -- $9,591 $13,749 $(21,224) $135,915 ======== ==== ====== ======= ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities Borrowings under revolving note payable $ 17,021 $ -- $ -- $ 282 $ -- $ 17,303 Redeemable preferred stock of a subsidiary 951 -- -- -- -- 951 Current maturities of long-term obligations and deferred compensation 624 -- -- -- -- 624 Accounts payable 15,497 -- 264 2,109 -- 17,870 Accrued expenses 17,877 -- 257 1,085 -- 19,219 Due to affiliate -- -- 7,108 3,454 (10,562) -- -------- ---- ------ ------- -------- -------- Total current liabilities 51,970 -- 7,629 6,930 (10,562) 55,967 10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000 Long-term obligations and deferred compensation, less current maturities 2,065 -- -- -- -- 2,065 Preferred Stock 30,317 -- -- -- -- 30,317 Shareholders' (deficit) equity (25,553) -- 1,962 6,819 (10,662) (27,434) -------- ---- ------ ------- -------- -------- Total liabilities and shareholders' (deficit) equity $133,799 $ -- $9,591 $13,749 $(21,224) $135,915 ======== ==== ====== ======= ======== ========
15 16 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
JANUARY 2, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS ASSETS Current assets Cash and cash equivalents $ 68 $ 66 $ 104 $ 1,969 $ -- $ 2,207 Accounts receivable, net 20,699 2 5,088 3,528 -- 29,317 Inventories 28,643 -- 3,878 4,641 -- 37,162 Prepaid expenses and other current assets 1,403 132 203 180 -- 1,918 Deferred tax assets 3,743 -- -- -- -- 3,743 -------- ------- ------- ------- -------- -------- Total current assets 54,556 200 9,273 10,318 -- 74,347 Property, plant and equipment, net 16,206 -- 24 1,313 -- 17,543 Other assets 41,512 7,652 4,357 402 (19,315) 34,608 -------- ------- ------- ------- -------- -------- Total assets $112,274 $ 7,852 $13,654 $12,033 $(19,315) $126,498 ======== ======= ======= ======= ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities Borrowings under revolving note payable $ 2,576 $ -- $ -- $ -- $ -- $ 2,576 Current maturities of long-term obligations and deferred compensation 656 -- -- -- -- 656 Accounts payable 10,961 998 406 2,534 -- 14,899 Accrued expenses 16,726 5,622 1,554 968 -- 24,870 Due to affiliate -- 3,757 7,088 2,380 (13,225) -- -------- ------- ------- ------- -------- -------- Total current liabilities 30,919 10,377 9,048 5,882 (13,225) 43,001 10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000 Long-term obligations and deferred compensation, less current maturities 2,228 -- -- -- -- 2,228 Redeemable preferred stock of a subsidiary 909 -- -- -- -- 909 Preferred Stock 27,936 926 -- -- -- 28,862 Shareholders' (deficit) equity (24,718) (3,451) 4,606 6,151 (6,090) (23,502) -------- ------- ------- ------- -------- -------- Total liabilities and shareholders' (deficit) equity $112,274 $ 7,852 $13,654 $12,033 $(19,315) $126,498 ======== ======= ======= ======= ======== ========
16 17 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ------------------------------------------------------------------------------- JULY 3, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $71,687 $ -- $ 2,844 $12,566 $ -- $87,097 Cost of goods sold 41,906 -- 3,010 5,829 -- 50,745 ------- ---- ------- ------- ------- ------- Gross profit (loss) 29,781 -- (166) 6,737 -- 36,352 Operating expenses 26,056 -- 2,302 5,476 -- 33,834 ------- ---- ------- ------- ------- ------- Income (loss) income from operations 3,725 -- (2,468) 1,261 -- 2,518 Interest expense (4,731) -- (153) (137) -- (5,021) Other income (expense), net 421 -- (24) (498) -- (101) Equity in earnings of consolidated subsidiaries 2,072 -- -- -- (1,988) 84 ------- ---- ------- ------- ------- ------- Income (loss) before income tax expense and dividends and accretion on preferred stock 1,487 -- (2,645) 626 (1,988) (2,520) Income tax expense -- -- -- -- -- -- ------- ---- ------- ------- ------- ------- Net income (loss) before dividends and accretion on preferred stock 1,487 -- (2,645) 626 (1,988) (2,520) Dividends and accretion on preferred stock 1,455 -- -- -- 1,455 ------- ---- ------- ------- ------- ------- Net income (loss) applicable to common shareholders $ 32 $ -- $(2,645) $ 626 $(1,988) $(3,975) ======= ==== ======= ======= ======= =======
17 18 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ------------------------------------------------------------------------------- JULY 4, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $35,690 $42,697 $ 501 $9,743 $ -- $88,631 Cost of goods sold 20,347 22,496 301 4,399 -- 47,543 ------- ------- ----- ------ ------- ------- Gross profit 15,343 20,201 200 5,344 -- 41,088 Operating expenses 23,984 11,422 300 3,502 -- 39,208 ------- ------- ----- ------ ------- ------- (Loss) income from operations (8,641) 8,779 (100) 1,842 -- 1,880 Interest expense (1,986) (613) (8) (31) -- (2,638) Other income (expense), net 7 12 -- (29) -- (10) Equity in earnings of consolidated subsidiaries 5,604 -- -- -- (5,604) -- ------- ------- ----- ------ ------- ------- (Loss) income before income tax benefit (expense) and dividends and accretion on preferred stock (5,016) 8,178 (108) 1,782 (5,604) (768) Income tax benefit (expense) 4,663 (3,725) -- (600) -- 338 ------- ------- ----- ------ ------- ------- Net (loss) income before dividends and accretion on preferred stock (353) 4,453 (108) 1,182 (5,604) (430) Dividends and accretion on preferred stock 1,357 -- -- -- -- 1,357 ------- ------- ----- ------ ------- ------- Net (loss) income applicable to common shareholders $(1,710) $ 4,453 $(108) $1,182 $(5,604) $(1,787) ======= ======= ===== ====== ======= =======
18 19 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ------------------------------------------------------------------------------- JULY 3, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Cash flows from operating activities $(9,701) $ -- $(75) $ (137) $ -- $(9,913) Cash flows from Investing activities: -- Purchase of property, plant and equipment (3,863) -- -- (1,029) -- (4,892) Advance to affiliates (328) -- -- -- 328 -- Other investing activities (460) -- (12) 235 -- (237) ------- ---- ---- ------- ----- ------- Net cash used in investing activities (4,651) -- (12) (794) 328 (5,129) ------- ---- ---- ------- ----- ------- Cash flows from financing activities: Net borrowings under revolving note payable 14,446 -- -- 282 -- 14,728 Payments on long-term obligations and deferred compensation (196) -- -- (140) -- (336) Due to (from) affiliates -- -- -- 328 (328) -- ------- ---- ---- ------- ----- ------- Net cash provided by financing activities 14,250 -- -- 470 (328) 14,392 ------- ---- ---- ------- ----- ------- Net (decrease) increase in cash (102) -- (87) (461) -- (650) Cash and cash equivalents, beginning of period 134 -- 104 1,969 -- 2,207 ------- ---- ---- ------- ----- ------- Cash and cash equivalents, end of period $ 32 $ -- $ 17 $ 1,508 $ -- $ 1,557 ======= ==== ==== ======= ===== =======
19 20 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ------------------------------------------------------------------------------- JULY 4, 1999 ------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Cash flows from operating activities $(10,817) $ 7,250 $(66) $ (466) $ -- $ (4,099) Cash flows from Investing activities: Purchase of property, plant and equipment (6,485) (3,872) -- (506) -- (10,863) Acquisitions, net of cash received (9,464) -- -- -- -- (9,464) Advance to affiliates (3,724) -- -- -- 3,724 -- Other investing activities (5,694) 3,023 -- 2 -- (2,669) -------- ------- ---- ------ ------- -------- Net cash (used in) provided by investing activities (25,367) (849) -- (504) 3,724 (22,996) -------- ------- ---- ------ ------- -------- Cash flows from financing activities: Net borrowings under revolving note payable 23,857 (8,949) -- -- -- 14,908 Proceeds from term note payable 13,222 -- -- -- -- 13,222 Payments on long-term obligations and deferred compensation (1,441) -- -- -- -- (1,441) Due (from) to affiliates (1,602) 2,471 486 2,369 (3,724) -- -------- ------- ---- ------ ------- -------- Net cash provided by (used in) financing activities 34,036 (6,478) 486 2,369 (3,724) 26,689 -------- ------- ---- ------ ------- -------- Net (decrease) increase in cash (2,148) (77) 420 1,399 -- (406) Cash and cash equivalents, beginning of period 2,354 183 -- 242 -- 2,779 -------- ------- ---- ------ ------- -------- Cash and cash equivalents, end of period $ 206 $ 106 $420 $1,641 $ -- $ 2,373 ======== ======= ==== ====== ======= ========
