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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
463 SEVENTH AVENUE, NEW YORK, NY 10018
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 646-473-4200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
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 then 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 requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
Yes X No
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As of March 8, 2001, 82,186,265 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the 17,762,414 shares of voting
stock of the Registrant held by non-affiliates of the Registrant at March 8,
2001 was $9,236,455.00.
Documents incorporated by reference: None.
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
Page
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PART I............................................................................................................1
Item 1. Business........................................................................................1
Item 2. Properties......................................................................................4
Item 3. Legal Proceedings...............................................................................4
Item 4. Submission of Matters to a Vote of Security Holders.............................................6
PART II...........................................................................................................6
Item 5. Market for Registrant's Common Equity and Related Security Holder Matters......................6
Item 6. Selected Financial Data.........................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....................................13
Item 8. Financial Statements and Supplementary Data....................................................14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........14
Part III.........................................................................................................15
Item 10. Directors and Executive Officers of the Registrant.............................................15
Item 11. Executive Compensation.........................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................21
Item 13. Certain Relationships and Related Transactions.................................................23
PART IV..........................................................................................................26
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K...............................26
SIGNATURES.......................................................................................................30
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PART I
ITEM 1. BUSINESS.
INTRODUCTION AND CURRENT BUSINESS
Calendar 2000 and the early part of 2001 was a time of change for Aris
Industries, Inc. (the "Company", the "Registrant" or "Aris"). During 2000, Aris,
through its wholly owned subsidiaries, designed, manufactured, imported and sold
sportswear, outerwear and loungewear under a variety of tradenames, some of
which are owned by the Company and some of which were licensed from others. In
early 2001, Aris entered into an agreement (the "Grupo Agreement"), which became
effective March 1, 2001, with Grupo Xtra of New York, Inc. ("Grupo"), an
unaffiliated third party, giving Grupo the exclusive right in the United States,
Puerto Rico, the Caribbean Islands and Israel, to manufacture and sell, subject
to Aris' design and quality approvals, women's clothing, jeanswear and
sportswear under the XOXO(R) and Fragile(R) trademarks and sportswear and
outerwear under the Members Only trademark. In addition, Aris granted Grupo the
right to manufacture and sell products covered by its license agreements for
Brooks Brothers Golfwear and Baby Phat sportswear. In exchange, Grupo agreed to
purchase substantially all of Aris's inventory of such products, pay royalties
based on its sales of such products and assume certain of Aris's overhead
obligations and contracts. The Grupo Agreement provides for royalties ranging
from 7% to 9% of Grupo's net sales. Minimum annual royalties are $8,100,000 for
2001 and increase by 14% per year until they reach $13,500,000. The term of the
Grupo Agreement is for five years, with options by Grupo for four additional
five year periods.
As a result of the Grupo Agreement, Aris intends to concentrate on growing
its brands through licensing arrangements for wider categories of products on a
global scale, and by expanding its XOXO(R) retail business. The Company will no
longer be engaged in the manufacture and wholesale distribution business. See
Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations below.
During 2000, the Company terminated its license relationships with Perry
Ellis and FUBU. The Company also abandoned its efforts to develop Cynthia Rowley
and Stetson sportswear pursuant to license agreements with the owners of those
trademarks.
The Company was incorporated in the State of New York in 1947. Reference to
the Company includes its subsidiaries, where applicable. The Company's principal
executive offices are located at 463 Seventh Avenue, New York, NY. Its phone
number at such offices is 646-473-4200.
LICENSING AND TRADEMARKS
The Company has registered the trademark "Members Only" in the United
States and 47 other countries, principally for use in connection with apparel
and other men's clothing. In addition to selling products under the "Members
Only" name, the Company licenses it to others. See "Member's Only Licensing."
The Company is the registered owner of the XOXO(R) and Fragile(R)
trademarks in the United States. It is also the registered owner of XOXO(R) in
24 other countries in various classifications, and
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has registrations pending in 23 other countries for XOXO(R) principally for use
in connection with the manufacture and sale of women's sportswear and
accessories.
The Company considers its Trademarks to be of material importance to its
business.
MEMBERS ONLY LICENSING
In addition to the Grupo Agreement, the Company has granted licenses of the
Members Only(R) trademark for the manufacture and sale of men's sportswear,
men's tailored suits and sportcoats, eyeglasses, and, in Canada, men's
outerwear. During 1999, it also granted a master license for the use of the
Members Only(R) trademark in Mexico.
XOXO(R) LICENSING
In addition to the Grupo agreement, the Company has granted licenses to use
XOXO(R) and, in some cases, Fragile(R) for the manufacture and sale of the
following product categories in the United States only: eyewear, activewear
essentials, outerwear, shoes, swimwear, handbags, leather and suede sportswear,
girls sportswear (0-16), girls swimwear, girls outerwear and school supplies. In
addition, the Company has granted master licenses for use of the XOXO(R)
trademark in Mexico, Central America, portions of South America, Japan and the
Middle East. The Company is in discussions with a prospective master licensee
for Central Europe, and on a domestic basis, for watches, jewelry, phone
accessories and intimate apparel.
LICENSE AGREEMENTS FOR TRADEMARKS OWNED BY OTHERS
BROOKS BROTHERS GOLF. In November 1999, the Company entered into a license
agreement with Brooks Brothers, Inc. to sell menswear, knits, sweaters, bottoms,
outerwear, woven apparel, ties, headwear, hosiery, underwear and footwear solely
in private and public golf course pro shops and resort pro shops worldwide. The
term of such license expires on March 31, 2006 (which is extendable by the
Company until March 31, 2011 if it achieves certain minimum sales for the
contract year April 1, 2004 - March 31, 2005). Pursuant to the agreement, the
Company is obligated to pay royalties equal to 6% of net sales. The minimum
guaranteed royalty ranges from $510,000 in year one of the license agreement to
$1,500,000 in years six through ten; the advertising payments by the Company are
the greater of 3% of net sales or $255,000 in year one up to $750,000 in years
six through ten.
BABY PHAT. The Company has entered into a license agreement with Phat
Fashions LLC to manufacture and sell casual apparel for women in all fabrics,
excluding swimwear and accessories, under the Baby Phat(R) trademark for a term
which commenced on July 1, 1999 and expires on December 31, 2004. The Company
was granted ten renewal terms of five years each. Pursuant to the agreement, the
Company is obligated to pay a royalty equal to 8% of its net sales of regularly
priced products, and 6% of net sales at outlet stores, or for items sold at 25%
or more below the Company's regular selling prices. Pursuant to the agreement,
the Company's minimum guaranteed royalties range from $960,000 in the first year
of the agreement to $1,920,000 in 2004. Its minimum advertising payments equal
3% of the minimum sales requirements.
The Company has assigned the Brooks Brothers Golf and Baby Phat license to
Grupo. The Company remains responsible for the obligations under such
agreements, but is entitled to indemnification from Grupo if it fails to perform
those obligations.
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DESIGN, MANUFACTURING AND IMPORTATION
The following discusses the Company's business as conducted prior to the
Grupo Agreement.
Many of the Company's products were manufactured overseas by independent
factories, each of which was required to satisfy the Company's quality and
delivery standards, pursuant to design samples and specifications provided by
the Company. The Company imported products from Hong Kong, Korea, China,
Guatemala, the Philippines, Bangladesh, Sri Lanka, Indonesia, India, Taiwan,
United Arab Emirates, Cambodia, Nepal, Mexico, Thailand and the Dominican
Republic. In addition, XOXO utilized its own cutting facilities in California
and contracted with unaffiliated domestic third parties to finish its garments.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's products are sold primarily to department and specialty
stores and national retail chains. The Company had sales to two customers,
namely Federated Department Stores and May Department Stores that represented
15% and 11%, respectively of net sales for the year ended December 31, 2000. The
Company had sales to J.C.Penney that represented 4% and 13% of net sales for the
years ended December 31, 1999 and 1998, respectively.
COMPETITION
The Company's products are sold in markets which place a premium on
identifiable brand names. The Company competes with other apparel manufacturers
based on style, quality, value and brand recognition. Although the Company sells
its products to retail customers, it also competes with the "private label"
apparel lines of its retail customers. The Company's apparel products, which are
sold on the main selling floors of its retail store customers, are facing
increasing competition from the expanded dedication of retail floor space to
"designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to changes in
consumer buying patterns, weather conditions and other factors.
SEASONALITY
The Company's outerwear business is particularly impacted by unusually warm
weather or the late arrival of cold weather. Other aspects of the Company's
business may also be adversely effected by unusual weather patterns and fashion
trends.
MATERIALS AND SUPPLIES
The principal raw materials used by the Company's apparel manufacturing
contractors are fabrics made from natural fibers, leather, synthetics and
blends. In addition, such manufacturers use yarn, thread and accessories such as
buttons, snaps, elastic and zippers which are purchased from many suppliers. The
Company believes the raw materials currently used in its products are readily
available at comparable prices and quality from sources other than those now
being used.
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EMPLOYEES
As of December 31, 2000, the Company and its subsidiaries had approximately
683 full and part-time employees and as of March 2001 has approximately 551 full
and part-time employees on its payroll, most of whom perform services for Grupo
and for which Grupo reimburses the Company. The Company's employees at its New
Bedford, Massachusetts warehouse are represented by a labor union. The Company
negotiated, but did not sign, a collective bargaining agreement with such union.
The Company currently plans to close such warehouse and to terminate the
workforce there, and is negotiating a plant termination agreement with the
union. The Company owes pension and health and welfare benefits to the union and
is in the process of negotiating for a settlement of such amounts owed together
with a schedule of payments.
FOREIGN SALES
Although the Company sells products in Canada, Mexico and South America,
such sales have not comprised a significant portion of the Company's sales.
BUSINESS SEGMENT DATA
The Company is engaged in one business, the design and manufacture or
importation of sportswear, outerwear, activewear and loungewear. The Company's
business is conducted domestically, with substantially all of its net sales
derived from domestic customers, although it contracts with others to
manufacture certain of its products overseas. Commencing March 1, 2001, most of
the Company's revenues will be derived from licensing royalties and retail
sales.
ITEM 2. PROPERTIES.
The Company currently has approximately 53,000 square feet of leased space
for its executive and sales offices and showrooms at 1411 Broadway and 463
Seventh Avenue in New York City, approximately 11,615 square feet of office and
showroom space at 1466 Broadway in New York City for XOXO and approximately
212,939 square feet in Commerce and Los Angeles, California for office,
showroom, manufacturing and distribution use in connection with XOXO's business.
The Company has retail outlets in the following locations: Virginia, Florida,
California, New Jersey, New York, Nevada, Illinois and Pennsylvania of
approximately 37,921 square feet, as well as full-price retail stores in New
York and California of approximately 14,700 square feet. Grupo has agreed to
assume the leases for, and to operate, the outlet stores. The Company leases
approximately 300,000 square feet of warehouse space in New Bedford,
Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial position and results of operations
at December 31, 2000. In addition, the Company is subject to the following:
DORFMAN AND HEIMSOHEN V. ARIS INDUSTRIES, INC.: An action was commenced in
the United States District Court by the plaintiffs, claiming they were dismissed
as sales representatives in violation of the Age Discrimination and Employment
Act. The case is in its initial stages and the Company has denied the
allegations of the complaint and intends to vigorously defend the action.
PERRY ELLIS INTERNATIONAL V. ARIS INDUSTRIES, ET AL.: Perry Ellis has
commenced an action in the Supreme Court of the State of New York seeking
royalties in the amount of approximately $1.3 million claimed to be due under
various licensing agreements with the Company and/or several of its
subsidiaries. The Company has answered the complaint and has interposed a
counterclaim which
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alleges that Perry Ellis International breached the license agreement. The case
is in its initial stages and its outcome is difficult to predict.
SARA LEE CORPORATION V. ARIS INDUSTRIES, INC.: Sara Lee has sued Aris to
enjoin it from using the name "Wonder Pant" in connection with the marketing and
sale of pants by the Company. The United States District Court for the Southern
District of New York granted plaintiff's motion for a preliminary injunction.
The Company has not commenced selling product under the Wonder Pant name.
CORONET GROUP, INC. V. EUROPE CRAFT IMPORTS, INC.: Coronet has sued Europe
Craft Imports, Inc., a wholly-owned subsidiary of the Company, in the Supreme
Court of the State of New York, County of New York, claiming that Europe Craft
breached a license agreement as Licensor of the Members Only trademark to
Coronet, and seeking damages in the amount of approximately $1,000,000. Europe
Craft has counterclaimed for unpaid future royalties under the agreement and
intends to vigorously dispute Coronet's claims.
DELLA FEMINA, ROTHSCHILD, JEARY & PARTNERS V. ARIS INDUSTRIES: Della Femina
has brought an action against Aris in the Supreme Court of the State of New
York, County of New York, for fees of approximately $400,000 claimed to be due
in connection with advertising services performed by Della Femina. The Company
admits that it owes the agency some, but not all, of the full amount claimed to
be due.
CALIFORNIA DISPLAY COMPANY V. ECI SPORTSWEAR, INC.: California Display
brought an action in the Superior Court of California for the County of Los
Angeles seeking the sum of $42,000 for plaques it claims to have manufactured
for ECI. ECI received some but not all of the plaques and intends to defend the
claim on that basis. The Company has made a motion to dismiss the motion for
lack of personal jurisdiction in California.
