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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file no.: 1-4814
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 22-1715274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-642-4300
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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 $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes _X_ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
Yes ___ No
As of April 12, 2000, 79,506,735 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the 15,641,884 shares of voting
stock of the Registrant held by non-affiliates of the Registrant at April 12,
2000 was $15,641,884.
Documents incorporated by reference: None.
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
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PART I ...........................................................................1
Item 1. Business.............................................................1
Item 2. Properties...........................................................6
Item 3. Legal Proceedings....................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................7
PART II ..........................................................................8
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters..................................8
Item 6. Selected Financial Data..............................................9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .........14
Item 8. Financial Statements and Supplementary Data.........................14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................15
Part III ........................................................................16
Item 10. Directors and Executive Officers of the Registrant..................16
Item 11. Executive Compensation..............................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management......27
Item 13. Certain Relationships and Related Transactions......................28
PART IV .........................................................................32
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K...32
SIGNATURES.......................................................................38
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PART I
Item 1. Business.
Introduction
Aris Industries, Inc. (the "Company", the "Registrant" or "Aris"), through
its wholly owned subsidiaries, designs, manufactures, imports and sells
sportswear, outerwear and loungewear under a variety of tradenames, some of
which are owned by the Company and some of which are licensed from others. The
Company was incorporated in the State of New York in 1947. Reference to the
Company includes its subsidiaries, where applicable. The Company's principal
executive offices are located at 1411 Broadway, New York, NY. Its phone number
at such offices is 212-642-4300.
The Company designs and manufactures or imports various lines of men's and
boys' outerwear, loungewear and sportswear under the Members Only trademark,
which it owns, women's sportswear under the XOXO and Fragile trademarks, which
it owns, and men's and boy's sportswear, outerwear and loungewear under the
Perry Ellis and Perry Ellis America tradenames and boys' sportswear and
activewear under the FUBU tradename, which it licenses from others. It also
licenses the Members Only and XOXO name to others for certain product
categories. The Company's products are marketed nationally in department stores,
specialty stores and national retail chains. The Company also operates XOXO
retail stores and outlet stores.
During 1999, under the leadership of new management, the Company began its
transformation to a multibrand jeanswear, sportswear, loungewear and outerwear
company. During the year, Aris acquired ownership of XOXO, a women's sportswear
label, which contributed substantially to the Company's increased sales. See,
"The XOXO Transaction." The Company also entered into license agreements to use
the following trademarks: Baby Phat(R) for young women's sportswear, Stetson(R)
for a full line of sportswear and Brooks Brothers Golf(R) for sale of apparel to
golf pro shops throughout the world. The Company plans to launch Brooks Brothers
Golf(R) and Baby Phat(R) in 2000, and Stetson(R) in 2001. During the year, the
Company also signed a new Perry Ellis America(R) jeanswear and sportswear
license which was subsequently terminated in April 2000 and, following the year
end, finalized an extension of its Perry Ellis(R) loungewear license. The
Company also entered into a license to sell sportswear under the Cynthia
Rowley(R) name commencing in 2001. See "License Agreements."
The XOXO Transaction
On August 10, 1999, the Company's Europe Craft Imports, Inc. ("ECI")
subsidiary consummated the merger of Lola, Inc. ("Lola"), the owner of the XOXO,
Lola and Fragile labels. In exchange for all of Lola's common stock, the Company
paid Lola's owners $10 million and issued an aggregate of 6.5 million shares of
the Company's common stock. Immediately following the Merger, ECI contributed
all of the assets and liabilities it acquired from Lola to a newly formed
subsidiary of ECI, The XOXO Clothing Company, Incorporated ("XOXO Sub" or
"XOXO"). Sales of XOXO clothing following the merger accounted for approximately
24% of the Company's sales for 1999.
In connection with the XOXO Transaction, the Company entered into
employment agreements with Gregg Fiene, the chief executive officer and a
principal shareholder of Lola, and Hollis Fiene, Gregg Fiene's wife. See
"Employment Agreements."
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Licensing
The Company has registered the trademark "Members Only" in the United
States and 47 other countries, principally for use in connection with apparel
and other men's clothing. In addition to selling products under the "Members
Only" name, the Company licenses it to others. See "Member's Only Licensing
Program."
The Company is the registered owner of the XOXO trademark in the United
States and has registrations pending in 30 other countries principally for use
in connection with the manufacture and sale of women's sportswear.
The Company also licenses the use of various "Perry Ellis" names, "FUBU,"
"Baby Phat," "Stetson," "Brooks Brothers Golf" and "Cynthia Rowley." See
"License Agreements." ---
Members Only Licensing Program
The Company has granted licenses of the "Members Only" trademark for the
manufacture and sale of men's woven shirts, men's tailored suits and sportcoats,
eyeglasses and cold weather accessories for distribution in the United States
and for men's outerwear for distribution in Canada. During 1999, it also granted
a master license for the use of the Members Only(R) trademark in Mexico.
XOXO Licensing Program
The Company's XOXO subsidiary has granted licenses for the manufacture and
sale of the following product categories in the United States only: belts,
leather and suede sportswear, eyewear, handbags, jewelry, swimwear and
activewear. In addition, the Company has granted master licenses for use of the
XOXO trademark in Mexico, Central America and portions of South America for all
product categories. The Company has also granted a license to a major Japanese
corporation for the manufacture and sale of products in Japan that the Company
does not otherwise manufacture. For the portion of 1999 that the Company owned
XOXO, royalty income derived from licensing the XOXO name was $1,102,000.
License Agreements
During 1999, the Company manufactured and sold products under license
agreements permitting it to use the names Perry Ellis(R) and FUBU(R). Set forth
below is a summary of the material terms of the license agreements:
Perry Ellis. The Company has an agreement, expiring December 31, 2000, to
use the trademarks Perry Ellis(R) and Perry Ellis Portfolio(R) in connection
with the manufacture and sale of men's loungewear, sleepwear and robes (but
excluding boxer shorts and silk boxers). The Territory in which such products
may be sold is the United States. Under the agreement, the Company is obligated
to pay royalties equal to 5% of net sales and an advertising fee equal to 2% of
net sales.
During April 2000, the Company entered into a new license agreement with
Perry Ellis for such products for a term expiring December 31, 2003, with the
Company having the right to renew for one additional three-year term if sales at
regular prices equal or exceed $10 million during calendar year 2002. The
royalty rate under the new agreement is 7% of net sales, and the Company is
required to make an advertising payment equal to 2% of its net sales. Under the
agreement,
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minimum royalties range from $805,000 in year one of the agreement to $1,015,000
in year three of the agreement, and minimum guaranteed advertising payments
range from $345,000 in year one to $435,000 in year three. The guaranteed
minimum royalty and guaranteed minimum advertising payments increase during the
renewal terms. Under the agreement, the Company is permitted to sell the
licensed products in better department stores and upscale specialty stores.
During 1999, the Company continued to sell men's jeans and other sportswear
under the Perry Ellis America(R) trademark pursuant to a license agreement with
both Perry Ellis International, Inc. ("PEI") and Salant Corporation ("Salant")
which expires on December 31, 2000. For calendar year 2000, the Company's
minimum royalties are $800,000 to PEI and $159,375 to Salant. In August 1999,
the Company entered into a new license agreement with PEI for the manufacture
and sale of men's jeans and other denim products and casual sportswear for a
term beginning January 1, 2001, and ending December 31, 2005. In April 2000, the
Company and PEI agreed to terminate the new agreement, and to reduce the minimum
royalties and advertising payments for the remainder of calendar year 2000.
During 1999, the Company sold men's outerwear under the Perry Ellis(R),
Perry Ellis Portfolio(R) and Perry Ellis America(R) trademarks pursuant to a
license agreement with PEI. The license expires December 31, 2000. Pursuant to
the agreement, the Company pays a royalty rate equal to 5% of net sales and an
advertising rate equal to 2% of net sales. For 2000, the Company's minimum
guaranteed royalties and minimum guaranteed advertising payments are $450,000
and $180,000, respectively. The Company has decided not to pursue renewal of
such license.
