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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
March 31, 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
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(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 14,905,044
At March 31, 1998
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<PAGE>
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Balance Sheets as of March 31, 1998,
December 31, 1997 and March 31, 1997 3
b. Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and March 31, 1997 4
c. Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and March 31, 1997 5
d. Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
ASSETS (Unaudited) (Audited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,146,000 $ 1,372,000 $419,000
Receivables 19,155,000 26,274,000 14,506,000
Inventories 21,721,000 19,498,000 3,629,000
Prepaid expenses and other current assets 2,033,000 2,215,000 1,795,000
----------- ----------- -----------
Total current assets 44,055,000 49,359,000 20,349,000
PROPERTY, PLANT AND EQUIPMENT, NET 1,459,000 1,463,000 1,219,000
OTHER ASSETS 2,671,000 2,718,000 1,188,000
GOODWILL 20,086,000 20,297,000 17,454,000
----------- ----------- -----------
$68,271,000 $73,837,000 $40,210,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $2,132,000 $6,292,000 $294,000
Accounts payable - trade 3,253,000 3,024,000 1,262,000
Accrued expenses and other current liabilities 6,170,000 7,528,000 3,631,000
Current portion of long term debt 526,000 2,172,000 752,000
Line of credit payable 21,150,000 18,605,000 2,000,000
----------- ----------- -----------
Total current liabilities 33,231,000 37,621,000 7,939,000
OTHER LIABILITIES 1,415,000 1,472,000 1,555,000
LONG TERM DEBT, LESS CURRENT PORTION 17,053,000 16,930,000 16,823,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01: 50,000,000 shares authorized;
issued and outstanding 14,905,044 at March 31, 1998 and
December 31, 1997, 11,852,544 at March 31, 1997 150,000 150,000 119,000
Additional paid-in capital 44,752,000 44,752,000 44,057,000
Accumulated deficit (28,330,000) (27,088,000) (30,283,000)
----------- ----------- -----------
Total stockholders' equity 16,572,000 17,814,000 13,893,000
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,271,000 $73,837,000 $40,210,000
=========== =========== ===========
</TABLE>
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
March 31, March 31,
1998 1997
------------ ------------
NET REVENUES $ 17,825,000 $ 14,447,000
------------ ------------
OPERATING COSTS:
Cost of sales 12,420,000 9,780,000
Selling and administrative 6,402,000 5,064,000
------------ ------------
TOTAL OPERATING COSTS 18,822,000 14,844,000
------------ ------------
LOSS BEFORE INTEREST AND DEBT EXPENSE,
INCOME TAXES AND EXTRAORDINARY ITEM (997,000) (397,000)
INTEREST AND DEBT EXPENSE, NET 851,000 457,000
------------ ------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,848,000) (854,000)
INCOME TAX (BENEFIT) EXPENSE (84,000) 8,000
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,764,000) (862,000)
EXTRAORDINARY ITEM:
Gain on debt forgiveness 522,000 --
------------ ------------
NET LOSS ($ 1,242,000) ($ 862,000)
============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,905,044 11,852,544
Weighted average shares outstanding - Diluted 16,509,219 12,658,969
BASIC EARNINGS PER SHARE:
Loss before extraordinary item ($ 0.12) ($ 0.07)
Extraordinary item 0.04 0.00
------------ ------------
Net Loss ($ 0.08) ($ 0.07)
============ ============
DILUTED EARNINGS PER SHARE:
Loss before extraordinary item ($ 0.11) ($ 0.07)
Extraordinary item 0.03 0.00
------------ ------------
Net Loss ($ 0.08) ($ 0.07)
============ ============
See condensed notes to consolidated financial statements
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ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,242,000) ($862,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 404,000 322,000
Capitalized interest 151,000 135,000
Forgiveness of debt (522,000) --
Change in assets and liabilities :
Decrease / (increase) in receivables 7,119,000 (7,182,000)
(Increase) / decrease in inventories (2,223,000) 5,605,000
Decrease in prepaid expenses and other current assets 182,000 181,000
Decrease in other assets 13,000 --
Decrease in trade acceptances payable (4,160,000) (5,308,000)
Increase in accounts payable - trade 229,000 340,000
Decrease in accrued expenses and other current liabilities (1,358,000) (866,000)
Decrease in other liabilities (50,000) (66,000)
----------- ----------
Total Adjustments (215,000) (6,839,000)
----------- ----------
Net cash used in operating activities (1,457,000) (7,701,000)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (133,000) (122,000)
----------- ----------
Net cash used in investing activities (133,000) (122,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (1,181,000) (36,000)
Net proceeds / (repayments) on bank line of credit 2,545,000 2,000,000
----------- ----------
Net cash provided by financing activities 1,364,000 1,964,000
NET DECREASE IN CASH AND CASH EQUIVALENTS (226,000) (5,859,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,372,000 6,278,000
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,146,000 $419,000
=========== ==========
CASH PAID DURING THE YEAR FOR:
Interest $500,000 $19,000
Income Taxes 26,000 31,000
</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 March 31, 1998 and March 31, 1997, the
consolidated statements of operations for the three months ended March 31, 1998
and March 31, 1997, and the consolidated statements of cash flows for the three
months ended March 31, 1998 and March 31, 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 three
months ended March 31, 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 three month period ended March
31, 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 received a $7 million note,
bearing interest at a rate of 7%
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<PAGE>
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
MARCH 31 DECEMBER 31 MARCH 31
1998 1997 1997
-------- ----------- --------
(IN THOUSANDS)
Finished goods $ 21,721 $19,498 $3,629
Work-in process -0- -0- -0-
Raw materials -0- -0- -0-
-------- ------- ------
$ 21,721 $19,498 $3,629
======== ======= ======
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
Sportswears 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
three months ended March 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 three months ended March 31, 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.
