-----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, NeEkvmE1aGUyb0eA1T+0xnvTGeaOpOHnL8KIyhqoKI2eaYTYcrQou/vYltXgu1Pd 5Jhmm/hbtiEMYp1rQawZJg== 0000950135-99-005326.txt : 19991117 0000950135-99-005326.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950135-99-005326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 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: 99759148 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 October 2, 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 November 16, 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 October 2, 1999 3 Consolidated Condensed Statements of Operations for the three and nine months ended October 3, 1998 and October 2, 1999 4 Consolidated Condensed Statements of Cash Flows for the nine months ended October 3, 1998 and October 2, 1999 5 Notes to Consolidated Condensed Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 27 ITEM 2. Changes in Securities and Use of Proceeds 27 ITEM 3. Defaults Upon Senior Securities 27 ITEM 4. Submission of Matters to a Vote of Security Holders 27 ITEM 5. Other Information 27 ITEM 6. Exhibits and reports on Form 8-K 27 SIGNATURES 28 2 3 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share and per share data)
ASSETS JANUARY 2, OCTOBER 2, 1999 1999 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 2,207 $ 2,939 Accounts receivable less reserves of approximately $9,975 and $7,659 29,317 42,202 Inventories 37,162 32,138 Prepaid expenses and other current assets 1,918 1,007 Deferred tax assets 3,743 3,743 --------- --------- Total current assets 74,347 82,029 --------- --------- Property, plant and equipment, net 17,543 18,264 Intangible assets 20,874 19,869 Other assets 8,415 7,872 Deferred tax assets 5,319 5,319 --------- --------- Total assets $ 126,498 $ 133,353 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable $ 2,576 $ 23,768 Redeemable preferred stock of a subsidiary -- 972 Current maturities of long-term obligations 626 863 Deferred compensation - current portion 30 9 Accounts payable 14,899 15,227 Accrued expenses 22,740 15,733 Accrued income taxes 2,130 2,107 --------- --------- Total current liabilities 43,001 58,679 --------- --------- 10 3/4% series B senior notes due 2006 75,000 75,000 Long-term obligations - less current maturities 780 313 Deferred compensation - less current portion 1,448 1,492 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 31,089 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) (239) Accumulated deficit (23,489) (33,257) --------- --------- Total shareholders' deficit (23,502) (33,220) --------- --------- Total liabilities and shareholders' deficit $ 126,498 $ 133,353 ========= =========
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 NINE MONTHS ENDED ---------------------------- ---------------------------- OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2, 1998 1999 1998 1999 ---------- ---------- ---------- ---------- NET SALES $ 36,849 $ 38,496 $ 125,480 $ 125,593 COST OF GOODS SOLD 20,449 24,155 67,992 74,900 --------- --------- --------- --------- Gross profit 16,400 14,341 57,488 50,693 OPERATING EXPENSES: Selling 12,792 12,155 36,275 36,951 General and administrative 5,823 4,572 18,948 13,610 Restructuring charge -- -- 2,600 -- --------- --------- --------- --------- (Loss) income from operations (2,215) (2,386) (335) 132 Interest expense (2,216) (2,657) (4,854) (7,679) Other (expense) income, net (243) 60 (253) 44 --------- --------- --------- --------- Loss before income tax benefit and dividends and accretion on preferred stock (4,674) (4,983) (5,442) (7,503) Income tax (expense) benefit -- (37) 338 (37) --------- --------- --------- --------- Net loss before dividends and accretion on preferred stock (4,674) (5,020) (5,104) (7,540) Dividends and accretion on preferred stock 699 773 2,056 2,228 --------- --------- --------- --------- Net loss applicable to common shareholders $ (5,373) $ (5,793) $ (7,160) $ (9,768) ========= ========= ========= ========= Basic and diluted net loss per share applicable to common shareholders $ (8.84) $ (9.53) $ (11.78) $ (16.07) ========= ========= ========= ========= 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)
