SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
June 30, 1998
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 22-1715274
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
475 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 686-5050
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
Number of shares of Common Stock outstanding 14,908,044
At June 30, 1998
<PAGE>
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Balance Sheets as of June
30, 1998, December 31, 1997 and June 30,
1997 3
b. Consolidated Statements of Operations for
the Six Months Ended June 30, 1998 and
June 30, 1997 4
c. Consolidated Statements of Operations for
the Three Months Ended June 30, 1998 and
June 30, 1997 5
c. Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1998 and
June 30, 1997 6
d. Condensed Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
ASSETS (Unaudited) (Audited) (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $735,000 $1,372,000 $761,000
Receivables 19,204,000 26,274,000 4,757,000
Inventories 32,246,000 19,498,000 11,932,000
Prepaid expenses and other current assets 2,438,000 2,215,000 1,694,000
------------ ------------ ------------
Total current assets 54,623,000 49,359,000 19,144,000
PROPERTY, PLANT AND EQUIPMENT, NET 1,334,000 1,463,000 1,114,000
OTHER ASSETS 2,638,000 2,718,000 1,188,000
GOODWILL 19,876,000 20,297,000 17,287,000
------------ ------------ ------------
$78,471,000 $73,837,000 $38,733,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $8,656,000 $6,292,000 $1,730,000
Accounts payable - trade 4,656,000 3,024,000 941,000
Accrued expenses and other current liabilities 3,099,000 7,528,000 3,591,000
Current portion of long term debt 486,000 2,172,000 756,000
Line of credit payable 29,400,000 18,605,000 2,000,000
------------ ------------ ------------
Total current liabilities 46,297,000 37,621,000 9,018,000
OTHER LIABILITIES 1,346,000 1,472,000 1,500,000
LONG TERM DEBT, LESS CURRENT PORTION 17,068,000 16,930,000 16,809,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01: 50,000,000 shares
authorized; issued and outstanding 14,908,044
at June 30, 1998, 14,905,044 at December 31, 1997
and 11,852,544 at June 30, 1997 150,000 150,000 119,000
Additional paid-in capital 44,752,000 44,752,000 44,057,000
Accumulated deficit (31,142,000) (27,088,000) (32,770,000)
------------ ------------ ------------
Total stockholders' equity 13,760,000 17,814,000 11,406,000
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $78,471,000 $73,837,000 $38,733,000
============ ============ ============
</TABLE>
See condensed notes to consolidated financial statements
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ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------
Six Six
Months Ended Months Ended
June 30, June 30,
1998 1997
------------ ------------
NET REVENUES $37,823,000 $19,683,000
------------ ------------
OPERATING COSTS:
Cost of sales 28,048,000 13,258,000
Selling and administrative 12,494,000 8,984,000
------------ ------------
TOTAL OPERATING COSTS 40,542,000 22,242,000
------------ ------------
LOSS BEFORE INTEREST AND DEBT EXPENSE,
INCOME TAXES AND EXTRAORDINARY ITEM (2,719,000) (2,559,000)
INTEREST AND DEBT EXPENSE, NET 2,033,000 976,000
------------ ------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (4,752,000) (3,535,000)
INCOME TAX BENEFIT (175,000) (186,000)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (4,577,000) (3,349,000)
EXTRAORDINARY ITEM:
Gain on debt forgiveness 522,000 --
------------ ------------
NET LOSS ($4,055,000) ($3,349,000)
============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,906,095 11,852,544
Weighted average shares outstanding - Diluted 16,440,444 12,685,018
Basic earnings per share:
Loss before extraordinary item ($0.31) ($0.28)
Extraordinary item 0.04 0.00
------------ ------------
Net Loss ($0.27) ($0.28)
============ ============
Diluted earnings per share:
Loss before extraordinary item ($0.28) ($0.26)
Extraordinary item 0.03 0.00
------------ ------------
Net Loss ($0.25) ($0.26)
============ ============
See condensed notes to consolidated financial statements
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ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------
Three Three
Months Ended Months Ended
June 30, June 30,
1998 1997
------------ ------------
NET REVENUES $19,998,000 $5,236,000
------------ ------------
OPERATING COSTS:
Cost of sales 15,628,000 3,478,000
Selling and administrative 6,092,000 3,920,000
------------ ------------
TOTAL OPERATING COSTS 21,720,000 7,398,000
------------ ------------
LOSS BEFORE INTEREST AND DEBT EXPENSE,
INCOME TAXES AND EXTRAORDINARY ITEM (1,722,000) (2,162,000)
INTEREST AND DEBT EXPENSE, NET 1,181,000 519,000
------------ ------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (2,903,000) (2,681,000)
INCOME TAX BENEFIT (91,000) (194,000)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,812,000) (2,487,000)
EXTRAORDINARY ITEM:
Gain on debt forgiveness -- --
------------ ------------
NET LOSS ($2,812,000) ($2,487,000)
============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,907,145 11,852,544
Weighted average shares outstanding - Diluted 16,361,740 12,711,068
Basic earnings per share:
Loss before extraordinary item ($0.19) ($0.21)
Extraordinary item 0.00 0.00
------------ ------------
Net Loss ($0.19) ($0.21)
============ ============
Diluted earnings per share:
Loss before extraordinary item ($0.17) ($0.20)
Extraordinary item 0.00 0.00
------------ ------------
Net Loss ($0.17) ($0.20)
