FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number 1-4814
DECEMBER 31, 1997
ARIS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 FIFTH AVENUE, NEW YORK, NEW YORK 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 686-5050
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Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE ONE ($.01) CENT PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
As of March 2, 1998, 14,905,044 shares of the registrant's Common Stock were
outstanding. The aggregate market value of the 2,665,201 shares of voting stock
of the registrant held by non-affiliates of the registrant at March 2, 1998 was
$4,997,252
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<PAGE>
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I ................................................................ 4
Item 1. Business............................................... 4
Item 2. Properties............................................. 11
Item 3. Legal Proceedings...................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.... 11
PART II ................................................................ 12
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.................. 12
Item 6. Selected Financial Data................................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 14
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ................................... 29
Item 8. Financial Statements and Supplementary Data............ 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 29
PART III ................................................................ 30
Item 10. Directors and Executive Officers of the Registrant..... 30
Item 11. Executive Compensation................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 44
Item 13. Certain Relationships and Related Transactions......... 46
PART IV ................................................................. 51
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K.......................................... 51
SIGNATURES............................................................... 60
EXHIBIT 21 List of Subsidiaries................................... 61
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EXHIBIT 23 Consent of Deloitte & Touche LLP....................... E-1
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<PAGE>
PART I
Item 1. Business.
Aris Industries, Inc. (the "Company", the "Registrant" or "Aris") owns and
operates Europe Craft Imports, Inc. ("ECI"), and ECI Sportswear, Inc. ("ECI
Sportswear").
ECI is a designer and importer of "Members Only" and private label mens'
outerwear as well as "Perry Ellis" mens' and "Perry Ellis America" mens' and
boys' outerwear. ECI is also the licensed maker of "S>>M by MTV Sports"
sportswear, activewear, outerwear, swimwear and headwear for the young mens'
market and "John Henry" mens' outerwear. ECI is also the licensor of other fine
"Members Only" products. ECI, a wholly-owned subsidiary of the Company, was
acquired by the Company in 1987.
ECI Sportswear is a designer and importer of mens' and boys' activewear,
swimwear, loungewear and some sportswear products sold under the "Perry Ellis
America" and/or "Perry Ellis" names, "Jeffrey Banks" mens' sportswear, "FUBU"
boys' sportswear, activewear and outerwear and "Members Only" mens' and boys'
sportswear and loungewear. ECI Sportswear, a wholly owned subsidiary of ECI,
acquired its business on July 15, 1997. See "Davco Acquisition."
On September 30, 1996, the Company sold 100% of the stock of another
wholly-owned subsidiary, Perry Manufacturing Company ("Perry"), which is engaged
in the manufacture and distribution of ladies' sportswear and which the Company
had owned since 1987.
The Company was incorporated in the State of New York in 1947.
Narrative Description of Businesses
Europe Craft Imports
ECI designs, imports and distributes mens' outerwear, including cloth and
leather jackets under the "Members Only" and other tradenames.
ECI has been granted licenses to manufacture and distribute mens' outerwear
under the "Perry Ellis" name and mens' and boys' outerwear under the "Perry
Ellis America" name; mens', young mens', womens' and juniors' sportswear,
activewear, outerwear, loungewear, swimwear and headwear under the "S>>M by MTV
Sports" name and mens' outerwear under the "John Henry" name.
ECI also designs, develops, sources and imports mens' and boys' outerwear
product lines as an agent for various national store chains selling such
products under ECI's name or through their own private label divisions.
The products of ECI are marketed nationally in department stores, specialty
stores and national retail chains, and through licensees in other parts of North
America and in South America and Asia. ECI also operates four stores located in
factory outlet malls.
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ECI Sportswear
ECI Sportswear designs, imports and distributes mens' sportswear, activewear,
swimwear, loungewear and outerwear under various tradenames licensed from other
parties as well as under the "Members Only" tradename.
ECI Sportswear has been granted licenses to manufacture and distribute mens' and
boys' activewear, swimwear, loungewear and some sportswear products under the
"Perry Ellis America" and/or "Perry Ellis" names, mens' sportswear under the
"Jeffrey Banks" name, and boys' sportswear, activewear and outerwear under the
"FUBU" name.
ECI Sportswear also designs, develops, sources and imports mens' and boys'
sportswear, activewear, swimwear and loungewear as an agent for various national
store chains selling such products under ECI Sportswear's name or through their
own private label divisions.
The products of ECI Sportswear are marketed nationally in department stores,
specialty stores and national retail chains.
New Brand Name Licenses
In December, 1997, the Company's operating subsidiaries entered into two license
agreements expanding and diversifying the Company's roster of licensed national
brand names.
ECI entered into an agreement with MTV Networks, a division of Viacom, whereby
ECI became the exclusive licensee for apparel merchandised under the "MTV
Sports" name as well as the "S>>M" (Sports and Music) by MTV Sports" sublabel.
This line covers young mens' apparel in a broad spectrum of sportswear,
outerwear, activewear, loungewear, swimwear and headwear, and will have a strong
emphasis on apparel influenced by alternative sports, including such sports as
snowboarding, skateboarding, rollerblading, BMX biking and other extreme sports.
ECI's alliance with MTV will build on the marketing visibility of MTV Sports'
alternative sports programming and on-air events.
ECI Sportswear entered into an exclusive license agreement with the owner of the
urban sportswear trademark FUBU to produce and merchandise its boys' sportswear,
outerwear, and activewear. The license will enable the Company to apply the
expertise it has acquired in merchandising its other boys' apparel brand names
to FUBU, which is one of the most widely recognized brand names in the urban
youth apparel market.
ECI's and ECI Sportswear's licenses to use trademarks owned by other parties
have terms expiring in the years 1999 to 2001 with renewal terms through the
years 2005 - 2009, contingent on achievement of certain net sales conditions.
Members Only Licensing Program
ECI has granted licenses of the "Members Only" trademark to licensees for mens'
woven shirts, mens' tailored suits and sportcoats, and eyeglasses, among others.
During the 1996 and 1997 fiscal years, ECI undertook an initiative to expand the
Members
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Only licensing program. In November, 1996, ECI entered into an umbrella license
for a variety of "Members Only" products in the People's Republic of China, Hong
Kong and Macau. During the 1997 fiscal year, ECI entered into new "Members Only"
licenses for mens' footwear and for luggage and cold weather accessories. In the
first quarter of 1998, ECI entered into a new "Members Only" license for mens'
dress and athletic socks, as well as a "Members Only" license for mens'
outerwear to be distributed in Canada.
Design, Manufacturing and Importation
Generally, products sold by the Company are manufactured to the designs and
specifications (including fabric selections) of designers employed by the
Company's ECI and ECI Sportswear subsidiaries.
All of the products of ECI and ECI Sportswear are manufactured overseas by
independent factories each selected by such operating subsidiaries or their
agents. In order to qualify as a manufacturer for ECI or ECI Sportswear
products, factories must satisfy strict quality and delivery standards required
by such operating subsidiaries. ECI presently imports most of its products from
Hong Kong, Korea, China, Guatemala, Philippines, Bangladesh, Sri Lanka and
Indonesia. ECI Sportswear presently imports most of its products from India,
China, Indonesia, Sri Lanka, Taiwan and Nepal. Foreign independent manufacturers
contract with ECI and ECI Sportswear to supply apparel made pursuant to design
samples and specifications. To ensure quality, ECI and ECI Sportswear supervise
production at these factories at various stages throughout the production
process with their own or their agent's own quality control teams.
Customers, Marketing and Distribution
ECI and ECI Sportswear sell their products primarily to department and specialty
stores and national retail chains. The Company had only one customer which
accounted for 10% or more of its total consolidated revenues for the year ended
December 31, 1997; this customer represented 10%, 18% and 13% of such revenues
for the year ended December 31, 1997, the eleven months ended December 31, 1996
and the fiscal year ended February 3, 1996, respectively. Although the Company
has traditionally had strong relationships with this customer, the loss of such
customer could have a material adverse effect on the Company.
Competition
The products of ECI and ECI Sportswear are sold to components of the consumer
market which places a premium on identifiable brand names. ECI and ECI
Sportswear compete with other apparel manufacturers based on style, quality,
value and brand recognition. Although ECI and ECI Sportswear sell their products
to retail customers, they also compete with such retailers' "private label"
apparel lines. ECI and ECI Sportswear apparel products are sold on the main
selling floor areas of their retail store customers and they are facing
increasing competition from such customer's expanded dedication of retail floor
space to "designer collections".
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<PAGE>
The Apparel Industry
The apparel industry is volatile and unpredictable due to cyclical and seasonal
swings caused, in part, by consumer buying patterns, weather conditions and
other factors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward Looking Statements" for a broader discussion
of risks and factors affecting the apparel industry and the Company in
particular.
Due to the lead time necessary for fabric delivery, product design, manufacture
and distribution, apparel importers such as the Company must make commitments
prior to the related selling season to purchase inventory sufficient to cover
the volume of apparel they expect to sell. Increasingly, retail customers of the
Company are ordering their products closer to the actual delivery date and
selling season; in order for the Company to deliver such products on time, it
must often commit to production in advance of obtaining firm orders from its
retail customers.
ECI, which sells primarily outerwear, is particularly impacted by unusually warm
weather or the late arrival of cold weather. ECI Sportswear can also be impacted
by such weather conditions.
ECI and ECI Sportswear utilize lines of credit to finance inventory purchases
and production costs. Most of ECI and ECI Sportswear sales are factored with
terms of sales maturing in a period of 30-60 days. ECI and ECI Sportswear factor
on a maturity basis and pay interest and commission charges.
Materials and Supplies
The principal raw materials used by the Company's apparel manufacturing
contractors are fabrics made from natural fibers, leather, synthetics and
blends. In addition, such manufacturers use yarn, thread and accessories such as
buttons, snaps, elastic and zippers which are purchased from many suppliers. The
Company believes the raw materials currently used in its products are readily
available at comparable prices and quality from sources other than those now
being used.
Trademarks
The Company has registered a variety of trade names, service marks and
trademarks ("Trademarks") with the United States Patent and Trademark Office
renewable for as long as the use thereof continues, including "Members Only"
Trademarks. The Company considers certain of its Trademarks to be of material
importance to its business and actively defends and enforces such Trademarks.
The Company also holds licenses to manufacture and distribute certain apparel
products under the "Perry Ellis" and "Perry Ellis America" Trademarks which it
considers to be of material importance to its business.
Employees
As of December 31, 1997, the Company and its subsidiaries had approximately 168
full and part-time employees, none of whom are covered by collective bargaining
agreements except for
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approximately 10 employees at ECI's New Jersey warehouse. The Company regards
its employee relations as satisfactory.
Foreign Sales
Although ECI sells products in Canada, Mexico and South America, these do not
comprise a significant portion of the Company's sales.
Segment Data
The Company is in the single industry of designing, manufacturing, importing and
distributing apparel.
Financing
The Company's long-term indebtedness consists of the debt obligations of the
Company to 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").
. Effective September 30, 1996, the Company sold 100% of the stock of a
wholly-owned subsidiary, Perry Manufacturing Company ("Perry") to Page
Holding Company, a company controlled by William K. Woltz, Jr., the
CEO of Perry (the "Perry Sale"). The total consideration was
$54,719,000 consisting of $40,857,000 paid by the purchaser,
$10,862,000 in forgiveness of indebtedness by Heller, and assumption
of approximately $3,000,000 of Perry debt. The proceeds of this sale
(including forgiveness of indebtedness), were applied to reduce the
Company's debt obligations to Heller from approximately $53,384,000 of
principal and accrued interest to only $1,665,000, which includes
principal of $1,000,000 and capitalized interest of $665,000. The
Company retained ownership of Europe Craft Imports, Inc.("ECI"), its
only other operating subsidiary on September 30, 1996.
Effective September 30, 1996, the Company entered into an amendment
and restatement of its Senior Secured Note Agreement with
Heller("Amended Heller Agreement"), pursuant to which Heller received
a note in the principal amount of $1,000,000("New Heller Note"), with
a maturity date of November 2, 2001, with interest at 10% per annum,
such interest to accrue and be added to principal, on a quarterly
basis in arrears and to be due and payable November 2, 2001. Heller
also received a warrant to purchase 584,345 shares of the Company's
common stock at an exercise price of $.01 per share. Such transaction
has been accounted for as a modification of terms to the original
Heller debt. Accordingly, the Company recorded the New Heller Note at
the total future cash payments to be made in accordance with the
Amended Heller Agreement which is principal of $1,000,000 and
capitalized interest of $665,000. Pursuant to the Amended Heller
Agreement, Heller forgave all other indebtedness of the Company to
Heller remaining after application of the proceeds of the Perry Sale,
and eliminated all financial covenants. Heller retained a pledge of
the stock (but not the assets) of ECI.
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<PAGE>
On January 29, 1998, the Company repaid its remaining obligations
under the New Heller Note and Heller released its lien on the stock of
ECI. Such payment amounted to $1,128,000.
. 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 shared with AIF II a second
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. Such accrued interest was $996,000 at December 31, 1997.
. 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 shared with BNY
a second 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
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<PAGE>
January 31, 1998, which were not and will not be paid in cash and
instead added to the principal of the AIF-II Note. Such accrued
interest was $2,396,000 at December 31, 1997.
In the September 12, 1997 amendments to the BNY and AIF-II Note Agreements, the
Company covenanted in favor of BNY and AIF-II that on or before January 31,
1998, the Company would repay in full all principal and interest under the New
Heller Note in the original principal amount of $1,000,000; the Company
completed such repayment to Heller on January 29, 1998. Such payment amounted to
$1,128,000, which included accrued interest through the date of repayment. BNY
and AIF-II's shared second lien on the stock of ECI then became a shared first
lien. 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.
Davco Acquisition
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 under the
"Jeffrey Banks" label. Davco's shareholders, Steven Arnold and Christopher
Healy, each entered into employment agreements with ECI Sportswear to manage the
Davco business as owned by ECI Sportswear. 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 included in this Report
on Form 10K. 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 remaining contingent cash payment
to Davco of $2,814,000 has been recorded by ECI Sportswear as of December 31,
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 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").
All 3,000,000 shares of the Company's Common Stock delivered to Davco are
subject to the terms, conditions and restrictions of a Shareholders Agreement
entered into on July 15, 1997 between Davco, Steven Arnold, Christopher Healy,
the Company and certain other shareholders of the Company. (See "Certain
Relationships and Related Transactions - Davco Shareholders Agreement".)
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<PAGE>
Item 2. Properties.
ECI has approximately 17,400 square feet of leased space for its executive and
sales offices and showrooms in New York, and also leases approximately 29,600
square feet of space in New Jersey which serves as its general business,
accounting and management information service headquarters. In March, 1996, ECI
leased an additional 120,000 square feet of warehouse space adjacent to its New
Jersey offices. ECI then consolidated warehouse and distribution functions at
this location, and substantially reduced use of a Los Angeles independent
warehouse. ECI has four retail outlet stores in Ohio, South Carolina, Tennessee
and Virginia with an aggregate of approximately 7,900 square feet.
ECI Sportswear has approximately 7,100 square feet of leased space for its
executive and sales offices and showrooms in New York and also leases
approximately 22,000 square feet of warehouse space in Stamford, Connecticut.
Aris' executive offices are co-located with ECI's executive offices in New York.
Item 3. Legal Proceedings.
The Company and/or its subsidiaries, in the ordinary course of their business,
from time to time may be the subject of, or a party to, various legal actions
involving private interests. While the Company cannot guaranty the outcome of
any litigation, the Company and/or its subsidiaries believe that any ultimate
liability arising from any such actions which may be pending will not have a
material adverse effect on its consolidated financial statements at December 31,
1997.
Item 4. Submission of Matters to a Vote of Security Holders.
None during the twelve month period ended December 31, 1997.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.
The Company's Common Stock is traded in the over-the-counter (OTC) market under
the symbol AISI (formerly ARIN). Set forth below are the high and low bid prices
for a share of the Common Stock for the first quarter of 1998 and for each
fiscal quarter during the prior two fiscal years, as reported in published
financial sources. Pursuant to the terms of the Company's loan agreements with
Heller, BNY and AIF II, the Company has agreed not to declare or pay any
dividends (other than stock dividends) on the Common Stock without the prior
written consent of such lenders. The Company has not paid any dividends over the
last two fiscal years. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
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High Low
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Eleven Months Ended December 31,
1996
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First Quarter .12 .0625
Second Quarter .08 .0625
Third Quarter .08 .0625
Fourth Quarter .41 .0625
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Year Ended December 31,
1997
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First Quarter .3437 .3125
Second Quarter .6400 .3750
Third Quarter 1.6562 .4800
Fourth Quarter 2.1250 .9375
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Year Ending December 31,
1998
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First Quarter 1.875 1.375
(through date of March 2, 1998)
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There were approximately 4,155 shareholders of record as of March 2, 1998 and
the closing bid price of a share of the Common Stock was $1.875 on March 2,
1998.
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<PAGE>
Item 6. Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA - ARIS INDUSTRIES, INC.
(In thousands except for per share data)
The following table presents selected financial data for Aris Industries, Inc.
and subsidiaries. The financial data for all periods have been derived from the
Company's audited Consolidated Financial Statements included elsewhere in this
report and should be read in conjunction with those Consolidated Financial
Statements and related notes.
<TABLE>
<CAPTION>
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11 Months
Year Ended Ended 52-53 Weeks Ended
<S> <C> <C> <C> <C> <C>
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12/31/97 12/31/96 2/3/96 1/28/95 1/29/94
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Net revenues $96,271 $131,802 $173,990 $188,143 $192,583
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Income (loss) from continuing
operations before extraordinary
items 2,333 2,104 (8,057) 2,216 1,998
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Net income (loss) 2,333 12,966 (8,057) 2,216 31,206
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Earnings (loss) per share before
extraordinary items - basic .18 .18 (.68) .19 .21
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Earnings (loss) per share before
extraordinary items - diluted .16 .17 (.68) .19 .21
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Earnings (loss) per share - basic .18 1.09 (.68) .19 3.29
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Earnings (loss) per share - diluted .16 1.07 (.68) .19 3.29
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Total assets 73,837 44,855 93,928 98,932 97,481
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Long-term obligations 16,930 16,702 66,505 64,239 66,973
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Working capital 11,738 12,370 29,809 34,248 37,128
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Stockholders' equity 17,814 14,755 564 8,611 6,544
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</TABLE>
1. On December 10, 1996, the Company determined to change its fiscal
year to the calendar year ending December 31st, rather than a
52-53 week year ending on the Saturday closest to January 31st.
The period ended December 31, 1996 is a transitional period of
eleven months from February 4, 1996 to December 31, 1996.
2. No common stock dividends were paid during any of the years
presented.
3. For the eleven months ended December 31, 1996, the Company had
net income of $12,966,000 or $1.09 per share, inclusive of the
gain of $7,786,000 on the sale of the
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stock of its wholly owned subsidiary, Perry Manufacturing
Company, on September 30, 1996 (reduced by the write off of the
cumulative effect of foreign currency translation adjustments of
$1,108,000 arising from the Perry Sale), and the extraordinary
gain of $10,862,000 associated with the reduction in the
Company's debt to its senior secured lender, Heller Financial,
Inc., from $53,384,000 to $1,665,000, which includes principal of
$1,000,000 and capitalized interest of $665,000.
4. All per share data have been restated for comparative purposes to
reflect one-for-ten reverse stock split effective June 30, 1993.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Introduction
The following analysis of the Company's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, including the notes thereto, and the "Selected Financial Data"
included on pages F-1 through F-33 and Page 13, respectively, of this Annual
Report.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission ("SEC"):
. The apparel industry in general is volatile and unpredictable due to
cyclical and seasonal swings caused in part by consumer buying
patterns.
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<PAGE>
. 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.
. 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.
. Retail store chains 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
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result, the Company may experience difficulty in obtaining factoring
and credit approval on certain customers.
. Although the Company's ECI and ECI Sportswear subsidiaries 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.
. 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.
. 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
their customers.
. Increasingly, retail customers 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 retail customers.
. 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.
. No assurance can be made that the Company's licensors do not change
policies on advertising and distribution which can have a materially
adverse effect on the Company.
. 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".
. 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
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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 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
Working Capital and Liquidity
As of December 31, 1997, the Company had working capital of approximately
$11,738,000 compared to $12,370,000 at December 31, 1996. The decrease in
working capital from December 31, 1996 to December 31, 1997 is due to the
inclusion in current liabilities, at December 31, 1997, of the remaining portion
of the contingent purchase price for ECI Sportswear's acquisition of Davco, and
the reclassification into current liabilities of capitalized interest on the
Heller Note which was paid in full in January 1998, offset by the Company's
operating profit in the 1997 calendar year as well as the inclusion of ECI
Sportswear, which acquired the assets of Davco on July 15, 1997. During the year
ended December 31, 1997, the Company financed its capital expenditures
principally through internally generated funds and credit facilities. The
Company's interest payments to its secured lenders scheduled for calendar year
1997 were paid in kind pursuant to amendments to the Company's loan agreements.
As described below, effective September 30, 1996, the Company's debt obligations
to its senior secured lender, Heller Financial, Inc.("Heller") were reduced from
approximately $53,384,000 of principal and accrued interest to only
$1,665,000("New Heller Note"), which includes principal of $1,000,000 and
capitalized interest of $665,000. Furthermore, all financial covenants in the
Company's note agreement with Heller were eliminated. The New Heller Note had a
maturity date of November 3, 2001. On September 12, 1997, the Company entered
into amendments of its note agreements with its junior secured lenders, BNY and
AIF-II, whereby the Company covenanted in favor of BNY and AIF-II that on or
before January 31, 1998, the Company would repay in full all principal and
interest under the New Heller Note in the original principal amount of
$1,000,000. The Company completed such repayment to Heller on January 29, 1998.
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
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accordance with the original amortization schedule of the BNY Note Agreement,
commencing with a $300,000 payment on November 3, 1998.