XOXO DEPARTMENT OF LABOR CLAIMS: J.S. Fashion. J.S. Fashion is a contractor
with whom XOXO has contracted to sew its goods for over two years. Moreover,
J.S. Fashion has exclusively worked for XOXO for the last year and one-half. One
of J.S. Fashion's employees filed a complaint with the Division of Labor
Standards Enforcement ("DLSE") claiming that she had not been paid $23,507.87 in
regular and overtime wages from January 5, 1998, until August 16, 2000. The DSLE
investigator examined the J.S. Fashion payroll records and determined that the
employee was entitled to $12,924.25 of regular wages and $9,683.25 of overtime
wages for a total of $22,607.50. Under a recently enacted law in California, a
garment manufacturer is liable as the guarantor for any unpaid wages owed to an
employee from January 1, 2000 to present. Therefore, if J.S. Fashion had not
paid the liability assessment, XOXO would have been liable. However, J.S.
Fashion proposed a settlement to the complainant which she accepted. As of yet,
XOXO does not have any details of the settlement; however, the DSLE has agreed
to furnish courtesy copies to us. At present, XOXO has no liability in this
matter.
MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a
substantial amount of sewing. Martinez & Sons went bankrupt, and therefore
failed to pay employees. In December of 2000, XOXO settled with the DOL on
behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other
employees sued, and XOXO settled that case in the amount of $62,000. Some of the
claimants of the DOL settlement, as well as two other employees, filed a
complaint with the DLSE for unpaid wages totaling $22,318.62. They asserted that
they had not been paid any wages and claimed that they were owed more money than
paid in settlement with the DOL. The Company is in the process of investigating
these matters. The Company received a demand letter from a law firm claiming to
represent some of the same individuals involved in the Martinez & Sons DOL
settlement and the DLSE investigation. The attorney representing these 16 former
employees have demanded $660,000 from XOXO. The attorney for these individuals
has stated that he may file a claim under Business and Professions Code 17200 et
seq. This statute
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allows individuals to sue for unfair business practices, and penalties include
treble damages. It is too premature at this time to assess liability in this
matter.
NATIONAL LABOR RELATIONS BOARD: On February 6, 2001, the Union representing
employees at the Company's New Bedford warehouse filed a complaint with the
National Labor Relations Board accusing the Company of failing to negotiate in
good faith with the Union and failing to make contributions to an employee
benefit trust fund contemplated by a proposed collective bargaining agreement in
the amount of $389,000. Although the case is in its initial stages, the Company
is in the process of negotiating for a settlement of all amounts owed, together
with a schedule of payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter (OTC) market
under the symbol AISI. Set forth below are the high and low bid prices for a
share of the Common Stock for each fiscal quarter during the prior two fiscal
years, as reported in published financial sources. Pursuant to the terms of the
Company's loan agreements, the Company has agreed not to declare or pay any
dividends (other than stock dividends) on the Common Stock without the prior
written consent of its lenders. The Company has not paid any dividends during
the last two fiscal years and does not intend to pay any cash dividends in the
foreseeable future. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
High Low
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1999 First Quarter $3.6875 $0.6250
Second Quarter 3.0000 1.5625
Third Quarter 3.4375 2.0000
Fourth Quarter 3.3125 2.0000
2000 First Quarter $2.0000 $1.0000
Second Quarter 1.0625 0.7500
Third Quarter 0.9375 0.4000
Fourth Quarter 0.4000 0.1400
There were approximately 3,736 shareholders of record as of March 8, 2001.
RECENT SALES OF UNREGISTERED SECURITIES
In October 2000, in connection with the settlement of a dispute with the
owner of the FUBU trademark and the termination of the license for such
trademark, the Company issued 1,000,000 shares of its common stock to the
trademark owner. The issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
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On January 17, 2001, the Company agreed to issue to Grupo Xtra of New York,
Inc., in connection with a license agreement between the parties, at the
beginning of each year during the initial five-year term of the Agreement,
shares of its common stock having a market value of $1,000,000, based on the
average closing price of such common stock for the five trading days immediately
preceding the date on which such shares are to be issued. To date, such shares
have not been issued. The issuance of such shares are exempt from registration
under Section 4(2) of the Securities Act as a transaction not involving a public
offering.
In February 2001, the Company entered into a Securities Purchase Agreement
with KC Aris Fund I, L.P. ("KC") pursuant to which the Company is to issue
Convertible Debentures for $10,000,000 to KC. Pursuant to the Debentures, which
mature in three years and bear interest at the rate of 8.5% per annum payable
quarterly in arrears, KC may convert the unpaid principal and any accrued
interest into shares of common stock at a conversion price of $.46 per share. To
date, KC has purchased $7,000,000 of Debentures and has advised the Company that
it intends to purchase the balance in the near term. The issuance and sale of
the Debenture were exempt from registration under Section 4(2) of the Securities
Act as a transaction not involving a public offering.
In March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to Tarrant.
The Company agreed that, in the event the market value of such shares as of
December 31, 2001 is less than $3,300,000, the Company will either, at its
option (x) pay to Tarrant in cash an amount, or (y) issue to Tarrant additional
shares of common stock having a share value, equal to the difference between
$3,300,000 and the greater of the share value as of December 31, 2001 and
$1,050,000. The issuance of shares to Tarrant was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except for per share data)
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Year Ended Year Ended Year Ended Year Ended 11 Months Ended
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12/31/00 12/31/99(4) 12/31/98 12/31/97(3) 12/31/96 (1)
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Net sales $199,439 $175,359 $127,680 $94,539 $130,155
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(Loss) income before extraordinary
items (36,480) (10,583) (4,250) 2,333 2,104
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Net (loss) income (36,480) (10,583) (3,728) 2,333 12,966 (2)
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Net (loss) earnings per share
before extraordinary items - basic (.46) (.19) (.29) .18 .18
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Net (loss) earnings per share
before extraordinary items - diluted (.46) (.19) (.29) .16 .17
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Net (loss) earnings per share - basic (.46) (.19) (.25) .18 1.09
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Net (loss) earnings per share - diluted (.46) (.19) (.25) .16 1.07
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Total assets 100,209 106,117 77,332 73,837 44,855
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Long-term obligations 5,242 14,342 16,438 16,930 16,702
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Working capital/(deficit) (33,283) 7,419 9,551 11,738 12,370
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Stockholders' equity 3,486 39,251 14,092 17,814 14,755
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1. On December 10, 1996, the Company determined to change its fiscal year to
the calendar year ending December 31st, rather than a 52-53 week year
ending on the Saturday closest to January 31st. The period
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ended December 31, 1996 is a transitional period of approximately eleven
months from February 4, 1996 to December 31, 1996.
2. For the eleven months ended December 31, 1996, the Company had net income
of $12,966,000 or $1.09 per share, inclusive of (i) a gain of $7,786,000 on
the sale of the stock of its wholly owned subsidiary, Perry Manufacturing
Company, on September 30, 1996 (reduced by the write off of the cumulative
effect of foreign currency translation adjustments of $1,108,000 arising
from the Perry Sale), and (ii) an extraordinary gain of $10,862,000
associated with the reduction in the Company's debt to its then senior
secured lender, Heller Financial, Inc., from $53,384,000 to $1,665,000,
including principal of $1,000,000 and capitalized interest of $665,000.
3. Includes results of operations and assets and liabilities of Davco from its
acquisition on July 15, 1997.
4. Includes results of operations and assets and liabilities of XOXO from its
acquisition on August 10, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements, including the notes thereto, and the
"Selected Financial Data" included on pages 7-8, and pages F-1 through F-24,
respectively, of this Annual Report.
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to factors discussed in this
Report, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission ("SEC").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL EXPENDITURES
As of December 31, 2000, the Company had a working capital deficit of
approximately $33,283,000 as compared to a working capital surplus of
approximately $ 7,419,000 at December 31, 1999. The decrease was primarily due
to the Company's net loss incurred in the twelve months ended December 31, 2000,
and a reclassification of the long term position of its term loan in the amount
of $6,000,000 to current liabilities. These conditions are further discussed
below. During the year, the Company financed its operations principally through
its Credit Facility as supplemented by the Letter of Credit Agreement between a
company owned by the Company's chief executive officer and its principal
commercial lender.
On February 26, 1999, simultaneous with the closing of the Simon Purchase
Transaction, the Company and its subsidiaries entered into a Financing Agreement
with CIT Commercial Services Group, Inc. ("CIT") and certain other financial
institutions, whereby such lenders agreed to provide
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a revolving credit facility (the "Credit Facility") of up to $65,000,000 for
working capital loans and letters of credit financing, which expires on February
26, 2002. In connection with the XOXO transaction, the Company's Financing
Agreement was amended to increase the revolving credit line to $80,000,000, and
to provide for a term loan of $10,000,000. The term loan bore interest, which is
paid monthly, at prime plus one-half percent and principal is payable in
quarterly installments of $500,000, which commenced on January 1, 2000, with a
balloon payment of $5,500,000 on February 26, 2002, the maturity date. The
Company is required to make certain mandatory prepayments based upon "excess
cash flows" as defined in the amendment to the loan agreement.
The obligations under the Financing Agreement are collateralized by
substantially all of the assets of the Company. Loans under the revolving credit
facility may be designated as revolving credit loans or Eurodollar loans. For
revolving credit loans, interest accrued at the bank's prime rate. For
Eurodollar loans, interest accrued at a rate per annum equal to the Eurodollar
rate plus 2.5%. The Financing Agreement contains various financial and other
covenants and conditions, including, but not limited to, limitations on paying
dividends, making acquisitions and incurring additional indebtedness.
During April 2000, the Company entered into an amendment of the Financing
Agreement, under which the lenders waived compliance with certain covenant
requirements for 1999 which the Company was not in compliance with and amended
the covenants for the year ended December 31, 2000. In addition, the amendment
provides an overadvance facility based on seasonal needs. The amendment also
increased the interest rate on the Company's revolving credit facility to prime
plus one-quarter percent and increased the interest rate on the Company's term
loan to prime plus three-quarter percent. In connection with the waivers and
amendment, the Company's chief executive officer agreed to provide a personal
guarantee on $3 million of indebtedness outstanding under the Financing
Agreement. This guaranty, which initially was to expire on December 6, 2000, has
been extended to May 4, 2001, provided the Company is not in default under the
Financing Agreement at that time.
In November 2000, the Financing Agreement was further amended to waive
compliance with additional covenant provisions and require the Company to raise
equity financing of $10,000,000 prior to January 10, 2001 and an additional
$10,000,000 prior to February 15, 2001.
The Company was not in compliance, as of December 31, 2000, with certain
covenants contained in its loan agreements. The Company's lenders have indicated
that they have no current intention to take action with respect to such
non-compliance but have not waived the covenant
-9-
violations. As a result, the Company has classified the long term portions of
its term loan as a current liability.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned by the
Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, the chief executive officer
entered into a guaranty agreement limited to $7,000,000 of the reimbursement of
AHS' obligations under the Letter of Credit Agreement. AHS owes its lender
approximately $8.6 million under the Letter of Credit Agreement, and the Company
owes AHS the same amount.
As a result of the Grupo Agreement, the Company no longer needs financing
to purchase inventory or to finance future accounts receivable. The Company is
currently reducing its revolving line of credit through the collection of
accounts receivable and the sale of inventory to Grupo pursuant to the Grupo
Agreement. The Company expects that the collection of its accounts receivable
and sale of inventory to Grupo will generate sufficient funds to substantially
pay off the revolving line of credit and the term loan.
The Company intends to finance its ongoing operations from the following
sources: (i) royalty revenues from Grupo and other licenses; (ii) excess funds
over the amount necessary to satisfy the revolving line of credit generated from
collection of accounts receivable and sale of inventory; (iii) $10 million for
the sale of the Convertible Debentures of which $7 million was received in
February 2001 and $3 million is expected to be received in the near term; and
(iv) negotiated reductions in amounts due to, and extended payment terms with,
certain creditors of the Company. Each of these factors is equally important to
the Company's ability to fund its operations during 2001. The Company may also
seek alternative sources of financing, but has no current plans to do so and no
assurance can be given that such financing would be available.
The Company's long-term indebtedness consists, in part, of its obligations
to BNY Financial Corporation ("BNY") under the Series A Junior Secured Note
Agreement dated June 30, 1993, pursuant to which BNY is owed $6,942,000,
including $1,042,000, representing the quarterly interest payments that were
deferred for the period February 1, 1996 through January 31, 1998 by agreement
with BNY in September 1997, plus interest at the rate of 7% per annum, with a
final maturity date of November 3, 2002. The Company received a forbearance on
the $600,000 principal payment that was due on November 3, 2000. The Company
paid the $600,000 principal payment on February 2, 2001. The principal of BNY's
Note is payable on November 3 of each year as follows:
YEAR AMOUNT
---- ------
2001 $1,100,000
2002 $5,242,000
BNY is also entitled to receive mandatory prepayments based upon 50% of certain
"excess cash flows" of the Company as defined in the Company's note agreements
with BNY.
CAPITAL EXPENDITURES. Capital expenditures were $4,608,000 for the year ended
December 31, 2000 compared to $4,289,000 in the year ended December 31, 1999.
The increase was due to the construction expenses incurred with the store build
out of the outlet operations and equipment purchases incurred in connection with
the consolidation of the Company's office, showroom and distribution facilities.
By virtue of the change in the nature of the Company's operations, the Company's
capital budget for 2001 is immaterial.
RESULTS OF OPERATIONS:
2000 Compared to 1999
NET INCOME. The Company reported a net loss of $36,480,000 for the twelve
months ended December 31, 2000 compared to a net loss of $ 10,583,000 for the
twelve months ended December 31, 1999. The Company's results in 2000 were
negatively impacted by the termination of the Company's "Fubu" license which
resulted in the Company's incurring substantial markdowns in
-10-
order to liquidate remaining inventory. In addition, the Company also incurred
markdowns on its Perry Ellis product lines in connection with the termination of
the Company's relationship with Perry Ellis. The loss in 2000 also included
restructuring and other charges of $7,040,000 consisting of (i) severance costs,
and (ii) occupancy charges relating to termination of leases as part of the
consolidation of facilities along with the write-off of the related abandoned
assets pertaining to terminated facilities. In addition, the Company incurred
$1,862,000 in start-up costs associated with new licensing arrangements some of
which have subsequently been cancelled. Additionally, interest expense increased
due to interest on the Company's $10,000,000 term loan dated August 10, 1999, an
increase in borrowings on the Company's revolving credit facility and increases
in the borrowing rate from 7.75% to 9.5% by December 31, 2000.