============ ============
See condensed notes to consolidated financial statements
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ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,055,000) ($3,349,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 827,000 648,000
Capitalized interest 151,000 135,000
Forgiveness of debt (522,000) --
Change in assets and liabilities :
Decrease in receivables 7,070,000 2,567,000
Increase in inventories (12,748,000) (2,698,000)
(Increase) / decrease in prepaid expenses and other current assets (223,000) 282,000
Decrease in other assets 12,000 --
Increase / (decrease) in trade acceptances payable 2,364,000 (3,872,000)
Increase in accounts payable - trade 1,632,000 19,000
Decrease in accrued expenses and other current liabilities (4,428,000) (906,000)
Decrease in other liabilities (113,000) (115,000)
------------ ------------
Total Adjustments (5,978,000) (3,940,000)
------------ ------------
Net cash used in operating activities (10,033,000) (7,289,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (163,000) (156,000)
------------ ------------
Net cash used in investing activities (163,000) (156,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (1,236,000) (72,000)
Net proceeds / (repayments) on bank line of credit 10,795,000 2,000,000
------------ ------------
Net cash provided by financing activities 9,559,000 1,928,000
NET DECREASE IN CASH AND CASH EQUIVALENTS (637,000) (5,517,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,372,000 6,278,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $735,000 $761,000
============ ============
CASH PAID DURING THE YEAR FOR:
Interest $1,516,000 $89,000
Income Taxes 41,000 48,000
</TABLE>
See condensed notes to consolidated financial statements
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<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheets as of June 30, 1998 and 1997, the consolidated
statements of operations for the six months ended June 30, 1998 and 1997, the
consolidated statements of operations for the three months ended June 30, 1998
and 1997 and the consolidated statements of cash flows for the six months ended
June 30, 1998 and 1997 were all prepared by the Company without audit. In
management's opinion, adjustments consisting of only normal recurring
adjustments necessary to present fairly the financial position, results of
operations and changes in cash flows for these periods have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted or abridged in this submission. It is suggested, therefore,
that these consolidated statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The operating results for the six
months ended June 30, 1998 are not necessarily indicative of the operating
results for the year ending December 31, 1998.
Effective July 15, 1997, ECI Sportswear, Inc. ("ECI Sportswear"), an indirect
wholly owned subsidiary of the Company, acquired substantially all of the assets
of Davco Industries, Inc. ("Davco"), a maker of mens' and boys' activewear,
swimwear, loungewear and some sportswear products sold under the "Perry Ellis
America" and/or "Perry Ellis" labels, "Jeffrey Banks" mens' sportswear, "FUBU"
boy's sportswear, activewear and outerwear and "Members Only" mens' and boys'
sportswear and loungewear. The operating results for ECI Sportswear are included
in the Company's results of operations for the six and three month periods ended
June 30, 1998.
2. DEBT SERVICE
The Company's long-term indebtedness consists of the debt obligations of the
Company to BNY Financial Corporation ("BNY") and AIF-II, L.P., a Delaware
limited partnership and an affiliate of Apollo Advisors, L.P. ("AIF II"). On
January 29, 1998, the Company repaid in full all of its remaining 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.
o On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY, pursuant to which BNY
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received a $7 million note, bearing interest at a rate of 7% per annum,
with a final maturity date of November 3, 2002. BNY shares with AIF-II a
first lien on the stock of ECI. On September 12, 1997, the 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 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 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 on
the BNY Note Agreement 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, 1997, with any
remaining balance due on November 3, 2002. The remaining principal of BNY's
note is required to be paid in five annual installments, payable on
November 3 of each year commencing in 1998 as follows:
Year Amount
1998 $ 300,000
1999 500,000
2000 600,000
2001 1,100,000
2002 4,200,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$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.
o On June 30, 1993 the Company entered into a Series B Junior Secured Note
Agreement with AIF-II, pursuant to which AIF-II received a $7.5 million
note bearing interest at 13% per annum. AIF-II shares with BNY a first lien
on the stock of ECI. On September 12, 1997, the Company and AIF-II entered
into an amendment of the AIF-II Note Agreement providing that (1) scheduled
interest accruing under the AIF-II Note Agreement 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 AIF-II Note Agreement accruing
for periods commencing February 1, 1998 will be made in cash on quarterly
payment dates commencing May 4, 1998. Principal of AIF-II's note is
required to be paid in two equal installments payable on November 3 in each
of 2001 and 2002.