Historically, the Company's operating subsidiaries renew their working capital
credit facilities annually, and the Company believes they will be able to renew
such lines in the Spring of 1998 to permit the upstreaming of funds to enable
the Company to make scheduled payments to BNY and AIF-II during the year ended
December 31, 1998. In the event such working capital lines are not renewed, or
the upstreaming of funds in sufficient amounts was not permitted under such
working capital lines, or the Company otherwise did not have sufficient cash
resources to make scheduled payments to BNY and AIF-II on dates commencing May
4, 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
May 4, 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 products sold under the "Perry Ellis America"
and/or "Perry Ellis" labels, and mens' sportswear 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 included in this Report on Form 10K. 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 expected contingent cash purchase price payable to Davco, to
be derived from such audited financial statements, is $3,395,000. The Company
anticipates payment of the balance of $2,814,000 (net of advances previously
paid of $581,000) during April 1998. ECI Sportswear's source of funds for the
cash payments of the purchase price will be its internally generated funds and
working capital credit lines.
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Cash used in operating activities for the year ended December 31, 1997 ("fiscal
1997") was $21,918,000 as compared to $9,556,000 of cash provided by operating
activities during the eleven month period ended December 31, 1996 ("fiscal
1996"). The decrease in funds provided by operating activities in fiscal 1997
was due to higher levels of inventory and timing of collection of receivables
offset by the Company's fiscal 1997 operating profit, the inclusion of the
operating results of the Davco business acquired by ECI Sportswear on July 15,
1997, and the exclusion of operating losses at Perry after its sale on September
30, 1996.
Cash used in investing activities during fiscal 1997 was $1,300,000 as compared
to $38,802,000 of cash provided by investing activities during fiscal 1996. The
amount provided in fiscal 1996 reflects the proceeds from the Perry Sale which
closed on September 30, 1996. There were decreases in capital expenditures
during the 1997 fiscal year compared to the 1996 fiscal year. The decrease in
capital expenditures is due primarily to the exclusion of Perry, after the sale
of Perry on September 30, 1996, which historically had higher capital
expenditures than ECI. ECI's capital expenditures were also higher in fiscal
1996 in connection with improvements to its new warehouse in Secaucus, New
Jersey.
Cash provided by financing activities during fiscal 1997 was $18,312,000 as
compared to $44,394,000 of cash used in financing activities during fiscal 1996.
Cash provided by financing activities in fiscal 1997 was due in large part to
net proceeds on borrowings on the Company's line of credit. The larger amount in
fiscal 1996 is primarily due to payment of the Company's debt to Heller from the
proceeds of the Perry Sale on September 30, 1996.
Debt Service and Capital Needs
The Company's long-term indebtedness consists of the debt obligations of the
Company to 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").
. Effective September 30, 1996, the Company sold 100% of the stock of a
wholly-owned subsidiary, Perry Manufacturing Company ("Perry") to Page
Holding Company, a company controlled by William K. Woltz, Jr., the CEO
of Perry (the "Perry Sale"). The total consideration was $54,719,000,
consisting of $40,857,000 paid by the purchaser, $10,862,000 in
forgiveness of indebtedness by Heller, and assumption of approximately
$3,000,000 of Perry debt. The proceeds of this sale (including
forgiveness of indebtedness), were applied to reduce the Company's debt
obligations to Heller from approximately $53,384,000 of principal and
accrued interest to $1,665,000, which includes principal of $1,000,000
and capitalized interest of $665,000. The Company retained ownership
of Europe Craft Imports,
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Inc. ("ECI"), its only other operating subsidiary on September 30,
1996.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity
date of November 2, 2001, with interest at 10% per annum, such interest
to accrue and be added to principal, on a quarterly basis in arrears
and to be due and payable November 2, 2001. Heller also received a
warrant to purchase 584,345 shares of the Company's common stock at an
exercise price of $.01 per share. Such transaction has been accounted
for as a modification of terms to the original Heller debt.
Accordingly, the Company recorded the New Heller Note at the total
future cash payments to be made in accordance with the Amended Heller
Agreement which is principal of $1,000,000 and capitalized interest of
$665,000. Pursuant to the Amended Heller Agreement, Heller forgave all
other indebtedness of the Company to Heller remaining after application
of the proceeds of the Perry Sale, and eliminated all financial
covenants. Heller retained a pledge of the stock (but not the assets)
of ECI.
On January 29, 1998, the Company repaid its remaining debt obligation
under the New Heller Note and Heller released its lien on the stock of
ECI. Such payment amounted to $1,128,000.
. 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 shared with AIF II a second 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:
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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. Such accrued interest was $996,000 at December 31, 1997.
. 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 shared with BNY
a second 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. Such accrued interest was $2,396,000 at
December 31, 1997.
In the September 12, 1997 amendments to the BNY and AIF-II Note Agreements, the
Company covenanted in favor of BNY and AIF-II that on or before January 31,
1998, the Company would repay in full all principal and interest under the New
Heller Note in the original principal amount of $1,000,000. The Company
completed such repayment to Heller on January 29, 1998 in the amount of
$1,128,000, inclusive of accrued interest through the date of repayment. BNY and
AIF-II's shared second lien on the stock of ECI then became a shared first lien.
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.
Capital Expenditures
Capital expenditures were $461,000 for the year ended December 31, 1997 compared
to $1,409,000 in the eleven month period ended December 31, 1996. This is due
primarily to the exclusion of Perry (after the sale of Perry on September 30,
1996), which historically had higher capital expenditures than ECI.
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ECI's capital expenditures were higher in fiscal 1996 in connection with
improvements to its new warehouse in Secaucus, New Jersey.
Results of Operations
The 1997 Fiscal Year: On December 10, 1996, the Company changed its fiscal year
to the calendar year ending December 31st rather than a 52-53 week year ending
on the Saturday closest to January 31st. The Company determined to change its
fiscal year end to the calendar year ending December 31st so its tax and
financial accounting years would end on the same date and to better reflect the
seasonal nature of the Company's apparel business by having the Spring, Holiday
and Fall seasons all included in the same calendar year whereas in the past the
Spring season overlapped two fiscal years. The operating results for the year
ended December 31, 1997 are compared to the fiscal period ended December 31,
1996, which was a transition period consisting of the eleven months ended
December 31, 1996. The operating results for the year ended December 31, 1997
include the operating results of ECI Sportswear from and after its July 15, 1997
acquisition of the Davco business. The operating results for the eleven month
period ending December 31, 1996 include Perry's operating results through
September 30, 1996, a gain of $7,786,000 resulting from the sale of Perry
(reduced by the write-off of the cumulative effect of foreign currency
translation adjustments of $1,108,000 arising from the Perry Sale) and an
extraordinary gain of $10,862,000 on the reduction of indebtedness to Heller.
The Company has not restated last year's operating results for the eleven month
period ended December 31, 1996, to a twelve month calendar reporting period due
to the inability to obtain operating results from Perry on a calendar month
basis, since Perry is no longer owned by Aris, and the difficulty in restating
the Company's 1996 results to a monthly basis since all monthly closings were
computed based on thirteen week quarters except the last quarter which was based
on nine weeks.
Net Income: The Company reported net income of $2,333,000 for the year ended
December 31, 1997, compared to net income of $12,966,000 for the eleven months
ended December 31, 1996, inclusive of the gain on the Perry sale and reduction
of indebtedness to Heller implemented on September 30, 1996.
The Company reported income before the sale of subsidiary, taxes and
extraordinary item of $2,195,000 for the year ended December 31, 1997 compared
to a loss of $5,090,000 for the eleven months ended December 31, 1996. The
increase in profitability was due to increased margins at ECI, the inclusion of
the profitable operating results of ECI Sportswear, which acquired the assets of
Davco on July 15, 1997, a reduction of interest expense by $3,716,000 due to the
Perry Sale on September 30, 1996 which significantly reduced the Heller debt,
the exclusion of interest expense attributable to Perry's debt after September
30, 1996, offset by interest on ECI Sportswear debt, and the exclusion of
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Perry's operating loss for the period through September 30, 1996.
Revenue
The Company's revenues decreased from $131,802,000 during the eleven month
period ended December 31, 1996 to $96,271,000 during the year ended December 31,
1997. The revenue decrease of $35,531,000 for the year ended December 31, 1997
compared to the same period in the prior year was due to the exclusion of Perry,
which had revenues of $64,639,000 in 1996. The revenue decrease was offset by
the inclusion of ECI Sportswear's revenues of $26,027,000 from and after the
July 15, 1997 date of the acquisition of the Davco business. In addition, ECI's
revenues increased by $2,996,000 due to the month of January 1997 being included
in the year ended December 31, 1997 as compared to the prior years comparable
period ended December 31, 1996 not including the month of January 1996. This was
a result of the change from a fiscal year to a calendar year.
Cost of Sales
Cost of sales for the year ended December 31, 1997 as a percentage of revenue
was 70.1% compared to 79.4% of revenues for the eleven months ended December 31,
1996. The favorable reduction in this percentage was due to improved gross
margins at ECI due to a better product mix for the year ended December 31, 1997
as compared to the eleven months ended December 31, 1996. Last year, due to the
adverse retail environment, ECI sold excess inventory at lower gross margins in
order to maintain a clean inventory position. In addition, this year's gross
margin reflects the inclusion of the Davco business, acquired by ECI Sportswear,
which includes sales at higher branded margins, similar to ECI's. Gross margins
for the year ended December 31, 1996 were also affected by the lower margins at
Perry, which historically as a private label manufacturer, had substantially
lower gross margins than ECI.
Selling and Administrative Expenses
Selling and Administrative expenses as a percentage of revenues for the year
ended December 31, 1997 were 24.4% compared to 19.2% for the eleven months ended
December 31, 1996. The percentage increase for the year ended December 31, 1997
from the comparable period in the prior year was due primarily to the exclusion
of Perry (after the Perry Sale on September 30, 1996), which historically had a
much lower Selling and Administrative expense structure. In addition, ECI's
sales commissions expense increased in 1997, the result of selling a branded
product at higher commission rates, while last year's comparable periods
reflected lower sales commissions expense which resulted from the selling of
excess inventory at lower prices in order to maintain an optimum inventory
level. There was an increase in depreciation expense in 1997 due to the purchase
of product data management equipment and other computer equipment allowing ECI
to more efficiently control its merchandising, production, sourcing and
shipping.
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Selling and Administrative expenses for the year ended December 31, 1997 were
$23,474,000 compared to $25,422,000 for the eleven months ended December 31,
1996, a decrease of $1,948,000 or 7.6%. Selling and Administrative expenses
decreased for the year ended December 31, 1997 over the comparable period in the
prior year due to the exclusion of Perry's Selling and Administrative expenses
of $6,965,000 offset by the inclusion of ECI Sportswear's Selling and
Administrative expenses of $3,319,000 since its acquisition of Davco on July 15,
1997. This reduction was further offset by increases at ECI relating to
depreciation expense (as explained above) along with a new print advertising
program and increase in expenses for trade shows.
Interest and Debt Expense
Interest and debt expense for the year ended December 31, 1997 decreased by
$3,716,000 or 54.5% compared to the eleven month period ended December 31, 1996.
This decrease is primarily due to the sale of Perry on September 30, 1996 which
reduced the Heller debt and corresponding interest after such date, as well as
the exclusion of Perry debt expense after September 30, 1996. In addition, ECI
had a reduction of interest expense due to lower borrowings against its line of
credit, offset by new borrowings of ECI Sportswear against its line of credit.
The 1996 Fiscal Year: The operating results for the eleven month period ended
December 31, 1996 include Perry's operating results through September 30, 1996,
a gain of $7,786,000 resulting from the sale of Perry (reduced by the write off
of the cumulative effect of foreign currency translation adjustments of
$1,108,000 arising from the Perry Sale) and an extraordinary gain of $10,862,000
on the reduction of indebtedness to Heller.
On December 10, 1996, the Company changed its fiscal year to the calendar year
ending December 31st rather than a 52-53 week year ending on the Saturday
closest to January 31st. The Company determined to change its fiscal year end to
the calendar year ending December 31 so its tax and financial accounting years
would end on the same date and to better reflect the seasonal nature of the
Company's apparel business by having the Spring, Holiday and Fall seasons all
included in the same calendar year, whereas in the past, the Spring season
overlapped two fiscal years. The period ended December 31, 1996 consists of the
eleven months ended December 31, 1996 and results of operations for this period
are compared to the eleven months ended December 31, 1995.
Net Income
The Company reported net income of $12,966,000 for the eleven months ended
December 31, 1996, inclusive of the gain on the sale of Perry (reduced by the
cumulative effect of foreign currency translation adjustments arising from the
Perry Sale) and the extraordinary gain on the reduction of indebtedness to
Heller implemented on September 30, 1996.
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The Company reported net income (before extraordinary gain) of $2,104,000 for
the eleven months ended December 31, 1996, compared to a net loss of $4,881,000
for the eleven months ended December 31, 1995. During the eleven months ended
December 31, 1996, ECI experienced an increase in net income, partially offset
by losses at Perry, whose results are included through September 30, 1996.
At ECI, the increase in net income was due to an improved product, favorable
cooler weather, improvement in the retail apparel environment, and initiatives
introduced to reduce overhead and increase gross margins.
The decrease in net income at Perry through September 30, 1996 was primarily due
to gross margins being adversely affected by the difficulty in obtaining knit
fabric which caused production and factory inefficiencies and price pressure
from major retail customers.
The Company's revenues decreased from $159,264,000 during the eleven month
period ended December 31, 1995 to $131,802,000 during the eleven month period
ended December 31, 1996. The revenue decrease of $27,462,000 for the eleven
month period ended December 31, 1996 compared to the same period in the prior
year was due to the decrease in Perry revenue contribution of $25,568,000, which
revenue was excluded from and after the Perry Sale on September 30, 1996, along
with a decrease in revenues at ECI of $1,894,000.
The decrease in revenues at ECI for the eleven months ended December 31, 1996
compared to the same period in the prior year were due to a large reduction in
sales to certain private label customers, who used ECI as a direct merchandise
supplier, partially offset by an increase in branded business along with
improved product together with favorable cooler weather and improvement in the
retail apparel environment in the second half of the year.
Costs of Sales
Costs of Sales for the eleven month period ended December 31, 1996 as a
percentage of revenue was 79.4% compared to 79.8% of revenues for the eleven
month period ended December 31, 1995. The reduction in this percentage was
primarily due to gross margin percentages increasing at ECI over the comparable
period in the prior year as a result of early sell throughs at the retail level
aided by the favorable cool weather along with an increase in the proportion of
branded product, compared to private label, sales of ECI. The increase in gross
margin percentages at ECI was partially offset by lower gross margins at Perry,
whose results were included through September 30, 1996, and which had been
experiencing knit fabric problems due to its primary supplier of knit fabric
closing down their knit facilities which created manufacturing inefficiencies.
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Selling and Administrative Expenses
Selling and Administrative expenses as a percentage of revenues for the eleven
months ended December 31, 1996 were 19.3% compared to 17.4% for the eleven
months ended December 31, 1995. The percentage increase for the eleven months
ended December 31, 1996 from the comparable period in the prior year was due
primarily to the exclusion of Perry, which historically had a much lower Selling
and Administrative expense structure, after the Perry Sale on September 30,
1996.
Selling and Administrative expenses for the eleven month period ended December
31, 1996 were $25,422,000 compared to $27,751,000 for the eleven month period
ended December 31, 1995, a decrease of $2,329,000 or 8.4% (excluding a credit of
$580,000 for the eleven month period ended December 31, 1996 for the
reimbursement of the Company by the purchaser of Perry in connection with such
purchaser's election under Section 338(h)(10) of the Code). Selling and
Administrative expenses decreased for the eleven month period ended December 31,
1996 over the comparable period in the prior year due to cost savings at ECI
realized from its 1995 repositioning program and the completion of the move of
ECI from its California warehouse to its new warehouse facility in New Jersey,
along with the exclusion of Perry expenses from and after its sale on September
30, 1996.
Interest and Debt Expense
Interest and debt expense for the eleven month period ended December 31, 1996
decreased by $2,000,000 or 22.7% compared to the eleven month period ended
December 31, 1995. This decrease is primarily due to the sale of Perry on
September 30, 1996 which reduced the Heller debt and corresponding interest
after such date, as well as the exclusion of Perry debt expense after September
30, 1996. In addition, there was a reduction in the prime lending rate from the
comparable periods last year for both Aris' and Perry's variable rate debt of
approximately 50 basis points.
Availability of Net Operating Loss Carryforwards
The Company has approximately $79,000,000 of net operating loss carryforwards at
December 31, 1997. Any significant loss or restriction on the use of the
Company's net operating loss carryforwards could have a material adverse effect
upon the Company's future earnings and resulting cash flows and could limit the
Company's ability to service its debt obligations. The conclusions drawn by the
Company in monitoring and calculating the requirements of Section 382 of the
Internal Revenue Code for activity subsequent to the Company's 1986
restructuring involve many complex and technical questions. The Internal Revenue
Service could disagree with the Company's position and should such a dispute
arise, it would be difficult to predict the outcome.
The Company's 1993 Plan of Reorganization should qualify under Section 382(l)(5)
of the Internal Revenue Code and therefore
- 26 -
<PAGE>
should preserve a substantial portion of the net operating loss carryforwards of
the Company.
In addition, for the year ended December 31, 1997, the Company expects to
utilize an additional amount of approximately $4,000,000 of its net operating
loss carryforward to offset taxable income during such fiscal year.
Reduction of Indebtedness and Effect on NOL Carryforwards
As a result of the implementation of the Company's Plan of Reorganization on
June 30, 1993, and the reorganization of its RJMJ subsidiary effected December
21, 1993, the Company recognized an extraordinary gain of $29,208,000 relating
to debt restructuring during the fiscal year ended January 29, 1994, and all
prior defaults on indebtedness were discharged and eliminated.
When debt is discharged in a Chapter 11 case, no ordinary income to the debtor
results. Instead, certain tax attributes otherwise available to the debtor are
reduced, in most cases by an amount equal to the adjusted issue price of the
indebtedness forgiven. As a result of the extraordinary gain recognized by the
Company due to implementation of the Plan, the Company's net operating loss
carryforwards were decreased by approximately $12,000,000, with approximately
$94,000,000 remaining at January 29, 1994. Tax attributes need not, however, be
reduced to the extent that payment of the indebtedness forgiven would have given
rise to a deduction. Tax attributes are generally subject to reduction in the
following order: (i) net operating losses for the current year ("NOLs") and NOL
carryforwards; (ii) general business credit carryforwards; (iii) capital losses
and carryforwards; (iv) the tax basis of the debtors' depreciable and
nondepreciable assets, but not in an amount greater than the excess of the
aggregate tax bases of the property held by the debtor immediately after the
discharge over the aggregate of the debtor's liabilities immediately after the
discharge; and (v) foreign tax credit carryforwards. The Company's most
significant tax attributes subject to reduction are NOL carryforwards. Attribute
reduction occurred after the determination of tax for the year ending January
29, 1994, which includes the Effective Date. To the extent the stock for debt
exception applies to stock issued in exchange for debt, tax attributes are not
reduced.
Ownership Changes and Effect on NOL Carryforwards
The Company believes that it and its consolidated group currently have
substantial NOL carryforwards. (See Note 12 to the financial statements included
in this Annual Report). Sections 382 and 383 of the Internal Revenue Code of
1986, as amended (the "Code"), and Temporary and Proposed Treasury regulations
implementing those sections, severely limit the amount of income each year that
a loss corporation may offset with its NOL and credit carryforwards after
certain changes in ownership of its stock. The Company experienced an "ownership
change" for purposes of Sections 382 and 383 of the Code on June 30, 1993, the
Effective Date of its Plan of Reorganization.
- 27 -
<PAGE>
However, the Section 382 and Section 383 limitations should not apply to the
Company's reorganization pursuant to the Plan because immediately after the
Effective Date at least 50% of the Company's Common Stock was held by
pre-reorganization stockholders of the Company and creditors of the Company that
had held their claims for at least 18 months prior to the filing date of the
Chapter 11 proceeding, by virtue of their status as shareholders or creditors,
respectively.
Although the general Section 382 and Section 383 limitations will not apply, the
Company's tax attributes were reduced, in addition to the attribute reductions
described above, by half of the income excluded under the "stock-for-debt
exception." In addition, the Company's pre-change losses and excess credits were
reduced by the amount of interest paid or accrued by the Company during the
three full taxable years prior to the taxable year ending January 29, 1994 and
during the portion of the taxable year ending January 29, 1994 that includes the
Effective Date, on its indebtedness exchanged for Common Stock.
Section 269
If a group acquires control of a corporation for the principal purpose of
evasion or avoidance of Federal income tax by securing the benefit of a
reduction or credit it might otherwise not enjoy, that benefit may be
disallowed. The determination of the principal purpose of an acquisition is
based on all the facts and circumstances surrounding the acquisition. However, a
regulatory presumption that certain acquisitions in bankruptcy proceedings have
as their principal purpose the evasion or avoidance of Federal income tax should
not apply to Company's reorganization, because some members of the Company's
consolidated group will continue to carry on their business after the
reorganization.
Effect of Inflation
The Company does not believe that inflation has had any material impact on its
operating results for any of the fiscal periods discussed in the management's
discussion and analysis.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accountings Standards No. 128 "Earnings per Share" (SFAS 128), which
is effective for periods ending after December 15, 1997. The Company's prior
years' results have been restated to conform with the provisions of this
Statement. Under SFAS 128, the Company has presented two earnings per share
("EPS") amounts. Basic EPS is calculated based on income available to common
shareholders and the weighted-average number of shares outstanding during the
reported period. Diluted EPS includes additional dilution from potential common
stock issuable pursuant to the exercise of stock options and a warrant
outstanding.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about
- 28 -
<PAGE>
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for fiscal periods beginning after December 15,
1997. The Company does not expect the adoption of this standard to have a
material effect on its financial statements or financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," ("SFAS 132"). SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain previous disclosures. SFAS 132 is effective for
fiscal periods beginning after December 15, 1997. The Company does not expect
the adoption of this Statement to have a material effect on its financial
statements or financial statement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The financial statements listed in the accompanying Index at Part IV, Item
14(a)1 are filed as a part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
- 29 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are the name, age and principal occupation of the members of the
Board of Directors and the executive officers of the Company, their positions
with the Company, their business experience during the last five years and the
year each was first elected a director of the Company.
================================================================================
Name Age Position
================================================================================
Charles S. Ramat 46 Director, Chairman of the Board, President,
Chief Executive Officer and Assistant Secretary
of the Company and of its wholly owned
subsidiary Europe Craft Imports, Inc. ("ECI")
and Chairman of the Board, Chief Executive
Officer and Assistant Secretary of its indirect
wholly owned subsidiary, ECI Sportswear, Inc.