NINE MONTHS ENDED --------------------------- OCTOBER 3, OCTOBER 2, 1998 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,104) $ (7,540) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 8,840 8,431 Amortization of interest costs related to debt 78 242 Equity in losses (earnings) of investments in affiliates 61 (84) Minority interest in income of consolidated subsidiary 53 63 Cumulative foreign currency translation adjustment (52) 50 Deferred interest on subordinated promissory notes payable 140 -- Deferred taxes (334) -- Changes in assets and liabilities, net of acquisitions - Accounts receivable (11,666) (12,885) Inventories 9,760 5,024 Prepaid expenses and other current assets 48 911 Deferred costs -- (155) Accounts payable (7,468) 328 Accrued expenses (25) (7,098) Accrued income taxes (87) (23) -------- -------- Net cash used in operating activities (5,756) (12,736) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash received (9,464) -- Purchases of property, plant and equipment (16,783) (7,031) Advances to officers/shareholders (3,511) -- Decrease in investment in affiliates 15 -- Decrease (increase) in other assets 21 (447) -------- -------- Net cash used in investing activities (29,722) (7,478) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable (32,258) 21,192 Proceeds from term note payable 13,222 -- Proceeds from 103/4senior notes 75,000 -- Costs related to issuance of 103/4senior notes (3,120) -- Payments on long term obligations and deferred compensation (2,203) (246) -------- -------- Net cash provided by financing activities 35,287 20,946 -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (191) 732 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 2,207 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,588 $ 2,939 ======== ========
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)
NINE MONTHS ENDED -------------------------- OCTOBER 3, OCTOBER 2, 1998 1999 ---------- ---------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Conversion of leasehold improvements to building improvements $ 1,393 $ -- ======== ====== Offset of advances to officers/shareholders against subordinated promissory notes payable to officers/shareholders $ 3,495 $ -- ======== ====== Cash paid during the period for- Interest $ 3,620 $9,183 ======== ====== Income Taxes $ 407 $ 8 ======== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS: During the three and nine months ended October 3, 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 Payments in connection with the $ 15,672 $ -- acquisitions, net of cash acquired Liabilities assumed and notes issued (9,464) -- -------- ------ $ 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 October 2, 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, taking into account historical experience, upon shipment to the customer. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following at January 2, 1999 and October 2, 1999 (in thousands):
JANUARY 2, OCTOBER 2, 1999 1999 ---------- ---------- Finished goods ......................... $31,037 $28,779 Work-in-process and raw materials ...... 6,125 3,359 ------- ------- $37,162 $32,138 ======= =======
(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 $1.2 million and $1.7 million, and $92,000 and $464,000 for the three and nine months ended October 3, 1998 and October 2, 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 nine months ended October 2, 1999, the Company capitalized approximately $49,000 and $155,000 of these costs, respectively, in the accompanying consolidated balance sheet. Amortization expense for the three months and nine months ended October 2, 1999 related to these costs as well as previously capitalized costs was approximately $306,000 and $903,000, respectively. No such cost were capitalized or amortized during the first nine months ended October 3, 1998. 7 8 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 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 was held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company acquired this 20% interest effective September 1, 1999. Accordingly, the Company currently holds 100% of the Fantasma member interests. 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 operations or financial condition. Another employee of Fantasma has options to acquire up to a 2% interest if certain earnings targets for Fantasma are met in 1999 and 2000. As of October 2, 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. 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.
NINE MONTHS ENDED OCTOBER 3, 1998 ----------------- Net sales ........................................ $131,702 Net loss applicable to common shareholders ....... (7,513) Basic and diluted net loss per share applicable To common shareholders ....................... (12.36)
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 Series B Notes is payable semiannually on January 15 and July 15. 8 9 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) The Notes are general unsecured obligations of the Company, rank senior in right of payment to all future subordinated indebtedness of the Company and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company including the 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 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 October 2, 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. 