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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number 1-4814
DECEMBER 31, 1996
ARIS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 FIFTH AVENUE, NEW YORK, NEW YORK 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 686-5050
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 ONE ($.01) CENT PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES |X| NO |_|
Indicate by 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 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 this
Form 10-K. [X]
As of March 3, 1997, 11,852,544 shares of the registrant's Common Stock were
outstanding. The aggregate market value of the 2,665,201 shares of voting stock
of the registrant held by non-affiliates of the registrant at March 3, 1997 was
$999,450.
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
Page
----
PART I..................................................................... 4
Item 1. Business................................................. 4
Item 2. Properties............................................... 9
Item 3. Legal Proceedings........................................ 9
Item 4. Submission of Matters to a Vote of Security
Holders.................................................. 10
PART II.................................................................... 10
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters...................... 10
Item 6. Selected Financial Data.................................. 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation............. 13
Item 8. Financial Statements and Supplementary Data.............. 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 27
PART III................................................................... 27
Item 10. Directors and Executive Officers of the
Registrant............................................... 27
Item 11. Executive Compensation................................... 30
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 39
Item 13. Certain Relationships and Related
Transactions............................................. 42
PART IV.................................................................... 45
Item 14. Exhibits, Financial Statement, Schedules and
Reports on Form 8-K...................................... 45
SIGNATURES................................................................. 51
EXHIBIT 21 List of Subsidiaries..................................... 81
EXHIBIT 23 Consent of Deloitte & Touche LLP.........................E-1
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PART I
Item 1. Business.
Aris Industries, Inc. (the "Company", the "Registrant" or "Aris") owns and
operates Europe Craft Imports, Inc. ("ECI"), a designer and importer of "Members
Only" and private label mens' outerwear and sportswear as well as "Perry Ellis"
mens' and "Perry Ellis America" mens' and boys' outerwear. ECI is also the
licensor of other fine "Members Only" products. ECI, a wholly-owned subsidiary,
was acquired by the Company in 1987. The Company was incorporated in the State
of New York in 1947.
On September 30, 1996, the Company sold 100% of the stock of another
wholly-owned subsidiary, Perry Manufacturing Company ("Perry"), which is engaged
in the manufacture and distribution of ladies' sportswear and which the Company
had owned since 1987.
Narrative Description of Businesses
ECI designs, imports and distributes mens' outerwear, including cloth and
leather jackets, and mens' sportswear, including knit shirts, under the "Members
Only" and other tradenames.
ECI has been granted licenses to manufacture and distribute mens' outerwear
under the "Perry Ellis" name and mens' and boys' outerwear under the "Perry
Ellis America" name.
ECI also designs, develops, sources and imports mens' and boys' outerwear
product lines as an agent for various national store chains selling such
products under ECI's name or through their own private label divisions.
The products of ECI are marketed nationally in department stores, specialty
stores and national retail chains, and through distributorships in other parts
of North America and South America. ECI has also commenced selling some of its
products in Europe. ECI also operates three stores located in factory outlet
malls.
Members Only Licensing Program
ECI has granted licenses of the "Members Only" trademark to licensees for mens'
woven shirts, mens' tailored suits and sportcoats, mens' and boys' hosiery and
socks and eyeglasses, among others. During the 1996 fiscal year, ECI undertook
an initiative to expand the Members Only licensing program and entered into a
new license for fragrance, cosmetics and toiletry products, as well as an
umbrella license for a variety of products in the People's Republic of China
("PRC"), Hong Kong and Macau. In the first
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quarter of 1997, ECI entered into a new "Members Only" license for mens'
footwear.
Design, Manufacturing and Importation
Generally, products sold by the Company are manufactured to the designs and
specifications (including fabric selections) of designers employed by the
Company's ECI subsidiary.
All of the products of ECI are manufactured overseas by independent factories
each selected by ECI or its agents. In order to qualify as a manufacturer for
ECI's products, factories must satisfy strict quality and delivery standards
required by ECI. ECI presently imports most of its products from Hong Kong,
Korea, China, Guatemala, Philippines, Bangladesh, Sri Lanka and Indonesia.
Foreign independent manufacturers contract with ECI to supply apparel made
pursuant to design samples and specifications. To ensure quality, ECI supervises
production at these factories at various stages throughout the production
process with ECI's own or its agent's own quality control teams.
Customers, Marketing and Distribution
ECI sells its products primarily to department and specialty stores and national
retail chains. ECI had only one customer which accounted for more than 10% of
its total revenues for the eleven month period ended December 31, 1996; this
customer represented 18.5% of ECI revenues for such period. Although ECI has
traditionally had strong relationships with this customer, the loss of such
customer could have a material adverse effect on the Company.
Competition
The products of ECI are sold to components of the consumer market which places a
premium on identifiable brand names. ECI competes with other apparel
manufacturers based on style, quality, value and brand recognition. Although ECI
sells its products to retail customers, it also competes with such retailers'
"private label" apparel lines. ECI's apparel products are sold on the main
selling floor areas of its retail store customers and are facing increasing
competition from such customer's expanded dedication of retail floor space to
"designer collections".
The Apparel Industry
The apparel industry is volatile and unpredictable due to cyclical and seasonal
swings caused, in part, by consumer buying patterns, weather conditions and
other factors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation Forward Looking Statements" for a broader discussion of
risks and
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factors affecting the apparel industry and the Company in particular.
Due to the lead time necessary for fabric delivery, product design, manufacture
and distribution, apparel importers such as the Company must make commitments
prior to the related selling season to purchase inventory sufficient to cover
the volume of apparel they expect to sell. Increasingly, retail customers of the
Company are ordering their products closer to the actual delivery date and
selling season; in order for the Company to deliver such products on time, it
must often commit to production in advance of obtaining hard orders from its
retail customers.
ECI, which sells primarily outerwear, is particularly impacted by unusually warm
weather or the late arrival of cold weather.
ECI utilizes lines of credit to finance inventory purchases and production
costs. Most of ECI's sales are factored with terms of sales maturing in a period
of 30-60 days. ECI factors on a maturity basis and pays interest and commission
charges.
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.
Trademarks
The Company has registered a variety of trade names, service marks and
trademarks ("Trademarks") with the United States Patent and Trademark Office
renewable for as long as the use thereof continues, including "Members Only"
Trademarks. The Company considers certain of its Trademarks to be of material
importance to its business and actively defends and enforces such Trademarks.
The Company also holds licenses to manufacture and distribute certain apparel
products under the "Perry Ellis" and "Perry Ellis America" Trademarks which it
considers to be of material importance to its business.
Employees
As of December 31, 1996, the Company and its subsidiaries had approximately 134
full and part-time employees, none of whom are covered by collective bargaining
agreements except for
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approximately 15 employees at ECI's New Jersey warehouse. The Company regards
its employee relations as satisfactory.
Foreign Sales
Although ECI exports products to Canada, Mexico and South America, these do not
comprise a significant portion of the Company's sales.
Segment Data
The Company is in the single industry of designing, manufacturing, importing and
distributing apparel.
Financing
The Company's long-term indebtedness consists of the debt
obligations of the Company to Heller Financial, Inc. ("Heller"),
BNY Financial Corporation ("BNY") and AIF-II, L.P., a Delaware
limited partnership and an affiliate of Apollo Advisors, L.P. ("AIF
II").
o Effective September 30, 1996, the Company sold 100% of the stock of a
wholly-owned subsidiary, Perry Manufacturing Company ("Perry") to Page
Holding Company, a company controlled by William K. Woltz, Jr., the CEO of
Perry (the "Perry Sale"). The total consideration was $54,719,000
consisting of $40,857,000 paid by the purchaser, $10,862,000 in
forgiveness of indebtedness, and assumption of approximately $3,000,000 of
Perry debt. The proceeds of this sale (including forgiveness of
indebtedness), were applied to reduce the Company's debt obligations to
Heller from approximately $53,000,000 of principal and accrued interest to
only $1,665,000, which includes principal of $1,000,000 and accrued
interest of $665,000. The Company retains ownership of Europe Craft
Imports, Inc.("ECI"), its sole remaining operating subsidiary.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller ("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000("New Heller Note"), with a maturity date of
November 2, 2001, with interest at 10% per annum, and a warrant to
purchase 584,345 shares of the Company's common stock at an exercise price
of $.01 per share. Such transaction has been accounted for as a
modification of terms to the original Heller debt. Accordingly, the
Company recorded the New Heller Note at the total future cash payments to
be made in accordance with the Amended Heller Agreement which is principal
of $1,000,000 and accrued interest of $665,000. Pursuant to the Amended
Heller Agreement, Heller forgave all other indebtedness of the Company to
Heller remaining after application of the proceeds of the Perry Sale, and
eliminated all financial covenants. Heller retained a pledge of the stock
(but not the assets) of ECI, the Company's remaining operating subsidiary.
The New Heller Note provides that no principal or interest be paid on the
Company's indebtedness to AIF-II until all principal and interest on the
New Heller Note is paid in full. In addition, the New Heller Note allows
the Company to make regularly scheduled interest payments on its
indebtedness to BNY (the "BNY Note") for interest accruing after February
3, 1997 and principal payments thereon. However, if the Company makes an
interest payment on the BNY Note it shall immediately make an interest
payment to Heller in an amount equal to the amount of interest which shall
have accrued on the New Heller Note in accordance with its terms during
the same period of time for which interest is being paid pursuant to the
interest payment on the BNY Note, and, if the Company makes a principal
payment on the BNY Note, it shall immediately on the same day prepay the
New Heller Note in an amount equal to the lesser of the principal payment
on the BNY Note or the then outstanding amount of the remaining obligation
on the New Heller Note.
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o On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY, pursuant to which BNY received a nine-year, $7 million
note, bearing interest at a rate of 7% per annum. BNY shares with AIF II a
second lien on the stock of ECI. With the consent of BNY, the quarterly
interest payments under such note due on and for the period May 6, 1996
through February 3, 1997 inclusive were not made in cash and instead were
added to the principal of such note. BNY's note is required to be paid in
six annual installments, payable on November 3 of each year commencing in
1997 as follows:
YEAR AMOUNT
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1997 $ 300,000
1998 300,000
1999 500,000
2000 600,000
2001 1,100,000
2002 4,200,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$460,000, representing the quarterly interest payments due on and for the
period May 6, 1996 through February 3, 1997, which were not paid in cash
and instead added to the principal of the Note to BNY.
o On June 30, 1993 the Company entered into a Series B Junior Secured Note
Agreement with AIF II, pursuant to which AIF II received a $7.5 million
note bearing interest at 13% per annum. AIF II shares with BNY a second
lien on the stock of ECI. With the consent of AIF II, the quarterly
interest payments under such note due for the period February 5, 1996
through February 3, 1997 inclusive were not made in cash and instead were
added to the principal of such note. AIF II's note is required to be paid
in two equal installments payable on November 3 in each of 2001 and 2002.
In addition, on November 3, 2002, the Company is obligated to pay AIF II
$1,208,000, representing the quarterly interest due for the period February
5, 1996 through February 3, 1997, which were not paid in cash and instead
added to the principal of the Note to AIF II.
Once the Heller obligations are paid in full, AIF II and BNY will share in
mandatory prepayments based upon 50% of certain "excess cash flows" as
defined in the Company's note agreements with AIF II and BNY.
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Implementation of 1993 Plan of Reorganization
On June 30, 1993 ("Effective Date"), the Plan of Reorganization of the Company
under Chapter 11 of the U.S. Bankruptcy Code (the "Plan") became effective
following confirmation by the U.S. Bankruptcy Court for the Southern District of
New York.
Pursuant to the Plan, (i) Apollo Aris Partners, L.P., a Delaware limited
partnership, an affiliate of AIF II ("Apollo Aris"), invested $1 million in the
Company in exchange for 5,804,820 shares of the Company's Common Stock, which
shares constitute approximately 48.8% of the Company's capital stock issued and
outstanding as of the Effective Date, (ii) AIF II invested $6.5 million in the
Company in exchange for a promissory note in the principal amount of $7.5
million issued by the Company, and (iii) the Company entered into the Senior
Secured Note Agreement with Heller, the Series A Junior Secured Note Agreement
with BNY and the Series B Junior Secured Note Agreement with AIF II, as
described above in "Financing".
Item 2. Properties.
ECI has approximately 17,400 square feet of leased space for its executive and
sales offices and showrooms in New York, and also leases approximately 29,600
square feet of space in New Jersey which serves as its general business,
accounting and management information service headquarters. In March, 1996, ECI
leased an additional 120,000 square feet of warehouse space adjacent to its New
Jersey offices. ECI then consolidated warehouse and distribution functions at
this location, and substantially reduced use of a Los Angeles independent
warehouse. ECI has three retail outlet stores in Ohio, Virginia, and Tennessee
with an aggregate of approximately 5,200 square feet.
Aris' executive offices were co-located with ECI's executive offices in New York
on December 1, 1995. Aris' former New York office lease of approximately 3,000
square feet was subleased on April 1, 1996 for the remainder of its term through
January 31, 1998.
Until 1981 the Company operated a department store in Akron, Ohio, and since
that time continued to sublease 115,000 square feet of space in a shopping
center. On May 1, 1996, the Company sold this leasehold interest.
Item 3. Legal Proceedings.
The Company and/or its subsidiaries, in the ordinary course of their business,
from time to time may be the subject of, or a party to, various legal actions
involving private interests. While the
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Company cannot guaranty the outcome of any litigation, the Company and/or its
subsidiaries believe that any ultimate liability arising from any such actions
which may be pending will not have a material adverse effect on its consolidated
financial statements at December 31, 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
None during the eleven month period ended December 31, 1996.
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 (formerly ARIN). Set forth below are the high and low bid prices
for a share of the Common Stock for each of the fiscal quarters to date of the
current fiscal year and 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 with Heller, BNY and AIF II, 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 such lenders. The Company has not
paid any dividends over the last two fiscal years. The price quotations set
forth below reflect inter-dealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
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High Low
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Twelve Months
Ending February 3, 1996
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First Quarter .75 .50
Second Quarter .625 .125
Third Quarter .25 .0625
Fourth Quarter .125 .01
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Eleven Months
Ending December 31, 1996
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First Quarter .12 .0625
Second Quarter .08 .0625
Third Quarter .08 .0625
Fourth Quarter .41 .0625
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================================================================================
High Low
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Twelve Months
Ending December 31, 1997
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First Quarter
(through date of .50 .375
March 3, 1997)
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There were approximately 4,155 shareholders of record as of March 3, 1997 and
the closing bid price of a share of the Common Stock was $.375 on March 3, 1997.
Item 6. Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA - ARIS INDUSTRIES, INC.
(In thousands except for per share data)
================================================================================
11 52-53 Weeks Ended
Months
Ended
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12/31/96 2/3/96 1/28/95 1/29/94 1/30/93
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Net revenues $131,802 $173,990 $188,143 $192,583 $193,241
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Income (loss) from
continuing operations
before discontinued
operations and
extraordinary items 2,104 (8,057) 2,216 1,998 ( 17,285)
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Net income (loss) 12,966 (8,057) 2,216 31,206 ( 16,629)
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Primary income (loss)
per share before
discontinued
operations and
extraordinary items
per common and common .18 (.68) 0.19 0.21 (6.18)
equivalent share
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Primary net income
(loss) per share 1.09 (.68) 0.19 3.29 (5.94)
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Total assets 44,855 93,928 98,932 97,481 100,173
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Long-term obligations 16,702 66,505 64,239 66,973 51,112
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================================================================================
11 52-53 Weeks Ended
Months
Ended
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12/31/96 2/3/96 1/28/95 1/29/94 1/30/93
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Working capital/
(deficiency) 13,042 30,540 34,979 37,128 (16,483)
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Stockholders'
equity/(deficiency) 14,755 564 8,611 6,544 (27,612)
================================================================================
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 ended December
31, 1996 is a transitional period of eleven months from February 4, 1996 to
December 31, 1996.
2. No common stock dividends were paid during any of the years presented.
3. For the eleven months ended December 31, 1996, the Company had net income
of $12,966,000 or $1.09 per share, inclusive of the 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 the extraordinary gain of $10,862,000 associated
with the reduction in the Company's debt to its senior secured lender,
Heller Financial, Inc., from $53,000,000 to $1,665,000, which includes
principal of $1,000,000 and accrued interest of $665,000.
4. The January 30, 1993 period reflects a goodwill writeoff of $7,960,000 and
reorganization expenses of $600,000 in the loss from continuing operations
before discontinued operations and extraordinary items.
5. Working capital deficiency at January 30, 1993 included $53,100,000 of
pre-petition liabilities subject to compromise that were classified as
long-term liabilities on the Company's balance sheet as of January 30, 1993
(at which time the Company was in Chapter 11); such liabilities were
previously classified as current liabilities.
