SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
October 22, 1999
Date of Report
(Date of earliest event reported)
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 1 - 4814 22-1715274
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1411 Broadway, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 642-4300
<PAGE>
Item 7: Acquisition of Lola Inc.
As reported in the Company's Form 8-K, filed on August 24, 1999, Aris
Industries, Inc. (the "Registrant") consummated the merger of Lola, Inc. and
subsidiaries ("Lola"), a California corporation, with and into Europe Craft
Imports, Inc. ("ECI"), a New Jersey corporation (the "Merger"), that is wholly
owned by the Registrant. Immediately following the effectiveness of the Merger,
ECI contributed all of the assets formerly owned by Lola to XOXO Clothing
Company, Incorporated, a Delaware corporation ("XOXO") that is wholly owned by
ECI. Lola's business consists principally of the manufacture and sale of women's
and junior apparel and accessories under the "XOXO" name.
The consideration paid to Lola's shareholders was $10,000,000 in cash and
6,500,000 shares of the Registrant's common stock, which were valued for the
purpose of the transaction, at $1.50 per share. In connection with the
transaction, ECI obtained a $10,000,000 term loan and the Company and its
subsidiaries amended its financing agreements to increase its revolving line of
credit from $65,000,000 to $80,000,000.
The $10,000,000 term loan with CIT Group/Commercial Services, Inc. bears
interest at prime plus one-half percent and is payable in quarterly installments
of $500,000, plus interest, commencing January 1, 2000 with a balloon payment of
$5,500,000 on February 26, 2002, the maturity date. The Company is required to
make certain mandatory prepayments based upon "excess cash flows".
Lola, Inc. is based in Los Angeles, California and owns the XOXO trademark and
worldwide licensing rights and has eleven current licenses in various product
categories that complement the Company's core brands. It produces a line of
women's and junior apparel and accessories which is distributed in major
department and specialty stores as well as the Company's free standing retail
stores.
This 8-K/A, is an amendment to the Company's 8-K filed during August 1999
and includes financial statements and pro forma information that was not
available in the initial filing.
Financial Statements and Pro Forma Financial Information
(a) Financial Statements of Business Acquired.
(i) Financial statements of Lola, Inc. and subsidiary as of January 31,
1999 and for the year then ended.
(ii) Unaudited Financial Statements as of July 31, 1999 and 1998
and for the six month periods then ended.
(b) Pro Forma Financial Information.
(i) Aris Industries, Inc. and Subsidiaries Unaudited Pro Forma Combined
Condensed Financial Statements.
<PAGE>
[KPMG LOGO]
LOLA, INC.
dba XOXO AND SUBSIDIARY
Consolidated Financial Statements and
Supplementary Information
January 31, 1999
(With Independent Auditors' Report Thereon)
<PAGE>
[KPMG LETTERHEAD]
Independent Auditors' Report
The Board of Directors
Lola, Inc.:
We have audited the accompanying consolidated balance sheet of Lola, Inc. dba
XOXO and subsidiary as of January 31, 1999 and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lola, Inc. dba XOXO
and subsidiary as of January 31, 1999 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
March 29, 1999, except for
note 12 which is as of
August 10, 1999
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Consolidated Balance Sheet
January 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 22,884
Due from factor (note 2) 86,190
Accounts receivable, less allowance for doubtful receivables of $15,000 603,614
Other receivables (note 10) 133,931
Refundable income taxes (note 5) 46,934
Due from affiliates (note 6) 343,393
Due from stockholder (note 8) 500,000
Inventories (note 3) 7,314,117
Prepaid expenses and other current assets 366,039
Deferred tax assets (note 5) 360,000
-----------
Total current assets 9,777,102
Property and equipment, at cost, net (note 4) 3,721,416
Other assets, at cost 369,889
-----------
$13,868,407
===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capital lease obligations (note 11) $ 426,504
Trade accounts payable 6,260,973
Accrued liabilities 2,941,294
Deferred royalty income (note 7) 39,951
-----------
Total current liabilities 9,668,722
Capital lease obligations, less current installments (note 11) 679,890
Deferred leasehold improvements incentives 272,211
Deferred rent 353,735
-----------
Total liabilities 10,974,558
-----------
Other 14,000
Stockholders' equity:
Common stock, no par value. Authorized 100,000 shares; issued and outstanding
10,000 shares 100,000
Additional paid-in capital 75,000
Retained earnings 2,704,849
-----------
Total stockholders' equity 2,879,849
Commitments and contingencies (notes 2 and 11)
-----------
$13,868,407
===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Consolidated Statement of Earnings
Year ended January 31, 1999
Net sales (note 6) $ 74,333,616
Cost of goods sold 45,482,767
------------
Gross profit 28,850,849
------------
Operating expenses:
Design and samplemaking 4,987,065
Selling 8,457,259
Shipping 2,547,494
Occupancy 1,330,291
General and administrative 11,392,060
------------
Total operating expenses 28,714,169
------------
Earnings from operations 136,680
Other income (expense):
Interest expense, net (875,815)
Royalty income (note 7) 1,140,876
Loss on investment (note 9) (39,000)
Litigation settlement (note 10) 250,000
------------
Earnings before income taxes 612,741
Income taxes (note 5) 286,000
------------
Net earnings $ 326,741
============
See accompanying notes to consolidated financial statements.