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 and 43,350 common equivalent shares at October 3, 1998 and October 2, 1999, respectively, as their effect would be anti-dilutive. Note 5 - Comprehensive Loss Comprehensive loss for the three and nine months ended October 2, 1999 was $5.0 million and $7.5 million, respectively, as compared to comprehensive loss for the three and nine months ended October 3, 1998 of $4.6 million and $5.2 million, 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 October 2, 1999, all of these 40 employees were terminated and severance benefits of approximately $947,000 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. 9 10 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 DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ OCTOBER 3, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------- ------------- ------------ ------- ------- --------- Net sales $ 24,470 $ 4,461 $ 3,529 $ 4,389 $ 36,849 ======== ======= ======= ======= ======== Segment (loss) profit $ (2,244) $ (477) $(1,375) $ (335) $ (4,431) ======== ======= ======= ======= ======== CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ OCTOBER 2, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------- ------------- ------------ ------- ------- --------- Net sales $ 28,727 $ 3,699 $ 3,858 $ 2,212 $ 38,496 ======== ======= ======= ======= ======== Segment (loss) profit $ (350) $(1,808) $(1,828) $(1,057) $ (5,043) ======== ======= ======= ======= ======== CHAIN DRUG NINE MONTHS STORES/COMBO ENDED MASS STORES/ OCTOBER 3, 1998 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------- ------------- ------------ ------- ------- -------- Net sales $ 70,862 $25,811 $12,954 $15,853 $125,480 ======== ======= ======= ======= ======== Segment (loss) profit $ (3,437) $ 2,167 $(3,437) $ (482) $ (5,189) ======== ======= ======= ======= ======== CHAIN DRUG NINE MONTHS STORES/COMBO ENDED MASS STORES/ OCTOBER 2, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------- ------------- ------------ ------- ------- -------- Net sales $ 79,509 $ 23,421 $ 14,581 $ 8,082 $ 125,593 ======== ======== ======== ======= ========= Segment (loss) profit $ (527) $ (937) $ (3,769) $(2,314) $ (7,547) ======== ======== ======== ======= =========
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 other income, which are not allocated by segment. The chief operating decision-maker does not review segment assets. 10 11 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) Total assets specifically identifiable with each reportable segment are as follows:
JANUARY 2, OCTOBER 2, 1999 1999 ---------- ---------- Mass merchandisers $ 25,248 $ 35,454 Chain drug stores/combo stores/supermarkets 6,368 4,738 Variety 1,246 4,888 Other 5,068 3,902 Unassigned assets 88,568 84,371 -------- -------- $126,498 $133,353 ======== ========
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 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. Prior to September 1, 1999, the Company held an 80% interest in Fantasma LLC ("Fantasma") and accordingly Fantasma was included as a mostly-owned subsidiary in the supplemental consolidating financial information for such periods. The Company and guarantor subsidiaries account for investments in subsidiaries on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the Company's and subsidiary's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Effective January 3, 1999, the assets of the Company's wholly owned guarantor subsidiaries (other than Fantasma) were transferred to the Company. Accordingly, the Company now performs all operations previously performed by these wholly owned guarantor subsidiaries, which are included in the Company in the consolidating financial information for periods ending after such date. Effective September 1, 1999, the Company acquired 100% of the interest of Fantasma, which is included as a wholly-owned subsidiary in the consolidating financial information for periods ending after such date. 11 12 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
OCTOBER 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 $ 22 $ 11 $ -- $ 2,906 $ -- $ 2,939 Accounts receivable, net 36,499 2,328 -- 3,375 -- 42,202 Inventories 26,074 2,608 -- 3,456 -- 32,138 Prepaid expenses and other current assets 400 257 -- 350 -- 1,007 Deferred tax assets 3,743 -- -- -- -- 3,743 --------- ------ ---- ------- -------- --------- Total current assets 66,738 5,204 -- 10,087 -- 82,029 Property, plant and equipment, net 16,824 17 -- 1,423 -- 18,264 Other assets 46,867 4,010 -- 1,579 (19,396) 33,060 --------- ------ ---- ------- -------- --------- Total assets $ 130,429 $9,231 $ -- $13,089 $(19,396) $ 133,353 ========= ====== ==== ======= ======== ========= LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities Borrowings under revolving note payable $ 23,768 $-- $ -- $ -- $ -- $ 23,768 Redeemable preferred stock of a subsidiary 972 -- -- -- -- 972 Current maturities of long-term obligations and deferred compensation 577 -- -- 295 -- 872 Accounts payable 12,642 1,042 -- 1,543 -- 15,227 Accrued expenses 15,899 703 -- 1,238 -- 17,840 Due to affiliate -- 6,931 -- 3,830 (10,761) -- --------- ------ ---- ------- -------- --------- Total current liabilities 53,858 8,676 -- 6,906 (10,761) 58,679 10 3/4% series B senior notes due 2006 75,000 -- -- -- -- 75,000 Long-term obligations and deferred compensation, less current maturities 1,805 -- -- -- -- 1,805 Preferred Stock 31,089 -- -- -- -- 31,089 Shareholders' (deficit) equity (31,323) 555 -- 6,183 (8,635) (33,220) --------- ------ ---- ------- -------- --------- Total liabilities and shareholders' (deficit) equity $ 130,429 $9,231 $ -- $13,089 $(19,396) $ 133,353 ========= ====== ==== ======= ======== =========