6. All per share data have been restated for comparative purposes to reflect
one-for-ten reverse stock split effective June 30, 1993.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Introduction
The following 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 F-1 through F-27 and Page 11, 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 several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission ("SEC"):
o The apparel industry in general is volatile and unpredictable due to
cyclical and seasonal swings caused in part by consumer buying patterns.
o During the past several fiscal years, an extremely adverse environment has
predominated in the retail apparel industry. Although improvement in the
retail apparel environment was experienced in the latter half of 1996,
adverse trends may return at any time, may severely impact the Company and
increase the risk of reduced orders, loss of particular customers or
particular selling programs of customers, shorter production lead times,
reduced margins and earlier and more extensive borrowing against working
capital lines.
o The Company has only one remaining operating subsidiary, Europe Craft
Imports, Inc. ("ECI") and is dependent on the revenues and profitability of
ECI within ECI's product lines. The Company does not have a diversified
group of
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operating subsidiaries, either within the apparel industry or in other
industries.
o The Company's ECI subsidiary, which sells primarily outerwear, is
particularly impacted by unusually warm weather or late arrival of cold
weather.
o Interest on the Company's subsidiary level debt obligations could increase
with changes in the prime lending rate.
o Virtually all of the Company's corporate cash flow is required to service
its principal long-term debt obligations.
o While in the past two fiscal years, the Company has been able to obtain the
necessary waivers and amendments, and the Company considers its
relationship with its lenders to be good, there are no assurances that the
Company will continue to obtain amendments to its secured debt obligations
to adjust debt service schedules to offset the impact of the adverse retail
apparel environment and other adverse factors affecting the Company's
financial results.
o Depending upon the performance of the Company's ECI operating subsidiary,
which in turn is dependent on a number of factors, including the retail
apparel industry environment, the Company may be required, in the future,
to obtain additional waivers under its existing corporate- level secured
debt obligations and/or its subsidiary working capital lines. There are no
assurances that the Company will be able to obtain such reductions in its
debt service requirements.
o There has been a substantial consolidation of formerly independent major
department store chains such that the consolidated customers exert greater
influence on suppliers such as the Company, resulting in greater demands
for price reductions, advertising support, returns and markdowns of apparel
products.
o Numerous retail organizations in the apparel industry have undergone
Chapter 11 reorganizations, bankruptcy liquidations, downsizing and/or
cessation of business, and others have suffered credit difficulties whereby
factors delay or deny credit to such retail organizations. As a result, the
Company may experience difficulty in obtaining factoring and credit
approval on certain customers.
o Although the Company's ECI subsidiary markets a wide variety of products,
it must compete with other apparel suppliers which specialize in particular
niche products
- 14 -
which may have greater resources, reputation and efficiencies in such
particular product areas.
o The substantial portion of the Company's products are manufactured
overseas, subjecting the Company to the generic risks of import and
delivery from distant locations, delays due to U.S. or foreign government
regulation and controls, and customs and transportation difficulties. From
time to time, the United States has proposed a 100% tariff on various
categories of Chinese imports to the United States, including some
categories of apparel. Should these tariffs be applied to include outerwear
or other apparel product lines of the Company, the Company could be
materially adversely affected.
o ECI imports its products primarily from manufacturing plants which it does
not own. While ECI, through its agents, exercises quality control over such
factories, there are inherent risks in such manufacturing which can result
in delivery delays and ultimately in cancellation of orders by ECI's
customers.
o Increasingly, retail customers of the Company are ordering their products
closer to the actual delivery date and selling season. In order for the
Company to deliver such products on time, it must often now commit to
production in advance of obtaining hard orders from its retail customers.
o There is an increasing trend by retail customers to develop their own
private label apparel lines to compete with products supplied by importers
and manufacturers such as the Company.
o The Company's apparel products are sold on the main selling floor areas of
its retail store customers and are facing increasing competition from such
customer's expanded dedication of retail floor space to "designer
collections".
FINANCIAL CONDITION
Working Capital and Liquidity
As of December 31, 1996, the Company had working capital of approximately
$13,042,000 compared to $30,540,000 at February 3, 1996. The decrease in working
capital from February 3, 1996 to December 31, 1996 is primarily attributable to
exclusion of the working capital of the Perry Manufacturing Company ("Perry")
subsidiary, which was sold on September 30, 1996. During the eleven months ended
December 31, 1996, the Company financed its capital expenditures principally
through internally generated funds and related working capital lines.
- 15 -
As described below, effective September 30, 1996, the Company's debt obligations
to its senior secured lender, Heller Financial, Inc.("Heller") were reduced from
approximately $53,000,000 of principal and accrued interest to only
$1,665,000("New Heller Note"), which includes principal of $1,000,000 and
accrued interest of $665,000. Furthermore, all financial covenants in the
Company's note agreement with Heller were eliminated.
On May 1, 1996, the Company entered into amendments of its note agreements with
its junior secured lenders, BNY Financial Corporation("BNY") and AIF-II,
L.P("AIF-II"), whereby the quarterly interest payments under such notes due on
and for the period May 6, 1996 through February 3, 1997 inclusive were not made
in cash and instead were added to the principal of such notes. Accordingly, the
Company's next required debt service payments are the quarterly interest
payments to BNY and AIF-II due May 3, 1997.
In addition to the interest payments due to BNY and AIF-II on May 3, 1997, the
Company is also obligated to make scheduled payments of quarterly interest to
BNY and AIF-II in future quarterly periods and to make scheduled annual payments
of principal to BNY commencing November 3, 1997. The New Heller Note provides
that no principal or interest be paid on the Company's indebtedness to AIF-II
until all principal and interest on the New Heller Note is paid in full. In
addition, the New Heller Note allows the Company to make regularly scheduled
interest payments on the BNY Note for interest accruing after February 3, 1997
and principal payments thereon. However, if the Company makes an interest
payment on the BNY Note it shall immediately make an interest payment
to Heller in an amount equal to the amount of interest which shall have
accrued on the New Heller Note in accordance with its terms during the same
period of time for which interest is being paid pursuant to the interest payment
on the BNY Note, and, if the Company makes a principal payment on the BNY Note,
it shall immediately on the same day prepay the New Heller Note in an amount
equal to the lesser of the principal payment on the BNY Note or the then
outstanding amount of the remaining obligation on the New Heller Note. The
Company is uncertain as to whether it would have sufficient cash resources to
pay off the New Heller Note to permit such payments as well as to make all
required interest payments, and required principal payments, if any, to Heller,
AIF-II and BNY commencing May 3, 1997. The Company intends to discuss with its
lenders the renegotiation of required payments so as to be in compliance with
its agreements with such lenders. While such lenders have in the past granted
consents to the payment of scheduled interest in kind rather than in cash,
and/or the deferral of principal amortization, there are no assurances that the
Company will be able to obtain such consents in the future. If the Company
cannot obtain such consents or a renegotiation of payment schedules, the Company
could, on quarterly payment dates from and after May 3, 1997, be in default of
its obligations to such lenders.
Cash provided by operating activities during the eleven month period ended
December 31, 1996 ("fiscal 1996") was $9,556,000 as compared to $10,901,000 of
cash used in operating activities during the eleven month period ended December
31, 1995 ("fiscal 1995"). The decrease in funds used in operating activities in
fiscal 1996 was due primarily to the income generated by ECI,
- 16 -
partially offset by operating losses at Perry, whose results are included
through September 30, 1996.
Cash provided by investing activities during fiscal 1996 was $38,802,000 as
compared to $913,000 of cash used in investing activities during fiscal 1995.
The change is due to the proceeds from the Perry Sale which closed on September
30, 1996 and decreases in capital expenditures during the 1996 fiscal year
compared to the 1995 fiscal year. The decrease in capital expenditures is due
primarily to the exclusion of Perry, which historically had higher capital
expenditures than ECI, after the sale of Perry on September 30, 1996. ECI's
capital expenditures increased in fiscal 1996 in connection with improvements to
its new warehouse in Secaucus, New Jersey.
Cash used in financing activities during fiscal 1996 was $44,394,000 as compared
to $9,951,000 of funds provided by financing activities during fiscal 1995. The
change is primarily due to payment of the Company's debt to Heller from the
proceeds of the Perry Sale on September 30, 1996.
Debt Service and Capital Needs
The Company's long-term indebtedness consists of the debt obligations of the
Company to Heller Financial, Inc. ("Heller"), BNY Financial Corporation ("BNY")
and AIF-II, L.P., a Delaware limited partnership and an affiliate of Apollo
Advisors, L.P.
("AIF II").
o Effective September 30, 1996, the Company sold 100% of the stock of a
wholly-owned subsidiary, Perry Manufacturing Company ("Perry") to Page
Holding Company, a company controlled by William K. Woltz, Jr., the CEO of
Perry (the "Perry Sale"). The total consideration was $54,719,000,
consisting of $40,857,000 paid by the purchaser, $10,862,000 in forgiveness
of indebtedness, and assumption of approximately $3,000,000 of Perry debt.
The proceeds of this sale (including forgiveness of indebtedness), were
applied to reduce the Company's debt obligations to Heller from
approximately $53,000,000 of principal and accrued interest to only
$1,665,000, which includes principal of $1,000,000 and accrued interest of
$665,000. The Company retains ownership of Europe Craft Imports,
Inc.("ECI"), its sole remaining operating subsidiary.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity date of
November 2, 2001, with interest at 10% per annum, and a warrant to purchase
584,345 shares of the Company's common stock at an exercise price of $.01
per share. Such transaction has been accounted for as a modification of
terms to the original Heller debt. Accordingly, the Company recorded the
New Heller Note at the total future cash payments to be made in accordance
with the Amended Heller Agreement which is principal of $1,000,000 and
accrued interest of $665,000.
- 17 -
Pursuant to the Amended Heller Agreement, Heller forgave all other
indebtedness of the Company to Heller remaining after application of the
proceeds of the Perry Sale, and eliminated all financial covenants. Heller
retained a pledge of the stock (but not the assets) of ECI, the Company's
remaining operating subsidiary. The New Heller Note provides that no
principal or interest be paid on the Company's indebtedness to AIF-II until
all principal and interest on the New Heller Note is paid in full. In
addition, the New Heller Note allows the Company to make regularly
scheduled interest payments on the BNY Note for interest accruing after
February 3, 1997 and principal payments thereon. However, if the Company
makes an interest payment on the BNY Note it shall immediately make an
interest payment to Heller in an amount equal to the amount of interest
which shall have accrued on the New Heller Note in accordance with its
terms during the same period of time for which interest is being paid
pursuant to the interest payment on the BNY Note, and, if the Company makes
a principal payment on the BNY Note, it shall immediately on the same day
prepay the New Heller Note in an amount equal to the lesser of the
principal payment on the BNY Note or the then outstanding amount of the
remaining obligation on the New Heller Note.
o On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY, pursuant to which BNY received a nine-year, $7 million
note, bearing interest
- 18 -
at a rate of 7% per annum. BNY shares with AIF II a second lien on the
stock of ECI. With the consent of BNY, the quarterly interest payments
under such note due on and for the period May 6, 1996 through February 3,
1997 inclusive were not made in cash and instead were added to the
principal of such note. BNY's note is required to be paid in six annual
installments, payable on November 3 of each year commencing in 1997 as
follows:
YEAR AMOUNT
---- ------
1997 $ 300,000
1998 300,000
1999 500,000
2000 600,000
2001 1,100,000
2002 4,200,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$460,000 representing quarterly interest due on and for the period May 6,
1996 through February 3, 1997 which were not paid in cash and instead added
to the principal of the note to BNY.
o On June 30, 1993, the Company entered into a Series B Junior Secured Note
Agreement with AIF II, pursuant to which AIF II received a $7.5 million
note bearing interest at 13% per annum. AIF II shares with BNY a second
lien on the stock of ECI. With the consent of AIF II, the quarterly
interest payments under such note due for the period February 5, 1996
through February 3, 1997 inclusive were not made in cash and instead were
added to the principal of such note. AIF II's note is required to be paid
in two equal installments payable on November 3 in each of 2001 and 2002.
In addition, on November 3, 2002, the Company is obligated to pay AIF II
$1,208,000 representing quarterly interest payments due for the period
February 5, 1996 through February 3, 1997 which were not paid in cash and
instead added to the principal of the Note to AIF II.
Once the Heller obligations are paid in full, AIF II and BNY will share in
mandatory prepayments based upon 50% of certain "excess cash flows" as
defined in the Company's note agreements with AIF II and BNY.
Capital Expenditures
Capital expenditures were $1,409,000 for the eleven month period ended December
31, 1996 compared to $913,000 in the eleven month period ended December 31,
1995.
- 19 -
ECI's capital expenditures increased in fiscal 1996 in connection with
improvements to its new warehouse in Secaucus, New Jersey.
Results of Operation
The 1996 Fiscal Year: The operating results for the eleven month period ending
December 31, 1996 include Perry's operating results through September 30, 1996,
a gain of $7,786,000 resulting from the sale of Perry (reduced by the write off
of the cumulative effect of foreign currency translation adjustments of
$1,108,000 arising from the Perry Sale) and an extraordinary gain of $10,862,000
on the reduction of indebtedness to Heller.
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 Company determined to change its fiscal
year end to the calendar year ending December 31 so its tax and financial
accounting years would end on the same date and to better reflect the seasonal
nature of the Company's apparel business. The period ended December 31, 1996
consists of the eleven months ended December 31, 1996 and results of operations
for this period are compared to the eleven months ended December 31, 1995.
Net Income
The Company reported net income of $12,966,000 for the eleven months ended
December 31, 1996, inclusive of the gain on the sale of Perry (reduced by the
cumulative effect of foreign currency translation adjustments arising from the
Perry Sale) and the extraordinary gain on the reduction of indebtedness to
Heller implemented on September 30, 1996.
The Company reported net income (before extraordinary gain) of $2,104,000 for
the eleven months ended December 31, 1996, compared to a net loss of $4,881,000
for the eleven months ended December 31, 1995. During the eleven months ended
December 31, 1996, ECI experienced an increase in net income, partially offset
by losses at Perry, whose results are included through September 30, 1996.
At ECI, the increase in net income was due to an improved product, favorable
cooler weather, improvement in the retail apparel environment, and initiatives
introduced to reduce overhead and increase gross margins.
- 20 -
The decrease in net income at Perry through September 30, 1996 was primarily due
to gross margins being adversely affected by the difficulty in obtaining knit
fabric which caused production and factory inefficiencies and price pressure
from major retail customers.
The Company's revenues decreased from $159,264,000 during the eleven month
period ended December 31, 1995 to $131,802,000 during the eleven month period
ended December 31, 1996. The revenue decrease of $27,462,000 for the eleven
month period ended December 31, 1996 compared to the same period in the prior
year was due to the decrease in Perry revenue contribution of $25,568,000, which
revenue was excluded from and after the Perry Sale on September 30, 1996, along
with a decrease in revenues at ECI of $1,894,000.
The decrease in revenues at ECI for the eleven months ended December 31, 1996
compared to the same period in the prior year were due to a large reduction in
sales to certain private label customers, who used ECI as a direct merchandise
supplier, partially offset by an increase in branded business along with
improved product together with favorable cooler weather and improvement in the
retail apparel environment in the second half of the year.
Costs of Sales
Costs of Sales for the eleven month period ended December 31, 1996 as a
percentage of revenue was 79.4% compared to 79.8% of revenues for the eleven
month period ended December 31, 1995. The reduction in this percentage was
primarily due to gross margin percentages increasing at ECI over the comparable
period in the prior year as a result of early sell throughs at the retail level
aided by the favorable cool weather along with an increase in the proportion of
branded product, compared to private label, sales of ECI. The increase in gross
margin percentages at ECI was partially offset by lower gross margins at Perry,
whose results were included through September 30, 1996, and which had been
experiencing knit fabric problems due to its primary supplier of knit fabric
closing down their knit facilities which created manufacturing inefficiencies.
Selling and Administrative Expenses
Selling and Administrative expenses as a percentage of revenues for the eleven
months ended December 31, 1996 were 19.3% compared to 17.4% for the eleven
months ended December 31, 1995. The percentage increase for the eleven months
ended December 31, 1996 from the comparable period in the prior year was due
primarily to the exclusion of Perry, which historically had a much lower Selling
and Administrative expense structure, after the Perry Sale on September 30,
1996.
- 21 -
Selling and Administrative expenses for the eleven month period ended December
31, 1996 were $25,422,000 compared to $27,751,000 for the eleven month period
ended December 31, 1995, a decrease of $2,329,000 or 8.4%. Selling and
Administrative expenses decreased for the eleven month period ended December 31,
1996 over the comparable period in the prior year due to cost savings at ECI
realized from its 1995 repositioning program and the completion of the move of
ECI from its California warehouse to its new warehouse facility in New Jersey,
along with the exclusion of Perry expenses from and after its sale on September
30, 1996.
Interest and Debt Expense
Interest and debt expense for the eleven month period ended December 31, 1996
decreased by $2,000,000 or 22.7% compared to the eleven month period ended
December 31, 1995. This decrease is primarily due to the sale of Perry on
September 30, 1996 which reduced the Heller debt and corresponding interest
after such date, as well as the exclusion of Perry debt expense after September
30, 1996. In addition, there was a reduction in the prime lending rate from the
comparable periods last year for both Aris' and Perry's variable rate debt of
approximately 50 basis points.
The 1995 Fiscal Year: The Company reported a net loss of $8,057,000 for the 1995
fiscal year (twelve months ending February 3, 1996) as compared to net income of
$2,216,000 for the 1994 fiscal year (twelve months ending January 28, 1995).
Decreases in net income were experienced at both Perry and ECI.
The decrease in net income at Perry was due to a decrease in sales of $4,102,000
which caused a related decrease in gross profit. In addition, margins were
adversely affected due to a restructuring charge of $430,000 as a result of
transferring sewing capacity from Perry's Costa Rica subsidiary to its
subsidiaries located in El Salvador and Honduras as well as additional interest
costs of $585,000 due to increases in the prime rate from the prior year and
additional borrowing from Perry's factors.
At ECI, the decrease in net income was due to a general slowdown in the retail
apparel environment resulting in a reduction in sales of $10,051,000 which
caused a related decrease in gross profit. In addition, during the 1995 fiscal
year, ECI was impacted by approximately $3,100,000 of costs incurred as part of
a repositioning program. Interest costs increased by $450,000 for the same
reasons as at Perry described above. ECI was further negatively impacted by a
California public warehouse utilized by ECI having encountered severe financial
difficulties which required ECI to find alternative warehousing which increased
warehousing costs.
- 22 -
Revenues
The Company's revenues decreased from $188,143,000 in fiscal 1994 to
$173,990,000 in fiscal 1995. This decrease of $14,153,000 or 7.5% is
attributable to a decrease in merchandise sales at both Perry and ECI. The
revenue decrease at Perry of $4,102,000 from fiscal 1994 to fiscal 1995 was
primarily attributable to the loss of a customer which ceased operations and had
contributed $10,390,000 in sales during fiscal 1994 and the loss of certain
reorders under existing successful programs which were not placed as a result of
the difficult retail environment. These sales decreases were partially offset by
an increase of $2,200,000 in sales to a catalog customer and an increase of
$5,500,000 in sales to a major chain for two new programs. Perry's sales include
a gain of $350,000 relating to a sale of a U.S. property.