("ECI Sportswear")
- --------------------------------------------------------------------------------
John J. Hannan 45 Director
- --------------------------------------------------------------------------------
Edward M. Yorke 39 Director
- --------------------------------------------------------------------------------
Robert A. Katz 31 Director
- --------------------------------------------------------------------------------
David N. Schreiber 54 Director
- --------------------------------------------------------------------------------
Paul Spector 56 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
- --------------------------------------------------------------------------------
Vincent F. Caputo 44 Vice President, Assistant Treasurer and
Assistant Secretary
================================================================================
CHARLES S. RAMAT, 46, has been a Director and President of the Company since
December 1986, Chairman of the Board of Directors and Chief Executive Officer
since August 1991 and Assistant Secretary since January 1988. Mr. Ramat has also
been Chairman of the Board, President and Chief Executive Officer of ECI since
December, 1995 and Chairman of the Board and Chief Executive Officer of ECI
Sportswear since July, 1997. Mr. Ramat has also engaged in private real estate
activity from prior to 1990. Mr. Ramat is the brother-in-law of David N.
Schreiber.
JOHN J. HANNAN, 45, has been a Director of the Company since June 1993. Mr.
Hannan is one of the founding principals of Apollo Advisors, L.P. which acts as
managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and
Apollo Investment Fund III, L.P., private securities investment funds, of Apollo
Real Estate Advisors, L.P. which acts as managing general partner of the Apollo
Real Estate Investment Funds, and of Lion Advisors, L.P., which acts as
financial advisor to and representative for certain institutional investors with
respect to securities investments. Mr. Hannan is also a director of
- 30 -
<PAGE>
Converse, Inc., Florsheim Group, Inc., and of United Auto Group, Inc.
EDWARD M. YORKE, 39, has been a Director of the Company since June 1993. Mr.
Yorke is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with
which he has been associated since 1992. From 1990 to 1992, Mr. Yorke was a vice
president in the high yield capital markets group of BT Securities Corp. Mr.
Yorke is also a director of Salant Corporation and Telemundo Group, Inc.
ROBERT A. KATZ, 31, has been a Director of the Company since June 1993. Mr. Katz
is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with which he
has been associated with since 1990. Mr. Katz is also a director of Salant
Corporation, Vail Resorts, Inc. and Alliance Imaging, Inc.
DAVID N. SCHREIBER, 54, has been a Director of the Company since December 1986.
Mr. Schreiber is currently the Vice President of A.H. Schreiber Co. Inc., a
manufacturer of womens' and children's swim wear and intimate apparel, a
position he has held since prior to 1988. Mr. Schreiber served as Chairman of
the Board of Directors of Servtex from May 1991 to November 1992 and as Vice
President from 1987 to 1991. Mr. Schreiber is Mr. Ramat's brother-in-law.
PAUL SPECTOR, 56, has been Senior Vice President and Chief Financial Officer of
the Company since May 1992 and Treasurer and Secretary of the Company since
August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the
Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
VINCENT F. CAPUTO, 44, has been Vice President, Assistant Treasurer and
Assistant Secretary of the Company since May 1992. From April 1988 until May
1992, Mr. Caputo was Director of Taxes for the Company. From January 1986 until
March 1988, Mr. Caputo was the Corporate Tax Manager for Automatic Data
Processing, Inc.
On June 30, 1993, a New Shareholders Agreement was entered into among Apollo and
the previous management shareholders of the Company (consisting of Alexander M.
Goren, James G. Goren, certain entities affiliated with the Gorens, Robert K.
Lifton, Charles S. Ramat, Howard L. Weingrow and the trustees of certain trusts
for the benefit of Mr. Ramat's children) providing that from and after June 30,
1993, the shareholder parties thereto agree to vote their shares such that the
prior management shareholders will be entitled to elect one member of the Board
of Directors, who shall be Charles S. Ramat, as long as Mr. Ramat's Executive
Employment Agreement with the Company (entitling him to be elected a Director of
the Company) is in effect. Pursuant to the Company's Plan of Reorganization
effective June 30, 1993, the Board of Directors of Aris was established as
Charles S. Ramat, David N. Schreiber, Herbert I. Wexler, and three additional
Directors designated by Apollo
- 31 -
<PAGE>
(John J. Hannan, Edward M. Yorke and Robert Katz). Mr. Wexler ceased to be a
Director of the Company on March 1, 1997.
On July 15, 1997, the closing date of the Company's acquisition of the assets of
Davco Industries, Inc. ("Davco"), the Company, Davco, the shareholders of Davco
(Steven Arnold and Christopher Healy), Apollo, and Charles S. Ramat entered into
a shareholders agreement with respect to the 3,000,000 shares of the Company's
Common Stock delivered to Davco as part of the purchase price of the acquisition
(the "Davco Shareholders Agreement"). The Davco Shareholders Agreement provides
that so long as Mr. Ramat is Chairman, Chief Executive Officer or President of
the Company, Davco and Messrs. Arnold and Healy agree to vote all of their
shares of the Company, on all corporate matters including the election of
Directors, for the recommendations, proposals and nominations of the Board of
Directors of the Company.
Board Meetings and Committees
The Board held four meetings during the fiscal year ended December 31, 1997.
The Board's Audit Committee consists of Messrs. Katz and Schreiber. The Audit
Committee is charged with reviewing matters relating to the annual consolidated
financial statements prepared by the Company's management and audited by the
independent auditors, reviewing interim financial statements and evaluating
internal controls and systems established by the Company.
The Board's Compensation and Stock Option Committee consists of Messrs. Hannan,
Yorke and Katz. The Compensation and Stock Option Committee is charged with
reviewing and making determinations with respect to compensation to be paid to
officers and other employees of the Company and with administering and making
determinations under the Company's stock option plan.
Election of Directors and Officers
The Company's current Board of Directors were appointed on June 30, 1993
pursuant to, and on the Effective Date of, the Company's Plan of Reorganization.
From and after such time as the next Annual Meeting of Shareholders of the
Company is held, Directors shall be elected by vote of the shareholders.
Directors so appointed or elected shall serve until the next Annual Meeting of
Shareholders and until their respective successors are elected and qualify,
provided that vacancies occurring in the Board of Directors may be filled by
vote of the Directors. The Board does not have a standing nominating committee.
Mr. Ramat's term of office is set forth in his Executive Employment Agreement.
See Item 11, "Executive Compensation-Employment Agreements". Other officers of
the Company serve at the pleasure of the Board of Directors of the Company.
- 32 -
<PAGE>
Item 11. Executive Compensation.
The following table presents certain specific information regarding the
compensation of the Chief Executive Officer of the Company and the only other
executive officers of the Company.
- 33 -
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long-Term All Other
------------------- Compensation Compensation
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Underlying
Name and Principal Fiscal Salary Stock
Position Year (1) ($) Bonus ($) Options (#)
-------- -------- ------ --------- -----------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Charles S. Ramat, President, 1997 $562,754 $227,871 (2) 750,000 (3) $46,649 (10)
Chairman and Chief Executive 1996 $500,207 $759,949 (5) 152,500 (6) 1,500 (4)
Officer of the Company and 1995 $531,093 -0- 400,000 (7) 136,919 (8)(9)
Europe Craft Imports, Inc. and
Chairman and Chief Executive
Officer of ECI Sportswear, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Spector, Senior Vice 1997 $140,000 $30,500 15,000 (3) $ -0-
President and Chief Financial 1996 125,000 -0- 15,000 (6) 1,500 (4)
Officer 1995 125,000 -0- 50,000 (7) 1,500 (9)
- ------------------------------------------------------------------------------------------------------------------------------------
Vincent Caputo, 1997 $75,000 $ -0- -0- $ -0-
Vice President, Assistant 1996 72,500 -0- 5,000 (6) 753 (4)
Treasurer & Assistant Secy. 1995 72,500 -0- 5,000 (7) 675 (9)
====================================================================================================================================
</TABLE>
(1) In this Summary Compensation Table, the 1997 fiscal year consists of
the twelve months ended December 31, 1997; the 1996 fiscal year
consists of the eleven months ended December 31, 1996; and the 1995
fiscal year consists of the twelve months ended January 28, 1995.
(2) Includes monthly installments paid during fiscal 1997 of the one-time
non-recurring success bonus earned for the 1996 fiscal year with
respect to the sale of Aris' Perry Manufacturing Co. subsidiary on
September 30, 1996. Also includes Mr. Ramat's bonus for services on
behalf of ECI for the 1997 fiscal year.
(3) These options were granted on August 28, 1997 under the Company's 1993
Incentive Stock Option Plan and shall vest eight years from the date of
grant, subject to accelerated vesting in the event of certain
refinancings of the Company's secured indebtedness. See "Stock Option
Plan and Stock Options" below.
(4) Includes amounts paid as matching contributions by the Company under
its 401(K) Plan.
(5) Includes one-time non-recurring success bonus earned for the 1996
fiscal year with respect to the sale of Aris' Perry Manufacturing Co.
subsidiary on September 30, 1996, 50% of which is to be paid in cash
upon completion of such
- 34 -
<PAGE>
fiscal year, with the other 50% to be paid in 36 equal monthly
installments, commencing after completion of the 1996 fiscal year. Also
includes Mr. Ramat's bonus for services on behalf of ECI for the twelve
month period February 4, 1996 through January 31, 1997.
(6) These options were granted in December, 1996 under the Company's 1993
Stock Incentive Plan with respect to shares of the Company's Common
Stock and vest in three equal annual installments.
(7) These options were granted on August 2, 1993 under the Company's 1993
Stock Incentive Plan with respect to shares of the Company's Common
Stock, and have vested in three equal annual installments. On June 26,
1995, all options outstanding on such date under the Company's 1993
Stock Incentive Plan (including these options) were repriced to have an
exercise price of fifty cents (the market price on such date), rather
than two dollars, per share. Pursuant to SEC regulations, the repriced
options are required to be reported as a grant in fiscal year 1995
(during which they were repriced) for purposes of this Summary
Compensation Table, even though they are the same options granted in
fiscal year 1993. The total number of such options originally granted
on August 2, 1993 held by Charles S. Ramat is 400,000, by Paul Spector
is 50,000, and by Vincent Caputo is 5,000.
(8) Includes $135,419 paid in the 1995 fiscal year to Mr. Ramat with
respect to performance compensation in connection with the
effectiveness of the Company's 1993 Plan of Reorganization, which Mr.
Ramat received in 24 equal monthly installments, without interest,
commencing on June 30, 1993.
(9) Includes amounts paid as matching contributions by the Company under
its 401(k) Plan, which were $1,500 for Mr. Ramat, $1,500 for Mr.
Spector and $675 for Mr. Caputo in fiscal 1995.
(10) Includes portion of bonus (50%) earned for the 1994 fiscal year, which
pursuant to Mr. Ramat's Executive Employment Agreement with the
Company, was paid three years after completion of such fiscal year
(that is, during 1997) contingent on the market value of the Company's
Common Stock at such later time. See "Employment Agreements".
Stock Option Plan and Stock Options
1993 Stock Incentive Plan
Stock Incentive Plan was adopted by the Company (the "1993 Stock Incentive
Plan"). The 1993 Stock Incentive Plan authorizes the Company's Board of
Directors (or a committee thereof), to award to employees and directors of, and
consultants to, the Company and its subsidiaries (i) options to acquire Common
Stock of the Company at prices determined when the options are granted, (ii)
stock appreciation rights (entitling the holder to a payment equal to the
appreciation in market value of a specified number of shares of Common Stock
- 35 -
<PAGE>
over a specified period), (iii) restricted shares of Common Stock whose vesting
is subject to terms and conditions specified at the time of grant, and (iv)
performance shares of Common Stock that are granted upon achievement of
specified performance goals. Options granted pursuant to the 1993 Stock
Incentive Plan may be either "incentive stock options" within the meaning of
Section 422A of the United States Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified options. As originally adopted on June 30, 1993, a
maximum of 1,200,000 shares of Common Stock can be covered by awards under the
1993 Stock Incentive Plan. On August 28, 1997, the Board of Directors of the
Company approved an amendment to the 1993 Stock Incentive Plan to increase to
2,500,000 the maximum number of shares of Common Stock which can be covered by
awards under the Plan, which amendment will be submitted to the shareholders of
the Company for ratification at the Annual Meeting of Shareholders to be held in
1998.
The 1993 Stock Incentive Plan provides that any shares subject to an option
under the Plan which terminate, are canceled or expire without being exercised
may again be subjected to an option under that plan, subject to the earlier
termination of that plan.
As at December 31, 1997, 1,695,000 options (excluding expired options and
exercised options) had been granted and were outstanding under 1993 Stock
Incentive Plan. 835,000 of the outstanding options provide for vesting in three
equal annual installments from the date of grant; as at December 31, 1997, a
total of 584,997 of these options were exercisable. 860,000 of the outstanding
options provide for vesting eight years from the date of grant on August 28,
1997, subject to accelerated vesting on certain refinancings of the Company's
indebtedness; as at December 31, 1997, none of these were exercisable. At such
date, there were 26 eligible participants with options outstanding under the
1993 Stock Incentive Plan. During the twelve month period ended December 31,
1997, the only options granted to Directors of the Company were those granted to
Charles S. Ramat, the Chairman, President and Chief Executive Officer of the
Company and ECI, and Chairman and Chief Executive Officer of ECI Sportswear, on
the terms set forth below under "Option Grants". The only options held by
Directors which were exercised during the fiscal year ended December 31, 1997
were 50,833 options exercised by Mr. Ramat at an exercise price of $0.10 per
share. See "Option Exercises" set forth below.
Option Grants
On July 15, 1997, the Company granted to employees of the business acquired on
such date by ECI Sportswear, a total of 50,000 options under the 1993 Stock
Incentive Plan at an exercise price of $0.50 per share. None of such employees
are officers or directors of the Company. Such options vest in three equal
installments from the date of grant.
On August 28, 1997, the Company granted to employees of the Company and its
subsidiaries, a total of 860,000 options under the 1993 Stock Incentive Plan at
an exercise price of $1.00 per share. Of this amount, 750,000 were granted to
Charles S. Ramat, Chairman, President and Chief Executive Officer of the Company
and ECI, and Chairman and Chief Executive Officer of ECI Sportswear; 15,000 were
granted to Paul Spector, Senior Vice
- 36 -
<PAGE>
President and Chief Financial Officer of the Company, and 95,000 were granted to
other employees of the Company and its subsidiaries. Mr. Ramat's options were
granted to him in consideration for, among other things, his consent to the
extension of the term of his Executive Employment Agreement with the Company for
three (3) additional years through June 30, 2001 and his agreement to eliminate
the Aris-level excess cash flow annual bonus which he otherwise would have
earned for fiscal years commencing January 1, 1997 and thereafter. All of such
options shall vest eight (8) years from the date of grant, but a portion of such
options shall obtain accelerated vesting on the occurrence of the "Refinancing
Date" (as defined herein) on or before December 31, 2000, depending on whether
the Refinancing Date occurs during fiscal years 1998, 1999 or 2000. The
Refinancing Date shall be the date upon which the Company's debt obligations to
Heller Financial, Inc., BNY Financial Corporation, and AIF-II, L.P., pursuant to
their respective secured note agreements with Aris dated June 30, 1993, each as
amended, are fully paid and satisfied in cash.
In the event that the Refinancing Date occurs during calendar year 1998, all
750,000 of such options granted to Mr. Ramat will obtain accelerated vesting. In
the event that the Refinancing Date occurs during calendar year 1999, 500,000 of
such options granted to Mr. Ramat will obtain accelerated vesting. In the event
that the Refinancing Date occurs during calendar year 2000, 250,000 of such
options granted to Mr. Ramat will obtain accelerated vesting. In the event that
the Refinancing Date occurs on or before December 31, 2000, all of such options
granted to the other employees of the Company or its subsidiaries will obtain
accelerated vesting. In the event that the Refinancing Date occurs during
calendar year 2001 or thereafter, none of such options granted to Mr. Ramat or
the other employees of the Company or its subsidiaries will obtain accelerated
vesting.
All options which obtain accelerated vesting as described above, shall vest as
follows: (i) one-third on the later to occur of the Refinancing Date and August
28, 1998 (the first anniversary of the date of grant); (ii) one-third on the
later to occur of the Refinancing Date and August 28, 1999 (the second
anniversary of the date of grant); and (iii) one-third on the later to occur of
the Refinancing Date and August 28, 2000 (the third anniversary of the date of
grant). By way of example, if the Refinancing Date occurred on November 1, 1999,
500,000 of such options granted to Mr. Ramat would obtain accelerated vesting,
of which 333,333 would vest on the Refinancing Date on November 1, 1999 (the
later to occur of the Refinancing Date and August 28, 1998 and August 28, 1999,
the first and second anniversaries of the date of grant), and the balance of
166,667 would vest on August 28, 2000(the later to occur of the Refinancing Date
and August 28, 2000, the third anniversary of the date of grant).
292,500 of such options granted to Mr. Ramat were provided from the unused
balance of the 1,200,000 shares initially reserved under Aris' 1993 Stock
Incentive Plan, and the remainder of the options granted to Mr. Ramat and the
other employees were provided by the amendment to the 1993 Stock Incentive Plan
to
- 37 -
<PAGE>
increase to 2,500,000 the maximum number of reserved shares as described above.
Such increase in reserved shares as well as the grant of options to Mr. Ramat
and other employees will be submitted to the shareholders of the Company for
ratification at the Annual Meeting of Shareholders to be held in 1998.
- 38 -
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
Number of Options at Assumed Annual Rates of Stock
Securities Granted to Exercise Market Price Appreciation For Option
Underlying Employees in or Base Price on Term
Options Fiscal Price Date of Expiration
Name Granted (#) Year ($/SH) Grant Date 5% ($) 10% ($)
- ---------- ----------- ------------ -------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles S.
Ramat(1) 750,000 82.4% $1.00 $1.00 8/28/2007 $471,750 $1,195,425
Paul
Spector(1) 15,000 1.6% $1.00 $1.00 8/28/2007 $ 9,435 $ 23,408
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See discussion above in "Option Grants" as to accelerated vesting on certain
refinancings of the Company's secured indebtedness.
Exercised/Unexercised Stock Options
The following table sets forth the December 31, 1997 fiscal year-end value of
unexercised options held by the executive officers of the Company on an
aggregated basis. The only exercises of stock options by any of the executive
officers of the Company during the twelve months ended December 31, 1997 were
options for 50,833 shares exercised by Mr. Ramat at an exercise price of $0.10
per share. All options referred to below were granted under the 1993 Stock
Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Acquired Number of Securities Underlying Value of Unexercised
on Exercise Value Realized Unexercised Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Charles S. 50,833 $65,605 400,000/851,667 $350,000 / $410,875
Ramat
Paul 0 0 55,000/25,000 $50,125 / $18,375
Spector
Vincent 0 0 6,666/3,333 $6,500 / $4,250
Caputo
</TABLE>
- 39 -
<PAGE>
Compensation of Directors
During the twelve months ended December 31, 1997, each Director (other than Mr.
Ramat) received director's fees at the rate of $18,000 per annum. Each of these
directors are also entitled to receive reimbursement for expenses incurred in
attending meetings of the Board or committees thereof on which they serve. In
addition, outside directors (Mr. Schreiber) are entitled to receive $500 per
meeting of the Committees of the Board to which they are assigned (Mr. Schreiber
is a member of the Audit Committee). Mr. Ramat receives no additional
compensation for service as a Director.
On August 2, 1993, Mr. Schreiber was granted options to purchase 10,000 shares
of Common Stock pursuant to the Company's 1993 Stock Incentive Plan. Such
options vested in three equal annual installments.
Employment Agreements
Charles S. Ramat is employed pursuant to the Executive Employment Agreement
between him and the Company dated as of February 1, 1988, as amended ("Ramat
Agreement"), pursuant to which Mr. Ramat serves as the Company's Chairman of the
Board, President and Chief Executive Officer, and will continue to be nominated
to serve on the Company's Board of Directors.
On October 3, 1995, the Ramat Agreement was amended to extend the term of Mr.
Ramat's employment for the period through June 30, 1998. On August 28, 1997, the
Ramat Agreement was amended to extend the term of Mr. Ramat's employment for the
period through June 30, 2001. This term will be further extended on a
year-to-year basis unless terminated by either party by notice given not less
than 60 days prior to the end of the then-current employment term.
Commencing June 30, 1993, Mr. Ramat is entitled to receive a base salary of
$500,000 per year (subject to an annual increase in an amount equal to the
proportionate annual increase in the Consumer Price Index - All Items), which
annual increases resulted in a base salary at the rate of $562,754 per annum
during the twelve months ended December 31, 1997.
On August 28, 1997, the Ramat Agreement was amended, in favor of the Company, to
eliminate the Aris-level excess cash flow annual bonus which Mr. Ramat otherwise
would have earned for fiscal years commencing January 1, 1997 and thereafter.
During fiscal year 1997, Mr. Ramat was paid the deferred portion of such
Aris-level annual bonus earned in the fiscal year ending January 29, 1994 and
during the first quarter of 1998, Mr. Ramat was paid the deferred portion of
such Aris-level bonus earned in the fiscal year ended January 28, 1995. There
was no Aris-level annual bonus earned for fiscal years ended February 3, 1996 or
December 31, 1996, other than with respect to the Perry Sale (described below).
On September 30, 1996, the Company sold 100% of the stock of Perry, for which
Mr. Ramat earned a bonus based on the excess
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cash flow bonus formula in the Ramat Agreement. One half of such bonus was paid
following completion of the fiscal year ended December 31, 1996, and the balance
of such bonus relating to the Perry Sale shall be paid in 36 equal consecutive
monthly installments, without interest, commencing after the filing of the
Company's Annual Report on Form 10-K for such fiscal year. If Mr. Ramat dies or
becomes totally disabled, the Ramat Agreement is terminated by the Company
without cause or there is a sale or liquidation of all or substantially all of
the operating assets of the Company (the Company's Ohio real estate interests
are not considered operating assets for this purpose), then the entire remaining
amount of all bonus payments relating to the Perry Sale shall be accelerated and
paid in full in a lump sum to Mr. Ramat.