12 13 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 ======== ======= ======= ======= ======== =========
13 14 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
THREE MONTHS ENDED ----------------------------------------------------------------------------------- OCTOBER 2, 1999 ----------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $ 30,490 $1,509 $ 2,879 $ 3,618 $ -- $ 38,496 Cost of goods sold 18,275 1,437 2,518 1,925 -- 24,155 -------- ------ ------- ------- ------ -------- Gross profit 12,215 72 361 1,693 -- 14,341 Operating expenses 12,717 570 1,173 2,267 -- 16,727 -------- ------ ------- ------- ------ -------- Loss from operations (502) (498) (812) (574) -- (2,386) Interest expense (2,471) (26) (56) (104) -- (2,657) Other income (expense), net 5 (14) (1) 70 -- 60 Equity in (losses) earnings of consolidated subsidiaries (2,487) -- -- -- 2,487 -- -------- ------ ------- ------- ------ -------- (Loss) income before income tax expense and dividends and accretion on preferred stock (5,455) (538) (869) (608) 2,487 (4,983) Income tax expense -- -- -- (37) -- (37) -------- ------ ------- ------- ------ -------- Net (loss) income before dividends and accretion on preferred stock (5,455) (538) (869) (645) 2,487 (5,020) Dividends and accretion on preferred stock 773 -- -- -- -- 773 -------- ------ ------- ------- ------ -------- Net loss applicable to common shareholders $ (6,228) $ (538) $ (869) $ (645) $2,487 $ (5,793) ======== ====== ======= ======= ====== ========
14 15 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
THREE MONTHS ENDED ------------------------------------------------------------------------------------- OCTOBER 3, 1998 ------------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $26,512 $ 3,629 $3,615 $3,093 $ -- $36,849 Cost of goods sold 18,036 (1,593) 2,448 1,558 -- 20,449 ------- ------- ------ ------ ------ ------- Gross profit 8,476 5,222 1,167 1,535 -- 16,400 Operating expenses 6,692 8,702 1,310 1,911 -- 18,615 ------- ------- ------ ------ ------ ------- Income (loss) from operations 1,784 (3,480) (143) (376) -- (2,215) Interest expense (2,089) 27 (134) (20) -- (2,216) Other (expense) income, net (76) 12 -- (179) -- (243) Equity in earnings of consolidated subsidiaries (4,201) -- -- -- 4,201 -- ------- ------- ------ ------ ------ ------- (Loss) income before income tax benefit (expense) and dividends and accretion on preferred stock (4,582) (3,441) (277) (575) 4,201 (4,674) Income tax benefit (expense) -- -- -- -- -- -- ------- ------- ------ ------ ------ ------- Net (loss) income before dividends and accretion on preferred stock (4,582) (3,441) (277) (575) 4,201 (4,674) Dividends and accretion on preferred stock 699 -- -- -- -- 699 ------- ------- ------ ------ ------ ------- Net (loss) income applicable to common shareholders $(5,281) $(3,441) $ (277) $ (575) $4,201 $(5,373) ======= ======= ====== ====== ====== =======
15 16 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED ---------------------------------------------------------------------------------- OCTOBER 2, 1999 ---------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $102,177 $1,509 $ 5,723 $16,184 $ -- $125,593 Cost of goods sold 60,181 1,437 5,528 7,754 -- 74,900 -------- ------ ------- ------- ---- -------- Gross profit 41,996 72 195 8,430 -- 50,693 Operating expenses 38,773 570 3,475 7,743 -- 50,561 -------- ------ ------- ------- ---- -------- Income (loss) from operations 3,223 (498) (3,280) 687 -- 132 Interest expense (7,203) (26) (209) (241) -- (7,679) Other income (expense), net 427 (14) (25) (428) -- (40) Equity in (losses) earnings of consolidated subsidiaries (415) -- -- -- 499 84 -------- ------ ------- ------- ---- -------- (Loss) income before income tax expense and dividends and accretion on preferred stock (3,968) (538) (3,514) 18 499 (7,503) Income tax expense -- -- -- (37) -- (37) -------- ------ ------- ------- ---- -------- Net (loss) income before dividends and accretion on preferred stock (3,968) (538) (3,514) (19) 499 (7,540) Dividends and accretion on preferred stock 2,228 -- -- -- -- 2,228 -------- ------ ------- ------- ---- -------- Net loss applicable to common shareholders $ (6,196) $ (538) $(3,514) $ (19) $499 $ (9,768) ======== ====== ======= ======= ==== ========