The decrease in merchandise sales at ECI of $10,051,000 from fiscal 1994 to
fiscal 1995 was primarily due to the general slowdown of the retail apparel
environment. In addition, ECI merchandise sales were impacted by the ongoing
consolidation in the retail industry along with the loss of a sportswear program
with a major chain.
Cost of Sales
The cost of sales of the Company represented 77.8% and 80.5% of revenues for the
fiscal years 1994 and 1995 respectively. This percentage increase was due to
lower margins at both Perry and ECI. At Perry, margins were adversely affected
by the unusually adverse retail environment that caused customers to shift
orders to future periods which in turn caused some unfavorable manufacturing
variances, in addition to the loss of a customer which accounted for $10,390,000
of sales during fiscal 1994 at a significant gross margin percentage. The
wind-down of Perry's Costa Rican subsidiary and subsequent transfer of sewing
operations to El Salvador and Honduras resulted in closure and startup costs
that impacted cost of sales. At ECI, margins were affected by the general
slowdown in the retail environment, sale of slow moving inventory and continued
pressure to reduce margins by major retailers.
Selling and Administrative Expenses
Selling and administrative expenses increased $353,000 or 1.1% from fiscal 1994
to 1995. Selling and administrative expenses as a percentage of revenue were
18.4% in fiscal 1995 as compared to 16.8% for fiscal 1994. The percentage
increase for the 1995 fiscal year as compared to the same period in fiscal 1994
was due to a significant decrease in sales that could not be offset
- 23 -
by a corresponding decrease in expenses due to the fixed nature of much of the
Company's expense structure.
Perry's selling and administrative expenses increased due to Perry, whose
manufacturing base is in the Caribbean basin, opening a warehouse and
distribution center in Miami during fiscal 1995. This facility cost increase has
been offset by the gain on the sale by Perry of a manufacturing facility in
North Carolina.
ECI's selling and administrative expense increased during fiscal 1995, as
compared to the same period in fiscal 1994 due to the public warehouse being
used by ECI in California having encountered financial difficulties, which
required ECI simultaneously to utilize a second warehouse while it shipped and
removed goods from the troubled warehouse. This increased warehouse expenses
along with legal and professional fees necessary to terminate ECI's relationship
with the original warehouse. In addition, ECI settled a lawsuit, which incurred
legal fees and other expenses.
Interest and Debt Expense
Interest and debt expense increased by $1,832,000 or 23.5% from $7,812,000 in
fiscal 1994 to $9,644,000 in fiscal 1995. This increase is primarily due to
increases in the prime lending rate during fiscal 1995 by as much as 300 basis
points from the rates during fiscal 1994 for both Aris', Perry's and ECI's
variable rate debt. In addition, due to the softness in the retail environment,
Perry and ECI had to borrow earlier in fiscal 1995 from their lenders than for
the comparable period in fiscal 1994, resulting in higher average borrowing
levels.
Availability of Net Operating Loss Carryforwards
The Company has approximately $76,000,000 of net operating loss carryforwards at
December 31, 1996. Any significant loss or restriction on the use of the
Company's net operating loss carryforwards could have a material adverse effect
upon the Company's future earnings and resulting cash flows and could limit the
Company's ability to service its debt obligations. The conclusions drawn by the
Company in monitoring and calculating the requirements of Section 382 of the
Internal Revenue Code for activity subsequent to the Company's 1986
restructuring involve many complex and technical questions. The Internal Revenue
Service could disagree with the Company's position and should such a dispute
arise, it would be difficult to predict the outcome.
The Company's 1993 Plan of Reorganization should qualify under Section 382(l)(5)
of the Internal Revenue Code and therefore
- 24 -
should preserve a substantial portion of the net operating loss carryforwards of
the Company.
In addition, for the eleven month period ended December 31, 1996, the Company
expects to utilize approximately $11,000,000 of its net operating loss
carryforward to offset taxable income, assuming that the purchaser in the Perry
Sale exercises its election under Section 338(h)(10) of the Internal Revenue
Code, which for tax purposes would classify the Perry Sale as a sale of the
assets of Perry. Also, the Company expects to reduce the net operating loss
carryforward by approximately $11,527,000 related to the exclusion of the gain
on debt forgiveness from taxable income.
Reduction of Indebtedness and Effect on NOL Carryforwards
As a result of the implementation of the Company's Plan of Reorganization on
June 30, 1993, and the reorganization of its RJMJ subsidiary effected December
21, 1993, the Company recognized an extraordinary gain of $29,208,000 relating
to debt restructuring during the fiscal year ended January 29, 1994, and all
prior defaults on indebtedness were discharged and eliminated.
When debt is discharged in a Chapter 11 case, no ordinary income to the debtor
results. Instead, certain tax attributes otherwise available to the debtor are
reduced, in most cases by an amount equal to the adjusted issue price of the
indebtedness forgiven. As a result of the extraordinary gain recognized by the
Company due to implementation of the Plan, the Company's net operating loss
carryforwards were decreased by approximately $12,000,000, with approximately
$94,000,000 remaining at January 29, 1994. Tax attributes need not, however, be
reduced to the extent that payment of the indebtedness forgiven would have given
rise to a deduction. Tax attributes are generally subject to reduction in the
following order: (i) net operating losses for the current year ("NOLs") and NOL
carryforwards; (ii) general business credit carryforwards; (iii) capital losses
and carryforwards; (iv) the tax basis of the debtors' depreciable and
nondepreciable assets, but not in an amount greater than the excess of the
aggregate tax bases of the property held by the debtor immediately after the
discharge over the aggregate of the debtor's liabilities immediately after the
discharge; and (v) foreign tax credit carryforwards. The Company's most
significant tax attributes subject to reduction are NOL carryforwards. Attribute
reduction occurred after the determination of tax for the year ending January
29, 1994, which includes the Effective Date. To the extent the stock for debt
exception applies to stock issued in exchange for debt, tax attributes are not
reduced.
Ownership Changes and Effect on NOL Carryforwards
- 25 -
The Company believes that it and its consolidated group currently have
substantial NOL carryforwards. (See Note 14 to the financial statements included
in this Annual Report). Sections 382 and 383 of the Internal Revenue Code of
1986, as amended ("Code"), and Temporary and Proposed Treasury regulations
implementing those sections, severely limit the amount of income each year that
a loss corporation may offset with its NOL and credit carryforwards after
certain changes in ownership of its stock. The Company experienced an "ownership
change" for purposes of Sections 382 and 383 of the Code on June 30, 1993, the
Effective Date of its Plan of Reorganization. However, the Section 382 and
Section 383 limitations should not apply to the Company's reorganization
pursuant to the Plan because immediately after the Effective Date at least 50%
of the Company's Common Stock was held by pre-reorganization stockholders of the
Company and creditors of the Company that had held their claims for at least 18
months prior to the filing date of the Chapter 11 proceeding, by virtue of their
status as shareholders or creditors, respectively.
Although the general Section 382 and Section 383 limitations will not apply, the
Company's tax attributes were reduced, in addition to the attribute reductions
described above, by half of the income excluded under the "stock-for-debt
exception." In addition, the Company's pre-change losses and excess credits were
reduced by the amount of interest paid or accrued by the Company during the
three full taxable years prior to the taxable year ending January 29, 1994 and
during the portion of the taxable year ending January 29, 1994 that includes the
Effective Date, on its indebtedness exchanged for Common Stock.
Section 269
If a group acquires control of a corporation for the principal purpose of
evasion or avoidance of Federal income tax by securing the benefit of a
reduction or credit it might otherwise not enjoy, that benefit may be
disallowed. The determination of the principal purpose of an acquisition is
based on all the facts and circumstances surrounding the acquisition. However, a
regulatory presumption that certain acquisitions in bankruptcy proceedings have
as their principal purpose the evasion or avoidance of Federal income tax should
not apply to Company's reorganization, because some members of the Company's
consolidated group will continue to carry on their business after the
reorganization.
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.
- 26 -
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share and Disclosure of
Information about Capital Structure", effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Statement establishes standards for computing and presenting earnings per share
(EPS) as well as disclosing information about an entity's capital structure. The
Statement eliminates the presentation of primary EPS and requires presentation
of basic EPS. Also, dual presentation of basic and diluted EPS is required on
the face of the income statement and would require a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Item 8. Financial Statements and Supplementary Data.
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.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are the name, age and principal occupation of the 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.
================================================================================
Name Age Position
- --------------------------------------------------------------------------------
Charles S. Ramat 45 Director, Chairman of the Board, President,
Chief Executive Officer and Assistant Secretary
of the Company and of its wholly owned
subsidiary Europe Craft Imports, Inc. ("ECI")
- --------------------------------------------------------------------------------
John J. Hannan 44 Director
- --------------------------------------------------------------------------------
Edward M. Yorke 38 Director
- --------------------------------------------------------------------------------
Robert A. Katz 30 Director
- --------------------------------------------------------------------------------
David N. Schreiber 53 Director
- --------------------------------------------------------------------------------
Herbert I. Wexler 80 Director (until February 28, 1997)
- --------------------------------------------------------------------------------
Paul Spector 55 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
- --------------------------------------------------------------------------------
Vincent F. Caputo 43 Vice President, Assistant Treasurer and
Assistant Secretary
================================================================================
CHARLES S. RAMAT, 45, has been a Director and President of the Company since
December 1986, Chairman of the Board of Directors and Chief Executive Officer
since August 1991 and Assistant
- 27 -
Secretary since January 1988. Mr. Ramat has also been Chairman of the Board,
President and Chief Executive Officer of ECI since December, 1995. Mr. Ramat has
also engaged in private real estate activity from prior to 1990. Mr. Ramat has
been a director of Empire Kosher Poultry, Inc. Since 1995. Mr. Ramat is the
brother-in-law of David N. Schreiber.
JOHN J. HANNAN, 44, has been a Director of the Company since June 1993. Mr.
Hannan is one of the founding principals of Apollo Advisors, L.P. which acts as
managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and
Apollo Investment Fund III, L.P., private securities investment funds, of Apollo
Real Estate Advisors, L.P. which acts as managing general partner of the Apollo
Real Estate Investment Funds, and of Lion Advisors, L.P., which acts as
financial advisor to and representative for certain institutional investors with
respect to securities investments. Mr. Hannan is also a director of Converse,
Inc., Florsheim Group, Inc., Furniture Brands International, Inc. and of United
Auto Group, Inc.
EDWARD M. YORKE, 38, has been a Director of the Company since June 1993. Mr.
Yorke is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with
which he has been associated since 1992. From 1990 to 1992, Mr. Yorke was a vice
president in the high yield capital markets group of BT Securities Corp. Mr.
Yorke is also a director of Big Flower Press, Inc., Salant Corporation and
Telemundo Group, Inc.
ROBERT A. KATZ, 30, 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 Salant
Corporation and Vail Resorts, Inc.
DAVID N. SCHREIBER, 53, has been a Director of the Company since December 1986.
Mr. Schreiber is currently the Vice President of A.H. Schreiber Co. Inc., a
manufacturer of womens' and children's swim wear and intimate apparel, a
position he has held since prior to 1988. Mr. Schreiber served as Chairman of
the Board of Directors of Servtex from May 1991 to November 1992 and as Vice
President from 1987 to 1991. Mr. Schreiber is Mr. Ramat's brother-in-law.
HERBERT I. WEXLER, 80, was a Director of the Company from 1973 until February
28, 1997. Mr. Wexler was a consultant to the Company from December 1986 until
December 1991.
PAUL SPECTOR, 55, 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
- 28 -
1983 until August 1991 Mr. Spector was Controller of the Company.
VINCENT F. CAPUTO, 43, has been Vice President, Assistant Treasurer and
Assistant Secretary of the Company since May 1992. From April 1988 until May
1992, Mr. Caputo was Director of Taxes for the Company. From January 1986 until
March 1988, Mr. Caputo was the Corporate Tax Manager for Automatic Data
Processing, Inc.
Pursuant to the Company's Plan of Reorganization, on June 30, 1993, a New
Shareholders Agreement was entered into among Apollo and the previous management
shareholders of the Company (consisting of Alexander M. Goren, James G. Goren,
certain entities affiliated with the Gorens, Robert K. Lifton, Charles S. Ramat,
Howard L. Weingrow and the trustees of certain trusts for the benefit of Mr.
Ramat's children) providing that from and after June 30, 1993 (the Effective
Date of the Plan), the shareholder parties thereto agree to vote their shares
such that the prior management shareholders will be entitled to elect one member
of the Board of Directors, who shall be Charles S. Ramat, as long as Mr. Ramat's
Executive Employment Agreement with the Company (entitling him to be elected a
Director of the Company) is in effect. On the Effective Date and pursuant to the
Plan, the Board of Directors of Aris was established as Charles S. Ramat, David
N. Schreiber, Herbert I. Wexler, and three additional Directors designated by
Apollo Aris (John J. Hannan, Edward M. Yorke and Robert Katz). Mr. Wexler ceased
to be a Director of the Company on March 1, 1997.
Board Meetings and Committees
The Board held two meetings during the fiscal year ended December 31, 1996.
The Board's Audit Committee consists of Messrs. Katz and Schreiber. The Audit
Committee is charged with reviewing matters relating to the annual consolidated
financial statements prepared by the Company's management and audited by the
independent auditors, reviewing interim financial statements and evaluating
internal controls and systems established by the Company.
The Board's Compensation and Stock Option Committee consists of Messrs. Hannan,
Yorke and Katz. The Compensation and Stock Option Committee is charged with
reviewing and making determinations with respect to compensation to be paid to
officers and other employees of the Company and with administering and making
determinations under the Company's stock option plan.
- 29 -
Election of Directors and Officers
The Company's current Board of Directors were appointed on June 30, 1993
pursuant to, and on the Effective Date of, the Company's Plan of Reorganization.
From and after such time as the next Annual Meeting of Shareholders of the
Company is held, Directors shall be elected by vote of the shareholders.
Directors so appointed or elected shall serve 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. The Board does not have a standing nominating committee.
Mr. Ramat's term of office is set forth in his Executive Employment Agreement.
See Item 11, Executive Compensation, Employment Agreements. Other officers of
the Company serve at the pleasure of the Board of Directors of the Company.
Item 11. Executive Compensation.
The following table presents certain specific information regarding the
compensation of the Chief Executive Officer of the Company and the only other
executive officers of the Company.
- 30 -
SUMMARY COMPENSATION TABLE
============================================================================================
Annual Compensation Long-Term All Other
Compensation Compensation
- --------------------------------------------------------------------------------------------
Securities
Underlying
Name and Principal Fiscal Salary Stock
Position Year (1) ($) Bonus ($) Options (#)
- --------------------------------------------------------------------------------------------
Charles S. Ramat, 1996 $500,207 $759,949(2) 152,500 (3) $ 1,500 (6)
President, 1995 531,093 -0- 400,000 (4) 136,919 (7)(8)
Chairman and Chief 1994 515,000 82,484 (5) -0- 325,000 (7)
Executive Officer
of the Company and
Europe Craft
Imports, Inc.
- --------------------------------------------------------------------------------------------
Paul Spector, 1996 $125,000 $-0- 15,000 (3) $1,500 (6)
Senior Vice 1995 125,000 -0- 50,000 (4) 1,500 (8)
President and Chief 1994 115,769 10,000 -0- -0-
Financial Officer
- --------------------------------------------------------------------------------------------
Vincent Caputo, 1996 $72,500 $-0- 5,000 (3) $753 (6)
Vice President, 1995 72,500 -0- 5,000 (4) 675 (8)
Assistant Treasurer 1994 70,654 2,000 -0- -0-
& Assistant Secy.
============================================================================================
(1) In this Summary Compensation Table, the 1996 fiscal year consists of the
eleven months ended December 31, 1996. The 1995 fiscal year consists of the
twelve months ended January 28, 1995. The 1994 fiscal year consists of the
twelve months ended January 29, 1994.
(2) Includes one-time non-recurring success bonus earned for the 1996 fiscal
year with respect to the sale of Aris' Perry Manufacturing Co. subsidiary
on September 30, 1996, 50% of which is to be paid in cash upon completion
of such fiscal year, with the other 50% to be paid in 36 equal monthly
installments, commencing after completion of the 1996 fiscal year. Also
includes Mr. Ramat's bonus for services on behalf of ECI for the twelve
month period February 4, 1996 through January 31, 1997.
(3) These options were granted in December, 1996 under the Company's 1993 Stock
Incentive Plan with respect to shares of the Company's Common Stock and
vest in three equal annual installments.
(4) These options were granted on August 2, 1993 under the Company's 1993 Stock
Incentive Plan with respect to shares of the Company's Common Stock, and
have vested in three equal annual installments. On June 26, 1995, all
options outstanding on such date under the Company's 1993 Stock Incentive
Plan (including these options) were repriced to have an exercise price of
fifty cents (the market price on
- 31 -
such date), rather than two dollars, per share. Pursuant to SEC
regulations, the repriced options are required to be reported as a grant in
fiscal year 1995 (during which they were repriced) for purposes of this
Summary Compensation Table, even though they are the same options granted
in fiscal year 1993. The total number of such options originally granted on
August 2, 1993 held by Charles S. Ramat is 400,000, by Paul Spector is
50,000, and by Vincent Caputo is 5,000.
(5) Represents portion of bonus (50%) earned for the 1994 fiscal year to be
paid in cash upon completion of such fiscal year. Pursuant to Mr. Ramat's
Executive Employment Agreement with the Company, the additional portion of
the bonus (50%) earned for the 1994 fiscal year will be paid three years
after completion of such fiscal year contingent on the market value of the
Company's Common Stock at such later time. The amount of such additional
portion of the bonus which will actually be paid is not calculable at the
present time. See "Employment Agreements".