FUBU. During 1999, the Company sold boys' sportswear and activewear
clothing under the trademark FUBU(R), pursuant to a license agreement with GTFM,
Inc. The term of the license commenced on December 10, 1997 and expires May 31,
2000. The agreement gives the Company the right to successive renewals through
April 30, 2005. The Company sent notice of renewal for a two year term through
April 30, 2002. Pursuant to the agreement, the Company is obligated to pay
royalties equal to 8% of net sales, and to make advertising payments of up to
$50,000 in each "contract year" (which is May 1 through April 30). The minimum
guaranteed royalty for the two year renewal term is $1,320,000 (May 1, 2000
through April 30, 2002).
The licensed territory included the United States, Canada and Mexico.
During 1999, the Company returned Canada and Mexico to the Licensor in exchange
for a $400,000 credit against royalties.
New Licenses
In addition to the foregoing, the Company also entered into license
agreements to manufacture and sell products under the following trademarks:
Brooks Brothers Golf(R), Baby Phat(R), Stetson(R) and Cynthia Rowley(R). During
1999, the Company had not yet commenced selling products under any of those
agreements. The material terms of such license agreements are set forth below.
Brooks Brothers Golf. In November 1999, the Company entered into a license
agreement with Brooks Brothers, Inc. to sell menswear, knits, sweaters, bottoms,
outerwear, woven apparel, ties, headwear, hosiery, underwear and footwear solely
in private and public golf course pro shops and resort pro shops worldwide. The
term commenced on November 10, 1999 and expires March 31, 2006. The license is
extendable by the Company until March 31, 2011, if it achieves certain minimum
sales for the contract year April 1, 2004 - March 31, 2005. Pursuant to the
agreement, the Company is obligated to pay royalties equal to 6% of net sales.
The minimum guaranteed royalty ranges from $510,000 in year one of the license
agreement to $1,500,000 in years
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six through ten; the advertising payments by the Company are the greater of 3%
of net sales or $255,000 in year one up to $750,000 in years six through ten.
Baby Phat. The Company has entered into a license agreement with Phat
Fashions LLC to manufacture and sell casual apparel for women in all fabrics,
excluding swimwear and accessories, under the Baby Phat(R) trademark for a term
which commenced on July 1, 1999 and expires on December 31, 2004. The Company
was granted ten renewal terms of five years each. Pursuant to the agreement, the
Company is obligated to pay a royalty equal to 8% of its net sales of regularly
priced products, and 6% of net sales at outlet stores, or for items sold at 25%
or more below the Company's regular selling prices. Pursuant to the agreement,
the Company's minimum guaranteed royalties range from $960,000 in the first year
of the agreement to $1,920,000 in 2004. Its minimum advertising payments equal
3% of the minimum sales requirements.
Stetson. The Company is party to a license agreement with John B. Stetson
Company for the manufacture and sale of men's, women's and children's casual
apparel to be sold under the trademarks Stetson(R) and Stetson Clothing
Company(R) for a term commencing January 11, 1999 and ending December 31, 2004.
The Company has the right to renew the agreement for six consecutive five-year
terms. Pursuant to the agreement, the Company is obligated to pay royalties
equal to 4% of net sales during the initial term and the first renewal term, and
5% thereafter. The royalty for off- price and closeouts is half of the regular
royalty rate. Pursuant to the agreement, the Company is obligated to spend not
less than 3% of its net sales in the U.S. and 2% of its net sales outside the
U.S. on advertising. The guaranteed minimum royalty payment ranges from $250,000
for 2000 to $2,000,000 in 2004. Pursuant to the agreement, the Company may only
sell the licensed product in first line, high quality retail, specialty and
department stores, mail order catalogs and duty-free shops, and may not sell to
mass merchandisers.
Cynthia Rowley. The Company entered into a license agreement to sell men's,
women's and children's jeanswear apparel under the name Cynthia Rowley(R) for a
term commencing January 1, 2000 and ending June 30, 2006. The Company is
obligated to pay royalties equal to 7% of its net sales of regularly priced
merchandise, and 3.5% of net sales for outlet stores and closeouts. It is also
required to spend not less than 3% of the preceding year's net sales on
advertising. The first year of the term ends on June 30, 2002, and the Company's
minimum royalties for each year of the term is $560,000, and the annual minimum
guaranteed advertising is $240,000. The licensed territory is worldwide,
excluding Japan, Korea, China, Hong Kong, Singapore, Indonesia, Thailand, India,
Taiwan and Vietnam. The Company is permitted to sell the licensed products at
better department stores and specialty stores.
Design, Manufacturing and Importation
All of the Company's products, other than its XOXO line, are manufactured
overseas by independent factories, each of which must satisfy the Company's
quality and delivery standards, pursuant to design samples and specifications
provided by the Company. The Company presently imports products from Hong Kong,
Korea, China, Guatemala, the Philippines, Bangladesh, Sri Lanka, Indonesia,
India, Taiwan, United Arab Emirates, Cambodia, Nepal, Mexico, Thailand and the
Dominican Republic. XOXO utilizes its own cutting facilities in California and
contracts out with unaffiliated domestic third parties to finish the garments.
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Customers, Marketing and Distribution
The Company's products are sold primarily to department and specialty
stores and national retail chains. The Company has sales to one customer that
represent 4%, 13% and 10% of consolidated Net Sales for the years ended December
31, 1999, 1998 and 1997, respectively.
Competition
The Company's products are sold in markets which place a premium on
identifiable brand names. The Company competes with other apparel manufacturers
based on style, quality, value and brand recognition. Although the Company sells
its products to retail customers, it also competes with the "private label"
apparel lines of its retail customers. The Company's apparel products, which are
sold on the main selling floors of their retail store customers, are facing
increasing competition from the expanded dedication of retail floor space to
"designer collections".
The Apparel Industry
The apparel industry is volatile and unpredictable due to cyclical and
seasonal swings caused by consumer buying patterns, weather conditions and other
factors. In addition, due to the lead time necessary for fabric delivery,
product design, manufacture and distribution, apparel importers such as the
Company must make commitments prior to the related selling season to purchase
inventory sufficient to cover the volume of apparel expected to be sold.
Increasingly, retail customers of the Company are ordering their products closer
to the actual delivery date and selling season. In order for the Company to
deliver its products on time, it must often commit to production in advance of
obtaining firm orders from its retail customers.
Seasonality
The Company's outerwear business is particularly impacted by unusually warm
weather or the late arrival of cold weather. Other aspects of the Company's
business may also be adversely effected by unusual weather patterns and fashion
trends.
Materials and Supplies
The principal raw materials used by the Company's apparel manufacturing
contractors are fabrics made from natural fibers, leather, synthetics and
blends. In addition, such manufacturers use yarn, thread and accessories such as
buttons, snaps, elastic and zippers which are purchased from many suppliers. The
Company believes the raw materials currently used in its products are readily
available at comparable prices and quality from sources other than those now
being used.
Trademarks
The Company has registered a variety of trade names, service marks and
trademarks ("Trademarks") with the United States Patent and Trademark Office
including "Members Only," "XOXO" and "Fragile" Trademarks. Registration of the
Trademarks is renewable for as long as the use thereof continues. The Company
considers certain of its Trademarks to be of material importance to its business
and actively defends and enforces those Trademarks.
The Company also holds licenses to manufacture and distribute certain
apparel products under the "Perry Ellis", "Perry Ellis America," "FUBU,"
"Stetson," "Baby Phat," "Cynthia Rowley,"
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and "Brooks Brothers Golf" Trademarks. The Company plans to commence selling
products under the Baby Phat(R) and Brooks Brothers Golf(R) names in 2000 and
under the Stetson(R) and Cynthia Rowley(R) name in 2001.
