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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
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-3340245
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(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
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(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.
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PART I
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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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
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PART II
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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
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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.
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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.
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Omitted pursuant to General Instruction I to Form 10-K.
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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.
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PART IV
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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.
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(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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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.
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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
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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
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Roger D. Dreyer Duane M. DeSisto
President Treasurer
(Principal Executive Officer) (Principal Financial Officer)
Date: ______________, 1999 Date: April 2, 1999
/s/ Stephen J. Korotsky
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Stephen J. Korotsky, Controller
(Principal Accounting Officer)
Date: April 2, 1999
AAi.FosterGrant, Inc. Houdini Capital Ltd.
By: /s/ Gerald F. Cerce By: *
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Gerald F. Cerce Roger D. Dreyer
President President
Date: April 2, 1999 Date: ______________, 1999
By: /s/ Gerald F. Cerce
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(Attorney-in-fact for
individuals indicated by
asterisk)
Date: April 2, 1999
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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
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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
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Total current assets 7,326 9,273
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PROPERTY AND EQUIPMENT, AT COST:
Equipment 68 29
Furniture and fixtures 11 --
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79 29
Less--Accumulated depreciation (13) (5)
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66 24
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $0 and $270 3 4,357
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Total assets $ 7,395 $ 13,654
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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
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Total current liabilities 7,082 9,048
COMMITMENTS AND CONTINGENCIES (NOTE 1)
MEMBERS' EQUITY 313 4,606
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Total liabilities and members' equity $ 7,395 $ 13,654
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The accompanying notes are an integral part of these financial statements.
F-3
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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
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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
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Income from operations 311 841 650
INTEREST EXPENSE 236 480 453
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INCOME BEFORE INCOME TAXES 75 361 197
PROVISION FOR INCOME TAXES (17) (58) --
--------------- --------------- ---------------
Net income $ 58 $ 303 $ 197
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The accompanying notes are an integral part of these financial statements.
F-4
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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
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BALANCE, DECEMBER 31, 1996 -- 206 206
Distribution to members -- (196) (196)
Net income -- 303 303
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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
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The accompanying notes are an integral part of these financial statements.
F-5
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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
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Net cash (used in) provided by operating activities (1,885) 285 (2,916)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (40) (14)
Decrease in other assets -- -- 3
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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)
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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
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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
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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
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Total assets transferred $ 3,764
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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)
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Cash paid $ 4,050
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F-7
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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,
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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.
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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
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