3
<PAGE>
LOLA, INC. dba
dba XOXO and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Year ended January 31, 1999
<TABLE>
<CAPTION>
Common stock Additional Total
----------------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
----------------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1998, as previously reported 10,000 $ 100,000 -- 2,378,108 2,478,108
Investment in affiliate (note 9) -- -- 25,000 -- 25,000
Investment in 8-3 Retailing, Inc. (note 1) -- -- 50,000 -- 50,000
--------- --------- --------- --------- ---------
Balance, January 31, 1998, as restated 10,000 100,000 75,000 2,378,108 2,553,108
Net earnings -- -- -- 326,741 326,741
--------- --------- --------- --------- ---------
Balance, January 31, 1999 10,000 $ 100,000 75,000 2,704,849 2,879,849
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Consolidated Statement of Cash Rows
Year ended January 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net earnings $ 326,741
-----------
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of property and equipment 1,301,222
Capital contribution 25,000
Deferred income taxes (149,000)
Reserve for open credits 88,026
Litigation settlement (112,500)
Other 14,000
Changes in assets and liabilities:
(Increase) decrease in assets:
Due from factor (5,974)
Accounts receivable 281,715
Due from affiliates 41,129
Inventories (2,215,320)
Prepaid expenses and other current assets (135,687)
Refundable income taxes (46,934)
Other assets (65,493)
Increase (decrease) in liabilities:
Trade accounts payable 1,057,307
Accrued liabilities 782,670
Deferred royalty income (375,403)
Deferred leasehold improvements incentives (35,898)
Deferred rent 115,213
Income tax payable (671,249)
-----------
Net cash provided by operating activities 219,565
-----------
Cash flows used in investing activities-- purchases of property and equipment (873,857)
Cash flows from financing activities:
Advances from factor 1,660,275
Due from shareholder (500,000)
Repayments of notes payable (342,303)
Repayments of capital lease obligations (251,556)
-----------
Net cash used in financing activities 566,416
-----------
Net decrease in cash (87,876)
Cash at beginning of year 110,760
-----------
Cash at end of year $ 22,884
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 875,815
Income taxes 1,153,183
Non-cash activities-capital expenditures financed 1,017,905
===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
(1) Summary of Significant Accounting Policies
(a) Description of Business
Lola, Inc. dba XOXO (Lola, Inc. or the Company) manufactures women's
apparel for sale to retailers under the labels XOXO and XOXO in
America and abroad. In addition, Lola, Inc., as licensor, has entered
into certain agreements that allow the licensees the exclusive right
to manufacture, sell, distribute and advertise certain products using
the tradename "XOXO."
Effective February 27, 1998, 8-3 Retailing, Inc., formerly owned by
related parties of the Company, became a wholly owned subsidiary of
the Company through a gift of stock transaction. The Company recorded
the transaction in a manner similar to a pooling of interests, whereby
the historical cost basis of the net assets has been retained, and
accordingly, the consolidated financial statements have been restated
as of January 31, 1998.
8-3 Retailing, Inc. operates XOXO retail stores throughout the United
States which sell exclusive XOXO women's apparel and related
accessories.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Lola,
Inc. dba XOXO and its wholly owned subsidiary, 8-3 Retailing, Inc.
Accordingly, all references herein to "Lola, Inc." include the
consolidated results of the Company and its subsidiary. All
significant intercompany accounts and transactions have been
eliminated.