In addition, on November 3, 2002, the Company is obligated to pay AIF-II
$2,502,000, representing the quarterly interest payments accruing for the
period November 1, 1995 through January 31, 1998, which were not and will
not be paid in cash and instead added to the principal of the AIF-II Note.
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BNY and AIF-II will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" of the Company as defined in the Company's note
agreements with BNY and AIF-II.
3. GOODWILL
Goodwill represents the unamortized excess of the cost of acquiring a business
over the fair values of the net assets received at the date of acquisition. The
Company continuously evaluates goodwill for any potential impairment. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows.
4. INVENTORIES
June 30 December 31 June 30
1998 1997 1997
---- ---- ----
(In Thousands)
Finished goods $32,246 $19,498 $11,932
Work-in process -0- -0- -0-
Raw materials -0- -0- -0-
-------- -------- --------
$32,246 $19,498 $11,932
======== ======== ========
5. ACQUISITIONS
Effective July 15, 1997, ECI Sportswear, Inc. ("ECI Sportswear"), an indirect
wholly owned subsidiary of the Company, acquired substantially all of the assets
of Davco Industries, Inc. ("Davco"), at that time a maker of mens' and boys'
activewear, swimwear, loungewear and some sportswear products sold under the
"Perry Ellis America" and/or "Perry Ellis" labels and mens' sportswear sold
under the "Jeffrey Banks" label. The aggregate purchase price, inclusive of
acquisition costs, paid by ECI Sportswear for such assets of $4,373,000
consisted of (a) the issuance to Davco of 3,000,000 shares of restricted Common
Stock of the Company valued at $720,000 and (b) a contingent cash purchase price
to Davco to be computed as 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), but not to exceed a maximum payment of
$3,600,000, such cash amount payable subsequent to issuance of the Company's
December 31, 1997 audited financial statements. On the closing date, ECI
Sportswear paid to Davco $500,000 as an advance towards the contingent cash
purchase price and ECI Sportswear paid an additional advance of $81,000
following completion of ECI Sportswear's third fiscal quarter ending September
30, 1997. 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
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<PAGE>
estimated fair values at the date of acquisition. This resulted in an excess of
purchase price over net assets acquired of $3,356,000, which has been recognized
as goodwill and is being amortized on a straight-line basis over 20 years. ECI
Sportswear is a wholly-owned subsidiary of Europe Craft Imports, Inc.("ECI").
The total contingent cash purchase price for the Davco assets derived from ECI
Sportswear's December 31, 1997 financial statements, was $3,483,000. On April
10, 1998, the Company paid $2,660,000 in respect of the contingent purchase
price for the Davco assets, after deducting advances previously paid of $581,000
and reserves for purchase price adjustments of $242,000.
The following unaudited pro forma consolidated results of operations for the six
months ended June 31, 1997 are presented as if the acquisition of Davco's assets
had been made at the beginning of such period. The unaudited consolidated
results of operations for the six months ended June 30, 1998 are presented for
comparison. Pro forma adjustments have been made to include the effects of
amortization of goodwill and intangible assets. The unaudited pro forma
information is not necessarily indicative of either the results of operations
that would have occurred had the purchase been made during the period presented
or the future results of the combined operations.
- --------------------------------------------------------------------------------
Six Months
Ended Six Months Ended
June 30, 1997 June 30, 1998
(Pro Forma) (Actual)
--------------------------- ------------- -----------------
Net Revenues .............. $36,721,000 $37,823,000
Gross Profit .............. 10,430,000 9,775,000
Loss before taxes and (3,721,000) (4,752,000)
extraordinary item
Income tax benefit ........ (176,000) (175,000)
Net loss .................. (3,545,000) (4,055,000)
Basic Earnings (loss) per (0.24) (0.27)
share
Diluted Earnings (loss) per (0.23) (0.25)
share
- --------------------------------------------------------------------------------
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6. INCOME TAXES
Due to significant net operating loss carryforwards, the Company does not
anticipate paying any federal income taxes for the year ending December 31,
1998, except for the alternative minimum income tax which was part of the 1986
Tax Reform Act.