On December 5, 1995, Mr. Ramat assumed the duties of Chairman, President and
Chief Executive Officer of ECI, in addition to his duties in such positions with
the Company. On December 18, 1996, the Company determined that for the fiscal
year commencing January 1, 1997, Mr. Ramat would be paid a bonus for his
services on behalf of ECI calculated as the sum of the following percentages of
net income of ECI computed prior to the provisions for taxes, for payment of
management fees to the Company, or for payment of any bonuses to ECI executives:
5.25% of such income in excess of $1,000,000 and up to $2,000,000; 10.5% of such
income in excess of $2,000,000 and up to $3,000,000; 7% of such income in excess
of $3,000,000 and up to $4,000,000; and 8.75% of such income in excess of
$4,000,000 and up to $5,000,000. Such ECI bonus will be paid to Mr. Ramat
following receipt of the audited financial statements for the 1997 fiscal year.
The Company amended the Ramat Agreement on August 28, 1997 to provide that for
the fiscal year commencing January 1, 1998, and each subsequent fiscal year
during the term of the Ramat Agreement, Mr. Ramat will be provided with a cash
bonus based upon achievement of performance targets of the Company and its
subsidiaries set annually in advance of each such fiscal year by mutual
agreement, which bonus programs shall each become an addendum to the Ramat
Agreement. Such an addendum was entered into between the Company and Mr. Ramat
to confirm that for the fiscal year commencing January 1, 1998, Mr. Ramat's cash
bonus shall be computed as the sum of the following percentages of the combined
net income of ECI and ECI Sportswear, computed prior to the provisions for
taxes, for payment of management fees to the Company, or for payment of any
bonuses to executives: 10% of such income in excess of $4,500,000 and up to
$6,000,000 and 20% of such income in excess of $6,000,000 and up to $8,000,000.
Such cash bonus will be paid to Mr. Ramat following receipt of the audited
financial statements for the 1998 fiscal year.
Since the Aris-level excess cash flow bonuses have been eliminated for the 1997,
1998 and all subsequent fiscal years, there is no duplication of bonuses by
reason of the bonuses provided to Mr. Ramat based on the net income of ECI and
ECI Sportswear.
Mr. Ramat is also entitled to participate, at the Company's expense, in all
insurance and medical plans of the Company
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<PAGE>
available to its employees, is entitled to reimbursement for business and
entertainment expenses and is entitled to an allowance of $500 per month towards
a leased automobile.
In the event of Mr. Ramat's death or total disability, he will be entitled to a
death or disability benefit equal to 150% of his annual base salary in effect on
the date of death or certification of disability, and if a "change in control"
(as defined in the Ramat Agreement) occurs, Mr. Ramat will have the right to
terminate the Ramat Agreement, in which event he will entitled to receive a lump
sum severance payment in an amount equal to 299% of his average annual
compensation (including bonus, other than bonus relating to a Perry Sale) from
the Company for the preceding five calendar years. Mr. Ramat will also be
entitled to receive such severance payment if he is terminated by the Company
without cause. On October 3, 1995, the Ramat Agreement was amended to clarify
the definition of "change in control" to include, among other events, the sale
or liquidation of the stock, assets or business of both Perry and ECI, unless at
such time the Company had acquired another operating subsidiary with a net worth
and net income not less than that of ECI at such time and which undertakes the
same contractual obligations that Perry and ECI have to Mr. Ramat.
The Ramat Agreement is subject, at the Company's option, to termination only for
cause upon 90 days' written notice if Mr. Ramat has been convicted for any
material act of fraud, misappropriation, embezzlement, disloyalty, dishonesty or
breach of trust against the Company or any of its subsidiaries or affiliated
companies. Notwithstanding such termination, the Company will remain obligated
to pay Mr. Ramat his annual base salary through the date of termination.
The Ramat Agreement provides for indemnification by the Company for all claims
relating to Mr. Ramat's service as an officer and director of the Company, and
for advancement of expenses, except in those circumstances where indemnification
would be precluded by Section 721 of the New York Business Corporation Law
("BCL") and requires that during the term of his employment thereunder, (a) the
Company's Certificate of Incorporation and/or By-Laws (as required by law) must
contain the provisions required by the BCL to provide for indemnification of
officers and directors to the fullest extent set forth in BCL Section 721 and to
provide for the limitation of liability of directors to the fullest extent set
forth in Section 402(b) of the BCL, and (b) the Company must maintain in full
force and effect directors and officers liability insurance, to the extent
available, providing coverage comparable to the insurance policy the Company had
in effect on August 2, 1991.
On December 18, 1996, the Company entered into an agreement with Mr. Ramat,
providing that with respect to 152,500 options granted to him in December, 1996
under the Company's 1993 Stock Incentive Plan, in the event that the Ramat
Agreement is not renewed upon any expiration of its term, or if Mr. Ramat is
terminated by the Company without cause (as defined in the Ramat Agreement),
then all of such options would immediately vest and become exercisable, and the
term for exercise of such options
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shall be one year after the date of such non-renewal or termination. On August
28, 1997, the Company amended the Ramat Agreement to provide for the grant of
750,000 options to Mr. Ramat under the 1993 Stock Incentive Plan as described
above in "Stock Option Plan and Stock Options". Such options were granted to Mr.
Ramat in consideration for, among other things, his consent to the extension of
the term of the Ramat Agreement for three additional years through June 30, 2001
and his agreement to eliminate the Aris-level excess cash flow annual bonus he
otherwise would have earned for fiscal years commencing January 1, 1997 and
thereafter. The amendment provided that with respect to such 750,000 options
granted to Mr. Ramat, in the event that the Ramat Agreement is not renewed upon
the expiration of its term, or if Mr. Ramat is terminated by the Company without
cause (as defined in the Ramat Agreement), then all of such options which have
obtained accelerated vesting because the Refinancing Date has occurred prior to
the non-renewal or termination date, would immediately vest and become
exercisable (regardless of whether the first, second or third anniversary of the
date of grant had occurred), and the term for exercise of such options shall be
one year after the date of such non-renewal or termination.
Mr. Paul Spector, the Company's Senior Vice President and Chief Financial
Officer, is contractually entitled to a severance payment if he is terminated by
the Company for reasons other than cause. The severance payment will equal
one-half of Mr. Spector's annual salary at the time of termination.
401(k) Plan
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee are Messrs.
Hannan, Yorke and Katz, none of whom were (i) during the twelve months ended
December 31, 1997, an officer of the Company or any of its subsidiaries or (ii)
formerly an officer of the Company or any of its subsidiaries. Messrs. Hannan,
Yorke and Katz may be considered executive officers of Apollo Advisors, L.P.,
the general partner of AIF-II, a holder of secured indebtedness of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
One report for one transaction due January 10, 1998 was inadvertently filed
later in that same month with respect to Charles S. Ramat due to the attorney's
EDGAR software difficulties.
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<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth the beneficial ownership of the Company's Common
Stock on March 2, 1998, by certain holders. Those holders are persons who either
(i) are beneficial owners of 5% or more of the Company's Common Stock, or (ii)
are officers or directors of the Company. This information is based on the
Company's current information concerning the ownership of its securities.
As a result of the agreements relating, among other things, to the nomination
and election of directors and the acquisition and disposition of Common Stock of
the Company set forth in the New Shareholders Agreement and Equity Registration
Rights Agreement, entered into June 30, 1993, Apollo Aris and the Non-Apollo
Subject Shareholders referred to therein (each a "Non-Apollo Subject
Shareholder" and collectively the "Non-Apollo Subject Shareholders") may be
deemed to constitute a "group" within the meaning of Section 13(d)(3) under the
Securities Exchange Act of 1934, as amended. As such, the Non-Apollo Subject
Shareholders and Apollo Aris may be deemed to have shared voting and dispositive
power over all of the 9,111,039 shares of Common Stock owned in the aggregate by
the Non-Apollo Subject Shareholders and Apollo Aris on June 30, 1993, or 76.6%
of the total number of shares of Common Stock then outstanding. Reference is
made to such statements on Schedule 13D as have been or may be filed with the
Securities and Exchange Commission by Apollo Aris and the Non-Apollo Subject
Shareholders regarding such parties and their respective ownership of Common
Stock.
================================================================================
Name and Address Shares of Common Percent
of Beneficial Owner (1) Stock of Class
- --------------------------------------------------------------------------------
Apollo Aris Partners, L.P. 5,804,820 (2)(3) 38.9%
% Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- --------------------------------------------------------------------------------
Davco Industries, Inc. 3,000,000 (4) 20.1%
(name changed to AH Equities,
Inc.)
Steven Arnold
Christopher Healy
c/o Sargent & Sargent
830 Post Road East
Westport, Connecticut 06880
- --------------------------------------------------------------------------------
Chase Manhattan Bank 833,973 5.6%
350 Fifth Avenue
New York, New York 10018
- --------------------------------------------------------------------------------
Robert K. Lifton 702,355 (2) 4.7%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
Howard L. Weingrow 702,469 (2) 4.7%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
Charles S. Ramat 1,047,465 (2)(5)(7) 7.0%
475 Fifth Avenue
New York, New York 10017
- --------------------------------------------------------------------------------
James G. and Alexander M. Goren 1,199,627 (2)(6) 8.1%
805 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
David N. Schreiber 115,135 (5)(7) 0.8%
c/o A.H. Schreiber & Co, Inc.
460 West 34th Street, 10th Floor
New York, New York 10001
- --------------------------------------------------------------------------------
Paul Spector 55,000 (7) 0.4%
475 Fifth Avenue
New York, New York 10017
- --------------------------------------------------------------------------------
Vincent Caputo 6,666 (7) 0.1%
475 Fifth Avenue
New York, New York 10017
- --------------------------------------------------------------------------------
All persons who are officers 1,224,266 (8) 8.2%
or directors of the Company,
as a group (seven persons)
================================================================================
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) These and certain related persons are parties to the New Shareholders
Agreement, described below, containing certain voting and other
arrangements as to shares covered thereby.
(3) This table does not reflect any beneficial ownership by Messrs. Yorke,
Katz or Hannan, directors of the Company associated with Apollo Aris.
Such persons do not directly own any shares of Common Stock, and such
persons disclaim beneficial ownership of all shares held by Apollo Aris
Partners, L.P.
(4) These shares are held of record by Davco Industries, Inc. ("Davco"),
whose name was changed to AH Equities, Inc., and were issued to Davco
on July 15, 1997 as a component of the purchase price for the Company's
acquisition of the assets of Davco. Steven Arnold is the 60%
shareholder, and Christopher Healy is the 40% shareholder, of Davco and
Messrs. Arnold and Healy are parties to the Davco Shareholders
Agreement containing certain voting and other arrangements covering
these shares described below.
(5) With respect to 105,135 of the shares listed next to Mr. Schreiber's
name: Mr. Schreiber is co-trustee, with Ora Ramat, the wife of Charles
S. Ramat, of three trusts for the benefit of three children of Mr. and
Mrs. Ramat that own these shares. Mr. Schreiber and Mrs. Ramat disclaim
beneficial ownership of these shares. These shares are not included in
the number of shares listed next to Mr. Ramat's name.
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<PAGE>
(6) James and Alexander Goren are brothers. These shares are beneficially
owned as follows: James Goren individually owns 267,857 shares of
Common Stock. Alexander Goren, individually owns 327,381 shares of
Common Stock. 476,191 shares are owned by MGI Associates, L.P., a
Delaware limited partnership, of which James Goren is the managing
general partner and Alexander Goren is a general partner, and over
which shares James Goren has full voting and dispositive power. 9,151
shares are owned by Goren Brothers, a New York general partnership of
which the Gorens are the only partners. 119,048 shares are held in two
trusts for the children of Alexander Goren, of which trusts the Gorens
are co-trustees.
(7) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which became
exercisable on or prior to December 31, 1997: Charles S. Ramat
(400,000), David N. Schreiber (10,000), Paul Spector (55,000) and
Vincent Caputo (6,666).
(8) These shares are attributed to Messrs. Ramat, Schreiber, Spector and
Caputo.
In connection with the Amended Heller Agreement entered into on September 30,
1996, the Company issued to Heller a warrant, exercisable for nominal
consideration until September 30, 2006, to obtain 584,345 shares of the
Company's Common Stock (equal to approximately 3.9% of the Company's outstanding
Common Stock on March 2, 1998).
Item 13. Certain Relationships and Related Transactions.
New Shareholders Agreement
Pursuant to the New Shareholders Agreement, Apollo Aris and the Non-Apollo
Subject Shareholders have agreed that, if any such party shall have nominated
any individual for election as a director of the Registrant pursuant to such
shareholder's rights under the Registrant's Certificate of Incorporation and/or
By-Laws, each of Apollo Aris and the Non-Apollo Subject Shareholders will vote
in favor of the election of each such nominee (or, if there are no such
nominees, in favor of the candidates nominated by a majority of the Board of
Directors) all shares of Common Stock over which such person has voting power;
provided, that each of Apollo Aris and the Non-Apollo Subject Shareholders have
agreed to vote in favor of the election of Charles S. Ramat (the Chairman of the
Board, President and Chief Executive Officer of the Company) as a director at
such times as Mr. Ramat is nominated as a director and entitled to be so
nominated pursuant to any agreement between the Company and Mr. Ramat. Pursuant
to the Company's Restated Certificate of Incorporation and By-Laws, only a
shareholder that owns, or together with its affiliates owns, shares of Common
Stock possessing a majority of the voting power of the outstanding Common Stock
is entitled to nominate candidates for election as directors.
The New Shareholders Agreement provides that each Non-Apollo Subject Shareholder
is required to obtain the consent of Apollo
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<PAGE>
Aris (or its successor or their designees) to transfer shares of Common Stock
owned by such Non-Apollo Subject Shareholder, other than transfers of shares
received pursuant to an employee stock option or purchase plan, transfers to
certain persons affiliated with or otherwise related to the Non-Apollo Subject
Shareholder, transfers by a Non-Apollo Subject Shareholder's estate, transfers
pursuant to the Equity Registration Rights Agreement, and transfers not
exceeding an annual aggregate of 10% of the shares of Common Stock owned by such
Non-Apollo Subject Shareholder on the Effective Date. Pursuant to the New
Shareholders Agreement, Apollo Aris is required to allow the Non-Apollo Subject
Shareholders to participate in any private sale to a non-affiliate of an annual
aggregate of more than 10% of the shares of Common Stock owned by Apollo Aris on
June 30, 1993.
The New Shareholders Agreement requires that the Non-Apollo Subject Shareholders
must obtain the consent of Apollo Aris (or its successor or their designees)
prior to the acquisition of additional shares of Common Stock, other than shares
acquired pursuant to an employee stock option or stock purchase plan, and shares
that (when aggregated with shares acquired pursuant to such employee stock plans
or acquired by certain persons affiliated with or otherwise related to a
Non-Apollo Subject Shareholder that are not parties to the New Shareholders
Agreement) do not exceed an annual aggregate of 10% of the shares of Common
Stock owned by such Non-Apollo Subject Shareholder on June 30, 1993.
The New Shareholders Agreement will terminate on the earliest to occur of (i)
June 30, 2000, (ii) in certain circumstances, upon the election of the
Non-Apollo Subject Shareholders following the transfer by Apollo Aris resulting
in the occurrence of certain reductions in Apollo Aris's ownership interest in
the Company, (iii) the end of the first fiscal year of the Company for which the
total amount of NOL carryforwards available for later taxable years is less than
$2.5 million, and (iv), as to Apollo Aris and any Non-Apollo Subject
Shareholder, the date on which such party owns shares equal to less than 10% of
the shares of Common Stock owned by such party on June 30, 1993. In addition,
Apollo Aris may terminate the New Shareholders Agreement with respect to any
Non-Apollo Subject Shareholders who are not "affiliates" of the Registrant
within the meaning of Rule 144(a)(1) under the Securities Act of 1933, as
amended.
Messrs. Hannan, Yorke and Katz, Directors of the Company, may be considered
executive officers of Apollo Advisors, L.P., the general partner of Apollo Aris,
L.P. and of AIF-II. AIF-II is a holder of secured indebtedness of the Company.
Equity Registration Rights Agreement
Pursuant to the Equity Registration Rights Agreement, any party that owns, or
together with its affiliates owns, 25% or more of the shares of Common Stock
subject to such agreement is entitled to require the Company to register under
the Securities Act of 1933, as amended, the offer and sale of Common Stock owned
by such person. Each of Apollo Aris and the Non-Apollo Subject Shareholders is
entitled to have shares of Common Stock owned by such person included in any
such registration statement
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<PAGE>
initiated by a party to the Equity Registration
Rights Agreement or by the Company. The Equity Registration Rights Agreement
also provides that Apollo Aris is required to allow the Non-Apollo Subject
Shareholders to participate in a non-underwritten public offering in which
Apollo Aris sells an annual aggregate of more than 10% of the shares of Common
Stock owned by Apollo Aris on June 30, 1993.
Pursuant to a letter agreement dated October 29, 1992, the Company, ECI and
Above the Belt, Inc. (a discontinued operating subsidiary), have agreed, subject
to certain exceptions, to indemnify each of Apollo Advisors, its partners and
certain other related persons from and against all losses, claims, liabilities,
damages, costs and expenses or actions in respect thereof arising out of any
actual or threatened claim against such party by a person other than the Company
related to or arising out of or in connection with, among other things, the Plan
or any actions taken by any indemnified party pursuant thereto or the
transactions contemplated thereby.
Director's Indemnification Agreements
On June 30, 1993, the Company entered into separate Indemnification Agreements
with each new and continuing member of its Board of Directors which provide such
Directors with contractual indemnification to the fullest extent permitted by
law, and for the advancement of legal fees and other expenses, and require the
Company to use its best efforts to maintain designated director and officer
liability insurance coverage.
Agreements with Affiliates of Prior ECI Management
ECI leases approximately 29,600 square feet of office space in New Jersey from a
partnership, some of whose partners are former officers and/or directors of ECI
(but not of the Company). Such lease was in effect when the Company acquired ECI
in 1987.
In March 1996, ECI entered into a sublease of approximately 120,000 square feet
of warehouse space in New Jersey (adjacent to ECI's offices) of which the ground
lessee is the same New Jersey partnership, some of whose partners are former
officers and/or directors of ECI (but not of the Company).
Davco Shareholders Agreement
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"). The aggregate purchase price 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 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 included in this
Report on Form 10K. On the closing date, ECI Sportswear paid to Davco
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<PAGE>
$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 expected
contingent cash purchase price payable to Davco, to be derived from such audited
financial statements, is $3,395,000. The Company anticipates payment of the
balance of $2,814,000 (net of advances previously paid of $581,000) during
April, 1998.
On July 15, 1997, 3,000,000 shares of the Company's Common Stock were issued to
Davco as part of the purchase price for the acquisition of its business (the
"Acquired Shares"), and Davco became the record owner (and Davco and its
shareholders, Steven Arnold and Christopher Healy as a group, became the
beneficial owners of) such Acquired Shares. Steven Arnold is the 60%
shareholder, and Christopher Healy is the 40% shareholder, of Davco. All of the
Acquired Shares are subject to the terms, conditions and restrictions of a
Shareholders Agreement (the "Davco Shareholders Agreement") entered into on such
date between Davco, the shareholders of Davco (Steven Arnold and Christopher
Healy), the Company, Apollo Aris Partners, L.P.("Apollo") and Charles S. Ramat,
providing that the Acquired Shares shall be "restricted stock" and that all
transfers thereof must comply with applicable federal and state securities laws,
including Rule 144 under the Securities Act of 1933, as amended("Rule 144");
that in addition to the limitations on transfer imposed by Rule 144, transfers
of Acquired Shares by Davco, Steven Arnold or Christopher Healy shall be limited
to Rule 144 "over the market" ordinary brokers transactions ("Rule 144 Brokers
Transactions"), limited in timing and amounts such that (1) No transfers would
be permitted during the first year following the closing date of the
acquisition, (2) in each of the second, third and fourth year following the
Closing Date, each of Steven Arnold and Christopher Healy may sell up to 300,000
shares per year in Rule 144 Brokers Transactions, and (3) commencing in the
fifth year following the closing date, each of Steven Arnold and Christopher
Healy may sell up to 600,000 shares per year in Rule 144 Brokers Transactions;
and further providing that during the first four years following the closing
date, neither Davco, Steven Arnold nor Christopher Healy are permitted to engage
in any privately negotiated or block or bulk sales, regardless of amount,
without the Company's consent, and are limited to the Rule 144 Brokers
Transaction sales in the amounts set forth above; and commencing in the fifth
year following the closing date, Davco, Steven Arnold and Christopher Healy may
engage in sales which are not Rule 144 Brokers Transactions, for an all-cash
purchase price, subject to successive rights of first refusal, first to the
Company, and second to Apollo and Charles S. Ramat (on an equal basis); and
further providing that Davco, Messrs. Arnold and Healy are prohibited from
acquiring any additional shares of the Company without the consent of the
Company; and further providing that for so long as Mr. Ramat is Chairman, Chief
Executive Officer or President of the Company, Davco, Steven Arnold and
Christopher Healy agree to vote all of their shares (on all corporate matters
including election of Directors) for the recommendations, proposals and
nominations of the Company's Board of Directors; and further providing that
Davco, Messrs. Arnold and Healy will have certain "piggyback" registration
rights as to the Acquired Shares, to the extent still owned by them at the time
of registration. These
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"piggyback" registration rights will enable Davco, Messrs. Arnold and Healy to
include their shares in a registration by the Company to the same proportionate
extent as if they were parties to the Equity Registration Rights Agreement
referred to above when, as and if the shares of the Company held by the parties
to such Equity Registration Rights Agreement are eligible for inclusion in such
registration statement on a "piggyback" basis.
On the July 15, 1997 closing date of the Davco acquisition, each of Steven
Arnold and Christopher Healy entered into employment agreements with ECI
Sportswear for a term through September 30, 2000 to manage the Davco business as
owned by ECI Sportswear.
Agreements Relating to Grant of Stock Options
In the August 28, 1997 amendment to the Ramat Agreement, the Company agreed to
call and hold a Shareholder's Meeting on a date no later than sixty(60) days
after the Company's 1997 audited financial statements are available, for the
purpose of approving an amendment to Aris' 1993 Stock Incentive Plan to increase
the number of shares reserved for issuance under such Plan from 1,200,000 shares
to 2,500,000 shares as well as ratifying the grant of options to Mr. Ramat and
other employees of the Company and its subsidiaries on August 28, 1997 referred
to above in "Executive Compensation - Stock Option Plan and Stock Options", with
the Board of Directors of the Company to recommend to the shareholders the
approval of such amendment and ratification, and with the Company to use its
best efforts to obtain such shareholder approval, and following such shareholder
approval and ratification, to prepare, file and distribute an amended Form S-8
Registration Statement covering the increased number of 2,500,000 shares
reserved for issuance under Aris' 1993 Stock Incentive Plan. On the same date,
Apollo, Davco, and Steven Arnold and Christopher Healy (the shareholders of
Davco) each executed letter agreements in favor of the Company and Charles S.
