-----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, GWAug3upNoDjUxO5Lg7UalSSV727j/U8HAcrc/hCgGz6JTV6KTPWWoBCWeKvktBx j0ZDTLAsdHL7qb2+1y4MAA== 0000950135-99-001827.txt : 19990405 0000950135-99-001827.hdr.sgml : 19990405 ACCESSION NUMBER: 0000950135-99-001827 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FANTASMA LLC CENTRAL INDEX KEY: 0001067354 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61119-05 FILM NUMBER: 99586690 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 10-K405 1 FANTASMA, LLC 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] Annual Report Under Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended January 2, 1999; or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 From the transition period from ________ to ________. FANTASMA, LLC ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) DELAWARE 11-3340245 - ------------------------------- ------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 500 George Washington Highway, SmithfielD RI 02917 - -------------------------------------------- ------------------- (Address of Principal Executive Offices) (Zip Code) (401) 231-3800 ----------------------------------------------- (Issuer's Telephone Number, Including Area Code) SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1999, the aggregate market value of the voting equity held by non-affiliates of the Registrant was none. The Registrant meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K (as modified by prior no-action release) and is therefore filing this form with the reduced disclosure format. ================================================================================ 2 ================================================================================ PART I ================================================================================ ITEM 1. BUSINESS Fantasma, LLC, a Delaware limited liability company, (the "Company" or "Fantasma"), is a mostly-owned subsidiary of AAi.FosterGrant, Inc., a Rhode Island corporation (the "Parent"). Fantasma designs, imports and wholesales licensed watches, clocks and other novelties to customers located primarily throughout the United States. Customers include mass merchandisers, department stores, chain drug stores, theme parks and private labels. Fantasma distributes products under numerous licensed names, including Winnie the Pooh(R), Sesame Street(R), The National Football League(R), and Peanuts(R). Approximately 51.6% of total sales are generated from three mass merchandisers. Fantasma outsources manufacturing for virtually all of its products to manufacturers in Asia with the remainder outsourced to independent domestic manufacturers. Costs associated with Fantasma's numerous royalty agreements, based on net sales, are classified in costs of goods sold. Accordingly, the two principal elements comprising Fantasma's cost of goods sold are the price of purchased manufactured goods and royalties. Fantasma 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 are comprised primarily of payroll, occupancy costs related to Fantasma's New York office and showroom, freight, depreciation and amortization. In June 1998, AAi.FosterGrant, Inc. acquired an 80% interest in Fantasma. The operating agreement under which Fantasma is managed provides AAi.FosterGrant, Inc. with sole voting rights on numerous significant matters. ITEM 2. PROPERTIES The Company's principal executive office is located at 500 George Washington Highway, Smithfield, Rhode Island 02917, which is owned by the Parent. The Company also leases an office at 307 5th Avenue, 4th Floor, New York, New York 10016. The Company believes that its facilities are suitable and adequate for its intended purposes. ITEM 3. LEGAL PROCEEDINGS The Company is subject to legal proceedings in the ordinary course of business. While the outcome of law suits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition, results of the operation or cash flow of the Company. 2 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction I to Form 10-K. ================================================================================ PART II ================================================================================ ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's equity securities are not publicly traded. The Parent owns 80% of the Company's membership interests and the remaining minority interests are held by an officer of the Company. Thus, no trading market exists for such stock. ITEM 6. SELECTED FINANCIAL DATA Omitted pursuant to General Instruction I to Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain "forward-looking" statements and are subject to risks and uncertainties that could cause actual results to differ significantly from expectations. In particular, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section which are not historical facts, including, but not limited to, statements regarding the anticipated adequacy of cash resources to meet Fantasma's working capital requirements and statements regarding the anticipated proportion of revenues to be derived from a limited number of customers, may constitute forward-looking statements. Although Fantasma believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These risks and uncertainties include dependence on licensed brands, customer concentration and consolidation, a single site distribution facility, a limited number of delivery companies, unpredictability of discretionary consumer spending, competition, susceptibility to changing consumer preferences and uncertainties relating to the Year 2000 computer issue. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere herein. RESULTS OF OPERATION Year Ended January 2, 1999 compared to December 31, 1997 Net Sales. Net sales were $14.7 million for the year ended January 2, 1999 as compared to $17.2 million for the year ended December 31, 1997, a decrease of 14.7% or $2.5 million. The 3 4 decrease is attributable to decreased sales of certain licensed analog watches in 1998 as compared to 1997. Gross Profit. Gross profit was $4.5 million for the year ended January 2, 1999 compared to $4.6 million for the year ended December 31, 1997 a decrease of $142,000. Gross profit as a percentage of net sales increased to 30.4% from 26.8% due to a shift in product mix from low margin analog watches to higher margin digital watches. Operating Expenses. Operating expenses were $3.8 million for the years ended January 2, 1999 and December 31, 1997. Operating expenses were impacted by the costs associated with moving Fantasma's sales office to New York City and moving warehouse operations from a New Jersey facility to the Company's distribution facility in Rhode Island. These costs were offset by decreased variable costs associated with the decrease in net sales. Interest Expense. Interest expense was $453,000 for the year ended January 2, 1999 compared to $480,000 for the year ended December 31, 1997, a decrease of 5.6% or $27,000. Net Income. As a result of the factors discussed above, net income was $197,000 for the year ended January 2, 1999 compared to net income of $303,000 for the year ended December 31, 1997, a decrease of $106,000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not believe that the adoption of SFAS No. 133 will have a material impact on its financial statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 Reporting on the Costs of Start Up Activities (SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start up activities and organization costs to be expensed as incurred. The Company does not believe that the adoption of SOP 98-5 will have a material impact on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 4 5 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to Financial Statements is included on page F-1 this Annual Report and is incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosure as defined by Item 304 of Regulation S-K. ================================================================================ PART III ================================================================================ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Omitted pursuant to General Instruction I to Form 10-K. 5 6 ITEM 11. EXECUTIVE COMPENSATION Omitted pursuant to General Instruction I to Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Omitted pursuant to General Instruction I to Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted pursuant to General Instruction I to Form 10-K. ================================================================================ PART IV ================================================================================ ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The Financial Statements are listed in the index on page F-1 of this Annual Report. (2) FINANCIAL STATEMENT SCHEDULE Valuation and Qualifying Accounts is included in the Notes to the Financial Statement on Page F-12 of this Annual Report. 