Employees
As of December 31, 1999, the Company and its subsidiaries had approximately
763 full and part-time employees. The Company's employees at its New Bedford,
Massachusetts warehouse are represented by a labor union. The Company is
currently in the process of negotiating a collective bargaining agreement with
such union. The Company regards its employee relations as satisfactory.
Foreign Sales
Although the Company sells products in Canada, Mexico and South America,
such sales do not comprise a significant portion of the Company's sales.
Business Segment Data
The Company is engaged in one business, the design, manufacture or
importation and sale of sportswear, outerwear, activewear and loungewear. The
Company's business is conducted domestically, with substantially all of its net
sales derived from domestic customers, although it contracts with others to
manufacture certain of its products overseas.
Item 2. Properties.
The Company currently has approximately 53,000 square feet of leased space
for its executive and sales offices and showrooms at 1411 Broadway and 463
Seventh Avenue in New York City, approximately 11,615 square feet of office and
showroom space at 1466 Broadway in New York City for XOXO and approximately
174,939 square feet in Commerce and Los Angeles, California for office,
showroom, manufacturing and distribution facilities used in connection with
XOXO's business. As the Company grows and expands its product offerings, it may
need additional office, sales and showroom facilities. The Company leases
approximately 300,000 square feet of warehouse space in New Bedford,
Massachusetts, and leased 125,000 square feet in Secaucus, New Jersey which
expired in March 2000, and was phased out in December, 1999. The Company has
eight retail outlets in the following locations: Tennessee, Virginia, Florida,
California and New Jersey, as well as four full-price retail stores in New York
and California.
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Item 3. Legal Proceedings.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial statements at December 31, 1999.
The Company's XOXO subsidiary is party to a settlement with the United
States Department of Labor ("DOL") concerning its compliance with certain wage
and hour regulations. Pursuant to such settlement, XOXO agreed to pay certain
current and former employees an aggregate of $83,000. XOXO also agreed to change
the future status of certain positions from salaried to hourly and to pay
overtime to those employees if they work more than certain prescribed hours.
The Company's XOXO subsidiary is party to certain equipment leases that its
predecessor, Lola, Inc., had entered into with Matrix Funding Corp. ("Matrix"),
who has claimed that Lola's merger into ECI allows it to accelerate the payment
of all amounts due under such leases. As of December 31, 1999, the aggregate
amount due through December 31, 2001 under the leases was approximately
$1,150,000, which the Company is continuing to pay in regular monthly
installments. If Matrix succeeds in accelerating such lease payments, the
Company will be required to obtain an alternative source of financing. There can
be no assurance that the Company will be able to obtain such financing.
Two former sales representatives of the Company, who are 64 and 73 years
old and were dismissed following the Simon Transaction, have threatened to sue
the Company under certain state and federal age discrimination laws. The Company
believes their claims are without merit and intends to defend vigorously against
such claims if they are pursued.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
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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. Set forth below are the high and low bid prices for a
share of the Common Stock for each fiscal quarter during the prior two fiscal
years, as reported in published financial sources. Pursuant to the terms of the
Company's loan agreements, the Company has agreed not to declare or pay any
dividends (other than stock dividends) on the Common Stock without the prior
written consent of its lenders. The Company has not paid any dividends during
the last two fiscal years and does not intend to pay any cash dividends in the
foreseeable future. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
High Low
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1998 First Quarter $2.0625 $1.3125
Second Quarter 2.125 .875
Third Quarter 1.0625 .625
Fourth Quarter .875 .125
1999 First Quarter 3.6875 .625
Second Quarter 3.0000 1.5625
Third Quarter 3.4375 2.0000
Fourth Quarter 3.3125 2.0000
There were approximately 3,960 shareholders of record as of March 8, 2000
and the closing price of a share of the Common Stock was $1.1875 on March 8,
2000.
Recent Sales of Unregistered Securities
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (convertible into 20,937,790 shares of Common Stock)
for $20,000,000 and (ii) the Company redeemed from AIF the Series B Junior
Secured Note of the Company including all accrued interest thereon (representing
a total indebtedness of $10,658,000) in exchange for $4,000,000 in cash plus
5,892,856 shares of common stock and 512,113 shares of Series A Preferred Stock
(convertible into 5,121,130 shares of Common Stock). All such shares were sold
to The Simon Group and AIF in a private, negotiated transaction, exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") as a transaction not involving any public offering.
During July 1999, all of the Preferred Shares were converted automatically into
common stock.
In March 1999, the Company issued 700,000 shares of Common Stock to
Warnaco, Inc. in consideration for Warnaco's consent to the Simon Purchase
Transaction (See "Certain Relationships and Related Transactions -- Agreements
with Warnaco"). In March 1999, the Company issued 250,000 shares of Common Stock
to Shapiro Forman & Allen LLP, in partial payment for services rendered by such
law firm to The Simon Group in connection with the Simon Purchase Transaction,
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which services, under the terms of the Purchase Agreement, were to be paid for
by the Company. These share issuances are exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions not involving any public
offering.
On August 10, 1999, as partial consideration for the acquisition of Lola,
Inc., the Company issued 6.5 million shares of common stock to the three
stockholders of Lola, one of which is the chief executive officer of the
Company's XOXO subsidiary. The issuance of such shares were exempt from
registration under Section 4(2) of the Securities Act as a transaction not
involving a public offering.
Item 6. Selected Financial Data
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(In thousands except for per share data)
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11 Months 53 Weeks
Year Ended Year Ended Year Ended Ended Ended
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12/31/99(4) 12/31/98 12/31/97 (3) 12/31/96 (1) 2/3/96
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Net sales $ 175,359 $ 127,680 $ 94,539 $ 130,155 $ 171,963
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Income (loss) from continuing
operations before extraordinary
items (5) (10,583) (4,250) 2,333 2,104 (8,057)
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Net income (loss) (10,583) (3,728) 2,333 12,966(2) (8,057)
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Earnings (loss) per share before
extraordinary items - basic (.19) (.29) .18 .18 (.68)
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Earnings (loss) per share before
extraordinary items - diluted (.19) (.29) .16 .17 (.68)
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Earnings (loss) per share - basic (.19) (.25) .18 1.09 (.68)
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Earnings (loss) per share - diluted (.19) (.25) .16 1.07 (.68)
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Total assets 106,117 77,332 73,837 44,855 93,928
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Long-term obligations 14,342 16,438 16,930 16,702 66,505
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Working capital 7,419 9,551 11,738 12,370 29,809
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Stockholders' equity 39,251 14,092 17,814 14,755 564
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1. On December 10, 1996, the Company determined to change its fiscal year to
the calendar year ending December 31st, rather than a 52-53 week year
ending on the Saturday closest to January 31st. The period ended December
31, 1996 is a transitional period of approximately eleven months from
February 4, 1996 to December 31, 1996.
2. For the eleven months ended December 31, 1996, the Company had net income
of $12,966,000 or $1.09 per share, inclusive of (i) a gain of $7,786,000 on
the sale of the stock of its wholly owned subsidiary, Perry Manufacturing
Company, on September 30, 1996 (reduced by the write off of the cumulative
effect of foreign currency translation adjustments of $1,108,000 arising
from the Perry Sale), and (ii) an extraordinary gain of $10,862,000
associated with the reduction in the Company's debt to its then senior
secured lender, Heller Financial, Inc., from $53,384,000 to $1,665,000,
including principal of $1,000,000 and capitalized interest of $665,000.
3. Includes results of operations and assets and liabilities of Davco from its
acquisition on July 15, 1997.
4. Includes results of operations and assets and liabilities of XOXO from its
acquisition on August 10, 1999.
5. Includes restructuring and other charges of $8,961,000.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the "Selected Financial
Data" included on pages F-1 through F-21 and Page 9, 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 factors discussed in this
Report, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission ("SEC").
