Back to GetFilings.com
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
475 FIFTH AVENUE, NEW YORK, NY 10017
- ---------------------------------------- ----------
(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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
Yes No
---- ----
As of March 22, 1999, 46,021,036 shares of the Registrant's Common Stock
and 2,605,903 shares of the Registrant's Series A Preferred Stock, convertible
into 26,059,030 shares of Common Stock, were outstanding. The aggregate market
value of the 6,335,615 shares of voting stock of the Registrant held by
non-affiliates of the Registrant at March 22, 1999 was $18,563,352.
Documents incorporated by reference: NONE
================================================================================
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
Page
----
PART I ...................................................................................................... 1
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 4
Item 3. Legal Proceedings............................................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4
PART II ...................................................................................................... 5
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.......................................................... 5
Item 6. Selected Financial Data...................................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................................. 12
Item 8. Financial Statements and Supplementary Data.................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 13
Part III ...................................................................................................... 13
Item 10. Directors and Executive Officers of the Registrant........................................... 13
Item 11. Executive Compensation....................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 21
Item 13. Certain Relationships and Related Transactions............................................... 22
PART IV ...................................................................................................... 25
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................ 25
SIGNATURES..................................................................................................... 30
-i-
PART I
ITEM 1. BUSINESS.
Aris Industries, Inc. (the "Company", the "Registrant" or "Aris"), through
its wholly owned subsidiaries, Europe Craft Imports, Inc. ("ECI"), and ECI
Sportswear, Inc. ("ECI Sportswear"), designs, imports and licenses men's and
boys' outerwear and sportswear. The Company was incorporated in the State of New
York in 1947. Reference to the Company includes ECI and ECI Sportswear, where
applicable.
The Company designs and imports various lines of men's and boy's outerwear,
activewear, swimwear, loungewear and sportswear under the Members Only
trademark, which it owns, and the following licensed names: Perry Ellis, Perry
Ellis America, John Henry and FUBU. It also licenses the Members Only name to
others. The Company's products are marketed nationally in department stores,
specialty stores and national retail chains, and through licensees in North
America and South America. ECI also operates three stores located in factory
outlet malls.
On June 30, 1998, the Company entered into a sublicense agreement with
Salant Corporation ("Salant"), a licensee of the "Perry Ellis America" name,
whereby the Company was granted the right to manufacture and sell, among other
things, men's jeans and other denim products under the "Perry Ellis America"
name. Sales of such products were not material in 1998.
SIMON TRANSACTION
On February 26, 1999, pursuant to a Securities Purchase Agreement (the
"Purchase Agreement") among the Company, The Simon Group, L.L.C., a New York
limited liability company ("The Simon Group"), Apollo Aris Partners, L.P., a
Delaware limited partnership ("AAP"), AIF-II, L.P., a Delaware limited
partnership ("AIF"), and Arnold Simon, the Company entered into the following
transactions (the "Simon Purchase Transaction"): (i) The Simon Group acquired
24,107,145 shares of Common Stock of the Company and 2,093,790 shares of Series
A Preferred Stock of the Company (which shares shall be convertible into
20,937,900 shares of Common Stock), for $20,000,000 and (ii) the Company
redeemed from AIF the Series B Junior Secured Note (which represented a total
indebtedness of $10,658,000) in exchange for $4,000,000 in cash and
approximately 5,892,856 shares of Common Stock and 512,113 shares of Series A
Preferred Stock (which shares shall be convertible into 5,121,130 shares of
Common Stock). AIF and AAP are collectively referred to as "Apollo."
Upon the closing of the Simon Purchase Transaction, The Simon Group became
the beneficial owner of approximately 63.4% of the Common Stock. The Company's
directors other than Charles S. Ramat and Robert A. Katz, resigned and the Board
was increased from five directors to six directors. Arnold Simon, David Fidlon,
Debra Simon and Howard Schneider, designees of The Simon Group, were elected to
the Board. Arnold Simon is the Managing Member of The Simon Group and has the
sole voting and investment power with respect to the shares of the Company owned
by The Simon Group. Upon the closing, Mr. Simon became the Chairman and Chief
Executive Officer of the Company, ECI and ECI Sportswear. Effective March 29,
1999, the Company terminated the employment of Charles Ramat, the Chairman and
Chief Executive Officer of the Company through the Closing of the Simon Purchase
Transaction. See, "Executive Compensation - Employment Agreements."
Arnold Simon, the new Chairman and Chief Executive Officer of the Company,
formerly held those positions with Designer Holdings, Ltd. ("Designer Holdings")
a manufacturer of, among other products, a variety of brand name jeans. Upon the
sale of Designer Holdings to the Warnaco Group, Inc. ("Warnaco"), Mr. Simon
agreed to certain non-competition restrictions. In connection with the Simon
Purchase Transaction, Warnaco agreed to permit the Company and Mr. Simon (in his
capacity with the Company) to compete with Warnaco in exchange for 700,000
shares of Common Stock and the Company's agreement to take over Warnaco's New
Bedford, Massachusetts warehouse and workforce effective June 1, 1999.
-1-
LICENSING
The Company has registered the trademark "Members Only" in the United
States and 47 other countries principally for use in connection with apparel and
other men's clothing. In addition to selling products under the "Members Only"
name, the Company licenses it to others. The Company also licenses the use of
various "Perry Ellis" names, "FUBU" and "John Henry."
MEMBERS ONLY LICENSING PROGRAM
The Company has granted licenses of the "Members Only" trademark for the
manufacture and sale of men's woven shirts, men's tailored suits and sportcoats,
eyeglasses, hosiery, luggage and cold weather accessories for distribution in
the United States and for men's outerwear for distribution in Canada.
LICENSE EXPIRATIONS
The Company's licenses to use trademarks owned by other parties have terms
expiring in the years 1999 to 2001 with renewal terms through the years 2005 -
2009, contingent on achieving certain sales volumes and otherwise complying with
the applicable license agreements. In November 1998, ECI's license of "MTV
Sports" and related trademarks was discontinued by mutual agreement with the
licensor. On February 26, 1999, the Company entered into an agreement with Perry
Ellis International, Inc. ("PEI") and Supreme International, Inc. ("Supreme"),
the proposed purchaser of PEI, whereby the Company agreed that if Supreme
acquires PEI prior to June 30, 1999, all of the Company's licenses to use
trademarks owned by PEI would terminate on December 31, 2000 and be renewable
only upon mutual agreement with PEI. On December 29, 1998, Salant, which is the
sublicensor to the Company of PEI trademarks for certain apparel lines, filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. Salant's proposed
plan of reorganization recommends maintaining its PEI apparel business, but
there are no assurances that such plan will be approved or that the Salant
sublicenses to the Company will not be rejected.
DESIGN, MANUFACTURING AND IMPORTATION
All of the Company's products are manufactured overseas by independent
factories, each of which must satisfy the Company's quality and delivery
standards, pursuant to design samples and specifications provided by the
Company. The Company presently imports products from Hong Kong, Korea, China,
Guatemala, the Philippines, Bangladesh, Sri Lanka, Indonesia, India, Taiwan, and
the Dominican Republic.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's products are sold primarily to department and specialty
stores and national retail chains. During 1998, J.C. Penney accounted for
approximately 13% of the Company's total consolidated revenues. Although the
Company has traditionally had a strong relationship with J.C. Penney, the loss
of J.C. Penney as a customer or a substantial reduction of revenues from sales
to J.C. Penney could have a material adverse effect on the Company. J.C. Penney
has informed the Company that it anticipates reducing the volume of outerwear in
both its private label and branded business as well as reducing the number of
outerwear vendors with which it deals. The Company cannot predict whether and to
what extent reductions by J.C. Penney will affect the Company.
COMPETITION
The Company's products are sold in markets which place a premium on
identifiable brand names. The Company competes with other apparel manufacturers
based on style, quality, value and brand recognition. Although the Company sells
its products to retail customers, it also competes with the "private label"
apparel lines of its retail customers. The Company's apparel products, which are
sold on the main selling floors of their retail store customers, are facing
increasing competition from the expanded dedication of retail floor space to
"designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to cyclical and
seasonal swings caused by consumer buying patterns, weather conditions and other
factors. In addition, due to the lead time necessary for fabric delivery,
product design, manufacture and distribution, apparel importers such as the
Company must make commitments prior
-2-
to the related selling season to purchase inventory sufficient to cover the
volume of apparel expected to be sold. 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 its products on time, it
must often commit to production in advance of obtaining firm orders from its
retail customers.
SEASONALITY
The Company's outerwear business is particularly impacted by unusually warm
weather or the late arrival of cold weather.
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
including "Members Only" Trademarks. Registration of the Trademarks is renewable
for as long as the use thereof continues. The Company considers certain of its
Trademarks to be of material importance to its business and actively defends and
enforces those Trademarks.
The Company also holds licenses to manufacture and distribute certain
apparel products under the "Perry Ellis", "Perry Ellis America" and "FUBU"
Trademarks which are of material importance to its business.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had approximately
163 full and part-time employees, none of whom are covered by collective
bargaining agreements except for approximately five employees at ECI's New
Jersey warehouse. The Company regards its employee relations as satisfactory.
Pursuant to the Warnaco Agreement, the Company has agreed to negotiate in good
faith with the union representing Warnaco's employees in New Bedford,
Massachusetts. See "Certain Relationships and Related Transactions - Agreement
with Warnaco."
FOREIGN SALES
Although the Company sells products in Canada, Mexico and South America,
such sales do not comprise a significant portion of the Company's sales.
BUSINESS SEGMENT DATA
The Company is engaged in one business, the design and import of men's and
boys' outerwear, activewear, swimwear, loungewear and sportswear. The Company is
organized and managed as one business segment that offers distinct men's and
boys' apparel products to its customers. The Company's business is conducted
domestically, with substantially all of its net sales derived from domestic
customers.
DAVCO ACQUISITION
Effective July 15, 1997, ECI Sportswear acquired substantially all of the
assets of Davco Industries, Inc. ("Davco"), a maker of men's and boys'
activewear, swimwear, loungewear and some sportswear products sold under the
"Perry Ellis America" and/or "Perry Ellis" labels and men's sportswear under the
"Jeffrey Banks" label. The purchase price paid consisted of (a) 3,000,000 shares
of the Company's Common Stock then valued at $720,000 and (b) a contingent cash
purchase price to Davco based on the pre-tax net income of the Davco apparel
business as owned by ECI Sportswear from the closing date through December 31,
1997 (subject to certain adjustments), which was $3,483,000. On April 10, 1998,
the Company completed payment of the contingent purchase price.
-3-
The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition were included in
the Company's consolidated financial statements. The purchase price was
allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of purchase price over net assets acquired of $3,219,000,
which has been recognized as goodwill and is being amortized on a straight-line
basis over 20 years. As a result of the amendments to PEI licenses entered into
in February 1999 (see "License Expirations"), the amortizations of this goodwill
may be accelerated.
All 3,000,000 shares of the Company's Common Stock delivered to Davco are
subject to the terms, conditions and restrictions of a Shareholders Agreement
entered into on July 15, 1997 between Davco, the Company, Steven Arnold and
Christopher Healy (Davco's sole shareholders) and certain other shareholders of
the Company. (See "Certain Relationships and Related Transactions - Davco
Shareholders Agreement".)
ITEM 2. PROPERTIES.
The Company currently has approximately 40,000 square feet of leased space
for its executive and sales offices and showrooms in New York in two locations,
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; 120,000 square feet of warehouse space adjacent to its New Jersey
offices; and approximately 22,000 square feet of warehouse space in Stamford,
Connecticut. ECI has three retail outlet stores in South Carolina, Tennessee and
Virginia with an aggregate of approximately 7,500 square feet. The leases for
the premises in New Jersey terminate on June 30, 1999 and March 31, 2000.
On March 16, 1999, the Company entered into a new lease for approximately
33,000 square feet at 1411 Broadway, New York, N.Y. In April, 1999, the Company
entered into a sublease for the third floor at 475 Fifth Avenue, New York, NY.
The Company intends to sublease the balance of its space at such location and to
consolidate all of its executive, finance, sales and administrative offices and
showroom into its new premises.
As part of the Simon Purchase Transaction, commencing on June 1, 1999, the
Company will take over Warnaco's New Bedford, Massachusetts warehouse
facilities, which consist of approximately 300,000 square feet. The Company is
currently in negotiations for a new lease for the New Bedford facility. The
Company intends to consolidate substantially all of its warehousing in the New
Bedford facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial statements at December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
-4-
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 the first quarter of 1999 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, the
Company has agreed not to declare or pay any dividends (other than stock
dividends) on the Common Stock without the prior written consent of its lenders.
The Company has not paid any dividends during the last two fiscal years and does
not intend to pay any cash dividends in the foreseeable future. The price
quotations set forth below reflect inter-dealer prices, without retail markup,
markdown or commission and may not necessarily represent actual transactions.
High Low
------ -------
1997 First Quarter .3437 .3125
Second Quarter .6400 .3750
Third Quarter 1.6562 .4800
Fourth Quarter 2.1250 .9375
1998 First Quarter 2.0625 1.3125
Second Quarter 2.125 .875
Third Quarter 1.0625 .625
Fourth Quarter .875 .125
1999 First Quarter 3.6875 .625
(through date of
March 22, 1999)
There were approximately 4,020 shareholders of record as of March 22, 1999
and the closing bid price of a share of the Common Stock was $2.94 on March 22,
1999.
RECENT SALES OF UNREGISTERED SECURITIES
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (convertible into 20,937,790 shares of Common Stock)
for $20,000,000 and (ii) the Company redeemed from AIF the Series B Junior
Secured Note of the Company including all accrued interest thereon (representing
a total indebtedness of $10,700,000) in exchange for $4,000,000 in cash plus
5,892,856 shares of common stock and 512,113 shares of Series A Preferred Stock
(convertible into 5,121,130 shares of Common Stock). All such shares were sold
to The Simon Group and AIF in a private, negotiated transaction, exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), as a transaction not involving any public offering.
In March 1999, the Company issued 700,000 shares of Common Stock to
Warnaco, Inc. in consideration for Warnaco's consent to the Simon Purchase
Transaction (See "Certain Relationships and Related Transactions --Agreements
with Warnaco). In March 1999, the Company issued 250,000 shares of Common Stock
to Shapiro Forman & Allen LLP, in partial payment for services rendered by such
law firm to The Simon Group in connection with the Simon Purchase Transaction,
which services, under the terms of the Purchase Agreement, were to be paid for
by the Company. These share issuances are exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions not involving any public
offering.
The shares of Series A Preferred Stock of the Company are not publicly
traded. Each share of Series A Preferred Stock is automatically convertible into
ten shares of Common Stock upon the filing of a Certificate of Amendment to the
Certificate of Incorporation of the Company increasing the authorized shares of
Common Stock of the Company to an amount sufficient to permit conversion of all
shares of outstanding Series A Preferred Stock. Pursuant to the Purchase
Agreement the Company has agreed to call and hold a Shareholders Meeting as
promptly as practical following the filing of this Annual Report for the purpose
of seeking shareholder approval of such amendment to the Company's Certificate
of Incorporation.