6 7 (3) EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1* Certificate of Formation of Fantasma, LLC 3.2* Amended and Restated Operating Agreement of Fantasma, LLC 4.1* Indenture dated as of July 21, 1998, by and among AAi.FOSTERGRANT, Inc. ("AAi"), its domestic subsidiaries named therein (the "Guarantors") and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the Series A and Series B 103/4% Senior Notes due 2006. 4.2* Purchase Agreement dated as of July 16, 1998, by and among AAi, the Guarantors and NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. (the "Initial Purchasers"). 10.1* Second Amended and Restated Financing and Security Agreement by and among AAi, certain of its Subsidiaries, NationsBank, N.A., as agent, and other lenders party thereto, dated July 21, 1998. 10.2* Fantasma, LLC Member Agreement by and among AAi, Roger D. Dreyer and Houdini Capital LTD dated as of June 23, 1998.+ 10.3.1* Fantasma, LLC Member Agreement by and among AAi and Paul Michaels dated as of June 23, 1998. 10.3.2 Amendment to Fantasma, LLC Member Agreement by and among AAi and Paul Michaels dated as of March 26, 1999.+ 10.4 Employment Agreement between Fantasma and Roger D. Dreyer dated June 23, 1998.+ 10.5 Employment Agreement between Fantasma and Paul Michaels dated as of June 23, 1998.+ 24.1 Power of Attorney 27.1 Financial Data Schedule for the year ended January 2, 1999. - ---------- * Previously filed as an exhibit to the Company's Registration Statement No. 333-61119 on Form S-4 and by this reference is incorporated herein. + Management or compensatory plan or arrangement. (B) REPORTS ON FORM 8-K None. 7 8 FANTASMA, LLC SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FANTASMA, LLC Date: April 2, 1999 By: /s/ Duane M. DeSisto ---------------------------------- Duane M. DeSisto Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. * /s/ Duane M. DeSisto - --------------------------------- -------------------------------------- Roger D. Dreyer Duane M. DeSisto President Treasurer (Principal Executive Officer) (Principal Financial Officer) Date: ______________, 1999 Date: April 2, 1999 /s/ Stephen J. Korotsky - --------------------------------- Stephen J. Korotsky, Controller (Principal Accounting Officer) Date: April 2, 1999 AAi.FosterGrant, Inc. Houdini Capital Ltd. By: /s/ Gerald F. Cerce By: * ------------------------------ ----------------------------------- Gerald F. Cerce Roger D. Dreyer President President Date: April 2, 1999 Date: ______________, 1999 By: /s/ Gerald F. Cerce ----------------------------- (Attorney-in-fact for individuals indicated by asterisk) Date: April 2, 1999 8 9 INDEX PAGE FANTASMA, LLC: Report of Independent Public Accountants F-2 Balance Sheets as of December 31, 1997 and January 2, 1999 F-3 Statements of Operations for the Years Ended December 31, 1996 and 1997 and January 2, 1999 F-4 Statements of Members' Equity for the Years Ended December 31, 1996 and 1997 and January 2, 1999 F-5 Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 and January 2, 1999 F-6 Notes to Financial Statements F-7 F-1 10 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of Fantasma LLC: We have audited the accompanying balance sheets of Fantasma LLC as of December 31, 1997 and January 2, 1999 and the related statements of operations, members' equity and cash flows for each of the three years in the period ended January 2, 1999. These financial statements are the responsibility of Fantasma LLC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fantasma LLC as of December 31, 1997 and January 2, 1999 and the results of its operations and its cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts February 19, 1999 F-2 11 FANTASMA LLC BALANCE SHEETS (IN THOUSANDS)
ASSETS DECEMBER 31, JANUARY 2, 1997 1999 CURRENT ASSETS: Cash $ 238 $ 104 Accounts receivable, less reserves of approximately $402 and $373 5,108 5,088 Inventory 1,908 3,878 Prepaids and other current assets 72 203 --------------- --------------- Total current assets 7,326 9,273 --------------- --------------- PROPERTY AND EQUIPMENT, AT COST: Equipment 68 29 Furniture and fixtures 11 -- --------------- --------------- 79 29 Less--Accumulated depreciation (13) (5) --------------- --------------- 66 24 OTHER ASSETS: Intangible assets, net of accumulated amortization of $0 and $270 3 4,357 --------------- --------------- Total assets $ 7,395 $ 13,654 =============== =============== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Note payable to member $ 3,764 $ 7,088 Advances payable to member 1,661 -- Accounts payable and accrued expenses 1,657 1,960 --------------- --------------- Total current liabilities 7,082 9,048 COMMITMENTS AND CONTINGENCIES (NOTE 1) MEMBERS' EQUITY 313 4,606 --------------- --------------- Total liabilities and members' equity $ 7,395 $ 13,654 =============== ===============
The accompanying notes are an integral part of these financial statements. F-3 12 FANTASMA LLC STATEMENTS OF OPERATIONS (IN THOUSANDS)
-------------------- YEARS ENDED ----------------- DECEMBER 31, JANUARY 2, 1996 1997 1999 NET SALES $ 10,815 $ 17,163 $ 14,645 COST OF GOODS SOLD 8,838 12,562 10,186 --------------- --------------- --------------- Gross profit 1,977 4,601 4,459 OPERATING EXPENSES: Selling expenses 643 1,501 2,197 General and administrative expenses 1,023 2,259 1,612 --------------- --------------- --------------- Income from operations 311 841 650 INTEREST EXPENSE 236 480 453 --------------- --------------- --------------- INCOME BEFORE INCOME TAXES 75 361 197 PROVISION FOR INCOME TAXES (17) (58) -- --------------- --------------- --------------- Net income $ 58 $ 303 $ 197 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. F-4 13 FANTASMA LLC STATEMENTS OF MEMBERS' EQUITY (IN THOUSANDS)
PARENT COMPANY MEMBERS' INVESTMENT EQUITY TOTAL BALANCE, DECEMBER 31, 1995 $ 1,838 $ -- $ 1,838 Capital contribution -- 1 1 Additional parent company investment 807 -- 807 Conversion of parent company investment to note payable to member (2,498) -- (2,498) Net (loss) income (147) 205 58 --------------- -------------- --------------- BALANCE, DECEMBER 31, 1996 -- 206 206 Distribution to members -- (196) (196) Net income -- 303 303 --------------- -------------- --------------- BALANCE, DECEMBER 31, 1997 -- 313 313 Distribution to members -- (531) (531) Pushdown of purchase price related to AAi.FosterGrant's investment in Fantasma -- 4,627 4,627 Net income -- 197 197 --------------- -------------- --------------- BALANCE, JANUARY 2, 1999 $ -- $ 4,606 $ 4,606 =============== ============== ===============
The accompanying notes are an integral part of these financial statements. F-5 14 FANTASMA LLC STATEMENTS OF CASH FLOWS (IN THOUSANDS)