A valuation allowance is recognized for those deferred tax assets that may not
be realized. At this time, the Company has determined that such a valuation
allowance be equal to the gross federal deferred tax asset, except for the
alternative minimum tax credit carryforwards and a portion of the 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 these credit carryforward will be realized.
7. PER SHARE DATA
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
was effective for periods ending after December 15, 1997. The Company's prior
years earnings per share ("EPS") results have been restated to conform with the
provisions of this Statement. Under SFAS 128, the Company has presented two
earnings per share amounts. Basic EPS is calculated based on income available to
common shareholders and the weighted-average number of shares outstanding during
the reporting period. Diluted EPS includes additional dilution from potential
common stock issuable pursuant to the exercise of stock options and a warrant
outstanding.
- --------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------- ----------- ------------- ----------
Six Months Ended
6/30/98
Basic EPS $(4,577,000) 14,906,095 $(0.31)
Loss before extraordinary
item ....................
Effect of Dilutive
Securities
Stock Options -- 953,726
Warrants -- 580,623
------------ ----------
Diluted EPS
Loss before extraordinary $(4,577,000) 16,440,444 $(0.28)
item ...................
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------- ----------- ------------- ----------
Six Months Ended
6/30/97
Basic EPS $(3,349,000) 11,852,544 $(0.28)
Loss before extraordinary
item ....................
Effect of Dilutive
Securities
Stock Options -- 260,091
Warrants -- 572,383
----------- ----------
Diluted EPS
Loss before extraordinary $(3,349,000) 12,685,018 $(0.26)
item ....................
- --------------------------------------------------------------------------------
8. CONTINGENCIES
The Company and/or its subsidiaries, in the ordinary course of their business,
from time to time may be the subject of, or a party to, various legal actions
involving private interests. While the Company cannot guaranty the outcome of
any litigation, the Company and/or its subsidiaries believe that any ultimate
liability arising from any such actions which may be pending will not have a
material adverse effect on its consolidated financial position, results of
operations or cash flows at June 30, 1998.
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ARIS INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") should be read in conjunction with the
consolidated financial statements, including the notes thereto, included on
pages 3 through 12 of this report.
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC:
o The apparel industry in general is volatile and unpredictable due to
cyclical and seasonal swings caused in part by consumer buying
patterns.
o The Company's ECI subsidiary, which sells primarily outerwear, is
particularly impacted by unusually warm weather or late arrival of
cold weather. The Company's ECI Sportswear subsidiary can also be
impacted by weather conditions.
o There has been a substantial consolidation of formerly independent
major department store chains such that the consolidated customers
exert greater influence on suppliers such as the Company, resulting in
greater demands for price reductions, advertising support, returns and
markdowns of apparel products.
o Retail organizations in the apparel industry have undergone
reorganizations, bankruptcy liquidations, downsizing and/or cessation
of business, and others have suffered credit difficulties whereby
factors delay or deny credit to such retail organizations. As a
result, the Company may experience difficulty in obtaining factoring
and credit approval on certain customers.
o Although the Company's ECI and ECI Sportswear subsidiaries
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market a wide variety of products, they must compete with other
apparel suppliers which specialize in particular niche products which
may have greater resources, reputation and efficiencies in such
particular product areas.
o A substantial portion of the Company's products are manufactured
overseas, subjecting the Company to the generic risks of import and
delivery from distant locations, delays due to U.S. or foreign
government regulation and controls, and customs and transportation
difficulties. In addition, the Company could be adversely affected by
tariffs, embargos and quotas involving countries from which the
Company imports its product lines.
o ECI and ECI Sportswear import their products primarily from
manufacturing plants which they do not own. While ECI and ECI
Sportswear, through their agents, exercise quality control over such
factories, there are inherent risks in such manufacturing which can
result in delivery delays and ultimately in cancellation of orders by
there customers.
o Increasingly, retail customers of the Company are ordering their
products closer to the actual delivery date and selling season. In
order for suppliers to deliver such products on time, they must often
now commit to production in advance of obtaining firm orders from
their retail customers.
o There is an increasing trend by retail customers to develop their own
private label apparel lines to compete with products supplied by brand
name suppliers such as the Company.
o No assurance can be made that the Company's licensors do not change
policies on advertising and distribution which can have a materially
adverse affect on the Company.
o The Company's apparel products are sold on the main selling floor
areas of its retail store customers and are facing increasing
competition from such customer's expanded dedication of retail floor
space to "designer collections".
o At present, political instability in some countries, like Indonesia,
where the Company sources, could have an impact on timely completion
or delivery of finished products.
o A large proportion of the Company's products are manufactured in Asia
by independent contractors, whose businesses, finances and credit
could be seriously impaired by the Asian economic crises which
commenced in the latter half of 1997 and has continued during the
calendar year 1998. If there were a sustained loss of the Company's
Asian sources of supply, the Company's business
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would be materially adversely affected. The Company is unable to
predict the impact of the Asian economic crises on particular Asian
countries where the Company sources its products or particular
contractors within those countries. The "Members Only" licensee for
apparel products to be sold in the territory of the People's Republic
of China, Hong Kong and Macau has maintained domestic production for
such markets, but has ceased manufacturing products for export; there
are no assurances that such licensee will be capable of continuing
domestic production for its Chinese licensed territory.