(6) Includes amounts paid as matching contributions by the Company under its
401(k) Plan.
(7) Includes amounts paid in the applicable fiscal year to Mr. Ramat with
respect to performance compensation in connection with the effectiveness of
the Company's 1993 Plan of Reorganization, which Mr. Ramat received in 24
equal monthly installments, without interest, commencing on June 30, 1993.
Such amount was $135,419 in fiscal 1995.
(8) Includes amounts paid as matching contributions by the Company under its
401(k) Plan, which were $1,500 for Mr. Ramat, $1,500 for Mr. Spector and
$675 for Mr. Caputo in fiscal 1995.
Stock Option Plan and Stock Options
1993 Stock Incentive Plan
Pursuant to the Company's Plan of Reorganization, on June 30, 1993, a new 1993
Stock Incentive Plan was adopted by the Company (the "1993 Stock Incentive
Plan"). The 1993 Stock Incentive Plan 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 of the Company 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 1993 Stock
Incentive
- 32 -
Plan may be either "incentive stock options" within the meaning of Section 422A
of the United States Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options. A maximum of 1.2 million shares of Common Stock (subject
to anti-dilution adjustments) can be covered by awards under the 1993 Stock
Incentive Plan.
The 1993 Stock Incentive Plan provides that any shares subject to an option
under the Plan which terminate, are canceled or expire without being exercised
may again be subjected to an option under that plan, subject to the earlier
termination of that plan. Effective on September 30, 1996, the date of the Perry
Sale, all 305,000 options held by Perry employees were terminated. On December
18, 1996, these 305,000 options were granted to employees of the Company and its
remaining wholly-owned subsidiary, ECI.
As at December 31, 1996, 962,500 options (excluding expired options) had been
granted under 1993 Stock Incentive Plan; none of such options had been exercised
and all of such options were outstanding. All of such options provide for
vesting in three equal annual installments from the date of grant; as at
December 31, 1996, a total of 657,500 options were exercisable. At such date,
there were 25 eligible participants with options outstanding under the 1993
Stock Incentive Plan. During the eleven month period ended December 31, 1996,
the only options granted to Directors of the Company were those granted to
Charles S. Ramat, the Chairman, President and Chief Executive Office of the
Company and ECI, on the terms set forth below under "Option Grants". No options
held by Directors were exercised during the fiscal year ended December 31, 1996.
Option Grants
In December, 1996, the Company granted to employees of the Company and its
remaining wholly-owned operating subsidiary, ECI, 305,000 options under the 1993
Stock Incentive Plan, corresponding to the same number of options formerly held
by employees of the Perry subsidiary which terminated on the date of the Perry
sale, September 30, 1996. The Chief Executive Officer and the other executive
officers of the Company received a portion of these options as set forth below.
- 33 -
OPTION GRANTS IN LAST FISCAL YEAR
% of Potential
Total Realizable Value
Options at Assumed Annual
Number of Granted Rates of Stock
Securities to Exercise Market Price Appreciation
Underlying Employees or Base Price on For Option Term
Options in Fiscal Price Date of Expiration -------------------
Name Granted (#) Year ($/SH) Grant Date 5% ($) 10% ($)
- ---------- ----------- --------- --------- -------- ---------- --------- --------
Charles S. 152,500 50.0% $0.10 $0.10 12/18/2006 $9,592 $24,307
Ramat
Paul 15,000 4.9% $0.10 $0.10 12/18/2006 $ 943 $ 2,391
Spector
Vincent 5,000 1.6% $0.10 $0.10 12/18/2006 $ 314 $ 797
Caputo
Exercised/Unexercised Stock Options
The following table sets forth the December 31, 1996 fiscal year-end value of
unexercised options held by the executive officers of the Company on an
aggregated basis. There were no exercises of stock options by any of the
executive officers of the Company during the eleven months ended December 31,
1996. 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 Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options
on Exercise Realized Options at FY-End (#) at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------- ----------- -------- ------------------------- -------------------------
Charles S. 0 0 400,000/152,500 $0/$46,711
Ramat
Paul 0 0 50,000/ 15,000 0/ $4,595
Spector
Vincent 0 0 5,000/ 5,000 0/ $1,532
Caputo
Compensation of Directors
- 34 -
During the eleven months ended December 31, 1996, each Director (other than Mr.
Ramat) received director's fees at the rate of $18,000 per annum. Each of these
directors are also entitled to receive reimbursement for expenses incurred in
attending meetings of the Board or committees thereof on which they serve. In
addition, outside directors (Messrs. Wexler and Schreiber) are entitled to
receive $500 per meeting of the Committees of the Board to which they are
assigned (Mr. Schreiber is a member of the Audit Committee). Mr. Ramat receives
no additional compensation for service as a Director.
On August 2, 1993, Mr. Schreiber and Mr. Wexler were each granted options to
purchase 10,000 shares of Common Stock pursuant to the Company's 1993 Stock
Incentive Plan. Such options vested in three equal annual installments.
Employment Agreements
Charles S. Ramat is employed pursuant to the Executive Employment Agreement
between him and the Company dated as of February 1, 1988, as amended ("Ramat
Agreement"), pursuant to which Mr. Ramat serves as the Company's Chairman of the
Board, President and Chief Executive Officer, and will continue to be nominated
to serve on the Company's Board of Directors.
On October 3, 1995, the Ramat Agreement was amended to extend the term of Mr.
Ramat's employment for the period through June 30, 1998. This term will be
further extended on a year-to-year basis unless terminated by either party by
notice given not less than 60 days prior to the end of the then-current
employment term.
Commencing June 30, 1993, Mr. Ramat is entitled to receive a base salary of
$500,000 per year (subject to an annual increase in an amount equal to the
proportionate annual increase in the Consumer Price Index - All Items), which
annual increases resulted in a base salary at the rate of $545,680 per annum
during the eleven months ended December 31, 1996. In addition, Mr. Ramat is
entitled to receive an annual bonus in an amount ("Annual Bonus Amount") not to
exceed 125% of his base salary for the year of the bonus ("Bonus Year"), equal
to 3-1/3% of "Excess Cash Flow" for such Bonus Year. "Excess Cash Flow" is
defined as the Company's net after-tax consolidated income, including the
benefit of any net operating loss carryforwards or tax credits, but subject to
adjustments to add back certain non-cash charges, in excess of $700,000. On
October 3, 1995, the Excess Cash Flow definition was amended, in favor of the
Company, to exclude from such computation extraordinary items occurring or
accruing after September 18, 1995, other than any sale of the stock, assets or
business of Aris' wholly-owned subsidiary, Perry Manufacturing Company
("Perry"), which sale of Perry ("Perry Sale") would be included in the
computation. The
- 35 -
exclusion for extraordinary items does not apply to the benefit of any net
operating loss carryforwards or tax credits, which shall be included in such
Excess Cash Flow computation.
The annual bonus for a particular Bonus Year is payable as follows: an initial
amount equal to one half of the Annual Bonus Amount for such Bonus Year is
payable no later than ten days following the Company's filing of its Annual
Report on Form 10-K with the SEC for such Bonus Year, and the balance of such
bonus (other than the portion relating to a Perry Sale) is paid 20 days after
the third anniversary of such Bonus Year, in an amount equal to the sum of (a)
the product of (i) the average closing price for the Company's Common Stock for
the 60 consecutive trading days ending immediately prior to the third
anniversary of the end of such Bonus Year and (ii) the number of shares (the
"Bonus Shares") of the Company's Common Stock that could be purchased with one
half of the Annual Bonus Amount for such Bonus Year assuming a price per share
equal to the average closing price for the Common Stock for the 60 consecutive
trading days ending immediately prior to the last day of such Bonus Year plus
(b) the aggregate amount of all dividends, if any, that would have been paid on
account of such Bonus Shares during the three years ending on such third
anniversary if such Bonus Shares had been issued at the beginning of such
three-year period. The deferred portion of the Annual Bonus Amount will be paid
only if (i) Mr. Ramat is employed by the Company or one of its subsidiaries or
affiliates on the third anniversary of the end of the pertinent Bonus Year or
(ii) payment is accelerated by certain earlier termination events, described
below.
On September 30, 1996, the Company sold 100% of the stock of Perry, which Perry
Sale is included in the computation of Mr. Ramat's bonus for the fiscal year
ended December 31, 1996. One half of such bonus is payable following completion
of such fiscal year, and as provided in the October 3, 1995 amendment to the
Ramat Agreement, the balance of such bonus relating to the Perry Sale shall be
paid in 36 equal consecutive monthly installments, without interest, commencing
ten days following the Company's filing of its Annual Report on Form 10-K with
the SEC for the fiscal year ended December 31, 1996 in which the Perry Sale
occurred, and is not subject to adjustment for price changes in the Company's
Common Stock.
If (a) the Company fails to extend the term of the Ramat Agreement, (b) Mr.
Ramat, after reaching the age of 65, retires or resigns, (c) Mr. Ramat dies or
becomes totally disabled, (d) the Ramat Agreement is terminated by the Company
without cause or (e) there is a sale or liquidation of all or substantially all
of the operating assets of the Company (the Company's Ohio real estate interests
are not considered operating assets for this purpose), then all Annual Bonus
Amounts that would otherwise have been deferred as above described for Bonus
Years
- 36 -
prior to the year in which such event occurs, accelerate and become due and
payable to Mr. Ramat in the same manner as if the applicable third anniversary
had fallen on the date of such occurrence; the entire remaining amount of all
bonus payments relating to the Perry Sale shall be accelerated and paid in full
in a lump sum to Mr. Ramat; and the Company remains obligated to pay Mr. Ramat
any previously earned unpaid bonuses for prior years and a pro rata portion of
the initial one half bonus amount for the year in which such event occurs.
Recognizing that Mr. Ramat assumed the duties of Chairman, President and Chief
Executive Officer of ECI on December 5, 1995, in addition to his duties in such
positions with the Company, the Company amended the Ramat Agreement on March 20,
1996 to provide that Mr. Ramat would be paid a bonus for his services on behalf
of ECI for the twelve month period commencing February 4, 1996. The amount of
the ECI bonus is calculated as the sum of the following percentages of net
income of ECI computed prior to provisions for taxes, for payment of management
fees to the Company, or for payment of any bonuses to ECI executives: 3.5% of
such income up to the first $1,000,000; 5.25% of such income in excess of
$1,000,000 and up to $2,000,000; 12.25% of such income in excess of $2,000,000
and up to $3,000,000; and 3.5% of such income in excess of $3,000,000 and up to
$4,000,000. Such ECI bonus would be paid to Mr. Ramat following completion of
such twelve month period and the ECI bonus paid to Mr. Ramat for such period
shall be credited against the Annual Bonus Amount (as described above) provided
to Mr. Ramat by the Company for the Company's fiscal year ended December 31,
1996, so that there is no duplication, but there is no credit or reduction of
that portion of the annual bonus relating to the Perry Sale.
On December 18, 1996, the Company determined that for the fiscal year commencing
January 1, 1997, Mr. Ramat would be paid a bonus for his services on behalf of
ECI calculated as the sum of the following percentages of net income of ECI
computed prior to the provisions for taxes, for payment of management fees to
the Company, or for payment of any bonuses to ECI executives: 5.25% of such
income in excess of $1,000,000 and up to $2,000,000; 10.5% of such income in
excess of $2,000,000 and up to $3,000,000; 7% of such income in excess of
$3,000,000 and up to $4,000,000; and 8.75% of such income in excess of
$4,000,000 and up to $5,000,000. Such ECI bonus would be paid to Mr. Ramat
following completion of the 1997 fiscal year, and the ECI bonus paid to Mr.
Ramat for the 1997 fiscal year shall be credited against the Annual Bonus Amount
(as described above) provided to Mr. Ramat by the Company for the 1997 fiscal
year, so that there is no duplication.
In the event of Mr. Ramat's death or total disability, he will be entitled to a
death or disability benefit equal to 150% of
- 37 -
his annual base salary in effect on the date of death or certification of
disability, and if a "change in control" (as defined in the Ramat Agreement)
occurs, Mr. Ramat will have the right to terminate the Ramat Agreement, in which
event he will entitled to receive a lump sum severance payment in an amount
equal to 299% of his average annual compensation (including bonus, other than
bonus relating to a Perry Sale) from the Company for the preceding five calendar
years. Mr. Ramat will also be entitled to receive such severance payment if he
is terminated by the Company without cause. On October 3, 1995, the Ramat
Agreement was amended to clarify the definition of "change in control" to
include, among other events, the sale or liquidation of the stock, assets or
business of both Perry and ECI, unless at such time the Company had acquired
another operating subsidiary with a net worth and net income not less than that
of ECI at such time and which undertakes the same contractual obligations that
Perry and ECI have to Mr. Ramat).
Mr. Ramat is also entitled to participate, at the Company's expense, in all
insurance and medical plans of the Company available to its employees, is
entitled to reimbursement for business and entertainment expenses and is
entitled to an allowance of $500 per month towards a leased automobile.
The Ramat Agreement is subject, at the Company's option, to termination only for
cause upon 90 days' written notice if Mr. Ramat has been convicted for any
material act of fraud, misappropriation, embezzlement, disloyalty, dishonesty or
breach of trust against the Company or any of its subsidiaries or affiliated
companies. Notwithstanding such termination, the Company will remain obligated
to pay Mr. Ramat his annual base salary through the date of termination and, to
the extent not therefore paid, the initial one half portion of the Annual Bonus
Amount with respect to all years proceeding such termination.
The Ramat Agreement provides for indemnification by the Company for all claims
relating to Mr. Ramat's service as an officer and director of the Company, and
for advancement of expenses, except in those circumstances where indemnification
would be precluded by Section 721 of the New York Business Corporation Law
("BCL") and requires that during the term of his employment thereunder, (a) the
Company's Certificate of Incorporation and/or By-Laws (as required by law) must
contain the provisions required by the BCL to provide for indemnification of
officers and directors to the fullest extent set forth in BCL Section 721 and to
provide for the limitation of liability of directors to the fullest extent set
forth in Section 402(b) of the BCL, and (b) the Company must maintain in full
force and effect directors and officers liability insurance, to the extent
available, providing coverage comparable to the insurance policy the Company had
in effect on August 2, 1991.
- 38 -
On December 18, 1996, the Company entered into an agreement with Mr. Ramat,
providing that with respect to 152,500 options granted to him in December, 1996
under the Company's 1993 Stock Incentive Plan, in the event that the Ramat
Agreement is not renewed upon any expiration of its term, or if Mr. Ramat is
terminated by the Company without cause (as defined in the Ramat Agreement),
then all of such options would immediately vest and become exercisable, and the
term for exercise of such options shall be one year after the date of such
non-renewal or termination.
In accordance with the Company's Plan of Reorganization effective June 30, 1993,
Mr. Ramat received $650,000 in performance compensation in connection with the
effectiveness of the Plan which was paid in 24 equal monthly installments,
without interest, commencing on June 30, 1993.
Mr. Paul Spector, the Company's Senior Vice President and Chief Financial
Officer, is contractually entitled to a severance payment if he is terminated by
the Company for reasons other than cause. The severance payment will equal
one-half of Mr. Spector's annual salary at the time of termination.
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 are Messrs.
Hannan, Yorke and Katz, none of whom were (i) during the eleven months ended
December 31, 1996, an officer 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 Company's Common
Stock on March 3, 1997, by certain holders. Those holders are persons who either
(i) are beneficial owners of 5% or more of the Company's Common Stock, or (ii)
are officers or directors of the Company. This information is based on the
Company's current information concerning the ownership of its securities.
As a result of the agreements relating, among other things, to the nomination
and election of directors and the acquisition and
- 39 -
disposition of Common Stock of the Company set forth in the New Shareholders
Agreement and Equity Registration Rights Agreement, entered into June 30, 1993,
Apollo Aris and the Non-Apollo Subject Shareholders referred to therein (each a
"Non-Apollo Subject Shareholder" and collectively the "Non-Apollo Subject
Shareholders") may be deemed to constitute a "group" within the meaning of
Section 13(d)(3) under the Securities Exchange Act of 1934, as amended. As such,
the Non-Apollo Subject Shareholders and Apollo Aris may be deemed to have shared
voting and dispositive power over all of the 9,111,039 shares of Common Stock
owned in the aggregate by the Non-Apollo Subject Shareholders and Apollo Aris on
June 30, 1993, or 76.6% of the total number of shares of Common Stock then
outstanding. Reference is made to such statements on Schedule 13D as have been
or may be filed with the Securities and Exchange Commission by Apollo Aris and
the Non-Apollo Subject Shareholders regarding such parties and their respective
ownership of Common Stock.
================================================================================
Name and Address Shares of Common Percent
of Beneficial Owner (1) Stock of Class
- --------------------------------------------------------------------------------
Apollo Aris Partners, L.P. 5,804,820 (2)(3) 48.9%
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- --------------------------------------------------------------------------------
Chase Manhattan Bank 833,973 7.0%
350 Fifth Avenue
New York, New York 10018
- --------------------------------------------------------------------------------
Robert K. Lifton 702,355 (2) 5.9%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
Howard L. Weingrow 702,469 (2) 5.9%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
Charles S. Ramat 996,632 (2)(4) 8.4%
475 Fifth Avenue (6)
New York, New York 10017
- --------------------------------------------------------------------------------
James G. and Alexander M. Goren 1,199,627 (2)(5) 10.1%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
David N. Schreiber 115,135 (4)(6) 1.0%
c/o A.H. Schreiber & Co, Inc.
460 West 34th Street, 10th Floor
New York, New York 10001
- --------------------------------------------------------------------------------
Herbert I. Wexler 86,296 (6)(7) 0.7%
26 Burr Farm Road
Westport, Connecticut 06880
- --------------------------------------------------------------------------------
- 40 -
- --------------------------------------------------------------------------------
Paul Spector 50,000 (6) 0.4%
475 Fifth Avenue
New York, New York 10017
- --------------------------------------------------------------------------------
Vincent Caputo 5,000 (6) 0.1%
475 Fifth Avenue
New York, New York 10017
- --------------------------------------------------------------------------------
All persons who are officers 1,253,063 (8) 10.6%
or directors of the Company,
as a group (eight persons)
================================================================================
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) These and certain related persons are parties to the New Shareholders
Agreement, described below.