-------------------- YEARS ENDED ----------------- DECEMBER 31, JANUARY 2, 1996 1997 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 58 $ 303 $ 197 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation and amortization 15 11 277 Write-off of property and equipment 20 -- 49 Change in assets and liabilities- Accounts receivable (1,811) (1,700) 20 Inventory (1,178) 87 (1,970) Prepaid expenses and other current assets (121) 49 (131) Advances payable to member 1,078 674 (1,661) Accounts payable and accrued liabilities 54 861 303 --------------- --------------- --------------- Net cash (used in) provided by operating activities (1,885) 285 (2,916) --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment -- (40) (14) Decrease in other assets -- -- 3 --------------- --------------- --------------- Net cash used in investing activities -- (40) (11) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable to member 1,266 -- 7,088 Repayments of note payable to member -- -- (3,764) Parent company investment 807 -- -- Member contributions (distributions) 1 (196) (531) --------------- --------------- --------------- Net cash provided by (used in) financing activities 2,074 (196) 2,793 --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH 189 49 (134) CASH, BEGINNING OF PERIOD -- 189 238 --------------- --------------- --------------- CASH, END OF PERIOD $ 189 $ 238 $ 104 =============== =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 156 $ 480 $ -- =============== =============== =============== Taxes paid $ -- $ 27 $ -- =============== =============== =============== SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Conversion of parent company investment to note payable to member $ 2,498 $ -- $ -- =============== =============== =============== Pushdown of purchase price related to AAi.FosterGrant's investment in Fantasma $ -- $ -- $ 4,627 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. F-6 15 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES 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 primarily in the United States. Prior to September 1, 1996, Fantasma operated as a division (the Fantasma division) of Overdrive Capital Corp. (formerly known as Good Stuff Corp.). Overdrive Capital Corp. (Overdrive) sold the Fantasma 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. The assets were transferred at historical book value and consisted of the following (in thousands): Unexpired royalties $ 289 Accounts receivable 798 Inventory 2,600 Prepaid expenses 49 Furniture and equipment 25 Trademarks 3 ----------- Total assets transferred $ 3,764 =========== The accompanying financial statements prior to the formation of Fantasma LLC represent the financial results of the Fantasma division as included in the financial statements of Overdrive from January 1, 1995 to August 31, 1996. In June 1998, AAi.FosterGrant, Inc. (AAi.FosterGrant) acquired an 80% interest in Fantasma for approximately $4.1 million in cash (the Acquisition). The operating agreement under which Fantasma is managed provides AAi.FosterGrant with sole voting rights on numerous significant matters. The Acquisition was accounted for using the purchase method. The purchase price was allocated based on estimated fair market value of assets and liabilities at the date of acquisition, as follows (in thousands): Cash $ 73 Accounts receivable 1,603 Inventory 2,002 Other current assets 165 Furniture and equipment 15 Goodwill 4,626 Notes payable (3,500) Other current liabilities (934) ----------- Cash paid $ 4,050 =========== F-7 16 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (Continued) The book value of Fantasma's assets and liabilities immediately prior to the Acquisition approximated fair market value. Goodwill is being amortized ratably over 10 years. Basis of Accounting The accompanying financial statements reflect the application of certain significant accounting policies, as discussed below and elsewhere in the notes to financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. Property and Equipment Fantasma provides for depreciation and amortization by charges to operations in amounts that allocate the cost of these assets on the straight-line and accelerated bases over their estimated useful lives as follows: ASSET CLASSIFICATION ESTIMATED USEFUL LIFE Equipment 5 years Furniture and fixtures 7 years Fantasma has adopted the provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The adoption of this pronouncement did not have a material effect on Fantasma's financial position or financial results. Royalties Fantasma has several agreements that require royalty payments based on a percentage of certain net product sales, subject to specified minimum payments. Minimum future royalty obligations relating to these agreements total $849,000. Royalty expense was approximately $1,049,000, $1,734,000 and $1,477,000 for the years ended December 31, 1996 and 1997 and January 2, 1999, respectively. Accrued royalties, which are included in accounts payable and accrued expenses on the accompanying balance sheets, totaled $732,000 and $707,000 at December 31, 1997 and January 2, 1999, respectively. Revenue Recognition Fantasma recognizes revenue from product sales, net of anticipated returns and discounts, taking into account historical experience, upon shipment to the customer. Concentration of Credit Risk F-8 17 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (Continued) Financial instruments that potentially subject Fantasma to concentrations of credit risk are principally accounts receivable. A significant portion of its business activity is with domestic mass merchandisers whose ability to meet their financial obligations is dependent on economic conditions germane to the retail industry. During recent years, many major retailers have experienced significant financial difficulties and some have filed for bankruptcy protection; other retailers have begun to consolidate within the industry. To reduce credit risk, Fantasma routinely assesses the financial strength of its customers. Intangible and Other Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of, Fantasma reviews its long-lived assets (consisting primarily of goodwill) for impairment as events and circumstances indicate the carrying amount of an asset may not be recoverable. Fantasma evaluates the realizability of its long-lived assets based on profitability and cash flow expectations for the related asset. Management believes that as of each of the balance sheet dates presented none of Fantasma's long-lived assets were impaired. Amortization expense was approximately $270,000 for the year ended January 2, 1999. Disclosure of Fair Value of Financial Instruments Fantasma's financial instruments consist mainly of cash, accounts receivable, accounts payable and debt. The carrying amounts of Fantasma's financial instruments approximate fair value. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Fantasma does not believe that the adoption of SFAS No. 133 will have a material impact on its financial instruments. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start-up activities and organization costs to be expensed as incurred. Fantasma does not believe that the adoption of SOP 98-5 will have a material impact on its financial statements. 