(c) Inventories
Inventories are stated at the lower of cost, determined on the
first-in, first-out basis, or market.
(d) Depreciation and Amortization
Depreciation and amortization are being provided by use of the
straight-line method over the estimated useful life of the assets
(generally five years). Leasehold improvements are amortized on a
straight-line basis over their estimated useful life or the life of
the lease, whichever is less.
(e) Revenue Recognition
The Company recognizes wholesale revenue from the sale of merchandise
upon shipment and for retail operations, at point of sale. Royalty
income is based upon a percentage, as defined in the underlying
agreement, of the licensee's net revenue and is recognized as earned.
Allowances for estimated sales returns, allowances and discounts are
provided when related revenue is recorded.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
6 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(g) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
revenue and expenses and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
(h) Preopening Costs
Store preopening costs, consisting primarily of labor and supplies
directly related to the opening of specific stores, are expensed as
incurred.
(i) Long-Lived Assets
The Company accounts for long-lived assets at amortized cost. As part
of an ongoing review of the valuation and amortization of long-lived
assets, management assesses the carrying value of such assets if facts
and circumstances suggest that the assets may be impaired. As a
result, the Company has determined that its long-lived assets are not
impaired as of January 31, 1999.
(j) Comprehensive Income
During fiscal year 1999, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. The statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations. There is no difference
between net earnings and comprehensive income for the Company.
Accordingly, the adoption of SFAS 130 did not affect the Company's
financial reporting.
(2) Due from Factor
The Company uses a factor for credit administration and working capital
purposes. Under the factoring agreement, the factor purchases substantially
all of the trade accounts receivable and assumes substantially all credit
risks with respect to such accounts for a factoring charge, as defined.
Receivables sold in excess of maximums established for each account are
subject to recourse in the event of nonpayment by the customer. At January
31, 1999, the Company was contingently liable for $238,481 in receivables
sold in excess of established credit limits. To the extent that the Company
draws on funds prior to the payment date of the accounts receivable sold to
the factor, the Company pays interest on such funds. The Company is
contingently liable to the factor for merchandise disputes and customer
claims on receivables sold to the factor.
7 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
Due from factor is comprised of the following:
Factored accounts receivable $8,740,471
Less:
Advances from factor 7,797,254
Unassigned credit memos 857,027
----------
$ 86,190
==========
(3) Inventories
Inventories consist of the following:
Raw materials $3,489,174
Work in progress 1,759,976
Finished goods 2,064,967
----------
$7,314,117
==========
(4) Property and Equipment
Property and equipment is summarized as follows:
Machinery and equipment $1,722,237
Office furniture and equipment 1,248,410
Showroom equipment and improvements 1,565,461
Leasehold improvements-- warehouse 599,313
Instore shops 934,482
Construction in progress 131,203
----------
6,201,106
Less accumulated depreciation and amortization 2,479,690
----------
$3,721,416
==========
Computer equipment and machinery and equipment include $306,315 and
$1,166,787, respectively, for amounts under capitalized leases at January
31, 1999. Accumulated depreciation includes $236,872 at January 31, 1999
for amounts under capitalized leases. Amortization expense applicable to
these leases is included in depreciation and amortization expense.
8 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
(5) Income Taxes
A summary of income taxes follows:
Current:
Federal $ 343,000
State 92,000
---------
435,000
---------
Deferred:
Federal (124,000)
State (25,000)
---------
(149,000)
---------
$ 286,000
=========
Income tax expense differs from the amounts computed by applying the
Federal statutory rate of 34% to earnings before income taxes as shown
below for the year ended January 31, 1999:
Computed "expected" taxes $208,000
State and local taxes, net of Federal income tax benefit 44,000
Nondeductible expenses 34,000
--------
$286,000
========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets of $360,000 arise primarily from timing
differences in deducting California franchise tax, capitalization of
certain inventory costs and depreciation and amortization expense for
financial accounting and income tax return purposes. The Company believes
its deferred tax asset is more likely that not to be realizable based on
historical and projected taxable income levels.
Refundable income taxes arise from the overpayment of estimated taxes.
(6) Related Party Transactions
During the year ended January 31, 1999, the Company sold merchandise to
XOXO Outlets, Inc., a company affiliated through common ownership
(Affiliate) (see note 9). The Affiliate owns and operates outlet stores
under the name XOXO. Sales, net of returns, to the Affiliate for the year
ended January 31, 1999 were $569,100 on a nonfactored basis. Due from
affiliates totaled $343,393 at January 31, 1999 and consists of amounts
resulting from the sale of inventory.