The loss in 1999 included restructuring and other charges, consisting of
(i) $2,401,000 in severance payments pursuant to the Retention Agreement
between the Company and its former President, (ii) a nonrecurring charge of
$3,749,000 in connection with the write-off of impaired goodwill, and, (iii)
additional charges of $2,811,000 relating to the consolidation of the Company's
operations and facilities. The 1999 loss also included start-up costs associated
with new licensing arrangements of $2,235,000. Additionally, due to the adverse
retail environment the Company gave accommodations, in the form of markdowns, to
customers to help them alleviate the generally poor sales at the retail level.
This loss was partially offset by an improvement in operations attributable to
increased sales and margins along with a reduction of interest expense due to
the conversion of Apollo debt to equity and the reduction of borrowing due to
the infusion of funds from the Simon Purchase Transaction
NET SALES. The Company's net sales increased from $175,359,000 during the
twelve months ended December 31, 1999 to $199,439,000 during the twelve months
ended December 31, 2000. This increase of $24,080,000 was due to an increase in
sales of XOXO products of $55,262,000, including XOXO outlet and retail store
sales (XOXO was acquired by the Company on August 10, 1999 and its sales were
included in 1999 revenues only from that date). In addition, the Company's net
sales were positively impacted by $9,946,000 in sales attributable to the roll
out of the Company's new "Baby Phat" product line and $2,505,000 attributable to
the roll out of the Company's "Brooks Brothers Golf" product line. These
increases in sales were offset by sales decreases of $23,365,000 in the "Fubu"
product line, $12,442,000 in the Company's "Members Only" product lines,
$6,381,000 in private label sales and $1,445,000 related to "Perry Ellis" and
other discontinued product lines.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 2000
was $55,200,000 or 27.7% of net sales compared to $50,534,000 or 28.8 % for the
twelve months ended December 31, 1999. Gross profit was positively impacted by
sales of higher margin XOXO branded products for the entire year along with
higher margins on the Company's "Baby Phat" product lines. These increases were
offset by the significant markdowns taken in liquidating the Company's "FUBU"
product lines. In addition, the Company also incurred markdowns on its Perry
Ellis product lines in connection with the termination of the Company's
relationship with Perry Ellis. Margins on the Company's own Members Only product
line were negatively impacted by warming temperatures throughout the country
during its peak selling season which resulted in increased inventory levels
requiring the Company to markdown excess inventory to facilitate its sale.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $78,703,000 or 39.5% of net sales for the twelve months ended December 31,
2000 compared to $48,057,000 or 27.4% of net sales for the twelve months ended
December 31, 1999. The increase in selling and administrative expenses was
attributable to the inclusion of XOXO's selling and administrative expenses
which included approximately $4,055,000 of depreciation and goodwill
amortization including XOXO retail and outlet store operations. In addition,
selling and
-11-
administrative expenses increased due to the inclusion of the XOXO retail and
outlet stores which have incurred significant expenses as a percentage of sales
due to the stores' limited market exposure in the short time that they have been
operating. Also, the Company incurred $2,021,000 of selling and administrative
expenses attributable to the Company's "Brooks Brothers Golf" and "Baby Phat"
product lines.
START-UP COSTS. During the twelve months ended December 31, 2000 the
Company incurred start-up costs of $1,862,000 relating to various license
agreements for newly launched and terminated product lines. These start-up costs
consist of salaries, samples and related supplies directly attributable to newly
licensed operations.
During the twelve months ended December 31, 1999 the Company incurred
$1,181,000 of start-up costs relating to various license agreements without any
related revenue. These start-up costs consist of salaries, samples and related
supplies directly attributable to the newly licensed operations. In addition,
the Company incurred $1,054,000 of start up costs in connection with the
relocation of its warehouse facilities.
INTEREST EXPENSE. Interest expense for the twelve months ended December 31,
2000 increased by $2,594,000 or 62% compared to the twelve months ended December
31, 1999. This increase was due to interest on the Company's $10,000,000 Term
Loan dated August 10, 1999, an increase in borrowings on the Company's revolving
credit facility, and increases in the prime lending rate from 7.75% as of
December 31, 1999 to 9.5% as of December 31, 2000. In addition, the amendment to
the Company's financing agreement increased the interest rate on the Company's
revolving credit facility from prime to prime plus one-quarter percent and
increased the interest rate on the Company's term loan from prime plus one-half
to prime plus three-quarter percent.
1999 Compared to 1998
NET INCOME. The Company reported a net loss of $10,583,000 for the twelve
months ended December 31, 1999 compared to a net loss of $ 3,728,000 for the
twelve months ended December 31, 1998. The loss in 1999 included restructuring
and other charges, consisting of (i) $2,401,000 in severance payment pursuant
to the Retention Agreement between the Company and its former President, (ii) a
nonrecurring charge of $3,749,000 in connection with the write-off of impaired
goodwill, (iii) additional charges of $2,811,000 relating to the consolidation
of the Company's operations and facilities, and (iv) $2,235,000 in start-up
costs associated with new licensing arrangements. Additionally, due to the
adverse retail environment the Company gave accommodations, in the form of
markdowns, to customers to help them alleviate the generally poor sales at the
retail level. This loss was partially offset by an improvement in operations
attributable to increased sales and margins along with a reduction of interest
expense due to the conversion of Apollo debt to equity and the reduction of
borrowing due to the infusion of funds from the Simon Purchase Transaction.
NET SALES. The Company's net sales increased from $127,680,000 during the
twelve months ended December 31, 1998 to $175,359,000 during the twelve months
ended December 31, 1999. This increase of $47,679,000 was a result of increased
sales of products under the "FUBU" license which amounted to $22,713,000 during
the twelve months ended December 31, 1999 as compared to the twelve months ended
December 31, 1998 which reflected the Company's initial shipment of the "FUBU"
products. In addition, there was an increase in sales due to the inclusion of
XOXO sales of $42,913,000 from August 10, 1999, the date of the XOXO
acquisition. These increases in sales were partially offset by a decrease in
sales of the Members Only(R) product line in the amount of approximately
$10,908,000, a reduction of $1,466,000 in the Company's "Perry Ellis" product
lines which suffered a lack of consumer demand along with a reduction of private
label sales and the
-12-
phase out of the "Jeffrey Banks" product lines resulting in a decrease of sales
in the approximate amount of $5,573,000.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 1999
was $50,534,000 or 28.8% of net sales compared to $29,540,000 or 23.1 % for the
twelve months ended December 31, 1998. Gross profit was positively impacted by
sales of higher margin XOXO(R) branded products included from August 10, 1999
the date of the XOXO acquisition and sales of the Company's "FUBU" product lines
partially offset by the weak performance of the Company's "Perry Ellis America"
brand which suffered from a lack of consumer demand which caused the Company to
liquidate prior season inventory at reduced prices.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $48,057,000 or 27.4% of net sales for the twelve months ended December 31,
1999 compared to $29,950,000 or 23.5% of net sales for the twelve months ended
December 31, 1998. The increase in Selling and administrative was attributable
to the inclusion of XOXO's Selling and Administrative expenses included from
August 10, 1999 the date of the acquisition along with increased fixed and
variable expenses relating to the " FUBU" licensed product line. The increase in
selling and administrative expenses as a percentage of net sales was primarily
due to the inclusion of XOXO's selling and administrative expenses from the date
of acquisition.
START-UP COSTS. Commencing with the third quarter ended September 30, 1999,
the Company incurred $1,181,000 of start-up costs relating to various license
agreements without any related revenue. These start-up costs consist of
salaries, samples and related supplies directly attributable to the newly
licensed operations. The Company expects to continue to incur such costs during
2000 in connection with several of its new license arrangements. In addition,
the Company incurred $1,054,000 of start up costs in connection with the
relocation of its warehouse facilities.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1999 was
$4,185,000, a decrease of $1,035,000 or 19.8% compared to interest expense of
$5,220,000 for the year ended December 31, 1998. The decrease was primarily due
to the conversion of Apollo debt to equity and the reduction of borrowings
resulting from the infusion of funds from the Simon Purchase Transaction, offset
partially by interest on the Company's $ 10,0000,00 Term Loan. Interest expense
on the Company's working capital facility increased due to an increase in the
prime lending rate from 7.75% to 8.50% during the twelve months ended December
31, 1999.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact on
its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-13-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL DATA.
(Unaudited) (in thousands except per share data)
Per Share
--------------------
Quarter Net Sales Gross Profit Net Income/(Loss) Basic Diluted
- --------------------------------------------------------------------------------------------------
2000
First $ 42,886 $15,152 $ (7,094) $(0.09) $(0.09)
Second 44,200 15,166 (5,528) (0.07) (0.07)
Third 58,262 16,513 (3,362) (0.04) (0.04)
Fourth 54,091 8,369 (20,496) (0.26) (0.26)
-------- ------- --------
$199,439 $55,200 $(36,480)
======== ======= ========
1999
First $28,133 $6,660 $(7,324) $(0.28) $(0.28)
Second 25,324 6,908 (3,083) (0.07) (0.07)
Third 62,869 18,318 3,275 0.05 0.05
Fourth 59,033 18,648 (3,451) (0.04) (0.04)
-------- ------- --------
$175,359 $50,534 $(10,583)
======== ======= ========
The financial statements listed in the accompanying Index at Part IV, Item
14(a)1 are filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 19, 1999, the Company engaged PricewaterhouseCoopers LLP ("PwC")
as the Registrant's independent accountants for 1999, replacing Deloitte &
Touche LLP (the "Former Accountants") as the Registrant's independent auditors.
The change was approved by the Registrant's board of directors.
The Former Accountants' report on the Registrant's consolidated financial
statements for 1998 did not contain any adverse opinion or disclaimer of opinion
and was not qualified as to uncertainty, audit scope or accounting principles.
During the Registrant's two most recent fiscal years and any subsequent
interim period, there were no disagreements between the Registrant and the
Former Accountants on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, nor were there
any "Reportable Events" within the meaning of Item 304(a)(1)(iv) of Regulation
S-K.
Prior to its engagement as the Company's independent accountant, PwC had
not been consulted by the Company with respect to the application of accounting
principles to a specific transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
The Former Accountants filed a letter with the Commission agreeing with the
foregoing statement.
-14-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and principal occupations of the
current members of the Board of Directors and the executive officers of the
Company, their positions with the Company, their business experience during the
last five years and the year each was first elected a director of the Company.
Directors hold office until the next Annual Meeting of Shareholders and until
their respective successors are elected and qualify, provided that vacancies
occurring in the Board of Directors may be filled by vote of the Directors.
Officers of the Company serve at the pleasure of the Board of Directors of the
Company.
====================================================================================================================
NAME AGE POSITION
- --------------------------------------------------------------------------------------------------------------------
Arnold H. Simon 55 Director, Chairman, Chief Executive Officer and President of the
Company.
- --------------------------------------------------------------------------------------------------------------------
Robert A. Katz 34 Director.
- --------------------------------------------------------------------------------------------------------------------
Debra Simon 44 Director.
- --------------------------------------------------------------------------------------------------------------------
Howard Schneider 73 Director.
- --------------------------------------------------------------------------------------------------------------------
Mark Weiner 46 Director.
- --------------------------------------------------------------------------------------------------------------------
Maurice Dickson 56 Executive Vice President, Chief Operating Officer.
- --------------------------------------------------------------------------------------------------------------------
Paul Spector 59 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary.
- --------------------------------------------------------------------------------------------------------------------
Gregg Fiene 49 Vice Chairman and Director of the Company and Chief Executive Officer
of XOXO Clothing Company
- --------------------------------------------------------------------------------------------------------------------
Steven Feiner 33 Director and President of XOXO.
- --------------------------------------------------------------------------------------------------------------------
Joseph Purritano 42 Vice President - Sales.
- --------------------------------------------------------------------------------------------------------------------
Tom Nastos 42 Vice President - Production.
- --------------------------------------------------------------------------------------------------------------------
ARNOLD H. SIMON became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 30 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in the Simon Group. Mr.
Simon is married to Debra Simon.
ROBERT A. KATZ has been a Director of the Company since June 1993. Mr. Katz
is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with which he
has been associated with since 1990. Mr. Katz is also a director of Vail
Resorts, Inc., QDI, Inc., Clark Retail Group, Inc. and Horizon PCS, Inc.
-15-
DEBRA SIMON became a Director of the Company on March 18, 1999. Ms. Simon
was Executive Vice-President and a Director of Designer Holdings Ltd. from March
1994 until December 1997, and was Vice-President of Rio Sportswear, Inc. from
1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
HOWARD SCHNEIDER became a Director of the Company on March 18, 1999. Mr.
Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
MARK S. WEINER became a Director of the Company on June 17, 2000. He is
currently, and for more than the past five years has been, president of
Financial Innovations, Inc., a private marketing and merchandising company. Mr.
Weiner was deputy treasurer of the Democratic National Committee from 1989 to
1993 and currently serves as treasurer of the Democratic National Governors
Association.