-5-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except for per share data)
----------------------------------------------------------------------------------
11 Months
Year Ended Year Ended Ended 52-53 Weeks Ended
---------- ---------- ------------ -----------------------------
12/31/98 12/31/97 12/31/96 (1) 2/3/96 1/28/95
- --------------------------------------------------------------------------------------------------------------------------
Net sales $127,680 $94,539 $130,155 $171,963 $186,091
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before extraordinary
items (4,250) 2,333 2,104 (8,057) 2,216
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) (3,728) 2,333 12,966 (2) (8,057) 2,216
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share before
extraordinary items - basic (.29) .18 .18 (.68) .19
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share before
extraordinary items - diluted (.29) .16 .17 (.68) .19
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic (.25) .18 1.09 (.68) .19
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share - diluted (.25) .16 1.07 (.68) .19
- --------------------------------------------------------------------------------------------------------------------------
Total assets 81,655 73,837 44,855 93,928 98,932
- --------------------------------------------------------------------------------------------------------------------------
Long-term obligations 16,438 16,930 16,702 66,505 64,239
- --------------------------------------------------------------------------------------------------------------------------
Working capital 9,098 11,738 12,370 29,809 34,248
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 14,092 17,814 14,755 564 8,611
- --------------------------------------------------------------------------------------------------------------------------
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 approximately eleven months from
February 4, 1996 to December 31, 1996.
2. For the eleven months ended December 31, 1996, the Company had net income
of $12,966,000 or $1.09 per share, inclusive of (i) a gain of $7,786,000
on the sale of the stock of its wholly owned subsidiary, Perry
Manufacturing Company, on September 30, 1996 (reduced by the write off of
the cumulative effect of foreign currency translation adjustments of
$1,108,000 arising from the Perry Sale), and (ii) an extraordinary gain of
$10,862,000 associated with the reduction in the Company's debt to its
then senior secured lender, Heller Financial, Inc., from $53,384,000 to
$1,665,000, including principal of $1,000,000 and capitalized interest of
$665,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the "Selected Financial
Data" included on pages F-1 through F-29 and Page 6, 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
-6-
costs, and income, are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward
looking statements, due to factors discussed in this Report, and other risks and
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission ("SEC").
During 1999, the Company expects to incur substantial restructuring charges
in connection with the consolidation of its operations and facilities. See
"Properties." Included in these restructuring charges are severance payments to
Charles Ramat. See "Executive Compensation - Employment Agreements." In
addition, the Company expects to enter into new licensing arrangements which may
result in startup expenses during 1999 without any related revenues during the
year.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 ("Y2K") Compliance issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain date-based information. The Company's Year 2000 Project ("Project") is
addressing the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000.
The Project has been divided into three major areas: 1) IBM AS400; 2)
Application Software, and 3) PC Hardware and software. The general phases common
to all sections are: 1) inventorying Year 2000 items; 2) assigning priorities to
inventoried items; 3) assessing the Year 2000 compliance of items determined to
be material to the Company; 4) repairing or replacing material items that are
determined not be Year 2000 compliant; 5) testing material items; and 6)
designing and implementing contingency and business continuation plans. Internal
resources are being used to make required modifications and test Year 2000
Compliance. The Company's target date for completion is June 30, 1999.
The IBM AS400 (Model 620) is the backbone of the Company's computer system.
The Company currently maintains 100% of its inventory valuation and tracking,
order processing and picking/shipping functions on the AS400. In addition, the
Company also maintains the bulk of its accounting records on the AS400. The IBM
AS400 (hardware) is Year 2000 compliant. The only modification to the AS400 will
be a change in the operating system from a "CISC" (Commercial Instruction Set
Computer) based system to a "RISC" (Reduced Instruction Set Computer) based
system. This change will be necessary to support the Y2K upgrades to the
Company's "PKMS" (Pick Ticket Management System) and "RLM" (Ron Lynn Management
Accounting Software System) application software packages which are based on the
"RISC" operating system. The Company contracted with a third party supplier for
installing the new system which was completed in February 1999.
The Applications Software section includes both the conversion of
applications software that is not Y2K compliant and, where available from the
supplier, the replacement of such software. The Company has contracted with the
suppliers of the "PKMS" and the "RLM" for Y2K compliant upgrades of these
packages and the upgrades were installed by December 31, 1998 with the testing
commencing in the first quarter of 1999. The remaining two applications, the
"ACS" Apparel Computer System which is used to process all customer orders,
invoices and inventory controls and the "Premenos" Electronic Document
Interchange Software system, which processes document interchanges between the
Company and retailers, will be upgraded using internal resources. The Company
has identified 100% of the programs/sub-system routines in these two
applications that require modification. These upgrades will be tested and
finished during the third quarter of 1999.
The final section of the Project is to determine if all of the Company's
personal computer (PC) hardware and software systems are Y2K compliant. Each PC
will be certified to be Y2K compliant. Any PC that is found to be noncompliant
will be replaced. The Company intends to use internal resources to do the
certification. All software needed to assure Y2K compliance will be completed
after all of the Company's PC's have been certified Y2K compliant. The Company
does not anticipate many Y2K issue in this area since approximately 90% of the
software in use is off the shelf retail software (spreadsheet, word processing
packages etc.) that is already Y2K compliant.
The total cost to the Company of these Y2K Compliance activities is
estimated to be approximately $100,000 which includes the cost of a programmer
as well as costs for software upgrades and third party contractors/suppliers,
and will be funded internally through operating cash flows. These costs and the
date on which the Company plans to complete the Y2K modification and testing
processes are based on management's best estimates, which were derived utilizing
continued availability of certain third party modification plans and other
factors. However, there can be no guarantee that these objectives will be
achieved; actual results could differ from those plans.
-7-
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and customers, the Company
is unable to determine at this time whether the consequences of Y2K failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Y2K Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000. The Company believes that
with the completion of the Project as scheduled the possibility of significant
interruptions of normal operations should be reduced.
FINANCIAL CONDITION
WORKING CAPITAL AND LIQUIDITY
As of December 31, 1998, the Company had working capital of approximately
$9,098,000 compared to $11,738,000 at December 31, 1997. The decrease in working
capital from December 31, 1997 to December 31, 1998 is due to funding the
Company's operating loss during the year, offset by the extraordinary gain of
$522,000 recorded by the Company in connection with the early extinguishment of
the Company's debt obligations to Heller. During the year ended December 31,
1998, the Company financed its capital expenditures principally through
internally generated funds and credit facilities. The Company's interest
payments to its secured lenders scheduled for payment: (i) on January 31, 1998
were paid in kind pursuant to amendments to the Company's loan agreements; (ii)
on May 4, 1998 and August 3, 1998 were paid in cash on their due dates; and
(iii) on November 3, 1998 were paid on February 26, 1999 by agreement with the
lenders.
On January 29, 1998, the Company repaid in full all principal and interest
of the Company's debt obligations to Heller Financial, Inc. ("Heller"). Such
payment amounted to $1,128,000, which included accrued interest through the date
of repayment. In addition, the Company recorded an extraordinary gain on the
early extinguishment of the Heller debt in the amount of $522,000. On February
26, 1999, simultaneous with the closing of the Simon Purchase Transaction, the
Company redeemed from AIF the Series B Junior Secured Note of the Company (which
represented a total indebtedness of $10,657,999 as of January 31, 1999). The
Company remains obligated under its Series A Junior Secured Note to BNY (See
"Debt Service and Capital Needs" below). On February 26, 1999, the Company
brought current and paid in full all scheduled principal and interest
obligations due to BNY on or prior to that date.
Also on February 26, 1999, simultaneous with the closing of the Simon
Purchase Transaction, the Company, ECI, ECI Sportswear, and certain ECI
subsidiaries entered into a Financing Agreement with CIT Commercial Services
Group, Inc. ("CIT") and certain other financial institution lenders, whereby
such lenders agreed to provide a revolving credit facility of up to $65,000,000
for working capital loans and letter of credit financing, with a final maturity
date of February 26, 2002. The obligations under the Financing Agreement are
secured by a lien on all of the Subsidiaries' assets and are guaranteed by the
Company on an unsecured basis. The revolving credit facility provided by such
Financing Agreement replaced ECI and ECI Sportswear's prior working capital
facilities. The Financing Agreement is filed herewith as Exhibit 10.115.
Cash used in operating activities for the year ended December 31, 1998
("fiscal 1998") was $11,236,000 as compared to $21,918,000 during the year ended
December 31, 1997 ("fiscal 1997"). The decrease in funds used in operating
activities in fiscal 1998 was due to the timing of collection of receivables
offset by an increase in other current liabilities due to higher levels of
markdowns and allowances.
Cash used in investing activities during fiscal 1998 was $2,892,000 as
compared to $1,300,000 during fiscal 1997. The increase in cash used in
investing activities was due to the payment of the Davco contingent cash
purchase price offset by a decrease in capital expenditures.
Cash provided by financing activities during fiscal 1998 was $13,868,000 as
compared to $18,312,000 during fiscal 1997. The decrease in cash provided by
financing activities in fiscal 1998 was the result of lower borrowings on the
Company's line of credit along with the repayment of the Heller Note.
DEBT SERVICE AND CAPITAL NEEDS
As of February 26, 1999, the Company's remaining long-term indebtedness
consisted of its obligations to BNY under the Series A Junior Secured Note
Agreement dated June 30, 1993, pursuant to which BNY was owed $7,442,000, plus
interest at the rate of 7% per annum, with a final maturity date of November 3,
2002. On September 12, 1997, the
-8-
Company and BNY entered into an amendment of the BNY Note Agreement
providing that (1) scheduled interest accruing under the BNY Note Agreement for
the period February 1, 1996 through January 31, 1998 would not be paid in cash
and instead would be added to principal and shall be payable on November 3,
2002, (2) scheduled interest under the BNY Note Agreement accruing for the
periods commencing February 1, 1998 will be made in cash on quarterly payment
dates commencing May 4, 1998 and (3) the principal payment of $300,000 otherwise
due November 3, 1997 would be paid quarterly in installments of $15,000 each on
the last day of each calendar quarter commencing on December 31, 1997, with any
remaining balance due on November 3, 2002. As a condition of BNY's consent to
the Simon Purchase Transaction, the remaining balance of $240,000 of such
quarterly principal was paid on February 26, 1999. In addition, the Company paid
$580,000 representing scheduled payments of principal of $300,000 and interest
of $280,000 otherwise due on February 1, 1999. The remaining principal of BNY's
Note, aggregating $6.4 million, is payable on November 3 of each year as
follows:
YEAR AMOUNT
---- ------
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
$1,042,000, representing the quarterly interest payments for the period February
1, 1996 through January 31, 1998, that were deferred under the September 1997
amendment. BNY is also entitled to receive mandatory prepayments based upon 50%
of certain "excess cash flows" of the Company as defined in the Company's note
agreements with BNY.
As a result of the Simon Purchase Transaction and the CIT Financing
Agreement, the Company believes it has adequate liquidity and capital resources
to meet its requirements for at least the next twelve months.
CAPITAL EXPENDITURES
Capital expenditures were $233,000 for the year ended December 31, 1998
compared to $461,000 in the year ended December 31, 1997.
-9-
RESULTS OF OPERATIONS
1998 Compared to 1997
NET INCOME. The Company reported a net loss of $3,728,000 (after taxes and
an extraordinary gain on debt forgiveness of $522,000) for the twelve months
ended December 31, 1998 compared to net income (after taxes) of $2,333,000 for
the twelve months ended December 31, 1997. The loss was primarily due to a
reduction in consumer demand for "Perry Ellis America" outerwear products which
resulted in a reduction of sales of $12,180,000 and related reduction of gross
profit of $6,947,000. This was partially offset by the Company's successful
introduction of its "Fubu" boys' licensed products which were introduced during
1998. In addition, the Company's business in general was impacted by the
unseasonably warm weather throughout the United States which adversely affected
the market for outerwear products. As a result of the Company's decreased net
income, borrowings against the lines of credit were necessary in order to source
and ship the Fubu licensed products which were in demand during 1998.
Additionally, increased borrowings were required to support the Davco operations
for the entire 1998 fiscal year compared to the five and a half months in 1997.
These increased borrowings resulted in increased interest and debt expense.
These factors were partially offset by an extraordinary gain of $522,000
recorded in connection with the early extinguishment of the Company's debt to
Heller.
NET SALES. The Company's net sales increased from $94,539,000, in 1997 to
$127,680,000 in 1998, an increase of $33,141,000. This increase was a result of
the inclusion for a full calendar year, of sales from product lines acquired
from Davco and the new "FUBU" license which amounted to $40,039,000. In
addition, net sales increased by $6,099,000 to private label customers. These
increases were offset by a decrease of $12,997,000 resulting from reduced sales
of the "Perry Ellis America" brand.
GROSS PROFIT. Gross Profit was $29,540,000 or 23.1% for the twelve months
ended December 31, 1998, as compared to $27,042,000 or 28.6% for the twelve
months ended December 31, 1997. Gross Profit was negatively impacted by several
factors, primarily the weak performance of the Company's "Perry Ellis America"
brand which suffered from markdowns necessary to sell off excess inventory and
unseasonably warm weather throughout the United States which adversely affected
outerwear companies resulting in lower gross profits.
COMMISSION AND LICENSING INCOME. Commission and Licensing Income decreased
from $1,732,000 for the twelve months ended December 31, 1997 to $1,570,000 for
the twelve months ended December 31, 1998. This decrease resulted from a
reduction in commissions from private label customers who are now using the
Company as a direct merchandise supplier.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and Administrative expenses
were $29,950,000 or 23.5% for the twelve months ended December 31, 1998 as
compared to $23,474,000 or 24.8% for the twelve months ended December 31, 1997,
an increase of $6,476,000 or 27.6%. The increase in Selling and Administrative
expenses were primarily due to the inclusion for the entire 1998 fiscal year of
Selling and Administrative expenses of Davco, whose assets were acquired by the
Company on July 15, 1997 and the addition of the new "FUBU" license during 1998.
INTEREST AND DEBT EXPENSE. The Company's interest and debt expense for 1998
increased by $2,115,000 or 68.1% compared to 1997. As a result of the Company's
decreased net income, increased borrowings against the Company's lines of credit
were necessary in order to source and ship the Fubu licensed products which were
in demand in 1998. Additionally, increased borrowings were required to support
the Davco operation for the entire 1998 fiscal year as compared to only five and
a half months in 1997. These increased borrowings resulted in an increase in
interest and debt expense.
1997 Compared to Fiscal 1996
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 31st so that 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 by having the Spring, Holiday
and Fall seasons all included in the same calendar year. In the past, the Spring
season overlapped two fiscal years. The operating results for the year ended
December 31, 1997 are compared to the fiscal period ended December 31, 1996,
which was a transition period consisting of the eleven months ended December 31,
1996. The operating results for the year ended December 31, 1997 include the
operating results of ECI Sportswear from and after its July 15, 1997 acquisition
of the Davco business. The operating results for the eleven month period ending
December
-10-
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.
The Company has not restated its operating results for the eleven month
period ended December 31, 1996, to a twelve month calendar reporting period due
to: (i) the inability to obtain operating results from Perry on a calendar month
basis, since Perry is no longer owned by Aris; and (ii) the difficulty in
restating the Company's 1996 results to a monthly basis since all monthly
closings were computed based on thirteen week quarters, except the last quarter
which was based on nine weeks.