During 2000, the Company expects to continue to incur restructuring charges
in connection with the consolidation of its operations and facilities. In
addition, the Company expects to continue to incur startup expenses during 2000
in connection with its new license arrangements without significant related
revenues during such period.
Year 2000 Compliance
The Company successfully completed its Year 2000 compatibility and
compliance testing during December 1999. The Company did not incur any
significant problems or unanticipated expenses related to Year 2000 compliance
issues.
FINANCIAL CONDITION
Working Capital, Liquidity, Capital Expenditures
As of December 31, 1999, the Company had working capital of approximately
$7,419,000 compared to $ 9,551,000 at December 31, 1998. The decrease was due to
the Company's net loss incurred for the year ended December 31, 1999, partially
offset by the capital infusion provided by the Simon Purchase Transaction.
During the year, the Company financed its capital expenditures and business
acquisitions principally through credit facilities and the issuance of common
stock.
On February 26, 1999, simultaneous with the closing of the Simon Purchase
Transaction, the Company and its subsidiaries entered into a Financing Agreement
with CIT Commercial Services Group, Inc. ("CIT") and certain other financial
institutions, whereby such lenders agreed to provide a revolving credit facility
of up to $ 65,000,000 for working capital, loans, and letters of credit
financing, which expires on February 26, 2002. The obligations under the
Financing Agreement are
-10-
<PAGE>
collateralized by liens on substantially all of the assets of the Company's
subsidiaries. The revolving credit facility provided by such Financing Agreement
replaced the Company's prior working capital facilities. For revolving credit
loans, interest accrues at the bank's prime rate. For Eurodollar loans, interest
accrues at a rate per annum equal to the Eurodollar rate plus 2.5%. The
Agreement contains various financial and other covenants and conditions,
including, but not limited to, limitations on paying dividends, making
acquisitions and incurring additional indebtedness. As of December 31, 1999 the
Company had availability under the facility of approximately $ 6,426,000 and was
incurring interest at prime or 8.50%.
In connection with the XOXO transaction, the Company's loan agreement was
amended to increase the revolving credit line to $ 80,000,000, and to provide
for a term loan of $ 10,000,000. 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 on
February 26, 2002, the maturity date. The Company is required to make certain
mandatory prepayments based upon " excess cash flows" as defined in the
amendment to the loan agreement.
On October 21, 1998, the Company entered into an amendment of its agreement
with BNY Financial Corporation ("BNY") providing that payment of scheduled
interest payments otherwise due to BNY on November 3, 1998 would be deferred
until February 1, 1999. Pursuant to agreements with BNY, the payments due
February 1, 1999 were paid on February 26, 1999 upon the closing of the Simon
Purchase Transaction. The Company's interest payments to BNY scheduled for May
3, August 2, and November 1, 1999 and the Company's principal payments scheduled
for November 3, 1999 were paid on their due dates.
The Company's long-term indebtedness also includes its obligations to BNY
under the Series A Junior Secured Note Agreement dated June 30, 1993, pursuant
to which BNY was owed, as of December 31, 1999 the sum of $ 6,942,000 (which
includes $ 1,042,000, representing the quarterly interest payments that were
deferred for the period February 1, 1996 through January 31, 1998 by agreement
with BNY in September 1997) plus interest at the rate of 7% per annum, with a
final maturity date of November 3, 2002. The principal of BNY's Note is payable
on November 3 of each year as follows:
Year Amount
---- ------
2000 $ 600,000
2001 $1,100,000
2002 $5,242,000
BNY is also entitled to receive mandatory prepayments based upon 50 % of
certain "excess cash flows" of the Company as defined in the Company's note
agreements with BNY.
As a result of the Simon Purchase Transaction and the CIT Financing
Agreement, the Company believes it has adequate liquidity and capital resources
to meet its requirements for at least the next twelve months. The Company
expects to incur approximately $4,100,000 capital expenditures which the Company
expects to fund through its working capital facility.
Capital Expenditures. Capital expenditures were $4,289,000 for the year
ended December 31, 1999 compared to $233,000 in the year ended December 31,
1998. The increase was due to the following: (i) the inclusion of capital
expenditures incurred by XOXO for in-store shops and cutting equipment; and,
(ii) construction expenses and equipment purchases incurred in connection with
the consolidation of the Company's office, showroom and distribution facilities.
-11-
<PAGE>
Results of Operations:
1999 Compared to 1998
Net Income. The Company reported a net loss of $ 10,583,000 for the twelve
months ended December 31, 1999 compared to a net loss of $ 3,728,000 for the
twelve months ended December 31, 1998. The loss in 1999 included restructuring
and other charges, consisting of (i) $ 2,401,000 in severance payment pursuant
to the Retention Agreement between the Company and its former President and
other severance of $ 182,000 (ii) a nonrecurring charge of $ 3,749,000 in
connection with the write-off of impaired goodwill, and (iii) additional charges
of $ 2,629,000 relating to the consolidation of the Company's operations and
facilities. In addition, the Company incurred $ 2,235,000 in start-up costs
associated with new licensing arrangements for which product launches are
scheduled for fiscal 2000 and 2001 and for costs related to its new distribution
facility prior to the commencement of its operations. Additionally, due to the
adverse retail environment, the Company gave accommodations, in the form of
markdowns, to customers to help them alleviate the generally poor sales at the
retail level. This loss was partially offset by an improvement in operations
attributable to increased sales and margins along with a reduction of interest
expense due to the conversion of Apollo debt to equity and the reduction of
borrowings due to the infusion of funds from the Simon Purchase Transaction.
Net Sales. The Company's net sales increased from $ 127,680,000 during the
twelve months ended December 31, 1998 to $ 175,359,000 during the twelve months
ended December 31, 1999. This increase of $ 47,679,000 was a result of increased
sales of products under the "FUBU" license which amounted to $ 22,713,000 during
the twelve months ended December 31, 1999 as compared to the twelve months ended
December 31, 1998 which reflected the Company's initial shipment of the "FUBU"
products. In addition, there was an increase in sales due to the inclusion of
XOXO sales of $ 42,913,000 from August 10, 1999, the date of the XOXO
acquisition. These increases in sales were partially offset by a decrease in
sales of the Members Only(R) product line in the amount of approximately $
10,908,000 , a reduction of $ 1,466,000 in the Company's "Perry Ellis" product
lines which suffered a lack of consumer demand along with a reduction of private
label sales and the phase out of the "Jeffrey Banks" product lines resulting in
a decrease of sales in the approximate amount of $ 5,573,000.
Gross Profit. Gross Profit for the twelve months ended December 31, 1999
was $ 50,534,000 or 28.8% of net sales compared to $ 29,540,000 or 23.1 % for
the twelve months ended December 31, 1998. Gross profit was positively impacted
by sales of higher margin XOXO branded products included from August 10, 1999,
the date of the XOXO acquisition which included markdowns provided to customers
previously discussed above, and sales of the Company's "FUBU" product lines
partially offset by the weak performance of the Company's "Perry Ellis America"
brand which suffered from a lack of consumer demand which caused the Company to
liquidate prior season inventory at reduced prices.
Commission and Licensing Income. Commission and Licensing Income increased
from $ 1,570,000 for the twelve months ended December 31, 1998 to $ 2,571,000
for the twelve months ended December 31, 1999. This increase was primarily due
to the inclusion of commission and licensing income of $ 1,102,000 from XOXO's
operations from August 10, 1999, the date of the XOXO acquisition.
Selling and Administrative Expenses. Selling and administrative expenses
were $48,057,000 or 27.4% of net sales for the twelve months ended December 31,
1999 compared to $ 29,950,000 or 23.5% of net sales for the twelve months ended
December 31, 1998. The increase in selling and administrative was attributable
to the inclusion of XOXO's Selling and Administrative expenses from August 10,
1999, the date of the acquisition, along with increased fixed and variable
expenses relating to the " FUBU" licensed product line. The increase in selling
and administrative expenses as a percentage of net sales was primarily due to
the inclusion of XOXO's selling and administrative expenses from the date of
acquisition. During 2000 the Company has initiated an extensive cost savings
program at XOXO.