PAUL SPECTOR has been Senior Vice President and Chief Financial Officer of
the Company since May 1992 and Treasurer and Secretary of the Company since
August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the
Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
MAURICE DICKSON has been Executive Vice President and Chief Operating
Officer of the Company since May 2000. From February 2000 until he assumed his
full time responsibilities with the Company, Mr. Dickson served as a consultant
to the Company. From October 1997 until February 2000, Mr. Dickson was
semi-retired. From October 1995 until October 1997, Mr. Dickson was chief
financial officer of Designer Holdings, Ltd. From 1981 until October 1995, Mr.
Dickson was chief financial officer of Ellen Tracy, Inc.
GREGG FIENE has been vice chairman of the Company's board of directors and
chief executive officer of the Company's XOXO subsidiary since August 10, 1999.
For more than five years prior to its acquisition by the Company, Mr. Fiene was
the chairman and chief executive officer and a principal shareholder of the
predecessor to XOXO.
STEVEN FEINER was appointed to the Board on March 23, 2000 to fill the
vacancy created by the death of David Fidlon. Mr. Feiner was appointed president
of XOXO in June 2000. Prior thereto, Mr. Feiner had been for more than the prior
five years, the owner and operator of various privately held apparel concerns.
JOSEPH PURRITANO has been Vice President of Sales of the Company since June
1999. From 1993 to 1997, Mr. Purritano was vice president of Calvin Klein
Jeanswear and from 1997 until June 1999, he was president of Calvin Klein
Jeanswear, which was acquired by Warnaco Group, Inc. in 1997.
TOM NASTOS has been Vice President of Production of the Company since July
1998. From 1990 to 1998, Mr. Nastos was President and Chief Operating Officer of
Synergy, Inc., a private label supplier of apparel.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of
-16-
Common Stock and other equity securities of the Company. Such persons are
required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the Company with respect to the fiscal year
ended December 31, 2000, no persons failed to file any such form in a timely
manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
of the Company as of December 31, 2000 who received compensation in excess of
$100,000.
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
- -----------------------------------------------------------------------------------------------------------------------------
Other Securities
Name and Fiscal Annual Underlying Stock All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation($)
- -----------------------------------------------------------------------------------------------------------------------------
Arnold H. Simon, Chairman, 2000 734,615 -- 177,611(7) 1,250,000 52,275(6)
Chief Executive Officer of 1999 634,615(1) 181,000 189,800(5) 1,000,000 26,137(6)
the Company and President
- -----------------------------------------------------------------------------------------------------------------------------
Maurice Dickson, Executive 2000 235,817(8) -- 1,000,000
Vice President and Chief
Operating Officer
- -----------------------------------------------------------------------------------------------------------------------------
Tom Nastos, Vice President 2000 404,000 -- --
- - Manufacturing 1999 382,666 -- 750,000(4)
1998 330,000 -- 250,000(4)
- -----------------------------------------------------------------------------------------------------------------------------
Gregg Fiene, 2000 749,996 -- 500,000
Vice Chairman, Chief 1999 281,250(2) -- 1,150,000
Executive Officer of XOXO
Clothing Company
- -----------------------------------------------------------------------------------------------------------------------------
Joseph Purritano, 2000 529,230 -- -- --
Vice President - Sales 1999 288,462(3) 250,000(3) -- 750,000
- -----------------------------------------------------------------------------------------------------------------------------
(1) Represents salary from date of Simon Purchase Transaction, February 26,
1999.
(2) Represents salary since date of XOXO Transaction, August 10, 1999.
(3) Mr. Purritano joined the Company on June 10, 1999, and received a "signing"
bonus at that time.
(4) In connection with Mr. Nastos' joining the Company, his employment
agreement provided for the grant of 1,000,000 options.
(5) Includes $87,800 in tax and accounting services and $102,000 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(6) Represents pro rata share of premiums for a life insurance policy a portion
of which Mr. Simon has the right to designate the beneficiary.
-17-
(7) Includes $147,775 in tax and accounting services and $29,836 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(8) Mr. Dickson joined the Company as an employee in May, 2000.
Option Grants
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the last fiscal year. No SARs
were granted during the last fiscal year.
POTENTIAL REALIZABLE VALUE
% OF OPTIONS/ AT ASSUMED ANNUAL RATES
SARS GRANTED WEIGHTED OF STOCK APPRECIATION
TO EMPLOYEES AVERAGE FOR OPTION TERM ($)
OPTIONS/SARS DURING FISCAL EXERCISE EXPIRATION -----------------------------
NAME GRANTED YEAR PRICE/SHARE DATE 5% per year 10% per year
- ---- ------------- ------------- ----------- ---------- ------------- -------------
Arnold H. Simon 1,250,000 21.9% $0.51 11/30/2010 $401,000 $1,016,000
Maurice Dickson 1,000,000 17.5% $0.57 11/30/2010 359,000 909,000
Tom Nastos -- -- -- -- -- --
Gregg Fiene 500,000 8.8% $0.30 11/30/2010 94,000 239,000
Joseph Purritano -- -- -- -- -- --
Exercised/Unexercised Stock Options and Fiscal Year End Option Values
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 2000 of
unexercised options, as well as options exercised by such executive officers
during the 2000 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
------------------------------------------------------------------------------------------------------
Shares
Acquired Number of Securities Underlying Value of Unexercised
on Exercise Value Realized Unexercised Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- ----------- -------------- --------------------------------- ----------------------------------
Arnold H. Simon -0- -0- 833,333/1,416,667 $-0-/$277,500
Maurice Dickson -0- -0- 250,000/750,000 $-0-/$185,000
Tom Nastos -0- -0- 500,000/500,000 $-0-/$-0-
Gregg Fiene -0- -0- 1,150,000/500,000 $-0-/$185,000
Joseph Purritano -0- -0- 250,000/500,000 $-0-/$-0-
- ----------
(1) The value of unexercised in-the-money options was calculated by determining
the difference between the closing price of the Company's common stock on
December 31, 2000 and the exercise price of the options.
-18-
Compensation of Directors
During the twelve months ended December 31, 2000, each outside director
(i.e., one not employed by the Company or any of its subsidiaries) was entitled
to receive director's fees at the rate of $18,000 per annum. The Company
suspended these payments in April 2000. Each of these directors was also
entitled to receive reimbursement for expenses incurred in attending meetings of
the Board or committees thereof on which they serve. In addition, each outside
director was entitled to receive $500 per meeting of the Committees of the Board
to which they are assigned. No executive officer received additional
compensation for service as a Director.
Employment Agreements
The Company has an employment agreement effective as of March 1, 1999 with
Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief
executive officer of the Company and its subsidiaries. The term of the agreement
is for three years, expiring on February 28, 2002. Pursuant to the agreement,
Mr. Simon's base salary is $750,000 per annum, subject to annual review for
increase (but not decrease) at the discretion of the Board. In addition, the
agreement provides for annual bonuses equal to 2% of adjusted EBITDA if adjusted
EBITDA is between $5 million and $10 million, and 3% of adjusted EBITDA if
adjusted EBITDA is in excess of $10 million.
The agreement entitles Mr. Simon to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, if the
Company's principal office or Mr. Simon's own office is relocated to a location
not within Manhattan, or if there are certain changes of control. In the event
of termination of Mr. Simon for good reason or if he is terminated without
cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Simon with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
The Company is party to an employment agreement with Joseph Purritano
effective as of June 7, 1999, pursuant to which Mr. Purritano is to serve as
Executive Vice President in charge of sales for the Company and its subsidiaries
for a 3-year term expiring on June 6, 2002. Pursuant to the agreement, Mr.
Purritano is to receive an annual base salary of $500,000 in the first year of
the term, $550,000 per annum in the second year of the term, and $600,000 in the
third year of the term. In addition, he is entitled to an annual bonus based
upon the Company achieving certain EBITDA targets. As inducement to join the
Company, the Company agreed to grant Mr. Purritano 750,000 options to purchase
shares under the Company's stock option plan, and further paid Mr. Purritano a
bonus of $250,000.
Mr. Purritano has the right to terminate the agreement for "good reason",
which includes the assignment of any duties or responsibilities inconsistent in
any material respect with the contemplated scope of Mr. Purritano's services,
the Company's failure to substantially perform any material term of his
employment agreement, relocation of the Company's principal office or Mr.
Purritano's own office to a location not within Manhattan, a "change of control"
as defined in the agreement. In the event Mr. Purritano terminates the Agreement
for good reason or if his employment is terminated without cause, Mr. Purritano
is entitled to a lump sum payment in an amount equal to 150% of his annual base
salary then in effect.
In connection with the acquisition of XOXO, the Company entered into an
employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to
which Mr. Fiene is to serve as
-19-
Vice Chairman of the Board of Directors of the Company, Chief Executive Officer
of the Company's XOXO subsidiary and all divisions of the Company (present and
future) engaged in the female apparel industry and related ancillary industries,
and as chief executive officer, president, or in such other senior executive
position with respect to any of the Company's current or future subsidiaries as
he and the Chairman of the Board of Directors of the Company shall mutually
determine. Pursuant to the agreement, Mr. Fiene's base salary is $750,000 per
annum, and he is entitled to an annual bonus if the Company meets certain EBITDA
targets. The term of Mr. Fiene's agreement is for five years, ending on August
9, 2004. In the event Mr. Fiene is terminated without cause, or if he terminates
for "good reason", which includes any diminution of his duties under the
agreement, certain changes of control, he is entitled to a lump sum payment
equal to his highest annual base salary during the term multiplied by 2.99, and
a lump sum payment in an amount equal to his average annual bonus with respect
to the immediately preceding three fiscal years multiplied by 2.99.
Also in connection with the acquisition of XOXO, the Company entered into
an employment agreement with Hollis Fiene, pursuant to which Ms. Fiene is to
serve as the Vice President, Design and Merchandising, for the Company's XOXO
subsidiary, and any other current or future subsidiaries or divisions of the
Company engaged in the design of women's apparel. The term of Ms. Fiene's
agreement is for three years, ending on August 9, 2002. Pursuant to the
agreement Ms. Fiene's base salary is $300,000 per annum, and she is entitled to
such annual discretionary bonus as the Board of Directors may determine. If her
employment is terminated by the Company without cause or if she terminates for
"good reason", which includes the termination of Gregg Fiene's employment by the
Company without cause or by Mr. Fiene for good reason, the assignment of the
duties and responsibilities inconsistent in any material respect with the scope
of the duties and responsibilities associated with Ms. Fiene's position, the
Company's failure to substantially perform material provisions of the employment
agreement and in the event of certain changes of control, she shall be entitled
to receive a lump sum amount equal to 150% of her base salary then in effect.
In April 1998, the Company entered into an employment agreement with Tom
Nastos, pursuant to which Mr. Nastos was to serve as the president and chief
executive officer of an outerwear company the Company was contemplating buying,
and as the president of the private label business of the Company's ECI
subsidiary. The acquisition never occurred. Pursuant to a letter agreement with
Mr. Nastos, if the acquisition did not occur by July 31, 1998, he was to be
employed in an executive capacity with ECI. Under the employment agreement as
modified by the letter agreement, Mr. Nastos' term of employment expires
December 31, 2001, and he is entitled to a base salary of $400,000 per annum. In
addition, pursuant to the Agreement, the total of 1,000,000 options were to be
granted to Mr. Nastos with the first 250,000 vesting in three equal installments
and the remaining 750,000 options vesting eight years from the closing of the
acquisition.
In May, 2000, the Company entered into an employment agreement expiring
February 28, 2003 with Maurice Dickson to serve as Executive Vice President and
Chief Operating Officer of the Company at an annual base salary of $375,000,
subject to annual review, and an annual bonus equal to 1% of adjusted EBITDA if
adjusted EBITDA is between $5 million and $10 million, and 1.5% of adjusted
EBITDA if adjusted EBITDA is in excess of $10 million. The agreement entitles
Mr. Dickson to terminate the agreement for a "good reason", which includes any
diminution of his duties under the agreement, the Company's failure to perform
its obligations under the agreement, if the Company's principal office or Mr.
Dickson's own office is relocated to a location not within Manhattan or Los
Angeles, or if there are certain changes of control. In the event the
termination of Mr. Dickson is for good reason or if he is terminated without
cause, Mr. Dickson is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Dickson with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
-20-
401(k) Plan
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee (the
"Committee") as of December 31, 2000 were Messrs. Simon, Schneider and Weiner.
Other than Mr. Simon, neither Committee member was (i) during the twelve months
ended December 31, 2000, an officer or employee of the Company or any of its
subsidiaries or (ii) formerly an officer of the Company or any of its
subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of March 1, 2001 by persons who are either (i) beneficial owners of 5% or more
of the Common Stock, (ii) named executive officers or directors of the Company,
and (iii) and all executive officers and directors as a group.
- --------------------------------------------------------------------------------------------------------------------
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
- --------------------------------------------------------------------------------------------------------------------
Arnold Simon 44,745,045 (2)(3) 56.3%
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------------------------------------------
Robert Katz 16,818,806 (3)(5) 21.2%
Apollo Aris Partners, L.P.