NET INCOME. The Company reported net income of $2,333,000 for the year
ended December 31, 1997, compared to net income of $12,966,000 for the eleven
months ended December 31, 1996, inclusive of the gain on the Perry sale and
reduction of indebtedness to Heller implemented on September 30, 1996.
The Company reported income before the sale of subsidiary, taxes and
extraordinary item of $2,195,000 for the year ended December 31, 1997 compared
to a loss of $5,090,000 for the eleven months ended December 31, 1996. The
increase in profitability was due to increased margins at ECI, the inclusion of
the profitable operating results of ECI Sportswear, which acquired the assets of
Davco on July 15, 1997, a reduction of interest expense by $3,716,000 due to the
Perry Sale on September 30, 1996 which significantly reduced the Heller debt,
the exclusion of interest expense attributable to Perry's debt after September
30, 1996, offset by interest on ECI Sportswear debt, and the exclusion of
Perry's operating loss for the period through September 30, 1996.
NET SALES
The Company's net sales decreased from $130,155,000 during the eleven month
period ended December 31, 1996 to $94,539,000 during the year ended December 31,
1997. The net sales decrease of $35,616,000 for the year ended December 31, 1997
compared to the same period in the prior year was due to the exclusion of Perry,
which had net sales of $64,639,000 in 1996. The net sales decrease was offset by
the inclusion of ECI Sportswear's net sales of $26,027,000 from and after the
July 15, 1997 date of the acquisition of the Davco business. In addition, ECI's
net sales increased by $2,996,000 due to the month of January 1997 being
included in the year ended December 31, 1997 as compared to the prior years
comparable period ended December 31, 1996 not including the month of January
1996. This was a result of the change from a fiscal year to a calendar year.
GROSS PROFIT
Gross Profit was $27,042,000 or 28.6% for the twelve months ended December
31, 1997, as compared to $25,506,000 or 19.6% for the eleven months ended
December 31, 1996. The favorable increase is due to improved gross margins at
ECI due to a better product mix for the year ended December 31, 1997 as compared
to the eleven months ended December 31, 1996. During the eleven months ended
December 31, 1996, due to the adverse retail environment, ECI sold excess
inventory at lower gross margins in order to maintain a clean inventory
position. In addition, the gross margin for fiscal year 1997 reflects the
inclusion of the Davco business, acquired by ECI Sportswear, which includes
sales at higher branded margins, similar to ECI's. Gross margins for the year
ended December 31, 1996 were also affected by the lower margins at Perry, which
historically as a private label manufacturer, had substantially lower gross
margins than ECI.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses as a percentage of net sales for the
year ended December 31, 1997 were 24.8% compared to 19.5% for the eleven months
ended December 31, 1996. The percentage increase for the year ended December 31,
1997 from the comparable period in the prior year was due primarily to the
exclusion of Perry (after the Perry Sale on September 30, 1996), which
historically had a much lower Selling and Administrative expense structure. In
addition, ECI's sales commissions expense increased in 1997, the result of
selling a branded product at higher commission rates, while comparable periods,
during the eleven months ended December 31, 1996, reflected lower sales
commissions expense which resulted from the selling of excess inventory at lower
prices in order to maintain an optimum inventory level. There was an increase in
depreciation expense in 1997 due to the purchase of product data management
equipment and other computer equipment allowing ECI to more efficiently control
its merchandising, production, sourcing and shipping.
-11-
Selling and Administrative expenses for the year ended December 31, 1997
were $23,474,000 compared to $25,422,000 for the eleven months ended December
31, 1996, a decrease of $1,948,000 or 7.6%. Selling and Administrative expenses
decreased for the year ended December 31, 1997 over the comparable period in the
prior year due to the exclusion of Perry's Selling and Administrative expenses
of $6,965,000 offset by the inclusion of ECI Sportswear's Selling and
Administrative expenses of $3,319,000 since its acquisition of Davco on July 15,
1997. This reduction was further offset by increases at ECI relating to
depreciation expense (as explained above) along with a new print advertising
program and increase in expenses for trade shows.
INTEREST AND DEBT EXPENSE
Interest and debt expense for the year ended December 31, 1997 decreased by
$3,716,000 or 54.5% compared to the eleven month period ended December 31, 1996.
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, ECI
had a reduction of interest expense due to lower borrowings against its line of
credit, offset by new borrowings of ECI Sportswear against its line of credit.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
The Company had approximately $76,000,000 of net operating loss
carryforwards ("NOL") at December 31, 1998, after offset against federal taxable
income for the year ended December 31, 1998. The Company believes the NOL will
be available to offset federal taxable income for the period from January 1,
1999 through February 26, 1999(the date of closing of the Simon Purchase
Transaction), including any taxable income due to cancellation of indebtedness
in connection with the redemption by the Company from AIF of the Series B Junior
Secured Note on February 26, 1999. However, due to the change of ownership
resulting from the Simon Purchase Transaction, the Company's use of any
remaining net operating loss carryforwards from and after February 27, 1999 will
be severely limited.
Any significant disallowance of the use of the Company's net operating loss
carryforwards in periods on or prior to February 26, 1999 could have a material
adverse effect upon the Company. 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 issues. 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 should preserve a substantial portion of the net operating loss
carryforwards of the Company for use in periods on and prior to February 26,
1999.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact on
its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of position and
measurement of these instruments at fair value. The Statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this Statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
-12-
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 current
members of the Board of Directors and the executive officers of the Company,
their positions with the Company, their business experience during the last five
years and the year each was first elected a director of the Company. Directors
hold office until the next Annual Meeting of Shareholders and until their
respective successors are elected and qualify, provided that vacancies occurring
in the Board of Directors may be filled by vote of the Directors. Officers of
the Company serve at the pleasure of the Board of Directors of the Company.
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------------
Arnold H. Simon 52 Director, Chairman and Chief Executive Officer of the Company
since February 26, 1999.
- ------------------------------------------------------------------------------------------------------------
David Fidlon 56 Director of the Company and Executive Vice President and Chief
Operating Officer of the Company and its subsidiaries since
February 26, 1999. President of the Company since April 12, 1999.
- ------------------------------------------------------------------------------------------------------------
Robert A. Katz 32 Director
- ------------------------------------------------------------------------------------------------------------
Debra Simon 42 Director since March 18, 1999.
- ------------------------------------------------------------------------------------------------------------
Howard Schneider 70 Director since March 18, 1999.
- ------------------------------------------------------------------------------------------------------------
Paul Spector 56 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
- ------------------------------------------------------------------------------------------------------------
Vincent F. Caputo 44 Vice President, Assistant Treasurer and Assistant Secretary
- ------------------------------------------------------------------------------------------------------------
ARNOLD H. SIMON, 52, became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 30 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in The Simon Group.
Mr. Simon is married to Debra Simon.
DAVID FIDLON, 56, became a Director of the Company and Executive Vice
President and Chief Operating Officer of the Company and its subsidiaries on
February 26, 1999. On April 12, 1999, he was appointed President of the Company.
From January 1998 until February 26, 1999, he was a consultant to A.S.
Enterprises, Inc., a private company owned by Mr. Simon. Mr. Fidlon was Senior
Vice-President and Controller of Designer Holdings Ltd. from June 1995 until
December 1997, and was Chief Accounting Officer from January 22, 1996 until
December 1997. From June 1994 until June 1995, Mr. Fidlon was Director of
Compliance and Financial Reporting for Ellen Tracy, Inc. From 1989 until 1994,
Mr. Fidlon was Senior Manager and Audit Compliance Manager at Weidenbaum Ryder
and Co., Accountants and Auditors. Mr. Fidlon owns approximately 1.7% of the
membership interests of The Simon Group.
ROBERT A. KATZ, 32, has been a Director of the Company since June 1993. Mr.
Katz is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with
which he has been associated with since 1990. Mr. Katz is also a director of
Vail Resorts, Inc., Alliance Imaging, Inc. and MTL, Inc.
DEBRA SIMON, 42, became a Director of the Company on March 18, 1999. Ms.
Simon was Executive Vice- President and a Director of Designer Holdings Ltd.
from March 1994 until December 1997, and was Vice-President of Rio Sportswear,
Inc. from 1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
-13-
HOWARD SCHNEIDER, 70, became a Director of the Company on March 18, 1999.
Mr. Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
PAUL SPECTOR, 56, has been Senior Vice President and Chief Financial
Officer of the Company since May 1992 and Treasurer and Secretary of the Company
since August 1991. From 1986 until May 1992, Mr. Spector was Vice President of
the Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
VINCENT F. CAPUTO, 44, 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.
John J. Hannan, Edward M. Yorke and David N. Schreiber were Directors of
the Company until February 26, 1999, when they resigned effective on the closing
of the Simon Purchase Transaction. Effective March 29, 1999, the Company
terminated the employment of Charles Ramat. Therefore, Mr. Ramat resigned as a
director of the Company.
SHAREHOLDERS AGREEMENTS
At the closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to vote their shares of the Company for the designees as
Directors of the Company nominated by The Simon Group, provided that such
nominations must include one individual nominated by Apollo (so long as Apollo
beneficially owns at least 50% of the shares of Common Stock beneficially owned
by it on such closing). Pursuant to the 1999 Shareholders Agreement, Arnold
Simon, David Fidlon, Debra Simon and Howard Schneider were designated by The
Simon Group as additional and replacement Directors of the Company. Prior to the
closing of the Simon Purchase Transaction on February 26, 1999, none of Arnold
Simon, Debra Simon, David Fidlon or Howard Schneider was a Director of, or held
any position, with the Company or any of its subsidiaries.
The Shareholders Agreement entered into June 30, 1993 between the Company,
Apollo, Charles S. Ramat and certain other non-Apollo subject shareholders,
which had provided for certain agreements as to election of directors of the
Company, terminated by its terms upon the closing of the Simon Purchase
Transaction.
BOARD MEETINGS AND COMMITTEES
The Board held four meetings during the fiscal year ended December 31,
1998.
The Board's Audit Committee during the fiscal year ended December 31, 1998
consisted 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 Audit Committee met once during the 1998
fiscal year.
The Board's Compensation and Stock Option Committee during the fiscal year
ended December 31, 1998 consisted 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. The Compensation and Stock Option Committee met
twice during the 1998 fiscal year.
-14-
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid, on a cash basis, to the
Chief Executive Officer of the Company and the one other executive officer of
the Company as of December 31, 1998 who received compensation in excess of
$100,000.
Long-Term All Other
Annual Compensation Compensation Compensation
----------------------------------- -------------------- ----------------------
Securities
Fiscal Underlying Stock
Name and Principal Position Year (1) Salary ($) Bonus ($) Options (#)
- ------------------------------- ------------- ------------ ------------------- -------------------- ----------------------
Charles S. Ramat, President (10) 1998 $579,842 $250,636 (2) -0- $155,914 (3)
1997 $562,754 $227,871 (4) 750,000 (5) $ 46,649 (6)
1996 $500,207 $759,949 (7) 152,500 (8) 1,500 (9)
- ------------------------------- ------------- ------------ ----------- ------- ----------- ------- ------------- --------
Paul Spector, Senior Vice 1998 $140,000 $20,775 -0- -0-
President and Chief 1997 $140,000 $30,500 15,000 (5) -0-
Financial Officer 1996 $125,000 -0- 15,000 (8) 1,500 (9)
- ------------------------------- ------------- ------------ ----------- ------- ----------- ------- ------------- --------
(1) In this Summary Compensation Table, the 1998 fiscal year consists of the
twelve months ended December 31, 1998; the 1997 fiscal year consists of
the twelve months ended December 31, 1997; and the 1996 fiscal year
consists of the eleven months ended December 31, 1996.
(2) Includes (i) payments during 1998 of (i) the one-time non-recurring
success bonus earned for the 1996 fiscal year with respect to the sale of
the Company's Perry Manufacturing Company subsidiary ("Perry") on
September 30, 1996; and (ii) bonus is based upon achievement of
performance targets of the Company and its subsidiaries in 1997. See
"Employment Agreements."
(3) Includes portion of bonus (50%) earned for the 1995 fiscal year, which
pursuant to Mr. Ramat's Employment Agent with the Company, was paid three
years after completion of such fiscal year (that is, during 1998)
contingent on the market value of the Common Stock at such later time. See
"Employment Agreements."
(4) Includes monthly installments paid during fiscal 1997 of the one-time
non-recurring success bonus earned for the 1996 fiscal year with respect
to the sale of Perry on September 30, 1996. Also includes Mr. Ramat's
bonus for services on behalf of ECI for the [1997] fiscal year.
(5) These options were granted on August 28, 1997 under the Company's 1993
Incentive Stock Option Plan and were to have vested eight years from the
date of grant, subject to accelerated vesting in the event of certain
refinancings of the Company's secured indebtedness. In accordance with the
terms of such Plan, these options vested on the closing date of the Simon
Purchase Transaction due to the change in control of the Company.
(6) Includes portion of bonus (50%) earned for the 1994 fiscal year, which
pursuant to Mr. Ramat's Executive Employment Agreement with the Company,
was paid three years after completion of such fiscal year (that is, during
1997) contingent on the market value of the Common Stock at such later
time. See "Employment Agreements".
(7) Includes one-time non-recurring success bonus earned for the 1996 fiscal
year with respect to the sale of Perry 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.
-15-
(8) These options were granted in December, 1996 under the Company's 1993
Stock Incentive Plan with respect to shares of the Common Stock and were
to have vested in three equal annual installments. In accordance with the
terms of the Plan, these options, to the extent not already vested, vested
on the closing date of the Simon Purchase Transaction due to the change in
control of the Company.
(9) Includes amounts paid as matching contributions by the Company under its
401(k) plan.
(10) Effective with the closing of the Simon Purchase Transaction, Mr. Ramat
relinquished the positions and Chairman and Chief Executive Officer.
Effective March 29, 1999, the Company terminated Mr. Ramat's employment.
As a result, he received a severance payment of $2,400,716.
STOCK OPTION PLAN AND STOCK OPTIONS
1993 Stock Incentive Plan
On June 30, 1993, the Company's 1993 Stock Incentive Plan was adopted (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 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. As originally adopted on June 30, 1993, a
maximum of 1,200,000 shares of Common Stock can be covered by awards under the
1993 Stock Incentive Plan. On August 28, 1997, the Board of Directors of the
Company approved an amendment to the 1993 Stock Incentive Plan to increase to
2,500,000 the maximum number of shares of Common Stock which can be covered by
awards under the Plan; on April 6, 1998, the Board approved a further amendment
to the 1993 Stock Incentive Plan to increase to 3,500,000 the maximum number of
shares of Common Stock which can be covered by awards under the Plan. The
amendment increasing such maximum to 3,500,000 shares was approved by the
shareholders of the Company at the Annual Meeting of Stockholders held on July
9, 1998.
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.
As at December 31, 1998, options to purchase 1,803,000 shares of Common
Stock were outstanding under the 1993 Stock Incentive Plan. In accordance with
the terms of the Plan, all outstanding options, to the extent not already
vested, vested and become exercisable on February 26, 1999, the closing date of
the Simon Purchase Transaction.