-12-
<PAGE>
Start-up Costs. During the year ended December 31, 1999, the Company
incurred $1,181,000 of start-up costs relating to various license agreements for
which product launches are scheduled in years 2000 and 2001. These start-up
costs consist of salaries, samples and related supplies directly attributable to
the newly licensed operations. The Company expects to continue to incur such
costs during 2000 in connection with several of its new license arrangements. In
addition, the Company incurred $1,054,000 of start up costs in connection with
its new distribution facility prior to commencement of its operation.
Interest Expense. Interest expense for the year ended December 31, 1999 was
$4,185,000, a decrease of $1,035,000 or 19.8% compared to interest expense of
$5,220,000 for the year ended December 31, 1998. The decrease was primarily due
to the conversion of Apollo debt to equity and the reduction of borrowings
resulting from the infusion of funds from the Simon Purchase Transaction, offset
partially by interest on the Company's $ 10,0000,00 Term Loan. Interest expense
on the Company's working capital facility increased due to an increase in the
prime lending rate from 7.75% to 8.50% during the twelve months ended December
31, 1999.
1998 Compared to 1997
Net Income. The Company reported a net loss of $3,728,000 (after taxes and
an extraordinary gain on debt forgiveness of $522,000) for the twelve months
ended December 31, 1998 compared to net income (after taxes) of $2,333,000 for
the twelve months ended December 31, 1997. The loss was primarily due to a
reduction in consumer demand for "Perry Ellis America" outerwear products which
resulted in a reduction of sales of $12,180,000 and related reduction of gross
profit of $6,947,000. This was partially offset by the Company's successful
introduction of its "FUBU" boys' licensed products which were introduced during
1998. In addition, the Company's business in general was impacted by the
unseasonably warm weather throughout the United States which adversely affected
the market for outerwear products. As a result of the Company's decreased net
income, borrowings against the lines of credit were necessary in order to source
and ship the FUBU licensed products which were in demand during 1998.
Additionally, increased borrowings were required to support the Davco operations
for the entire 1998 fiscal year compared to the five and a half months in 1997.
These increased borrowings resulted in increased interest and debt expense.
These factors were partially offset by an extraordinary gain of $522,000
recorded in connection with the early extinguishment of the Company's debt to
Heller.
Net Sales. The Company's net sales increased from $94,539,000, in 1997 to
$127,680,000 in 1998, an increase of $33,141,000. This increase was a result of
the inclusion for a full calendar year, of sales from product lines acquired
from Davco and the new "FUBU" license which amounted to $40,039,000. In
addition, net sales increased by $6,099,000 to private label customers. These
increases were offset by a decrease of $12,997,000 resulting from reduced sales
of the "Perry Ellis America" brand.
Gross Profit. Gross Profit was $29,540,000 or 23.1% for the twelve months
ended December 31, 1998, as compared to $27,042,000 or 28.6% for the twelve
months ended December 31, 1997. Gross Profit was negatively impacted by several
factors, primarily the weak performance of the Company's "Perry Ellis America"
brand which suffered from markdowns necessary to sell off excess inventory and
unseasonably warm weather throughout the United States which adversely affected
outerwear companies resulting in lower gross profits.
Commission and Licensing Income. Commission and Licensing Income decreased
from $1,732,000 for the twelve months ended December 31, 1997 to $1,570,000 for
the twelve months
-13-
<PAGE>
ended December 31, 1998. This decrease resulted from a reduction in commissions
from private label customers who are now using the Company as a direct
merchandise supplier.
Selling and Administrative Expenses. Selling and Administrative expenses
were $29,950,000 or 23.5% for the twelve months ended December 31, 1998 as
compared to $23,474,000 or 24.8% for the twelve months ended December 31, 1997,
an increase of $6,476,000 or 27.6%. The increase in Selling and Administrative
expenses were primarily due to the inclusion for the entire 1998 fiscal year,
Selling and Administrative expenses of Davco, whose assets were acquired by the
Company on July 15, 1997 and the addition of the new "FUBU" license during 1998.
Interest Expense. The Company's interest expense for 1998 increased by
$2,115,000 or 68.1% compared to 1997. As a result of the Company's decreased net
income, increased borrowings against the Company's lines of credit were
necessary in order to source and ship the FUBU licensed products which were in
demand in 1998. Additionally, increased borrowings were required to support the
Davco operation for the entire 1998 fiscal year as compared to only five and a
half months in 1997. These increased borrowings resulted in an increase in
interest and debt expense.
Net Operating Loss Carryforwards
At December 31, 1999, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $80,000,000 which
expire during fiscal 2000 through 2018. As a result of the change in control of
the Company caused by the Simon Purchase Transaction, the utilization of these
net operating loss carryforwards are limited by Section 382 of the Internal
Revenue Code to approximately $1,500,000 annually. Accordingly, the Company
expects that a significant portion of these net operating loss carryforwards
will expire. In addition, the Company's alternative minimum tax credit
carryovers are subject to similar restrictions but do not expire.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data listed in the accompanying
Index at Part IV, Item 14(a)1 and 14(a)2 are filed as a part of this report.
-14-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On April 19, 1999, the Company engaged PricewaterhouseCoopers LLP ("PwC")
as the Registrant's independent accountants for 1999, replacing Deloitte &
Touche LLP (the "Former Accountants") as the Registrant's independent auditors.
The change was approved by the Registrant's board of directors.
The Former Accountants' report on the Registrant's consolidated financial
statements for each of the past two years did not contain any adverse opinion or
disclaimer of opinion and was not qualified as to uncertainty, audit scope or
accounting principles.
During the Registrant's two most recent fiscal years and any subsequent
interim period, there were no disagreements between the Registrant and the
Former Accountants on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, nor were there
any "Reportable Events" within the meaning of Item 304(a)(1)(iv) of Regulation
S-K. The Former Accountants filed a letter with the Commission agreeing with the
foregoing statement.
-15-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are the name, age and principal occupation of the current
members of the Board of Directors and the executive officers of the Company,
their positions with the Company, their business experience during the last five
years and the year each was first elected a director of the Company. Directors
hold office until the next Annual Meeting of Shareholders and until their
respective successors are elected and qualify, provided that vacancies occurring
in the Board of Directors may be filled by vote of the Directors. Officers of
the Company serve at the pleasure of the Board of Directors of the Company.
Name Age Position
- --------------------------------------------------------------------------------
Arnold H. Simon 54 Director, Chairman and Chief Executive Officer
of the Company since February 26, 1999;
President since August 15, 1999.
- --------------------------------------------------------------------------------
Robert A. Katz 33 Director since 1993.
- --------------------------------------------------------------------------------
Debra Simon 43 Director since March 18, 1999.
- --------------------------------------------------------------------------------
Howard Schneider 72 Director since March 18, 1999.
- --------------------------------------------------------------------------------
Mark Weiner 45 Director since June 17, 1999.
- --------------------------------------------------------------------------------
Paul Spector 58 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
- --------------------------------------------------------------------------------
Gregg Fiene 48 Vice Chairman and Director since August 10, 1999,
Chief Executive Officer of XOXO Clothing Company
- --------------------------------------------------------------------------------
Vincent F. Caputo 46 Vice President, Assistant Treasurer and Assistant
Secretary
- --------------------------------------------------------------------------------
Steven Feiner 32 Director since March 23, 2000.
- --------------------------------------------------------------------------------
Joseph Purritano 41 Vice President - Sales
- --------------------------------------------------------------------------------
Tom Nastos 41 Vice President - Production
- --------------------------------------------------------------------------------
Arnold H. Simon became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 30 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in the Simon Group. Mr.
Simon is married to Debra Simon.
-16-
<PAGE>
Robert A. Katz has been a Director of the Company since June 1993. Mr. Katz
is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with which he
has been associated with since 1990. Mr. Katz is also a director of Vail
Resorts, Inc., QDI, Inc., and Clark Retail Group, Inc.