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- --------------------------------------------------------------------------------------------------------------------
Maurice Dickson 416,447 (6) *
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------------------------------------------
Paul Spector 106,666 (6) *
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------------------------------------------
Gregg Fiene 4,176,667 (6) 5.0%
6000 Sheila Street
Commerce, CA 90040
- --------------------------------------------------------------------------------------------------------------------
Joseph Purritano 250,000 (4)(6) *
463 Seventh Avenue
New York, NY 10018
- --------------------------------------------------------------------------------------------------------------------
Debra Simon 33,333 (6) *
463 Seventh Avenue
New York, NY 10018
- --------------------------------------------------------------------------------------------------------------------
-21-
- --------------------------------------------------------------------------------------------------------------------
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
- --------------------------------------------------------------------------------------------------------------------
Howard Schneider 33,333 (6) *
Schneider Schechter & Yoss
1979 Marcus Avenue, Suite 232
Lake Success, NY 11042
- --------------------------------------------------------------------------------------------------------------------
Mark Weiner 33,333 (6) *
Weingeroff Enterprises
1 Weingeroff Boulevard
Cranson, RI 02910
- --------------------------------------------------------------------------------------------------------------------
Tom Nastos 500,000 (6) *
463 Seventh Avenue
New York, NY 10018
- --------------------------------------------------------------------------------------------------------------------
Steven Feiner 750,000 (6)
6000 Sheila Street
Commerce, CA 90040
- --------------------------------------------------------------------------------------------------------------------
All persons who are executive officers or directors of the 49,070,045 (6) 60.1%
Company, as a group (4 persons)
- --------------------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) Includes 9,170,204 shares of Common Stock which were sold to two
unaffiliated third parties by The Simon Group LLC, but over which Mr. Simon
has voting and certain dispositive power. Includes 35,574,841 shares owned
by The Simon Group. Arnold Simon, the Managing Member of The Simon Group,
has sole voting and investment power with respect to the shares of the
Company held of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999 Equity
Registration Rights Agreement described in Item 13 below, containing
certain voting and other arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which such person holds a
membership interest. Such person has no power or authority to vote or
dispose of any shares held by The Simon Group, LLC, and disclaims
beneficial ownership of such shares.
(5) This table does not reflect any beneficial ownership by Mr. Katz, a
Director of the Company, associated with Apollo. Mr. Katz does not directly
own any shares of Common Stock, and disclaims beneficial ownership of all
shares held by Apollo Aris Partners, L.P. and AIF, L.P.
(6) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(106,666), Tom Nastos (500,000), and Gregg Fiene (1,316,667), Maurice
Dickson (416,447), Joseph Purritano (250,000), Debra Simon (33,333), Howard
Schneider (33,333), Mark Weiner (33,333) and Steven Feiner (750,000).
-22-
(7) Mrs. Simon disclaims beneficial ownership of shares beneficially owned by
Arnold H. Simon.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (convertible into 20,937,900 shares of Common Stock)
for $20,000,000 in cash, and (ii) the Company redeemed from AIF the Series B
Junior Secured Note of the Company including all accrued interest thereon
(representing total indebtedness as of January 31, 1999 of $10,658,000), in
exchange for $4,000,000 in cash plus 5,892,856 shares of Common Stock and
512,113 shares of Series A Preferred Stock (which are convertible into 5,121,130
shares of Common Stock). Effective July 1999, all of the Series A Preferred
Stock converted into common stock.
During the latter part of 2000, First AHS Corporation, a company wholly
owned by Mr. Simon, opened up letters of credit for merchandise that the Company
required for sale to fulfill its orders. When the goods subject to those letters
of credit were received, First AHS sold them to the Company at cost. Currently,
the Company owes First AHS approximately $8.6 million in connection with these
purchases and sales. In addition, Mr. Simon guaranteed $7 million of First AHS's
obligations to the Company's lenders in connection with the letter of credit
facility.
During 2000 and continuing to the present, Mr. Simon has guaranteed $3
million of the Company's indebtedness to its principal lender under its
financing agreement. The guaranty is due to expire May 4, 2001, provided that
the Company is not in default under the credit agreement at that time.
During 2000, the Company had sales of approximately $14,286,000 to Humane,
Inc., a company wholly owned by Steven Feiner. In addition, Humane acted as
agent for the Company in connection with sales of certain of the Company's
products to retailers in the United States. As of December 31, 2000, the Company
had receivables from Humane of $787,000 and incurred commissions of $572,259
during 2000 and $593,734 in 1999.
In late January 2001, Mr. Simon loaned the Company $2,000,000. Such loan
bears interest at prime plus 1/4% per annum and is repayable upon demand by Mr.
Simon.
1999 Shareholders Agreement
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in
-23-
the 1999 Shareholders Agreement) or other affiliates of such Non-Simon Subject
Shareholders; transfers by a Non-Simon Subject Shareholder's estate; transfers
pursuant to offerings registered under the Securities Act; transfers in
compliance with Rule 144 of the Securities Act; and transfers not exceeding an
annual aggregate of 10% of the shares of Common Stock owned by such Non-Simon
Subject Shareholder on the closing of the Simon Purchase Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same consideration per share of Common Stock to be
received by The Simon Group in such transfers. Such tag-along rights will also
apply to certain transfers by Arnold Simon or his affiliates of their beneficial
ownership in The Simon Group after six months from the closing of the Simon
Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
1999 Equity Registration Rights Agreement
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
The XOXO Shareholders Agreement
In connection with the XOXO Transaction, the Company, The Simon Group, LLC,
and each of the former shareholders of Lola, Inc. entered into a shareholders
agreement which provides that each Lola shareholder will vote his or her shares
for the election of directors nominated by Arnold Simon. The Agreement also
provides that during its term, Simon shall nominate and vote all of its shares
of common stock for the election of Gregg Fiene as a director of the Company
provided that at such time Mr. Fiene is employed as an executive officer of the
Company. The Agreement contains certain restrictions on the sale by Gregg Fiene
and one other former Lola shareholder of the Aris shares received in the XOXO
Transaction and provides for certain "tag-along" and "drag-along" rights in
connection with such shares. The Agreement also provides that in the event the
Company registers any shares of its Common Stock under the Securities Act of
1933, as amended, each former Lola shareholder has the right to include a
certain amount of his or her shares in such registration statement. The term of
the shareholders' agreement is for ten years unless sooner terminated in
accordance with its terms.
-24-
During 1999 and 2000, the Company reimbursed Mr. Simon for accounting and
tax services provided to Mr. Simon by Mr. Schneider's accounting firm in the
amount of $87,800 and $147,775, respectively. In addition, Mr. Schneider's firm
provided services to the Company amounting to approximately $28,000 and $45,050
during 1999 and 2000, respectively.
-25-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
Page
----
1. Financial Statements and Independent Accountants' Report
Independent Accountants' Report...................................... F-1
Independent Auditor's Report......................................... F-1A
Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999......... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998................................... F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998............................. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998................................... F-5
Notes to Consolidated Financial Statements........................... F-7
2. Financial Statement Schedule
The following financial statement schedule should be read in
conjunction with the consolidated financial statements in Item 8 of
this Annual Report on Form 10-K:
Schedule II--Valuation and Qualifying Accounts....................... S-1
All other schedules are omitted because they are not applicable or because
the required information is included in the financial statements or notes
thereto.
(b) Reports on Form 8-K
There were none filed during the fourth calendar quarter ended December 31,
2000.
(c) INDEX TO EXHIBITS
-----------------
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------
3.3 Restated Certificate of Incorporation filed on June 30, 1993 (3)
3.4 Amended and Restated By-Laws effective June 30, 1993 (3)
3.5 Amendment to the Restated Certificate of Incorporation filed (20)
with the Secretary of State on July 29, 1999
3.6 Amendment to the Restated Certificate of Incorporation filed (21)
with the Secretary of State in January 2001
10.67 Series A Junior Secured Note Agreement dated as of June 30, (3)
1993 between Registrant and BNY Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, 1993 issued (3)
by Registrant to BNY Financial Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, 1993 between (3)
Registrant, BNY Financial Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of June 30, 1993 (3)
between Registrant and each member of Registrant's Board of
Directors.
10.99 Warrant dated September 30, 1996 issued by Aris Industries, (10)
Inc. to Heller Financial, Inc.
-26-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------
10.111 Securities Purchase Agreement, dated as of February 26, 1999, (17)
between Aris Industries, Inc., Apollo Aris Partners, L.P.,
AIF, L.P., The Simon Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, 1999, (17)
between Aris Industries, Inc., Apollo Aris Partners, L.P.,
AIF, L.P., The Simon Group, L.L.C. and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C. and
Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by and among the (18)
Company and its Subsidiaries and CIT Commercial Group, Inc.
and the other Financial Industries named therein.
10.116 Agreement and Plan of Merger dated July 19, 1999 by and among (19)
Aris Industries, Inc., XOXO Acquisition Corp. and Lola, Inc.
and its shareholders ("Agreement and Plan of Merger"). The
exhibits and schedules to the Agreement and Plan of Merger
are listed on the last page of such Agreement. Such exhibits
and schedules have not been filed by the Registrant, who
hereby undertakes to file such exhibits and schedules upon
request of the Commission.
10.117 Amendment No. 1 to Agreement and Plan of Merger. (19)
10.118 Employment Agreement by and among the Registrant, Europe (19)
Craft Imports, Inc., ECI Sportswear, Inc., XOXO and Gregg
Fiene, dated August 10, 1999.
10.119 Employment Agreement by and among the Registrant, ECI, ECI (19)
Sportswear, Inc., XOXO and Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the Registrant, The (19)
Simon Group, LLC, Gregg Fiene, Michele Bohbot and Lynne
Hanson, dated August 10, 1999.
-27-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------
10.121 Amendment No. 2 to Financing Agreement by and among Aris (19)
Industries, Inc., Europe Craft Imports, Inc., ECI Sportswear,
Inc., Stetson Clothing Company, Inc., XOXO; the Financial
Institutions from time to time party to the Financing
Agreement, as Lenders; and The CIT Group/Commercial Services,
Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
10.123 Employment Agreement with Steven Feiner (21)
10.124 Employment Agreement with Maurice Dickson (21)
10.125 Agreement between the Company and certain of its subsidiaries (21)
and Grupo Xtra dated January, 2001
10.126 Form Securities Purchase Agreement Dated as of February, 2001 (21)
between the Company and KC Aris Fund I, L.P.
21. List of Subsidiaries (21)
23. Consent of PricewaterhouseCoopers LLP (21)
23.1 Consent of Deloitte & Touche LLP (21)
- ----------------
(1) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended February 2, 1991 and incorporated
herein by reference.
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June
30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
-28-
(16) Filed as Annex A to the Company's Proxy Statement filed with the
Commission on May 27, 1999, and incorporated herein by reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with
the Commission on or about April 13, 1999 and incorporated herein by
reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999.
(20) Omitted.
(21) Filed herewith.
- ----------
* The Schedules and Exhibits to such Agreements have not been filed by the
Company, who hereby undertakes to file such schedules and exhibits upon
request of the Commission.
-29-
SIGNATURES
Pursuant to the requirements of Sections 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.
ARIS INDUSTRIES, INC.
By: /S/ ARNOLD H. SIMON
---------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /S/ PAUL SPECTOR
---------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /S/ VINCENT F. CAPUTO
---------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/ARNOLD SIMON April 16, 2001
- ----------------------------------
Arnold Simon, Chairman of the Board
and Chief Executive Officer; Director
/S/STEVEN FEINER April 16, 2001
- ----------------------------------
Steven Feiner, Director
/S/GREGG FIENE April 16, 2001
- ----------------------------------
Gregg Fiene, Director
April __, 2001
- ----------------------------------
Robert Katz, Director
/S/DEBRA SIMON April 16, 2001
- ----------------------------------
Debra Simon, Director
/S/HOWARD SCHNEIDER April 16, 2001
- ----------------------------------
Howard Schneider, Director
/S/MARK WEINER April 16, 2001
- ----------------------------------
Mark Weiner, Director
-30-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Aris Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 26 present fairly, in all material
respects, the financial position of Aris Industries, Inc. and Subsidiaries at
December 31, 2000 and 1999, and the results of their operations and of their
cash flows for each of the two years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under item 14(a)(2) on page 26 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has incurred recurring losses and negative
cash flows from operations and has a working capital deficit at December 31,
2000. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
New York, New York
March 28, 2001
/s/ PricewaterhouseCoopers LLP
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Aris Industries, Inc.
New York, New York
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Aris Industries, Inc. and Subsidiaries for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Aris Industries,
Inc. and Subsidiaries for the year ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
March 31, 1999
Parsippany, New Jersey
F-1A
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,389 $ 1,109
Receivables, net 33,888 34,004
Inventories 15,919 18,233
Prepaid expenses and other current assets 1,359 2,509
--------- ---------
TOTAL CURRENT ASSETS 53,555 55,855
Property and equipment, net 9,963 10,752
Goodwill, net 36,151 37,894
Other assets 540 1,616
--------- ---------
TOTAL ASSETS $ 100,209 $ 106,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility $ 38,679 $ 25,485
Current portion of long-term debt 9,700 2,600
Current portion of capitalized lease obligations 1,150 1,755
Accounts payable 26,354 14,591
Accrued expenses and other current liabilities 10,955 4,005
--------- ---------
TOTAL CURRENT LIABILITIES 86,838 48,436
Long-term debt 5,242 14,342
Capitalized lease obligations 1,478 1,818
Other liabilities 3,165 2,270
--------- ---------
TOTAL LIABILITIES 96,723 66,866
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01,
authorized 10,000 shares, none issued
Common stock, par value $.01, 100,000 shares
authorized, 80,665 shares issued
and outstanding at December 31, 2000
and 79,434 shares issued and outstanding
at December 31, 1999 807 795
Additional paid-in capital 80,753 80,323
Accumulated deficit (77,879) (41,399)
Unearned compensation (195) (468)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,486 39,251
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,209 $ 106,117
========= =========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2000 1999 1998
--------- --------- ---------
Net sales $ 199,439 $ 175,359 $ 127,680
Cost of sales 144,239 124,825 98,140
--------- --------- ---------
Gross profit 55,200 50,534 29,540
Commission and licensing income 2,737 2,571 1,570
--------- --------- ---------
Income before operating expenses, interest expense,
income tax provision and extraordinary item 57,937 53,105 31,110
Operating expenses:
Selling and administrative expenses 78,703 48,057 29,950
Start-up costs 1,862 2,235 --
Restructuring and other charges 7,040 8,961 --
--------- --------- ---------
(Loss) income before interest expense, income tax
provision and extraordinary item (29,668) (6,148) 1,160
Interest expense, net 6,779 4,185 5,220
--------- --------- ---------
Loss before income tax provision
and extraordinary item (36,447) (10,333) (4,060)
Income tax provision 33 250 190
--------- --------- ---------
Loss before extraordinary item (36,480) (10,583) (4,250)
Extraordinary item:
Gain on early extinguishment of debt, net -- -- 522
--------- --------- ---------
NET LOSS $ (36,480) $ (10,583) $ (3,728)
========= ========= =========
BASIC NET LOSS PER SHARE:
Loss before extraordinary item $ (0.46) $ (0.19) $ (0.29)
Extraordinary item -- -- .04
--------- --------- ---------
Net loss $ (0.46) $ (0.19) $ (0.25)
========= ========= =========
DILUTED NET LOSS PER SHARE:
Loss before extraordinary item $ (0.46) $ (0.19) $ (0.29)
Extraordinary item -- -- .04
--------- --------- ---------
Net loss $ (0.46) $ (0.19) $ (0.25)
========= ========= =========
Per share data:
Weighted average shares outstanding - basic 79,777 55,374 14,912
Weighted average shares outstanding - diluted 79,777 55,374 14,912
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
-------- -------- -------- -------- ------------ --------
Balance at December 31, 1997 14,905 $ 150 $ 44,752 $(27,088) $ 17,814
Stock options exercised 51 1 5 6
Net loss -- -- -- (3,728) (3,728)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 14,956 151 44,757 (30,816) 14,092
Common stock issued in connection with Simon
Transaction, net of transaction costs of $1,468 57,009 570 24,107 -- 24,677
Stock options exercised 969 9 429 -- 438
Common stock issued in connection with Lola, Inc.