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
Compliance issue. As the year 2000 approaches, such systems may be
unable to accurately process certain date based information.
The Company is currently identifying all significant applications that
will require modification to ensure Year 2000 Compliance. Internal
resources are being used to make required modifications and test Year
2000 Compliance. The Company target date for completion is June 30,
1999.
In addition, the Company has communicated with others with whom it
does significant business to determine their Year 2000 Compliance
readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely
will be timely converted, or that a failure to convert by another
company or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities
is estimated to be approximately $75,000 and will be funded internally
through operating cash flows. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing
processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the
continued availability of certain third party modification plans and
other factors. However, there can be no guarantee that these
objectives will be achieved and actual results could differ from those
plans.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had working capital of approximately $8,326,000
as compared to $11,738,000 at December 31,
-15-
<PAGE>
1997 and $10,126,000 at June 30, 1997. The decrease in working capital from
December 31, 1997 to June 30, 1998 is due to funding the Company's operating
loss in the first six months offset by the extraordinary gain of $522,000
recorded by the Company in connection with the early extinguishment of the New
Heller Note. During this period, the Company financed its capital expenditures
principally through internally generated funds and credit facilities.
The Company's interest payments to its secured lenders, BNY Financial Corp.
("BNY") and AIF II, L.P. ("AIF-II") scheduled for the period January 1, 1998
through January 31, 1998 were paid in kind pursuant to amendments to the
Company's loan agreements with such lenders. The Company's interest payments to
BNY and AIF-II scheduled for the period February 1, 1998 through August 3, 1998
were paid in cash on their due dates.
On January 29, 1998, the Company repaid in full all principal and interest of
the Company's debt obligations to Heller Financial, Inc.
("Heller").
On September 12, 1997, the Company entered into amendments of its note
agreements with BNY and AIF-II providing that scheduled interest accruing under
the BNY Note Agreement for the period February 1, 1996 through January 31, 1998
and under the AIF-II Note Agreement 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.
The September 12, 1997 amendments to the Company's BNY and AIF-II Note
Agreements provide that cash payments of scheduled interest to BNY and AIF-II
will resume on quarterly payment dates commencing May 4, 1998, and that the
Company must make principal payments to BNY of $15,000 on the last day of each
calendar quarter commencing December 31, 1997. In addition, the Company is
required to make annual principal payments to BNY in accordance with the
original amortization schedule of the BNY Note Agreement, commencing with a
$300,000 payment on November 3, 1998.
On May 15, 1998, the Company's operating subsidiaries renewed their working
capital credit facilities for the period through April 15, 1999. The working
capital facilities impose limitations on the level of borrowings at different
times during the year, require the operating subsidiaries to maintain certain
levels of net worth during the year, contain other covenants and reporting
requirements, and place certain limitations on the upstreaming of funds from the
operating subsidiaries to the Company. Depending upon the performance of the
Company's operating subsidiaries these covenants and requirements have been or
may be amended, waived or changed from time to time. The Company believes that
if the operating subsidiaries achieve their business plans these working capital
covenants and other requirements will be met and sufficient funds may be
upstreamed to enable the Company to make scheduled payments to BNY and AIF-II
during the year ended December 31, 1998. If the operating subsidiaries do not
achieve their business plans, or the working capital lender does not permit the
upstreaming of funds in sufficient amounts, or the Company otherwise did not
have sufficient
-16-
<PAGE>
cash resources to make scheduled payments to BNY and AIF-II on payment dates
commencing November 3, 1998, the Company would intend to discuss with BNY and
AIF-II the renegotiation of required payments and discuss with its working
capital lenders the amendment of covenants and other requirements so as to be in
compliance with its agreements with such lenders. While BNY and AIF-II have in
the past granted consents to the payment of scheduled interest in kind rather
than in cash, and/or the deferral of interest payments and principal
amortization and the working capital lenders have in the past granted amendments
of covenants and other requirements, there are no assurances that the Company
will be able to obtain such consents in the future. If, under such
circumstances, the Company cannot obtain such consents or a renegotiation of
payment schedules, the Company could be in default of its working capital
obligations and could on quarterly payment dates from and after November 3,
1998, be in default of its obligations to BNY and AIF-II.