Debra Simon became a Director of the Company on March 18, 1999. Ms. Simon
was Executive Vice-President and a Director of Designer Holdings Ltd. from March
1994 until December 1997, and was Vice-President of Rio Sportswear, Inc. from
1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
Howard Schneider became a Director of the Company on March 18, 1999. Mr.
Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
Mark S. Weiner is currently, and for more than the past five years has
been, president of Financial Innovations, Inc., a private marketing and
merchandising company. Mr. Weiner was deputy treasurer of the Democratic
National Committee from 1989 to 1993 and currently serves as treasurer of the
Democratic National Governors Association.
Paul Spector 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.
Gregg Fiene has been vice chairman of the Company's board of directors and
chief executive officer of the Company's XOXO subsidiary since August 10, 1999.
He co-founded Lola, Inc. ("Lola"), the owner of XOXO(R) until its merger with
ECI, Mr. Fiene was the chairman and chief executive officer and a principal
shareholder of Lola.
Vincent F. Caputo 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.
Steven Feiner was appointed to the Board on March 23, 2000 to fill the
vacancy created by the death of David Fidlon. Mr. Feiner is, and has been for
more than the past five years, the owner and operator of various privately held
apparel concerns.
Joseph Purritano has been Vice President of Sales of the Company since June
1999. From 1993 to 1997, Mr. Purritano was vice president of Calvin Klein
Jeanswear and from 1997 until June 1999, he was president of Calvin Klein
Jeanswear, which was acquired by Warnaco Group, Inc. in 1997.
Tom Nastos has been Vice President of Production of the Company since July
1998. From 1990 to 1998, Mr. Nastos was President and Chief Operating Officer of
Synergy, Inc., a private label supplier of apparel.
-17-
<PAGE>
Board Meetings and Committees
The Board held four meetings during the fiscal year ended December 31, 1999
and acted by unanimous written consent two times.
Following the Simon Transaction, the Board's Audit Committee during the
fiscal year ended December 31, 1999 consisted of Messrs. Fidlon and Schneider.
The Audit Committee is charged with reviewing matters relating to the annual
consolidated financial statements prepared by the Company's management and
audited by the independent auditors, reviewing interim financial statements and
evaluating internal controls and systems established by the Company. The Audit
Committee did not meet during the 1999 fiscal year.
Following the Simon Transaction, the Board's Compensation and Stock Option
Committee during the fiscal year ended December 31, 1999 consisted of Messrs.
Simon, Schneider and Weiner. The Compensation and Stock Option Committee is
charged with reviewing and making determinations with respect to compensation to
be paid to officers and other employees of the Company and with administering
and making determinations under the Company's stock option plan. The
Compensation and Stock Option Committee met or acted by unanimous written
consent one time during 1999.
During 1999, the Board established an Executive Committee with all powers
and responsibilities allowed under the Company's by-laws in the New York
Business Corporation Law. The initial members of the Committee were Messrs.
Simon and Katz. At the annual meeting of directors held in June 1999, David
Fidlon was added to the Executive Committee. During 1999, the Executive
Committee acted by unanimous written consent once and informally on several
occasions.
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<PAGE>
Item 11. Executive Compensation.
The following table presents the compensation paid, on a cash basis, to the
Chief Executive Officer of the Company and the four most highly compensated
executive officers of the Company as of December 31, 1999 who received
compensation in excess of $100,000.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Other Securities
Name and Fiscal Annual Underlying Stock All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arnold H. Simon, 1999 634,615(9) 208,840(13) 1,000,000 26,137 (14)
Chairman, Chief
Executive Officer of the
Company and President
- ------------------------------------------------------------------------------------------------------------------------------------
David Fidlon, 1999 317,308(9) -0-
Executive Vice President
and Chief Operating
Officer(12)
- ------------------------------------------------------------------------------------------------------------------------------------
Charles S. Ramat, 1999 132,909 -0- 1,000,000 (7) $2,400,716 (6)
President, Chairman and 1998 579,842 250,636 (1) -0- $155,914 (2)
Chief Executive Officer 1997 562,754 227,871 (3) 750,000 (4) $46,649 (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Tom Nastos, Vice 1999 382,666 750,000 (11)
President - 1998 330,000 250,000 (11)
Manufacturing
- ------------------------------------------------------------------------------------------------------------------------------------
Gregg Fiene, 1999 281,250(8)
Vice Chairman, Chief
Executive Officer of
XOXO Clothing
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph Purritano, 1999 288,462(10) 250,000 750,000
Vice President - Sales
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes (i) payments during 1998 of the one-time non-recurring success
bonus earned for the 1996 fiscal year with respect to the sale of the
Company's Perry Manufacturing Company subsidiary ("Perry") on September 30,
1996; and (ii) bonus is based upon achievement of performance targets of
the Company and its subsidiaries in 1997. See "Employment Agreements."
(2) Includes portion of bonus (50%) earned for the 1995 fiscal year, which
pursuant to Mr. Ramat's Employment Agent with the Company, was paid three
years after completion of such fiscal year (that is, during 1998)
contingent on the market value of the Common Stock at such later time. See
"Employment Agreements."
(3) Includes monthly installments paid during fiscal 1997 of the one-time
non-recurring success bonus earned for the 1996 fiscal year with respect to
the sale of Perry on September 30, 1996. Also includes Mr. Ramat's bonus
for services on behalf of ECI for the 1997 fiscal year.
(4) These options were granted on August 28, 1997 under the Company's 1993
Incentive Stock Option Plan and were to have vested eight years from the
date of grant, subject to accelerated vesting in the event of certain
refinancings of the Company's secured indebtedness. In accordance with the
terms of such Plan, these options vested on the closing date of the Simon
Purchase Transaction due to the change in control of the Company.
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<PAGE>
(5) Includes portion of bonus (50%) earned for the 1994 fiscal year, which
pursuant to Mr. Ramat's Executive Employment Agreement with the Company,
was paid three years after completion of such fiscal year (that is, during
1997) contingent on the market value of the Common Stock at such later
time. See "Employment Agreements".
(6) Effective with the Closing of the Simon Purchase Transaction, Mr. Ramat
relinquished the position of Chairman and Chief Executive Officer.
Effective March 29, 1999, the Company terminated Mr. Ramat's employment. As
a result, he received a severance payment of $2,400,716.
(7) In connection with the Simon Purchase Transaction, Mr. Ramat received
options to purchase 1,000,000 shares at $.48 per share, all of which fully
vested on the termination of his employment.
(8) Represents salary since date of XOXO Transaction, August 10, 1999.
(9) Represents salary since date of Simon Purchase Transaction, February 26,
1999.
(10) Mr. Purritano joined the Company on June 10, 1999.
(11) In connection with Mr. Nastos' joining the Company, his employment
agreement provided for the grant of 1,000,000 options.
(12) Mr. Fidlon died in February 2000.
(13) Includes $87,800 in tax and accounting services and $102,000 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(14) Represents pro rata share of premiums for a life insurance policy a portion
of which Mr. Simon has the right to designate the beneficiary.