acquisition 6,500 65 9,685 -- 9,750
Issuance of stock options in connection with
Lola, Inc. acquisition -- -- 805 -- 805
Issuance of stock options to employees/consultants -- -- 540 -- $ (540) --
Amortization of unearned compensation on
stock options -- -- -- -- 72 72
Net loss -- -- -- (10,583) -- (10,583)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1999 79,434 795 80,323 (41,399) (468) 39,251
Stock options exercised 231 2 114 -- -- 116
Common stock issued in connection with
settlement of FUBU royalty obligations 1,000 10 290 -- -- 300
Issuance of stock options to consultants -- -- 300 -- (300) --
Cancellation of compensatory stock options
issued to employees -- -- (274) -- 274 --
Amortization of unearned compensation on
stock options -- -- -- -- 299 299
Net loss -- -- -- (36,480) -- (36,480)
-------- -------- -------- -------- -------- --------
Balance, December 31, 2000 80,665 $ 807 $ 80,753 $(77,879) $ (195) $ 3,486
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss $(36,480) $(10,583) $ (3,728)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on early extinguishment of debt -- -- (522)
Gain on settlement of licensing royalty obligations (1,500) -- --
Loss on disposal of property and equipment 1,538 733 --
Depreciation and amortization of property and equipment 4,115 1,515 601
Amortization of goodwill 1,868 1,037 1,110
Amortization of deferred financing costs 864 79 --
Provision for allowances on receivables 1,807 2,773 --
Provision for obsolescence on inventory 3,912 (453) --
Provision for restructuring charges 4,187 -- --
Impairment of goodwill -- 3,749 --
Issuance of notes in lieu of interest -- 108 276
Deferred income taxes -- 137 151
Non-cash stock based compensation 299 72 --
Changes in assets and liabilities:
Increase in receivables (1,691) (11,393) (52)
(Increase) decrease in inventories (1,598) 18,376 (6,873)
Decrease (increase) in prepaid expenses and
other current assets 1,150 (575) 390
Decrease (increase) in other assets 517 (241) 1,187
Increase (decrease) in accounts payable 12,652 (2,685) (2,626)
Increase (decrease) in accrued expenses and
other current liabilities 4,563 (4,811) (500)
Increase (decrease) in other liabilities 895 510 (748)
-------- -------- --------
Net cash used in operating activities (2,902) (1,652) (11,334)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (4,608) (4,289) (233)
Acquisition of businesses, net of cash acquired -- (10,320) (2,659)
-------- -------- --------
Net cash used in investing activities (4,608) (14,609) (2,892)
-------- -------- --------
Cash flows from financing activities:
Book overdraft (889) 1,544 --
Proceeds from issuance of common stock -- 20,000 --
Common stock issuance costs paid -- (1,468) --
Stock options exercised 116 438 6
Proceeds from long-term debt -- 10,000 --
Deferred financing costs paid (430) (406) --
Payments of long-term debt and capitalized leases (3,201) (5,435) (1,335)
Increase (decrease) in borrowings under revolving
credit facility 13,194 (8,415) 15,295
-------- -------- --------
Net cash provided by financing activities 8,790 16,258 13,966
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,280 (3) (260)
Cash and cash equivalents, beginning of year 1,109 1,112 1,372
-------- -------- --------
Cash and cash equivalents, end of year $ 2,389 $ 1,109 $ 1,112
-------- -------- --------
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,267 $ 4,242 $ 4,229
------- ------- -------
Income taxes $ 33 $ 254 $ 63
------- ------- -------
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock in connection with
settlement of Fubu royalty obligations $ 300
-------
Capitalized lease obligations $ 256 $ 1,995
------- -------
Acquisition of business:
Fair value of the assets acquired $40,568
Liabilities assumed 19,540
Common stock and stock options issued 10,555
Cash acquired 153
-------
Cash paid for acquisition, net $10,320
-------
Exchange of Series B Junior Secured Note
for common stock $ 4,864
-------
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Aris Industries, Inc. and Subsidiaries (collectively, the "Company") has
been engaged in the business of designing, manufacturing and marketing
men's and boys' outerwear and activewear, women's sportswear, loungewear
and swimwear under a variety of tradenames which are owned and licensed
from others. These products were distributed and marketed in the United
States, primarily in department stores, specialty stores and national
retain chains, as well as Company-owned retail and outlet stores. In
addition, the Company has granted licenses to use Company-owned tradenames
for the manufacture and sale of various products. During 2000, the Company
terminated its licensing relationships with Perry Ellis and Fubu and
abandoned its efforts to develop licensed businesses under the Stetson and
Cynthia Rowley tradenames.
On January 17, 2001, the Company entered into a multi-year licensing
agreement (the "Agreement") with Grupo Xtra of New York, Inc. ("Grupo").
Under the terms of the Agreement, Grupo will have the exclusive rights in
the United States, Puerto Rico, Israel and the Caribbean Islands to license
for production, marketing, advertising and distribution all products under
the tradenames owned by the Company, which include XOXO, Fragile and
Members Only, as well as tradenames currently licensed by the Company,
which include both Baby Phat and Brooks Brothers Golf (collectively, the
"Licensed Products").
The Agreement has an initial term of five years and can be extended for
four additional five-year periods, provided Grupo is in substantial
compliance with its obligations under the Agreement. The Agreement provides
for minimum royalties, which aggregate to $53,360,000 over its initial
five-year term. The Agreement is subject to early termination under certain
circumstances.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. During the three-year period
ended December 31, 2000, the Company experienced losses and negative cash
flows from operations. As of December 31, 2000, the Company has a working
capital deficit and was not in compliance with certain covenants contained
in its credit facility. As a result, the Company has classified the
long-term portion of its term loan under the credit facility as a current
liability.
In response to these declining financial conditions, the Company reduced
planned spending in fiscal 2000 and, in the fourth quarter, initiated a
plan to consolidate its operations into its existing XOXO facilities
located in California. As a result of the Agreement, in 2001, the Company
has substantially reduced its workforce and terminated its production and
sales operations. During this transition, the Company expects to continue
to incur operating losses and recognize additional restructuring charges,
principally related to additional severance, in the first quarter of 2001.
The Company plans to finance its transition to a licensing and brand
management business through (i) cash received from the turnover of
inventory, realization of receivables and royalties under the Agreement and
other licenses; (ii) additional financing in the form of convertible
debentures and a loan from the Company's principal stockholder; (iii)
negotiated reductions in amounts due to, and extended payment terms with,
certain creditors of the Company; and, (iv) the negotiation of the
continued availability of financing under the Company's existing credit
facility until such time as such indebtedness can be repaid. In this
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
connection, the Company has receivables and inventory aggregating
$49,807,000 at December 31, 2000, which are expected to be realized in
2001. In addition, the Agreement provides for minimum royalties of
$8,100,000 in 2001, although the Company expects such royalties to exceed
the minimum amount. With respect to additional financing, the Company
entered into an agreement for the issuance of $10,000,000 in convertible
debentures to a private investor in 2001. In February 2001, the Company
received $7,000,000 in convertible debenture proceeds which was used to pay
down its revolving line of credit and expects to receive the remaining
$3,000,000 which will be used to further paydown the revolving line of
credit. Also, in January 2001, the Company received a $2,000,000 loan from
its principal stockholder which is payable on demand. Although the Company
is not in compliance with certain covenants of its credit facility, the
lenders have allowed the financing to continue under the facility with the
expectation that borrowings under the facility will be substantially repaid
in 2001.
The Company believes that the financing discussed above will be sufficient
to transition and sustain its operations as a licensing and brand
management business and to payoff indebtedness under the credit facility,
however, there can be no assurance that the Company's lenders will continue
the credit facility or that the timing of cash receipts to be realized from
working capital and operations will be sufficient to meet obligations as
they become due. These factors raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Aris
Industries, Inc. and its wholly-owned subsidiaries after elimination of all
significant intercompany transactions and balances.
USE OF ESTIMATES
The preparation of the Company's 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 disclosures relating to contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses for the reporting period. The most significant
estimates relate to the allowances for sales returns, discounts, credits
and doubtful accounts, inventory valuation allowances, recoverability of
long-lived assets and valuation allowances on deferred tax assets. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits.
INVENTORIES
Inventories are stated at the lower of cost (weighted average basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of the life of the lease or the improvement. Expenditures for maintenance,
repairs and minor renewals are expensed as incurred. When property or
equipment is sold or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and the
gain or loss realized on disposition is reflected in operations.
GOODWILL
Goodwill represents the excess of purchase price over the fair values of
identifiable net assets of businesses acquired, which includes intangible
assets related to certain tradenames and licensing arrangements. Goodwill
is amortized on a straight-line basis over periods of 20 to 40 years.
At December 31, 2000 and 1999, goodwill is stated net of accumulated
amortization of $9,863,513 and $7,995,358, respectively.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company performs undiscounted
operating cash flow analyses to determine if an impairment exists. If an
impairment is determined to exist, any related impairment loss is
calculated based on fair value.
In 1999, the Company recorded an impairment charge of $3,749,000 with
respect to goodwill associated with its Perry Ellis licenses as a result of
a change in the terms of the licenses (see Note 5). At December 31, 2000,
goodwill consists of the costs associated with the acquisition of the
Company's XOXO and Members Only tradenames. In January 2001, the Company
entered into the Agreement and commenced a transition to a licensing and
brand management business. Based on the expected cash flows from this
business, the Company concluded that the carrying amount of goodwill would
be fully recovered over its remaining amortization periods. However, the
Company will continue to evaluate the actual and expected results from this
business and reassess its conclusions with respect to any potential
impairment of goodwill in 2001. If it is determined that goodwill is
impaired, then an impairment charge will be recorded to reduce goodwill to
its fair value. Such charge could have a material adverse effect on the
Company's financial position and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, approximate fair value due to the short
maturity of these assets and liabilities. The interest on substantially all
of the Company's borrowings are adjusted regularly to reflect current
market rates. Accordingly, the carrying amounts of such borrowing
approximate fair value. The fair value of the Company's subordinated
long-term debt was determined using valuation techniques that considered
cash flows discounted at current market rates. The estimated fair value of
this instrument at December 31, 2000 approximated $5,606,000.
CONCENTRATION OF CREDIT RISK
The Company assigns a substantial portion of its receivables to a factor
which assures the credit risk with respect to collection of non-recourse
receivables. Ongoing customer credit evaluations are performed with respect
to the Company's trade receivables not factored and collateral is not
required.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
Revenue from the sale of merchandise is recognized at the date of shipment
to the customer. Allowances for sales returns, discounts and credits are
provided when the sale is recorded.
Commission and licensing income is based upon a percentage of the
licensee's net sales, as defined in the underlying agreements, and is
recognized as earned.
START-UP COSTS
Start-up costs are expensed as incurred. During 2000 and 1999, the Company
incurred $1,862,000 and $1,181,000, respectively, for start-up costs
relating to various licensing agreements. These start-up costs consist of
salaries, samples and related supplies directly attributable to newly
licensed operations. During 1999, the Company also incurred approximately
$1,054,000 of start-up expenses for its new distribution facility prior to
the commencement of operations.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $5,547,000 in 2000, $3,190,000 in 1999 and $1,941,000 in 1998.
EARNINGS PER SHARE
Basic (loss) income per common share is computed by dividing net (loss)
income available for common shareholders, by the weighted average number of
shares of common stock outstanding during each period. Diluted (loss)
income per share is computed assuming the conversion of stock options and
warrants with a market value greater than the exercise price.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" which had an initial
adoption date of January 1, 2000. During 1999, the FASB postponed the
required adoption date of SFAS No. 133 until January 1, 2001. In addition,
during 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends the
requirements of SFAS No. 133. These standards require that all derivative
financial instruments be recorded on consolidated balance sheets at fair
value as either assets or liabilities. Changes in the fair value of
derivatives will be recorded each period in earnings or other comprehensive
earnings, depending on whether a derivative is designated and effective as
part of a hedge transaction and, if it is, the type of hedge transaction.