Ramat, consenting to such amendment of the 1993 Stock Incentive Plan and such
grant of options to Mr. Ramat and other employees of the Company and its
subsidiaries, and agreeing to vote, at any annual or special meeting of
shareholders of the Company, all shares of the Company owned or controlled by
them in favor of such amendment to the 1993 Stock Incentive Plan and
ratification of such grant of options to Mr. Ramat and the other employees of
the Company and its subsidiaries.
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PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Auditors' Report Page
Independent Auditors' Report....................................F-l
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and 1996......................................F-2
Consolidated Statements of Operations for the Year Ended
December 31, 1997, for the Period from February 4, 1996 through
December 31, 1996 and for the 53 Weeks Ended February 3, 1996...F-3
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1997, for the Period from February 4, 1996 through
December 31, 1996 and for the 53 Weeks Ended February 3,
1996............................................................F-4
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1997, for the Period from February 4, 1996
through December 31, 1996 and for the 53 Weeks Ended
February 3, 1996................................................F-5
Notes to Consolidated Financial Statements......................F-6
2. Financial Statement Schedules
The following financial statement schedules should be read in
conjunction with the consolidated financial statements in Item
8 of this Annual Report on Form 10-K:
Schedule I - Condensed Financial Information
of Registrant................................F-22
Schedule II - Valuation and Qualifying
Accounts.....................................F-26
All other schedules are omitted because they are not
applicable or because the required information is included in
the financial statements or notes thereto.
3. Exhibits
Incorporated herein by reference is a list of the Exhibits
contained in the Exhibit Index included in
- 51 -
<PAGE>
Item 14(c) below, numbered in accordance with Item 601 of
Regulation S-K.
(b) Reports on Form 8-K
None during the fourth calendar quarter ended December 31, 1997.
(c) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
2. Second Amended Joint Plan of Reorganization dated March (3)
26, 1993, as amended May 11 and June 9, 1993
(Note: Annexes omitted)
- ------------------------------------------------------------------------------------------------------------
3.3 Restated Certificate of Incorporation filed on June 30, (3)
1993
- ------------------------------------------------------------------------------------------------------------
3.4 Amended and Restated By-Laws effective June 30, 1993 (3)
- ------------------------------------------------------------------------------------------------------------
4.1 Specimen Certificate Evidencing Common Stock. (1)
- ------------------------------------------------------------------------------------------------------------
10.42 Employment Agreement dated February 1, 1988 between the (1)
Company and Charles S. Ramat.
- ------------------------------------------------------------------------------------------------------------
10.60 Amendment dated as of August 2, 1991 to Executive (2)
Employment Agreement dated February 1, 1988 Between the
Registrant and Charles S. Ramat.
- ------------------------------------------------------------------------------------------------------------
10.65 Senior Secured Note Agreement dated as of June 30, 1993 (3)
between Registrant and Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.66 Senior Secured Note dated as of June 30, 1993 issued by (3)
Registrant to Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.67 Series A Junior Secured Note Agreement dated as of June (3)
30, 1993 between Registrant and BNY Financial
Corporation.
============================================================================================================
</TABLE>
- 52 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.68 Series A Junior Secured Note dated as of June 30, 1993 (3)
issued by Registrant to BNY Financial Corporation.
- ------------------------------------------------------------------------------------------------------------
10.69 Series B Junior Secured Note Agreement dated as of June (3)
30, 1993 between Registrant and AIF II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.70 Series B Junior Secured Note dated June 30, 1993 issued (3)
by Registrant to AIF II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.71 Primary Pledge Agreement dated as of June 30, 1993 (3)
between Registrant and Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.72 Secondary Pledge Agreement dated as of June 30, 1993 (3)
between Registrant, BNY Financial Corporation and AIF
II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.73 Securities Purchase Agreement dated as of June 30, 1993 (3)
between Registrant, Apollo Aris Partners, L.P. and AIF
II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.74 Debt Registration Rights Agreement dated as of June 30, (3)
1993 among Registrant and the Holders of Registrable
Securities Referred to Therein.
- ------------------------------------------------------------------------------------------------------------
10.75 Shareholders Agreement dated as of June 30, 1993 among (3)
Registrant and the Subject Shareholders Referred to
Therein.
- ------------------------------------------------------------------------------------------------------------
10.76 Equity Registration Rights Agreement dated as of June (3)
30, 1993 among Registrant and the Holders of
Registrable Shares Referred to Therein.
- ------------------------------------------------------------------------------------------------------------
10.77 Intercreditor Agreement dated as of June 30, 1993 among (3)
Heller Financial, Inc., BNY Financial Corporation and AIF II,
L.P.
============================================================================================================
</TABLE>
- 53 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.78 Second Amendment dated May 6, 1992, Third Amendment (3)
dated March 25, 1993, and Fourth Amendment dated June
14, 1993 to Executive Employment Agreement dated
February 1, 1988 between Registrant and Charles S.
Ramat.
- ------------------------------------------------------------------------------------------------------------
10.79 Severance Agreement dated April 3, 1991 between (3)
Registrant and Paul Spector.
- ------------------------------------------------------------------------------------------------------------
10.80 1993 Stock Incentive Plan of Registrant, as amended by (3)
Amendment No. 1 thereto dated June 24, 1993.
- ------------------------------------------------------------------------------------------------------------
10.81 Form of Indemnification Agreement dated as of June 30, (3)
1993 between Registrant and each member of Registrant's
Board of Directors.
- ------------------------------------------------------------------------------------------------------------
10.82 Letter Agreement dated February 8, 1993 among James G. (3)
Goren, Alexander M. Goren, Charles S. Ramat, and David
Schreiber and Ora Ramat as Trustees for the Benefit of
Hana Leah Ramat and Abraham Ramat.
- ------------------------------------------------------------------------------------------------------------
10.83 Addendum dated June 30, 1993 to Shareholders Agreement (3)
dated May 26, 1988 among The Marcade Group Inc. and the
Shareholders referred to therein.
- ------------------------------------------------------------------------------------------------------------
10.84 Stipulated Entry Liquidating Claims dated March 10, (3)
1993 among The Marcade Group Inc., Robert K. Lifton,
Howard L. Weingrow, and JAG Consulting Co. Ltd.
- ------------------------------------------------------------------------------------------------------------
10.85 Letter Agreement dated June 28, 1993 among AIF II, (3)
L.P., Apollo Aris Partners, L.P. and Registrant.
============================================================================================================
</TABLE>
- 54 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.86 Letter Agreement dated October 29, 1992 among The (3)
Marcade Group Inc., Above The Belt, Inc., Europe Craft
Imports, Inc., Perry Manufacturing Company, Apollo
Investment Fund, L.P., AIF II, L.P., and Altus Finance.
- ------------------------------------------------------------------------------------------------------------
10.87 Amendment dated December 12, 1994 to Senior Secured (4)
Note Agreement dated as of June 30, 1993 between Registrant and
Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.88 Amendment dated June 12, 1995 to Senior Secured Note (5)
Agreement dated as of June 30, 1993 between Registrant and
Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.89 Amendment dated October 27, 1995 to Senior Secured Note (6)
Agreement dated as of June 30, 1993 between Registrant and
Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.90 Amendment dated February 2, 1996 to Series B Junior (7)
Secured Note Agreement dated as of June 30, 1993 between
Registrant and AIF-II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.91 Fifth Amendment dated October 3, 1995 and Sixth (8)
Amendment dated March 20, 1996 to Executive Employment
Agreement dated February 1, 1988 between Registrant and
Charles S. Ramat
- ------------------------------------------------------------------------------------------------------------
10.92 Fifth Amendment dated May 1, 1996 to Senior Secured (9)
Note Agreement dated as of June 30, 1993 between Registrant and
Heller Financial, Inc.
============================================================================================================
</TABLE>
- 55 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.93 Consent dated May 1, 1996 to Series A Junior Secured (9)
Note Agreement dated as of June 30, 1993 between Registrant and
BNY Financial Corporation.
- ------------------------------------------------------------------------------------------------------------
10.94 Consent dated May 1, 1996 to Series B Junior Secured (9)
Note Agreement dated as of June 30, 1993 between Registrant and
AIF-II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.95 Stock Purchase Agreement dated as of September 19, 1996 (10)
between Aris Industries, Inc., as Seller, Page Holding
Company, as Buyer, and Perry Manufacturing Company,
with respect to the stock of Perry Manufacturing
Company.
- ------------------------------------------------------------------------------------------------------------
10.96 Amended and Restated Senior Secured Note Agreement (10)
dated September 30, 1996, between Aris Industries, Inc.
as Borrower, and Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.97 Interest Note (Principal Amount $1,000,000) dated (10)
September 30, 1996 from Aris Industries, Inc. payable
to Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.98 Amended and Restated Pledge Agreement dated September (10)
30, 1996 between Aris Industries, Inc., as Pledgor, and
Heller Financial, Inc., as Pledgee.
- ------------------------------------------------------------------------------------------------------------
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
- ------------------------------------------------------------------------------------------------------------
10.100 Letter dated December 18, 1996 from the Registrant to (11)
Charles S. Ramat.
- ------------------------------------------------------------------------------------------------------------
10.101 Amendment dated May 5, 1997 to Series A Junior Secured (11)
Note Agreement dated as of June 30, 1993 between Registrant and
BNY Financial Corporation.
============================================================================================================
</TABLE>
- 56 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.102 Amendment dated May 5, 1997 to Series B Junior Secured (12)
Note Agreement dated as of June 30, 1993 between Registrant and
AIF-II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.103 Amendment dated June 18, 1997 to Series A Junior (13)
Secured Note Agreement dated as of June 30, 1993
between Registrant and BNY Financial Corporation.
- ------------------------------------------------------------------------------------------------------------
10.104 Amendment dated June 18, 1997 to Series B Junior (13)
Secured Note Agreement dated as of June 30, 1993 between
Registrant and AIF-II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.105 Asset Purchase Agreement dated as of July 15, 1997 (14)
among Davco Industries, Inc., as Seller, Steven Arnold
and Christopher Healy as Shareholders of Seller, and
Aris Management Corp. (n/k/a ECI Sportswear, Inc.) , as
Purchaser.
- ------------------------------------------------------------------------------------------------------------
10.106 Shareholders Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., Steven Arnold, Christopher
Healy, Aris Management Corp. (n/k/a ECI Sportswear,
Inc.), the Registrant, Apollo Aris Partners, L.P. and
Charles S. Ramat.
- ------------------------------------------------------------------------------------------------------------
10.107 Amendment dated July 18, 1997 to Series A Junior (14)
Secured Note Agreement dated as of June 30, 1993
between Registrant and BNY Financial Corporation.
- ------------------------------------------------------------------------------------------------------------
10.108 Amendment dated July 18, 1997 to Series B Junior (14)
Secured Note Agreement dated as of June 30, 1993 between
Registrant and AIF-II, L.P.
============================================================================================================
</TABLE>
- 57 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
Exhibit Filed as
No. Description Indicated Exhibit
------- ----------- to Document
Referenced in
Footnote No.
-----------------
<S> <C> <C>
============================================================================================================
10.109 Amendment executed September 12, 1997 to Series A and (15)
Series B Junior Secured Note Agreements dated as of
June 30, 1993 between Registrant, BNY Financial Corporation and
AIF-II, L.P.
- ------------------------------------------------------------------------------------------------------------
10.110 Eighth Amendment dated August 28, 1997 to Executive
Employment Agreement dated February 1, 1988 between the
Registrant and Charles S. Ramat and letter agreements
executed on the same date by Apollo Aris Partners,
L.P., AH Equities, Inc. (f/k/a Davco Industries, Inc.),
Steven Arnold and Christopher Healy in favor of the
Registrant and Mr. Ramat, filed herewith.
- ------------------------------------------------------------------------------------------------------------
21. List of Subsidiaries
- ------------------------------------------------------------------------------------------------------------
23. Consent of Deloitte & Touche LLP E-1
============================================================================================================
</TABLE>
(1) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended February 2, 1991 and incorporated
herein by reference.
(2) Filed as the indicated Exhibit to the Report on Form 8-K dated August
29, 1991 and incorporated herein by reference.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30,
1993 and incorporated herein by reference.
(4) Filed as the indicated Exhibit to the Report on Form 8-K dated December
12, 1994 and incorporated herein by reference.
(5) Filed as the indicated Exhibit to the Report on Form 8-K dated June 12,
1995 and incorporated herein by reference.
(6) Filed as the indicated Exhibit to the Report on Form 8-K dated October
27, 1995 and incorporated herein by reference.
(7) Filed as the indicated Exhibit to the Report on Form 8-K dated February
2, 1996 and incorporated herein by reference.
- 58 -
<PAGE>
(8) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended February 3, 1996 and incorporated
herein by reference.
(9) Filed as the indicated Exhibit to the Report on Form 8-K dated May 1,
1996 and incorporated herein by reference.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
(12) Filed as the indicated Exhibit to the Report on Form 8-K dated May 5,
1997 and incorporated herein by reference.
(13) Filed as the indicated Exhibit to the Report on Form 8-K dated June 18,
1997 and incorporated herein by reference.
(14) Filed as the indicated Exhibit to the Report on Form 8-K dated July 15,
1997 and incorporated herein by reference.
(15) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 12, 1997 and incorporated herein by reference.
- 59 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By: /S/ Paul Spector
--------------------------
Paul Spector,
` Senior Vice President
Chief Financial Officer
By: /S/ Vincent F. Caputo
--------------------------
Vincent F. Caputo,
Vice President
Assistant Secretary and
Assistant Treasurer
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/ John Hannan March 25, 1998
- ----------------------------------
John Hannan, Director
/S/Edward M. Yorke March 25, 1998
- ----------------------------------
Edward M. Yorke, Director
/S/Robert Katz March 25, 1998
- ----------------------------------
Robert Katz, Director
/S/Charles S. Ramat March 25, 1998
- ----------------------------------
Charles S. Ramat, Chairman of
the Board, President, Chief
Executive Officer and Assistant
Secretary; Director
/S/David N. Schreiber March 25, 1998
- ----------------------------------
David N. Schreiber, Director
- 60 -
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-80862 of Aris Industries, Inc. and Subsidiaries on Form S-8 of our report
dated March 18, 1998, appearing in this Annual Report on Form 10-K of Aris
Industries, Inc. and Subsidiaries for the fiscal year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 27, 1998
E-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Aris Industries, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Aris Industries,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997 and for the period from February 4, 1996
through December 31, 1996, and for the fiscal year in the period ended February
3, 1996. Our audits also included the financial statement schedules listed in
the Index at Item 14(a)2. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aris Industries, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997 and for the
period from February 4, 1996 through December 31, 1996 and for the fiscal year
in the period ended February 3, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Parsippany, New Jersey
March 18, 1998
F-1
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,372,000 $ 6,278,000
Receivables, net 26,274,000 7,324,000
Inventories, net 19,498,000 9,234,000
Prepaid expenses and other current assets 2,215,000 1,304,000
------------ ------------
Total current assets 49,359,000 24,140,000
FURNITURE, FIXTURES AND EQUIPMENT - NET 1,463,000 1,233,000
OTHER ASSETS 2,718,000 1,860,000
GOODWILL 20,297,000 17,622,000
------------ ------------
TOTAL ASSETS $ 73,837,000 $ 44,855,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 6,292,000 $ 5,602,000
Accounts payable - trade 3,024,000 922,000
Accrued expenses and other current liabilities 7,528,000 4,497,000
Current portion of long-term debt 2,172,000 749,000
Line of credit payable 18,605,000 --
------------ ------------
Total current liabilities 37,621,000 11,770,000
OTHER LIABILITIES 1,472,000 1,628,000
LONG-TERM DEBT (net of unamortized original
issue discount of $630,000 and $736,000 at
December 31, 1997 and 1996, respectively) 16,930,000 16,702,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01: 50,000,000 shares authorized;
issued and outstanding 14,905,044 and 11,852,544 shares
at December 31, 1997 and 1996, respectively 150,000 119,000
Preferred stock, par value $.01: 10,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 44,752,000 44,057,000
Accumulated deficit (27,088,000) (29,421,000)
------------ ------------
Total stockholders' equity 17,814,000 14,755,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,837,000 $ 44,855,000
============ ============
</TABLE>
F-2
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
<S> <C> <C> <C>
NET REVENUES $ 96,271,000 $ 131,802,000 $ 173,990,000
------------- ------------- -------------
OPERATING COSTS:
Cost of sales 67,497,000 104,649,000 140,008,000
Selling and administrative 23,474,000 25,422,000 32,030,000
Costs of restructuring -- -- 430,000
------------- ------------- -------------
90,971,000 130,071,000 172,468,000
------------- ------------- -------------
INCOME BEFORE INTEREST AND
DEBT EXPENSE, SALE OF SUBSIDIARY,
INCOME TAXES, AND EXTRAORDINARY
ITEM 5,300,000 1,731,000 1,522,000
INTEREST AND DEBT EXPENSE (3,105,000) (6,821,000) (9,644,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE SALE OF
SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM 2,195,000 (5,090,000) (8,122,000)
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company -- 7,786,000 --
Realization of cumulative foreign currency translation -- (1,108,000) --
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 2,195,000 1,588,000 (8,122,000)
INCOME TAX BENEFIT (138,000) (516,000) (65,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 2,333,000 2,104,000 (8,057,000)
EXTRAORDINARY ITEM -
Gain on debt forgiveness -- 10,862,000 --
------------- ------------- -------------
NET INCOME (LOSS) $ 2,333,000 $ 12,966,000 $ (8,057,000)
============= ============= =============
PER SHARE DATA:
Weighted average shares outstanding - Basic 13,245,000 11,905,000 11,925,400
Weighted average shares outstanding - Diluted 14,338,000 12,045,000 11,925,400
Basic earnings per share:
Income (loss) before extraordinary item $ 0.18 $ 0.18 $ (0.68)
Extraordinary item -- 0.91 --
------------- ------------- -------------
Net Income (Loss) $ 0.18 $ 1.09 $ (0.68)
============= ============= =============
Diluted earnings per share:
Income (loss) before extraordinary item $ 0.16 $ 0.17 $ (0.68)
Extraordinary item -- 0.90 --
------------- ------------- -------------
Net Income (Loss) $ 0.16 $ 1.07 $ (0.68)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Additional Currency
Common Common Preferred Paid-in Accumulated Translation
Shares Stock Stock Capital Deficit Adjustment Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 28, 1995 11,925,400 $119,000 $ -- $44,061,000 $(34,330,000) $(1,239,000) $ 8,611,000
Foreign currency translation adjustment -- -- -- -- -- 10,000 10,000
Net loss -- -- -- -- (8,057,000) -- (8,057,000)
---------- -------- ------ ----------- ------------ ----------- -----------
BALANCE, FEBRUARY 3, 1996 11,925,400 119,000 -- 44,061,000 (42,387,000) (1,229,000) 564,000
Net income -- -- -- -- 12,966,000 -- 12,966,000
Foreign currency translation adjustment -- -- -- -- -- 121,000 121,000
Retirement of stock (72,856) -- -- (4,000) -- -- (4,000)
Realization of cumulative foreign
currency translation -- -- -- -- -- 1,108,000 1,108,000
---------- -------- ------ ----------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 1996 11,852,544 119,000 -- 44,057,000 (29,421,000) -- 14,755,000
Net income -- -- -- -- 2,333,000 -- 2,333,000
Issuance of new shares of common stock 3,000,000 30,000 -- 690,000 -- -- 720,000
Exercise of stock options 52,500 1,000 -- 5,000 -- -- 6,000
---------- -------- ------ ----------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 1997 14,905,044 $150,000 $ -- $44,752,000 $(27,088,000) $ -- $17,814,000
========== ======== ====== =========== ============ =========== ===========
</TABLE>
See Notes to consolidated financial statements.
F-4
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,333,000 $ 12,966,000 $(8,057,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Loss (gain) on sale of property -- 39,000 (350,000)
Depreciation and amortization 1,346,000 2,594,000 3,320,000
Gain on sale of Perry -- (7,786,000) --
Gain on debt forgiveness -- (10,862,000) --
Deferred income tax benefit (212,000) (580,000) (102,000)
Cumulative translation adjustment -- 1,108,000 --
Capitalized interest 1,830,000 1,424,000 --
Changes in assets and liabilities:
Decrease in cash - restricted -- -- 10,000
(Increase) decrease in receivables (18,860,000) 8,120,000 2,159,000
(Increase) decrease in inventories (6,693,000) 36,000 11,000
Decrease (increase) in prepaid expenses and
other current assets 445,000 (942,000) 204,000
Increase in other assets (3,000) (8,000) (21,000)
Increase (decrease) in trade acceptances payable 690,000 3,595,000 (410,000)
(Decrease) increase in accounts payable - trade (1,726,000) 2,084,000 (1,696,000)
(Decrease) increase in accrued expenses and other
current liabilities (935,000) (2,230,000) 863,000
Decrease in other liabilities (133,000) (2,000) (389,000)
------------ ------------ -----------
Net cash (used in) provided by operating activities (21,918,000) 9,556,000 (4,458,000)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition (839,000) -- --
Proceeds from sale of assets -- 66,000 539,000
Net proceeds from sale of Perry -- 40,145,000 --
Capital expenditures (461,000) (1,409,000) (1,501,000)
------------ ------------ -----------
Net cash (used in) provided by investing activities (1,300,000) 38,802,000 (962,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (15,000) (40,857,000) --
Net proceeds (payments) from bank line of credit 18,605,000 (6,000,000) 6,000,000
Proceeds from issuance of long-term debt -- 3,528,000 400,000
Principal payments of long-term debt, including
capital leases (284,000) (1,073,000) (2,266,000)
Purchase of common stock -- (4,000) --
Proceeds from exercise of stock options 6,000 -- --
Proceeds from equipment financing agreement -- 12,000 343,000
------------ ------------ -----------
Net cash (used in) provided by financing activities 18,312,000 (44,394,000) 4,477,000
------------ ------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (4,000) (3,000)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,906,000) 3,960,000 (946,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,278,000 2,318,000 3,264,000
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,372,000 $ 6,278,000 $ 2,318,000
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 1,284,000 $ 3,307,000 $ 9,474,000
============ ============ ===========
Income taxes $ 49,000 $ 226,000 $ 466,000
============ ============ ===========
</TABLE>
See Notes to consolidated financial statements.