Option Grants
There were no grants of stock options to the Chief Executive Officer or any
other executive officer of the Company during Fiscal Year 1998. The Company has
not granted any stock appreciation rights.
-16-
Exercised/Unexercised Stock Options
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 1998 of
unexercised options, as well as options exercised by such executive officers
during the 1998 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
-----------------------------------------------
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Exercise Value Realized Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- -------- -----------------------------------------------------------------------------------------------
Charles S. Ramat -0- -0- 450,833/800,834 $220,391/42,892
Paul Spector 10,000 $8,400 50,000/ 20,000 $ 22,188/4,219
Vincent Caputo 1,667 $1,400 5,000 / 1,666 $ 2,219/1,405
- -----------
(1) The value of unexercised in-the-money options was calculated by
determining the difference between the closing price of the Company's
common stock on December 31, 1998 and the exercise price of the options.
Compensation of Directors
During the twelve months ended December 31, 1998, each Director (other than
Mr. Ramat) received director's fees at the rate of $18,000 per annum. Each of
these directors was also entitled to receive reimbursement for expenses incurred
in attending meetings of the Board or committees thereof on which they serve. In
addition, outside directors (Mr. Schreiber) were entitled to receive $500 per
meeting of the Committees of the Board to which they are assigned (Mr. Schreiber
was a member of the Audit Committee). Mr. Ramat received no additional
compensation for service as a Director.
Employment Agreements
Charles S. Ramat was employed pursuant to an Executive Employment Agreement
dated as of February 1, 1988, as amended ("Ramat Agreement"). The term of the
Ramat Agreement was scheduled to expire on December 31, 2001.
Mr. Ramat was 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 of $579,842 for 1998.
The Ramat Agreement was amended on August 28, 1997 to provide that for the
fiscal year commencing January 1, 1998, and each subsequent fiscal year during
the term of the Ramat Agreement, Mr. Ramat would be entitled to a cash bonus
based upon achievement of performance targets of the Company and its
subsidiaries set annually in advance of each such fiscal year by mutual
agreement. For the fiscal year commencing January 1, 1998, Mr. Ramat's cash
bonus was computed as the sum of the following percentages of the combined net
income of ECI and ECI Sportswear, computed prior to the provisions for taxes,
for payment of management fees to the Company, or for payment of any bonuses to
executives: 10% of such income in excess of $4,500,000 and up to $6,000,000 and
20% of such income in excess of $6,000,000 and up to $8,000,000.
Mr. Ramat was also entitled to participate, at the Company's expense, in
all insurance and medical plans of the Company available to its most senior
employees, is entitled to reimbursement for business and entertainment expenses
and is entitled to an allowance of $500 per month towards a leased automobile,
and was entitled to receive, upon his death or total disability, 150% of his
annual base salary.
-17-
The Ramat Agreement was subject, at the Company's option, to termination
only for cause upon 90 days' written notice if Mr. Ramat has been convicted of
any material act of fraud, misappropriation, embezzlement, disloyalty,
dishonesty or breach of trust against the Company or any of its subsidiaries or
affiliated companies.
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 ByLaws (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.
The Ramat Agreement provided for payments equal to 299% of Mr. Ramat's
average cash compensation for the prior five years if his employment was
terminated without cause, or if he terminated his employment for Good Reason (as
defined in the Ramat Agreement).
In connection with the Simon Purchase Transaction, the Company and Mr.
Ramat entered into a Retention Agreement dated February 18, 1999 (the "Retention
Agreement") which further amended the Ramat Agreement by, among other things,
(i) fixing the dollar amount of the severance payment to be provided to Mr.
Ramat upon termination of employment at $2,400,716 (the "Severance Payment"),
(ii) providing for the Severance Payment in the event Mr. Ramat's employment
with the Company terminates for any reason whatsoever, during the period
commencing on the date the Retention Agreement was executed and ending 13 months
following the closing date of the Simon Purchase Transaction, (iii) providing
that the Company grant to Mr. Ramat additional options under the 1993 Stock
Incentive Plan for 1,000,000 shares of Common Stock at an exercise price of
$0.48 per share, (iv) providing, consistent with the 1993 Stock Incentive Plan,
that all prior options granted to Mr. Ramat under the 1993 Stock Incentive Plan,
to the extent not already vested, shall vest and become exercisable on the
closing of the Simon Purchase Transaction, and (v) all new and prior options
granted to Mr. Ramat under the 1993 Stock Incentive Plan will survive and remain
exercisable for a period of two (2) years following termination of employment
(except that this period shall be one-year in the event of death, total
disability or termination by Mr. Ramat without Good Reason and this period shall
be three (3) months in the event of termination by the Company for Cause, or in
the case of the new options only, expiration and non-renewal of the term of the
Ramat Agreement), but in no event in excess of the original term of the option.
Effective March 29, 1999, the Company terminated Mr. Ramat's employment and
made the Severance Payment required by the Retention Agreement.
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.
In March, 1999, the Company's Board of Directors authorized the Company and
its principal subsidiaries to enter into three-year employment agreements with
Arnold Simon and David Fidlon to serve as Chairman and Chief Executive Officer,
and Executive Vice President and Chief Operating Officer, respectively, at an
annual base salary of $750,000 and $375,000, respectively, subject to annual
review, and an annual bonus equal to 2% and 1%, respectively, of adjusted EBITDA
if adjusted EBITDA is between $5 million and $10 million, and 3% and 1.5%,
respectively, of adjusted EBITDA if adjusted EBITDA is in excess of $10 million.
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.
-18-
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee (the
"Committee") during the fiscal year ended December 31, 1998 were Messrs. Hannan,
Yorke and Katz, none of whom were (i) during the twelve months ended December
31, 1998, an officer of the Company or any of its subsidiaries or (ii) formerly
an officer of the Company or any of its subsidiaries. Messrs. Hannan and Katz
may be considered executive officers of Apollo Advisors, L.P., the general
partner of AIF, which until February 26, 1999, was a holder of secured
indebtedness of the Company. Effective February 26, 1999, Messrs. Hannan and
Yorke resigned from the Company's board of directors.
Report of the Committee on Executive Compensation
The compensation of Charles S. Ramat, who was Chairman, President and Chief
Executive Officer of Aris and Chairman and Chief Executive Officer of ECI and
ECI Sportswear through February 26, 1999, is specified by the Ramat Agreement.
See "Executive Compensation--Employment Agreements." This Agreement, which has
been in effect for more than ten years, provided for a base salary (with annual
cost of living increases) and an Aris-level excess cash flow annual bonus.
On August 28, 1997, upon the recommendation of the Committee and approval
by the Board of Directors, the Company entered into the Eighth Amendment(the
"Eighth Amendment") to the Ramat Agreement. The Eighth Amendment, in summary,
provides for the extension of Mr. Ramat's term of employment from June 30, 1998
to June 30, 2001; for the elimination of the existing provisions for any level
excess cash flow annual bonus earned for fiscal year 1997 and thereafter; for
the provision of annual cash bonuses based on achievement of performance targets
of the Company and its subsidiaries to be set annually in advance of each fiscal
year by mutual agreement; and for the grant (subject to achievement of vesting
requirements) on the date of the Eighth Amendment of 750,000 options under Aris'
1993 Stock Incentive Plan to Mr. Ramat at an exercise price of $1.00 per share
and vesting eight years from the date of grant, provided that Mr. Ramat has been
continuously employed by the Company or its subsidiaries during such period. All
or a portion of the options granted pursuant to the Eighth Amendment shall
obtain accelerated vesting on the occurrence of the refinancing of the Company's
debt obligations to Heller Financial, Inc., BNY Financial Corporation, and
AIF-II, L.P. on or prior to December 31, 2000, and were granted in consideration
for, among other things, Mr. Ramat's consent to the extension of the term of the
Ramat Agreement for three (3) additional years through June 30, 2001, and his
agreement to eliminate the Company-level excess cash flow annual bonus which he
otherwise would have earned for fiscal years commencing January 1, 1997. The
grant of such options to Mr. Ramat was ratified by the shareholders of the
Company at the Annual Meeting of Shareholders held on July 9, 1998. (See
"Executive Compensation - Employment Agreements" and "Executive Compensation -
Stock Option Plan and Stock Options".)
On December 5, 1995, Mr. Ramat assumed the duties of Chairman and Chief
Executive Officer of ECI, in addition to his duties in such positions at the
Company and on July 15, 1997, upon ECI Sportswear's acquisition of the business
of Davco Industries, Inc., Mr. Ramat also assumed the position of Chairman and
Chief Executive Officer of ECI Sportswear. No increases in base salary or other
salaried compensation were provided to Mr. Ramat for services on behalf of these
operating subsidiaries of the Company. The bonuses provided to Mr. Ramat based
on achievement of performance targets, were for the fiscal years ending December
31, 1997 and 1998 established by the Stock Option and Compensation Committee at
the commencement of such fiscal years as a percentage of the projected targets
of net income of the operating subsidiaries prepared at the commencement of such
fiscal years. The Stock Option and Compensation Committee selected the use of
such performance-based bonuses to enable a direct tie to the net income of such
operating subsidiaries during each such fiscal year of Mr. Ramat's employment.
Since Mr. Ramat's Company-level excess cash flow bonuses have been eliminated
for the 1997, 1998 and all subsequent fiscal years, there is no duplication of
bonuses by reason of the performance bonuses based on net income of the
operating subsidiaries of the Company.
The grant of such options to Mr. Ramat was ratified by the shareholders of
the Company at the Annual Meeting of Shareholders held on July 9, 1998. (See
"Executive Compensation - Employment Agreements; and "Executive
Compensation--Stock Option Plan and Stock Options").
The bonuses provided to Mr. Ramat based on achievement of performance
targets were, for the fiscal years ending December 31, 1997 and 1998,
established by the Committee at the commencement of such fiscal years as a
percentage of the projected targets of net income of the operating subsidiaries
of the Company in existence at such time, computed prior to provision for taxes,
for payment of management fees to the Company or for payment of any bonuses to
executives, under the business plans of such subsidiaries prepared at the
commencement of such fiscal years. The Committee selected the use of such
performance-based bonuses to enable a direct tie to the net income of such
operating
-19-
subsidiaries during each such fiscal year of Mr. Ramat's employment. On February
18, 1999, the Company and Ramat entered into the Retention Agreement which
further amended his employment agreement. See "Executive Compensation -
Employment Agreements."
Compensation of other Executive Officers of the Company
The Committee's compensation policy with regard to other executive officers
has reflected an annual evaluation, with the input of the Company's Chief
Executive Officer, of their performance in relation to the overall operating
results of the Company and its operating subsidiaries. For the fiscal year ended
December 31, 1997, Paul Spector, Senior Vice President, Chief Financial Officer
and Secretary, was granted an increase in base salary and a performance bonus to
reflect the improved operating results of the Company for such fiscal year and
his efforts in the implementation of the Company's acquisition of the business
of Davco Industries, Inc. completed July 15, 1997. For the fiscal year ended
December 31, 1997, Vincent Caputo, Vice President, Assistant Treasurer, and
Assistant Secretary received a salary increase to reflect the improved operating
results of the Company for such fiscal year.
John Hannan
Robert A. Katz
Edward M. Yorke
PERFORMANCE GRAPH
The following table compares the cumulative total shareholder return on the
Aris Common Stock with the cumulative total shareholder returns of (x) the S&P
500 Textile-apparel Manufacturers index and (y) Wilshire 5000 index from
December, 1993 to December, 1998. The return on the indices is calculated
assuming the investment of $100 on December 31, 1993 and the reinvestment of
dividends.
CUMULATIVE TOTAL SHAREHOLDER RETURN DECEMBER, 1993 TO DECEMBER, 1998
- -------------------------------------------------------------------------------------------
Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98
- --------------------- ------- ------ ------- ------- ------- --------
Aris Common Stock $100.00 $60.74 $ 4.07 $ 23.15 $ 94.81 $ 71.85
- --------------------- ------- ------ ------- ------- ------- --------
Wilshire 5000 Index $100.00 $97.50 $130.06 $154.51 $199.63 $242.95
- --------------------- ------- ------ ------- ------- ------- --------
S&P 500 Textile $100.00 $95.70 $105.27 $138.43 $148.95 $126.31
- --------------------- ------- ------ ------- ------- ------- --------
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the Company with respect to the fiscal year
ended December 31, 1998, no persons failed to file any such form in a timely
manner.
-20-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership by certain holders of
the Common Stock on March 19, 1999 and gives effect to the consummation of the
Simon Purchase Transaction on February 26, 1999. Those holders are persons who
are either (i) be beneficial owners of 5% or more of the Common Stock or (ii)
current officers or directors of the Company.
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
----------------------- -------------------------- --------
Arnold Simon ....................................................... 45,045,045 (2)(3) 62.5%
The Simon Group, L.L.C.
1385 Broadway
New York, New York 10018
David Fidlon ....................................................... -- (4) *
The Simon Group, L.L.C.
1385 Broadway
New York, New York 10018
Apollo Aris Partners, L.P. ......................................... 16,818,806 (3)(5)(6) 23.4%
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
Paul Spector ....................................................... 80,000 (7) *
475 Fifth Avenue
New York, New York 10017
Vincent Caputo ..................................................... 8,333 (7) *
475 Fifth Avenue
New York, New York 10017
All persons who are officers or directors of the Company, .......... 45,133,378 (7)(8) 63.7%
as a group (eight persons)
- ------------
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) Includes 2,093,790 shares of Series A Preferred Stock which are
automatically convertible into 20,937,900 shares of Common Stock upon the
filing of an amendment to the Company's Certificate of Incorporation
authorizing a sufficient number of shares of Common Stock for such
conversion. Arnold Simon, the Managing Member of The Simon Group, has sole
voting and investment power with respect to the shares of the Company held
of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999
Equity Registration Rights Agreement described below, containing certain
voting and other arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which Mr. Fidlon holds a 1.7%
membership interest. Mr. Fidlon does not directly own any shares of Common
Stock and, because he has no power or authority to vote or dispose of any
shares held by The Simon Group, he disclaims beneficial ownership of all
such shares.
-21-
(5) Includes 512,113 shares of Series A Preferred Stock which are
automatically convertible to 5,121,130 shares of Common Stock upon the
filing of an amendment to the Company's Certificate of Incorporation
authorizing a sufficient number of shares of Common Stock for such
conversion. See "Certain Relationships and Related Transactions -- AIF
Note."
(6) This table does not reflect any beneficial ownership by Mr. Katz, a
Director of the Company, associated with Apollo. Mr. Katz does not
directly own any shares of Common Stock, and disclaims beneficial
ownership of all shares held by Apollo Aris Partners, L.P and AIF, L.P.
(7) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(70,000) and Vincent Caputo (8,333).
(8) These shares are attributed to Messrs. Simon, Fidlon, Spector and Caputo.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Simon Purchase Transaction; Redemption of AIF Note
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (which shares shall be convertible into 20,937,900
shares of Common Stock) for $20,000,000 in cash, and (ii) the Company redeemed
from AIF the Series B Junior Secured Note of the Company including all accrued
interest thereon (representing total indebtedness as of January 31, 1999 of
$10,657,999), in exchange for $4,000,000 in cash plus 5,892,856 shares of Common
Stock and 512,113 shares of Series A Preferred Stock (which are convertible into
5,121,130 shares of Common Stock).