Gains and losses on derivative instruments reported in other comprehensive
earnings will be reclassified as earnings in the periods in which earnings
are affected by the hedged item. Initial adoption of these new standards on
January 1, 2001 will have an insignificant impact on the Company's
consolidated financial position and results of operations.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
3. THE SIMON TRANSACTION
On February 26, 1999, the Company issued (i) 24,107,145 shares of common
stock of the Company and 2,093,790 shares of Series A Preferred Stock of
the Company (which shares were converted into 20,937,900 shares of common
stock on July 29, 1999), for $20,000,000 and (ii) redeemed the Series B
Junior Secured Note (which represented a total indebtedness of $10,658,000)
in exchange for $4,000,000 in cash and an aggregate of 5,892,856 shares of
common stock and 512,113 shares of Series A Preferred Stock (which shares
were converted into 5,121,130 shares of common stock on July 29, 1999),
(the "Simon Purchase Transaction"). In connection with the Simon Purchase
Transaction, the Company also issued 700,000 shares of common stock to a
third party as a condition to its consent to the transaction. In addition,
the Company paid approximately $1,468,000 in cash, issued 250,000 shares of
common stock to cover the costs associated with the transaction and paid
principal and interest of $4,830,000 on its existing debt facilities. As a
result of this transaction, the Company received net proceeds of
approximately $13,702,000.
4. ACQUISITION
On August 10, 1999, the Company completed the acquisition of Lola, Inc.
("Lola"), a California corporation, with and into Europe Craft Imports,
Inc. ("ECI"), a New Jersey corporation, that is wholly owned by the
Company. Concurrent with the closing, ECI contributed all of the assets
formerly owned by Lola to XOXO Clothing Company, Incorporated, a Delaware
corporation ("XOXO") that is wholly owned by ECI. Lola's business consisted
principally of the manufacture and sale of women's apparel and accessories
principally under the "XOXO" name.
In connection with the acquisition, Lola's shareholders received
$10,000,000 in cash, 6,500,000 shares of the Company's common stock, valued
at $1.50 per share at the time of the acquisition, and options to purchase
1,150,000 shares of the Company's common stock (valued at $805,000). In
addition, the Company incurred acquisition expenses which approximated
$473,000. The acquisition was accounted for under the purchase method of
accounting, and, accordingly, the operating results have been included in
the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the fair values of
assets acquired and liabilities assumed amounted to $22,774,000 and has
been recorded as goodwill. In conjunction with the merger, the Company
obtained a $10,000,000 term loan and increased its line of credit from
$65,000,000 to $80,000,000 with a financial institution (see Note 9).
The table below reflects unaudited pro forma combined results of the
Company as if the acquisition of Lola had taken place on January 1, 1999
(in thousands, except per share data):
Net sales $221,804
Net loss (15,001)
Net loss per diluted share $ (0.25)
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The unaudited pro forma results of operations have been prepared for
informational purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill and increased
interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in the
future.
5. RESTRUCTURING AND OTHER CHARGES
In connection with the continued restructuring of its corporate office and
distribution facilities, the Company, through September 30, 2000, recorded
a restructuring charge of $1,315,000. The charges consisted of employee
severance costs and other administrative facility costs. During the fourth
quarter of 2000, the Company's board of directors approved and the Company
announced a revised restructuring plan which includes moving and
consolidating its headquarters, showrooms and warehouses into its existing
XOXO facilities located in California. This plan resulted in a charge of
$5,725,000. The charge consisted of property and equipment write-downs of
$1,538,000, net of salvage costs, and lease termination costs of
$4,187,000. At December 31, 2000, the Company had a remaining liability of
$4,187,000 related to lease termination costs which amounts are included in
accrued expenses.
During 1999, the Company recorded charges of $5,212,000 associated with the
restructuring of its corporate office and distribution facilities. These
charges before taxes include employee severance costs of $2,583,000, asset
write-downs of $733,000, and rent and other exit costs of $1,896,000.
In connection with the Simon Purchase Transaction (see Note 3), the Company
was required to obtain consents from the licensor of its Perry Ellis
licenses. As a condition to granting its consent, such licensor required
that the term of its licenses be shortened. Based on the negative future
undiscounted net cash flows expected to be derived from these licenses over
their revised terms, the remaining intangible assets associated with the
acquisition of these licenses of $3,749,000 (included in goodwill) was
deemed impaired and written-off in 1999.
6. RECEIVABLES
Receivables consist of the following (in thousands):
DECEMBER 31,
-----------------
2000 1999
------- -------
Due from factor $37,693 $36,866
Trade receivables 5,336 4,472
------- -------
43,029 41,338
Less allowances for sales returns, discounts,
credits and doubtful accounts 9,141 7,334
------- -------
$33,888 $34,004
======= =======
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has an agreement with a commercial finance company which
provides for the factoring of certain trade receivables. The receivables
are factored without recourse as to credit risk but with recourse for any
claims by the customer for adjustments in the normal course of business
relating to pricing errors, vendor allowances, shortages, damaged goods,
and other claims. All factored receivables and related proceeds are the
property of the commercial finance company. The Company is charged a
factoring commission of .4% of factored trade receivables. The Company
receives payment based upon the actual maturity dates of the receivables.
The Company holds no collateral with respect to amounts due from the
commercial finance company.
7. INVENTORY
Inventory consists of the following (in thousands):
DECEMBER 31,
------------------------
2000 1999
------- -------
Raw materials $ 3,784 $ 2,997
Work-in-process 3,515 1,196
Finished goods 8,620 14,040
------- -------
$15,919 $18,233
======= =======
Finished goods inventory includes in-transit amounts of approximately
$4,036,000 at December 31, 1999.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------
IN YEARS 2000 1999
------------ ------- -------
Furniture, fixtures and equipment 3 - 7 $15,256 $12,381
Leasehold improvements 5 - 10 3,605 4,615
------- -------
18,861 16,996
Less accumulated depreciation and amortization 8,898 6,244
------- -------
$ 9,963 $10,752
======= =======
As of December 31, 2000 and 1999, property and equipment include amounts
for equipment leased under capital leases with an original cost of
$4,363,000 and $4,185,000, respectively. As of December 31, 2000 and 1999,
accumulated depreciation and amortization include $1,426,000 and
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$726,000, respectively, associated with these leased assets.
9. FINANCING
The following amounts represent borrowings outstanding (in thousands):
DECEMBER 31,
-----------------
2000 1999
------- -------
Revolving Credit Facility (a) $38,679 $25,485
------- -------
Long-term debt:
Term Loan (a) $ 8,000 $10,000
Series A Junior Secured Note (b) 6,942 6,942
------- -------
14,942 16,942
Less current portion 9,700 2,600
------- -------
$ 5,242 $14,342
======= =======
a. During February 1999, the Company entered into a Financing Agreement
with CIT Commercial Services Group, Inc. ("CIT") and certain other
financial institutions, whereby such lenders agreed to provide a
revolving credit facility up to $65,000,000 for working capital loans
and letters of credit financing. In connection with the XOXO
transaction (see Note 4), the Company's Financing Agreement was
amended to increase the revolving credit facility to $80,000,000, and
provide a term loan of $10,000,000.
Availability under the revolving credit facility is based on a formula
of eligible receivables and inventory, as defined. At December 31,
2000, outstanding letters of credit amounted to $1,490,000 and there
was $803,000 available for use under the credit facility. At the
Company's option, loans under the revolving credit facility may be in
the form of revolving credit loans or Eurodollar loans. For revolving
credit loans, interest was accrued at the bank's prime rate. For
Eurodollar loans, interest was accrued at a rate per annum equal to
the Eurodollar rate (as defined) plus 2.5%.
The term loan bore interest at prime plus one-half percent (9.5% at
December 31, 2000) and is payable in quarterly installments of
$500,000, plus interest, with a final payment of $5,500,000 due on
February 26, 2002, the maturity date. The Company is required to make
certain mandatory prepayments based upon "excess cash flows" as
defined in the amendment to the agreement.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Borrowings under the credit agreement are collateralized by
substantially all of the assets of the Company. The agreement contains
restrictive covenants that, among other requirements, restrict the
payment of dividends, additional indebtedness, leases, capital
expenditures, investments and the sale of assets or merger of the
Company with another entity. The covenants also require the Company to
meet certain financial ratios and maintain minimum levels of net
worth.
In April 2000, the Company entered into an amendment of its Financing
Agreement, under which the lenders waived compliance with certain
covenant violations at December 31, 1999, and increased the interest
rates on the Company's revolving credit facility to prime plus
one-quarter percent and the term loan to prime plus three-quarter
percent. At December 31, 2000 and 1999, the weighted average interest
rate on borrowings was 9.5% and 8.5%, respectively. The amendment also
provided for an overadvance facility based on seasonal needs.
In November 2000, the Financing Agreement was further amended to waive
compliance with additional covenant provisions and require the Company
to raise equity financing of $10,000,000 prior to January 10, 2001 and
an additional $10,000,000 prior to February 15, 2001.
In connection with the amendments, the Company's chief executive
officer agreed to provide a personal guarantee on $3,000,000 of
indebtedness outstanding under the Financing Agreement which presently
expires on the earlier of (i) the date on which all borrowings are
paid in full and all letters of credit are cancelled or cash
collateralized after the termination of the commitment; (ii) May 4,
2001, unless the lenders have made a demand for payment prior to such
date; and, (iii) the date on which the full amount of the guarantee
has been paid.
At December 31, 2000, the Company was not in compliance with certain
covenants contained in the amended Financing Agreement. The Company's
lenders have indicated that they have no current intention to take
action with respect to such non-compliance but have not waived the
covenant violations. The lenders have allowed the continuance of
financing under the revised terms of the Financing Agreement with the
expectation that borrowings under the facility will be substantially
repaid in 2001. As a result, the Company has classified the long-term
portion of its term loan under the Financing Agreement as a current
liability.
b. On June 30, 1993, the Company entered into a Series A Junior Secured
Note Agreement with BNY Financial Corporation ("BNY"), pursuant to
which BNY received a nine-year, $7,000,000 note. On September 17,
1997, the Company and BNY entered into an amendment of the BNY note
which provided that scheduled interest accruing under the note for the
period February 1, 1996 through January 31, 1998 be deferred and added
to the principal. The note bears interest at 7% per annum and requires
annual principal payments of $1,100,000 and $5,242,000 for fiscal 2001
and 2002, respectively. During November 2000, the Company received a
forbearance on the $600,000 principal payment that was due. The due
date for the principal payment was extended to February 1, 2001 at
which time the Company paid the outstanding amount. BNY is also
entitled to receive mandatory prepayments based upon "excess cash
flows" of the Company, as defined in the Company's note agreements
with BNY.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Annual maturities of long-term debt are as follows (in thousands):
2001 $ 9,700
2002 5,242
-------
$14,942
=======
10. EARNINGS PER SHARE
The computation of basic and diluted (loss) per share from continuing
operations for each year is as follows (in thousands, except per share
data):
2000 1999 1998
-------- -------- -------
Numerator:
Net loss before extraordinary item $(36,480) $(10,583) $(4,250)
-------- -------- -------
Denominator:
Basic and diluted weighted average
shares outstanding 79,777 55,374 14,912
-------- -------- -------
Basic loss per share $ (0.46) $ (0.19) $ (0.29)
======== ======== =======
Diluted loss per share $ (0.46) $ (0.19) $ (0.29)
======== ======== =======
In 2000, 1999 and 1998, options and warrants to purchase 6,474,877,
3,543,511 and 1,140,000 shares of common stock, respectively, were
anti-dilutive and were excluded from the calculation of diluted weighted
average shares outstanding.
11. STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the
Company's Board of Directors (or a committee thereof), to award to
employees and directors of, and consultants to, the Company and its
subsidiaries: (i) options to acquire common stock at prices determined when
the options are granted, (ii) stock appreciation rights (entitling the
holder to a payment equal to the appreciation in market value of a
specified number of shares of common stock over a specified period), (iii)
restricted shares of common stock whose vesting is subject to terms and
conditions specified at the time of grant, and (iv) performance shares of
common stock that are granted upon achievement of specified performance
goals. Options granted pursuant to the Plan may be either "incentive stock
options" within the meaning of Section 422A of the United States Internal
Revenue Code of 1986, as amended, or non-qualified options. In April 1999,
the Company's Board of Directors approved an amendment to the Plan to allow
for the granting of options to purchase an additional 3,500,000 shares
under the Plan for a total of 7,000,000 shares. Additionally, in 2000, the
Company received approval from its board of directors and shareholders to
increase the number of shares for which options may be granted to
10,000,000.
The Plan provides that options which are cancelled or expire remain subject
to future grant under the
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Plan. In general, options granted provide for vesting in three equal annual
installments from the date of grant and are exercisable for a period of 10
years from the grant date.