20 21 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES Fantasma, LLC (A Mostly Owned Subsidiary of AAi.FosterGrant, Inc.) Condensed Balance Sheets (In thousands)
ASSETS JANUARY 2, JULY 3, 1999 1999 -------- ------ CURRENT ASSETS: Cash and cash equivalents $ 104 $ 17 Accounts receivable less reserves of approximately $373 and $206 5,088 1,817 Inventories 3,878 3,338 Prepaid expenses and other current assets 203 262 ------- ------ Total current assets 9,273 5,434 ------- ------ Property and equipment, net 24 19 Other assets, net 4,357 4,138 ------- ------ Total assets $13,654 $9,591 ======= ====== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Note payable to member $ 7,088 $7,108 Accounts payable and accrued liabilities 1,960 521 ------- ------ Total current liabilities 9,048 7,629 Members' Equity 4,606 1,962 ------- ------ Total liabilities and members' equity $13,654 $9,591 ======= ======
The accompanying notes are an integral part of these condensed financial statements 21 22 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES Fantasma, LLC (A Mostly Owned Subsidiary of AAi.FosterGrant, Inc.) Condensed Statements of Operations (In thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------ JULY 4, JULY 3, JULY 4, JULY 3, 1998 1999 1998 1999 ------ ------- ------ ------- Net sales $1,810 $ 1,167 $4,841 $ 2,844 Cost of goods sold 1,682 1,478 3,354 3,010 ------ ------- ------ ------- Gross profit (loss) 128 (311) 1,487 (166) Operating Expenses: Selling 59 502 707 862 General and administrative 366 754 957 1,440 ------ ------- ------ ------- Loss from operations (297) (1,567) (177) (2,468) Interest expense (65) (69) (168) (153) Other expense, net -- (54) -- (24) ------ ------- ------ ------- Net loss $ (362) $(1,690) $ (345) $(2,645) ====== ======= ====== =======
The accompanying notes are an integral part of these condensed financial statements. 22 23 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES Fantasma, LLC (A Mostly Owned Subsidiary of AAi.FosterGrant, Inc.) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED ------------------- JULY 4, JULY 3, 1998 1999 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (345) $(2,645) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization 21 236 Write off of property and equipment 49 -- Changes in assets and liabilities - Accounts receivable 3,482 3,271 Inventories (469) 540 Prepaid expenses and other current assets (98) (59) Advance payable to member (1,661) 21 Accounts payable and accrued expenses (215) (1,439) ------- ------- Net cash provided by (used in) operating activities 764 (75) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in other assets 3 (12) Purchases of property and equipment (2) -- ------- ------- Net cash provided by (used in) investing activities 1 (12) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under note payable to member 3,712 -- Repayments under note payable to member (3,764) -- Member contributions (distributions) (531) -- ------- ------- Net cash used in financing activities (583) -- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 182 (87) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 238 104 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 420 $ 17 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ -- $ -- ======= ======= Income taxes $ -- $ -- ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES Pushdown of purchase price related to Aai.FosterGrant's investment In Fantasma, LLC $ 4,627 $ -- ======= =======
The accompanying notes are an integral part of these condensed financial statements. 23 24 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES FANTASMA, LLC NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1 - Significant Accounting Policies (a) Interim Consolidated Condensed Financial Statements The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes of AAi.FosterGrant, Inc. ("AAi" or the "Company") and Fantasma LLC for the year ended January 2, 1999 as reported in the Company's Form 10-K filed with the SEC on April 2, 1999. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of January 2, 1999 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the period ended July 3, 1999 may not be indicative of the results that may be expected for the year ending January 1, 2000 or for any other future period. (b) Organization and Business Activity Fantasma LLC (Fantasma) was organized under the laws of the State of Delaware on August 22, 1996 and began business operations on September 1, 1996. Fantasma imports and wholesales licensed watches, clocks, and other novelties; and grants credit to customers located throughout the United States. Prior to September 1, 1996, Fantasma operated as a division of Overdrive Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital Corp. (Overdrive) sold the division's operating assets to Fantasma LLC in exchange for a two-year, $3,764,366 note. Overdrive maintained a 67% ownership interest in Fantasma, with a former stockholder of Overdrive holding a 33% ownership interest. In June 1998, AAi acquired an 80% interest in Fantasma for approximately $4.1 million in cash. The remaining 20% interest in Fantasma is held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company has the obligation to repurchase this interest for nominal consideration (based on the Company's calculations). This previous member has filed a lawsuit asserting that his termination was wrongful and the Company has asserted counterclaims related to the Fantasma acquisition. The Company does not believe this litigation is material to its results of 24 25 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) operations or financial condition. Another employee of Fantasma has options to acquire up to a 2% interest in Fantasma and up to an additional 2% interest if certain earnings targets for Fantasma are met in 1999 and 2000. As of July 3, 1999, the exercise price of the options to purchase member interests of Fantasma was equal to or greater than the fair market value; therefore no expense was recorded. (c) Inventory Inventories are stated at the lower of cost (first-in, first-out) or market and consist of finished goods for all years presented. Finished goods inventory consists of material and overhead. (d) Income Taxes Fantasma is treated as a partnership for federal and state income tax purposes, whereby the membership owners are taxed on their proportionate share of Fantasma's income. As a result, Fantasma has not provided for Federal income taxes. Note 2 - Comprehensive Loss Comprehensive loss was the same as net income for the periods presented. Note 3 - Segment Reporting Fantasma has adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, in the 1998 fiscal year. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. To date, Fantasma has viewed its operations and manages its business as principally one segment. 25 26 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES 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. Important factors, which could cause actual results to differ materially from such expectations, are disclosed in the Company's Form 10-K filed with the SEC on April 2, 1999. 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 may contain required minimum sales volumes or termination penalties equal to the Company's unamortized cost of product displays provided to the customer. The Company believes its relationships with retailers are dependent upon its ability to efficiently utilize allocated floor space to generate satisfactory returns for its customers. To meet this end, the Company strives to consistently deliver competitively priced products and service programs which provide retailers with attractive gross margins and inventory turnover rates. The Company has historically retained customers from year to year, although retailers may drop or add product lines supplied by the Company. Generally, customer loss has been attributable to such customer going out of business or being acquired by a company which does not carry AAi's product line or has prior relationships with a competitor of the Company. 