Stock Option Plan and Stock Options
1993 Stock Incentive Plan
On June 30, 1993, the Company's 1993 Stock Incentive Plan was adopted (the
"1993 Stock Incentive Plan"). The 1993 Stock Incentive Plan authorizes the
Company's Board of Directors (or a committee thereof), to award to employees and
directors of, and consultants to, the Company and its subsidiaries (i) options
to acquire Common Stock of the Company at prices determined when the options are
granted, (ii) stock appreciation rights (entitling the holder to a payment equal
to the appreciation in market value of a specified number of shares of Common
Stock over a specified period), (iii) restricted shares of Common Stock whose
vesting is subject to terms and conditions specified at the time of grant, and
(iv) performance shares of Common Stock that are granted upon achievement of
specified performance goals. Options granted pursuant to the 1993 Stock
Incentive Plan may be either "incentive stock options" within the meaning of
Section 422A of the United States Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified options. As originally adopted on June 30, 1993, a
maximum of 1,200,000 shares of Common Stock can be covered by awards under the
1993 Stock Incentive Plan. On August 28, 1997, the Board of Directors of the
Company approved an amendment to the 1993 Stock Incentive Plan to increase to
2,500,000 the maximum number of shares of Common Stock which can be covered by
awards under the Plan; on April 6, 1998, the Board approved a further amendment
to the 1993 Stock Incentive Plan to increase to 3,500,000 the maximum number of
shares of Common Stock which can be covered by awards under the Plan. The
amendment increasing such maximum to 3,500,000 shares was approved by the
shareholders of the Company at the Annual Meeting of Stockholders held on July
9, 1998. On April 12, 1999, the Company's board of directors approved an
amendment to the Stock Option Plan increasing the number of shares for which
options may be granted to 7,000,000. Shareholders approved such amendment at the
Annual Meeting of Shareholders held on June 17,
-20-
<PAGE>
1999. On March 23, 2000, the Board approved a further amendment increasing the
number of shares for which options may be granted under the Plan to 10,000,000.
The Company intends to present such amendment to shareholders at the 2000 Annual
Meeting.
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, 1999, options to purchase 8,621,316 shares of Common
Stock were outstanding under the 1993 Stock Incentive Plan. In accordance with
the terms of the Plan, all outstanding options as of February 26, 1999
(1,803,000 options) to the extent not already vested, vested and became
exercisable on that date, the closing date of the Simon Purchase Transaction.
Option Grants
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the last fiscal year. No SARs
were granted during the last fiscal year.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
% of Options/ of Stock Appreciation
SARs Granted for Option Term ($)
Options/SARs to Employees Exercise Expiration -------------------------------
Name Granted during Fiscal Year Price/Share Date 5% per year 10% per year
- ---- ------------ ------------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arnold H. Simon 1,000,000 11.3% $2.00 8/10/2009 1,258,000 3,188,000
David Fidlon -0- -0-
Charles S. Ramat 1,000,000 11.3% $ .48 2/26/2009 302,000 471,000
Joseph Purritano 750,000 8.5% $2.00 8/10/2009 943,000 2,391,000
Gregg Fiene 1,150,000 13.0% $1.50 8/10/2009 1,085,000 2,749,000
Tom Nastos 750,000 8.5% $2.00 8/10/2009 943,000 2,391,000
</TABLE>
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<PAGE>
Exercised/Unexercised Stock Options
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 1999 of
unexercised options, as well as options exercised by such executive officers
during the 1999 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
-----------------------------------------------
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Exercise Value Realized Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- -------- ----------- -------------- ------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Arnold H. Simon -0- -0- -0-/ 1,000,000 -0- / -0-
David Fidlon -0- -0- -0- -0- / -0-
Gregg Fiene -0- -0- 1,150,000/-0- 2,228,125/-0-
Joseph Purritano -0- -0- -0- / 750,000 -0- / -0-
Tom Nastos -0- -0- 250,000 / 750,000 -0- / -0-
</TABLE>
- ----------
(1) The value of unexercised in-the-money options was calculated by determining
the difference between the closing price of the Company's common stock on
December 31, 1999 and the exercise price of the options.
Compensation of Directors
During the twelve months ended December 31, 1999, each outside director
(i.e., one not employed by the Company or any of its subsidiaries) received
director's fees at the rate of $18,000 per annum. Each of these directors was
also entitled to receive reimbursement for expenses incurred in attending
meetings of the Board or committees thereof on which they serve. In addition,
each outside director was entitled to receive $500 per meeting of the Committees
of the Board to which they are assigned. No executive officer received
additional compensation for service as a Director.
During 1999, outside directors newly appointed to the Board, Howard
Schneider, Mark Weiner and Debra Simon were each awarded options to purchase
100,000 shares of the Company's common stock.
Employment Agreements
The Company has an employment agreement effective as of March 1, 1999 with
Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief
executive officer of the Company and its subsidiaries. The term of the agreement
is for three years, expiring on February 28, 2002. Pursuant to the agreement,
Mr. Simon's base salary is $750,000 per annum, subject to annual review for
increase (but not decrease) at the discretion of the Board. In addition, the
agreement provides for annual bonuses equal to 2% of adjusted EBITDA if adjusted
EBITDA is between $5 million and $10 million, and 3% of adjusted EBITDA if
adjusted EBITDA is in excess of $10 million.
-22-
<PAGE>
The agreement entitles Mr. Simon to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, if the
Company's principal office or Mr. Simon's own office is relocated to a location
not within Manhattan, or if there are certain changes of control. In the event
of termination of Mr. Simon for good reason or if he is terminated without
cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Simon with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
In March, 1999, the Company entered into a three-year employment agreement
with David Fidlon to serve as Executive Vice President and Chief Operating
Officer at an annual base salary of $375,000, subject to annual review, and an
annual bonus equal to 1% of adjusted EBITDA if adjusted EBITDA is between $5
million and $10 million, and 1.5% of adjusted EBITDA if adjusted EBITDA is in
excess of $10 million. Mr. Fidlon died in February 2000. Pursuant to Mr.
Fidlon's employment agreement, his family will receive his salary and car
allowance for six months; Aris will continue health and related benefits through
the end of his agreement, which is February, 2002; and his family will receive
Company life insurance benefits for the sum of $220,000. During 1999, the
Company loaned Mr. Fidlon the sum of $250,000. Aris has agreed to defer payment
of the note until shares of Aris stock held in the LLC that were allocated to
Mr. Fidlon are sold.
The Company is party to an employment agreement with Joseph Purritano
effective as of June 7, 1999, pursuant to which Mr. Purritano is to serve as
Executive Vice President in charge of sales for the Company and its subsidiaries
for a 3-year term expiring on June 6, 2002. Pursuant to the agreement, Mr.
Purritano is to receive an annual base salary of $500,000 in the first year of
the term, $550,000 in the second year of the term, and $600,000 in the third
year of the term. In addition, he is entitled to an annual bonus based upon the
Company achieving certain EBITDA targets. As inducement to join the Company, the
Company agreed to grant Mr. Purritano 750,000 options to purchase shares under
the Company's stock option plan, and further paid Mr. Purritano a bonus of
$250,000.
Mr. Purritano has the right to terminate the agreement for "good reason",
which includes the assignment of any duties or responsibilities inconsistent in
any material respect with the contemplated scope of Mr. Purritano's services,
the Company's failure to substantially perform any material term of his
employment agreement, relocation of the Company's principal office or Mr.
Purritano's own office to a location not within Manhattan, a "change of control"
as defined in the agreement. In the event Mr. Purritano terminates the Agreement
for good reason or if his employment is terminated without cause, Mr. Purritano
is entitled to a lump sum payment in an amount equal to 150% of his annual base
salary then in effect.
In connection with the Lola transaction, the Company entered into an
employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to
which Mr. Fiene is to serve as Vice Chairman of the Board of Directors of the
Company, Chief Executive Officer of the Company's XOXO subsidiary and all
divisions of the Company (present and future) engaged in the female apparel
industry and related ancillary industries, and as chief executive officer,
president, or in such other senior executive position with respect to any of the
Company's current or future subsidiaries as he and the Chairman of the Board of
Directors of the Company shall mutually determine. Pursuant to the agreement,
Mr. Fiene's base salary is $750,000 per annum, and he is entitled to an annual
bonus if the Company meets certain EBITDA targets. The term of Mr. Fiene's
agreement is for five years, ending on August 9, 2004. In the event Mr. Fiene is
terminated without cause, or if he terminates for "good reason", which includes
any diminution of his duties under the agreement, certain changes of
-23-
<PAGE>
control, he is entitled to a lump sum payment equal to his highest annual base
salary during the term multiplied by 2.99, and a lump sum payment in an amount
equal to his average annual bonus with respect to the immediately preceding
three fiscal years multiplied by 2.99.