9 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
(7) Licensing Agreements
The Company, as licensor, has entered into several agreements that allow
the licensees the exclusive right to manufacture, sell, distribute and
advertise certain products using the tradename "XOXO." These agreements
range in length from five to eight years including option periods. The
Company receives royalty payments of between 5% to 8% of net sales and
advertising payments of 0.5% to 3% of net sales, payable monthly. As of
January 31, 1999, the Company has received nonrefundable deferred royalty
income of $39,951 and recognized royalty income of $1,140,876 during the
year ended January 31, 1999.
(8) Due from Stockholder
During fiscal year 1999, the Company loaned $500,000 pursuant to an
agreement with the Company's Chief Executive Officer. The note bears
interest at 7% per annum and is due on demand. The Company anticipates
payment of this note prior to January 31, 2000. Accordingly, the note is
classified as current on the accompanying consolidated balance sheet.
Interest earned under this arrangement amounted $32,100 during the fiscal
year ended January 31, 1999.
(9) Investment in Affiliate
On February 27, 1998, a 50% interest in XOXO Outlets, Inc. was gifted to
the Company. Due to the common ownership, the historical cost of the
investment was retained. The investment in XOXO Outlets, Inc. is accounted
for under the equity method. The losses of XOXO Outlets, Inc. have exceeded
the investment of $25,000. Accordingly, the investment has been written off
Because the Company is a guarantor of several leases on behalf of its
investee, the Company has accrued for up to 50%, representing the Company's
investment, of the investee's losses. This liability of $14,000 is included
in the accompanying consolidated balance sheet.
(10) Litigation Settlement
During fiscal year 1999, the Company reached an agreement with an unrelated
third party in the amount of $250,000 for the settlement of its obligations
under a licensing agreement. The Company has recognized income of $250,000
related to settlement during the year ended January 31, 1999. As of January
31, 1999, the Company has a related receivable of $112,500 which is
included in other receivables in the accompanying consolidated balance
sheet.
10 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
(11) Commitments and Contingencies
The Company has noncancelable operating and capital leases expiring through
2007 for the rental of its corporate office and warehouse, showrooms and
certain machinery and equipment.
Future minimum lease payments at January 31, 1999 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases Total
------- --------- -----
<S> <C> <C> <C>
Year ending January 31:
2000 $ 508,166 1,957,332 2,465,498
2001 494,836 2,017,645 2,512,481
2002 234,822 1,679,226 1,914,048
2003 -- 1,334,511 1,334,511
2004 -- 1,141,083 1,141,083
Thereafter -- 3,506,586 3,506,586
----------- ----------- -----------
Total minimum obligations 1,237,824 $11,636,383 12,874,207
=========== ===========
Less amount representing interest 131,430
-----------
Present value of minimum
obligations 1,106,394
Less current installments 426,504
-----------
$ 679,890
===========
</TABLE>
Rent expense approximated $1,898,000 for the year ended January 31, 1999.
The Company is contingently liable under noncancelable operating leases
entered into on behalf of its investee, XOXO Outlets, Inc. Future minimum
annual lease payments under these affiliate leases at January 31, 1999 are:
2000 $49,000
2001 8,000
2002 8,000
2003 8,000
2004 6,000
-------
$79,000
=======
11 (Continued)
<PAGE>
LOLA, INC.
dba XOXO AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 1999
The Company is subject to certain miscellaneous legal claims which have
arisen during the ordinary course of business. The Company believes that
the outcome of such pending legal proceedings, in the aggregate, will not
have a material adverse effect on the Company's financial position or
results of operations.
(12) Subsequent Events
On August 10, 1999, Aris Industries, Inc. (Aris) consummated the merger of
the Company, with and into Europe Craft Imports, Inc. ("ECI"), a New Jersey
corporation (the "Merger"), that is wholly owned by Aris. Immediately
following the effectiveness of the Merger, ECI contributed all of the
assets formerly owned by the Company to XOXO Clothing Company,
Incorporated, a Delaware corporation ("XOXO") that is wholly owned by ECI.