26 27 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Certain segments of the retail industry, particularly mass merchandisers, variety stores, drugstores and supermarkets, are experiencing significant consolidation and in recent years many major retailers have experienced financial difficulties. These industry wide developments have had and may continue to have an impact on the Company's results of operations. In addition, as a result of financial pressures, 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, watches, clocks and other accessories, generally at retail price points of $20 or less. Net sales of the Company's optical products accounted for approximately 54.9% and 55.3% of the Company's net sales for the six months ended July 3, 1999 and July 4, 1998, respectively; net sales of the Company's costume jewelry accounted for approximately 36.7% and 42.5% of the Company's net sales for the six months ended July 3, 1999 and July 4, 1998, respectively, and the balance represented sales of synthetic leather goods, watches, clocks and other accessories. Optical products generally have higher gross margins than the Company's other product lines. Cost of Goods Sold. The Company outsources manufacturing for all of its products, approximately 75% of which is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. Accordingly, the principal element comprising the Company's cost of goods sold is the price of manufactured goods purchased through the Company's joint venture or from independent manufacturers. The Company believes outsourcing manufacturing allows it to reliably deliver competitively priced products to the retail market while retaining considerable flexibility in its cost structure. Operating Expenses. Operating expenses are comprised primarily of payroll and occupancy costs related to the Company's selling, general and administrative activities as well as depreciation and amortization. The Company incurs various costs in connection with the acquisition of new customers and new stores for existing customers, principally the cost of new product display fixtures and costs related to the purchase of the customer's existing inventory. The Company makes substantial investments in the design, production and installation of display fixtures in connection with establishing and maintaining customer relationships. The Company capitalizes the production cost of these display fixtures as long as it retains ownership of them. These costs are amortized to selling expenses on a straight-line basis over their estimated useful life, which is one to three years. If the Company does not retain title to the displays, the display costs are expensed as shipped. 27 28 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with most of these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expense when incurred. The Company expensed customer acquisition costs of approximately $372,000 and $500,000 for the six months ended July 3, 1999 and July 4, 1998, respectively. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer 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 six months ended July 3, 1999, the Company capitalized approximately $45,000 and $106,000 of these costs, respectively in the accompanying consolidated balance sheet. Amortization expense for the three months and six months ended July 3, 1999 related to these costs as well as previously capitalized costs was approximately $300,000 and $596,000, respectively. No such cost were capitalized or amortized during the first six months ended July 4, 1998. 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 LP and related companies ("Foster Grant US"). Beginning on June 30, 2002, shares of the Series A Preferred Stock are redeemable at the option of the holder for an amount equal to the original issue price plus accrued and unpaid dividends yielding a 10% compounded annual rate of return, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined in the Articles of Incorporation) is outstanding. Net loss applicable to common shareholders represents net loss less accretion of original issuance costs and cumulative dividends due on the Series A Preferred Stock. 28 29 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 was $3.5 million and $8.4 million for the three and six months ended July 3, 1999, respectively as compared to $3.0 million and $7.3 million for the three and six months ended July 4, 1998, respectively. In June 1998, the Company acquired an 80% interest in Fantasma, LLC (Fantasma) for approximately $4.1 million in cash. The remaining 20% interest in Fantasma is held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company has the obligation to repurchase this interest for nominal consideration (based on the Company's calculations). This previous member has filed a lawsuit asserting that his termination was wrongful and the Company has asserted counterclaims related to the Fantasma acquisition. The Company does not believe this litigation is material to it's results of operations or financial condition. Another employee of Fantasma has options to acquire up to a 2% interest in Fantasma and up to an additional 2% interest if certain earnings targets for Fantasma are met in 1999 and 2000. As of July 3, 1999, the exercise price of the options to purchase member interests of Fantasma was equal to or greater than the fair market value; therefore no expense was recorded. AAi's acquisition of Fantasma added watches and clocks to AAi's product lines and Disney and Warner Bros. stores to its customer base. As a result of this transaction, the Company recorded approximately $4.6 million in intangible assets, which are being amortized over 10 years. In March 1998, the Company acquired certain assets of Foster Grant UK for the aggregate book value of certain acquired assets, including inventory items of $3.3 million and accounts receivable of $1.7 million, less the aggregate amount of trade payables assumed of $1.1 million and bank debt assumed of $1.7 million. In addition, the Company acquired the Foster Grant trademark in the United Kingdom and Europe for $0.7 million, which amount is subject to upward adjustment at the end of 1998 and 1999 based on annual sales, up to a maximum additional payment of $0.7 million. No adjustment to the purchase price is required as result of sales to date. As a result of the Foster Grant UK acquisition, the Company recorded approximately $1.1 million of intangible assets, which are being amortized over 20 years. Net loss before dividends and accretion on preferred stock was $1.8 million and $2.5 million for the three and six months ended July 3, 1999 as compared to a net loss before dividends and accretion on preferred stock of $834,000 and $430,000 for the three and six months ended July 4, 1998. 29 30 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's Consolidated Condensed Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ----------------- JULY 4, JULY 3, JULY 4, JULY 3, 1998 1999 1998 1999 ------ ------ ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 52.5 58.7 53.7 58.3 ----- ----- ----- ----- Gross profit 47.5 41.3 46.3 41.7 Operating expenses 47.4 39.1 44.2 38.8 ----- ----- ----- ----- Income from operations 0.1 2.2 2.1 2.9 Interest expense (3.2) (5.9) (3.0) (5.8) Other expense, net (0.1) (0.3) -- -- ----- ----- ----- ----- Loss before taxes and dividends and accretion on preferred Stock (3.2) (4.0) (0.9) (2.9) Income tax benefit 1.4 -- 0.4 -- ----- ----- ----- ----- Net loss before dividends and accretion on preferred stock (1.8) (4.0) (0.5) (2.9) Dividends and accretion on preferred stock 1.5 1.6 1.5 1.7 ----- ----- ----- ----- Net loss applicable to common shareholders (3.3)% (5.6)% (2.0)% (4.6)% ===== ===== ===== =====