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. The provision for income taxes reflects New York City Unincorporated Business Tax and New York State filing fees. For the period from January 1, 1996 to August 31, 1996, Fantasma accounted for state income taxes on a separate company basis. (2) NOTE PAYABLE F-9 18 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (Continued) Fantasma issued a note payable to Overdrive as consideration for the asset purchase on September 1, 1996 (see Note 1), under which it could borrow up to $5,000,000. At December 31, 1997, approximately $3,764,000 was outstanding under this note. The note accrued interest at the prime rate (8.5% at December 31, 1997). Total interest charged on this note was approximately $107,000, $320,000 and $141,000 in the years ended December 31, 1996 and 1997 and January 2, 1999, respectively. This note was repaid in June 1998 with the proceeds from a note payable issued to AAi.FosterGrant. On June 13, 1998, the Company entered into a $15,000,000 demand revolving promissory note payable with AAi.FosterGrant. Borrowings under the note are secured by substantially all of Fantasma's assets and bear interest at a rate equal to AAi.FosterGrant's borrowing rate. The note is payable on demand with thirty-days notice. Total interest charged on this note was approximately $282,000 for the year ended January 2, 1999. At January 2, 1999, $7,088,000 was outstanding under this note payable. (3) OPTIONS In connection with AAi.FosterGrant's investment in Fantasma, Fantasma issued options to two employees. The options provide that the employees may purchase up to 13% of Fantasma at the fair market value on the date of grant. Certain of these options contain performance criteria and, therefore, will be accounted for as variable options. Based on 1998 activity, options to purchase 3% of Fantasma expired during the fiscal year. As of January 2, 1999 options to purchase 10% of the Company were outstanding and the exercise price was equal to or greater than the fair market value, therefore no expense was recorded. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options granted to employees to be included in the statement of operations or disclosed in the notes to financial statements. Fantasma has determined that it will account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. Had compensation cost for Fantasma's options been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, Fantasma's net loss for the fiscal year ended January 2, 1999 would have been $63,000. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period: no dividend; yield volatility of 35.53%; risk-free interest rates of 6.00% and a weighted average expected option term of 5 years. The weighted average grant date fair value for an option to purchase a 1% membership interest in Fantasma granted during the year ended January 2, 1999 was approximately $14,400. (4) RELATED PARTY TRANSACTIONS Shared Resources As discussed in Note 1, for the period from January 1, 1995 to August 31, 1996, Fantasma operated as the Fantasma division of Overdrive. During this period, and for the period from September 1, 1996 to June 10, F-10 19 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (Continued) 1998, general corporate overhead costs related to corporate headquarters and shared administrative support were allocated by Overdrive to Fantasma based on a number of factors, including, for example, personnel and space utilized. In addition, Fantasma has operated as a division of AAi.FosterGrant since June 10, 1998 and has had similar expenses allocated to it by AAi.FosterGrant using similar factors. Management believes these allocations were reasonable and the costs of the services charged to Fantasma were not materially different from the costs that would have been incurred had Fantasma performed these functions as a stand-alone entity. Overdrive allocated expenses through advances. Interest on advances was charged monthly until June 10, 1998, based on the prime rate applied to the average outstanding monthly balance. Total interest charged on advances payable to Overdrive was $129,000, $160,000, and $27,000 in the years ended December 31, 1996 and 1997 and January 2, 1999, respectively. Advances from Overdrive were repaid on June 10, 1998. Expenses allocated by AAi.FosterGrant are funded through the note payable (see Note 2 for further discussion). (5) SIGNIFICANT CUSTOMERS During the year ended January 2, 1999, three customers accounted for approximately 22%, 17% and 10% of net sales, respectively. These customers' accounts receivable balances represented approximately 27%, 14% and 4% of gross accounts receivable as of January 2, 1999. F-11 20 FANTASMA LLC NOTES TO FINANCIAL STATEMENTS JANUARY 2, 1999 (Continued) (6) SEGMENT REPORTING The Company 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 now to allocate resources and assess performance. To date, the Company has viewed its operations and manages its business as principally one segment. (7) VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BEGINNING OF COSTS AND FROM BALANCE AT PERIOD EXPENSES RESERVES(1) END OF PERIOD Accounts receivable- December 31, 1996 $ 80 $ 171 $ 65 $ 186 December 31, 1997 186 360 144 402 January 2, 1999 402 -- 29 373
(1) Amounts deemed uncollectible F-12 EX-10.3.2 2 AMENDMENT TO MEMBER AGREEMENT 1 Exhibit 10.3.2 AMENDMENT TO MEMBER AGREEMENT ----------------------------- The undersigned, being parties to the Member Agreement, dated June 19/23, 1998, as previously amended, do agree that Section A.1 is hereby amended by changing the third line to read as follows: "For the period commencing on the date hereof and ending June 30, 1999, "First Exercise". The Member Agreement remains in full force and effect, amended and unmodified, except to the extent expressly set forth above. The undersigned have executed this Amendment as of the 26th day of March, 1999. AAi.FosterGrant, Inc. By /s/ Duane DeSisto ------------------------------ Chief Financial Officer /s/ Paul Michaels ------------------------------ Paul Michaels EX-10.4 3 EMPLOYMENT AGREEMENT 1 Exhibit 10.4 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made as of the 23rd day of June, 1998, between Fantasma, LLC., a Delaware limited liability company with its principal place of business at 500 George Washington Highway, Smithfield, Rhode Island 02917, ("Employer") and Roger Dreyer of New York, New York, ("Employee"). WITNESSETH: ---------- WHEREAS, Employee possesses valuable skills, experience and knowledge in the marketing, distribution and sale of watches and clocks and has heretofore served as President of Employer; and WHEREAS, on this date, AAi.FosterGrant, Inc. ("AAi") is acquiring a majority of the membership interests of Employer, including acquiring of a 13.0% membership interest from Employee (the "Interest"); and WHEREAS, Employer has a need for Employee's services and wishes to employ Employee, and Employee wishes to accept employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the undertakings and the payments provided under the covenants and agreements herein set forth, the parties hereto mutually agree as follows: 1. EMPLOYMENT. ---------- Employer hereby agrees to employ Employee as President of Employer and/or in such other capacity of Employer as may be mutually satisfactory to Employer and Employee or as Employer determines is compatible with Employee's abilities, and Employee agrees to accept such employment upon the terms and conditions hereinafter set forth. 2. TERM. ---- The term of employment pursuant to this Agreement shall begin as of the date hereof, and shall continue for the period ending three (3) years thereafter, unless terminated prior thereto pursuant to the terms of this Agreement. 3. DUTIES AND AUTHORITY. -------------------- a. During the Term, Employee shall devote his full time and best efforts to the business of Employer and shall perform the duties of his office of President and exercise such powers, as may from time to time be assigned to or vested in him, faithfully, diligently and loyally, devoting thereto the whole of his time, attention and skill to the due performance of his duties hereunder, and shall follow the lawful directions of the Chairman of Employer. 