Upon the closing of the Simon Purchase Transaction, The Simon Group became
the beneficial owner of approximately 63.4% of the Common Stock; the current
directors of the Company, other than Charles S. Ramat and Robert A. Katz,
resigned; the size of the Board was increased from five to six Directors; and
Arnold Simon, David Fidlon, Debra Simon and Howard Schneider were elected to the
Board. Arnold Simon is the Managing Member of The Simon Group and has the sole
voting and investment power with respect to the shares of the Company owned by
The Simon Group.
1999 Shareholders Agreement
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase
Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same
-22-
consideration per share of Common Stock to be received by The Simon Group in
such transfers. Such tag-along rights will also apply to certain transfers by
Arnold Simon or his affiliates of their beneficial ownership in The Simon Group
after six months from the closing of the Simon Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
The Shareholders Agreement entered into June 30, 1993 between the Company,
Apollo, Charles S. Ramat and certain other non-Apollo subject shareholders
terminated by its terms as a result of the Simon Purchase Transaction.
1999 Equity Registration Rights Agreement
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
Director's Indemnification Agreements
On the closing of the Simon Purchase Transaction, the Company entered into
an indemnification agreement with each of Arnold Simon, David Fidlon, Debra
Simon and Howard Schneider, and on June 30, 1993, the Company entered into an
indemnification agreement with each of Charles S. Ramat and Robert A. Katz,
pursuant to which the Company has agreed to indemnify each such Director to the
fullest extent permitted by law, and for the advancement of legal fees and other
expenses and to use its best efforts to maintain designated directors' and
officers' liability insurance coverage.
Agreement with Warnaco
Arnold Simon is party to various non-competition agreements with The
Warnaco Group, Inc. and Designer Holdings, Ltd. (collectively, "Warnaco") which
could be deemed to have been violated by the consummation of Simon Purchase
Transaction. Warnaco consented to the Simon Purchase Transaction and to the
inapplicability of the restrictions to Arnold Simon in his various capacities
with the Company effective February 26, 1999 with respect to the Company's
current lines of business after June 1, 1999 in all respects pursuant to a
letter agreement in which the Company (i) issued 700,000 shares of Common Stock
to Warnaco and agreed to (ii) assume Warnaco's lease for certain premises in New
Bedford, Massachusetts on June 1, 1999, and (iii) offer employment to Warnaco's
workforce in New Bedford, Massachusetts and thereafter recognize the union
currently representing such workers as the representative of such employees and
negotiate in good faith with such union for a new collective bargaining
agreement with respect to respect to such employees.
Davco Shareholders Agreement
The 3,000,000 shares of the Company's Common Stock which were issued to
Davco in connection with the Davco Acquisition are subject to a Shareholders
Agreement (the "Davco Shareholders Agreement") between Davco, the shareholders
of Davco (Steven Arnold and Christopher Healy), the Company, Apollo and Charles
S. Ramat, providing that in each of the second, third and fourth year following
the Closing Date, each of Steven Arnold and Christopher Healy may sell up to
300,000 shares per year in Rule 144 Brokers Transactions, and commencing in the
fifth year following the closing date, each of Steven Arnold and Christopher
Healy may sell up to 600,000 shares per year in Rule 144 Brokers Transactions.
The Davco Shareholders Agreement further provides that (i) during the first four
years following the closing date, neither Davco, Steven Arnold nor Christopher
Healy is permitted to engage in any privately negotiated or block or bulk sales,
regardless of amount, without the Company's consent, and each is limited
-23-
to the Rule 144 Brokers Transaction sales in the amounts set forth above; (ii)
commencing in the fifth year following the closing date, Davco, Steven Arnold
and Christopher Healy may engage in sales which are not Rule 144 Brokers
Transactions, for an all-cash purchase price, subject to successive rights of
first refusal, first to the Company, and second to Apollo and Charles S. Ramat
(on an equal basis); (iii) restricts Davco, Messrs. Arnold and Healy from
acquiring any additional shares of the Company without the consent of the
Company; and (iv) requires that for so long as Mr. Ramat is Chairman, Chief
Executive Officer or President of the Company, Davco, Steven Arnold and
Christopher Healy agree to vote all of their shares for the recommendations,
proposals and nominations of the Company's Board of Directors. The Agreement
affords Davco, Messrs. Arnold and Healy certain "piggyback" registration rights
as to the Acquired Shares. These "piggyback" registration rights will enable
Davco, Messrs. Arnold and Healy to include their shares in a registration by the
Company to the same proportionate extent as if they were parties to the 1993
Equity Registration Rights Agreement referred to above when, as and if the
shares of the Company held by the parties to such 1993 Equity Registration
Rights Agreement are eligible for inclusion in such registration statement on a
"piggyback" basis. These "piggyback" registration rights shall remain in
existence in accordance with the 1999 Equity Registration Rights Agreement
entered into upon the closing of the Simon Purchase Transaction.
In connection with the Simon Purchase Transaction, Apollo and Charles S.
Ramat agreed that The Simon Group could participate pro rata in any exercise of
their secondary rights of first refusal as to sales of the Acquired Shares by
Messrs. Arnold and Healy.
On the July 15, 1997 closing date of the Davco acquisition, each of Steven
Arnold and Christopher Healy entered into employment agreements with ECI
Sportswear for a term through September 30, 2000 to manage the Davco business as
owned by ECI Sportswear.
Vesting of Stock Options on Change in Control
At the closing of the Simon Purchase Transaction, all outstanding stock
options under the 1993 Stock Incentive Plan (include without limitation, those
held by executive officers of the Company), by the terms of the Plan, vested and
become immediately exercisable due to the change of control in ownership in the
Company resulting from the purchase of shares by The Simon Group. See "Executive
Compensation -- Stock Option Plan and Stock Options."
-24-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Auditors' Report Page
----
Independent Auditors' Report...................................................F-l
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and 1997.....................................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 and for
the Period from February 4, 1996 through December 31, 1996.....................F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997
and for the Period from February 4, 1996 through December 31, 1996.............F-4
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998, the Year Ended December 31, 1997
and for the Period from February 4, 1996 through December 31, 1996.............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-25
Schedule II - Valuation and Qualifying
Accounts............................................F-29
All other schedules are omitted because they are not
applicable or because the required information is included in
the financial statements or notes thereto.
-25-
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
None during the fourth calendar quarter ended December 31, 1998.
However, a Report on Form 8-K dated February 26, 1999 was filed to
report the closing of the Simon Purchase Transaction (See "Business").
(c) INDEX TO EXHIBITS
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
2. Second Amended Joint Plan of Reorganization dated March (3)
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)
3.4 Amended and Restated By-Laws effective June 30, 1993 (3)
4.1 Specimen Certificate Evidencing Common Stock. (1)
10.67 Series A Junior Secured Note Agreement dated as of June 30, (3)
1993 between Registrant and BNY Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, 1993 (3)
issued by Registrant to BNY Financial Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, 1993 (3)
between Registrant, BNY Financial Corporation and AIF II,
L.P.
10.75 Shareholders Agreement dated as of June 30, 1993 among (3)
Registrant and the Subject Shareholders Referred to Therein.
10.76 Equity Registration Rights Agreement dated as of June 30, (3)
1993 among Registrant and the Holders of Registrable Shares
Referred to Therein.
10.79 Severance Agreement dated April 3, 1991 between Registrant (3)
and Paul Spector.
10.80 1993 Stock Incentive Plan of Registrant, as amended by (3)
Amendment No. 1 thereto dated June 24, 1993.
10.81 Form of Indemnification Agreement dated as of June 30, (3)
1993 between Registrant and each member of Registrant's
Board of Directors.
10.82 Letter Agreement dated February 8, 1993 among James G. (3)
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.
10.84 Stipulated Entry Liquidating Claims dated March 10, 1993 (3)
among The Marcade Group Inc., Robert K. Lifton, Howard
L. Weingrow, and JAG Consulting Co. Ltd.
-26-
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
10.86 Letter Agreement dated October 29, 1992 among The (3)
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.
10.93 Consent dated May 1, 1996 to Series A Junior Secured Note (9)
Agreement dated as of June 30, 1993 between Registrant and
BNY Financial Corporation.
10.95 Stock Purchase Agreement dated as of September 19, 1996 (10)
between Aris Industries, Inc., as Seller, Page Holding
Company, as Buyer, and Perry Manufacturing Company, with
respect to the stock of Perry Manufacturing Company.
10.99 Warrant dated September 30, 1996 issued by Aris Industries, (10)
Inc. to Heller Financial, Inc.
10.100 Letter dated December 18, 1996 from the Registrant to (11)
Charles S. Ramat.
10.101 Amendment dated May 5, 1997 to Series A Junior Secured (11)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.103 Amendment dated June 18, 1997 to Series A Junior Secured (13)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.105 Asset Purchase Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., as Seller, Steven Arnold and
Christopher Healy as Shareholders of Seller, and Aris
Management Corp. (n/k/a ECI Sportswear, Inc.) , as
Purchaser.
10.106 Shareholders Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., Steven Arnold, Christopher Healy,
Aris Management Corp. (n/k/a ECI Sportswear, Inc.), the
Registrant, Apollo Aris Partners, L.P. and Charles S. Ramat.
10.107 Amendment dated July 18, 1997 to Series A Junior Secured (14)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.109 Amendment executed September 12, 1997 to Series A and (15)
Series B Junior Secured Note Agreements dated as of June
30, 1993 between Registrant, BNY Financial Corporation and
AIF, L.P.
10.111 Securities Purchase Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris Partners,
L.P., AIF, L.P., The Simon Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, 1999, (17)
between Aris Industries, Inc., Apollo Aris Partners, L.P., AIF,
L.P., The Simon Group, L.L.C. and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris Partners,
L.P., AIF, L.P., The Simon Group, L.L.C. and Charles S.
Ramat.
-27-
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
10.114 Retention Agreement dated as of February 18, 1999 by and (17)
between Aris Industries, Inc. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by and among (18)
the Company and its Subsidiaries and CIT Commercial
Group, Inc. and the other Financial Industries named therein.
21. List of Subsidiaries (18)
23. Consent of Deloitte & Touche LLP (18)
27. Financial Disclosure Schedule (18)
- -------------
(1) Filed as the indicated Exhibit to the Annual Report of the Company on Form
10-K for the fiscal year ended February 2, 1991 and incorporated herein by
reference.
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30,
1993 and incorporated herein by reference.
(4) Omitted.
(5) Filed as the indicated Exhibit to the Report on Form 8-K dated June 12,
1995 and incorporated herein by reference.
(6) Filed as the indicated Exhibit to the Report on Form 8-K dated October 27,
1995 and incorporated herein by reference.
(7) Filed as the indicated Exhibit to the Report on Form 8-K dated February 2,
1996 and incorporated herein by reference.
(8) Omitted.
(9) Filed as the indicated Exhibit to the Report on Form 8-K dated May 1, 1996
and incorporated herein by reference.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated September
30, 1996 and incorporated herein by reference.
(11) Filed as the indicated Exhibit to the Annual Report of the Company on Form
10-K for the fiscal year ended December 31, 1996 and incorporated herein
by reference.
(12) Omitted.
(13) Filed as the indicated Exhibit to the Report on Form 8-K dated June 18,
1997 and incorporated herein by reference.
(14) Filed as the indicated Exhibit to the Report on Form 8-K dated July 15,
1997 and incorporated herein by reference.
(15) Filed as the indicated Exhibit to the Report on Form 8-K dated September
12, 1997 and incorporated herein by reference.
(16) Omitted.
-28-
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated February
26, 1999 and incorporated herein by reference.
(18) Filed herewith.
-29-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By:/s/ ARNOLD H. SIMON
--------------------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /s/ PAUL SPECTOR
---------------------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /s/ VINCENT F. CAPUTO
---------------------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 12, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ ARNOLD SIMON April 12, 1999
- -----------------------------
Arnold Simon, Chairman of the
Board and Chief Executive
Officer; Director
/s/ DAVID FIDLON April 12, 1999
- -----------------------------
David Fidlon, Director
/s/ ROBERT KATZ April 12, 1999
- -----------------------------
Robert Katz, Director
/s/ DEBRA SIMON April 12, 1999
- -----------------------------
Debra Simon, Director
/s/ HOWARD SCHNEIDER April 12, 1999
- -----------------------------
Howard Schneider, Director
30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 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, 1998 and 1997, and the results of their
operations and cash flows for the years ended December 31, 1998 and 1997 and for
the period from February 4, 1996 through December 31, 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
Parsippany, New Jersey
March 31, 1999
F-1
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,112,000 $ 1,372,000
Receivables, net 29,905,000 26,274,000
Inventories, net 26,371,000 19,498,000
Prepaid expenses and other current assets 1,753,000 2,215,000
------------ ------------
Total current assets 59,141,000 49,359,000
FURNITURE, FIXTURES AND EQUIPMENT - NET 1,094,000 1,463,000
OTHER ASSETS 2,095,000 2,718,000
GOODWILL 19,325,000 20,297,000
------------ ------------
TOTAL ASSETS $ 81,655,000 $ 73,837,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 5,178,000 $ 6,292,000
Accounts payable - trade 1,512,000 3,024,000
Accrued expenses and other current liabilities 8,370,000 7,528,000
Current portion of long-term debt 1,083,000 2,172,000
Line of credit payable 33,900,000 18,605,000
------------ ------------
Total current liabilities 50,043,000 37,621,000
OTHER LIABILITIES 1,082,000 1,472,000
LONG-TERM DEBT (net of unamortized original issue discount of
$506,000 and $630,000, respectively) 16,438,000 16,930,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01: 50,000,000 shares authorized;
issued and outstanding 14,956,377 and 14,905,044 shares,
respectively 151,000 150,000
Preferred stock, par value $.01: 10,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 44,757,000 44,752,000
Accumulated deficit (30,816,000) (27,088,000)
------------ ------------
Total stockholders' equity 14,092,000 17,814,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,655,000 $ 73,837,000
============ ============
See notes to consolidated financial statements.