Effective July 15, 1997, ECI Sportswear, an indirect wholly owned subsidiary of
the Company, acquired substantially all of the assets of Davco Industries, Inc.
("Davco"), at that time a maker of mens' and boys activewear, swimwear,
loungewear and some sportswear proeucts sold under the "Perry Ellis America"
and/or "Perry Ellis" labels, and mens' sportswear sold under the "Jeffrey Banks"
label. The acquisition was accounted for as a purchase. The aggregate purchase
price paid by ECI Sportswear of $4,373,000 for such assets consisted of (a) the
issuance to Davco of 3,000,000 shares of restricted Common Stock of the Company
valued at $720,000 and (b) a contingent cash purchase price computed as 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), but
not to exceed a maximum payment of $3,600,000. Such contingent cash amount is
payable subsequent to the issuance of the Company's December 31, 1997 audited
financial statements. On the closing date, ECI Sportswear paid to Davco $500,000
as an advance towards the contingent cash purchase price and ECI Sportswear paid
an additional advance of $81,000 following completion of ECI Sportswear's third
fiscal quarter ending September 30, 1997. The total contingent cash purchase
price payable to Davco, derived from ECI Sportswear's' December 31, 1997
financial statements, was $3,483,000. On April 10, 1998, the Company paid
$2,660,000 in respect of the contingent purchase price for the acquisition of
assets from Davco, after deducting advances previously paid of $581,000 and
reserves for purchase price adjustments of $242,000. ECI Sportswear's source of
funds for the cash payments of the purchase price were its internally generated
funds and working capital credit lines.
DEBT SERVICE AND CAPITAL NEEDS
The Company's long-term indebtedness consists of the debt obligations of the
Company to BNY Financial Corporation ("BNY") and AIF-II, L.P., a Delaware
limited partnership and an affiliate of Apollo Advisors, L.P. ("AIF II"). On
January 29, 1998, the Company repaid in full all of its remaining debt
obligations to Heller Financial, Inc. ("Heller"). Such payment amounted to
$1,128,000,
-17-
<PAGE>
inclusive of accrued interest through the date of repayment.
o On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY, pursuant to which BNY received a $7 million note,
bearing interest at a rate of 7% per annum, with a final maturity date of
November 3, 2002. BNY shares with AIF II a first lien on the stock of ECI.
On September 12, 1997, the 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
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 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 on the BNY Note Agreement 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, 1997, with any remaining balance due on November
3, 2002. The remaining principal of BNY's note is required to be paid in
five annual installments, payable on November 3 of each year commencing in
1998 as follows:
Year Amount
1998 $ 300,000
1999 500,000
2000 600,000
2001 1,100,000
2002 4,200,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$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.
o On June 30, 1993 the Company entered into a Series B Junior Secured Note
Agreement with AIF-II, pursuant to which AIF-II received a $7.5 million
note bearing interest at 13% per annum. AIF-II shares with BNY a first lien
on the stock of ECI. On September 12, 1997, the Company and AIF-II entered
into an amendment of the AIF-II Note Agreement providing that (1) scheduled
interest accruing under the AIF-II Note Agreement 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 AIF-II Note Agreement accruing
for periods commencing February 1, 1998 will be made in cash on quarterly
payment dates commencing May 4, 1998. Principal of AIF-II's note is
required to be paid in two equal installments payable on November 3 in each
of 2001 and 2002.
In addition, on November 3, 2002, the Company is obligated to pay AIF-II
$2,502,000, representing the quarterly interest
-18-
<PAGE>
payments accruing for the period November 1, 1995 through January 31, 1998,
which were not and will not be paid in cash and instead added to the
principal of the AIF-II Note.
BNY and AIF-II will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" of the Company as defined in the Company's note
agreements with BNY and AIF-II.
RESULTS OF OPERATIONS
NET INCOME
The Company reported net losses of $2,812,000 and $4,055,000 for the three and
six month periods ended June 30, 1998 respectively, compared to net losses of
$2,487,000 and $3,349,000, respectively for the three and six month periods
ended June 30, 1997.
The increase in the loss for the three month period was primarily due to the
inclusion of ECI Sportswear operating results in the current year. ECI
Sportswear acquired the assets of Davco on July 15, 1997. In addition, there was
increase in interest expense at ECI and ECI Sportswear which was caused by a
poor fall selling season at many retailers and specialty stores who had
carryover inventory and therefore reduced their spring season purchases of
higher margin "Perry Ellis America" outerwear and sportswear creating additional
borrowings against the Company's line of credit.