30 31 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998 Net Sales. Consolidated net sales were $45.6 million for the three months ended July 3, 1999 as compared to $45.9 million for the three months ended July 4, 1998, a decrease of $312,000. The decrease in net sales is attributable to a reduction in sales to non-core segments, primarily department stores, of $2.0 million partially offset by improved sales with variety stores of $597,000, chain drug stores/combo stores/supermarkets of $566,000 and mass merchandisers of $501,000. The general downward trend of department stores is expected to continue for the remainder of fiscal 1999. Gross Profit. Gross profit was $18.9 million for the three months ended July 3, 1999 as compared to $21.8 million for the three months ended July 4, 1998. Gross profit as a percentage of net sales decreased to 41.3% for the three months ended July 3, 1999 from 47.4% for the three months ended July 4, 1998. The $2.9 million or 13.6% decrease is primarily due to increased closeout sales in an effort to reduce inventory levels, increased sales of promotional products, which have lower margins, and a change in product sales mix from higher margin optical products to lower margin jewelry products. Operating Expenses. Operating expenses were $17.8 million for the three months ended July 3, 1999 as compared to $21.8 million for the three months ended July 4, 1998, a decrease of 18.0% or $4.0 million. The decrease is primarily attributable the June 1998 restructuring charge of $2.6 million for the closing of the Texas distribution center and related 1999 payroll and overhead savings generated from the closing. Interest Expense. Interest expense was $2.7 million for the three months ended July 3, 1999 as compared to $1.5 million for the three months ended July 4, 1998, an increase of 83.5% or $1.2 million. This resulted from additional borrowings under the Company's credit facilities to fund operations and a higher effective interest rate related to the Company's 10 3/4% Series B Senior Notes due 2006. Income Tax. No income tax benefit was recorded for the three months ended July 3, 1999 as compared to a benefit of $655,000 for the three months ended July 4, 1998. Net Income (Loss). As a result of the factors discussed above, net loss before dividends and accretion on preferred stock was $1.8 million for the three months ended July 3, 1999 as compared to net loss before dividends and accretion on preferred stock of $834,000 for the three months ended July 4, 1998, an increase of $976,000. 31 32 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders was $2.5 million for the three months ended July 3, 1999 as compared to a loss of $1.5 for the three months ended July 4, 1998, an increase of $1.0 million. The increase is attributable to the $976,000 decrease in earnings and an increase of $63,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. SIX MONTHS ENDED JULY 3, 1999 COMPARED TO JULY 4, 1998 Net Sales. Consolidated net sales were $87.1 million for the six months ended July 3, 1999 as compared to $88.6 million for the six months ended July 4, 1998, a decrease of 1.7% or $1.5 million. The decrease in net sales is attributable to a reduction in sales to non-core segments, primarily department stores, of $5.6 million and chain drug stores/combo stores/supermarkets of $1.6 million partially offset by improved sales with mass merchandisers of $4.4 million and variety stores of $1.3 million. The general downward trend of department stores is expected to continue for the remainder of fiscal 1999. Gross Profit. Gross profit was $36.4 million for the six months ended July 3, 1999 as compared to $41.1 million for the six months ended July 4, 1998. Gross profit as a percentage of net sales decreased to 41.7% for the six months ended July 3, 1999 from 46.3% for the six months ended July 4, 1998. The $4.7 million or 11.5% decrease is primarily due to increased closeout sales in an effort to reduce inventory levels, increased sales of promotional products, which have lower margins, and a change in product sales mix from higher margin optical products to lower margin jewelry products. Operating Expenses. Operating expenses were $33.8 million for the six months ended July 3, 1999 as compared to $39.2 million for the six months ended July 4, 1998, a decrease of 13.7% or $5.4 million. The decrease is primarily attributable the June 1998 restructuring charge of $2.6 million for the closing of the Texas distribution center and related 1999 payroll and overhead savings generated from the closing. Interest Expense. Interest expense was $5.0 million for the six months ended July 3, 1999 as compared to $2.6 million for the six months ended July 4, 1998, an increase of 90.3% or $2.4 million. This resulted from additional borrowings under the Company's credit facilities to fund operations and a higher effective interest rate related to the Company's 10 3/4% Series B Senior Notes due 2006. Income Tax. No income tax benefit was recorded for the six months ended July 3, 1999 as compared to $338,000 of benefit for the six months ended July 4, 1998. 32 33 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock was $2.5 million for the six months ended July 3, 1999 as compared to $430,000 for the six months ended July 4, 1998, an increase of $2.1 million. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders was $4.0 million for the six months ended July 3, 1999 as compared to a loss of $1.8 million for the six months ended July 4, 1998, an increase of $2.2 million. The increase as attributable to the $2.1 million decrease in earnings and an increase of $98,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. LIQUIDITY AND CAPITAL RESOURCES At July 3, 1999 the Company had cash and cash equivalents of $1.6 million and working capital of $28.5 million. To date, the Company has funded its operations through credit facilities, issuance of equity and debt securities, and cash generated from operations. The Company used $9.9 million of cash in operations during the six months ended July 3, 1999 compared to a use of $4.1 million during the six months ended July 4, 1998. Cash used in operating activities increased due to the funding of higher operating losses, a lower decrease in inventory as a result of eliminating inventory in 1998 prior to the relocation of Foster Grant to Rhode Island, and the timing of payments for accruals and accounts payable partially offset by increases in non-cash depreciation and amortization charges and a lower increase in accounts receivable. The Company used $5.1 million in investing activities during the six months ended July 3, 1999 compared to a use of $23.0 million during the six months ended July 4, 1998. The uses of funds for investing activities during the six months ended July 3, 1999 consisted primarily of $4.9 million for the purchase of display fixtures and the new information management system. The decrease from the six months ended July 4, 1998 is attributable to lower spending on display fixtures and the 1998 acquisitions of Fantasma and Foster Grant UK. The Company generated $14.4 million from financing activities during the six months ended July 3, 1999 compared to $26.7 million during the six months ended July 4, 1998. The funds generated from financing activities consisted mainly of borrowings under the revolving note payable. The decrease from the six months ended July 4, 1998 is attributable to proceeds from the term loan received in fiscal 1998. 33 34 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has 43,700 shares of Series A Preferred Stock that has a redemption value at July 3, 1999 of $30.3 million. Shares of Series A Preferred Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for certain dilutive events. Conversion is at the option of the shareholder, but is automatic upon the consummation of a qualified public offering. The holders of Series A Preferred Stock have the right to require redemption for cash for any unconverted shares, beginning June 30, 2002, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined in the Company's Articles of Incorporation) is outstanding. The 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 are redeemable on February 28, 2000, or earlier upon the occurrence of certain specified capital transactions. The redemption price will range between $1.0 million and $4.0 million depending upon the net sales of sunglasses, reading glasses and accessories by FG Holdings and the Company, and upon the total transaction value. The Company is continually engaged in evaluating potential acquisitions. The Company expects that funding for future acquisitions may come from a variety of sources, depending on the size and nature of any such acquisition. Potential sources of capital include cash generated from operations, borrowings under the Company's Senior Credit Facility with Bank of America, as an agent and lender, or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to the Company, if at all, on terms that the Company finds acceptable. The Company has substantial indebtedness and significant debt service obligations. As of July 3, 1999, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $93.4 million. The Company had current liabilities of approximately $56.0 million. In addition, the Company has significant annual obligations that include interest on the Notes of approximately $8.1 million, minimum royalty obligations over the next two years of approximately $5.1 million and minimum payments under its operating leases of approximately $1.3 million. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. The Company has up to $25.3 million available for borrowings under the Senior Credit Facility as of July 3, 1999. 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 34 35 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of financial performance and limit the payment of cash dividends and similar restricted payments. On May 7, 1999, the Company entered into an amendment to the Senior Credit Facility which modified the financial covenant and waived non-compliance with the prior covenants. As of July 3, 1999, the Company was not in compliance with certain financial covenants, as modified. The Company has received a waiver of such non-compliance from its lenders and is negotiating an amendment to the Senior Credit Facility which will modify the financial covenants going forward. If the Company does not successfully negotiate an amendment to the Senior Credit Facility, the Company expects that it will not be in compliance with certain financial covenants in the Senior Credit Facility for the remainder of fiscal 1999. The Company has received a letter from the bank stating that it intends to modify the covenants so they are amounts that the Company believes they will be able to obtain. The Company believes it will successfully negotiate the amendment, however, there can be no assurance that it will be able to do so. 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 at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated cost savings and revenue growth will be realized or that future borrowings will be available under the Senior Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. YEAR 2000 The Company uses several application programs written over many years using two-digit fields to define the applicable year, rather than four-digit year fields. Programs that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This misinterpretation of the year could result in an incorrect computation or a computer shutdown. 35 36 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As a result of the Company's growth, AAi is implementing a new information management system that is expected to be Year 2000 compliant. The design of the new system is substantially complete and ready for implementation. Full implementation is scheduled for October 1999, since September is historically one of the heaviest shipping months. Accordingly, the Company believes that with the successful conversion to the new software, the Year 2000 issue will not pose significant operational problems for the Company's systems. Since Year 2000 compliance is being addressed with the implementation of the Company's new system, the costs of addressing the Year 2000 issue are not separately identifiable. No material additional costs are anticipated at this time. The Company has completed a compliance review of its property that uses embedded technology. Although the Company believes that the Year 2000 issue will not pose a significant problem for any of the Company's systems or property utilizing embedded technology, there can be no assurance that the Year 2000 issue will not interfere with the function and use of such property. The Company has engaged in formal communications with its major customers and most significant vendors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. These major customers and vendors have informed the Company that they are either compliant or are currently addressing the Year 2000 issue and expect to be Year 2000 compliant by the end of the third quarter. While there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and will not have an adverse effect on the Company's systems, the Company does not believe that its operations are materially vulnerable to the failure of any vendor or customer to properly address the Year 2000 issue. The Company's contingency plan in the event other parties are unable to provide Year 2000 compliant electronic data is to revert to paper documentation from these parties. The failure to correct a material Year 2000 problem could result in an interruption in, or failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The aforementioned steps being undertaken by the Company are expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material customers and 36 37 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) vendors. The Company believes that, with the implementation of its new information management system and the other steps being taken, the possibility of significant interruptions of normal operations should be reduced. 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. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. At July 3, 1999, approximately 99% of the carrying values of the Company's long-term debt were at fixed 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 and the Hong Kong Dollar. During the six months ended July 3, 1999, 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 does not expect to be materially impacted by the introduction of the Euro dollar. 37 38 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 At the Annual Meeting of Shareholders held May 13, 1999, shareholders elected the Company's Board of Directors and increased the numbers of shares of Common Stock authorized for issuance under the Company's 1996 Incentive Stock plan. The vote for the director nominees was: FOR* WITHHELD Gerald F. Cerce 1,004,620 0 John H. Flynn, Jr. 1,004,620 0 Stephen J. Carlotti 1,004,620 0 Michael Cronin 1,004,620 0 George Graboys 1,004,620 0 Martin E. Franklin 1,004,620 0 David Jenkins 1,004,620 0 The vote to increase the number of shares of Common Stock authorized for issuance under the Company's 1996 Incentive Stock Plan by 38,000 shares was: FOR* AGAINST ABSTAIN 1,004,620 0 0 * Includes the holders of Common Stock and Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote based on the number of shares of Common Stock into which such shares are convertible, currently 10 to 1. ITEM 5. OTHER INFORMATION On July 19, 1999, the Company hired John R. Ranelli as President, Chief Operating Officer and a member of the Office of the Chief Executive. Mr. Ranelli was previously the Executive Vice President of Stride Rite Corporation (from August 1996 to September 1998) and the Chief Operating Officer (from February 1995 to July 1996) and a director (from June 1994 to September 1995) of Deckers Outdoor Corporation, a $125 million footwear and apparel manufacturer. From June 1994 to January 1995, he served as the Executive Vice President and Chief Financial Officer of TLC Beatrice, a $2 billion consumer products manufacturer and retailer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1.1 First Amendment to Second Amended & Restated Financing and Security Agreement 10.15 Employment Agreement between AAi and John Ranelli dated July 19, 1999. EX-27.1 Financial Data Schedule (b) Report on Form 8-K The registrant filed no reports on form 8-K during the quarter ended July 3, 1999. 