F-5
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Aris Industries, Inc., (the "Company"), is a
publicly held company that was incorporated in 1947 in the State of New
York. The Company is engaged in the design, manufacture, importing and
distribution of men's and young men's sportswear, outerwear, activewear,
swimwear and loungewear. The Company's operations are conducted primarily
through its wholly-owned subsidiary, Europe Craft Imports, Inc. ("ECI") ,
which was acquired by Aris in 1987 and ECI's wholly-owned subsidiary ECI
Sportswear, Inc. ("ECI Sportswear"), which acquired its business (See Note
4) on July 15, 1997. As described in Note 5, effective September 30, 1996,
the Company sold 100% of the stock of Perry Manufacturing Company ("Perry")
for a total consideration of approximately $54,719,000, and reduced its
indebtedness to Heller Financial, Inc. ("Heller") from approximately
$53,384,000 to $1,665,000. Perry's operating results are included in the
consolidated statements of operations through September 30, 1996.
ECI designs, imports and distributes men's outerwear, including cloth and
leather jackets under the "Members Only" and other trade names. ECI has
been granted licenses to manufacture and distribute men's outerwear under
the "Perry Ellis" name and men's and boy's outerwear under the "Perry Ellis
America" name; young men's sportswear, activewear, outerwear, loungewear,
swimwear and headwear under the "S>>M by MTV Sports" name and men's
outerwear under the "John Henry" name. ECI Sportswear has been granted
licenses to manufacture and distribute men's and boys' activewear,
swimwear, loungewear and some sportswear products under the "Perry Ellis
America" and/or "Perry Ellis" names, men's sportswear under the "Jeffrey
Banks" name, and boys' sportswear, activewear and outerwear under the
"FUBU" name. The Company also designs, develops, sources and imports men's
and boys' outerwear and sportswear product lines as an agent for national
retail store chains. The Company has granted licenses to use the "Members
Only" trademark to licensees for men's woven shirts, tailored suits and
sportcoats, footwear, dress and athletic socks, eyeglasses, luggage and
cold weather accessories.
The Company purchases a majority of its products from independent
manufacturers located in Hong Kong, China, Korea, India, Taiwan, Nepal,
Guatemala, Philippines, Bangladesh, Sri Lanka and Indonesia. The Company's
products are marketed nationally in department stores, specialty stores and
national retail chains, and through licensees in other parts of North
America and in South America and Asia. The Company also operates four
stores located in factory outlet malls. The Company's net revenues for the
year ended December 31, 1997 were accounted for in three product lines:
Outerwear (50%), Perry Ellis (45%) and other (5%).
The Company's wholly-owned subsidiary, ECI, had sales to one customer that
represents 10%, 18% and 13% of net revenues for the year ended December 31,
1997, for the period from February 4, 1996 through December 31, 1996, and
for the fiscal year ended February 3, 1996, respectively.
Perry, primarily a supplier of private label goods to national chain
stores, designed, manufactured and distributed ladies' and men's
sportswear. Perry's manufacturing operations consisted of designing,
cutting, sewing and packaging with locations in North Carolina, Virginia,
El Salvador, Costa Rica and Honduras. The Company also employed independent
factories and contractors in the United States, Latin America and South
America. The five largest customers of Perry accounted for approximately
98% of its total net revenues in the period from February 4, 1996 through
December 31, 1996.
F-6
<PAGE>
The Company is subject to certain risks and uncertainties. The apparel
industry, in general, is volatile and unpredictable due to cyclical and
seasonal swings caused, in part, by customer buying patterns. There is an
extremely adverse environment in the retail apparel industry which is
likely to continue to impact the Company and increase the risk of reduced
orders, loss of particular customers or particular selling programs of
customers, shorter production lead times, reduced margins and earlier and
more extensive borrowings against working capital lines. There has been a
substantial consolidation of formerly independent major department store
chains, such that the consolidated customers exert greater influence on
suppliers such as the Company which result in greater demands for price
reductions, advertising support, returns and markdowns of apparel products.
In addition, the Company is particularly impacted by unusually warm weather
or late arrival of cold weather. A substantial portion of the Company's
products are manufactured overseas, subjecting the Company to generic risks
of import and delivery from distant locations, delays due to foreign
government regulation and controls, and customs and transportation
difficulties. In particular, the Company imports its products from
manufacturing plants which it does not own. The Company does not expect to
be negatively impacted by the current Asian economic issue.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures relating to contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates. The most significant use of
estimates in the Company's consolidated financial statements involves the
ultimate recoverability of goodwill.
Principles of Consolidation - The consolidated financial statements of Aris
Industries, Inc. and Subsidiaries (the "Company") include the accounts of
its subsidiaries, all of which are wholly owned. All material intercompany
transactions and balances have been eliminated.
Cash Equivalents - The Company considers all investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
Inventories - Inventories consist exclusively of finished goods.
Inventories are stated at the lower of cost (weighted average basis) or
market for ECI. ECI Sportswear, Inc., a wholly-owned subsidiary of ECI,
states its inventory at the lower of cost (first-in, first-out method) or
market.
Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
stated at cost. Depreciation and amortization are computed using the
straight-line method over the following estimated useful lives of the
assets, the terms of the leases or the lives of the improvements, whichever
are less:
Furniture and fixtures 3 to 5 years
Leasehold improvements 5 to 10 years
Income Taxes - The provision for income taxes includes Federal and state
taxes currently payable and deferred taxes arising from temporary
differences in determining income for financial statement and tax purposes.
The Company and its subsidiaries file a consolidated Federal income tax
return on a calendar year basis.
Goodwill and Other Assets - Goodwill represents the unamortized excess of
the cost of acquiring a business over the fair values of the net assets
received at the date of acquisition. Acquired intangible assets, which are
included in other assets, are carried at cost less accumulated
amortization. Amortization expense is computed by use of the straight-line
method over the assets' estimated useful lives. Goodwill is being amortized
over 20 to 40 years. The Company continuously evaluates goodwill for any
potential impairment. The Company assesses the recoverability of goodwill
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through expected
F-7
<PAGE>
undiscounted future results. Accumulated amortization at December 31, 1997
and 1996 for goodwill and other intangible assets was $ 8,145,000 and
$7,395,000, respectively.
Fiscal Year - On December 10, 1996, the Company changed its fiscal year to
the calendar year ending December 31 rather than a fiscal year ending on
the Saturday closest to January 31, effective for the period from February
4, 1996 through December 31, 1996.
The following sets forth unaudited financial data for the period from
January 29, 1995 through December 31, 1995, the comparable 1995 period to
the period from February 4, 1996 through December 31, 1996:
Net revenues $159,264,000
Operating income 3,840,000
Loss before income taxes (4,981,000)
Income tax benefit (100,000)
Net loss (4,881,000)
There are 53 weeks in the period ended February 3, 1996.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal periods beginning after December 15, 1997. The Company
does not expect the adoption of this Statement to have a material effect on
its financial statements or financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits", ("SFAS 132"). SFAS 132 revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
previous disclosures. SFAS 132 is effective for fiscal periods beginning
after December 15, 1997. The Company does not expect the adoption of this
Statement to have a material effect on its financial statements or
financial statement disclosures.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform them to the current year
presentation.
2. RECEIVABLES
1997 1996
Due from factor $25,849,000 $7,051,000
Other receivables 1,607,000 1,450,000
----------- ----------
27,456,000 8,495,000
Less allowance for chargebacks 1,182,000 1,177,000
----------- ----------
$26,274,000 $7,324,000
=========== ==========
F-8
<PAGE>
The Company has agreements with three commercial financial companies which
provide for the factoring of certain trade receivables. The receivables
were factored without recourse as to credit risk but with recourse for any
claims by the customer for adjustments in the normal course of business
relating to pricing errors, shortages, damaged goods, etc. All factored
receivables and related proceeds of sales are the property of the
respective commercial financial companies. ECI is charged a factoring
commission ranging from .70% to 1% of factored sales. The Company receives
payment based upon the actual maturity dates of the receivables.
3. FURNITURE, FIXTURES AND EQUIPMENT
1997 1996
Furniture,fixtures and equipment $5,046,000 $4,352,000
Leasehold improvements 1,058,000 1,052,000
---------- ----------
6,104,000 5,404,000
Less accumulated depreciation and amortization 4,641,000 4,171,000
---------- ----------
$1,463,000 $1,233,000
========== ==========
As of December 31, 1997 and 1996, furniture, fixtures and equipment include
amounts associated with assets leased under capital leases with an original
cost of $343,000 and $375,000, respectively. As of December 31, 1997 and
1996, accumulated depreciation and amortization include $122,000 and
$171,000, respectively, associated with the leased assets. Related
amortization expense of $107,000, $84,000 and $87,000 is included within
depreciation expense for the year ended December 31, 1997, for the period
from February 4, 1996 through December 31, 1996 and for the fiscal year
ended February 3, 1996, respectively.
4. BUSINESS ACQUISITION
On July 15, 1997, the Company's wholly-owned subsidiary, ECI Sportswear,
Inc. ("ECI Sportswear"), acquired substantially all of the assets of Davco
Industries, Inc. ("Davco") for an aggregate purchase price of $4,373,000,
including acquisition costs. At that time, Davco has been granted licenses
to manufacture and distribute men's and boys' activewear, swimwear,
loungewear and some sportswear products under the "Perry Ellis America"
and/or "Perry Ellis" labels and men's sportswear under the "Jeffrey Banks"
label. The purchase price is comprised of 3 million restricted shares of
the Company's common stock, valued at $720,000, and a contingent cash
purchase price based upon the pre-tax earnings of the Davco business for
the period from July 16, 1997 through December 31, 1997. In accordance with
the terms of the agreement, ECI Sportswear made cash advances of $581,000
and recorded additional consideration payable of $2,814,000 as of December
31, 1997, which is recorded in accrued expenses and other current
liabilities.
The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition are included
in the Company's consolidated financial statements. The purchase price was
allocated based on estimated fair values at the date of acquisition. 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.
F-9
<PAGE>
The following pro forma information is presented assuming the acquisition
of the Davco business had been completed at the beginning of the Company's
1996 fiscal year. Pro forma adjustments have been made to include the
effects of amortization of goodwill and intangible assets and to exclude
the operating results of Perry and to adjust interest expense for loans
repaid from the proceeds of the Perry Sale (See Note 5). This unaudited pro
forma information is not necessarily indicative of the results of
operations that might have occurred had the acquisition of the Davco
business and the Perry sale occurred at the beginning of the Company's 1996
fiscal year, or of future results of operations.
<TABLE>
<CAPTION>
1997 1996
(Unaudited)
<S> <C> <C>
Net revenues $ 113,309,000 $ 85,911,000
Gross profit 33,619,000 23,772,000
Income (loss) before income taxes and extraordinary item 2,059,000 (5,391,000)
Income tax (benefit) expense (129,000) 66,000
Net income (loss) 2,188,000 (5,457,000)
Basic earnings (loss) per share 0.17 (0.46)
Diluted earnings (loss) per share 0.15 (0.46)
</TABLE>
5. SALE OF PERRY MANUFACTURING COMPANY
The Company completed a transaction effective September 30, 1996 in which
it sold 100% of the stock of its wholly-owned subsidiary, Perry
Manufacturing Company, to Page Holding Company (the "Buyer"). The Company
received cash proceeds of $40,857,000 and the Buyer assumed $3,000,000 of
Perry debt. The cash proceeds were used as final satisfaction of principal
and accrued interest of approximately $53,384,000 due to Heller Financial,
Inc. ("Heller"). The Company and Heller then entered into a new note
agreement for $1,665,000 and the Company granted Heller warrants to
purchase 584,345 shares of the Company's common stock at an exercise price
of $.01 per share. See Note 6 for additional information on the new Heller
agreement. Such transactions resulted in a gain on the sale of Perry of
$7,786,000, the realization of $1,108,000 of a cumulative foreign currency
translation loss and an extraordinary gain on debt forgiveness of
$10,862,000.
F-10
<PAGE>
6. LONG-TERM DEBT
Long-term debt is comprised of:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
New Heller Note, interest at 10%, including
capitalized interest of $665,000 $ 1,650,000 $ 1,665,000
BNY Financial Corporation Note, interest at 7% 7,981,000 7,460,000
Apollo Note, interest at 13%. Net of unamortized
original issue discount of $630,000 and $736,000 at
December 31, 1997 and 1996, respectively 9,266,000 7,972,000
Other 205,000 354,000
----------- -----------
19,102,000 17,451,000
Less current portion 2,172,000 749,000
----------- -----------
$16,930,000 $16,702,000
=========== ===========
</TABLE>
F-11
<PAGE>
New Heller Note - On June 30, 1993, the Company entered into a Senior
Secured Note Agreement with Heller Financial, Inc. ("Heller") pursuant to
which Heller received a note in the original principal amount of
$50,857,000 to be repaid over seven years, with interest at 2% over prime.
Heller retained a pledge of the Company's stock (but not the assets) in ECI
and Perry.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller ("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity date of
November 3, 2001 and a warrant to purchase 584,345 shares of the Company's
common stock at an exercise price of $.01 per share. Such transaction has
been accounted for as a modification of terms to the original Heller debt.
Accordingly, the Company recorded the New Heller Note at the total future
cash payments to be made in accordance with the Amended Heller Agreement
which is principal of $1,000,000 and accrued interest of $665,000.
At September 30, 1996, the Company owed Heller approximately $53,384,000 of
principal and accrued interest. Pursuant to the Amended Heller Agreement,
Heller accepted the cash proceeds of $40,857,000 received from the Perry
sale and the New Heller Note as full satisfaction of such indebtedness and
eliminated all financial covenants. Such transaction resulted in an
extraordinary gain on debt forgiveness of $10,862,000. Heller retained a
pledge of the stock (but not the assets) of ECI, the Company's remaining
operating subsidiary. The New Heller Note provides that no principal or
interest be paid on the Company's indebtedness to Apollo (as defined below)
until all principal and interest on the New Heller Note is paid in full. In
addition, the New Heller Note allows the Company to make regularly
scheduled interest payments on the BNY Note (as defined below) for interest
accruing after February 3, 1997 and principal payments. However, if the
Company makes an interest payment on the BNY Note, it shall immediately
make an interest payment to Heller in an amount equal to the amount of
interest which shall have accrued on the New Heller Note in accordance with
its terms during the same period of time for which interest is being paid
pursuant to the interest payment on the BNY Note. Also, if the Company
makes a principal payment on the BNY Note, it shall immediately prepay the
New Heller Note in an amount equal to the lesser of the principal payment
on the BNY Note or the then outstanding amount of the remaining obligation
on the New Heller Note.
On January 29, 1998, the Company repaid in full its remaining obligation on
the New Heller Note of $1,128,000. The difference between the net carrying
amount of the New Heller Note and the remaining obligation amounted to
$522,000 which will be accounted for as an extraordinary gain in the first
quarter of 1998. The entire carrying amount of the New Heller Note of
$1,650,000 has been recorded within the current portion of long-term debt
as of December 31, 1997. As a result of the repayment, Heller released its
first lien on the stock of ECI.
Apollo Note - On June 30, 1993, the Company entered into a Series B Junior
Secured Note Agreement with Apollo Aris Partners, L.P. and its affiliate
AIF-II, L.P. ("Apollo") pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shared
with BNY Financial Corporation ("BNY") a second lien on the stock of ECI.
The Apollo Note is required to be paid in two equal installments payable on
November 3, 2001 and 2002. The Apollo Note contains certain affirmative and
negative covenants on the operation of the Company. Pursuant to the Debt
Registration Rights Agreement entered into on June 30, 1993 between the
Company and Apollo, Apollo and one transferee are entitled to require the
Company twice to register the offer and sale of the Apollo Note under
Federal and applicable state securities laws, and at the request of Apollo
or such transferee, to negotiate with such party in good faith to convert
the Apollo Notes into registered notes issued pursuant to a trust
indenture.
On September 12, 1997, the Company and 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
F-12
<PAGE>
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
$2,396,000 representing the quarterly interest payments accruing for the
period November 1, 1995 through December 31, 1997, which were not and will
not be paid in cash and instead added to the principal of the AIF-II Note.
BNY Note - On June 30, 1993, the Company entered into a Series A Junior
Secured Note Agreement with BNY pursuant to which BNY received a nine-year,
$7 million note, bearing interest at a rate of 7% per annum (the "BNY
Note"). BNY shared with Apollo a second lien on the stock of ECI. On
September 12, 1997, the Company and BNY entered into an amendment of the
BNY Note 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 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:
1998 $ 360,000
1999 560,000
2000 660,000
2001 1,160,000
2002 5,256,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$996,000 representing the quarterly interest payments accruing for the
period February 1, 1996 through December 31, 1997, which were not and will
not be paid in cash and instead added to the principal of the BNY Note .The
BNY note contains certain affirmative and negative covenants on the
operations of the Company. The Company was in compliance with these
covenants at December 31, 1997.
BNY and AIF-II's shared second lien on the stock of ECI became a shared
first lien upon the repayment of the New Heller Note on January 29, 1998.
BNY and AIF-II will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" as defined in the Company's note agreements
with BNY and AIF-II.
F-13
<PAGE>
Maturities - Future maturities of long-term debt are as follows:
Year Ending
December 31,
1998 $ 2,172,000
1999 603,000
2000 660,000
2001 4,910,000
2002 11,387,000
-----------
$19,732,000
===========
Restricted Net Assets - In accordance with ECI's credit facility agreement,
as of December 31, 1997 and 1996, the maximum amount of upstream payments
in the form of management fees from ECI to Aris have been made. Under this
agreement, net assets restricted to ECI's use at December 31, 1997 and 1996
were $20,078,000 and $14,077,000, respectively.
At this time, the Company believes that based on current business plans and
financial arrangements that management fee revenues from its principal
operating subsidiary, after taking into account all restrictions contained
in the relevant subsidiary lending agreements, will be sufficient to cover
debt service requirements and corporate cash requirements for the year
ending December 31, 1998.
7. LINE OF CREDIT PAYABLE
ECI has available a $61,100,000 line of credit which is secured by liens on
certain assets of ECI. As of December 31, 1997, there was an outstanding
balance payable of $18,605,000. Interest is accrued at the bank's prime
rate plus 1/4% for ECI and at the bank's prime rate plus 1% for ECI's
wholly-owned subsidiary, ECI Sportswear, Inc. As of December 31, 1997, the
bank's prime rate was 8.50%. The line of credit contains various clauses
which, among other things, limits payment of management fees to the Company
and requires the maintenance of certain levels of net worth (as defined)
during the year. ECI was in violation of its net worth covenant as of
December 31, 1997, but received a waiver from the bank on March 18, 1998.
The line of credit expires on April 15, 1998. The Company expects to renew
its line with terms similar to its existing line.
8. 1993 STOCK INCENTIVE PLAN
Pursuant to the Company's Plan of Reorganization on June 30, 1993, a new
1993 Stock Incentive Plan was adopted by the Company (the "1993 Stock
Incentive Plan"). The 1993 Stock Incentive Plan authorizes the Company's
Board of Directors (or a committee thereof), to award to employees and
directors of, and consultants to, the Company and its subsidiaries (i)
options to acquire Common Stock at prices determined when the options are
granted, (ii) stock appreciation rights (entitling the holder to a payment
equal to the appreciation in market value of a specified number of shares
of Common Stock over a specified period), (iii) restricted shares of Common
Stock whose vesting is subject to terms and conditions specified at the
time of grant, and (iv) performance shares of Common Stock that are granted
upon achievement of specified performance goals. Options granted pursuant
to the 1993 Stock Incentive Plan may be either "incentive stock options"
within the meaning of Section 422A of the United States Internal Revenue
Code of 1986, as amended, or non-qualified options. A maximum of 1.2
million shares of Common Stock (subject to anti-dilution adjustments) can
be covered by awards under the 1993 Stock Incentive Plan.
F-14
<PAGE>
The 1993 Stock Incentive Plan provides that any shares subject to an option
under such plan which terminate, are canceled or expire without being
exercised may again be subjected to an option under the plan, subject to
the earlier termination of that plan. All options granted on or before July
15, 1997 provide for vesting in three equal annual installments from the
date of grant and are exercisable for a period of 10 years from the grant
date.
During August 1997, the Company's Board of Directors approved an amendment
to the 1993 Stock Incentive Plan to increase to 2,500,000 the maximum
number of shares of Common Stock which can be covered by awards under the
Plan. This amendment will be submitted for shareholder approval at the
Company's Annual Meeting to be held in 1998
In July 1997, the Company granted to employees of its indirect wholly-owned
subsidiary, ECI Sportswear, Inc., 50,000 options under the Plan. The
exercise price of the options is fifty cents per share (the market price on
such date). In August 1997, the Company granted to officers and employees
of the Company and its subsidiaries 860,000 options under the Plan. The
exercise price of the options is $1.00 per share (the market price on such
date). All options granted on this date shall vest 8 years from the date of
grant, but a portion of such options shall obtain accelerated vesting on
the occurrence of certain events. Of the 860,000 options granted, 547,500
are subject to ratification by the shareholders of the Company of the
amendment to the Plan. At December 31, 1997, there were 26 eligible
participants with options outstanding under the Plan.
In December 1996, the Company granted to employees of the Company and its
remaining wholly-owned operating subsidiary, ECI, 305,000 options under the
Plan. The exercise price of the options is ten cents per share (the market
price on such date). For the year ended December 31, 1997 and for the
period from February 4, 1996 through December 31, 1996, a total of 765,000
and 172,500 stock options, respectively, were granted to Officers of the
Company under the 1993 Stock Incentive Plan. On June 26, 1995, all
outstanding stock options under the 1993 Stock Incentive Plan were repriced
to have an exercise price of fifty cents (the market price on such date),
rather than two dollars per share.