The increase in the loss for the six month period was primarily due to reduced
margins at ECI which were the result of a poor fall selling season at many
retailers and specialty stores who had carryover inventory and therefore reduced
their spring season purchases of higher margin "Perry Ellis America" outerwear
offset by the continued strong performance of the Company's own Members Only
brand which has historically lower margins. This created additional borrowings
against the Company's line of credit resulting in increased interest expense
which was offset by an extraordinary gain of $522,000 recorded on the early
extinguishment of the New Heller Note, which was paid off on January 29, 1998.
REVENUE
The Company's revenues increased from $5,236,000 during the three months ended
June 30, 1997 to $19,998,000 during the three months ended June 30, 1998. The
revenue increase of $14,762,000 was due to the inclusion of ECI Sportswear's
revenues of $10,292,000, ECI Sportswear acquired the assets of Davco on July 15,
1998, in the current year along with an increase in ECI's revenues of $4,470,000
which was due to sales to certain private label customers, who used ECI this
year as a direct merchandise supplier; last year these private label customers
used ECI as a sourcing agent to arrange for and oversee production of
merchandise for such customers for a commission.
-19-
<PAGE>
The Company's revenues increased from $19,683,000 during the six months ended
June 30, 1997 to $37,823,000 during the six months ended June 30, 1998. The
revenue increase was primarily due to the inclusion of ECI Sportswear's revenues
of $17,175,000 in the current year. ECI Sportswear acquired the assets of Davco
on July 15, 1997. In addition, ECI's revenues increased by $965,000.
COST OF SALES
Cost of Sales for the three months ended June 30, 1998 as a percentage of
revenue was 78.1% compared to 66.4% for the three months ended June 30, 1997.
Cost of Sales were impacted by a poor fall selling season at many retailers and
specialty stores who had carryover inventory and therefore reduced their spring
season purchases of higher margin "Perry Ellis America" business offset by the
continued strong performance of the Company's own Members Only brand which
historically is sold at lower margins. In addition, further negatively impacting
this percentage was the sales to certain private label customers, who used ECI
this year as a direct merchandise supplier; last year these private label
customers used ECI as a sourcing agent which generated commission income for ECI
without reflecting the corresponding revenue. This year as a direct merchandise
supplier ECI is required to reflect both the revenue and related margin
components which increases the Cost of Sales as a percentage of revenue.
Cost of Sales for the six months ended June 30, 1998 as a percentage of revenue
was 74.2% compared to 67.4% for the six months ended June 30, 1997. Cost of
Sales were impacted by a poor fall selling season at many retailers and
specialty stores who had carryover inventory and therefore reduced their spring
season purchases of higher margin "Perry Ellis America" business offset by the
continued strong performance of the Company's own Members Only brand which
historically is sold at lower margins. In addition, further negatively impacting
this percentage was the sales to certain private label customers, who used ECI
this year as a direct merchandise supplier; last year these private label
customers used ECI as a sourcing agent which generated commission income for ECI
without reflecting the corresponding revenue. This year as a direct merchandise
supplier ECI is required to reflect both the revenue and related margin
components which increases the Cost of Sales as a percentage of revenue.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses as a percentage of revenues for the three
and six month periods ended June 30, 1998 were 30.5% and 33.0% respectively,
compared to 74.9% and 45.6 for the three and six month periods ended June 30,
1997, respectively. The decrease for the three and six month periods ended June
30, 1998 in Selling and Administrative expenses as a percentage of revenue was
due primarily to the inclusion of ECI Sportswear in the current year which has a
lower Selling and Administrative expense structure than ECI. ECI Sportswear
acquired the assets of Davco on July 15, 1997. In addition, the inclusion of
revenue from private label customers, who
-20-
<PAGE>
used ECI this year as a direct merchandise supplier, further decreased the
percentage this year as compared to last year when ECI had the same fixed
expenses but no related revenue. Due to the fixed nature of the Company's
expense structure the Company will experience a higher Selling and
Administrative expense percentage in the first half of the year which should
decrease in the second half of the year due to the seasonality of the Company's
business.
Selling and Administrative expenses for the three months ended June 30, 1998
were $6,092,000 compared to $3,920,000 for the three months ended June 30, 1997,
an increase of $2,172,000 or 55.4%. The increase in Selling and Administrative
expenses was due to the inclusion of ECI Sportswear's Selling and Administrative
expenses of $2,111,000 since its acquisition of Davco on July 15, 1997,
offsetting a decrease in Selling and Administrative expenses at ECI due to a
decrease in "Perry Ellis America" sales which resulted in lower payments on
contractual advertising obligations and lower salesmans commissions.