16 17 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED ---------------------------------------------------------------------------------------- OCTOBER 3, 1998 ---------------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Net sales $62,202 $46,326 $4,116 $12,836 $ -- $125,480 Cost of goods sold 38,383 20,903 2,749 5,957 -- 67,992 ------- ------- ------ ------- ------- -------- Gross profit 23,819 25,423 1,367 6,879 -- 57,488 Operating expenses 30,676 20,124 1,610 5,413 -- 57,823 ------- ------- ------ ------- ------- -------- (Loss) income from operations (6,857) 5,299 (243) 1,466 -- (335) Interest expense (4,075) (586) (142) (51) -- (4,854) Other (expense) income, net (69) 24 -- (208) -- (253) Equity in earnings of consolidated subsidiaries 1,403 -- -- -- (1,403) -- ------- ------- ------ ------- ------- -------- (Loss) income before income tax benefit (expense) and dividends and accretion on preferred stock (9,598) 4,737 (385) 1,207 (1,403) (5,442) Income tax benefit (expense) 4,663 (3,725) -- (600) -- 338 ------- ------- ------ ------- ------- -------- Net (loss) income before dividends and accretion on preferred stock (4,935) 1,012 (385) 607 (1,403) (5,104) Dividends and accretion on preferred stock 2,056 -- -- -- -- 2,056 ------- ------- ------ ------- ------- -------- Net (loss) income applicable to common shareholders $(6,991) $ 1,012 $ (385) $ 607 $(1,403) $ (7,160) ======= ======= ====== ======= ======= ========
17 18 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED --------------------------------------------------------------------------------- OCTOBER 2, 1999 --------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Cash flows from operating activities $(14,305) $1,371 $(1,275) $ 1,473 $ -- $(12,736) Cash flows from Investing activities: Purchase of property, plant and equipment (5,988) -- -- (1,043) -- (7,031) Advance to affiliates (239) -- -- -- 239 -- Other investing activities (408) -- (12) (27) -- (447) -------- ------ ------- ------- ----- -------- Net cash (used in) provided by investing activities (6,635) -- (12) (1,070) 239 (7,478) -------- ------ ------- ------- ----- -------- Cash flows from financing activities: Net borrowings under revolving note payable 21,192 -- -- -- -- 21,192 Payments on long-term obligations and Deferred compensation (541) -- -- 295 -- (246) Due to (from) affiliates 177 (1,360) 1,183 239 (239) -- -------- ------ ------- ------- ----- -------- Net cash provided by (used in) financing activities 20,828 (1,360) 1,183 534 (239) 20,946 -------- ------ ------- ------- ----- -------- Net (decrease) increase in cash (112) 11 (104) 937 -- 732 Cash and cash equivalents, beginning of period 134 -- 104 1,969 -- 2,207 -------- ------ ------- ------- ----- -------- Cash and cash equivalents, end of period $ 22 $ 11 $ -- $ 2,906 $ -- $ 2,939 ======== ====== ======= ======= ===== ========
18 19 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
NINE MONTHS ENDED --------------------------------------------------------------------------------- OCTOBER 3, 1998 --------------------------------------------------------------------------------- WHOLLY OWNED MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED CONDENSED BALANCE SHEETS Cash flows from operating activities $(20,293) $ 14,424 $(1,494) $ 1,607 $ -- $ (5,756) Cash flows from Investing activities: Purchase of property, plant and equipment (8,671) (5,806) (13) (2,293) -- (16,783) Acquisitions, net of cash received (9,464) -- -- -- -- (9,464) Advance to affiliates (10,060) -- -- -- 10,060 -- Other investing activities (236) (60) (22) (3,157) -- (3,475) -------- -------- ------- ------- -------- -------- Net cash (used in) provided by investing Activities (28,431) (5,866) (35) (5,450) 10,060 (29,722) -------- -------- ------- ------- -------- -------- Cash flows from financing activities: Net borrowings under revolving note payable (8,865) (14,715) -- (8,678) -- (32,258) Proceeds from term note payable 13,222 -- -- -- -- 13,222 Proceeds from 10 3/4% senior notes 75,000 -- -- -- -- 75,000 Costs related to issuance of 10 3/4% senior notes (3,120) -- -- -- -- (3,120) Payments on long-term obligations and deferred compensation (29,447) -- -- 11,890 -- (17,557) Due to affiliates -- 6,057 1,653 2,350 (10,060) -- -------- -------- ------- ------- -------- -------- Net cash provided by (used in) financing Activities 46,790 (8,658) 1,653 5,562 (10,060) 35,287 -------- -------- ------- ------- -------- -------- Net (decrease) increase in cash (1,934) (100) 124 1,719 -- (191) Cash and cash equivalents, beginning of period 2,354 183 73 169 -- 2,779 -------- -------- ------- ------- -------- -------- Cash and cash equivalents, end of period $ 420 $ 83 $ 197 $ 1,888 $ -- $ 2,588 ======== ======== ======= ======= ======== ========