2 b. During the Term, Employee shall be a full time employee of Employer and Employee shall not engage in any other business activity; PROVIDED, HOWEVER, that the foregoing shall not be construed as preventing Employee from investing Employee's assets or otherwise conducting Employee's personal affairs, unless such investment and activity interferes with the due performance of Employee's duties to Employer hereunder. c. Employee shall report only to the Chairman of Employer so long as he is the Chairman of AAi, and if not the same person, then to the Chairman of AAi, or in the event of the Chairman's absence from the country or other unavailability, the person designated by the Chairman to fulfill the duties of the Chairman generally. The scope of said employment as, and the duties and responsibilities to be performed by Employee hereunder as President of the Employer shall consist of responsibility for overall operations of Employer. d. Employee shall work out of Employer's location in Metropolitan New York City. 4. DEATH, DISABILITY OR INCAPACITY DURING EMPLOYMENT. ------------------------------------------------- a. If during the Term Employee dies, Employer shall provide to the estate of Employee the items set forth at SECTION 4.c, below. b. If during the Term Employee becomes disabled or incapacitated to such an extent that, in the reasonable opinion of Employer, Employee is unable to discharge a material portion of Employee's duties as contemplated by this Agreement or becomes permanently disabled under Employer's long term disability insurance coverage ("Permanent Disability"), then, at the option of Employer, Employee's employment hereunder may be terminated upon written notice to Employee or Employee's personal representative; PROVIDED, HOWEVER, that Employer shall pay to Employee, as and when otherwise due, the items set forth at SECTION 4.c below. c. Upon the death or Permanent Disability of Employee, as set forth in SECTION 4.a or SECTION 4.b, above, the Employer shall provide the following: i. Basic Salary owing to Employee (x) upon the death of the Employee through and including the end of the month in which the Employee dies or (y) upon the Permanent Disability of Employee, through and including the earlier of (1) the expiration of the term of this Agreement or (2) the date he receives payments under Employer's long term disability insurance coverage; ii. Incentive Compensation pro rated on a 12 month basis from the start of the fiscal year through the date of death or Permanent Disability assuming that financial performance of Employer for the balance of the year is the same as the twelve month period preceding his Permanent Disability through and including the end of the month in which Employee dies or becomes permanently disabled; and 3 iii. Any benefits due under any then current benefits program in which Employee participates. 5. TERMINATION BY EMPLOYER. ----------------------- a. In the event that Employee shall: i. fail to devote his full time and best efforts to the performance of his services during the term of this Agreement; or ii. commit an act of gross negligence, dishonesty, fraud, gross insubordination, gross malfeasance, disloyalty, bad faith or breach of trust in the performance of his duties and obligations under this Agreement or otherwise against or materially adversely affecting the reputation, business or business relationship of Employer; or iii. fail to observe the agreements of nondisclosure of information and not to compete set forth in SECTION 10, respectively, hereof; or iv. become the subject of a Bankruptcy as defined at EXHIBIT C, attached hereto, or be accused of (by the filing of an accusatory instrument) or be convicted of a felony or an act involving moral turpitude, fraud, dishonesty or theft which, in the reasonable judgment of the Chairman of Employer, subjects Employee or Employer to public disrespect, scandal or ridicule so as to materially adversely affect the utility of the services of Employee to Employer; or v. Be accused of or commit a felony or an act which, in the reasonable judgment of the Chairman of Employer, subjects Employee or Employer to public disrespect, scandal or ridicule so as to materially adversely affect the utility of the services of Employee to Employer, provided that in such circumstances the Employer shall have the right to suspend the Employees employment without compensation and such suspension shall continue for a reasonable period of time before it shall constitute cause for termination under this Paragraph 5, such reasonable period of time to be no less than (a) the withdrawal of the accusation; (b) six (6) months and (c) no more than (a) the earlier of the expiration of this Agreement, (b) the termination of this Agreement for other reasons as provided in this Agreement, the conviction of Employee or (c) eighteen (18) months after the initial suspension by Employer; or vi. refuse to perform the duties assigned to him in good faith in accordance with this Agreement; or 4 vii. violates or fail to observe in a material respect any lawful business instruction or lawful business policy established by the Employer that is of a material nature with respect to the operation of its business and affairs; or viii.fail to, or refuse to, substantially perform his duties, responsibilities and obligations as set forth in this Agreement after a written demand for substantial performance is delivered by Employer, which specifically identifies the manner in which Employee has not substantially performed his duties, responsibilities, and obligations, if the Employee's failure or refusal is not cured within twenty (20) days after such written demand; then Employer shall be deemed to have cause to terminate Employee's employment and may (after written notice to Employee and a reasonable time (not to exceed twenty (20) days) to cure with respect to SECTIONS 5.a.i., 5.a.vi and 5.a.vii only) completely terminate Employee's employment and rights to receive any future compensation or other benefits hereunder (including but not limited to Basic Salary under SECTION 7, Incentive Compensation under SECTION 8, benefits under SECTION 6 and reimbursement of expenses under SECTION 9 incurred after the date of termination) and Employer shall be relieved of any further obligations hereunder. b. In addition to its right to terminate employment of Employee set forth in SECTION 5.a, above, and in SECTION 2, above, Employer may at any time terminate its obligations to Employee hereunder if Employer does not meet 75% of the Target EBIT as set forth in EXHIBIT A for any year; PROVIDED, HOWEVER, that, in the event of such termination, so long as Employee is in compliance with his obligations under the Non Competition/Proprietary Rights Agreement between Employer, AAi and Company, dated this date, Employee shall be entitled to receive an amount equal to the Basic Salary, as and when otherwise provided for and payable herein, for the balance of the then unexpired Term, but Employee shall not be entitled to Incentive Compensation under SECTION 8, benefits under SECTION 6 or reimbursement of expenses referred to in SECTION 9 hereof incurred after the date of termination. c. Notwithstanding the foregoing, after termination, Employer shall remain obligated to pay Employee Basic Salary and Incentive Compensation, both as hereinafter defined, fully earned by Employee or accrued prior to such termination. 6. BENEFITS. -------- During the Term: a. Employer shall provide Employee with benefits equivalent to those offered to Division heads of AAi, as amended from time to time, which currently includes 401(k), life insurance, health insurance and long term disability insurance; 5 b. Employee shall be entitled to participate in AAi's stock option program; c. $1,000,000 company paid term life insurance, payable to Employee's designated beneficiary, provided Employee is insurable at standard rates. 