38 39 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AAi.FosterGrant, Inc. (Registrant) Dated: August 17, 1999 /s/ Gerald F. Cerce ---------------------------------- Gerald F. Cerce Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: August 17, 1999 /s/ Duane M. DeSisto ---------------------------------- Duane M. DeSisto Assistant Secretary and Chief Financial Officer (Principal Financial Officer) 39 EX-10.1.1 2 FINANCING AND SECURITY AGREEMENT 1 EXHIBIT 10.1.1 FIRST AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (this "Agreement") is made as of the 7th day of May, 1999, 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 (the "Borrower"); FOSTER GRANT GROUP, L.P., a limited partnership organized under the laws of the State of Delaware ("Foster Grant") and FANTASMA, LLC, a limited liability company organized under the laws of the State of Delaware ("Fantasma"); F.G.G. INVESTMENTS, INC., a corporation organized and existing under the laws of the State of Delaware, THE BONNEAU COMPANY, a corporation organized and existing under the laws of the State of Texas, BONNEAU HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware, BONNEAU GENERAL, INC., a corporation organized and existing under the laws of the State of Delaware, FOSTER GRANT HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware, and O-RAY HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporate Guarantors; the Corporate Guarantors together with Foster Grant and Fantasma, the "Guarantors"; and the Guarantors together with the Borrower, the "Obligors"); NATIONSBANK, N.A., a national banking association ("NationsBank") 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 NATIONSBANK, N.A., a national banking association, in its capacity as both collateral and administrative agent for each of the Lenders (the "Agent"). RECITALS A. The Borrower, the Guarantors, the Lenders and the Agent entered into a Second Amended and Restated Financing and Security Agreement dated July 21, 1998 (as amended, restated, modified, substituted, extended, and renewed from time to time, the "Financing Agreement.") The Financing Agreement provides for some of the agreements between the Borrower, the Guarantors, the Lenders and the Agent with respect to the "Loans" (as defined in the Financing Agreement), including the Revolving Credit Facility (as that term is defined in the Financing Agreement) in an amount not to exceed $60,000,000 and the Letter of Credit Facility which is part of the Revolving Credit Facility. 1 2 B. The Borrower has requested that the Agent and Lenders waive certain financial covenant violations and amend certain financial covenants. C. The Agent and Lenders are willing to agree to the Borrower's request on the condition, among others, that this Agreement be executed. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower, Lenders and Agent agree as follows: 1. The Obligors, the Lenders and the Agent agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. The Obligors, the Lenders and Agent agree that on the date hereof the aggregate outstanding principal balance under the Revolving Credit Note (subject to change for returned items and other adjustments made in the ordinary course of business) as of the close of the business day of May 6, 1999 is $19,476,060.17. 3. Each of The Borrower, Foster Grant and Fantasma represents and warrants to the Lenders and Agent as follows: (a) The Borrower is a corporation duly organized, and validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign corporation in good standing in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (b) Foster Grant is a limited partnership 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) 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. (d) Each of the Borrower, Foster Grant 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. (e) 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 2 3 valid and legally binding obligation of the Borrower, Foster Grant and Fantasma, enforceable in accordance with its terms. (f) All of the Borrower's, Foster Grant'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, Foster Grant's and Fantasma's execution of this Agreement. (g) 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. 4. As a condition to the Agent' and Lenders' agreement to enter into this Agreement and the waivers granted herein, the Borrower hereby agrees to pay to the Lender a fee in the amount of $60,000, which fee shall be due at the time this Agreement is executed and is fully earned and non-refundable upon payment. 5. The Financing Agreement is hereby amended as follows: (a) The definition of "Fixed Charges" is hereby deleted and amended in its entirety to read as follows: 1. "Fixed Charges" means for any period of determination thereof, the scheduled or required payments (including, without limitation, principal and interest) made in cash on all Indebtedness for Borrowed Money of the Borrower and its Subsidiaries, plus Capital Expenditures made in cash (and Permitted Acquisitions to the extent not included in Capital Expenditures) of the Borrower and its Subsidiaries, plus cash payments of taxes, provided, however, for the fiscal quarter periods ending June 30, 1999 and September 30, 1999 "interest expense" means year-to-date interest expense as reflected in the consolidated year-to-date income statement of the Borrower and its Subsidiaries for the period then ended. (b) Section 6.1.13(a) is hereby deleted and the following is substituted in its place: (c) FIXED CHARGE COVERAGE RATIO. The Borrower and its Subsidiaries on a consolidated basis will maintain a Fixed Charge Coverage Ratio, tested on the last Business Day of each of the Borrower's fiscal quarters beginning on the last Business Day of the fiscal quarter ending closest to June 30, 1999, (i) for the fiscal year-to-date for the periods ending closest to June 30, 1999 and September 30, 1999 and (ii) thereafter, for the four (4) quarter period ending on such date, of not less than the following 3 4 1. ------------------------------------------------------------ FISCAL QUARTER ENDING CLOSEST TO: RATIO ------------------------------------------------------------ June 30, 1999 through and including .90 to 1.0 September 30, 1999 ------------------------------------------------------------ December 31, 1999 through and including 1.0 to 1.0 December 31, 2000 ------------------------------------------------------------ March 31, 2001 through and including 1.20 to 1.0 December 31, 2001 ------------------------------------------------------------ March 31, 2002 through and including 1.35 to 1.0 December 31, 2002 ------------------------------------------------------------ March 31, 2003 and thereafter 1.40 to 1.0 ------------------------------------------------------------ 2. (b) Section 6.1.13(b) is hereby deleted in its entirety and the following is substituted in its place: 3. (b) LEVERAGE RATIO. The Borrower and its Subsidiaries on a consolidated basis will maintain a ratio of Funded Debt to EBITDA, tested on the last Business Day of each of the Borrower's fiscal quarters beginning on the last Business Day of the fiscal quarter ending closest to June 30, 1999, (i) for the fiscal year-to-date for the periods ending closest to June 30, 1999 and September 30, 1999 and (ii) thereafter, for the four (4) quarter period ending on such date, so that it is not more than the following, 4 5 4. ------------------------------------------------------------ FISCAL QUARTER ENDING CLOSEST TO: RATIO ------------------------------------------------------------ June 30, 1999 4.50 to 1.0 ------------------------------------------------------------ September 30, 1999 5.50 to 1.0 ------------------------------------------------------------ December 31, 1999 5.10 to 1.0 ------------------------------------------------------------ March 31, 2000 through and including 4.40 to 1.0 December 31, 2000 ------------------------------------------------------------ March 31, 2001 through and including 3.90 to 1.0 December 31, 2001 ------------------------------------------------------------ March 31, 2002 through and including 3.50 to 1.0 December 31, 2002 ------------------------------------------------------------ March 31, 2003 and thereafter 3.10 to 1.0 ------------------------------------------------------------ 1. For the purposes of the foregoing calculation only, for the fiscal quarters ending June 30, 1999 through and including September 30, 1999, EBITDA shall be computed for the fiscal year to date and then multiplied (x) for the closest to June 30, 1999 calculation, by two (2); and for the closest to September 30, 1999 calculation, by one and one-third (1-1/3). 