19 20 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. 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 47.4% and 44.9% of the Company's net sales for the nine months ended October 2, 1999 and October 3, 1998, respectively; net sales of the Company's costume jewelry accounted for approximately 42.1% and 36.6% of the Company's net sales for the nine months ended October 2, 1999 and October 3, 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. 20 21 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 $92,000 and $464,000 and $1.2 million and $1.7 million for the three and nine months ended October 2, 1999 and October 3, 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 nine months ended October 2, 1999, the Company capitalized approximately $49,000 and $155,000 of these costs, respectively, in the accompanying consolidated balance sheet. Amortization expense for the three months and nine months ended October 2, 1999 related to these costs as well as previously capitalized costs was approximately $306,000 and $903,000, respectively. No such cost were capitalized or amortized during the first nine months ended October 3, 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. 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 approximately $227,000 and $8.6 million for the three and nine months ended October 2, 1999, respectively as compared to $903,000 and $8.3 million for the three and nine months ended October 3, 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 was held by a previous member of Fantasma. As a result of the termination of the employment of this member, in April 1999, the Company acquired this 20% interest effective September 1, 1999. Accordingly, the Company currently holds 100% of the Fantasma member interests. 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 if certain earnings targets for Fantasma are met in 1999 and 2000. As of October 2, 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. 21 22 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 $5.0 million and $7.5 million for the three and nine months ended October 2, 1999 as compared to a net loss before dividends and accretion on preferred stock of $4.7 million and $5.1 million for the three and nine months ended October 3, 1998. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's Consolidated Condensed Statements of Operations:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2, 1998 1999 1998 1999 ---------- ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 55.5 62.7 54.2 59.6 ----- ----- ----- ----- Gross profit 44.5 37.3 45.8 40.4 Operating expenses 50.5 43.5 46.1 40.3 ----- ----- ----- ----- (Loss) income from operations (6.0) (6.2) (0.3) 0.1 Interest expense 6.0 6.9 3.9 6.1 Other expense (income), net 0.7 (0.2) 0.2 -- ----- ----- ----- ----- Loss before taxes and dividends and accretion on preferred Stock (12.7) (12.9) (4.4) (6.0) Income tax (expense) benefit -- (0.1) 0.3 -- ----- ----- ----- ----- Net loss before dividends and accretion on preferred stock (12.7) (13.0) (4.1) (6.0) Dividends and accretion on preferred stock 1.9 2.0 1.6 1.8 ----- ----- ----- ----- Net loss applicable to common shareholders (14.6)% (15.0)% (5.7)% (7.8)% ===== ===== ===== =====
THREE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO OCTOBER 3, 1998 Net Sales. Consolidated net sales were $38.5 million for the three months ended October 2, 1999 as compared to $36.8 million for the three months ended October 3, 1998, an increase of $1.6 million. The increase in net sales is primarily attributable to an increase of $4.3 million in the mass merchandiser channel and $329,000 in the variety channel partially offset by lower sales to non-core segments, primarily department stores, of $2.2 million and lower chain drug stores/combo stores/supermarkets sales of $762,000. The general downward trend of department store sales is expected to continue for the remainder of fiscal 1999. Gross Profit. Gross profit was $14.3 million for the three months ended October 2, 1999 as compared to $16.4 million for the three months ended October 3, 1998. Gross profit as a percentage of net sales decreased to 37.3% for the three months ended October 2, 1999 from 44.5% for the three months ended October 3, 1998. The $2.1 million or 12.6% decrease is primarily due to increased closeout sales in an effort to reduce inventory levels and a change in jewelry product mix to lower margin products. Operating Expenses. Operating expenses were $16.7 million for the three months ended October 2, 1999 as compared to $18.6 million for the three months ended October 3, 1998, a decrease of 10.1% or $1.9 million. The decrease is primarily attributable to inefficiencies incurred in the third quarter of 1998 after the announced closing of the Texas distribution center and related 1999 payroll and overhead savings generated from the closing. 