7. BASIC SALARY. ------------ Employer agrees to pay to Employee the following basic compensation ("Basic Salary"), less normal and customary payroll deductions for local, state and federal income, employment, excise or similar taxes, fees and deductions, for all services rendered to Employer at the following annual rate (payable at Employer's normal pay periods in arrears): $250,000, which shall be increased on each anniversary of the date of this Agreement to reflect changes in the Consumer Price Index (CPI-U) for Metropolitan New York from June 1, 1998. Basic Salary shall be subject to annual review and periodic increases by Employer, in Employer's absolute discretion. 8. INCENTIVE COMPENSATION. ---------------------- During the Term, Employer shall pay to Employee (a) the incentive compensation set forth at EXHIBIT A, attached hereto, ("Incentive Compensation") and (b) a bonus, at the absolute discretion of Employer, of up to 50% of Basic Salary less normal and customary payroll deductions for local, state and federal income, employment, excise or similar taxes, fees and deductions. 9. REIMBURSEMENT OF EXPENSES. ------------------------- Employee is authorized to incur reasonable expenses in connection with and for the promotion of the business of Employer, including expenses for meals and lodging, entertainment, and similar items as required from time to time by Employee's duties which are beneficial to Employer. Employer shall reimburse Employee for all such expenses, in accordance with Employer's policies in effect from time to time, upon the presentation of an account therefor, together with appropriate supporting documentation. 10. SPECIAL PROVISIONS. ------------------ In consideration for the agreements set forth in this Agreement and AAi's purchase of the Interest, Employee agrees to the provisions set forth at EXHIBIT B, attached hereto and incorporated herein by reference, which are an inducement for Employer to enter into this Agreement and AAi to purchase the Interest, and shall survive the Term along with SECTIONS 11 THROUGH 15. 11. WAIVER. ------ Failure of any party hereto to insist upon strict compliance with any of the terms, covenants and conditions hereof shall not be deemed a waiver or relinquishment of any similar right or power hereunder at any subsequent time. 6 12. NOTICES. ------- Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by certified mail, return receipt requested, or by telefacsimile, to the party to whom notice should be given at the address set forth below: Employer: Fantasma, LLC 500 George Washington Highway Smithfield, Rhode Island 02917 Attn: Mr. Gerald F. Cerce Telefacsimile: 401-231-3212 With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Attn: Pasco Gasbarro Jr., Esq. Telefacsimile: 401-277-9600 Employee: Mr. Roger Dreyer 345 East 69th Street Apt. 14H New York, New York 10021 With a copy to Rosen & Reade, LLP 757 Third Avenue New York, NY 10017-2049 Attn: Jerry Kowalski, Esq. Telefacsimile: 212-586-0951 13. ENTIRE AGREEMENT. ---------------- This Agreement (including the Exhibits attached hereto) and the Member Agreement dated this date contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and cancels all other agreements, whether oral or written, including but not limited to any other employment agreement or terms of employment existing on the date hereof. This Agreement may not be amended or modified, except by an agreement in writing signed by the Employee and an executive officer of Employer. 7 14. REPRESENTATIONS OF EMPLOYEE; INDEMNITY. -------------------------------------- In order to induce Employer to enter into this Agreement, Employee represents and warrants to Employer that Employee is free to enter into and perform this Agreement and that he is not a party to any oral or written contract, understanding, agreement or restriction which inhibits or which will be violated by Employee's performance of the duties assigned to Employee hereunder. In the event any action or proceeding shall be wrongfully commenced and prosecuted against Employee by reason of Employee's entry into this Agreement and/or the performance of Employee's duties, Employer shall indemnify and hold Employee harmless from and against any losses or expenses incurred by Employee, including reasonable attorneys' fees, provided Employer shall have the sole right to designate counsel to defend Employee and sole right to approve any settlements or other resolutions of the matter. 15. ADEQUACY OF REMEDY. ------------------ Employee acknowledges that he remedy at law for Employee's breach of any of the provisions herein contained relating to non-competition or confidentiality will be inadequate and that Employer shall be entitled to injunctive relief, in addition to any other remedies that Employer may have. 16. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors and assigns of Employer and the heirs, assigns, executors, administrators and legal representatives of Employee. This Agreement may not be assigned by either party without the prior written consent of the other; provided, however, that Employer may assign this Agreement, without Employee's consent, to any person or entity, controlling, controlled by or under common control with Employer, or in connection with the merger, reorganization or consolidation of Employer or sale of all or substantially all of its assets. 17. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, without regard to its conflict of laws rules. Any action, suit or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Rhode Island or, if it has or can acquire jurisdiction, in the United States District Court for the District of Rhode Island, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served by mail on any party anywhere in the world, in accordance with court rules. Each party hereby waives trial by jury in any such action, suit or proceeding. 8 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: EMPLOYER: FANTASMA, LLC /s/ Laurie Wilkins By:/s/ Duane DeSisto - ------------------------------- --------------------------- Title: Chief Financial Officer and Treasurer Witness: /s/ /s/ Roger Dreyer - ------------------------------- --------------------------- EMPLOYEE: Roger Dreyer EX-10.5 4 EMPLOYMENT AGREEMENT 1 Exhibit 10.5 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made as of the 23rd day of June, 1998, between Fantasma, LLC., a Delaware limited liability company with its principal place of business at 500 George Washington Highway, Smithfield, Rhode Island 02917 ("Employer"), and Paul Michaels of Shoreview, Minnesota ("Employee"). WITNESSETH: ---------- WHEREAS, Employee possesses valuable skills, experience and knowledge in the marketing, distribution and sale of watches and clocks and has heretofore served as Executive Vice President of Employer; and WHEREAS, on this date, AAi.FosterGrant, Inc. ("AAi") is acquiring a majority of the membership interests of Employer; and WHEREAS, Employer has a need for Employee's services and wishes to employ Employee, and Employee wishes to accept employment on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the undertakings and the payments provided under the covenants and agreements herein set forth, the parties hereto mutually agree as follows: 1. EMPLOYMENT. ---------- Employer hereby agrees to employ Employee as Executive Vice President of Employer and/or in such other capacity of Employer as may be mutually satisfactory to Employer and Employee or as Employer determines is reasonably commensurate with the Employee's education, experience and skills, and Employee agrees to accept such employment upon the terms and conditions hereinafter set forth. 2. TERM. ---- The term of employment pursuant to this Agreement shall begin as of the date hereof, and shall continue for the period ending three (3) years thereafter, unless terminated prior thereto pursuant to the terms of this Agreement. 