12
<PAGE>
LOLA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands of dollars)
July 31, July 31,
ASSETS 1999 1998
------- -------
CURRENT ASSETS:
Cash $ 44 $ 226
Receivables, net 2,669 2,336
Inventories 9,077 5,524
Prepaid expenses and other current assets 1,133 852
------- -------
Total current assets 12,923 8,938
Property, plant and equipment, net 5,520 3,260
Intangible and other assets 424 388
------- -------
TOTAL ASSETS $18,867 $12,586
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 8,991 $ 5,491
Accrued expenses and other current liabilities 4,587 2,868
Current portion of long term debt 515 142
Notes payable -- 206
------- -------
Total current liabilities 14,093 8,707
Long-term debt, less current portion 1,188 251
Other long-term liabilities 644 728
------- -------
Total Liabilities 15,925 9,686
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized
100,000 shares; issued and outstanding 10,000 shares 100 100
Additional paid-in capital 265 265
Retained earnings 2,577 2,535
------- -------
Total stockholders' equity 2,942 2,900
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,867 $12,586
======= =======
See Notes to Unaudited Consolidated Condensed Financial Statements
<PAGE>
LOLA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of dollars)
Six Six
Months Ended Months Ended
July 31, 1999 July 31, 1998
------------- -------------
Net sales $ 49,369 $ 39,642
Cost of goods sold (32,752) (24,369)
-------- --------
Gross profit 16,617 15,273
Commission and licensing income 527 554
-------- --------
Income before selling and administrative expenses,
interest expense and income taxes 17,144 15,827
Selling and administrative expenses (16,739) (14,531)
-------- --------
Income before interest and taxes 405 1,296
Interest expense, net (525) (416)
-------- --------
(Loss) income before taxes (120) 880
Income tax expense (8) (423)
-------- --------
Net (loss) income $ (128) $ 457
======== ========
See Notes to Unaudited Consolidated Condensed Financial Statements
<PAGE>
LOLA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
July 31, July 31,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($128) $457
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 871 553
Increase in allowance for sales discounts and
other credits 438 617
Deferred rent (14) 110
Change in assets and liabilities:
Increase in receivables (7,916) (2,903)
Increase in inventories (1,689) (308)
Increase in prepaid expenses and other current assets (82) (7)
Increase in other assets (35) (65)
Increase in accounts payable - trade 2,725 272
Increase/(decrease) in accrued expenses
and other current liabilities 1,903 (375)
------- -------
Total adjustments (3,799) (2,106)
------- -------
Net cash used in operating activities (3,927) (1,649)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,690) (354)
------- -------
Net cash used in investing activities (1,690) (354)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (137)
Payments under capital leases (238) (72)
Advances to stockholder 255 (500)
Other (25) --
Increase in bank credit line borrowings 5,635 2,800
------- -------
Net cash provided by financing activities 5,627 2,091
------- -------
NET INCREASE IN CASH 10 88
CASH, BEGINNING OF PERIOD 34 138
------- -------
CASH, END OF PERIOD $44 $226
======= =======
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements
<PAGE>
LOLA, INC.
AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(1) Summary of Significant Accounting Policies
(a) The consolidated condensed financial statements for the six month
periods ended July 31, 1999 and July 31, 1998 are unaudited and
reflect all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the
periods. The results of operations of any interim period are subject
to year-end audit and adjustments, and are not necessarily indicative
of the results of operations for the fiscal year.
(b) Description of Business
Lola, Inc. and subsidiaries ("Lola, Inc". or the "Company")
manufactures women's apparel for sale to retailers under the labels
XOXO. In addition, Lola, Inc. as licensor, has entered into certain
agreements that allow its licensees the exclusive right to
manufacture, sell, distribute and advertise certain products using the
tradename "XOXO".
Effective February 27, 1998, 8-3 Retailing, Inc., formerly owned by
related parties of the Company, became a wholly owned subsidiary of
the Company through a contribution of 100% of the capital stock of 8-3
Retailing, Inc. to the Company by the former shareholders. 8-3
Retailing, Inc. operates XOXO retail stores throughout the United
States which sell exclusive XOXO women's and junior apparel and
related accessories. The Company recorded the transaction in a manner
similar to a pooling of interests, whereby the historical cost basis
of the net assets has been retained, and the consolidated financial
statements have been restated as of January 31, 1998.