2. (c) Section 6.1.13(c), is hereby deleted in its entirety and the following is substituted in its place: 3. (c) EBITDA. The Borrower and its Subsidiaries on a consolidated basis will maintain EBITDA, tested on the last Business Day of each of the Borrower's fiscal quarters beginning on the last Business Day of the fiscal quarter ending closest to June 30, 1999, (i) for the fiscal year-to-date for the periods ending closest to June 30, 1999 and September 30, 1999 and (ii) thereafter, for the four (4) quarter period ending on such date, of not less than the following, 5 6 4. -------------------------------------------------------------------- FISCAL QUARTER ENDING CLOSEST TO: AMOUNT -------------------------------------------------------------------- June 30, 1999 $10,900,000 -------------------------------------------------------------------- September 30, 1999 $13,400,000 -------------------------------------------------------------------- December 31, 1999 $19,200,000 -------------------------------------------------------------------- March 31, 2000 through and including $21,100,000 December 31, 2000 -------------------------------------------------------------------- March 31, 2001 through and including $23,200,000 December 31, 2001 -------------------------------------------------------------------- March 31, 2002 through and including $25,500,000 December 31, 2002 -------------------------------------------------------------------- March 31, 2003 and thereafter $28,100,000 -------------------------------------------------------------------- 1. 2. The Lenders and the Agent hereby waive defaults under the following provisions of the Financing Agreement which for the period stated, existed under the Obligations; provided, however that this Paragraph shall not be deemed to waive any defaults under the following provisions after the period stated, or any other defaults arising out of non-compliance by the Borrower with the Financing Agreement, whether or not the events, facts or circumstances giving rise to such non-compliance existed on or prior to the date hereof: Section Default ------- ------- 6.1.13(a) As of March 31, 1999 6.1.13(b) As of March 31, 1999 6.1.13(c) As of March 31, 1999 7. The Obligors, as applicable, hereby issue, ratify and confirm the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Obligors agree that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations.: 6 7 8. The Obligors acknowledge and warrant that the Agent and Lenders have acted in good faith and have conducted in a commercially reasonable manner their relationships with the Obligors in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Obligors hereby waiving and releasing any claims to the contrary. 9. The Obligors shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Agent and Lenders and their counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Agent's counsel and all recording fees, taxes and charges. 10. 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 facsimile. Any party who chooses to deliver its signature by facsimile agrees to provide a counterpart of this Agreement with its inked signature promptly to each other party. IN WITNESS WHEREOF, the Borrower, the Guarantors, the Lenders and Agent have executed this Agreement under seal as of the date and year first written above. WITNESS AAi.FOSTERGRANT, INC. (formerly known as Accessories, Associates, Inc.) /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: FOSTER GRANT GROUP, L.P. By: Bonneau General, Inc. General Partner /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: FANTASMA, LLC /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Treasurer 7 8 WITNESS: F.G.G. INVESTMENTS, INC. /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: THE BONNEAU COMPANY /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: BONNEAU GENERAL, INC. /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: BONNEAU HOLDINGS, INC. /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer 8 9 WITNESS: FOSTER GRANT HOLDINGS, INC. /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: O-RAY HOLDINGS, INC. /s/ Stephen J. Korotsky By: /s/ Duane M. DeSisto (SEAL) - ---------------------------- ----------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: NATIONSBANK, N.A. /s/ Richard J. Baldwin By: /s/ Gary W. Bartlett (SEAL) - ---------------------------- ----------------------------- Gary W. Bartlett Vice President WITNESS: NATIONSBANK, N.A. in its capacity as a Lender /s/ Richard J. Baldwin By: /s/ Gary W. Bartlett (SEAL) - ---------------------------- ----------------------------- Gary W. Bartlett Vice President 10 WITNESS: LASALLE BUSINESS CREDIT, INC. /s/ By: /s/ John C. Baier (SEAL) - ---------------------------- ----------------------------- Name: John C. Baier Title: Vice President WITNESS: PNC BUSINESS CREDIT By: /s/ Rose M. Crump (SEAL) - ---------------------------- ----------------------------- Name: Rose M. Crump Title: Vice President 10 EX-10.15 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement") is entered into as of the 19th day of July, 1999, by and between AAi.FosterGrant, Inc., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and John R. Ranelli, an individual with a residence address of 223 Giants Neck Road, Niantic, Connecticut 06359 ("Executive"). INTRODUCTION ------------ 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT --------- In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to termination as hereinafter provided, shall continue for an unlimited number of successive two (2) year periods, the first of such periods beginning on the date hereof and each subsequent period beginning on the first day of each month thereafter. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as President, Chief Operating Officer and a member of the office of the Chief Executive Officer of the Company during the Employment Period, and Executive hereby accepts such employment. The Company shall recommend to the shareholders the election of Executive as a director of the Company for the Employment Period. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by the Chairman and Chief Executive Officer from time to time. All officers holding the title of Executive Vice President or above shall report to the Office of the Chief Executive Officer. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. Executive may also be a member of not more than three other company boards of directors so long as such membership does not conflict with Executive's performance of his duties under this Agreement. The Executive shall report to the Chairman. 2 3. SALARY AND BONUS. (a) BASE SALARY. During the first twelve (12) months of the Employment Period, the Company agrees to pay Executive $350,000 per year, payable weekly in arrears. During the second twelve (12) months of employment, the Company agrees to pay Executive $400,000 per year, payable weekly in arrears. Executive's base salary shall not be decreased, and after the first twenty-four (24) months shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of July, 2000 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be the product of (a) $400,000 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first twenty-four (24) months, the Chief Executive Officer of the Company shall review and may increase the Executive's annual base salary in his discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus of up to fifty percent (50%) of his annual base salary under the Company's Executive Incentive Compensation Plan ("Annual Target Bonus Amount"), subject to the discretion of the Company's Board of Directors. Sixty percent (60%) of any such bonus shall be based upon the Company's overall financial goals and forty percent (40%) shall be based on personal goals for the Executive established by mutual agreement between Executive and the Chief Executive Officer. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health, supplemental health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with the maximum monthly benefit available to Executive, based upon Executive's monthly base salary, after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's qualified and non-qualified 401(k) Plan, Supplemental 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the Chief Executive Officer, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary offered to senior executives generally. -2- 3 (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with a monthly automobile allowance consistent with the plan adopted or to be adopted by the Company for other senior executives. (d) REIMBURSEMENT OF MOVING AND OTHER EXPENSES. The Company shall reimburse Executive for all reasonable moving expenses incurred in Executive's move from his present residence to a temporary residence one located in Rhode Island or nearby Southern Massachusetts, travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal Revenue Service. Additionally, the Company will pay all closing costs and moving expenses incurred by Executive (including the federal and state income taxes payable with respect thereto) in relocating to permanent residence in the same geographic area. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Chief Executive Officer of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof which specifically identifies the manner in which the Chief Executive Officer believes that Executive has not performed his duties and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. (a) TERMINATION BY THE EXECUTIVE. Executive may terminate this Agreement at any time by providing written notice to the Company. (b) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate this Agreement at any time, without Cause by providing written notice to Executive. As used in this Agreement, the term "without Cause" shall mean termination for any reason not specified in Section 5 hereof, including the death or disability of Executive. -3- 4 (c) CHANGE IN CONTROL. A "Change in Control" will be deemed to have occurred if: (1) a Takeover Transaction occurs; or (2) any election of directors of the Company takes place (whether by the directors then in office or by the stockholders at a meeting or by written consent) and a majority of the directors in the office following such election are individuals who were not nominated by a vote of two-thirds of the members of the Board of Directors immediately preceding such election; or (3) the Company effectuates a complete liquidation of the Company or a sale or disposition of all or substantially all of its assets. A "Change in Control" shall not be deemed to include, however, a merger or sale of stock, assets or business of the Company if the Executive immediately after such event owns, or in connection with such event immediately acquires (other than in the Executive's capacity as an equity holder of the Company or as a beneficiary of its employee stock ownership plan or profit sharing plan), any stock of the buyer or any affiliate thereof which, at the time of Executive's initial investment in such stock, had a purchase price or fair market value greater than $50,000. (d) TAKEOVER TRANSACTION. A "Takeover Transaction" shall mean (i) a merger or consolidation of the Company with, or an acquisition of the Company or all or substantially all of its assets by, any other corporation, other than a merger, consolidation or acquisition in which the individuals who were members of the Board of Directors of the Company immediately prior to such transaction continue to constitute a majority of the Board of Directors of the surviving corporation (or, in the case of an acquisition involving a holding company, constitute a majority of the Board of Directors of the holding company) for a period of not less than twelve (12) months following the closing of such transaction, or (ii) when any person or entity or group of persons or entities (other than any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any one or more of the present stockholders of the Company or their affiliates) either related or acting in concert becomes after the date hereof the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities of the Company representing more than fifty percent (50%) of the total number of votes that may be cast for the election of directors of the Company. 6.2 EXECUTIVE'S RIGHT-TO-TERMINATE. Executive may terminate Executive's employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Executive's express written consent): (a) a Change in Control provided that in such event Executive may exercise his right only within the twelve month period next following such Change in Control. (b) the assignment to Executive by the Company of any duties materially inconsistent with Executive's status with the Company or a material alteration in the nature or status of Executive's responsibilities from those in effect on the date hereof, or a material reduction in Executive's titles or offices as in effect on the date hereof, or any removal of Executive from, or any failure to reelect Executive to, any of such positions, except in connection with the termination of his employment for Disability or Cause or as a result of Executive's death or by Executive other than for Good Reason; -4- 5 (c) a reduction by the Company in Executive's Salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (d) except if such action applies to all senior executive officers of the Company generally, any failure by the Company to continue in effect its present Executive Incentive Compensation Plan, any fringe benefits, the taking of any action by the Company which would, directly or indirectly, materially reduce Executive's benefits or deprive Executive of any fringe benefits enjoyed by Executive at the date hereof, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled at the date hereof; (e) a relocation of the Company's principal executive offices to a location more than 50 miles from their current location in, or the Company's requiring Executive to be based anywhere other than the Company's principal executive offices; or (f) any material breach, uncured after reasonable notice, by the Company of any provisions of this Agreement. 6.3 SEVERANCE. (a) WITHOUT CAUSE. If the Company terminates this Agreement without Cause, or if Executive has the right to terminate this Agreement pursuant to Section 6.2 hereof, then commencing on the date of termination of this Agreement, the Company shall provide Executive with a severance package which shall consist of the following: (i) for a period equal to two (2) years after the date of termination (A) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof and (B) continuation of all benefits under Section 4; and (ii) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's Annual Target Bonus Amount under the Company's Executive Incentive Compensation Plan for the year of termination. (b) GENERAL RELEASE. As a condition precedent to receiving any severance payment, the Executive shall execute a general release of any and all claims which Executive or his heirs, executors, agents or assigns might have against the Company, its subsidiaries, affiliates, successors, assigns and its past, present and future employees, officers, directors, agents and attorneys. (c) WITHHOLDING. All payments made by the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Employer under applicable law. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, the Employment Period will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall -5- 6 each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by the Executive under Section 6.1(a), or by the Company under Section 5 or Section 6.1(b), the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending two (2) years after the date of termination of this Agreement (the "Non-compete Period") provided that the Company has not otherwise breached its obligations under the Agreement. As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during Executive's employment with the Company. During the Non-compete Period, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall be construed by the court in such a manner as to impose only those restrictions on the conduct of Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. 9. CONFIDENTIALITY COVENANTS. (a) Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any -6- 7 Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. (b) The Company will not disclose the terms and conditions of Executive's employment, unless it is required by law to do so. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 223 Giants Neck Road Niantic, Connecticut 06359 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. -7- 8 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. AAi.FosterGrant, Inc. By: /s/ Gerald F. Cerce ----------------------------- Title: Chairman EXECUTIVE: /s/ John R. Ranelli ----------------------------- John R. Ranelli -8- EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEET AS OF JULY 3, 1999 (UNAUDITED) AND THE CONDENSED STATEMENT OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JULY 3, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999. 0001067346 AAI.FOSTERGRANT, INC. 1,000 U.S. DOLLARS 6-MOS JAN-01-2000 JAN-02-1999 JUL-03-1999 1 1,557 0 50,450 8,108 35,111 84,453 41,847 23,929 135,915 55,967 78,000 0 30,317 6 (27,440) 135,915 87,097 87,097 50,745 33,834 17 0 5,021 (2,520) 0 (2,520) 0 0 0 (3,975) (6.54) 0
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