F-15
<PAGE>
Weighted
Shares Average
Under Price Per
Option Share
BALANCE, JANUARY 28, 1995 1,042,000 $0.50
Granted -- --
Exercised -- --
Expired/Surrendered (77,000) 0.50
---------- -----
BALANCE, FEBRUARY 3, 1996 965,000 0.50
Granted 305,000 0.10
Exercised -- --
Expired/Surrendered (307,500) 0.50
---------- -----
BALANCE, DECEMBER 31, 1996 962,500 0.37
Granted 910,000 0.97
Exercised (52,500) 0.10
Expired/Surrendered (125,000) 0.48
---------- -----
BALANCE, DECEMBER 31, 1997 1,695,000 $0.70
========== =====
At December 31, 1997 there were 805,000 options available for grant, all of
which are subject to ratification by the shareholders of the Company. At
December 31, 1996 and February 3, 1996, 237,500 and 235,000 , respectively,
of options were available for grant. The outstanding stock options at
December 31, 1997 have a weighted average contractual life of 8.1 years and
the exercise price ranges from $.10 to $1.00. The number of stock options
exercisable at December 31, 1997 and 1996 and February 3, 1996 was 584,997,
657,500 and 643,366, respectively. The stock options exercisable at
December 31, 1997 have a weighted average exercise price of $.47 per share.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), requires either the recognition of
compensation expense for stock options and other stock-based compensation
or supplemental disclosure of the impact such expense recognition would
have had on the Company's results of operations. The Company has elected to
continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees and to provide the supplemental information required by SFAS No.
123. The Company believes that the supplemental disclosures required by
SFAS No. 123 are not material as net income and basic and diluted earnings
per share would be decreased by less than 1% had stock-based compensation
been recognized in expense under the provisions of the Statement.
9. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128),
which is 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. Antidilutive stock options of 657,500 for the period ended
December 31, 1996 and 965,000 for the 53 weeks ended February 3, 1996 have
been excluded from the calculation of diluted EPS.
F-16
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------- -----
<S> <C> <C> <C>
Year Ended 1997
---------------
Basic EPS
Income before extraordinary item $ 2,333,000 13,245,000 $0.18
=====
Effect of Dilutive Securities
Stock options -- 517,000
Warrant -- 576,000
----------- ----------
Diluted EPS
Income before
extraordinary item $ 2,333,000 14,338,000 $0.16
=========== =========== =====
-----------------------------------------------------------------------------
Period From February 4, 1996
through December 31, 1996
-------------------------
Basic EPS
Income before extraordinary item $ 2,104,000 11,905,000 $0.18
=====
Effect of Dilutive Securities
Stock options -- 4,000
Warrant -- 136,000
----------- ----------
Diluted EPS
Income before
extraordinary item $ 2,104,000 12,045,000 $0.17
=========== =========== =====
-----------------------------------------------------------------------------
53 Weeks Ended February 3, 1996
-------------------------------
Basic EPS
Loss before extraordinary item $(8,057,000) 11,925,400 $(0.68)
======
Effect of Dilutive Securities
Stock options -- --
Warrant -- --
----------- ----------
Diluted EPS
Loss before
extraordinary item $(8,057,000) 11,925,400 $(0.68)
=========== =========== ======
</TABLE>
10. TRANSACTIONS WITH RELATED PARTIES
During the year ended December 31, 1997 and for the period from February 4,
1996 through December 31, 1996 and in the fiscal year ended February 3,
1996, rent payments of $1,045,000, $888,000 and
F-17
<PAGE>
$325,000, respectively, were made by ECI to a general partnership
controlled by then current and former officers of ECI. These officers of
ECI were never officers or directors of the Company.
11. RETIREMENT PLANS
The Company participates in a defined contribution plan with its
subsidiary, ECI, pursuant to Section 401(k) of the Internal Revenue Code.
All employees are eligible to participate. Employer contributions are
discretionary. Participants immediately vest in their own contributions and
in employer contributions after seven years of service. During the year
ended December 31, 1997, for the period from February 4, 1996 through
December 31, 1996 and for the fiscal year ended February 3, 1996 total
matching contributions of $-0-, $4,000 and $4,000, respectively, were made.
In May 1991, a discontinued operating subsidiary of the Company terminated
all of its remaining employees who participated in its pension plan. There
was no net periodic pension benefit/cost for the year ended December 31,
1997, for the period from February 4, 1996 through December 31, 1996, or in
the fiscal year ended February 3, 1996. Assets of the plan are invested in
a U.S. government securities fund.
The following table sets forth the funded status of the pension plan:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation (all vested) $ 61,000 $ 63,000
======== ========
Plan assets at fair value $163,000 $172,000
Actuarial present value of projected benefit obligation 61,000 63,000
-------- --------
Plan assets in excess of projected benefit obligation 102,000 109,000
Contingent liability 102,000 109,000
-------- --------
Prepaid pension cost $ -- $ --
======== ========
</TABLE>
The benefits paid are non-earnings related; thus the projected and
accumulated benefit obligations are equal. The expected long-term rate of
return on assets was 7.5% and 7% as of December 31, 1997 and 1996,
respectively.
F-18
<PAGE>
12. INCOME TAXES
The following tables present the components of the provision (benefit) for
income taxes, a reconciliation of the expected statutory Federal income tax
expense (benefit) to the actual expense (benefit) and the principal items
of deferred taxes.
The (benefit) provision for income taxes is as follows:
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
Current:
Federal $ 46,000 $ -- $ --
State 28,000 64,000 37,000
Deferred:
Federal (34,000) (665,000) (223,000)
State (178,000) 85,000 121,000
--------- --------- ---------
$(138,000) $(516,000) $ (65,000)
========= ========= =========
A reconciliation of the expected statutory Federal income tax expense
(benefit) and the actual expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
<S> <C> <C> <C>
Expected income tax expense (benefit) 34 % 34 % (34)%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill 10 2 6
State and local income tax, net 1 -- 1
Losses from foreign subsidiaries -- 4 8
Change in Valuation Allowance (16) -- --
Non-recognization of NOL benefit
and deferred tax assets -- -- 19
Non-taxable gain on debt forgiveness -- (32) --
Recognition of NOL benefit (36) (31) --
Non-deductible interest -- 10 --
Other 2 9 (1)
---- --- ---
Actual income tax benefit (6)% (4)% (1)%
==== === ===
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's deferred tax assets and
liabilities are as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Deferred tax assets:
Current:
Book/tax inventory basis differences $ 270,000 $ 128,000
Customer allowances 456,000 480,000
Other 403,000 624,000
------------ ------------
1,129,000 1,232,000
------------ ------------
Noncurrent:
Operating loss carryforwards 30,529,000 31,635,000
Tax credit carryforwards 122,000 198,000
Alternative minimum tax credit carryforward 833,000 787,000
Non-deductible interest 1,154,000 793,000
Other -- 13,000
------------ ------------
32,638,000 33,426,000
33,767,000 34,658,000
Valuation allowance (32,711,000) (33,835,000)
------------ ------------
Net deferred tax assets $ 1,056,000 $ 823,000
============ ============
Deferred tax liabilities:
Intangible assets $ 721,000 $ 747,000
Book/tax fixed asset basis differences 47,000 --
------------ ------------
Total noncurrent deferred tax liabilities $ 768,000 $ 747,000
============ ============
</TABLE>
F-20
<PAGE>
A valuation allowance is recognized for those deferred tax assets that may
not be realized. At this time, the Company has determined that such
valuation allowance be equal to the net deferred tax assets except for the
alternative minimum tax credit carryforwards and a portion of the state net
operating loss carryforwards at ECI. During the period from February 4,
1996 through December 31, 1996, the valuation allowance was reversed by
$347,000, related to alternative minimum tax credit carryforwards. The
alternative minimum tax credit carryforwards do not expire, and in the
Company's opinion, it is more likely than not that this credit carryforward
will be realized.
Net current deferred tax assets and noncurrent deferred tax liabilities are
included in prepaid expenses and other current assets, and other
liabilities, respectively. Net noncurrent deferred tax assets are included
in other assets.
The Company has taken the position that consummation of a prior
restructuring in 1986 did not materially eliminate or reduce any portion of
the net operating loss carryforwards. It is possible, however, that on
audit the Internal Revenue Service could disagree with the positions taken
by the Company, and should such a dispute arise, it would be difficult to
predict the ultimate outcome since these issues involve many complex and
technical questions under Section 382 of the Internal Revenue Code, as in
effect prior to the Tax Reform Act of 1986, and other provisions of Federal
tax law. Accordingly, no assurance can be given as to whether all or any
part of such carryforwards from the 1986 restructuring will be available to
the Company to offset future income.
Section 382, as amended by the Tax Reform Act of 1986 ("New Section 382"),
limits a corporation's use of carryforwards in the event of a "Change of
Ownership", which is defined generally as a 50 percentage point change in
stock ownership at any time during the relevant testing period.
Any significant loss of, or restriction on the use of the Company's net
operating loss carryforwards could have a material adverse effect upon the
Company's future earnings and future cash flow and could limit the
Company's future ability to service its debt obligations. The conclusions
drawn by the Company in monitoring and calculating the requirements of New
Section 382 for activity subsequent to the 1986 restructuring involve many
complex and technical questions. The Company's 1993 Chapter 11 Plan of
Reorganization qualifies under New Section 382 (l)(5) and, therefore, its
ability to utilize a substantial portion of the net operating loss
carryforwards of the Company should be preserved. The Internal Revenue
Service could disagree with the Company's position and, should such a
dispute arise, it would be difficult to predict the outcome.
The amounts and expiration dates, if accepted, of the remaining Federal tax
net operating loss carryforwards are as follows:
1999 $11,000,000
2000 9,000,000
2001 6,000,000
2005 38,000,000
2006 11,000,000
2007 3,000,000
2008 1,000,000
-----------
$79,000,000
===========
F-21
<PAGE>
Approximately $122,000 of investment tax and job credits, expiring from
1998 to 2000, are available as a carryforward to reduce future Federal
income tax payments.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Future minimum rental payments under capital leases and
noncancellable operating leases that have initial or remaining lease terms
in excess of one year as of December 31, 1997 are as follows:
Operating Capital
Year Ending Leases Leases
--------------------------------------- ----------- -----------
1998 $ 2,484,000 $ 114,000
1999 2,109,000 76,000
2000 1,301,000 32,000
2001 1,215,000 26,000
2002 1,206,000 26,000
Thereafter 1,359,000 --
----------- -----------
Total minimum lease payments $ 9,674,000 274,000
===========
Less amount representing interest (36,000)
-----------
Present value of minimum lease payments $ 238,000
===========
The Company has various operating leases in effect primarily for outlet
stores, automobiles, selling and administrative facilities and warehouse
facilities. The outlet store leases expire over the next three to ten
years, the selling and administrative facility leases expire over the next
six years and the warehouse leases expire over the next two years. The
outlet store leases contain a clause whereby the stores are assessed
additional rent based on a percentage of sales. For the year ended December
31, 1997 and the period from February 4, 1996 through December 31, 1996 and
in the fiscal year ended February 3, 1996 the outlet stores were not
charged rent as a percentage of sales. Most of the operating leases contain
a renewal option to extend the lease terms. Total rental expense under all
operating leases was approximately $1,769,000, $1,885,000 and $2,326,000
for the year ended December 31, 1997, for the period from February 4, 1996
through December 31, 1996 and in the fiscal year ended February 3, 1996,
respectively.
The Company is involved in certain warehousing arrangements where charges
are assessed based upon the number of units received into and shipped out
of the warehouse. Total warehouse charges paid by the Company for the year
ended December 31, 1997, for the period from February 4, 1996 through
December 31, 1996 and in the fiscal year ended February 3, 1996 were
$445,000, $261,000 and $1,498,000, respectively.
The Company leases various office equipment under capital leases expiring
over the next two to five years. As of December 31, 1997 and 1996, the
current obligation payable is $98,000 and $94,000, respectively, and is
included in accrued expenses and other current liabilities. The noncurrent
obligation payable is $140,000 and $137,000, respectively, and is included
in other liabilities.
Equipment Financing Agreement - The Company has entered into a financing
agreement with a third party for the purpose of acquiring various computer
hardware and software and additional services. The terms of the agreement
require the Company to make specified monthly payments over a 3-year period
with payments commencing on April 2, 1996. The third party is secured by an
interest in the computer hardware and software. As of December 31, 1997 and
1996, the current obligation payable is $162,000
F-22
<PAGE>
and $149,000, respectively, and is included in the current portion of
long-term debt. The noncurrent obligation payable is $43,000 and $205,000,
respectively, and is included in long-term debt.
License Agreements - The Company has been granted several licensing
agreements to manufacture and distribute men's and boys' outerwear,
sportswear and activewear products bearing the licensors' labels. The
agreements expire at various dates through 2001. The Company is required to
make minimum royalty payments, along with additional royalty payments in
the range of 2.5% to 9% based on a percentage of defined sales. Royalty
expenses under these licensing agreements totaled $2,480,000 in 1997 and
$1,629,000 for the period from February 4, 1996 through December 31, 1996.
The following is a schedule by year of future minimum royalty payments
required under the license agreements with initial or remaining terms in
excess of one year as of December 31, 1997:
1998 $1,085,000
1999 1,223,000
2000 780,000
----------
$3,088,000
==========
The Company has the option to renew the license agreements for an
additional period based on the terms of each agreement. The following is a
schedule by year of additional future minimum royalty payments required
over the renewal period if the Company were to exercise its option to renew
all of its license agreements:
1998 $ --
1999 113,000
2000 1,013,000
2001 1,054,000
2002 1,031,000
Thereafter 4,165,000
----------
$7,376,000
==========
Employment Contracts - The Company has entered into employment contracts
with three of its senior executives for a period of three to four years,
expiring no later than June 30, 2001. Under the agreements, the covered
individuals are entitled to a specified salary over the contract period. In
addition, bonuses are payable contingent upon profitability and cash flows
of the Company for each period. The estimated future minimum obligation
under these contracts as of December 31, 1997 is $3,896,000.
Contingencies - The Company, in the ordinary course of its business, is the
subject of, or a party to, various pending or threatened legal actions
involving private interests. While the Company cannot quantify the outcome
of any litigation, the Company is vigorously defending these claims and
believes that any ultimate liability arising from these actions will not
have a material adverse effect on its consolidated financial statements.
F-23
<PAGE>
14. SIGNIFICANT CUSTOMERS
The percentage of net revenues from significant customers was as follows:
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
Customer 1 10 % 34 % 34%
Customer 2 -- 15 17
Customer 3 -- 5 11
15. FOURTH QUARTER RESULTS
During the fourth quarter in the period from February 4, 1996 through
December 31, 1996, the Company recorded management bonuses of $600,000
based on financial performance for this period.
In connection with the sale of Perry Manufacturing Company, the Company
realized a cumulative foreign currency translation loss of $1,108,000
associated with Perry during the fourth quarter of the period from February
4, 1996 through December 31, 1996.
F-24
<PAGE>
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In the opinion of management, the carrying value of floating rate notes
payable and other floating rate borrowings approximates estimated fair
value. Further, in the opinion of management, it is not practicable to
reasonably estimate the fair value of the Company's fixed rate subordinated
long-term debt since there are no quoted market prices for such financial
instruments with similar risk, including those associated with the
Company's emergence from bankruptcy proceedings in June 1993. Additionally,
the cost of obtaining independent valuations or otherwise determining the
fair value of the Company's fixed rate subordinated long-term debt in the
circumstances, is considered excessive.
17. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
In connection with the acquisition described in Note 4, the Company
acquired the following net assets:
Receivables $ 90,000
Inventories 3,571,000
Prepaid expenses and other current assets 1,170,000
Furniture, fixtures and equipment 327,000
Other assets 924,000
Accounts payable (3,828,000)
Accrued expenses and other current liabilities (1,181,000)
Other liabilities (56,000)
-----------
Fair value of net assets acquired $ 1,017,000
===========
Total consideration $ 4,373,000
===========
18. SUBSEQUENT EVENT
On January 29, 1998, the Company repaid in full its remaining obligation on
the New Heller Note of $1,128,000. The difference between the net carrying
amount of the New Heller Note and the remaining obligation amounted to
$522,000 which will be accounted for as an extraordinary gain in the first
quarter of 1998. The entire carrying amount of the New Heller Note of
$1,650,000 has been recorded within the current portion of long-term debt
as of December 31, 1997. As a result of the repayment, Heller released its
first lien on the stock of ECI.
******
F-25
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 670,000 $ 89,000
Prepaid expenses and other current assets 54,000 649,000
------------ ------------
Total current assets 724,000 738,000
INVESTMENTS IN/ADVANCES TO SUBSIDIARIES 36,742,000 32,714,000
PROPERTY AND EQUIPMENT - NET 5,000 11,000
OTHER ASSETS 795,000 795,000
------------ ------------
TOTAL ASSETS $ 38,266,000 $ 34,258,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 654,000 $ 1,382,000
Current portion of long-term debt 2,010,000 600,000
------------ ------------
Total current liabilities 2,664,000 1,982,000
OTHER LIABILITIES 901,000 1,024,000
LONG-TERM DEBT (net of unamortized discount of $630,000
and $736,000 at December 31, 1997 and 1996, respectively 16,887,000 16,497,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 150,000 119,000
Preferred stock, par value $.01 -- --
Additional paid-in capital 44,752,000 44,057,000
Accumulated deficit (27,088,000) (29,421,000)
Cumulative translation adjustment -- --
------------ ------------
Total stockholders' equity 17,814,000 14,755,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,266,000 $ 34,258,000
============ ============
</TABLE>
See notes to condensed financial statements.
F-26
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Management fees from subsidiaries $ 2,600,000 $ 1,818,000 $ 7,741,000
Equity in earnings (losses) of subsidiaries 3,413,000 32,000 (5,756,000)
------------ ------------ ------------
6,013,000 1,850,000 1,985,000
------------ ------------ ------------
OPERATING COSTS:
Selling and administrative expenses 1,134,000 827,000 1,466,000
Amortization and depreciation expenses 676,000 1,058,000 1,412,000
------------ ------------ ------------
1,810,000 1,885,000 2,878,000
------------ ------------ ------------
INCOME(LOSS) BEFORE INTEREST EXPENSE,
GAIN ON SALE OF SUBSIDIARY, INCOME
TAXES AND EXTRAORDINARY ITEM 4,203,000 (35,000) (893,000)
INTEREST EXPENSE (1,821,000) (4,991,000) (7,060,000)
SALE OF SUBSIDIARY
Gain on sale of Perry Manufacturing Company -- 7,786,000 --
Realization of cumulative foreign currency
translation loss -- (1,108,000) --
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 2,382,000 1,652,000 (7,953,000)
INCOME TAX EXPENSE(BENEFIT) 49,000 (452,000) 104,000
------------ ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,333,000 2,104,000 (8,057,000)
EXTRAORDINARY ITEM:
Gain on debt extinguishment -- 10,862,000 --
------------ ------------ ------------
NET INCOME (LOSS) $ 2,333,000 $ 12,966,000 $ (8,057,000)
============ ============ ============
</TABLE>
(Continued)
See notes to condensed financial statements.
F-27
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Period From
Year February 4, 1996 53 Weeks
Ended Through Ended
December 31, December 31, February 3,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,333,000 $ 12,966,000 $ (8,057,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 676,000 1,058,000 1,412,000
Interest in undistributed equity (earnings) losses
of subsidiaries (3,413,000) (32,000) 5,756,000
Gain on sale of Perry -- (7,786,000) --
Gain on debt forgiveness -- (10,862,000) --
Cumulative translation adjustment -- 1,108,000 --
Capitalized interest 1,830,000 1,424,000 --
Deferred income tax benefit (26,000) (544,000) (26,000)
Change in assets and liabilities (795,000) (1,741,000) 628,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 605,000 (4,409,000) (287,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (4,000) (4,000)
Net proceeds from sale of Perry -- 40,145,000 --
------------ ------------ ------------
Net cash provided by (used in) investing activities -- 40,141,000 (4,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (15,000) (40,857,000) --
Principal payments of long-term debt (15,000) -- (500,000)
Proceeds from issuance of long-term debt -- 3,528,000 --
Purchase of common stock -- (4,000) --
Proceeds from exercise of stock options 6,000 -- --
------------ ------------ ------------
Net cash used in financing activities (24,000) (37,333,000) (500,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 581,000 (1,601,000) (791,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 89,000 1,690,000 2,481,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 670,000 $ 89,000 $ 1,690,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ -- $ 1,477,000 $ 6,907,000
============ ============ ============
Income taxes $ 24,000 $ 30,000 $ 110,000
============ ============ ============
</TABLE>
(Continued)
F-28
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Investment in subsidiaries - Investments in subsidiaries are accounted for
using the equity method under which Aris' 100% share of earnings or losses
of these subsidiaries are reflected in operations as earned. Dividends, if
any, are credited against the investment in subsidiaries when received.
2. DEBT MATURITIES
New Heller Note - On June 30, 1993, the Company entered into a Senior
Secured Note Agreement with Heller Financial, Inc. ("Heller") pursuant to
which Heller received a note in the original principal amount of
$50,857,000 to be repaid over seven years, with interest at 2% over prime.
Heller retained a pledge of the Company's stock (but not the assets) in ECI
and Perry.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement with Heller ("Amended
Heller Agreement"), pursuant to which Heller received a note in the
principal amount of $1,000,000 ("New Heller Note"), with a maturity date of
November 3, 2001 and a warrant to purchase 584,345 shares of the Company's
common stock at an exercise price of $.01 per share. Such transaction has
been accounted for as a modification of terms to the original Heller debt.
Accordingly, the Company recorded the New Heller Note at the total future
cash payments to be made in accordance with the Amended Heller Agreement
which is principal of $1,000,000 and accrued interest of $665,000.