3. DUTIES AND AUTHORITY. -------------------- a. During the Term, Employee shall devote his full time and best efforts to the business of Employer and shall perform the duties of his office for the time being and exercise such powers, as may from time to time be assigned to or vested in him, faithfully, diligently and loyally, 2 devoting thereto the whole of his time, attention and skill to the due performance of his duties hereunder, and shall follow the lawful directions of the President of Employer. b. During the Term, Employee shall be a full time employee of Employer and Employee shall not engage in any other business activity; PROVIDED, HOWEVER, that the foregoing shall not be construed as preventing Employee from investing Employee's assets or otherwise conducting Employee's personal affairs, unless such investment and activity interferes with the due performance of Employee's duties to Employer hereunder. c. Employee shall report only to the President of Employer, or in the event of the President's absence from the country or other unavailability, the person designated by the Chairman or the President to fulfill the duties of the President generally. The scope of said employment as, and the duties and responsibilities to be performed by Employee hereunder as Executive Vice President of Employer shall consist of responsibility for handling product development, marketing, and key accounts worldwide and for sales in the Minneapolis, Minnesota territory. d. Employee shall work in the Minneapolis, Minnesota, metropolitan area out of Employer's office, and Employer shall provide office space and an assistant at the office. 4. DEATH, DISABILITY OR INCAPACITY DURING EMPLOYMENT. ------------------------------------------------- a. If during the Term Employee dies, Employer shall provide to the estate of Employee the items set forth at SECTION 4.c, below. b. If during the Term Employee becomes Permanently Disabled ("Permanent Disability" meaning permanently disabled under Employer's long term disability coverage or if no such coverage, his being disabled or incapacitated to such an extent that he is unable to perform a material portion of his duties as contemplated by this Agreement for a period of six (6) consecutive months ("Permanently Disabled" or "Permanent Disability"), then, at the option of Employer, Employee's employment hereunder may be terminated upon written notice to Employee or Employee's personal representative; PROVIDED, HOWEVER, that Employer shall pay to Employee, as and when otherwise due, the items set forth at SECTION 4.c below. c. Upon the death or Permanent Disability of Employee, as set forth in SECTION 4.a or SECTION 4.b, above, the Employer shall provide the following: i. Basic Salary owing to Employee through and including the end of the month in which the Employee dies or becomes disabled or incapacitated; ii. Incentive Compensation pro rated on a 12-month basis from the start of the fiscal year through the date of death or Permanent Disability, assuming that financial performance of Employer for the balance of the year is the same as the twelve-month period preceding his Permanent 3 Disability, through and including the end of the month in which Employee dies or becomes disabled or incapacitated; and iii. Any benefits due under any then current benefits program in which Employee participates. 5. TERMINATION BY EMPLOYER. ----------------------- a. In the event that Employee shall: i. fail to devote his full time and best efforts to the performance of his services during the term of this Agreement; or ii. commit an act of gross negligence, dishonesty, fraud, gross insubordination, gross malfeasance, disloyalty, bad faith or breach of trust in the performance of his duties and obligations under this Agreement or otherwise against or materially adversely affecting the reputation, business or business relationships of Employer; or iii. fail to observe the agreements of nondisclosure of information and not to compete set forth in SECTION 10, respectively, hereof; or iv. become the subject of a Bankruptcy as defined at EXHIBIT C, attached hereto, or be accused of (in the filing of an accusatory instrument) or be convicted of a felony or an act involving moral turpitude, fraud, dishonesty or theft which, in the reasonable judgment of the Chairman of Employer, subjects Employee or Employer to public disrespect, scandal or ridicule so as to materially adversely affect the utility of the services of Employee to Employer; or v. be accused of or commit a felony or an act which, Employer to public disrespect, scandal or ridicule so as to materially adversely affect the utility of the services of Employee to Employer, and shall continue ninety (90) days after the Employer's notifying Employee of such circumstances; provided that in such circumstances, after the expiration of said ninety (90) day period, the Employer shall have the right to suspend the Employees employment with compensation reduced to 50% of Basic Salary during such suspension and such suspension shall continue for a reasonable period of time before it shall constitute cause for termination under this Paragraph 5, such reasonable period of time to be no less than six (6) months and no more than the earlier of the expiration of this Agreement, the termination of this Agreement for other reasons as provided in this Agreement, the conviction of Employee or eighteen (18) months after the initial suspension by Employer; or 4 vi. refuse to perform the duties assigned to him in good faith in accordance with this Agreement; or vii. violates or fail to observe in a material respect any lawful business instruction or lawful business policy established by the Employer that is of a material nature with respect to the operation of its business and affairs; or viii.fail to, or refuse to, substantially perform his duties, responsibilities and obligations as set forth in this Agreement after a written demand for substantial performance is delivered by Employer, which specifically identifies the manner in which Employee has not substantially performed his duties, responsibilities, and obligations, if the Employee's failure or refusal is not cured within twenty (20) days after such written demand; then Employer shall be deemed to have cause to terminate Employee's employment and may (after written notice to Employee and a reasonable time (not to exceed twenty (20) days) to cure with respect to SECTIONS 5.a.i., 5.a.vi and 5.a.vii only) completely terminate Employee's employment and rights to receive any future compensation or other benefits hereunder (including but not limited to Basic Salary under SECTION 7, Incentive Compensation under SECTION 8, benefits under SECTION 6 and reimbursement of expenses under SECTION 9 incurred after the date of termination) and Employer shall be relieved of any further obligations hereunder. b. In addition to its right to terminate employment of Employee set forth in SECTION 5.a, above, and in SECTION 2, above, Employer may at any time, without cause, terminate its obligations to Employee hereunder if Employer does not meet 75% of the Target EBIT set forth in EXHIBIT A for any year or 50% of the Sales Target set forth at EXHIBIT A for any year; PROVIDED, HOWEVER, that, in the event of such termination, so long as Employee is in compliance with his obligations under SECTION 10, below, Employee shall be entitled to receive an amount equal to one hundred percent (100%) the Basic Salary, as and when otherwise provided for and payable herein, for athe balance of the unexpired Term, but Employee shall not be entitled to Incentive Compensation under SECTION 8, benefits under SECTION 6 or reimbursement of expenses referred to in SECTION 9 hereof incurred after the date of termination. c. Notwithstanding the foregoing, after termination, Employer shall remain obligated to pay Employee Basic Salary, fully earned by Employee prior to such termination and Incentive Compensation as calculated in accordance with SECTION 4.c.ii. d. If at the expiration of the three (3) year term, Employer terminates the employment of Employee for reasons other than as set forth at SECTION 5.a, Employer shall pay to Employee as severance for a period of one (1) year after such expiration, payable at Employer's normal pay periods, an amount equal to the Basic Salary so long as Employee is in compliance with his obligations under Section 10, below. 