22 23 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Expense. Interest expense was $2.7 million for the three months ended October 2, 1999 as compared to $2.2 million for the three months ended October 3, 1998, an increase of 19.9% or $441,000. This resulted from additional borrowings under the Company's credit facilities to fund operations. Income Tax. Income tax expense was $37,000 for the three months ended October 2, 1999 and represents the provision on the Company's UK operations. No expense or benefit was recorded for the three months ended October 3, 1998. Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock was $5.0 million for the three months ended October 2, 1999 as compared to net loss before dividends and accretion on preferred stock of $4.7 million for the three months ended October 3, 1998, an increase of $346,000. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders was $5.8 million for the three months ended October 2, 1999 as compared to a loss of $5.4 million for the three months ended October 3, 1998, an increase of $420,000. The increase is attributable to the $346,000 decrease in earnings and an increase of $74,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO OCTOBER 3, 1998 Net Sales. Consolidated net sales were $125.6 million for the nine months ended October 2, 1999 as compared to $125.5 million for the nine months ended October 3, 1998, an increase of $113,000. The increase in net sales is primarily attributable to an increase of $8.6 million in the mass merchandiser channel and $1.6 million in the variety channel largely offset by lower sales to non-core segments, primarily department stores, of $7.8 million and lower chain drug stores/combo stores/supermarkets sales of $2.4 million. The general downward trend of department store sales is expected to continue for the remainder of fiscal 1999. Gross Profit. Gross profit was $50.7 million for the nine months ended October 2, 1999 as compared to $57.5 million for the nine months ended October 3, 1998. Gross profit as a percentage of net sales decreased to 40.4% for the nine months ended October 2, 1999 from 45.8% for the nine months ended October 3, 1998. The $6.8 million or 11.8% 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 jewelry product mix to lower margin products. Operating Expenses. Operating expenses were $50.6 million for the nine months ended October 2, 1999 as compared to $57.8 million for the nine months ended October 3, 1998, a decrease of 12.6% or $7.2 million. The decrease is primarily attributable to the April 1998 restructuring charge of $2.6 million for the closing of the Texas distribution center, related inefficiencies incurred in the third quarter of 1998 after the announced closure and related 1999 payroll and overhead savings generated from the closing. Interest Expense. Interest expense was $7.7 million for the nine months ended October 2, 1999 as compared to $4.9 million for the nine months ended October 3, 1998, an increase of 58.2% or $2.8 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 issued in July 1998. Income Tax. Income tax expense was $37,000 for the three months ended October 2, 1999 as compared to a benefit of $338,000 for the nine months ended October 3, 1998. Net Loss. As a result of the factors discussed above, net loss before dividends and accretion on preferred stock was $7.5 million for the nine months ended October 2, 1999 as compared to $5.1 million for the nine months ended October 3, 1998, an increase of $2.4 million. Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders was $9.8 million for the nine months ended October 2, 1999 as compared to a loss of $7.2 million for the nine months ended October 3, 1998, an increase of $2.6 million. The increase as attributable to the $2.4 million decrease in earnings and an increase of $172,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. 23 24 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES At October 2, 1999 the Company had cash and cash equivalents of $2.9 million and working capital of $23.4 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 $12.7 million of cash in operations during the nine months ended October 2, 1999 compared to a use of $5.8 million during the nine months ended October 3, 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 unfavorable accounts receivable resulting from higher third quarter sales in 1999 than third quarter sales in 1998. The Company used $7.5 million in investing activities during the nine months ended October 2, 1999 compared to a use of $29.7 million during the nine months ended October 3, 1998. The uses of funds for investing activities during the nine months ended October 2, 1999 consisted primarily of $7.0 million for the purchase of display fixtures and the new information management system. The decrease from the nine months ended October 3, 1998 is attributable to lower spending on display fixtures and the 1998 acquisitions of Fantasma and