(3) This table does not reflect any beneficial ownership by Messrs. Yorke, Katz
or Hannan, directors of the Company associated with Apollo Aris. Such
persons do not directly own any shares of Common Stock, and such persons
disclaim beneficial ownership of all shares held by Apollo Aris Partners,
L.P.
(4) With respect to 105,135 of the shares listed next to Mr. Schreiber's name:
Mr. Schreiber is co-trustee, with Ora Ramat, the wife of Charles S. Ramat,
of three trusts for the benefit of three children of Mr. and Mrs. Ramat
that own these shares. Mr. Schreiber and Mrs. Ramat disclaim beneficial
ownership of these shares. These shares are not included in the number of
shares listed next to Mr. Ramat's name.
(5) James and Alexander Goren are brothers. These shares are beneficially owned
as follows: James Goren individually owns 267,857 shares of Common Stock.
Alexander Goren, individually owns 327,381 shares of Common Stock. 476,191
shares are owned by MGI Associates, L.P., a Delaware limited partnership,
of which James Goren is the managing general partner and Alexander Goren is
a general partner, and over which shares James Goren has full voting and
dispositive power. 9,151 shares are owned by Goren Brothers, a New York
general partnership of which the Gorens are the only partners. 119,048
shares are held in two trusts for the children of Alexander Goren, of which
trusts the Gorens are co-trustees.
(6) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which became
exercisable on or prior to December 31, 1996: Charles S. Ramat (400,000),
David N.
- 41 -
Schreiber (10,000), Herbert I. Wexler (10,000), Paul Spector (50,000) and
Vincent Caputo (5,000).
(7) Mr. Wexler was a Director of the Company until February 28, 1997.
(8) These shares are attributed to Messrs. Ramat, Schreiber, Wexler, Spector
and Caputo.
In connection with the Amended Heller Agreement entered into on September 30,
1996, the Company issued to Heller a warrant, exercisable for nominal
consideration until September 30, 2006, to obtain 584,345 shares of the
Company's Common Stock (equal to approximately 4.9% of the Company's outstanding
Common Stock on September 30, 1996 and March 3, 1997).
Item 13. Certain Relationships and Related Transactions.
Pursuant to the Plan and an Addendum dated June 30, 1993 to the (old)
Shareholders Agreement dated May 26, 1988 among the Company and the certain of
the Non-Apollo Subject Shareholders, (i) all shareholders agreements and
registration rights agreements in effect prior to the Effective Date (including
those previously reported to be in effect between the Company and certain
Non-Apollo Subject Shareholders) were terminated in all respects, and (ii) the
Registrant, Apollo Aris and the Non-Apollo Subject Shareholders have entered
into the New Shareholders Agreement and the Equity Registration Rights Agreement
regarding their holdings of Common Stock of the Company.
New Shareholders Agreement
Pursuant to the New Shareholders Agreement, Apollo Aris and the Non-Apollo
Subject Shareholders have agreed that, if any such party shall have nominated
any individual for election as a director of the Registrant pursuant to such
shareholder's rights under the Registrant's Certificate of Incorporation and/or
ByLaws, each of Apollo Aris and the Non-Apollo Subject Shareholders will vote in
favor of the election of each such nominee (or, if there are no such nominees,
in favor of the candidates nominated by a majority of the Board of Directors)
all shares of Common Stock over which such person has voting power; provided,
that each of Apollo Aris and the Non-Apollo Subject Shareholders have agreed to
vote in favor of the election of Charles S. Ramat (the Chairman of the Board,
President and Chief Executive Officer of the Company) as a director at such
times as Mr. Ramat is nominated as a director and entitled to be so nominated
pursuant to any agreement between the Company and Mr. Ramat. Pursuant to the
Company's Restated Certificate of Incorporation and By-Laws, only a shareholder
that owns, or together with its affiliates owns, shares of Common Stock
possessing a majority of the voting power
- 42 -
of the outstanding Common Stock is entitled to nominate candidates for election
as directors.
The New Shareholders Agreement provides that each Non-Apollo Subject Shareholder
is required to obtain the consent of Apollo Aris (or its successor or their
designees) to transfer shares of Common Stock owned by such Non-Apollo Subject
Shareholder, other than transfers of shares received pursuant to an employee
stock option or purchase plan, transfers to certain persons affiliated with or
otherwise related to the Non-Apollo Subject Shareholder, transfers by a
Non-Apollo Subject Shareholder's estate, transfers pursuant to the Equity
Registration Rights Agreement, and transfers not exceeding an annual aggregate
of 10% of the shares of Common Stock owned by such Non-Apollo Subject
Shareholder on the Effective Date. Pursuant to the New Shareholders Agreement,
Apollo Aris is required to allow the Non-Apollo Subject Shareholders to
participate in any private sale to a non-affiliate of an annual aggregate of
more than 10% of the shares of Common Stock owned by Apollo Aris on June 30,
1993.
The New Shareholders Agreement requires that the Non-Apollo Subject Shareholders
must obtain the consent of Apollo Aris (or its successor or their designees)
prior to the acquisition of additional shares of Common Stock, other than shares
acquired pursuant to an employee stock option or stock purchase plan, and shares
that (when aggregated with shares acquired pursuant to such employee stock plans
or acquired by certain persons affiliated with or otherwise related to a
Non-Apollo Subject Shareholder that are not parties to the New Shareholders
Agreement) do not exceed an annual aggregate of 10% of the shares of Common
Stock owned by such Non-Apollo Subject Shareholder on the Effective Date.
The New Shareholders Agreement will terminate on the earliest to occur of (i)
the seventh anniversary of the Effective Date, (ii) in certain circumstances,
upon the election of the Non-Apollo Subject Shareholders following the transfer
by Apollo Aris resulting in the occurrence of certain reductions in Apollo
Aris's ownership interest in the Company, (iii) the end of the first fiscal year
of the Company for which the total amount of NOL carryforwards available for
later taxable years is less than $2.5 million, and (iv), as to Apollo Aris and
any Non-Apollo Subject Shareholder, the date on which such party owns shares
equal to less than 10% of the shares of Common Stock owned by such party on the
Effective Date. In addition, Apollo Aris may terminate the New Shareholders
Agreement with respect to any Non-Apollo Subject Shareholders who are not
"affiliates" of the Registrant within the meaning of Rule 144(a)(1) under the
Securities Act of 1933, as amended.
Equity Registration Rights Agreement
- 43 -
Pursuant to the Equity Registration Rights Agreement, any party that owns, or
together with its affiliates owns, 25% or more of the shares of Common Stock
subject to such agreement is entitled to require the Company to register under
the Securities Act of 1933, as amended, the offer and sale of Common Stock owned
by such person. Each of Apollo Aris and the Non-Apollo Subject Shareholders is
entitled to have shares of Common Stock owned by such person included in any
such registration statement initiated by a party to the Equity Registration
Rights Agreement or by the Company. The Equity Registration Rights Agreement
also provides that Apollo Aris is required to allow the Non-Apollo Subject
Shareholders to participate in a non-underwritten public offering in which
Apollo Aris sells an annual aggregate of more than 10% of the shares of Common
Stock owned by Apollo Aris on the Effective Date.
Pursuant to a letter agreement dated October 29, 1992, the Company, ECI and
Above the Belt, Inc. (a discontinued operating subsidiary), have agreed, subject
to certain exceptions, to indemnify each of Apollo Advisors, its partners and
certain other related persons from and against all losses, claims, liabilities,
damages, costs and expenses or actions in respect thereof arising out of any
actual or threatened claim against such party by a person other than the Company
related to or arising out of or in connection with, among other things, the Plan
or any actions taken by any indemnified party pursuant thereto or the
transactions contemplated thereby.
Director's Indemnification Agreements
On the June 30, 1993 Effective Date, the Company entered into separate
Indemnification Agreements with each new and continuing member of its Board of
Directors which provide such Directors with contractual indemnification to the
fullest extent permitted by law, and for the advancement of legal fees and other
expenses, and require the Company to use its best efforts to maintain designated
director and officer liability insurance coverage.
Agreements with Affiliates of Prior ECI Management
ECI leases approximately 29,600 square feet of office space in New Jersey from a
partnership, some of whose partners are former officers and/or directors of ECI
(but not of the Company). Such lease was in effect when the Company acquired ECI
in 1987.
In March 1996, ECI entered into a sublease of approximately 120,000 square feet
of warehouse space in New Jersey (adjacent to ECI's offices) of which the ground
lessee is the same New Jersey partnership, some of whose partners are former
officers and/or directors of ECI (but not of the Company).
- 44 -
PART IV
Item 14. Exhibits, Financial Statement, Schedules and Reports
on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Auditors' Report
Page
----
Independent Auditors' Report................................F-l
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and February 3, 1996......................F-2
Consolidated Statements of Operations for the period from
February 4, 1996 through December 31, 1996, for the 53 Weeks
Ended February 3, 1996 and the 52 Weeks Ended January 28,
1995........................................................F-3
Consolidated Statements of Stockholders' Equity for the
period from February 4, 1996 through December 31, 1996,
for the 53 Weeks Ended February 3, 1996 and the
52 Weeks Ended January 28, 1995.............................F-4
Consolidated Statements of Cash Flows for the period from
February 4, 1996 through December 31, 1996, for the 53
Weeks Ended February 3, 1996 and for the 52 Weeks Ended
January 28, 1995............................................F-5
Notes to Consolidated Financial Statements..................F-6
2. Financial Statement Schedules
The following financial statement schedules should be read
in conjunction with the consolidated financial statements
in Item 8 of this Annual Report on Form 10-K:
Schedule I - Condensed Financial Information
of Registrant............................F-22
Schedule II - Valuation and Qualifying
Accounts.................................F-27
All other schedules are omitted because they are not applicable or
because the required information is included in the financial
statements or notes thereto.
- 45 -
3. Exhibits
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index included in Item 14(c) below, numbered in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 30, 1996 with respect to the sale by
the Company, effective September 30, 1996, of 100% of the stock of a
wholly-owned subsidiary, Perry Manufacturing Company ("Perry") and the
application of the proceeds of this sale (including forgiveness of
indebtedness), to reduce the Company's debt obligations to Heller Financial,
Inc. from approximately $53,000,000 of principal and accrued interest to only
$1,665,000, which includes principal of $1,000,000 and accrued interest of
$665,000.
(c) INDEX TO EXHIBITS
======================================================================
Exhibit Sequential
No. Description Page No.
- ----------------------------------------------------------------------
2. Second Amended Joint Plan of ***
Reorganization dated March 26, 1993,
as amended May 11 and June 9, 1993
(Note: Annexes omitted)
- ----------------------------------------------------------------------
3.3 Restated Certificate of Incorporation ***
filed on June 30, 1993
- ----------------------------------------------------------------------
3.4 Amended and Restated By-Laws ***
effective June 30, 1993
- ----------------------------------------------------------------------
4.1 Specimen Certificate Evidencing *
Common Stock.
- ----------------------------------------------------------------------
10.42 Employment Agreement dated February *
1, 1988 between the Company and
Charles S. Ramat.
- ----------------------------------------------------------------------
10.60 Amendment dated as of August 2, 1991 **
to Executive Employment Agreement
dated February 1, 1988 Between the
Registrant and Charles S. Ramat.
- ----------------------------------------------------------------------
10.65 Senior Secured Note Agreement dated ***
as of June 30, 1993 between
Registrant and Heller Financial, Inc.
- ----------------------------------------------------------------------
10.66 Senior Secured Note dated as of June ***
30, 1993 issued by Registrant to
Heller Financial, Inc.
- ----------------------------------------------------------------------
- 46 -
======================================================================
Exhibit Sequential
No. Description Page No.
- ----------------------------------------------------------------------
10.67 Series A Junior Secured Note ***
Agreement dated as of June 30, 1993
between Registrant and BNY Financial
Corporation.
- ----------------------------------------------------------------------
10.68 Series A Junior Secured Note dated as ***
of June 30, 1993 issued by
Registrant to BNY Financial Corporation.
- ----------------------------------------------------------------------
10.69 Series B Junior Secured Note ***
Agreement dated as of June 30, 1993
between Registrant and AIF II, L.P.
- ----------------------------------------------------------------------
10.70 Series B Junior Secured Note dated ***
June 30, 1993 issued by
Registrant to AIF II, L.P.
- ----------------------------------------------------------------------
10.71 Primary Pledge Agreement dated as of ***
June 30, 1993 between Registrant and
Heller Financial, Inc.
- ----------------------------------------------------------------------
10.72 Secondary Pledge Agreement dated as ***
of June 30, 1993 between
Registrant, BNY Financial Corporation and
AIF II, L.P.
- ----------------------------------------------------------------------
10.73 Securities Purchase Agreement dated ***
as of June 30, 1993 between
Registrant, Apollo Aris Partners,
L.P. and AIF II, L.P.
- ----------------------------------------------------------------------
10.74 Debt Registration Rights Agreement ***
dated as of June 30, 1993 among
Registrant and the Holders of
Registrable Securities Referred to
Therein.
- ----------------------------------------------------------------------
10.75 Shareholders Agreement dated as of ***
June 30, 1993 among Registrant and
the Subject Shareholders Referred to
Therein.
- ----------------------------------------------------------------------
10.76 Equity Registration Rights Agreement ***
dated as of June 30, 1993 among
Registrant and the Holders of
Registrable Shares Referred to
Therein.
- ----------------------------------------------------------------------
10.77 Intercreditor Agreement dated as of ***
June 30, 1993 among Heller Financial,
Inc., BNY Financial Corporation and
AIF II, L.P.
- ----------------------------------------------------------------------
- 47 -
======================================================================
Exhibit Sequential
No. Description Page No.
- ----------------------------------------------------------------------
10.78 Second Amendment dated May 6, 1992, ***
Third Amendment dated March 25, 1993,
and Fourth Amendment dated June 14,
1993 to Executive Employment Agreement
dated February 1, 1988 between
Registrant and Charles S. Ramat.
- ----------------------------------------------------------------------
10.79 Severance Agreement dated April 3, ***
1991 between Registrant and Paul
Spector.
- ----------------------------------------------------------------------
10.80 1993 Stock Incentive Plan of ***
Registrant, as amended by Amendment
No. 1 thereto dated June 24, 1993.
- ----------------------------------------------------------------------
10.81 Form of Indemnification Agreement ***
dated as of June 30, 1993 between
Registrant and each member of
Registrant's Board of Directors.
- ----------------------------------------------------------------------
10.82 Letter Agreement dated February 8, ***
1993 among James G. Goren, Alexander
M. Goren, Charles S. Ramat, and David
Schreiber and Ora Ramat as Trustees
for the Benefit of Hana Leah Ramat
and Abraham Ramat.
- ----------------------------------------------------------------------
10.83 Addendum dated June 30, 1993 to ***
Shareholders Agreement dated May 26,
1988 among The Marcade Group Inc. and
the Shareholders referred to therein.
- ----------------------------------------------------------------------
10.84 Stipulated Entry Liquidating Claims ***
dated March 10, 1993 among The
Marcade Group Inc., Robert K. Lifton,
Howard L. Weingrow, and JAG
Consulting Co. Ltd.
- ----------------------------------------------------------------------
10.85 Letter Agreement dated June 28, 1993 ***
among AIF II, L.P., Apollo Aris
Partners, L.P. and Registrant.
- ----------------------------------------------------------------------
10.86 Letter Agreement dated October 29, ***
1992 among The Marcade Group Inc.,
Above The Belt, Inc., Europe Craft
Imports, Inc., Perry Manufacturing
Company, Apollo Investment Fund,
L.P., AIF II, L.P., and Altus
Finance.
- ----------------------------------------------------------------------
10.87 Amendment dated December 12, 1994 to ****
Senior Secured Note Agreement dated as
of June 30, 1993 between Registrant and
Heller Financial, Inc.
- ----------------------------------------------------------------------
- 48 -
======================================================================
Exhibit Sequential
No. Description Page No.
- ----------------------------------------------------------------------
10.88 Amendment dated June 12, 1995 to *****
Senior Secured Note Agreement dated
as of June 30, 1993 between
Registrant and Heller Financial, Inc.
- ----------------------------------------------------------------------
10.89 Amendment dated October 27, 1995 to ******
Senior Secured Note Agreement dated
as of June 30, 1993 between
Registrant and Heller Financial, Inc.
- ----------------------------------------------------------------------
10.90 Amendment dated February 2, 1996 to #
Series B Junior Secured Note
Agreement dated as of June 30, 1993
between Registrant and AIF-II, L.P.
- ----------------------------------------------------------------------
10.91 Fifth Amendment dated October 3, 1995 ##
and Sixth Amendment dated March 20,
1996 to Executive Employment
Agreement dated February 1, 1988
between Registrant and Charles S.
Ramat
- ----------------------------------------------------------------------
10.92 Fifth Amendment dated May 1, 1996 to ###
Senior Secured Note Agreement dated
as of June 30, 1993 between
Registrant and Heller Financial, Inc.
- ----------------------------------------------------------------------
10.93 Consent dated May 1, 1996 to Series A ###
Junior Secured Note Agreement dated
as of June 30, 1993 between
Registrant and BNY Financial
Corporation.
- ----------------------------------------------------------------------
10.94 Consent dated May 1, 1996 to Series B ###
Junior Secured Note Agreement dated
as of June 30, 1993 between
Registrant and AIF-II, L.P.
- ----------------------------------------------------------------------
10.95 Stock Purchase Agreement dated as of ####
September 19, 1996 between Aris
Industries, Inc., as Seller, Page
Holding Company, as Buyer, and Perry
Manufacturing Company, with respect
to the stock of Perry Manufacturing
Company.