5 6. BENEFITS. -------- During the Term: a. Employer shall provide Employee with benefits equivalent to those offered to middle management of AAi, as amended from time to time, which currently includes 401(k), life insurance, health insurance and long term disability insurance; and b. Employee shall be entitled to participate in AAi's stock option program. c. Employer shall pay to Employee the sum of $267 per month as reimbursement for additional health insurance coverage. 7. BASIC SALARY. ------------ Employer agrees to pay to Employee the following basic compensation ("Basic Salary"), less normal and customary payroll deductions for local, state and federal income, employment, excise or similar taxes, fees and deductions, for all services rendered to Employer at the following annual rate ( payable at Employer's normal pay periods in arrears): $200,000. Basic Salary shall be subject to annual review and adjustment by Employer, in Employer's absolute discretion. 8. INCENTIVE COMPENSATION. ---------------------- During the Term, Employer shall pay to Employee the incentive compensation set forth at EXHIBIT A, attached hereto, ("Incentive Compensation") less normal and customary payroll deductions for local, state and federal income, employment, excise or similar taxes, fees and deductions. 9. REIMBURSEMENT OF EXPENSES. ------------------------- Employee is authorized to incur reasonable expenses in connection with and for the promotion of the business of Employer, including expenses for meals and lodging, entertainment, and similar items as required from time to time by Employee's duties which are beneficial to Employer. Employer shall reimburse Employee for all such expenses, in accordance with Employer's policies in effect from time to time, upon the presentation of an account therefor, together with appropriate supporting documentation. 10. SPECIAL PROVISIONS. ------------------ In consideration for the agreements set forth in this Agreement and AAi's purchase of the membership interests in Employer, Employee agrees to the provisions set forth at EXHIBIT B, attached hereto and incorporated herein by reference, which are an inducement for Employer to enter into this Agreement and AAi to purchase membership interests in Employer, and shall survive the Term along with SECTIONS 11 THROUGH 15. 11. WAIVER. ------ 6 Failure of any party hereto to insist upon strict compliance with any of the terms, covenants and conditions hereof shall not be deemed a waiver or relinquishment of any similar right or power hereunder at any subsequent time. 12. NOTICES. ------- Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by certified mail, return receipt requested, or by telefacsimile, to the party to whom notice should be given at the address set forth below: Employer: Fantasma, LLC 500 George Washington Highway Smithfield, Rhode Island 02917 Attn: Mr. Gerald F. Cerce Telefacsimile: 401-231-3212 With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Attn: Pasco Gasbarro Jr., Esq. Telefacsimile: 401-277-9600 Employee: Mr. Paul Michaels 5983 Highview Place Minneapolis, Minnesota 55126 Telefacsimile: 612-481-0561 13. ENTIRE AGREEMENT. ---------------- This Agreement (including the Exhibits attached hereto) and the Member Agreement dated this date contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and cancels all other agreements, whether oral or written, including but not limited to any other employment agreement or terms of employment existing on the date hereof. This Agreement may not be amended or modified, except by an agreement in writing signed by the Employee and an executive officer of Employer. 14. REPRESENTATIONS OF EMPLOYEE; INDEMNITY. -------------------------------------- In order to induce Employer to enter into this Agreement, Employee represents and warrants to Employer that Employee is free to enter into and perform this Agreement and that he is not a party to any oral or written contract, understanding, agreement or restriction which inhibits or which will be violated by Employee's performance of the duties assigned to Employee hereunder. In the event any action or proceeding shall be wrongfully commenced and prosecuted against Employee by reason 7 of Employee's entry into this Agreement and/or the performance of Employee's duties, Employer shall indemnify and hold Employee harmless from and against any losses or expenses incurred by Employee, including reasonable attorneys' fees, provided Employer shall have the sole right to designate counsel to defend Employee and sole right to approve any settlements or other resolutions of the matter. 15. ADEQUACY OF REMEDY. ------------------ Employee acknowledges that he remedy at law for Employee's breach of any of the provisions herein contained relating to non-competition or confidentiality will be inadequate and that Employer shall be entitled to injunctive relief, in addition to any other remedies that Employer may have. 16. SUCCESSORS AND ASSIGNS. ---------------------- [Signatures Appear On Next Page] 8 This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors and assigns of Employer and the heirs, assigns, executors, administrators and legal representatives of Employee. This Agreement may not be assigned by either party without the prior written consent of the other; provided, however, that Employer may assign this Agreement, without Employee's consent, to any person or entity, controlling, controlled by or under common control with Employer, or in connection with the merger, reorganization or consolidation of Employer or sale of all or substantially all of its assets. 17. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, without regard to its conflict of laws rules. Any action, suit or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be brought against any of the parties in the courts of the State of Rhode Island or, if it has or can acquire jurisdiction, in the United States District Court for the District of Rhode Island, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served by mail on any party anywhere in the world, in accordance with court rules. Each party hereby waives trial by jury in any such action, suit or proceeding. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: EMPLOYER: FANTASMA, LLC /s/ Laurie Wilkins By: /s/ Duane DeSisto - ----------------------------- ------------------------------ Title: Treasurer Witness: /s/ Ramona M. Michaels /s/ Paul Michaels - ----------------------------- ------------------------------ EMPLOYEE: Paul Michaels EX-24.1 5 POWER OF ATTORNEY 1 Exhibit 24.1 FANTASMA, LLC POWER OF ATTORNEY TO SIGN ANNUAL REPORT ON FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce and Duane M. DeSisto, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Annual Report on Form 10-K for the year ended January 2, 1999 of Fantasma, LLC (the "Company"), and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Roger D. Dreyer President March 30, 1999 - ------------------------------- (Principal Executive Officer) Roger D. Dreyer Houdini Capital Ltd. Member March 30, 1999 By: /s/ Roger D. Dreyer --------------------------- Roger D. Dreyer, President EX-27 6 FINANCIAL DATA SCHEDULE
5 0001067354 FANTASMA LLC 1,000 U.S. DOLLARS YEAR JAN-02-1999 JAN-01-1998 JAN-02-1999 1 104 0 5,088 373 3,878 9,273 24 5 13,654 9,048 0 0 0 0 4,606 13,654 14,645 14,645 10,186 10,186 3,809 0 453 197 0 197 0 0 0 197 0 0
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