Transactions in stock options under the Plan are summarized as follows:
2000 1999 1998
------------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
----------- -------- ---------- -------- ---------- --------
Outstanding, January 1 8,621,316 $ 1.70 1,803,000 $ 0.76 1,695,000 $ 0.70
Granted 5,698,500 0.58 7,888,350 1.73 280,000 0.96
Exercised (231,166) 0.50 (968,834) 0.45 (51,333) 0.13
Expired/Cancelled (863,050) 1.97 (101,200) 1.61 (120,667) 0.66
---------- ------ --------- ------ --------- -------
Outstanding, December 31 13,225,600 $ 1.20 8,621,316 $ 1.70 1,803,000 $ 0.76
========== ====== ========= ====== ========= ======
Options Exercisable, December 31 5,890,532 $ 1.29 2,959,166 $ 1.05 622,666 $ 0.45
========== ====== ========= ====== ========= ======
Stock options outstanding and exercisable at December 31, 2000 are as
follows:
WEIGHTED
WEIGHTED AVERAGE
RANGE OF SHARES AVERAGE REMAINING
EXERCISE UNDER PRICE CONTRACTUAL
PRICES OPTION PER SHARE LIFE IN YEARS
- --------------- ---------- --------- -------------
Outstanding:
under $1.00 6,248,000 $ 0.53 9.1
$1.00 - $1.50 1,915,000 1.30 7.8
$1.51 - $2.00 5,062,600 2.00 8.6
---------- ------ ---
13,225,600 $ 1.20 8.7
========== ====== ===
Exercisable:
under $1.00 2,288,000 $ 0.75 7.8
$1.00 - $1.50 1,915,000 1.30 7.8
$1.51 - $2.00 1,687,532 2.00 8.6
---------- ------ ---
5,890,532 $ 1.29 8.0
========== ====== ===
The Plan provides for the immediate vesting of outstanding options upon a
change of control of the Company. Accordingly, on the date of the Simon
Purchase Transaction, options to purchase 1,803,000 shares of common stock
became fully vested and exercisable.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company applies the intrinsic value method in accounting for its
stock-based compensation plan. Had the Company measured compensation under
the fair value based method for stock options granted, the Company's net
(loss) and net (loss) per share-diluted would have been as follows (in
thousands, except per share data):
2000 1999 1998
-------- -------- --------
Net loss from continuing operations
As reported $(36,480) $(10,583) $ (4,250)
Pro forma (40,857) (14,774) (4,478)
Net loss per share from continuing
operations - diluted
As reported $ (0.46) $ (0.19) $ (0.29)
Pro forma (0.51) (0.27) (0.30)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes Option pricing model with the following assumptions
for fiscal 2000, 1999 and 1998, respectively: Risk-free interest rates of
6.2%, 5.8% and 5.5%; dividend yield of 0% for each year; expected lives of
5 years for each year; and, volatility of 140%, 180% and 150%.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----
Current:
Federal $-- $-- $--
State and local 33 113 39
---- ---- ----
33 113 39
---- ---- ----
Deferred:
Federal -- -- 75
State and local -- 137 76
---- ---- ----
-- 137 151
---- ---- ----
$ 33 $250 $190
==== ==== ====
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is summarized as follows:
DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
Federal statutory income tax rate (34)% (34)% (34)%
State and local income taxes -- 1 1
Goodwill amortization 1 3 7
Valuation allowance 32 32 28
Other, individually less than 5% 1 -- 3
---- ---- ----
-- 2% 5%
==== ==== ====
The components of deferred tax assets and liabilities are as follows (in
thousands):
DECEMBER 31,
-------------------------
2000 1999
-------- --------
Deferred tax assets:
Current:
Restructuring charge $ 1,801 $ 723
Inventories 2,891 89
Allowance for sales returns, discounts, credits and
doubtful accounts 3,930 1,318
Accruals 1,304 --
Other 78 416
-------- --------
10,004 2,546
-------- --------
Noncurrent:
Net operating loss carryforwards 37,998 33,365
Goodwill 1,408 1,440
Alternative minimum tax credit carryforward 846 846
Other tax credit carryforwards 37 37
Other 605 460
-------- --------
40,894 36,148
-------- --------
50,898 38,694
Valuation allowance (50,322) (38,321)
-------- --------
Total deferred tax assets $ 576 $ 373
======== ========
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31,
----------------
2000 1999
---- ----
Deferred tax liabilities:
Property and equipment $576 $373
---- ----
Total deferred tax liabilities $576 $373
==== ====
Net deferred tax asset $-- $--
==== ====
At December 31, 2000, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $88,368,000
which expire during fiscal 2001 through 2020. As a result of the change in
control of the Company caused by the Simon Purchase Transaction, the
utilization of net operating loss carryforwards generated prior to the this
transaction are limited by Section 382 of the Internal Revenue Code to
approximately $1,500,000 annually through 2019. Accordingly, the Company
expects that a significant portion of these net operating loss
carryforwards will expire unused.
13. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum rental payments under capital leases and noncancelable
operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2000 are as follows (in thousands):
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
----------- --------- -------
2001 $ 6,154 $ 1,242
2002 4,739 855
2003 4,779 810
2004 3,875 492
2005 2,628 3
Thereafter 1,288 --
-------- -------
Total minimum lease payments $ 23,463 3,402
========
Less amount representing interest 774
-------
Present value of minimum lease payments (including
short-term portion of $1,150) $ 2,628
=======
The Company has various operating leases in effect primarily for retail and
outlet stores, offices and warehouses. The store leases expire over the
next ten years, the office leases expire over the next ten years and the
warehouse leases expire over the next four years. The store leases contain
clauses whereby the stores are assessed additional rents based on a
percentage of sales. For the years ended
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 2000, 1999 and 1998, the stores were not charged rent as a
percentage of sales. Most of the operating leases contain renewal options
to extend the lease terms. Total rental expense under all operating leases
was approximately $6,782,000, $4,385,000 and $2,282,000 for fiscal 2000,
1999 and 1998, respectively.
LICENSE AGREEMENTS
The Company has been granted several licensing agreements to manufacture
and distribute men's, women's and boys' outerwear, sportswear and
activewear products bearing the licensors' labels. The agreements expire at
various dates through 2011. The Company is required to make royalty and
advertising payments based on a percentage of sales, as defined in the
respective agreements, subject to minimum payment thresholds. Royalty and
advertising expenses under these licensing agreements totaled $7,990,845,
$6,920,000 and $5,600,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
Future minimum royalty and advertising payments required under the license
agreements are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
-------------
2001 $ 1,985
2002 2,534
2003 2,670
2004 2,820
2005 1,264
Thereafter 7,835
-------
Total minimum royalty payments $19,108
=======
In April 2000, Perry Ellis International and the Company mutually agreed
not to continue the "Perry Ellis America" jeanswear and loungewear licenses
after the year 2000.
On October 24, 2000, the Company signed an agreement providing for the
termination of the Company's license to produce and market products under
the "Fubu" name. The licensor forgave approximately $1,800,000 in license
royalty obligations in exchange for the termination of the license and
1,000,000 shares of the Company's common stock (estimated market value
$300,000). This settlement resulted in a gain of approximately $1,500,000
which is reflected in selling and administrative expenses. Additionally,
the licensor accepted responsibility for certain shipments of "Fubu"
products.
The Company also abandoned its efforts to develop sportswear under the
Stetson and Cynthia Rowley tradenames pursuant to license agreements with
the owners of the trademarks.
As described in Notes 1 and 17, the Company has assigned or sublicensed its
remaining licenses to Grupo, however, remains as the primary obligor under
the license agreements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior
executives for periods of three to five years, expiring no later than
August 2004. Under the agreements, the executives are entitled to a
specified salary over the contract period. Bonuses are payable based upon
profitability and cash flows of the Company for each period. The estimated
future minimum obligation under these contracts as of December 31, 2000 is
$7,750,417. In addition, upon certain events of termination or change in
control of the Company, certain of these agreements contain lump sum
payment provisions, as defined within the respective agreements.
LITIGATION
The Company, in the ordinary course of its business, is the subject of, or
a party to, various pending or threatened legal actions involving private
interests. While it is not possible at this time to predict the outcome of
these legal actions, in the opinion of management, the dispositions of
these matters will not have a material adverse effect on financial position
or results of operations. However, depending upon the amount and timing of
such dispositions, the Company's cash flows could be materially affected in
a particular period.
14. RETIREMENT PLANS
The Company participates in a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants vest
immediately in their own contributions and after seven years of service in
employer contributions. The Company made no contributions in 2000, 1999 and
1998.
The Company's union employees, at its leased warehouse and distribution
facility in New Bedford, Massachusetts, participate in a multi-employer
defined benefit pension plan. The Company's obligations with respect to the
plan will be determined based on a settlement which is presently being
negotiated.
15. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by
the Company's chief executive officer, entered into an agreement (the
"Letter of Credit Agreement") with the Company's principal commercial
lender to facilitate the opening of up to $17,500,000 in letters of credit
for the purchase of inventory. Pursuant to the Letter of Credit Agreement,
AHS will purchase inventory which will be held at the Company's warehouse
facilities. Such inventory will be sold to the Company at cost when the
Company is ready to ship the merchandise to the customer. As of and for the
year ended December 31, 2000, the Company purchased $19,482,988 from AHS,
owes AHS $8,579,000 and AHS is holding $2,981,000 of inventory which the
Company will purchase in 2001. In connection with the Letter of Credit
Agreement, the Chief Executive Officer of the Company has guaranteed up to
$7,000,000 of AHS obligations to the Company's principal commercial lender.
The Company has utilized the services of Schneider, Schecter & Yoss, an
accounting firm, of which Howard Schneider, a director of the Company, is a
partner. During 2000 and 1999, total fees paid were $193,010 and $115,800,
respectively.
During 2000, the Company had sales of approximately $14,286,000 to Humane
Incorporated
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
("Humane") of which Steven Feiner, a director of the Company, is the owner.
As of December 31, 2000, the Company had receivables from Humane of
approximately $787,000. In addition, Humane acted as agent for the Company
in connection with sales of certain of the Company's products to retailers
in the United States for which it received commissions of approximately
$572,000 and $594,000 in 2000 and 1999, respectively.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. The loan is payable on demand and bears interest at
prime plus 1/4%.
16. BUSINESS SEGMENT DATA
The Company is organized and managed as one business segment that offers
distinct men's, women's and boys' apparel products to its customers. Its
operations are conducted domestically and substantially all of its net
sales are derived from domestic customers. Additionally, all of the
Company's assets are located within the United States. The Company had
sales to two customers that represent 15% and 11% of net sales for the year
ended December 31, 2000. The Company had sales to one customer that
represent 4% and 13% of net sales for the years ended December 31, 1999 and
1998, respectively.
17. SUBSEQUENT EVENTS
On January 4, 2001, the stockholders of the Company amended its Certificate
of Incorporation by increasing the authorized common shares to 200,000,000.
On January 17, 2001, the Company entered into a trademark license with
Grupo. Grupo has received the exclusive right, for an initial term of 5
years (the "Initial Term"), renewable at its option for four additional
5-year periods, to manufacture, market and distribute at wholesale to
retailers XOXO women's jeanswear and sportswear, Fragile women's jeanswear
and sportswear, Member's Only sportswear and outerwear, and, subject to
Aris' rights as a licensee with respect thereto, Baby Phat apparel and
Brooks Brothers Golf apparel (the "Licensed Products") in Puerto Rico, the
United States, the Caribbean Islands and Israel. The Grupo Agreement
provides for minimum royalties, which aggregate to $53,360,000 over its
initial five-year term.
Grupo is to be solely responsible for manufacturing, marketing, and
distributing the Licensed Products sold thereunder, subject to Aris'
rights, as licensor or sublicensor, to approve all designs and otherwise
act to maintain the integrity of the licensed trademarks. As a result,
certain key members of the Company will continue to be actively involved in
the design and marketing of the Licensed Products. Grupo also agreed to
assume substantially all of the Company's future contractual commitments,
other than those relating to its existing licensing business, corporate
functions, warehouse operations in New Bedford, Massachusetts, loans under
the Company's credit facility and its Series A Junior Secured Note and
retained employees.
In connection with the Agreement, the Company agreed to issue to Grupo, at
the beginning of each year during the initial five-year term of the
Agreement, shares of its common stock having a market value of $1,000,000,
based on the average closing price of such common stock for the five
trading days immediately preceding the date on which such shares are to be
issued.
During February 2001, the Company entered into a securities purchase
agreement with KC Aris Fund I, L.P. pursuant to which the Company will
issue convertible debentures in the aggregate sum of $10,000,000. The
Company subsequently received $7,000,000 of this financing and expects to
receive the remaining $3,000,000. The debentures mature in three years,
bear interest at the rate of 8.5% per annum, payable quarterly, and are
convertible into shares of common stock at the rate of $.46 per share. The
Company has used the proceeds to pay down a portion of borrowings under its
revolving credit facility.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to
Tarrant. The Company agreed that, in the event the market value of such
shares as of December 31, 2001 is less than $3,300,000, the Company will
either, at its option (x) pay to Tarrant in cash an amount, or (y) issue to
Tarrant additional shares of common stock having a share value, equal to
the difference between $3,300,000 and the greater of the share value as of
December 31, 2001 and $1,050,000.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------- -------------- --------------- ------------
Year ended December 31, 2000:
Allowance for sales returns, discounts, $ 7,334,000 $ 1,807,000 $ -- $ 9,141,000
credits and doubtful accounts
Inventory reserves 2,105,000 3,912,000 -- 6,017,000
------------ ------------ ----------- ------------
$ 9,439,000 $ 5,719,000 $ -- $ 15,158,000
============ ============ =========== ============
Year ended December 31, 1999:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 4,561,000 $ 9,935,000 (1) $ 7,162,000 (2) $ 7,334,000
Inventory reserves 2,558,000 597,000 1,050,000 (3) 2,105,000
------------ ------------ ----------- ------------
$ 7,119,000 $ 10,532,000 $ 8,212,000 $ 9,439,000
============ ============ =========== ============
Year ended December 31, 1998:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 1,832,000 $ 10,440,000 $ 7,711,000 $ 4,561,000
Inventory reserves 268,000 1,240,000 -- 1,508,000
Reserve for price allowances 880,000 1,075,000 905,000 1,050,000
------------ ------------ ----------- ------------
$ 2,980,000 $ 12,755,000 $ 8,616,000 $ 7,119,000
============ ============ =========== ============
(1) Includes assumed allowances in connection with the XOXO acquisition.
(2) Write-off of receivables.
(3) Write-off of inventory.