- ----------------------------------------------------------------------
10.96 Amended and Restated Senior Secured ####
Note Agreement dated September 30,
1996, between Aris Industries, Inc.
as Borrower, and Heller Financial,
Inc.
- ----------------------------------------------------------------------
10.97 Interest Note (Principal Amount ####
$1,000,000) dated September 30, 1996
from Aris Industries, Inc. payable to
Heller Financial, Inc.
- ----------------------------------------------------------------------
- 49 -
======================================================================
Exhibit Sequential
No. Description Page No.
- ----------------------------------------------------------------------
10.98 Amended and Restated Pledge Agreement ####
dated September 30, 1996 between Aris
Industries, Inc., as Pledgor, and
Heller Financial, Inc., as Pledgee.
- ----------------------------------------------------------------------
10.99 Warrant dated September 30, 1996 ####
issued by Aris Industries, Inc. to
Heller Financial, Inc.
- ----------------------------------------------------------------------
10.100 Letter dated December 18, 1996 from
the Registrant to Charles S. Ramat,
filed herewith. 79
- ----------------------------------------------------------------------
21. List of Subsidiaries 81
- ----------------------------------------------------------------------
23. Consent of Deloitte & Touche LLP E-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.
** Filed as the indicated Exhibit to the Report on Form 8-K dated
August 29, 1991 and incorporated herein by reference.
*** Filed as the indicated Exhibit to the Report on Form 8-K dated
June 30, 1993 and incorporated herein by reference.
**** Filed as the indicated Exhibit to the Report on Form 8-K dated
December 12, 1994 and incorporated herein by reference.
***** Filed as the indicated Exhibit to the Report on Form 8-K dated
June 12, 1995 and incorporated herein by reference.
****** Filed as the indicated Exhibit to the Report on Form 8-K dated
October 27, 1995 and incorporated herein by reference.
# Filed as the indicated Exhibit to the Report on Form 8-K dated
February 2, 1996 and incorporated herein by reference.
## Filed as the indicated Exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended February 3, 1996
and incorporated herein by reference.
### Filed as the indicated Exhibit to the Report on Form 8-K dated
May 1, 1996 and incorporated herein by reference.
#### Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
- 50 -
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/Paul Spector
------------------------
Paul Spector,
Senior Vice President
Chief Financial Officer
By: /S/Vincent F. Caputo
------------------------
Vincent F. Caputo,
Vice President
Assistant Secretary and
Assistant Treasurer
Date: March 7, 1997
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/John Hannan March 7, 1997
- --------------------------------
John Hannan, Director
/S/Edward M. Yorke March 7, 1997
- --------------------------------
Edward M. Yorke, Director
/S/Robert Katz March 7, 1997
- --------------------------------
Robert Katz, Director
/S/Charles S. Ramat March 7, 1997
- --------------------------------
Charles S. Ramat, Chairman of
the Board, President, Chief
Executive Officer and Assistant
Secretary; Director
/S/David N. Schreiber March 7, 1997
- --------------------------------
David N. Schreiber, Director
- 51 -
Deloitte & Touche LLP
-----------------------------------------------------------
Two Hilton Court Telephone: (201) 683-7000
P.O. Box 319 Facsimile: (201) 683-7459
Parsippany, New Jersey 07054-0319
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Aris Industries, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Aris Industries,
Inc. and Subsidiaries as of December 31, 1996 and February 3, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from February 4, 1996 through December 31, 1996, and for
each of the two fiscal years in the period ended February 3, 1996. Our audits
also included the financial statement schedules listed in the Index at Item
14(a) 2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aris Industries, Inc. and
Subsidiaries as of December 31, 1996 and February 3, 1996, and the results of
their operations and their cash flows for the period from February 4, 1996
through December 31, 1996 and for each of the two fiscal years in the period
ended February 3, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
March 7, 1997
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
F-1
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, FEBRUARY 3,
ASSETS 1996 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,278,000 $ 2,318,000
Receivables, net 7,324,000 16,970,000
Inventories, net 9,234,000 35,272,000
Prepaid expenses and other current assets 1,976,000 1,312,000
------------ ------------
Total current assets 24,812,000 55,872,000
PROPERTY, PLANT AND EQUIPMENT - NET 1,233,000 13,462,000
OTHER ASSETS 1,188,000 834,000
GOODWILL 17,622,000 23,760,000
------------ ------------
TOTAL ASSETS $ 44,855,000 $ 93,928,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 5,602,000 $ 2,007,000
Accounts payable - trade 922,000 8,592,000
Accrued expenses and other current liabilities 4,497,000 7,431,000
Current portion of long-term debt 749,000 1,302,000
Line of credit payable -- 6,000,000
------------ ------------
Total current liabilities 11,770,000 25,332,000
OTHER LIABILITIES 1,628,000 1,527,000
LONG-TERM DEBT 16,702,000 66,505,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01: 50,000,000 shares authorized;
issued and outstanding 11,852,544 and 11,925,400 shares
at December 31, 1996 and February 3, 1996, respectively 119,000 119,000
Preferred stock, par value $.01: 10,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 44,057,000 44,061,000
Accumulated deficit (29,421,000) (42,387,000)
Cumulative foreign currency translation adjustment -- (1,229,000)
------------ ------------
Total stockholders' equity 14,755,000 564,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,855,000 $ 93,928,000
============ ============
See notes to consolidated financial statements.
F-2
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
------------- ------------- -------------
NET REVENUES $ 131,802,000 $ 173,990,000 $ 188,143,000
------------- ------------- -------------
OPERATING COSTS:
Cost of sales 104,649,000 140,008,000 146,295,000
Selling and administrative 25,422,000 32,030,000 31,677,000
Costs of restructuring -- 430,000 --
------------- ------------- -------------
130,071,000 172,468,000 177,972,000
------------- ------------- -------------
INCOME BEFORE INTEREST AND
DEBT EXPENSE, SALE OF SUBSIDIARY,
INCOME TAXES, AND EXTRAORDINARY
ITEM 1,731,000 1,522,000 10,171,000
INTEREST AND DEBT EXPENSE - NET (6,821,000) (9,644,000) (7,812,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE SALE OF
SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM (5,090,000) (8,122,000) 2,359,000
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company 7,786,000 -- --
Realization of cumulative foreign currency translation (1,108,000) -- --
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 1,588,000 (8,122,000) 2,359,000
INCOME TAX (BENEFIT) EXPENSE (516,000) (65,000) 143,000
------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 2,104,000 (8,057,000) 2,216,000
EXTRAORDINARY ITEM -
Gain on debt forgiveness 10,862,000 -- --
------------- ------------- -------------
NET INCOME (LOSS) $ 12,966,000 $ (8,057,000) $ 2,216,000
============= ============= =============
PER SHARE DATA:
Income (loss) before extraordinary item $ 0.18 $ (0.68) $ 0.19
Extraordinary item 0.91 -- --
------------- ------------- -------------
NET INCOME (LOSS) $ 1.09 $ (0.68) $ 0.19
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 11,905,000 11,925,400 11,925,400
============= ============= =============
See notes to consolidated financial statements.
F-3
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON PREFERRED PAID-IN ACCUMULATED TRANSLATION
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ---------- ------------ ------------ ------------ ------------
BALANCE, JANUARY 29, 1994 $ 119,000 $ -- $ 44,061,000 $(36,546,000) $ (1,090,000) $ 6,544,000
---------- ---------- ------------ ------------ ------------ ------------
Foreign currency translation adjustment -- -- -- -- (149,000) (149,000)
Net income -- -- -- 2,216,000 -- 2,216,000
---------- ---------- ------------ ------------ ------------ ------------
BALANCE, JANUARY 28, 1995 119,000 -- 44,061,000 (34,330,000) (1,239,000) 8,611,000
Foreign currency translation adjustment -- -- -- -- 10,000 10,000
Net loss -- -- -- (8,057,000) -- (8,057,000)
---------- ---------- ------------ ------------ ------------ ------------
BALANCE, FEBRUARY 3, 1996 119,000 -- 44,061,000 (42,387,000) (1,229,000) 564,000
Net income -- -- -- 12,966,000 -- 12,966,000
Foreign currency translation adjustment -- -- -- -- 121,000 121,000
Retirement of stock -- (4,000) -- -- -- (4,000)
Realization of cumulative foreign
currency translation -- -- -- -- 1,108,000 1,108,000
---------- ---------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 119,000 $ -- $ 44,057,000 $(29,421,000) $ -- $ 14,755,000
========== ========== ============ ============ ============ ============
See notes to consolidated financial statements.
F-4
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,966,000 $ (8,057,000) $ 2,216,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain (loss) on sale of property 39,000 (350,000) (82,000)
Depreciation and amortization 2,594,000 3,320,000 3,278,000
Gain on sale of Perry (7,786,000) -- --
Gain on debt forgiveness (10,862,000) -- --
Deferred income tax benefit (580,000) (102,000) (335,000)
Cumulative translation adjustment 1,108,000 -- --
Capitalized interest 1,424,000 -- --
Changes in assets and liabilities:
Decrease in cash - restricted -- 10,000 25,000
Decrease (increase) in receivables 8,120,000 2,159,000 (2,848,000)
Decrease (increase) in inventories 36,000 11,000 (5,466,000)
(Increase) decrease in prepaid expenses and
other current assets (942,000) 204,000 120,000
Increase in other assets (8,000) (21,000) (321,000)
Increase (decrease) in trade acceptances payable 3,595,000 (410,000) 923,000
Increase (decrease) in accounts payable - trade 2,084,000 (1,696,000) (1,354,000)
(Decrease) increase in accrued expenses and other
current liabilities (2,230,000) 863,000 899,000
(Decrease) increase in other liabilities (2,000) (389,000) 75,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 9,556,000 (4,458,000) (2,870,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 66,000 539,000 141,000
Net proceeds from sale of Perry 40,145,000 -- --
Capital expenditures (1,409,000) (1,501,000) (4,582,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 38,802,000 (962,000) (4,441,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (40,857,000) -- --
Net (payments) proceeds from bank line of credit (6,000,000) 6,000,000 --
Proceeds from issuance of long-term debt 3,528,000 400,000 2,509,000
Principal payments of long-term debt, including
capital leases (1,073,000) (2,266,000) (2,931,000)
Purchase of common stock (4,000) -- --
Proceeds from equipment financing agreement 12,000 343,000 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (44,394,000) 4,477,000 (422,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,000) (3,000) (2,000)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,960,000 (946,000) (7,735,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,318,000 3,264,000 10,999,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,278,000 $ 2,318,000 $ 3,264,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 3,307,000 $ 9,474,000 $ 7,649,000
============ ============ ============
Income taxes $ 106,000 $ 226,000 $ 466,000
============ ============ ============
See notes to consolidated financial statements.
F-5
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Aris Industries, Inc., formerly the Marcade Group,
Inc. (the "Company"), is a publicly held company that was incorporated in
1947 in the State of New York. The Company is engaged in the design,
manufacture, importing and distribution of men's and young men's
sportswear and outerwear and ladies' sportswear and other apparel. The
Company's operations are conducted primarily through two wholly-owned
subsidiaries, Europe Craft Imports, Inc. ("ECI") and Perry Manufacturing
Company ("Perry"), which were acquired by Aris in 1987. As described in
Note 5, effective September 30, 1996, the Company sold 100% of the stock
of Perry for a total consideration of approximately $54,719,000, and
reduced its indebtedness to Heller Financial, Inc. ("Heller") from
approximately $53,384,000 to $1,665,000. Perry's operating results are
included in the consolidated statements of operations through September
30, 1996. In addition, there are four inactive wholly-owned subsidiaries:
Above the Belt, Marlene Industries Corporation, RJMJ Inc., and Clarkins.
ECI designs, imports and distributes men's sportswear, including cloth and
leather jackets, primarily under the "Members Only" trade name. ECI has
also been granted a license to distribute men's outerwear and raincoats
under the "Perry Ellis" trade name. In addition, ECI acts as a sourcing
agent for various national retail store chains and arranges for and
oversees the production of merchandise for such companies. ECI also has
licensing agreements with various licensees, granting them the right to
operate under the "Members Only" trade name.
ECI purchases a majority of its products from foreign manufacturers
located in Hong Kong, China, Korea and Indonesia. The majority of ECI's
net revenues for the period from February 4, 1996 through December 31,
1996 were accounted for in four business lines: Outerwear (65%), Perry
Ellis (30%) and Private Label and Sportswear (5%). ECI's products are
marketed nationally in department stores, specialty stores and retail
chains. In addition, ECI operates three outlet stores. ECI's largest
customer accounts for approximately 18% of its total net revenues.
Perry, primarily a supplier of private label goods to national chain
stores, designed, manufactured and distributed ladies' and men's
sportswear. Perry's manufacturing operations consisted of designing,
cutting, sewing and packaging with locations in North Carolina, Virginia,
El Salvador, Costa Rica and Honduras. The Company also employed
independent factories and contractors in the United States, Latin America
and South America. The five largest customers of Perry accounted for
approximately 98% of their total net revenues.
The Company is subject to certain risks and uncertainties. The apparel
industry, in general, is volatile and unpredictable due to cyclical and
seasonal swings caused, in part, by customer buying patterns. There is an
extremely adverse environment in the retail apparel industry which is
likely to continue to impact the Company and increase the risk of reduced
orders, loss of particular customers or particular selling programs of
customers, shorter production lead times, reduced margins and earlier and
more extensive borrowings against working capital lines. There has been a
substantial consolidation of formerly independent major department store
chains, such that the consolidated customers exert greater influence on
suppliers such as the Company which result in greater demands for price
reductions, advertising support, returns and markdowns of apparel
products. In addition, the Company is particularly impacted by unusually
warm weather or late arrival of cold weather. A substantial portion of the
Company's products are manufactured overseas, subjecting the Company to
generic risks of
F-6
import and delivery from distant locations, delays due to foreign
government regulation and controls, and customs and transportation
difficulties. In particular, the Company imports its products from
manufacturing plants which it does not own.
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, 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. Actual
results could differ from those estimates. The most significant use of
estimates in the Company's consolidated financial statements involves the
ultimate recoverability of goodwill.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
Aris Industries, Inc. and Subsidiaries (the "Company") include the
accounts of its subsidiaries, all of which are wholly owned. All material
intercompany transactions and balances have been eliminated.
CASH EQUIVALENTS - The Company considers all investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
INVENTORIES - All inventories, except for those of one subsidiary which
accounts for its inventory, at the lower of cost (weighted average basis)
or market, are stated at the lower of cost (first in, first out basis) or
market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Depreciation and amortization are computed using the
straight-line method over the following estimated useful lives of the
assets, the terms of the leases or the lives of the improvements,
whichever are less:
Building and improvements 16 to 30 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 3 to 5 years
Leasehold improvements 5 to 10 years
INCOME TAXES - The provision for income taxes includes Federal and state
taxes currently payable and deferred taxes arising from temporary
differences in determining income for financial statement and tax
purposes. The Company and its subsidiaries file a consolidated Federal
income tax return on a calendar year basis.
GOODWILL - Goodwill represents the unamortized excess of the cost of
acquiring a business over the fair values of the net assets received at
the date of acquisition. Amortization expense is computed by use of the
straight-line method over an estimated life of 40 years. The Company
continuously evaluates goodwill for any potential impairment. The Company
assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through expected undiscounted future results. Accumulated
amortization at December 31, 1996 and February 3, 1996 was $ 7,395,000 and
$8,362,000, respectively.
FISCAL YEAR - On December 10, 1996, the Company changed its fiscal year to
the calendar year ending December 31 rather than a fiscal year ending on
the Saturday closest to January 31, effective for the period from February
4, 1996 through December 31, 1996.
F-7
The following sets forth unaudited financial data for the period from
January 29, 1995 through December 31, 1995, the comparable 1995 period to
the period from February 4, 1996 through December 31, 1996:
Net revenues $ 159,264,000
Operating income 3,840,000
Loss before income taxes (4,981,000)
Income tax benefit (100,000)
Net loss (4,881,000)
There are 53 weeks in the period ended February 3, 1996 and 52 weeks in
the period ended January 28, 1995.
PER SHARE DATA - Income (loss) per share was computed based upon the
weighted average number of common shares outstanding during the applicable
period. Stock options are excluded from per share calculations because
they are anti dilutive.
2. RECEIVABLES
DECEMBER 31, FEBRUARY 3,
1996 1996
----------- -----------
Due from factor $ 7,051,000 $16,264,000
Other receivables 1,450,000 1,378,000
Less allowance for uncollectible
accounts and sales discounts 1,177,000 672,000
----------- -----------
$ 7,324,000 $16,970,000
=========== ===========
As of December 31, 1996, ECI has an agreement with a commercial financial
company which provides for the factoring of certain trade receivables. The
receivables were 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, shortages, damaged goods,
etc. All factored receivables and related proceeds of sales are the
property of the respective commercial financial companies. ECI is charged
a factoring commission ranging from .70% to 1% of factored sales. As of
February 3, 1996, Perry had taken loans and advances of $7,940,000 against
total factored receivables of $11,706,000. The weighted average interest
rate on loans and advances for the fiscal year ended February 3, 1996 was
10%.
3. INVENTORIES
DECEMBER 31, FEBRUARY 3,
1996 1996
----------- -----------
Finished goods $ 9,234,000 $18,681,000
Work-in-process -- 7,493,000
Raw materials -- 9,098,000
----------- -----------
$ 9,234,000 $35,272,000
=========== ===========
Inventories are reported net of a reserve for obsolescence of $939,000 as
of February 3, 1996.