(c) Principles of Consolidation
The consolidated condensed financial statements include the accounts
of Lola, Inc. and its wholly owned subsidiaries, 8-3 Retailing, Inc.
and XOXO Outlets. Accordingly, all references herein to "Lola, Inc."
include the consolidated results of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
(d) Inventories
Inventories are stated at the lower of cost, determined on the
first-in, first-out basis, or market.
(e) Depreciation and Amortization
Depreciation and amortization are being provided by use of the
straight-line method over the estimated useful life of the assets
(generally five years). Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives or the life of
the lease, whichever is less.
<PAGE>
LOLA, INC.
AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(2) Inventories
Inventories consist of the following: 1999 1998
---- ----
Raw materials $3,887,000 $3,081,000
Work in progress 1,974,000 1,037,000
Finished goods 3,216,000 1,406,000
---------- ----------
$9,077,000 $5,524,000
========== ==========
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
Aris Pro Forma Adjustments (1)
Industries, Inc. Lola Inc. Debit Credit Combined
---------------- --------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 572 $ 44 $ 10,000(2) $ 10,000(3) $ 616
Receivables, net 24,118 2,669 26,787
Inventories 19,041 9,077 28,118
Prepaid expenses and other current assets 2,126 1,133 3,259
-------- -------- -------- -------- --------
Total current assets 45,857 12,923 10,000 10,000 58,780
Property, plant and equipment, net 2,746 5,520 8,266
Goodwill 15,947 -- 16,808(3) 33,155
400(4)
Intangible and other assets 1,363 424 1,787
-------- -------- -------- -------- --------
TOTAL ASSETS $ 65,913 $ 18,867 $ 26,808 $ 10,000 $101,988
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 2,050 -- $ 2,050
Accounts payable - trade 3,581 $ 8,991 12,572
Accrued expenses and other current liabilities 3,600 4,587 $ 400(4) 8,587
Current portion of long term debt 500 515 2,000(2) 3,015
Line of credit payable 18,530 -- 18,530
-------- -------- -------- -------- --------
Total current liabilities 28,261 14,093 2,400 44,754
Long-term debt, less current portion 6,942 1,188 8,000(2) 16,130
Other long-term liabilities 2,309 644 2,953
-------- -------- -------- -------- --------
Total Liabilities 37,512 15,925 10,400 63,837
-------- -------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 460 -- 65(3) 525
Common stock, no par value 100 100(3)
Preferred stock, $.01 par value 26 -- 26
Additional paid-in capital 69,138 265 265(3) 9,685(3) 78,823
(Accumulated deficit)/retained earnings (41,223) 2,577 2,577(3) (41,223)
-------- -------- -------- -------- --------
Total stockholders' equity 28,401 2,942 2,942 9,750 38,151
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,913 $ 18,867 $ 2,942 $ 20,150 $101,988
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
1. The accompanying Unaudited Pro Forma Combined Condensed Balance Sheet at June
30, 1999 represents the historical consolidated balance sheet of Aris Industries
Inc. at June 30, 1999 and the historical consolidated balance sheet of Lola Inc.
and subsidiaries at July 31, 1999. The Unaudited Pro Forma Combined Condensed
Balance Sheet has been prepared assuming that the Merger occurred as of June 30,
1999 using the purchase method of accounting.
2. Reflects the $10,000,000 in cash received by Aris under the term loan from
CIT Group/Commercial Services, Inc. The term loan bears interest at prime plus
one-half percent and is payable in quarterly installments of $500,000, plus
interest, commencing January 1, 2000, with a balloon payment of $5,500,000 due
on February 26, 2002, the maturity date.
3. Records the issuance of 6,500,000 shares of Aris Common Stock valued at $1.50
per share and $10,000,000 in cash paid to Lola's shareholders as the
consideration for the Merger of Lola, Inc. into Europe Craft Imports, a wholly
owned subsidiary of Aris. This adjustment also reflects the elimination and
consolidation entry related to consolidating Lola, Inc. with Aris.