F-2
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
Period From
February 4, 1996
Years Ended Through
December 31, December 31,
1998 1997 1996
NET SALES $ 127,680,000 $ 94,539,000 $ 130,155,000
COST OF SALES 98,140,000 67,497,000 104,649,000
------------- ------------- -------------
GROSS PROFIT 29,540,000 27,042,000 25,506,000
COMMISSION AND LICENSING INCOME 1,570,000 1,732,000 1,647,000
------------- ------------- -------------
INCOME BEFORE SELLING AND ADMINISTRATIVE
EXPENSES, INTEREST AND DEBT EXPENSE, SALE
OF SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM 31,110,000 28,774,000 27,153,000
SELLING AND ADMINISTRATIVE EXPENSES (29,950,000) (23,474,000) (25,422,000)
------------- ------------- -------------
INCOME BEFORE INTEREST AND DEBT
EXPENSE, SALE OF SUBSIDIARY, INCOME
TAXES AND EXTRAORDINARY ITEM 1,160,000 5,300,000 1,731,000
INTEREST AND DEBT EXPENSE (5,220,000) (3,105,000) (6,821,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE SALE OF SUBSIDIARY,
INCOME TAXES AND EXTRAORDINARY ITEM (4,060,000) 2,195,000 (5,090,000)
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company -- -- 7,786,000
Realization of cumulative foreign currency translation -- -- (1,108,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (4,060,000) 2,195,000 1,588,000
INCOME TAX EXPENSE (BENEFIT) 190,000 (138,000) (516,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (4,250,000) 2,333,000 2,104,000
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 522,000 -- --
Gain on debt forgiveness -- -- 10,862,000
------------- ------------- -------------
NET (LOSS) INCOME $ (3,728,000) $ 2,333,000 $ 12,966,000
============= ============= =============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,912,000 13,245,000 11,905,000
Weighted average shares outstanding - Diluted 14,912,000 14,338,000 12,045,000
Basic earnings per share:
(Loss) income before extraordinary item $ (0.29) $ 0.18 $ 0.18
Extraordinary item 0.04 -- 0.91
------------- ------------- -------------
Net (loss) income $ (0.25) $ 0.18 $ 1.09
============= ============= =============
Diluted earnings per share:
(Loss) income before extraordinary item $ (0.29) $ 0.16 $ 0.17
Extraordinary item 0.04 -- 0.90
------------- ------------- -------------
Net (loss) income $ (0.25) $ 0.16 $ 1.07
============= ============= =============
See notes to consolidated financial statements.
F-3
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Common Preferred Paid-in Accumulated Comprehensive
Shares Stock Stock Capital Deficit Income Total
BALANCE, FEBRUARY 3, 1996 11,925,400 $119,000 $-- $ 44,061,000 $(42,387,000) $(1,229,000) $ 564,000
Comprehensive Income:
Net income -- -- -- -- 12,966,000 -- 12,966,000
Foreign currency translation adjustment -- -- -- -- -- 121,000 121,000
Realization of cumulative foreign
currency translation -- -- -- -- -- 1,108,000 1,108,000
---------- -------- --- ------------ ------------ ----------- ------------
Total comprehensive income -- -- -- -- -- -- 14,195,000
---------- -------- --- ------------ ------------ ----------- ------------
Retirement of stock (72,856) -- -- (4,000) -- -- (4,000)
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 11,852,544 119,000 -- 44,057,000 (29,421,000) -- 14,755,000
Net income -- -- -- -- 2,333,000 -- 2,333,000
Issuance of new shares of common stock 3,000,000 30,000 -- 690,000 -- -- 720,000
Exercise of stock options 52,500 1,000 -- 5,000 -- -- 6,000
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1997 14,905,044 150,000 -- 44,752,000 (27,088,000) -- 17,814,000
Net loss -- -- -- -- (3,728,000) -- (3,728,000)
Exercise of stock options 51,333 1,000 -- 5,000 -- -- 6,000
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1998 14,956,377 $151,000 $-- $ 44,757,000 $(30,816,000) $ -- $ 14,092,000
========== ======== === ============ ============ =========== ============
See notes to consolidated financial statements.
F-4
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,728,000) $ 2,333,000 $ 12,966,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Loss on sale of property -- -- 39,000
Depreciation and amortization 1,711,000 1,346,000 2,594,000
Gain on sale of Perry -- -- (7,786,000)
Gain on debt forgiveness and extinguishments (522,000) -- (10,862,000)
Deferred income tax expense (benefit) 151,000 (212,000) (580,000)
Cumulative translation adjustment -- -- 1,108,000
Capitalized interest 276,000 1,830,000 1,424,000
Changes in assets and liabilities:
(Increase) decrease in receivables (3,631,000) (18,860,000) 8,120,000
(Increase) decrease in inventories (6,873,000) (6,693,000) 36,000
Decrease (increase) in prepaid expenses and
other current assets 390,000 445,000 (942,000)
Decrease (increase) in other assets 443,000 (3,000) (8,000)
(Decrease) increase in trade acceptances payable (1,114,000) 690,000 3,595,000
(Decrease) increase in accounts payable - trade (1,512,000) (1,726,000) 2,084,000
Increase (decrease) in accrued expenses and other
current liabilities 3,532,000 (935,000) (2,230,000)
Decrease in other liabilities (359,000) (133,000) (2,000)
------------ ------------ ------------
Net cash (used in) provided by operating
activities (11,236,000) (21,918,000) 9,556,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition (2,659,000) (839,000) --
Proceeds from sale of assets -- -- 66,000
Net proceeds from sale of Perry -- -- 40,145,000
Capital expenditures (233,000) (461,000) (1,409,000)
------------ ------------ ------------
Net cash (used in) provided by investing
activities (2,892,000) (1,300,000) 38,802,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (1,128,000) (15,000) (40,857,000)
Net proceeds (payments) from bank line of credit 15,295,000 18,605,000 (6,000,000)
Proceeds from issuance of long-term debt -- -- 3,528,000
Principal payments of long-term debt, including
capital leases (305,000) (284,000) (1,073,000)
Purchase of common stock -- -- (4,000)
Proceeds from exercise of stock options 6,000 6,000 --
Proceeds from equipment financing agreement -- -- 12,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities 13,868,000 18,312,000 (44,394,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH -- -- (4,000)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (260,000) (4,906,000) 3,960,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,372,000 6,278,000 2,318,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,112,000 $ 1,372,000 $ 6,278,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 4,229,999 $ 1,284,000 $ 3,307,000
============ ============ ============
Income taxes $ 63,000 $ 49,000 $ 226,000
============ ============ ============
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., (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, outerwear, activewear,
swimwear and loungewear. The Company's operations are conducted primarily
through its wholly-owned subsidiary, Europe Craft Imports, Inc. ("ECI"),
which was acquired by Aris in 1987 and ECI's wholly-owned subsidiary ECI
Sportswear, Inc. ("ECI Sportswear"), which acquired the Davco apparel
business (See Note 4) on July 15, 1997.
ECI designs, imports and distributes men's outerwear, including cloth and
leather jackets under the "Members Only" and other trade names. ECI has
been granted licenses to manufacture and distribute men's outerwear under
the "Perry Ellis" name and men's and boy's outerwear under the "Perry
Ellis America" name; and men's outerwear under the "John Henry" name. ECI
Sportswear has been granted licenses to manufacture and distribute men's
and boys' sportswear, activewear and swimwear under the "Perry Ellis
America" name, men's and boys' loungewear under the "Perry Ellis" name,
men's and boys' sportswear under the "Jeffrey Banks" name, and boys'
sportswear, activewear and outerwear under the "FUBU" name. The Company
also designs, develops, sources and imports men's and boys' outerwear and
sportswear product lines as an agent for national retail store chains. The
Company has granted licenses to use the "Members Only" trademark to
licensees for men's woven shirts, tailored suits and sportcoats,
eyeglasses, hosiery, luggage and cold weather accessories.
The Company purchases a majority of its products from independent
manufacturers located in Hong Kong, China, Korea, India, Taiwan, Dominican
Republic, Guatemala, Philippines, Bangladesh, Sri Lanka and Indonesia. The
Company's products are marketed nationally in department stores, specialty
stores and national retail chains and through distributorships in other
parts of North America and South America. The Company has also begun to
sell some of its products in Europe. The Company also operates three
stores located in factory outlet malls.
As described in Note 5, effective September 30, 1996, the Company sold
100% of the stock of Perry Manufacturing Company ("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. 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 apparel industry is volatile and unpredictable due to cyclical and
seasonal swings caused by consumer buying patterns, weather conditions and
other factors. In addition, 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
expected to be sold. 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 its products on time, it must
often commit to production in advance of obtaining firm orders from its
retail customers. The Company's outerwear business is particularly
impacted by unusually warm weather or the late arrival of cold weather.
F-6
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.
Principles of Consolidation - The consolidated financial statements of 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 - Inventories consist exclusively of finished goods.
Inventories are stated at the lower of cost (weighted average basis) or
market.
Furniture, Fixtures and Equipment - Furniture, fixtures 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:
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 and Other Assets - 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. Acquired intangible assets, which
include primarily licenses, are recorded in other assets and are carried
at cost less accumulated amortization. Amortization expense is computed by
use of the straight-line method over the assets' estimated useful lives.
Goodwill is being amortized over 20 to 40 years, and licenses are being
amortized over 8 years. The Company continuously evaluates goodwill and
other intangible assets for any potential impairment. The Company assesses
the recoverability of goodwill and other intangible assets by determining
whether the amortization of the goodwill and other intangible asset
balances over their remaining lives can be recovered through expected
undiscounted future results.
F-7
Accumulated amortization at December 31, 1998 and 1997 for goodwill and
other intangible assets was $9,323,000 and $8,213,000, respectively.
Comprehensive Income - During 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income, which is reported in
the Consolidated Statements of Stockholders' Equity, is defined as the
total change in stockholders' equity during the period other than from
transactions with stockholders. For the Company, comprehensive income
consists of net income and the change in the accumulated foreign currency
translation adjustment account. Accumulated other comprehensive income
consists of the accumulated foreign currency translation adjustment
account.
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.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of position and measurement of these
instruments at fair value. The Statement is effective for fiscal years
beginning after June 15, 1999. Management believes that adopting this
Statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
2. RECEIVABLES
December 31,
1998 1997
Due from factor $29,318,000 $25,849,000
Other receivables 1,569,000 1,607,000
----------- -----------
30,887,000 27,456,000
Less allowance for chargebacks 982,000 1,182,000
----------- -----------
$29,905,000 $26,274,000
=========== ===========
The Company has agreements with three commercial financial companies which
provide for the factoring of certain trade receivables. The receivables
are factored without recourse as to credit risk but with recourse for any
claims by the customer for adjustments in the normal course of business
relating to pricing errors, 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. The Company receives
payment based upon the actual maturity dates of the receivables.
On February 26, 1999, the Company terminated its current factoring
agreements and opened a new factoring agreement with The CIT Group. ECI
will be charged a factoring fee of .45% of factored sales with a minimum
guaranteed factoring fee of $450,000.
F-8
3. FURNITURE, FIXTURES AND EQUIPMENT
December 31,
1998 1997
Furniture, fixtures and equipment $5,222,000 $5,046,000
Leasehold improvements 1,058,000 1,058,000
---------- ----------
6,280,000 6,104,000
Less accumulated depreciation and amortization 5,186,000 4,641,000
---------- ----------
$1,094,000 $1,463,000
========== ==========
As of December 31, 1998 and 1997, furniture, fixtures and equipment
include amounts associated with assets leased under capital leases with an
original cost of $343,000. As of December 31, 1998 and 1997, accumulated
depreciation and amortization include $223,000 and $122,000, respectively,
associated with the leased assets. Related amortization expense of
$68,000, $107,000 and $84,000 is included within depreciation expense for
the years ended December 31, 1998 and 1997 and for the period from
February 4, 1996 through December 31, 1996, respectively.
4. BUSINESS ACQUISITION
On July 15, 1997, ECI Sportswear acquired substantially all of the assets
of Davco Industries, Inc. ("Davco") for a final aggregate purchase price
of $4,234,000, including acquisition costs. At that time, Davco has been
granted licenses to manufacture and distribute men's and boys' activewear,
swimwear, loungewear and some sportswear products under the "Perry Ellis
America" and/or "Perry Ellis" labels and men's sportswear under the
"Jeffrey Banks" label. The purchase price is comprised of 3 million
restricted shares of the Company's common stock, valued at $720,000, and a
contingent cash purchase price based upon the pre-tax earnings of the
Davco business for the period from July 16, 1997 through December 31,
1997. In accordance with the terms of the agreement, ECI Sportswear made
cash advances of $581,000 and recorded additional consideration payable of
$2,814,000 as of December 31, 1997, which is recorded in accrued expenses
and other current liabilities. Final consideration paid in 1998 amounted
to $2,659,000.
The acquisition was accounted for as a purchase and, accordingly,
operating results of this business subsequent to the date of acquisition
are included in the Company's consolidated financial statements. The
purchase price was allocated based on estimated fair values at the date of
acquisition, including the allocation of $840,000 to the licenses
acquired. The excess of the purchase price paid over the net assets
acquired of $3,219,000 has been recognized as goodwill and is being
amortized on a straight-line basis over 20 years.
The following pro forma information is presented assuming the acquisition
of the Davco business had been completed at the beginning of the Company's
1997 fiscal year. Pro forma adjustments have been made to include the
effects of amortization of goodwill and intangible assets. This unaudited
pro forma information is not necessarily indicative of the results of
operations that might have occurred had the acquisition of the Davco
business occurred at the beginning of the Company's 1997 fiscal year or of
future results of operations.
F-9
1997
(Unaudited)
Net revenues $ 113,309,000
Gross profit 33,619,000
Income before income taxes and extraordinary item 2,059,000
Income tax benefit (129,000)
Net income 2,188,000
Basic earnings per share 0.17
Diluted earnings per share 0.15
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 the principal amount of $1,000,000 plus capitalized interest
of $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.
6. LONG-TERM DEBT
Long-term debt is comprised of:
December 31,
1998 1997
Heller Note, interest at 10%, including capitalized
interest of $665,000 $ -- $ 1,650,000
BNY Financial Corporation Note, interest at 7% 7,982,000 7,981,000
Apollo Note, interest at 13%. Net of unamortized original
issue discount of $506,000 and $630,000 at December 31,
1998 and 1997, respectively 9,496,000 9,266,000
Other 43,000 205,000
----------- -----------
17,521,000 19,102,000
Less current portion 1,083,000 2,172,000
----------- -----------
$16,438,000 $16,930,000
=========== ===========
F-10
Heller Note - 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 ("Amended Heller
Agreement"). Pursuant to the Amended Heller Agreement, Heller accepted the
cash proceeds of $40,857,000 received from the Perry sale and a warrant to
purchase 584,345 shares of the Company's common stock at an exercise price
of $.01 per share. In addition, Heller received a new note in the
principal amount of $1,000,000 ("Heller Note"), with a maturity date of
November 3, 2001. Such transaction has been accounted for as a
modification of terms to the original Heller debt and resulted in an
extraordinary gain on debt forgiveness of $10,862,000. 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. Heller retained a pledge of
the stock (but not the assets) of ECI, the Company's remaining operating
subsidiary. The Heller Note provides certain restrictions on the payment
of principal and interest to Apollo and BNY (as defined below).
On January 29, 1998, the Company repaid in full its remaining obligation
on the Heller Note of $1,128,000. The difference between the net carrying
amount of the Heller Note and the remaining obligation amounted to
$522,000 and was accounted for as an extraordinary gain during the first
quarter of 1998. As a result of the repayment, Heller released its first
lien on the stock of ECI.
Apollo Note - On June 30, 1993, the Company entered into a Series B Junior
Secured Note Agreement with Apollo Aris Partners, L.P. and its affiliate
AIF-II, L.P. ("Apollo") pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shared
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 September 12, 1997, the Company and Apollo entered into an amendment of
the Apollo Note providing that: (1) scheduled interest accruing under the
Apollo Note for the period November 1, 1995 through January 31, 1998 was
not and will not be paid in cash and instead shall be added to principal
and shall be payable on November 3, 2002 and (2) scheduled interest under
the Apollo Note accruing for periods commencing February 1, 1998 will be
made in cash on quarterly payment dates commencing May 4, 1998. The
principal balance of the Apollo Note is required to be paid in two equal
installments payable on November 3 in each of 2001 and 2002.