F-8
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, FEBRUARY 3,
1996 1996
----------- -----------
Land $ -- $ 1,155,000
Building and improvements -- 9,456,000
Machinery and equipment -- 12,554,000
Furniture and fixtures 4,352,000 2,667,000
Leasehold improvements 1,052,000 1,432,000
----------- -----------
5,404,000 27,264,000
Less accumulated depreciation 4,171,000 13,802,000
----------- -----------
$ 1,233,000 $13,462,000
=========== ===========
5. SALE OF PERRY MANUFACTURING COMPANY
The Company completed a transaction effective September 30, 1996 in which
it sold 100% of the stock of its wholly-owned subsidiary, Perry
Manufacturing Company, to Page Holding Company (the "Buyer"). The Company
received cash proceeds of $40,857,000 and the Buyer assumed $3,000,000 of
Perry debt. The cash proceeds were used as final satisfaction of principal
and accrued interest of approximately $53,384,000 due to Heller Financial,
Inc. ("Heller"). The Company and Heller then entered into a new note
agreement for $1,665,000 and the Company granted Heller warrants to
purchase 584,345 shares of the Company's common stock at an exercise price
of $.01 per share. See Note 6 for additional information on the new Heller
agreement. Such transactions resulted in a gain on the sale of Perry of
$7,786,000, the realization of $1,108,000 of a cumulative foreign currency
translation loss and an extraordinary gain on debt forgiveness of
$10,862,000.
The following pro forma information is presented assuming the sale of
Perry had been completed at the beginning of the Company's current fiscal
year. Pro forma adjustments have been made to exclude the operating
results of Perry and to adjust interest expense for loans repaid from the
proceeds of the transaction. This unaudited pro forma information is not
necessarily indicative of the results of operations that might have
occurred had the Perry sale occurred at the beginning of the Company's
current fiscal year, or of future results of operations.
HISTORICAL PRO FORMA
------------- -------------
(UNAUDITED)
Net revenues $ 131,802,000 $ 67,163,000
Gross profit 27,153,000 19,166,000
Selling and administrative expenses 25,422,000 18,456,000
Interest and debt expense-net 6,821,000 2,300,000
Income (loss) before income taxes
and extraordinary item 1,588,000 (1,590,000)
Income tax (benefit) expense (516,000) 20,000
Net Income (loss) 12,966,000 (1,610,000)
Net Income (loss) per share 1.09 (0.14)
F-9
6. LONG-TERM DEBT
Long-term debt is comprised of:
DECEMBER 31, FEBRUARY 3,
1996 1996
----------- -----------
ARIS-CORPORATE:
Heller Note, interest at prime plus 2% $ -- $49,857,000
New Heller Note, interest at 10%. Including capitalized interest of
$665,000. 1,665,000 --
BNY Note, interest at 7% 7,460,000 7,000,000
Apollo Note, interest at 13%. Net of unamortized original
issue discount of $736,000 and $819,000 at December 31,
1996 and February 3, 1996, respectively 7,972,000 6,681,000
OPERATING SUBSIDIARIES:
Secured notes:
Note payable, interest at 11%, due in monthly installments of $42,000
through June 1999, plus interest at LIBOR plus
4.125% (9.313% at February 3, 1996) -- 1,907,000
Note payable due in quarterly installments of $25,000
through January 1999, plus interest at prime plus 1/2% -- 275,000
Note payable to financing company, due in monthly
installments varying from $1,200 to $18,400 (including
principal and interest at 13% through 2000 -- 47,000
Note payable, interest at a variable rate, quarterly
principal payments of $40,500 through 1997 -- 203,000
Note payable, interest at a variable rate, quarterly
principal payments of $31,250 through 1997 -- 220,000
Note payable, interest at prime plus 1%, quarterly
principal payments of $18,750 through 1997 -- 55,000
Industrial Revenue Bonds:
Interest at 78% of prime (not to exceed 14-5/8%) due
quarterly. Quarterly principal installments of $65,885
due through April 1998 -- 593,000
Other 354,000 969,000
----------- -----------
17,451,000 67,807,000
Less current portion 749,000 1,302,000
----------- -----------
$16,702,000 $66,505,000
=========== ===========
F-10
On June 30, 1993, the Company entered into a Senior Secured Note Agreement
with Heller Financial, Inc. ("Heller") pursuant to which Heller received a
note in the original principal amount of $50,857,000 to be repaid over
seven years, with interest at 2% over prime. Heller retained a pledge of
the Company's stock (but not the assets) in ECI and Perry.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller ("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity date
of November 3, 2001 and a warrant to purchase 584,345 shares of the
Company's common stock at an exercise price of $.01 per share. Such
transaction has been accounted for as a modification of terms to the
original Heller debt. Accordingly, the Company recorded the New Heller
Note at the total future cash payments to be made in accordance with the
Amended Heller Agreement which is principal of $1,000,000 and accrued
interest of $665,000.
At September 30, 1996, the Company owed Heller approximately $53,384,000
of principal and accrued interest. Pursuant to the Amended Heller
Agreement, Heller accepted the cash proceeds of $40,857,000 received from
the Perry sale and the New Heller Note as full satisfaction of such
indebtedness and eliminated all financial covenants. Such transaction
resulted in an extraordinary gain on debt forgiveness of $10,862,000.
Heller retained a pledge of the stock (but not the assets) of ECI, the
Company's remaining operating subsidiary. The New Heller Note provides
that no principal or interest be paid on the Company's indebtedness to
Apollo (as defined below) until all principal and interest on the New
Heller Note is paid in full. In addition, the New Heller Note allows the
Company to make regularly scheduled interest payments on the BNY Note (as
defined below) for interest accruing after February 3, 1997 and principal
payments. However, if the Company makes an interest payment on the BNY
Note, it shall immediately make an interest payment to Heller in an amount
equal to the amount of interest which shall have accrued on the New Heller
Note in accordance with its terms during the same period of time for which
interest is being paid pursuant to the interest payment on the BNY Note.
Also, if the Company makes a principal payment on the BNY Note, it shall
immediately prepay the New Heller Note in an amount equal to the lesser of
the principal payment on the BNY Note or the then outstanding amount of
the remaining obligation on the New Heller Note.
During the fiscal year ended January 29, 1994, (i) Apollo Aris Partners,
L.P., a Delaware limited partnership ("Apollo Aris"), invested $1 million
in the Company in exchange for 5,804,820 shares of the Company's New
Common Stock issued to Apollo Aris, which shares constitute approximately
48.8% of the Company's capital stock issued and outstanding as of June 30,
1993, (ii) its affiliate, AIF-II, L.P., a Delaware limited partnership
("AIF-II" and, together with Apollo Aris, "Apollo"), invested $6.5 million
in the Company in exchange for a promissory note. Apollo maintains minimum
ownership and Board of Directors representation.
On June 30, 1993, the Company entered into a Series B Junior Secured Note
Agreement with Apollo pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shares
with BNY Financial Corporation ("BNY") a second lien on the stock of ECI.
The Apollo Note is required to be paid in two equal installments payable
on November 3, 2001 and 2002. The Apollo Note contains certain affirmative
and negative covenants on the operation of the Company. Pursuant to the
Debt Registration Rights Agreement entered into on June 30, 1993 between
the Company and Apollo, Apollo and one transferee are entitled to require
the Company twice to register the offer and sale of the Apollo Note under
Federal and applicable state securities laws, and at the request of Apollo
or such transferee, to negotiate with such party in good faith to convert
the Apollo Notes into registered notes issued pursuant to a trust
indenture.
F-11
On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY pursuant to which BNY received a nine-year, $7 million
note, bearing interest at a rate of 7% per annum (the "BNY Note"). BNY
shares with Apollo a second lien on the stock of ECI. The BNY Note is
required to be paid in six annual installments, payable on November 3 of
each year commencing in 1997 as follows:
CALENDAR
YEAR AMOUNT
-------- ----------
1997 $ 300,000
1998 300,000
1999 500,000
2000 600,000
2001 1,100,000
2002 4,660,000
The BNY note contains certain affirmative and negative covenants on
the operations of the Company.
Once the New Heller Note is paid in full, Apollo and BNY will share in
mandatory prepayments based upon 50% of certain "excess cash flows" (as
defined). With the consent of BNY and Apollo, as agreed to in May 1996,
the quarterly interest payments under the Company's notes due to BNY and
Apollo for the period May 6, 1996 through February 3, 1997 and all accrued
interest at May 6, 1996 will not be made in cash and instead will be added
to the principal of such notes. On November 3, 2002, the Company is
obligated to pay BNY and Apollo $460,000 and $1,208,000, respectively,
representing interest through December 31, 1996, which was not paid in
cash and instead added to the principal of the respective notes.
MATURITIES - Future maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31,
------------
1997 $ 749,000
1998 762,000
1999 1,043,000
2000 1,165,000
2001 4,850,000
Thereafter 9,618,000
-----------
$18,187,000
===========
RESTRICTED NET ASSETS - In accordance with ECI's credit facility
agreement, as of December 31, 1996 and February 3, 1996, the maximum
amount of upstream payments in the form of management fees from ECI to
Aris have been made. Under this agreement, net assets restricted to ECI's
use at December 31, 1996 and February 3, 1996 were $14,077,000 and
$14,802,000, respectively.
In addition, Perry had net assets restricted to its use at February 3,
1996 of $22,889,000, which arise from its Industrial Revenue Bond
Agreements.
At this time, the Company believes that based on current business plans
and financial arrangements that management fee revenues from it principal
operating subsidiary, after taking into account all restrictions contained
in the relevant subsidiary lending agreements, will be sufficient to cover
debt service requirements and corporate cash requirements for the year
ending December 31, 1997.
F-12
7. LINE OF CREDIT PAYABLE
ECI has available a $30,000,000 line of credit which is secured by liens
on certain assets of ECI. As of December 31, 1996, there was no
outstanding balance payable. Interest is accrued at the bank's prime rate
plus 1/4%. As of December 31, 1996, the bank's prime rate was 8.25%. The
line of credit contains various clauses which, among other things, limits
payment of management fees to the Company and requires the maintenance of
certain levels of net worth (as defined) during the year. ECI was not in
violation of any of its covenants as of December 31, 1996.
On March 7, 1997, ECI renegotiated a new line of credit agreement with the
bank with terms similar to the existing agreement. Under the new
agreement, ECI has available a $39,000,000 line of credit with interest
accruing at the bank's prime rate plus 1/4% which is secured by liens on
certain assets of ECI. The new agreement contains various clauses which,
among other things, limits payment of management fees to the Company and
requires the maintenance of certain levels of net worth (as defined)
during the year. ECI expects to comply with the provisions of the new
agreement for the calendar year ended December 31, 1997.
8. 1993 STOCK INCENTIVE PLAN
Pursuant to the Company's Plan of Reorganization on June 30, 1993, a new
1993 Stock Incentive Plan was adopted by the Company (the "1993 Stock
Incentive Plan"). The 1993 Stock Incentive Plan 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 1993 Stock Incentive 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. A maximum of
1.2 million shares of Common Stock (subject to anti-dilution adjustments)
can be covered by awards under the 1993 Stock Incentive Plan.
The 1993 Stock Incentive Plan provides that any shares subject to an
option under such plan which terminate, are canceled or expire without
being exercised may again be subjected to an option under the plan,
subject to the earlier termination of that plan. All options granted to
date 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.
In December 1996, the Company granted to employees of the Company and its
remaining wholly-owned operating subsidiary, ECI, 305,000 options under
the Plan. The exercise price of the options is ten cents per share (the
market price on such date). As of December 31, 1996, there were 25
eligible participants with options outstanding under the 1993 Stock
Incentive Plan. During the period from February 4, 1996 through December
31, 1996 a total of 172,500 stock options were granted to Officers of the
Company under the 1993 Stock Incentive Plan. On June 26, 1995, all
outstanding stock options under the 1993 Stock Incentive Plan were
repriced to have an exercise price of fifty cents (the market price on
such date), rather than two dollars per share.
F-13
WEIGHTED
SHARES AVERAGE
UNDER PRICE PER
OPTION SHARE
--------- --------
BALANCE, JANUARY 30, 1994 1,040,500 $ 2.00
Granted 12,000 2.00
Exercised -- --
Expired/Surrendered (10,500) 2.00
--------- --------
BALANCE, JANUARY 28, 1995 1,042,000 2.00
Granted -- --
Exercised -- --
Expired/Surrendered (77,000) 0.50
--------- --------
BALANCE, FEBRUARY 3, 1996 965,000 0.50
Granted 305,000 0.10
Exercised -- --
Expired/Surrendered (307,500) 0.50
--------- --------
BALANCE, DECEMBER 31, 1996 962,500 $ 0.37
========= ========
At December 31, 1996, February 3, 1996 and January 28, 1995, 237,500,
235,000 and 158,000, respectively, of options were available for grant.
The outstanding stock options at December 31, 1996 have a weighted average
contractual life of 8.6 years and the exercise price ranges from $.10 to
$.50. The number of stock options exercisable at December 31, 1996,
February 3, 1996 and January 28, 1995 was 657,500, 643,366 and 137,300,
respectively. The stock options exercisable at December 31, 1996 have a
weighted average exercise price of $.50 per share.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), which requires either the recognition of compensation
expense for stock options and other stock-based compensation or
supplemental disclosure of the impact such expense recognition would have
had on the Company's results of operations. The Company has elected to
continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees and to provide the supplemental information required by SFAS No.
123. The Company believes that the supplemental disclosures required by
SFAS No. 123 are not material as net income and earnings per share would
be decreased by less than 1% had stock-based compensation been recognized
in expense under the provisions of the Statement.
9. TRANSACTIONS WITH RELATED PARTIES
During the period from February 4, 1996 through December 31, 1996 and in
each of the two fiscal years ended February 3, 1996, rent payments of
$888,000, $325,000 and $411,000, respectively, were made by ECI to a
general partnership controlled by then current and former officers of ECI.
These officers of ECI were never officers or directors of the Company.
F-14
10. RETIREMENT PLANS
During the fiscal year ended January 28, 1995, the Company and its two
subsidiaries established defined contribution plans pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants
immediately vest in their own contributions and in employer contributions
after six or seven years of service. During the period from February 4,
1996 through December 31, 1996 and for the fiscal year ended February 3,
1996, total matching contributions of $51,000 and $74,000, respectively,
were made.
In May 1991, a discontinued operating subsidiary of the Company terminated
all of its remaining employees who participated in its pension plan. There
was no net periodic pension benefit/cost for the period from February 4,
1996 through December 31, 1996, or in each of the two fiscal years ended
February 3, 1996. Assets of the plan are invested in a U.S. government
securities fund.
The following table sets forth the funded status of the pension plan:
DECEMBER 31, FEBRUARY 3,
1996 1996
----------- -----------
Actuarial present value of accumulated benefit
obligation (all vested) $ 63,000 $ 95,000
=========== ===========
Plan assets at fair value $ 172,000 $ 222,000
Actuarial present value of projected benefit obligation 63,000 95,000
----------- -----------
Plan assets in excess of projected benefit obligation 109,000 127,000
Contingent liability 109,000 127,000
----------- -----------
Prepaid pension cost $ -- $ --
=========== ===========
The benefits paid are non-earnings related; thus the projected and
accumulated benefit obligations are equal. The expected long-term rate of
return on assets was 7% and 6% as of December 31, 1996 and February 3,
1996, respectively.
F-15
11. INCOME TAXES
The following tables present the components of the provision (benefit) for
income taxes, a reconciliation of the expected statutory Federal income
tax expense (benefit) to the actual expense (benefit) and the principal
items of deferred taxes.
The (benefit) provision for income taxes is as follows:
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
------------- ------------ ------------
Current:
Federal $ -- $ -- $ 70,000
State 64,000 37,000 408,000
Deferred:
Federal (665,000) (223,000) (300,000)
State 85,000 121,000 (35,000)
------------- ------------ ------------
$ (516,000) $ (65,000) $ 143,000
============= ============ ============
A reconciliation of the expected statutory Federal income tax expense
(benefit) and the actual expense (benefit) is summarized as follows:
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
---------------- ----------- -----------
Expected income tax expense (benefit) 34 % (34)% 34 %
Increase (decrease) in taxes resulting from:
Non-deductible goodwill 2 6 20
State and local income tax, net -- 1 10
Losses from foreign subsidiaries 4 8 --
Non-recognization of NOL benefit
and deferred tax assets -- 19 (61)
Non-taxable gain on debt forgiveness (32) -- --
Recognition of NOL benefit (31) -- --
Non-deductible interest 10 -- --
Other 9 (1) 3
---- ---- ----
Actual income tax (benefit) expense (4)% (1)% 6 %
==== ==== ====
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's deferred tax assets and
liabilities are as follows:
F-16
DECEMBER 31, FEBRUARY 3,
1996 1996
------------ ------------
Deferred tax assets:
Current:
Book/tax inventory basis differences $ 128,000 $ 812,000
Customer allowances 480,000 514,000
Other 624,000 791,000
------------ ------------
1,232,000 2,117,000
------------ ------------
Noncurrent:
Operating loss carryforwards 31,635,000 38,991,000
Tax credit carryforwards 198,000 242,000
Alternative minimum tax credit carryforward 787,000 627,000
Non-deductible interest 793,000 --
Other 13,000 --
------------ ------------
33,426,000 39,860,000
------------ ------------
34,658,000 41,977,000
Valuation allowance (33,835,000) (40,817,000)
------------ ------------
Net deferred tax assets $ 823,000 $ 1,160,000
============ ============
Deferred tax liabilities:
Intangible assets $ 747,000 $ 837,000
Book/tax fixed asset basis differences -- 827,000
------------ ------------
Total noncurrent deferred tax liabilities $ 747,000 $ 1,664,000
============ ============
A valuation allowance is recognized for those deferred tax assets that may
not be realized. At this time, the Company has determined that such
valuation allowance be equal to the net deferred tax assets except for the
alternative minimum tax credit carryforwards and a portion of the state
net operating loss carryforwards at ECI. During the period from February
4, 1996 through December 31, 1996 and during the fiscal year ended January
28, 1995, the valuation allowance was reversed by $347,000 and $280,000,
respectively, related to alternative minimum tax credit carryforwards. The
alternative minimum tax credit carryforwards do not expire, and in the
Company's opinion, it is more likely than not that this credit
carryforward will be realized.