4. Reflects estimated merger and direct costs of the acquisition. Such costs
consist primarily of legal, accounting and other fees associated with the
Merger.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Aris Pro Forma (1)
Industries,Inc. Lola Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $127,680 $74,334 $202,014
Cost of goods sold (98,140) (45,483) (143,623)
------------ ------------ ------------ ------------
Gross profit 29,540 28,851 58,391
Commission and licensing income 1,570 1,141 2,711
------------ ------------ ------------ ------------
Income before selling and administrative expenses,
interest expense, income taxes and extraordinary item 31,110 29,992 61,102
Selling and administrative expenses (29,950) (28,503) ($860)(2) (59,313)
------------ ------------ ------------ ------------
Income before interest, taxes and extraordinary item 1,160 1,489 (860) 1,789
Interest expense, net (5,220) (876) (875)(3) (6,971)
------------ ------------ ------------ ------------
(Loss)/income before taxes and extraordinary item (4,060) 613 (1,735) (5,182)
Income tax expense (190) (286) 208 (5) (268)
------------ ------------ ------------ ------------
(Loss)/income before extraordinary item (4,250) 327 (1,527) (5,450)
Gain on extinguishment of debt 522 -- 522
------------ ------------ ------------ ------------
Net (loss)/income ($3,728) $327 ($1,527) ($4,928)
============ ============ ============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,912,000 6,500,000(4) 21,412,000
Weighted average shares outstanding - Diluted 14,912,000 6,500,000(4) 21,412,000
Basic loss per share:
Loss before extraordinary item ($0.29) ($0.25)
Extraordinary item 0.04 0.02
------------ ------------
Net loss ($0.25) ($0.23)
============ ============
Diluted loss per share:
Loss before extraordinary item ($0.29) ($0.25)
Extraordinary item 0.04 0.02
------------ ------------
Net loss ($0.25) ($0.23)
============ ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Statements of
Income
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Six Months Ended June 30, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Aris Pro Forma (1)
Industries, Inc. Lola Inc. Adjustments Combined
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $53,457 $49,369 $102,826
Cost of goods sold (39,889) (32,752) (72,641)
------------ ------------ ------------ ------------
Gross profit 13,568 16,617 30,185
Commission and licensing income 536 527 1,063
------------ ------------ ------------ ------------
Income before selling and administrative expenses,
restructuring and other charges, interest expense
and income taxes 14,104 17,144 31,248
Selling and administrative expenses (15,508) (16,739) ($430)(2) (32,677)
Restructuring and other charges (8,001) -- (8,001)
------------ ------------ ------------ ------------
(Loss)/income before interest and taxes (9,405) 405 (430) (9,430)
Interest expense, net (1,589) (525) (438)(3) (2,552)
------------ ------------ ------------ ------------
Loss before taxes (10,994) (120) (868) (11,982)
Income tax benefit/(expense) 587 (8) 579
------------ ------------ ------------ ------------
Net loss ($10,407) ($128) ($868) ($11,403)
============ ============ ============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 36,486,933 6,500,000(4) 42,986,933
Weighted average shares outstanding - Diluted 36,486,933 6,500,000(4) 42,986,933
------------ ------------
Basic loss per share ($0.29) ($0.27)
============ ============
Diluted loss per share ($0.29) ($0.27)
============ ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Statements of
Income
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Statements of Income
1. The accompanying Unaudited Pro Forma Combined Condensed Statement of Income
for the year ended December 31, 1998 is based upon the historical results of
Aris Industries Inc. for the year then ended and the historical results of Lola,
Inc. and subsidiaries for the fiscal year ended January 31, 1999. The Unaudited
Pro Forma Combined Condensed Statement of Income for the six months ended June
30, 1999 is based upon the results of operations of Aris Industries Inc. for the
six months ended June 30, 1999 and the results of operations of Lola, Inc. and
subsidiaries for the six months ended July 31, 1999. The Unaudited Pro Forma
Combined Condensed Statements of Income have been prepared assuming that the
Merger had been consummated using the purchase method of accounting as of
January 1, 1998.
2. Reflects amortization of the excess of cost over net assets acquired of Aris
of approximately $860,000 and $430,000 for the year ended December 31, 1998 and
for the six months ended June 30, 1999, respectively, using the straight line
method over twenty years.
3. Reflects interest expense of $875,000 and $438,000 for the year ended
December 31, 1998 and the six months ended June 30, 1999, respectively, related
to the Aris' $10,000,000 CIT Group/Financial Services Inc. Term Loan the
proceeds of which were used to acquire Lola, Inc. Interest was calculated
assuming a prime rate of 8.25% plus one-half percent.
4. Represents the issuance of 6,500,000 shares of Aris common stock.
5. Reflects reduction in Federal Taxes as a result of the combined losses of the
Company for 1998.