On October 21, 1998, the Company obtained a consent pursuant to the Apollo
Note to defer, until February 1, 1999, the required payments of the
quarterly interest under the Apollo Note otherwise due November 3, 1998.
The nonpayment of such quarterly interest prior to February 1, 1999 shall
not be a Default or Event of Default under the Apollo Note.
F-11
BNY Note - 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 shared with Apollo a second lien on the stock of
ECI. On September 12, 1997, the Company and BNY entered into an amendment
of the BNY Note providing that: (1) scheduled interest accruing under the
BNY Note for the period February 1, 1996 through January 31, 1998 was not
and will not be paid in cash and instead shall be added to principal and
shall be payable on November 3, 2002, (2) scheduled interest under the BNY
Note accruing for periods commencing February 1, 1998 will be made in cash
on quarterly payment dates commencing May 4, 1998 and (3) the principal on
the BNY Note of $300,000 otherwise due November 3, 1997 shall be
rescheduled and paid quarterly in installments of $15,000 each on the last
day of each calendar quarter commencing on December 31, 1998, with any
remaining balance due on November 3, 2002.
In addition, on November 3, 2002, the Company is obligated to pay BNY
$1,042,000 representing the quarterly interest payments accruing for the
period February 1, 1996 through January 31, 1998, which were not and will
not be paid in cash and instead added to the principal of the BNY Note.
The BNY Note contains certain affirmative and negative covenants on the
operations of the Company. The Company was in compliance with these
covenants at December 31, 1998.
BNY and Apollo's shared second lien on the stock of ECI became a shared
first lien upon the repayment of the Heller Note on January 29, 1998. BNY
and Apollo will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" as defined in the Company's note agreements
with BNY and Apollo.
On October 21, 1998, the Company obtained a consent pursuant to the BNY
Note to defer, until February 1, 1999, the required payments of: (a) the
quarterly interest under the BNY Note otherwise due November 3, 1998 and
(b) the principal payment of $300,000 under the Note otherwise due
November 3, 1998. The nonpayment of such quarterly interest and principal
payments prior to February 1, 1999 shall not be a Default or Event of
Default under the BNY Note.
The remaining principal of the BNY Note is required to be paid in four
annual installments, payable on November 3 of each year commencing in 1999
as follows:
Calendar Year Amount
1999 $ 1,040,000
2000 600,000
2001 1,100,000
2002 5,242,000
-----------
$ 7,982,000
===========
F-12
Maturities - Future maturities of long-term debt are as follows:
Year Ending December 31,
1999 $ 1,083,000
2000 600,000
2001 4,850,000
2002 11,494,000
------------
$ 18,027,000
============
Subsequent Event - In connection with the Simon Purchase Transaction (as
defined in Note 17, Subsequent Events), on February 26, 1999, the Company
redeemed in full its outstanding obligation of $10,658,000 under the
Apollo Note. The redemption was effected through the payment of $4,000,000
in cash and the issuance of 5,892,856 shares of Common Stock and 512,113
shares of Series A Preferred Stock which is manditorily convertible to
5,121,130 shares of Common Stock. The transaction resulted in a gain on
debt forgiveness of $1,768,000 which the Company will record as a capital
contribution in the first quarter of 1999. As a result of the repayment,
Apollo released its second lien on the stock of ECI.
In addition, the Company amended the BNY Note where BNY waives a Default
or an Event of Default and further confirms that it has no objection to
the completion of the Simon Purchase Transaction. On February 26, 1999,
BNY was paid the sum of $820,000 consisting of: (a) the remaining balance
of $240,000 of the principal payment on the BNY Note originally due
November 3, 1997 (and previously deferred) and (b) $580,000 which is the
total of the scheduled payments due on February 1, 1999 (which include the
scheduled payments of principal of $300,000 and interest of $280,000
deferred from November 3, 1998).
Restricted Net Assets - In accordance with ECI and ECI Sportswear's credit
facility agreement, as of December 31, 1998 and 1997, the maximum amount
of upstream payments in the form of management fees from ECI and ECI
Sportswear to Aris have been made. Under this agreement, net assets
restricted to ECI and ECI Sportswear's use at December 31, 1998 and 1997
were $17,087,000 and $20,078,000, respectively.
At this time, the Company believes that based on current business plans
and financial arrangements that management fee revenues from ECI and ECI
Sportswear, 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, 1999.
7. LINE OF CREDIT PAYABLE
ECI and ECI Sportswear have available a $75,000,000 line of credit which
is secured by liens on certain assets of the subsidiaries. As of December
31, 1998, there was an outstanding balance payable of $33,900,000.
Interest is accrued at the bank's prime rate plus 1/4% for ECI and at the
bank's prime rate plus 1% for ECI Sportswear. As of December 31, 1998, the
bank's prime rate was 8%. 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.
F-13
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the Company repaid in full on February 26, 1999 its
remaining obligation under its existing line of credit and subsequently
terminated the agreement. Immediately thereafter, the Company entered into
a new line of credit with The CIT Group. The new line of credit allows for
aggregate borrowings not to exceed $65,000,000 at any time outstanding.
The new line of credit is secured by liens on certain assets of the
Company. For revolving credit loans, interest will accrue at the bank's
prime rate. For Eurodollar loans, interest will accrue at a rate per annum
equal to the Eurodollar Rate (as defined) plus 2.5%. The line of credit
contains various covenants as defined that the Company must adhere to
during the year.
8. 1993 STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended through April 6,
1998, authorizes the Company's Board of Directors (or a committee
thereof), to award to employees and directors of, and consultants to, the
Company and its subsidiaries: (i) options to acquire Common Stock at
prices determined when the options are granted, (ii) stock appreciation
rights (entitling the holder to a payment equal to the appreciation in
market value of a specified number of shares of Common Stock over a
specified period), (iii) restricted shares of Common Stock whose vesting
is subject to terms and conditions specified at the time of grant, and
(iv) performance shares of Common Stock that are granted upon achievement
of specified performance goals. Options granted pursuant to the Plan may
be either "incentive stock options" within the meaning of Section 422A of
the United States Internal Revenue Code of 1986, as amended, or
non-qualified options. A maximum of 3.5 million shares of Common Stock
(subject to anti-dilution adjustments) can be covered by awards under the
Plan.
The 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 the Plan. In general, options granted provide for vesting
in three equal annual installments from the date of grant and are
exercisable for a period of 10 years from the grant date.
During August 1997, the Company's Board of Directors approved an amendment
to the Plan to increase to 2,500,000 the maximum number of shares of
Common Stock which can be covered by awards under the Plan. On April 6,
1998, the Board approved a further amendment to the Plan to increase to
3,500,000 the maximum number of shares of Common Stock which can be
covered by awards under the Plan. The amendment increasing the number of
shares to 3,500,000 was approved by the stockholders of the Company at the
Annual Meeting of Stockholders held on July 9, 1998.
During 1998, the Company granted to employees of ECI and ECI Sportswear
280,000 options under the Plan. The exercise price of the options ranged
from $.92 to $1.50 per share and equaled the market price on the date of
grant.
In July 1997, the Company granted to employees of ECI Sportswear 50,000
options under the Plan. The exercise price of the options is $.50 per
share (the market price on such date). In August 1997, the Company granted
to officers and employees of the Company and its subsidiaries 860,000
options under the Plan. The exercise price of the options is $1.00 per
share (the market price on such date). All options granted on this date
shall vest 8 years from the date of grant, but a portion of such options
shall obtain accelerated vesting on the occurrence of certain events as
defined in the amendment to the Plan.
In December 1996, the Company granted to employees of the Company and ECI
305,000 options under the Plan. The exercise price of the options is $.10
per share (the market price on such date). For the
F-14
year ended December 31, 1998, there were no stock options granted to
Officers of the Company. For the year ended December 31, 1997, a total of
765,000 stock options were granted to Officers of the Company. At December
31, 1998, there were 22 eligible participants with options outstanding
under the Plan.
1998 1997 1996
----------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
OUTSTANDING, JANUARY 1 1,695,000 $ 0.70 962,500 $ 0.37 965,000 $ 0.50
Granted 280,000 0.96 910,000 0.97 305,000 0.10
Exercised (51,333) 0.13 (52,500) 0.10 -- --
Expired/Surrendered (120,667) 0.66 (125,000) 0.48 (307,500) 0.50
--------- -------- ------- -------- ------- --------
OUTSTANDING, DECEMBER 31 1,803,000 $ 0.76 1,695,000 $ 0.70 962,500 $ 0.37
========= ======== ========= ======== ======= ========
OPTIONS EXERCISABLE,
DECEMBER 31 622,666 $ 0.45 584,997 $ 0.47 657,500 $ 0.50
========= ======== ========= ======== ======= ========
At December 31, 1998, 1997 and 1996, there were 1,593,167 options, 752,500
options and 237,500 options available for grant, respectively. The
outstanding stock options at December 31, 1998 have a weighted average
contractual life of 8.1 years and the exercise price ranges from $.10 to
$1.50.
The Company accounts for its stock compensation arrangements using the
intrinsic value method. If the fair value method of accounting was applied
as defined by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's pro forma net income (loss) would have been $(3,956,000),
$2,249,000 and $12,963,000 for 1998, 1997 and 1996, respectively. Pro
forma basic earnings (loss) per share would have been $(.27), $.17 and
$1.09 for 1998, 1997 and 1996, respectively, and pro forma diluted
earnings (loss) per share would have been $(.27), $.16 and $1.08 for 1998,
1997 and 1996, respectively.
The weighted-average fair value per option granted in 1998, 1997 and 1996
was $.89, $.89 and $.09, respectively. The fair value was estimated using
the Black-Scholes option pricing model based on the following assumptions:
1998 1997 1996
Volatility 150% 150% 150%
Risk-free interest rate 5.5% 6.2% 5.8%
Expected term of options (in years) 5 5 5
No dividends are assumed to be paid during the expected life of any
option.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), all options issued and outstanding shall immediately
vest and become exercisable upon a change of control. Immediately
following the close of the Simon Purchase Transaction on February 26,
1999,
F-15
1,803,000 options are fully vested and exercisable. Also on February 26,
1999, an Officer of the Company was granted an option to purchase
1,000,000 shares of Common Stock of the Company at an exercise price of
$.48 per share. The option shall vest within twelve months of the date of
grant; however, the option shall obtain accelerated vesting on the
occurrence of certain events as defined in the agreement. The option shall
expire on the tenth anniversary of the Simon Purchase Transaction.
9. EARNINGS PER SHARE
The Company computes earnings per share in accordance with the provisions
of SFAS No. 128, Earnings per Share. SFAS No. 128 requires the dual
presentation of basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if stock options or other contracts to issue common stock
were exercised and resulted in the issuance of common stock that then
shared in the earnings of the Company. Diluted EPS is computed using the
treasury stock method when the effect of common stock equivalents would be
dilutive. All prior periods have been restated to comply with the
provisions of SFAS No. 128. The dilutive effect of stock options and
warrants on weighted average shares outstanding was 0 shares, 1,093,000
shares and 140,000 shares for the years ended December 31, 1998 and 1997,
and for the period from February 3, 1996 through December 31, 1996,
respectively. Antidilutive stock options and warrants of 1,140,000 shares,
1,407,500 shares and 657,500 shares for the year ended December 31, 1998
and 1997 and for the period from February 3, 1996 through December 31,
1996 have been excluded from the calculation of diluted EPS.
10. TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1998 and 1997 and for the period from
February 4, 1996 through December 31, 1996, rent payments of $1,045,000,
$1,045,000 and $888,000, respectively, were made by ECI to a general
partnership controlled by then current and former officers of ECI during
1996 only. These officers of ECI were never officers or directors of the
Company.
11. RETIREMENT PLANS
The Company participates in a defined contribution plan with ECI and ECI
Sportswear 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 seven years of service. During the
years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 1996, total matching contributions of $0, $0 and
$4,000, 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 years ended December 31,
1998 and 1997 and for the period from February 4, 1996 through December
31, 1996. Assets of the plan are invested in a U.S. government securities
fund.
F-16
The following table sets forth the funded status of the pension plan:
December 31,
1998 1997
Actuarial present value of accumulated benefit obligation (all vested) $ 73,000 $ 61,000
======== ========
Plan assets at fair value $164,000 $163,000
Actuarial present value of projected benefit obligation 73,000 61,000
-------- --------
Plan assets in excess of projected benefit obligation 91,000 102,000
Contingent liability 91,000 102,000
-------- --------
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 7.5% as of December 31, 1998 and 1997.
12. 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 provision (benefit) for income taxes is as follows:
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
Current:
Federal $ -- $ 46,000 $ --
State 39,000 28,000 64,000
Deferred:
Federal 75,000 (34,000) (665,000)
State 76,000 (178,000) 85,000
--------- --------- ---------
$ 190,000 $(138,000) $(516,000)
========= ========= =========
F-17
A reconciliation of the expected statutory Federal income tax expense
(benefit) and the actual expense (benefit) is summarized as follows:
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
Expected income tax (benefit) expense (34)% 34% 34%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill 7 10 2
State and local income tax, net 1 1 --
Losses from foreign subsidiaries -- -- 4
Change in valuation allowance -- (16) --
Non-taxable gain on debt forgiveness -- -- (32)
Recognition of NOL benefit -- (36) (31)
Non-recognition of NOL benefit 28
Non-deductible interest -- -- 10
Other 3 1 9
--- --- ---
Actual income tax expense (benefit) 5% (6)% (4)%
=== === ===
F-18
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:
December 31,
1998 1997
Deferred tax assets:
Current:
Book/tax inventory basis differences $ 371,000 $ 270,000
Customer allowances 1,979,000 456,000
Other 310,000 403,000
------------ ------------
2,660,000 1,129,000
------------ ------------
Noncurrent:
Operating loss carryforwards 30,719,000 30,529,000
Tax credit carryforwards 37,000 122,000
Alternative minimum tax credit carryforward 846,000 833,000
Non-deductible interest 1,205,000 1,154,000
------------ ------------
32,807,000 32,638,000
------------ ------------
35,467,000 33,767,000
Valuation allowance (34,573,000) (32,711,000)
------------ ------------
Net deferred tax assets $ 894,000 $ 1,056,000
============ ============
Deferred tax liabilities:
Intangible assets $ 694,000 $ 721,000
Book/tax fixed asset basis differences 63,000 47,000
------------ ------------
Total noncurrent deferred tax liabilities $ 757,000 $ 768,000
============ ============
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 a
portion of the alternative minimum tax credit carryforwards and state net
operating loss carryforwards at ECI and ECI Sportswear. 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 of $150,000 and $269,000 are included in
prepaid expenses and other current assets, net noncurrent deferred tax
assets of $744,000 and $787,000 are included in other assets, and
noncurrent deferred tax liabilities of $757,000 and $768,000 are included
in other liabilities as of December 31, 1998 and 1997, respectively.