Net current deferred tax assets and noncurrent deferred tax liabilities
are included in prepaid expenses and other current assets, and other
liabilities. Net noncurrent deferred tax assets are included in other
assets.
The Company has taken the position that consummation of a prior
restructuring in 1986 did not materially eliminate or reduce any portion
of the net operating loss carryforwards. It is possible, however, that on
audit the Internal Revenue Service could disagree with the positions taken
by the Company, and should such a dispute arise, it would be difficult to
predict the ultimate outcome since these issues involve many complex and
technical questions under Section 382 of the Internal Revenue Code, as in
effect prior to the Tax Reform Act of 1986, and other provisions of
Federal tax law. Accordingly, no assurance can be given as to whether all
or any part of such carryforwards from the 1986 restructuring will be
available to the Company to offset future income.
F-17
Section 382, as amended by the Tax Reform Act of 1986 ("New Section 382"),
limits a corporation's use of carryforwards in the event of a "Change of
Ownership", which is defined generally as a 50 percentage point change in
stock ownership at any time during the relevant testing period.
Any significant loss of, or restriction on the use of the Company's net
operating loss carryforwards could have a material adverse effect upon the
Company's future earnings and future cash flow and could limit the
Company's future ability to service its debt obligations. The conclusions
drawn by the Company in monitoring and calculating the requirements of New
Section 382 for activity subsequent to the 1986 restructuring involve many
complex and technical questions. The Company's 1993 Chapter 11 Plan of
Reorganization qualifies under New Section 382 (l)(5) and, therefore, its
ability to utilize a substantial portion of the net operating loss
carryforwards of the Company should be preserved. The Internal Revenue
Service could disagree with the Company's position and, should such a
dispute arise, it would be difficult to predict the outcome.
The amounts and expiration dates, if accepted, of the remaining tax net
operating loss carryforwards are as follows:
1999 $ 4,000,000
2000 9,000,000
2001 6,000,000
2005 38,000,000
2006 11,000,000
2007 3,000,000
2008 1,000,000
2010 4,000,000
-----------
$76,000,000
===========
Approximately $198,000 of investment tax and job credits, expiring from
1997 to 2000, are available as a carryforward to reduce future Federal
income tax payments.
F-18
12. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - Future minimum rental payments under capital leases
and noncancellable operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1996 are as follows:
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
----------- ---------- ----------
1997 $1,639,000 $ 107,000
1998 1,664,000 107,000
1999 1,336,000 36,000
2000 662,000 --
2001 561,000 --
Thereafter 1,544,000 --
---------- ----------
Total minimum lease payments $7,406,000 250,000
==========
Less amount representing interest (19,000)
----------
Present value of minimum lease payments $ 231,000
==========
The Company has various operating leases in effect primarily for outlet
stores, automobiles, selling and administrative facilities and a
warehouse. The outlet store leases expire over the next four to seven
years, the selling and administrative facility leases expire over the next
nine years and the warehouse lease expires over the next four years. The
outlet store leases contain a clause whereby the stores are assessed
additional rent based on a percentage of sales. For the period from
February 4, 1996 through December 31, 1996 and in each of the two fiscal
years ended February 3, 1996 the outlet stores were not charged rent as a
percentage of sales. Most of the operating leases contain a renewal option
to extend the lease terms. Total rental expense under all operating leases
was approximately $1,885,000, $2,326,000 and $1,853,000 for the period
from February 4, 1996 through December 31, 1996 and in each of the two
fiscal years ended February 3, 1996, respectively.
The Company is involved in a warehousing arrangement where charges are
assessed based upon the number of units received into and shipped out of
the warehouse. Total warehouse charges paid by the Company for the period
from February 4, 1996 through December 31, 1996 and in each of the two
fiscal years ended February 3, 1996 were $261,000, $1,498,000 and
$1,452,000, respectively.
The Company leases various office equipment under capital leases expiring
over the next three years. As of December 31, 1996 and February 3, 1996,
the current obligation payable is $94,000 and $81,000, respectively, and
is included in accrued expenses and other current liabilities. The
noncurrent obligation payable is $137,000 and $223,000, respectively, and
is included in other liabilities. The noncash impact of the capital leases
transactions on the balance sheet as of February 3, 1996 is an increase to
the cost of furniture, fixtures and equipment and obligations under
capital leases of $375,000.
In April 1996, the Company sublet a facility to a third party and received
rental income for the period from February 4, 1996 through December 31,
1996 of approximately $40,000. Total future minimum rental income to be
received by the Company is $60,000.
EQUIPMENT FINANCING AGREEMENT - During the 53 weeks ended February 3,
1996, the Company entered into a financing agreement with a third party
for the purpose of acquiring various computer
F-19
hardware and software. During the period from February 4, 1996 through
December 31, 1996, the Company received services from the third party for
which additional financing was provided. The terms of the agreement
require the Company to make specified monthly payments over a 3-year
period with payments commencing on April 2, 1996. The third party is
secured by an interest in the computer hardware and software. As of
December 31, 1996 and February 3, 1996, the current obligation payable is
$149,000 and $85,000, respectively, and is included in the current portion
of long-term debt. The noncurrent obligation payable is $205,000 and
$257,000, respectively, and is included in long-term debt.
EMPLOYMENT CONTRACTS - The Company has entered into an employment contract
with one of its senior executives for a period of three years, expiring no
later than June 30, 1998. Under the agreement, the covered individual is
entitled to a specified salary over the contract period. In addition,
bonuses are payable contingent upon profitability and cash flow of the
Company for each period. The estimated future minimum obligation under
these contracts as of December 31, 1996 is $796,000.
CONTINGENCIES - 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 the Company cannot quantify the outcome
of any litigation, the Company is vigorously defending these claims and
believes that any ultimate liability arising from these actions will not
have a material adverse effect on its consolidated financial statements at
December 31, 1996. Included in selling and administrative expenses for the
53 weeks ended February 3, 1996 are charges related to the settlement of a
civil action. This settlement did not have a material impact on the
consolidated financial statements.
13. SIGNIFICANT CUSTOMERS
The percentage of net revenues from significant customers was as follows:
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
---------------- ----------- -----------
Customer 1 34% 34% 33%
Customer 2 15 17 9
Customer 3 5 11 16
14. FOURTH QUARTER RESULTS
During the fourth quarter of the period from February 4, 1996 through
December 31, 1996, ECI recorded management bonuses of $600,000 based on
ECI's financial performance for this period.
In connection with the sale of Perry Manufacturing Company, the Company
realized a cumulative foreign currency translation loss of $1,108,000
associated with Perry during the fourth quarter of the period from
February 4, 1996 through December 31, 1996.
F-20
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In the opinion of management, the carrying value of floating rate notes
payable and other floating rate borrowings approximates estimated fair
value. Further, in the opinion of management, it is not practicable to
reasonably estimate the fair value of the Company's fixed rate
subordinated long-term debt since there are no quoted market prices for
such financial instruments with similar risk, including those associated
with the Company's emergence from bankruptcy proceedings in June 1993.
Additionally, the cost of obtaining independent valuations or otherwise
determining the fair value of the Company's fixed rate subordinated
long-term debt in the circumstances, is considered excessive.
******
F-21
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, FEBRUARY 3,
1996 1996
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 89,000 $ 1,690,000
Prepaid expenses and other current assets 649,000 58,000
------------ ------------
Total current assets 738,000 1,748,000
INVESTMENTS IN/ADVANCES TO SUBSIDIARIES 32,714,000 65,620,000
PROPERTY AND EQUIPMENT - NET 11,000 12,000
OTHER ASSETS 795,000 288,000
------------ ------------
TOTAL ASSETS $ 34,258,000 $ 67,668,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 1,382,000 $ 2,719,000
Current portion of long-term debt 600,000 --
------------ ------------
Total current liabilities 1,982,000 2,719,000
OTHER LIABILITIES 1,024,000 847,000
LONG-TERM DEBT (net of unamortized discount of $736,000
and $819,000 at December 31, 1996 and February 3, 1996,
respectively) 16,497,000 63,538,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 119,000 119,000
Preferred stock, par value $.01 -- --
Additional paid-in capital 44,057,000 44,061,000
Accumulated deficit (29,421,000) (42,387,000)
Cumulative translation adjustment -- (1,229,000)
------------ ------------
Total stockholders' equity 14,755,000 564,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,258,000 $ 67,668,000
============ ============
See notes to condensed financial statements.
F-22
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
--------------- --------------- ---------------
REVENUES:
Management fees from subsidiaries $ 1,818,000 $ 7,741,000 $ 10,400,000
Equity in earnings (losses) of subsidiaries 32,000 (5,756,000) 2,043,000
--------------- --------------- ---------------
1,850,000 1,985,000 12,443,000
--------------- --------------- ---------------
OPERATING COSTS:
Selling and administrative expenses 827,000 1,466,000 1,693,000
Amortization and depreciation expenses 1,058,000 1,412,000 1,538,000
--------------- --------------- ---------------
1,885,000 2,878,000 3,231,000
--------------- --------------- ---------------
(LOSS) INCOME BEFORE INTEREST,
GAIN ON SALE OF SUBSIDIARY, INCOME
TAXES AND EXTRAORDINARY ITEM (35,000) (893,000) 9,212,000
INTEREST EXPENSE - NET (4,991,000) (7,060,000) (6,263,000)
SALE OF SUBSIDIARY
Gain on sale of Perry Manufacturing Company 7,786,000 -- --
Realization of cumulative foreign currency
translation loss (1,108,000) -- --
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,652,000 (7,953,000) 2,949,000
INCOME TAX (BENEFIT) EXPENSE (452,000) 104,000 733,000
--------------- --------------- ---------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,104,000 (8,057,000) 2,216,000
EXTRAORDINARY ITEM:
Gain on debt extinguishment 10,862,000 -- --
--------------- --------------- ---------------
NET INCOME (LOSS) $ 12,966,000 $ (8,057,000) $ 2,216,000
=============== =============== ===============
(Continued)
See notes to condensed financial statements.
F-23
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 4, 1996 53 WEEKS 52 WEEKS
THROUGH ENDED ENDED
DECEMBER 31, FEBRUARY 3, JANUARY 28,
1996 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,966,000 $ (8,057,000) $ 2,216,000
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,058,000 1,412,000 1,538,000
Interest in undistributed equity (earnings) losses
of subsidiaries (32,000) 5,756,000 (2,043,000)
Gain on sale of Perry (7,786,000) -- --
Gain on debt forgiveness (10,862,000) -- --
Cumulative translation adjustment 1,108,000 -- --
Capitalized interest 1,424,000 -- --
Deferred income tax benefit (544,000) (26,000) --
Change in assets and liabilities (1,741,000) 628,000 186,000
------------ ------------ ------------
Net cash (used in) provided by operating activities (4,409,000) (287,000) 1,897,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,000) (4,000) --
Net proceeds from sale of Perry 40,145,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 40,141,000 (4,000) --
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (40,857,000) -- --
Principal payments of long-term debt -- (500,000) (1,500,000)
Proceeds from issuance of long-term debt 3,528,000 -- --
Purchase of common stock (4,000) -- --
------------ ------------ ------------
Net cash used in financing activities (37,333,000) (500,000) (1,500,000)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,601,000) (791,000) 397,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,690,000 2,481,000 2,084,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 89,000 $ 1,690,000 $ 2,481,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 1,477,000 $ 6,907,000 $ 5,958,000
============ ============ ============
Income taxes $ 30,000 $ 110,000 $ 166,000
============ ============ ============
(Continued)
See notes to condensed financial statements.
F-24
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN SUBSIDIARIES - Investments in subsidiaries are accounted for
using the equity method under which Aris' 100% share of earnings or losses
of these subsidiaries are reflected in operations as earned. Dividends, if
any, are credited against the investment in subsidiaries when received.
2. DEBT MATURITIES
On June 30, 1993, the Company entered into a Senior Secured Note Agreement
with Heller Financial, Inc. ("Heller") pursuant to which Heller received a
note in the original principal amount of $50,857,000 to be repaid over
seven years, with interest at 2% over prime. Heller retained a pledge of
the Company's stock (but not the assets) in ECI and Perry.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller ("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity date
of November 3, 2001 and a warrant to purchase 584,345 shares of the
Company's common stock at an exercise price of $.01 per share. Such
transaction has been accounted for as a modification of terms to the
original Heller debt. Accordingly, the Company recorded the New Heller
Note at the total future cash payments to be made in accordance with the
Amended Heller Agreement which is principal of $1,000,000 and accrued
interest of $665,000.
At September 30, 1996, the Company owed Heller approximately $53,384,000
of principal and accrued interest. Pursuant to the Amended Heller
Agreement, Heller accepted the cash proceeds of $40,857,000 received from
the Perry sale and the New Heller Note as full satisfaction of such
indebtedness and eliminated all financial covenants. Such transaction
resulted in an extraordinary gain on debt forgiveness of $10,862,000.
Heller retained a pledge of the stock (but not the assets) of ECI, the
Company's remaining operating subsidiary. The New Heller Note provides
that no principal or interest be paid on the Company's indebtedness to
Apollo (as defined below) until all principal and interest on the New
Heller Note is paid in full. In addition, the New Heller Note allows the
Company to make regularly scheduled interest payments on the BNY Note (as
defined below) for interest accruing after February 3, 1997 and principal
payments. However, if the Company makes an interest payment on the BNY
Note, it shall immediately make an interest payment to Heller in an amount
equal to the amount of interest which shall have accrued on the New Heller
Note in accordance with its terms during the same period of time for which
interest is being paid pursuant to the interest payment on the BNY Note.
Also, if the Company makes a principal payment on the BNY Note, it shall
immediately on the same day prepay the New Heller Note in an amount equal
to the lessor of the principal payment on the BNY Note or the then
outstanding amount of the remaining obligation on the New Heller Note.
During the fiscal year ended January 29, 1994, (i) Apollo Aris Partners,
L.P., a Delaware limited partnership ("Apollo Aris"), invested $1 million
in the Company in exchange for 5,804,820 shares of the Company's New
Common Stock issued to Apollo Aris, which shares constitute approximately
48.8% of the Company's capital stock issued and outstanding as of June 30,
1993, (ii) its affiliate, AIF-II, L.P., a Delaware limited partnership
("AIF-II" and, together with Apollo Aris, "Apollo"), invested $6.5 million
in the Company in exchange for a promissory note. Apollo maintains minimum
ownership and Board of Directors representation.
F-25
On June 30, 1993, the Company entered into a Series B Junior Secured Note
Agreement with Apollo pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shares
with BNY Financial Corporation ("BNY") a second lien on the stock of ECI.
The Apollo Note is required to be paid in two equal installments payable
on November 3, 2001 and 2002. The Apollo Note contains certain affirmative
and negative covenants on the operation of the Company. Pursuant to the
Debt Registration Rights Agreement entered into on June 30, 1993 between
the Company and Apollo, Apollo and one transferee are entitled to require
the Company twice to register the offer and sale of the Apollo Note under
Federal and applicable state securities laws, and at the request of Apollo
or such transferee, to negotiate with such party in good faith to convert
the Apollo Notes into registered notes issued pursuant to a trust
indenture.
On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY pursuant to which BNY received a nine-year, $7 million
note, bearing interest at a rate of 7% per annum (the "BNY Note"). BNY
shares with Apollo a second lien on the stock of ECI. The BNY Note is
required to be paid in six annual installments, payable on November 3 of
each year. The BNY note contains certain affirmative and negative
covenants on the operations of the Company.
Once the New Heller Note is paid in full, Apollo and BNY will share in
mandatory prepayments based upon 50% of certain "excess cash flows" (as
defined). With the consent of BNY and Apollo, as agreed to in May 1996,
the quarterly interest payments under the Company's notes due to BNY and
Apollo, respectively, for the period May 6, 1996 through February 3, 1997
and all accrued interest at May 6, 1996 will not be made in cash and
instead will be added to the principal of such notes. On November 3, 2002,
the Company is obligated to pay BNY and Apollo $460,000 and $1,208,000,
respectively, representing interest through December 31, 1996, which was
not paid in cash and instead added to the principal of the respective
notes.
Future maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31,
------------
1997 $ 600,000
1998 600,000
1999 1,000,000
2000 1,165,000
2001 4,850,000
Thereafter 9,618,000
-----------
$17,833,000
===========
F-26
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS -
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------- ----------- ----------- ------------ -----------
Period from February 4, 1996 through
December 31, 1996:
Allowance for sales
returns and discounts $ 2,273,000 $ 3,930,000 $ 4,400,000 (1)(3) $ 1,803,000
Inventory reserve for obsolescence 939,000 -- 939,000 (2)(3) --
Reserve for sales allowances 886,000 964,000 889,000 (1) 961,000
----------- ----------- ----------- -----------
$ 4,098,000 $ 4,894,000 $ 6,228,000 $ 2,764,000
=========== =========== =========== ===========
53 weeks ended February 3, 1996:
Allowance for sales
returns and discounts $ 496,000 $ 8,894,000 $ 7,117,000 (1) $ 2,273,000
Inventory reserve for obsolescence 1,041,000 515,000 617,000 (2) 939,000
Reserve for sales allowances -- 886,000 -- 886,000
----------- ----------- ----------- -----------
$ 1,537,000 $10,295,000 $ 7,734,000 $ 4,098,000
=========== =========== =========== ===========
52 weeks ended January 28, 1995:
Allowance for sales
returns and discounts $ 378,000 $ 2,920,000 $ 2,802,000 (1) $ 496,000
Inventory reserve for obsolescence 1,237,000 2,214,000 2,410,000 (2) 1,041,000
----------- ----------- ----------- -----------
$ 1,615,000 $ 5,134,000 $ 5,212,000 $ 1,537,000
=========== =========== =========== ===========
(1) Returns and discounts taken.
(2) Inventory written off.
(3) Sale of Perry Manufacturing Company
F-27