Selling and Administrative expenses for the six months ended June 30, 1998 were
$12,494,000 compared to $8,984,000 for the six months ended June 30, 1997, an
increase of $3,510,000 or 39.1%. The increase in Selling and Administrative
expenses was due to the inclusion of ECI Sportswear's Selling and Administrative
expenses of $3,966,000 since its acquisition of Davco on July 15, 1997,
offsetting a decrease in Selling and Administrative expenses at ECI due to a
decrease in "Perry Ellis America" sales which resulted in lower payments on
contractual advertising obligations and lower salesmans commissions.
INTEREST AND DEBT EXPENSE
Interest and debt expense for the three month period ended June 30, 1998
increased by $662,000 or 127.6% compared to the three month period ended June
30, 1997. This increase is due to the inclusion of new borrowings of ECI
Sportswear in 1998, since the acquisition of Davco on July 15, 1997 along with
an increase in interest expense at ECI due to increased borrowings against its
line of credit.
Interest and debt expense for the six month period ended June 30, 1998 increased
by $1,057,000 or 108.3% compared to the six month period ended June 30, 1997.
This increase is due to the inclusion of new borrowings of ECI Sportswear in
1998, since the acquisition of Davco on July 15, 1997 along with an increase in
interest expense at ECI due to increased borrowings against its line of credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-21-
<PAGE>
NONE
Item 2 Changes in Securities
NONE
Item 3. Defaults upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Aris Industries, Inc., held on July 9,
1998, all of the current five members of the Board of Directors, Charles S.
Ramat, John Hannan, Edward M. Yorke, Robert A. Katz and David N. Schreiber, were
re-elected by the stockholders. The votes were as follows:
Charles S. Ramat: 13,585,066 for; 16,203 against.
John Hannan: 13,585,658 for; 15,611 against
Edward M. Yorke: 13,585,648 for; 15,621 against
Robert A. Katz: 13,585,628 for; 15,641 against
David N. Schreiber: 13,585,578 for; 15,691 against
In addition, at such Annual Meeting of Stockholders, the other three proposals
were approved by the stockholders with votes as follows:
Ratification of the appointment of Deloitte & Touche LLP, as independent
auditors of the Company for the fiscal year ending December 31, 1998;
13,591,475 shares voted in favor, 6,097 against, and 3,697 abstentions.
Ratification of the amendment of the Aris 1993 Stock Incentive Plan, to
increase the shares reserved for grants and awards under such Plan from
1,200,000 to 3,500,000; 11,550,601 shares voted in favor, 69,504 against,
and 7,787 abstentions.
Ratification of the grant of 750,000 stock options (subject to achievement
of vesting requirements) under the Aris 1993 Stock Incentive Plan to
Charles S. Ramat, Chairman of the Board, Chief Executive Officer and
President of Aris; 11,550,033 shares voted in favor, 67,089 against, and
10,170 abstentions.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - NONE
(b) Reports on Form 8-K - NONE
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: August 12, 1998 By /s/ Paul Spector
----------------------------
Paul Spector,
Senior Vice President
Chief Financial Officer
By /s/ Vincent F. Caputo
----------------------------
Vincent F. Caputo,
Vice President
Assistant Secretary and
Assistant Treasurer
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Amendment No. 1 is being filed because the Registrant's previously
filed Form 10-Q for the quarter ended April 29, 1995 omitted to include a
Financial Data Schedule as required. Accordingly, attached as Exhibit 27 is
the Financial Data Schedule.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 735,000
<SECURITIES> 0
<RECEIVABLES> 19,204,000
<ALLOWANCES> 0
<INVENTORY> 32,246,000
<CURRENT-ASSETS> 2,438,000
<PP&E> 6,269,000
<DEPRECIATION> (4,935,000)
<TOTAL-ASSETS> 78,471,000
<CURRENT-LIABILITIES> 46,297,000
<BONDS> 17,068,000
150,000
0
<COMMON> 0
<OTHER-SE> 13,610,000
<TOTAL-LIABILITY-AND-EQUITY> 78,471,000
<SALES> 37,823,000
<TOTAL-REVENUES> 37,823,000
<CGS> 28,048,000
<TOTAL-COSTS> 28,048,000
<OTHER-EXPENSES> 12,494,000
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<INCOME-TAX> (175,000)
<INCOME-CONTINUING> (4,577,000)
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<EXTRAORDINARY> 522,000
<CHANGES> 0
<NET-INCOME> (4,055,000)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.25)
</TABLE>