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
F-19
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. 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.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the purchase by Simon of approximately 63.4% of the
stock of the Company will limit the Company's use of its net operating
loss carryforwards and other tax credits. 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. The anticipated Section 382 limitation
will severely limit the remaining Federal tax net operating loss
carryforwards disclosed below.
The amounts and expiration dates, if accepted, of the remaining Federal
tax net operating loss carryforwards are as follows:
1999 $ 7,000,000
2000 9,000,000
2001 6,000,000
2005 39,000,000
2006 11,000,000
2007 3,000,000
2008 1,000,000
-----------
$76,000,000
===========
Approximately $37,000 of investment tax and job credits, expiring from
1999 to 2000, are available as a carryforward to reduce future Federal
income tax payments.
F-20
13. 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, 1998 are as follows:
Operating Capital
Year Ending Leases Leases
1999 $ 2,153,000 $ 76,000
2000 1,222,000 32,000
2001 1,064,000 26,000
2002 1,047,000 26,000
2003 1,048,000 --
Thereafter 6,098,000 --
------------ ---------
Total minimum lease payments $ 12,632,000 160,000
============
Less amount representing interest (19,000)
---------
Present value of minimum lease payments $ 141,000
=========
The Company has various operating leases in effect primarily for outlet
stores, automobiles, selling and administrative facilities and warehouse
facilities. The outlet store leases expire over the next three to ten
years, the selling and administrative facility leases expire over the next
six years and the warehouse leases expire over the next two years. The
outlet store leases contain a clause whereby the stores are assessed
additional rent based on a percentage of sales. For the years ended
December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 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 $2,282,000, $1,769,000 and $1,885,000 for the years
ended December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 1996, respectively.
The Company is involved in certain warehousing arrangements 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
years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 1996 were $1,606,000, $445,000 and $261,000,
respectively.
The Company leases various office equipment under capital leases expiring
over the next two to five years. As of December 31, 1998 and 1997, the
current obligation payable is $67,000 and $98,000, respectively, and is
included in accrued expenses and other current liabilities. The noncurrent
obligation payable is $73,000 and $140,000, respectively, and is included
in other liabilities.
Equipment Financing Agreement - The Company has entered into a financing
agreement with a third party for the purpose of acquiring various computer
hardware and software and additional services. 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, 1998 and 1997, the current obligation payable is
F-21
$43,000 and $162,000, respectively, and is included in the current portion
of long-term debt. The noncurrent obligation payable is $0 and $43,000,
respectively, and is included in long-term debt.
License Agreements - The Company has been granted several licensing
agreements to manufacture and distribute men, women and boys' outerwear,
sportswear and activewear products bearing the licensors' labels. The
agreements expire at various dates through 2000. The Company is required
to make minimum royalty payments, along with additional royalty payments
in the range of 2.5% to 9% based on a percentage of defined sales. Royalty
expenses under these licensing agreements totaled $5,600,000, $2,480,000
and $1,629,000 for the years ended December 31, 1998 and 1997 and for the
period from February 3, 1996 through December 31, 1996, respectively.
The following is a schedule by year of future minimum royalty payments
required under the license agreements with initial or remaining terms in
excess of one year as of December 31, 1998:
1999 $ 1,862,000
2000 769,000
-----------
$ 2,631,000
===========
The Company has the option to renew the license agreements for an
additional period based on the terms of each agreement. The following is a
schedule by year of additional future minimum royalty payments required
over the renewal period if the Company were to exercise its option to
renew all of its license agreements:
1999 $ 0
2000 780,000
2001 970,000
2002 1,060,000
2003 1,100,000
Thereafter 1,690,000
----------
$5,600,000
==========
Employment Contracts - The Company has entered into employment contracts
with certain senior executives for a period of three to four years,
expiring no later than December 31, 2001. Under the agreements, the
covered individuals are entitled to a specified salary over the contract
period. In addition, bonuses are payable contingent upon profitability and
cash flows of the Company for each period. The estimated future minimum
obligation under these contracts as of December 31, 1998 is $2,425,000.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the Company entered into a retention agreement with
the former Chairman and Chief Executive Officer of the Company providing
for severance dependent on certain events occurring as defined. In March
1999, the Company paid $2,401,000 to this former Officer as severance
under the agreement.
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
F-22
that any ultimate liability arising from these actions will not have a
material adverse effect on its consolidated financial statements.
14. BUSINESS SEGMENT DATA
The Company is engaged in one business, the design and import of men's and
boy's outerwear, activewear, swimwear, loungewear and sportswear. The
Company is organized and managed as one business segment that offers
distinct men's and boy's apparel products to its customers. The Company's
business is conducted domestically, with substantially all of its net
sales derived from domestic customers. The Company had sales to one
customer that represent 13%, 10% and 34% of net sales for the years ended
December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 1996, respectively. For the period from February 4,
1996 through December 31, 1996, the Company had sales to another customer
that represented 15% of net sales.
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.
16. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
In connection with the acquisition described in Note 4, the Company
acquired the following net assets:
Receivables $ 90,000
Inventories 3,571,000
Prepaid expenses and other current assets 1,170,000
Furniture, fixtures and equipment 327,000
Other assets 924,000
Accounts payable (3,828,000)
Accrued expenses and other current liabilities (1,183,000)
Other liabilities (56,000)
-----------
Fair value of net assets acquired $ 1,015,000
===========
Total consideration $ 4,234,000
===========
17. SUBSEQUENT EVENTS
On February 26, 1999, the Company entered into a Securities Purchase
Agreement ("Purchase Agreement") with The Simon Group L.L.C. ("Simon") and
Apollo (as defined in Note 6) providing for the purchase by Simon of
24,107,145 newly issued shares of Common Stock of the Company and
2,093,790 newly issued shares of Series A Preferred Stock of the Company
for $20,000,000 cash ("Simon Purchase Transaction"). Immediately
thereafter, the Company redeemed in full the outstanding balance of the
Apollo Note (as defined in Note 6) as of the date of the transaction which
F-23
amounted to $10,658,000 of remaining principal and accrued interest. The
redemption was satisfied through the exchange of $4,000,000 in cash and
the issuance of 5,892,856 shares of Common Stock and 512,113 shares of
Series A Preferred Stock of the Company. The redemption of the Apollo Note
resulted in a gain on debt forgiveness of $1,768,000 which has been
accounted for as a capital contribution to the Company. As a result of the
completion of the Simon Purchase Transaction, Simon effectively became the
beneficial owner of approximately 63.4% of the Company, while Apollo
retains approximately 23.7% ownership of the Company.
The shares of Series A Preferred Stock issued to both Simon and Apollo are
manditorily convertible upon the filing of an amendment to the Certificate
of Incorporation of the Company authorizing a sufficient number of shares
of Common Stock into which the Series A Preferred Stock are convertible.
The conversion shall occur at a ratio of 10 shares of Common Stock for
every 1 share of Series A Preferred Stock. The newly issued Common Stock
and Series A Preferred Stock has not been registered under the Securities
Act of 1933 and may not be offered or sold absent a registration or an
applicable exemption from registration requirements.
Also in connection with the Simon Purchase Transaction, the Company was
required to issue 700,000 shares of Common Stock to the Warnaco Group,
Inc. ("Warnaco") to satisfy a non-competition agreement the new Chairman
and Chief Executive Officer of the Company had with Warnaco. In addition,
the former Chairman and Chief Executive Officer of the Company has been
granted an option to purchase 1,000,000 shares of Common Stock of the
Company at an exercise price of $.48 per share. The option shall vest
within twelve months of the date of grant; however, the option shall
obtain accelerated vesting on the occurrence of certain events as defined
in the agreement. All 1,803,000 options issued and outstanding to Officers
and employees of the Company as of December 31, 1998 have immediately
vested and become exercisable on the date of the Simon Purchase
Transaction.
As a result of the change in control, the Company was required to obtain
consents from the licensors of its Perry Ellis licenses upon the closing
of the transaction. In obtaining the appropriate consents, the Company's
Perry Ellis licenses have been severely restricted. In the opinion of
management and based upon future forecasted results of the Perry Ellis
product line, the remaining value of the associated goodwill and licenses
of $3,726,000 acquired in connection with the Davco acquisition (as
discussed in Note 4, Business Acquisition) will not be recoverable. The
Company will record this nonrecurring charge to operations in the first
quarter of 1999.
The pro forma effect on the consolidated balance sheet assuming the Simon
Purchase Transaction had been completed at the end of the Company's 1998
fiscal year includes an increase in cash and cash equivalents of
$16,000,000, a reduction in accrued expenses and other current liabilities
of $542,000 representing accrued interest on the Apollo Note, a reduction
in long-term debt for the principal amount of the Apollo Note of
$9,496,000, and an increase in stockholders' equity of $26,038,000
reflecting the newly issued shares of Common Stock and Series A Preferred
Stock and the increase to paid-in-capital for the gain on debt
forgiveness. The pro forma effect on the consolidated statement of
operations assuming the Simon Purchase Transaction had been completed at
the beginning of the Company's 1998 fiscal year includes a reduction in
net loss of $1,272,000 representing the net effect of a reduction in
interest and debt expense. The pro forma basic and diluted loss per share
before extraordinary item would have been ($.04), and the pro forma basic
and diluted net loss per share would have been ($.03). The corresponding
weighted-average shares outstanding for purposes of these computations
would have been 71,671,000. This unaudited pro forma information is not
necessarily indicative of the results that might have occurred had the
Simon Purchase Transaction occurred at the beginning of the Company's 1998
fiscal year or of future results.
F-24
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------------------
December 31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,000 $ 670,000
Prepaid expenses and other current assets 19,000 54,000
------------ ------------
Total current assets 128,000 724,000
INVESTMENTS IN/ADVANCES TO SUBSIDIARIES 32,550,000 36,742,000
PROPERTY AND EQUIPMENT - NET 2,000 5,000
OTHER ASSETS 1,024,000 795,000
------------ ------------
TOTAL ASSETS $ 33,704,000 $ 38,266,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 1,351,000 $ 654,000
Current portion of long-term debt 1,040,000 2,010,000
------------ ------------
Total current liabilities 2,391,000 2,664,000
OTHER LIABILITIES 783,000 901,000
LONG-TERM DEBT (net of unamortized discount of $506,000
and $630,000, respectively) 16,438,000 16,887,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 151,000 150,000
Preferred stock, par value $.01 -- --
Additional paid-in capital 44,757,000 44,752,000
Accumulated deficit (30,816,000) (27,088,000)
------------ ------------
Total stockholders' equity 14,092,000 17,814,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,704,000 $ 38,266,000
============ ============
See notes to condensed financial statements
F-25
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
REVENUES:
Management fees from subsidiaries $ 2,595,000 $ 2,600,000 $ 1,818,000
Equity in (losses) earnings of subsidiaries (3,271,000) 3,413,000 32,000
------------ ------------ ------------
(676,000) 6,013,000 1,850,000
------------ ------------ ------------
OPERATING COSTS:
Selling and administrative expenses 886,000 1,134,000 827,000
Amortization and depreciation expenses 673,000 676,000 1,058,000
------------ ------------ ------------
1,559,000 1,810,000 1,885,000
------------ ------------ ------------
(LOSS) INCOME BEFORE INTEREST
EXPENSE, GAIN ON SALE OF
SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM (2,235,000) 4,203,000 (35,000)
INTEREST EXPENSE (1,975,000) (1,821,000) (4,991,000)
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company -- -- 7,786,000
Realization of cumulative foreign currency
translation loss -- -- (1,108,000)
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (4,210,000) 2,382,000 1,652,000
INCOME TAX EXPENSE(BENEFIT) 40,000 49,000 (452,000)
------------ ------------ ------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (4,250,000) 2,333,000 2,104,000
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 522,000 -- --
Gain on debt forgiveness -- -- 10,862,000
------------ ------------ ------------
NET (LOSS) INCOME $ (3,728,000) $ 2,333,000 $ 12,966,000
============ ============ ============
See notes to condensed financial statements.
F-26
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,728,000) $ 2,333,000 $ 12,966,000
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 673,000 676,000 1,058,000
Interest in undistributed equity losses (earnings)
of subsidiaries 3,271,000 (3,413,000) (32,000)
Gain on sale of Perry -- -- (7,786,000)
Gain on debt forgiveness and extinguishments (522,000) -- (10,862,000)
Cumulative translation adjustment -- -- 1,108,000
Capitalized interest 276,000 1,830,000 1,424,000
Deferred income tax expense (benefit) 79,000 (26,000) (544,000)
Change in assets and liabilities 557,000 (795,000) (1,741,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 606,000 605,000 (4,409,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- -- (4,000)
Net proceeds from sale of Perry -- -- 40,145,000
------------ ------------ ------------
Net cash provided by investing activities -- -- 40,141,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (1,128,000) (15,000) (40,857,000)
Principal payments of long-term debt (45,000) (15,000) --
Proceeds from issuance of long-term debt -- -- 3,528,000
Purchase of common stock -- -- (4,000)
Proceeds from exercise of stock options 6,000 6,000 --
------------ ------------ ------------
Net cash used in financing activities (1,167,000) (24,000) (37,333,000)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (561,000) 581,000 (1,601,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 670,000 89,000 1,690,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 109,000 $ 670,000 $ 89,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 1,081,000 $ -- $ 1,477,000
============ ============ ============
Income taxes $ 37,000 $ 24,000 $ 30,000
============ ============ ============
See notes to condensed financial statements.
F-27
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
Maturities - Future maturities of long-term debt are as follows:
Year Ending December 31,
1999 $ 1,040,000
2000 600,000
2001 4,850,000
2002 11,494,000
------------
$ 17,984,000
============
3. SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS
On July 15, 1997, the Company contributed 3 million restricted shares of
its Common Stock, par value $.01, to its wholly-owned subsidiary, ECI
Sportswear, Inc. The value assigned to these shares was $720,000. The
effect of this transaction was an increase to investments in/advances to
subsidiaries of $720,000, Common Stock of $30,000 and additional paid-in
capital of $690,000.
F-28
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
Year ended December 31, 1998:
Allowance for sales
returns and discounts $ 1,832,000 $ 9,738,000 $ 7,711,000(1) $ 3,859,000
Inventory reserve for obsolescence 268,000 1,240,000 -- 1,508,000
Reserve for price allowances 880,000 1,075,000 905,000(1) 1,050,000
----------- ----------- ----------- -----------
$ 2,980,000 $12,053,000 $ 8,616,000 $ 6,417,000
=========== =========== =========== ===========
Year ended December 31, 1997:
Allowance for sales
returns and discounts $ 1,803,000 $ 2,738,000 $ 2,709,000(1) $ 1,832,000
Inventory reserve for obsolescence -- 268,000 -- 268,000
Reserve for price allowances 961,000 732,000 813,000(1) 880,000
----------- ----------- ----------- -----------
$ 2,764,000 $ 3,738,000 $ 3,522,000 $ 2,980,000
=========== =========== =========== ===========
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 price allowances 886,000 964,000 889,000(1) 961,000
----------- ----------- ----------- -----------
$ 4,098,000 $ 4,894,000 $ 6,228,000 $ 2,764,000
=========== =========== =========== ===========
(1) Returns, discounts and allowances taken.
(2) Inventory written off.
(3) Sale of Perry Manufacturing Company.
F-29