F-29
<PAGE>
At September 30, 1996, the Company owed Heller approximately $53,384,000 of
principal and accrued interest. Pursuant to the Amended Heller Agreement,
Heller accepted the cash proceeds of $40,857,000 received from the Perry
sale and the New Heller Note as full satisfaction of such indebtedness and
eliminated all financial covenants. Such transaction resulted in an
extraordinary gain on debt forgiveness of $10,862,000. Heller retained a
pledge of the stock (but not the assets) of ECI, the Company's remaining
operating subsidiary. The New Heller Note provides that no principal or
interest be paid on the Company's indebtedness to Apollo (as defined below)
until all principal and interest on the New Heller Note is paid in full. In
addition, the New Heller Note allows the Company to make regularly
scheduled interest payments on the BNY Note (as defined below) for interest
accruing after February 3, 1997 and principal payments. However, if the
Company makes an interest payment on the BNY Note, it shall immediately
make an interest payment to Heller in an amount equal to the amount of
interest which shall have accrued on the New Heller Note in accordance with
its terms during the same period of time for which interest is being paid
pursuant to the interest payment on the BNY Note. Also, if the Company
makes a principal payment on the BNY Note, it shall immediately prepay the
New Heller Note in an amount equal to the lesser of the principal payment
on the BNY Note or the then outstanding amount of the remaining obligation
on the New Heller Note.
On January 29, 1998, the Company repaid in full its remaining obligation on
the New Heller Note of $1,128,000. The difference between the net carrying
amount of the New Heller Note and the remaining obligation amounted to
$522,000 which will be accounted for as an extraordinary gain in the first
quarter of 1998. The entire carrying amount of the New Heller Note of
$1,650,000 has been recorded within the current portion of long-term debt
as of December 31, 1997. As a result of the repayment, Heller released its
first lien on the stock of ECI.
Apollo Note - On June 30, 1993, the Company entered into a Series B Junior
Secured Note Agreement with Apollo Aris Partners, L.P. and its affiliate
AIF-II, L.P. ("Apollo") pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shared
with BNY Financial Corporation ("BNY") a second lien on the stock of ECI.
The Apollo Note is required to be paid in two equal installments payable on
November 3, 2001 and 2002. The Apollo Note contains certain affirmative and
negative covenants on the operation of the Company. Pursuant to the Debt
Registration Rights Agreement entered into on June 30, 1993 between the
Company and Apollo, Apollo and one transferee are entitled to require the
Company twice to register the offer and sale of the Apollo Note under
Federal and applicable state securities laws, and at the request of Apollo
or such transferee, to negotiate with such party in good faith to convert
the Apollo Notes into registered notes issued pursuant to a trust
indenture.
On September 12, 1997, the Company and 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
F-30
<PAGE>
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
$2,396,000 representing the quarterly interest payments accruing for the
period November 1, 1995 through December 31, 1997, which were not and will
not be paid in cash and instead added to the principal of the AIF-II Note.
BNY Note - On June 30, 1993, the Company entered into a Series A Junior
Secured Note Agreement with BNY pursuant to which BNY received a nine-year,
$7 million note, bearing interest at a rate of 7% per annum (the "BNY
Note"). BNY shared with Apollo a second lien on the stock of ECI. On
September 12, 1997, the Company and BNY entered into an amendment of the
BNY Note 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 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:
1998 $ 360,000
1999 560,000
2000 660,000
2001 1,160,000
2002 5,256,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$996,000 representing the quarterly interest payments accruing for the
period February 1, 1996 through December 31, 1997, which were not and will
not be paid in cash and instead added to the principal of the BNY Note .The
BNY note contains certain affirmative and negative covenants on the
operations of the Company. The Company was in compliance with these
covenants at December 31, 1997.
BNY and AIF-II's shared second lien on the stock of ECI became a shared
first lien upon the repayment of the New Heller Note on January 29, 1998.
BNY and AIF-II will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" as defined in the Company's note agreements
with BNY and AIF-II.
Future maturities of long-term debt are as follows:
F-31
<PAGE>
Year Ending
December 31,
1998 $ 2,010,000
1999 560,000
2000 660,000
2001 4,910,000
2002 11,387,000
-----------
$19,527,000
===========
3. SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS
On July 15, 1997, the Company contributed 3 million restricted shares of
its common stock, par value $.01, to its wholly-owned subsidiary, ECI
Sportswear, Inc. The value assigned to these shares was $720,000. The
effect of this transaction was an increase to investments in/advances to
subsidiaries of $720,000, common stock of $30,000 and additional paid-in
capital of $690,000.
4. SUBSEQUENT EVENT
On January 29, 1998, the Company repaid in full its remaining obligation on
the New Heller Note of $1,128,000. The difference between the net carrying
amount of the New Heller Note and the remaining obligation amounted to
$522,000 which will be accounted for as an extraordinary gain in the first
quarter of 1998. The entire carrying amount of the New Heller Note of
$1,650,000 has been recorded within the current portion of long-term debt
as of December 31, 1997. As a result of the repayment, Heller released its
first lien on the stock of ECI.
F-32
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------
Additions -
Balance at Charged to Balance
Beginning Costs and at End of
Classification of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for sales
returns and discounts $ 1,803,000 $ 2,738,000 $ 2,709,000(1) $ 1,832,000
Inventory reserve for obsolescence -- 268,000 -- (2) 268,000
Reserve for price allowances 961,000 732,000 813,000(1) 880,000
----------- ----------- ----------- -----------
$ 2,764,000 $ 3,738,000 $ 3,522,000 $ 2,980,000
=========== =========== =========== ===========
Period from February 4, 1996 through
December 31, 1996:
Allowance for sales
returns and discounts $ 2,273,000 $ 3,930,000 $ 4,400,000(1)(3) $ 1,803,000
Inventory reserve for obsolescence 939,000 -- 939,000(2)(3) --
Reserve for price allowances 886,000 964,000 889,000(1) 961,000
----------- ----------- ----------- -----------
$ 4,098,000 $ 4,894,000 $ 6,228,000 $ 2,764,000
=========== =========== =========== ===========
53 weeks ended February 3, 1996:
Allowance for sales
returns and discounts $ 496,000 $ 8,894,000 $ 7,117,000(1) $ 2,273,000
Inventory reserve for obsolescence 1,041,000 515,000 617,000(2) 939,000
Reserve for price allowances -- 886,000 -- 886,000
----------- ----------- ----------- -----------
$ 1,537,000 $10,295,000 $ 7,734,000 $ 4,098,000
=========== =========== =========== ===========
</TABLE>
(1) Returns, discounts and allowances taken.
(2) Inventory written off.
(3) Sale of Perry Manufacturing Company
F-33
EXHIBIT 10.110
ARIS INDUSTRIES, INC.
475 FIFTH AVENUE
NEW YORK, NEW YORK 10017
August 28, 1997
Mr. Charles S. Ramat
1185 Park Avenue
Apartment No. 16A
New York, New York 10028
Re: Eighth Amendment to Executive Employment Agreement
Dear Mr. Ramat:
Reference is made to your Senior Executive Employment Agreement with
Aris Industries, Inc. ("Aris") made as of February 1, 1988 and amended August 2,
1991, May 6, 1992, March 25, 1993, June 14, 1993, October 3, 1995, March 20,
1996 and December 18, 1996 (such Agreement, as amended, referred to as the
"Employment Agreement"). Recognizing the need to provide continuity of senior
executive management, Aris has agreed to continue and extend the term of your
Employment Agreement for the period through June 30, 2001, on the same terms and
conditions currently set forth in your Employment Agreement, with the following
amendments provided herein:
1. Aris hereby elects to extend the term of your Employment Agreement
as Chairman, President and Chief Executive Officer of Aris for the period
through June 30, 2001, and accordingly, Section 3 of the Employment Agreement is
hereby amended to provide that the term of your employment shall extend through
June 30, 2001 and all references in Section 3 of the Employment Agreement to
"three (3) years after the Effective Date" or to "June 30, 1998" shall
hereinafter read "June 30, 2001". During the extension of the term of your
Employment Agreement, you will continue to be compensated pursuant to, and will
continue to receive all benefits and perquisites provided in, your Employment
Agreement.
2. (a) A total of 900,000 options to purchase Aris Common Stock shall
be granted under Aris' 1993 Stock Incentive Plan as follows:(i) 750,000 options
to yourself and (ii) 150,000 options to be allocated by you to other employees
of Aris and its subsidiaries. All of such options shall have an exercise price
of $1.00 per share, shall be granted as of the date of this Agreement, and shall
vest eight (8) years from the date of grant, provided that the optionee has been
continuously employed by Aris or its subsidiaries during such period.
(b) All or a portion of the options granted pursuant to
Paragraph 2(a) above shall obtain accelerated vesting on the occurrence of the
"Refinancing Date" (as defined herein) on or before December 31, 2000, depending
on whether the Refinancing Date occurs during fiscal years 1997, 1998, 1999 or
2000. The Refinancing Date shall be the date upon which Aris' debt obligations
to Heller Financial, Inc., BNY Financial Corporation, and AIF-II, L.P., pursuant
to their respective secured note agreements with Aris dated June 30, 1993, each
as amended to the date of this Agreement, are fully paid and satisfied in cash.
<PAGE>
(c) In the event that the Refinancing Date occurs during
calendar years 1998 or 1997, all 750,000 of such options granted to you will
obtain accelerated vesting. In the event that the Refinancing Date occurs during
calendar year 1999, 500,000 of such options granted to you will obtain
accelerated vesting. In the event that the Refinancing Date occurs during
calendar year 2000, 250,000 of such options granted to you will obtain
accelerated vesting. In the event that the Refinancing Date occurs on or before
December 31, 2000, all of such options granted to the other employees of Aris or
its subsidiaries will obtain accelerated vesting. In the event that the
Refinancing Date occurs during calendar year 2001 or thereafter, none of such
options granted to you or the other employees of Aris or its subsidiaries will
obtain accelerated vesting.
(d) All options which obtain accelerated vesting pursuant to
Paragraph 2(c) above, shall vest as follows: (i) one-third on the later to occur
of the Refinancing Date and the first anniversary of the date of this
Agreement;(ii) one-third on the later to occur of the Refinancing Date and the
second anniversary of the date of this Agreement; and (iii) one-third on the
later to occur of the Refinancing Date and the third anniversary of the date of
this Agreement. By way of example, if the Refinancing Date occurred on November
1, 1999, 500,000 of such options granted to you would obtain accelerated
vesting, of which 333,333 would vest on the Refinancing Date on November 1,
1999(the later to occur of the Refinancing Date and the first and second
anniversaries of the date of this Agreement), and the balance of 166,667 would
vest on August 28, 2000(the later to occur of the Refinancing Date and the third
anniversary of the date of this Agreement).
(e) In the event that the Employment Agreement is not renewed
upon the expiration of its term, or if you are terminated by Aris without cause
as defined in the Employment Agreement, then all of such options granted to you
hereunder which have obtained accelerated vesting because the Refinancing Date
has occurred prior to the non-renewal or termination date, shall immediately
vest (regardless of whether the first, second or third anniversary of the date
of this Agreement has occurred), and the term for exercise of such options shall
be one year after the date of such non-renewal or termination. Upon your
resignation or termination for cause(as defined in the Employment Agreement),
all such options which are not then vested will expire and you will have
ninety(90) days in which to exercise those options which are vested on the
resignation or termination date.
(f) Aris shall enter into stock option agreements to document
the grant of such options to you and such other recipients. 292,500 of the
options granted to you shall be provided from the unused balance of the
1,200,000 shares currently reserved under Aris' 1993 Stock Incentive Plan, and
the remainder of the options granted to you and the other key employees shall be
provided by an amendment to Aris' 1993 Stock Incentive Plan to increase the
number of reserved shares, referred to in paragraph 2(g) below.
<PAGE>
(g) Aris shall call and hold a Shareholder's Meeting on a date
no later than sixty(60) days after Aris' 1997 audited financial statements are
available, for the purpose of approving an amendment to Aris' 1993 Stock
Incentive Plan to increase the number of shares reserved for issuance under such
Plan from 1,200,000 shares to 2,500,000 shares as well as ratifying the grant of
options referred to above. The Board of Directors of Aris shall recommend to the
shareholders the approval of such amendment and ratification, and Aris shall use
its best efforts to obtain such shareholder approval. Aris shall prepare, file
and distribute appropriate proxy statements, annual reports and other materials
necessary for such shareholders meeting. In addition, following such shareholder
approval and ratification, Aris agrees to prepare, file and distribute an
amended Form S-8 Registration Statement covering the increased number of
2,500,000 shares reserved for issuance under Aris' 1993 Stock Incentive Plan.
3. For the fiscal year commencing January 1, 1998, and each subsequent
fiscal year during the term of this Agreement, you will be provided with a cash
bonus based upon achievement of performance targets of Aris and its subsidiaries
set annually in advance of each such fiscal year by mutual agreement, which
bonus programs shall each become an addendum to the Employment Agreement.
4. For the fiscal year commencing January 1, 1997, and each subsequent
fiscal year during the term of the Employment Agreement, there will be no bonus
earned under Section 4(b) of the Employment Agreement. The bonus provided by
Section 4(b) of the Employment Agreement shall remain in effect for fiscal years
through and including 1996(including the SAR portion of such bonus for 1996 and
prior years which is paid in future years). The ECI Bonus Pool program for the
fiscal year commencing January 1, 1997 provided by the letter agreement between
Aris and you dated December 18, 1996 shall remain in effect with respect to such
fiscal year.
5. In all other respects your Employment Agreement (as previously
amended) shall continue unchanged and remain in full force and effect. The
amendments to your Employment Agreement set forth in this letter shall become
effective immediately. Please indicate your concurrence with the foregoing by
signing in the space provided below, whereby this letter shall become a legal
and binding agreement between you and Aris.
AGREED AND ACCEPTED: Very truly yours,
ARIS INDUSTRIES, INC.
/S/ Paul Spector
/s/ Charles S. Ramat ----------------------------
- ---------------------------------- Paul Spector
Charles S. Ramat Senior Vice President
and Chief Financial Officer
<PAGE>
ARIS INDUSTRIES, INC.
475 FIFTH AVENUE
NEW YORK, NEW YORK 10017
March 10, 1998
Mr. Charles S. Ramat
1185 Park Avenue
Apartment No. 16A
New York, New York 10028
Re: Addendum to Executive Employment Agreement
Dear Mr. Ramat:
Reference is made to your Senior Executive Employment Agreement with
Aris Industries, Inc. ("Aris") made as of February 1, 1988 and amended August 2,
1991, May 6, 1992, March 25, 1993, June 14, 1993, October 3, 1995, March 20,
1996, December 18, 1996 and August 28, 1997(such Agreement, as amended, referred
to as the "Employment Agreement"). Section 3 of the Eighth Amendment to your
Employment Agreement dated August 28, 1997 provides that for the fiscal year
commencing January 1, 1998, and each subsequent fiscal year during the term of
the Employment Agreement, you will be provided with a cash bonus based upon
achievement of performance targets of Aris and its subsidiaries set annually in
advance of each such fiscal year by mutual agreement, which bonus programs shall
each become an addendum to the Employment Agreement.
This addendum will confirm that for the fiscal year commencing January
1, 1998, your cash bonus shall be computed as the sum of (i) 10% of the combined
Pre-Tax, Pre-Management Fee and Pre-Bonus Net Income of Europe Craft Imports,
Inc. and ECI Sportswear, Inc. for such fiscal year in excess of $4,500,000 and
up to $6,000,000 and (ii) 20% of the combined Pre-Tax, Pre-Management Fee and
Pre-Bonus Net Income of Europe Craft Imports, Inc. and ECI Sportswear, Inc. for
such fiscal year in excess of $6,000,000 and up to $8,000,000. Such cash bonus
for 1998 shall be paid within ten days after Aris' receipt of its audited
financial statements for such fiscal year.
Please indicate your concurrence with the foregoing by signing in the
space provided below, whereby this letter shall become a legal and binding
agreement between you and Aris.
Very truly yours,
ARIS INDUSTRIES, INC.
By: /s/ Paul Spector
-----------------------------------
Paul Spector, Senior Vice President
AGREED AND ACCEPTED: and Chief Financial Officer
/s/ Charles S. Ramat
- ----------------------------
Charles S. Ramat
<PAGE>
APOLLO ARIS PARTNERS, L.P.
Two Manhattanville Road
Purchase, New York 10577
August 28, 1997
Mr. Charles S. Ramat
1185 Park Avenue
Apartment No. 16A
New York, New York 10028
Aris Industries, Inc.
475 Fifth Avenue
New York, New York 10017
Re: Shareholders Meeting
Gentlemen:
Reference is made to the Eighth Amendment to the Executive Employment
Agreement between Aris Industries, Inc.("Aris") and Charles S. Ramat, Chairman,
President and Chief Executive Officer thereof, dated the date hereof, a copy of
which has been received and reviewed by Apollo Aris Partners, L.P.("Apollo"), a
shareholder of Aris. This will confirm that (i) Apollo hereby consents to the
amendment of the Aris' 1993 Stock Incentive Plan to increase the number of
shares reserved for options from 1,200,000 to 2,500,000, (ii) Apollo hereby
consents to the grant of options to Mr. Ramat and the other employees of Aris
and its subsidiaries pursuant to the Eighth Amendment, and (iii) Apollo will, at
any annual or special meeting of shareholders of Aris, vote all shares of Aris
owned or controlled by it in favor of approval of an amendment to Aris' 1993
Stock Incentive Plan to increase the number of shares reserved for options under
such plan from 1,200,000 to 2,500,000 as well as ratification of options granted
to Mr. Ramat and other employees of Aris pursuant to such Eighth Amendment, and
shall otherwise cooperate and use its best efforts to obtain approval by other
Aris shareholders of such amendment and ratification.
Very truly yours,
APOLLO ARIS PARTNERS, L.P.
By: APOLLO ADVISORS, L.P.,
General Partner
By: /S/ Robert A. Katz
----------------------------
Title: Vice President
-------------------------
<PAGE>
ARIS INDUSTRIES, INC.
475 FIFTH AVENUE
NEW YORK, NEW YORK 10017
August 28, 1997
AH EQUITIES, INC.
(f/k/a Davco Industries, Inc.)
Steven Arnold
Christopher Healy
350 Fifth Avenue
New York, New York 10118
Re: Shareholders Meeting
Gentlemen:
Reference is made to the Shareholder's Agreement dated July 15, 1997
between Aris Industries, Inc.("Aris"), AH Equities, Inc.(f/k/a Davco Industries,
Inc.), Steven Arnold and Christopher Healy, whereby AH Equities, Inc. and
Messrs. Arnold and Healy agreed to vote all of the shares of Aris owned by them
in favor of the recommendations of the Aris Board of Directors at any meetings
of Aris shareholders, so long as Charles S. Ramat remained Chairman or President
or CEO of Aris. Aris' Board of Directors has determined to grant a total of
900,000 options under Aris' 1993 Stock Incentive Plan, of which 750,000 would be
granted to Mr. Ramat and 150,000 would be granted to other employees of Aris and
its subsidiaries, all at an exercise price of $1.00 per share, vesting eight
years from the date of the grant. In the event the "Refinancing Date" (as
defined below) occurs prior to December 31, 2000, all or a portion of such
options will obtain accelerated vesting depending on whether the Refinancing
Date occurs in fiscal years 1997, 1998, 1999 or 2000. Options which obtain
accelerated vesting shall vest as follows: (i) one third on the later to occur
of the Refinancing Date and the first anniversary of the date of grant; (ii) one
third on the later to occur of the Refinancing Date and the second anniversary
of the date of grant; and(iii) one third on the later to occur of the
Refinancing Date and the third anniversary of the date of grant. The Refinancing
Date shall be the date upon which Aris' obligations to Heller Financial, Inc. ,
BNY Financial Corporation and AIF-II, L.P., pursuant to their respective secured
note agreements with Aris dated June 30, 1993, each as amended, are fully paid
and satisfied in cash. A meeting of Aris shareholders will be called and held
during the Spring of 1998 to approve an amendment to Aris' 1993 Stock Incentive
Plan to increase the number of shares reserved under the Plan from 1,200,000 to
2,500,000 to enable grant of such options and to ratify the grant of such
options to Mr. Ramat and such other employees. By the grant of such options to
Mr. Ramat, Aris was able to obtain an extension of the term of Mr. Ramat's
Senior Executive Employment Agreement until June 30, 2001.
By your signature in the space provided below, you hereby confirm that
AH Equities, Inc., Steven Arnold and Christopher Healy (i) consent to the
amendment of Aris 1993 Stock Incentive Plan to increase the number of reserved
shares from 1,200,000 to 2,500,000,
<PAGE>
(ii) consent to the grant to Mr. Ramat and the other employees of Aris of the
options described above, and (iii) will, at any annual or special meeting of
shareholders of Aris, vote all shares of Aris owned or controlled by them in
favor of approval of an amendment to Aris' 1993 Stock Incentive Plan to increase
the number of shares reserved for options under such plan from 1,200,000 to
2,500,000 as well as ratification of options granted to Mr. Ramat and other
employees of Aris described above, and shall otherwise cooperate and use their
best efforts to obtain approval by other Aris shareholders of such amendment and
ratification.
Very truly yours,
ARIS INDUSTRIES, INC.
By: /s/ Charles S. Ramat
------------------------------
Charles S. Ramat, President
AGREED AND ACCEPTED:
AH EQUITIES, INC.
(F/K/A DAVCO INDUSTRIES, INC.)
By: /s/ Steven Arnold
------------------------------
Steven Arnold, President
By: /s/ Christopher Healy
-----------------------------
Christopher Healy, Chief
Executive Officer
/s/ Steven Arnold
- ---------------------------------
Steven Arnold, individually
/s/ Christopher Healy
- ---------------------------------
Christopher Healy, individually
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Europe Craft Imports, Inc. New Jersey
ECI Sportswear, Inc. New York
All other subsidiaries of the Registrant, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary as of the end of
the year covered by this Annual Report, and, therefore, their names have been
omitted.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,372,000
<SECURITIES> 0
<RECEIVABLES> 27,456,000
<ALLOWANCES> 1,182,000
<INVENTORY> 19,498,000
<CURRENT-ASSETS> 2,215,000
<PP&E> 6,104,000
<DEPRECIATION> 4,641,000
<TOTAL-ASSETS> 73,837,000
<CURRENT-LIABILITIES> 37,621,000
<BONDS> 16,930,000
<COMMON> 150,000
0
0
<OTHER-SE> 17,664,000
<TOTAL-LIABILITY-AND-EQUITY> 73,837,000
<SALES> 96,271,000
<TOTAL-REVENUES> 96,271,000
<CGS> 67,497,000
<TOTAL-COSTS> 67,497,000
<OTHER-EXPENSES> 23,474,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,105,000
<INCOME-PRETAX> 2,195,000
<INCOME-TAX> (138,000)
<INCOME-CONTINUING> 2,333,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,333,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