- --------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1998
(Pro Forma) (Actual)
- --------------------------------------------------------------------------------
Net Revenues ......................... $24,282,000 $17,825,000
Gross Profit.......................... 7,031,000 5,405,000
Income (loss) before
taxes and extraordinary item ....... (45,000) (1,849,000)
Income tax expense ................... 32,000 (84,000)
Net income (loss)..................... (77,000) (1,242,000)
Basic Earnings (loss) per share....... (0.01) (0.08)
Diluted Earnings (loss) per share .... (0.01) (0.08)
- --------------------------------------------------------------------------------
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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
- --------------------------------------------------------------------------------
Quarter Ended 3/31/98
Basic EPS
Loss before extraordinary item .... $(1,765,000) 14,905,044 $(0.12)
Effect of Dilutive Securities
Stock Options ..................... -- 1,023,208
Warrants .......................... -- 580,967
----------- ----------
Diluted EPS Loss before
extraordinary item .............. $(1,765,000) 16,509,219 $(0.11)
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Quarter Ended 3/31/97
Basic EPS
Loss before extraordinary item .... $ (862,000) 11,852,544 $(0.07)
Effect of Dilutive Securities
Stock Options ..................... -- 234,783
Warrants .......................... -- 571,642
----------- ----------
Diluted EPS Loss before
extraordinary item ............. $ (862,000) 12,658,969 $(0.07)
- --------------------------------------------------------------------------------
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 March 31, 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 11 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 into the first half of 1998. If there
were a sustained loss of the Company's Asian sources of supply, the
Company's business 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
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<PAGE>
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 March 31, 1998, the Company had working capital of approximately
$10,824,000 as compared to $11,738,000 at December 31, 1997 and $12,410,000 at
March 31, 1997. The decrease in working capital from December 31, 1997 to March
31, 1998 is due to funding the Company's operating loss in the first three
months offset by the extraordinary gain of $522,000 recorded by the Company in
connection
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with the early extinguishment 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 through April 30, 1998 were
paid in cash on May 1, 1998.
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. The Company believes that if the
operating subsidiaries achieve their business plans, 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 cash resources to make scheduled payments to BNY and AIF-II on
payment dates commencing August 3, 1998, the Company would intend to discuss
with BNY and AIF-II the renegotiation of required payments so as to be in
compliance with its agreements with such lenders. While such lenders have in the
past granted consents to the payment of scheduled interest in kind rather than
in cash, and/or the deferral of interest payments and principal amortization,
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 on quarterly
payment dates from and after August 3,
-15-
<PAGE>
1998, be in default of its obligations to such lenders.
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 Sportswears' 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, 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
-16-
<PAGE>
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.
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.
-17-
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
The Company reported a net loss of $1,242,000, inclusive of an extraordinary
gain in the amount of $522,000 recorded on the early extinguishment of the New
Heller Note, which was paid off on January 29, 1998, for the three month period
ended March 31, 1998, compared to a net loss of $862,000 for the three month
period ended March 31, 1997. The decrease in profitability was primarily due to
reduced sales and 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.
REVENUE
The Company's revenues increased from $14,447,000 during the three months ended
March 31, 1997 to $17,825,000 during the three months ended March 31, 1998. The
revenue increase was due to the inclusion of ECI Sportswear's revenues of
$6,883,000 in the current year offset by a decrease in ECI's revenues of
$3,505,000. ECI Sportswear acquired the assets of Davco on July 15, 1997. ECI's
revenues 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 "Perry Ellis America" lines offset by the continued strong
performance of the Company's own Members Only brand.
COST OF SALES
Costs of Sales for the three months ended March 31, 1998 as a percentage of
revenue was 69.7% compared to 67.7% for the three months ended March 31, 1997.
Cost of Sales were also 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.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses as a percentage of revenues for the three
month period ended March 31, 1998 were 35.9% compared to 35.1% for the three
period ended March 31, 1997. The increase for the three month period ended March
31, 1998 in Selling and Administrative expenses as a percentage of revenue was
predominantly 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 will decrease in the second half of the year
due to the seasonality of the Company's business.
-18-
<PAGE>
Selling and Administrative expenses for the three months ended March 31, 1998
were $6,402,000 compared to $5,064,000 for the three months ended March 31,
1997, an increase of $1,338,000 or 26.4%. The increase in Selling and
Administrative expenses was due to the inclusion of ECI Sportswear's Selling and
Administrative expenses of $1,889,000 since its acquisition of Davco on July 15,
1997, offsetting a decrease in Selling and Administrative expenses of $435,000
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 March 31, 1998
increased by $394,000 or 86.2% compared to the three month period ended March
31, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K - NONE
-19-
<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: May 11, 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
-20-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,146,000
<SECURITIES> 0
<RECEIVABLES> 19,155,000
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