Foster Grant UK. The Company generated $20.9 million from financing activities during the nine months ended October 2, 1999 compared to $35.3 million during the nine months ended October 3, 1998. The funds generated from financing activities consisted mainly of borrowings under the revolving note payable. The decrease from the nine months ended October 3, 1998 is attributable to proceeds from the Notes and the term loan received in fiscal 1998. The Company has 43,700 shares of Series A Preferred Stock that has a redemption value at October 2, 1999 of $31.1 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 October 2, 1999, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $99.9 million. The Company had current liabilities of approximately $58.7 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 $5.9 million and minimum payments under its operating leases of approximately $714,000. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. 24 25 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has up to $ 16.9 million available for borrowings under the Senior Credit Facility as of October 2, 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 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 covenants and waived non-compliance with the prior covenants. As of October 2, 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. As a result of the Company's growth, AAi has implemented a new information management system which is certified by the vendor to be Year 2000 compliant. The Company has completed Phase I of the conversion to the new system during October 1999 and believes that the Year 2000 issue will not pose significant operational problems for the Company's systems. Since Year 2000 compliance has been 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 compliant. 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. 25 26 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 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 October 2, 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 nine months ended October 2, 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. 26 27 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.8.1 Amendment to 1996 Incentive Stock Plan 27.1 Financial Data Schedule (b) Report on Form 8-K The registrant filed no reports on form 8-K during the quarter ended October 2, 1999. 27 28 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AAi.FosterGrant, Inc. (Registrant) Dated: November 16, 1999 /s/ Gerald F. Cerce ------------------------------------------- Gerald F. Cerce Chairman and Chief Executive Officer (Principal Executive Officer) Dated: November 16, 1999 /s/ John R. Ranelli ------------------------------------------- John R. Ranelli President and Chief Operating Officer (Principal Financial Officer) 28 EX-10.8.1 2 AMENDMENT TO 1996 INCENTIVE STOCK PLAN 1 EXHIBIT 10.8.1 AAi.FosterGrant, Inc. AMENDMENT TO 1996 INCENTIVE STOCK PLAN WHEREAS, AAi.FosterGrant, Inc. (the "Company") desires to amend the provisions of the Company's 1996 Incentive Stock Plan (the "Plan") to reflect an increase in the maximum number of Shares for which awards may be granted under the Plan; and WHEREAS, under Section 16 of the Plan, the Board of Directors of the Company, may amend the Plan to increase the maximum number of Shares for which options may be granted under the Plan, provided that such amendment shall not become effective until the approval of the shareholders; and WHEREAS, the Board of Directors and Shareholders of the Company have each approved the amendment to increase the maximum number of Shares for which awards may be granted under the Plan; NOW, THEREFORE, the Plan is amended as follows: 1. That Section 2 of the Plan be amended by substituting the number "88,000" for "50,000" in the second sentence thereof to increase the maximum number of Shares for which awards may be granted under the Plan. 2. All other provisions of the Plan shall remain in full force and effect and are hereby ratified, approved and confirmed. IN WITNESS WHEREOF, the Company has caused this Amendment to the 1996 Incentive Stock Plan to be executed by its duly authorized officer as of the 13th day of May, 1999. AAi.FosterGrant, Inc. By: /s/ Gerald F. Cerce ------------------------------- President Attest: /s/ Stephen J. Carlotti - ------------------------------ Secretary EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEET AS OF OCTOBER 2, 1999 (UNAUDITED) AND THE CONDENSED STATEMENT OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED OCTOBER 2, 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. 1,000 U.S. DOLLARS 9-MOS JAN-01-2000 JAN-02-1999 OCT-02-1999 1 2,939 0 42,202 7,659 32,138 82,029 36,399 18,135 133,353 58,679 75,000 0 31,089 6 (33,220) 133,353 125,593 125,593 74,900 50,561 (44) 0 7,679 (7,503) 37 (7,540) 0 0 0 (9,768) (16.07) 0
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