Also in connection with the Lola transaction, the Company entered into an
employment agreement with Hollis Fiene, pursuant to which Ms. Fiene is to serve
as the Vice President, Design and Merchandising, for the Company's XOXO
subsidiary, and any other current or future subsidiaries or divisions of the
Company engaged in the design of women's apparel. The term of Ms. Fiene's
agreement is for three years, ending on August 9, 2002. Pursuant to the
agreement Ms. Fiene's base salary is $300,000 per annum, and she is entitled to
such annual discretionary bonus as the Board of Directors may determine. If her
employment is terminated by the Company without cause or if she terminates for
"good reason", which includes the termination of Gregg Fiene's employment by the
Company without cause or by Mr. Fiene for good reason, the assignment of the
duties and responsibilities inconsistent in any material respect with the scope
of the duties and responsibilities associated with Ms. Fiene's position, the
Company's failure to substantially perform material provisions of the employment
agreement and in the event of certain changes of control, she shall be entitled
to receive a lump sum amount equal to 150% of her base salary then in effect.
In April 1998, the Company entered into an employment agreement with Tom
Nastos, pursuant to which Mr. Nastos was to serve as the president and chief
executive officer of an outerwear company the Company was contemplating buying,
and as the president of the private label business of the Company's ECI
subsidiary. The acquisition never occurred. Pursuant to a letter agreement with
Mr. Nastos, if the acquisition did not occur by July 31, 1998, he was to be
employed in an executive capacity with ECI. Under the employment agreement as
modified by the letter agreement, Mr. Nastos' term of employment expires
December 31, 2001, and he is entitled to a base salary of $400,000 per annum. In
addition, pursuant to the Agreement, the total of 1,000,000 options were to be
granted to Mr. Nastos with the first 250,000 vesting in three equal installments
and the remaining 750,000 options vesting eight years from the closing of the
acquisition.
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.
BENEFIT PLANS
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.
The Company's union employees at its newly leased warehouse and
distribution facility in New Bedford, Mass. participate in a multi-employer
defined benefit plan. The Company's obligations with respect to the plan, will
be determined by its collective bargaining agreement with the union which is
presently being negotiated.
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee (the
"Committee") as of December 31, 1999 were Messrs. Simon, Schneider and Weiner.
Other than Mr. Simon, neither Committee member was (i) during the twelve months
ended December 31, 1999, an officer of the Company or any of its subsidiaries or
(ii) formerly an officer of the Company or any of its subsidiaries.
-24-
<PAGE>
Report of the Committee on Executive Compensation
Mr. Simon's 1999 compensation, including bonus, was determined pursuant to
the terms of his employment agreement which was approved by the entire board in
March, 1999. In formulating the terms of Mr. Simon's employment agreement, the
board considered Mr. Simon's past successes, the compensation paid to the
Company's prior chief executive officer, Mr. Simon's prior compensation, the
compensation paid to chief executive officers by other companies, and its
judgment of compensation terms appropriate to retain his services and motivate
his performance for the benefit of the Company. Mr. Simon's compensation under
the employment agreement is comprised of a specified base salary and a bonus
based on the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") exceeding certain specified levels. See "Employment
Agreement" and "Executive Compensation - Summary Compensation Table."
The Company relies upon Mr. Simon, its chief executive officer, to
establish management compensation levels, including the compensation of the
Company's other executive officers, several of whom have employment agreements.
For 1999, each said executive officer's compensation consisted of a salary, a
bonus based on the Company's EBITDA and stock options. In establishing their
salaries, Mr. Simon considered compensation paid to executives by other
companies, and his judgment of each executive officer's value to the Company
compared with that of other employees and each executive officer's performance.
Executive Committee:
Arnold H. Simon
Howard Schneider
Mark Weiner
-25-
<PAGE>
Performance Graph
The following table compares the cumulative total shareholder return on the
Aris Common Stock with the cumulative total shareholder returns of (x) the S&P
500 Textile-apparel Manufacturers index and (y) Wilshire 5000 index from
December 31, 1994 to December 31, 1999. The return on the indices is calculated
assuming the investment of $100 on December 31, 1994 and the reinvestment of
dividends.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL SHAREHOLDER RETURN DECEMBER 31, 1994 TO DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aris Common Stock $14.28 $88.87 $207.89 $148.72 $307.48
- -----------------------------------------------------------------------------------------------------------------
Wilshire 5000 Index $133.40 $158.53 $204.78 $249.25 $304.20
- -----------------------------------------------------------------------------------------------------------------
S&P 500 Textile $110.00 $148.83 $158.53 $135.30 $99.03
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the Company with respect to the fiscal year
ended December 31, 1998, no persons failed to file any such form in a timely
manner.
-26-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth the beneficial ownership of the Common Stock as
of March 1, 2000 by persons who are either (i) beneficial owners of 5% or more
of the Common Stock or (ii) current officers or directors of the Company.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Arnold Simon 44,745,045(2)(3) 56.3%
1411 Broadway
New York, New York 10018
- ------------------------------------------------------------------------------------------
Robert Katz 16,818,806(3)(5) 21.2%
Apollo Aris Partners, L.P.
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- ------------------------------------------------------------------------------------------
Paul Spector 80,000(6) *
1411 Broadway
New York, New York 10018
- ------------------------------------------------------------------------------------------
Vincent Caputo -0- *
1411 Broadway
New York, New York 10018
- ------------------------------------------------------------------------------------------
Gregg Fiene 4,010,000(6) 5.0%
6000 Sheila Street
Commerce, CA 90040
- ------------------------------------------------------------------------------------------
Joseph Purritano -0-(4)
1411 Broadway
New York, NY 10018
- ------------------------------------------------------------------------------------------
Debra Simon -0-(7)
1411 Broadway
New York, NY 10018
- ------------------------------------------------------------------------------------------
Howard Schneider -0-
Schneider Schechter & Yoss
1979 Marcus Avenue, Suite 232
Lake Success, NY 11042
- ------------------------------------------------------------------------------------------
Mark Weiner -0-(4)
Weingeroff Enterprises
1 Weingeroff Boulevard
Cranson, RI 02910
- ------------------------------------------------------------------------------------------
Tom Nastos 250,000(6) *
1411 Broadway
New York, NY 10018
- ------------------------------------------------------------------------------------------
All persons who are officers or 49,085,045(6) 60.1%
directors of the Company,
as a group (eight persons)
- ------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
-27-
<PAGE>
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) Includes 9,170,204 shares of Common Stock which were sold to two
unaffiliated third parties by The Simon Group LLC, but over which Mr. Simon
has voting and certain dispositive power. Includes 35,574,841 shares owned
by The Simon Group. Arnold Simon, the Managing Member of The Simon Group,
has sole voting and investment power with respect to the shares of the
Company held of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999 Equity
Registration Rights Agreement described below, containing certain voting
and other arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which such person holds a
membership interest. Such person has no power or authority to vote or
dispose of any shares held by The Simon Group, LLC, and disclaims
beneficial ownership of such shares.
(5) This table does not reflect any beneficial ownership by Mr. Katz, a
Director of the Company, associated with Apollo. Mr. Katz does not directly
own any shares of Common Stock, and disclaims beneficial ownership of all
shares held by Apollo Aris Partners, L.P. and AIF, L.P.
(6) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(65,000), Tom Nastos (250,000), and Gregg Fiene (1,150,000).
(7) Mrs. Simon disclaims beneficial ownership of shares beneficially owned by
Arnold H. Simon.
Item 13. Certain Relationships and Related Transactions.
Simon Purchase Transaction; Redemption of AIF Note
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (which shares were converted into 20,937,900 shares
of Common Stock) for $20,000,000 in cash, and (ii) the Company redeemed from AIF
the Series B Junior Secured Note of the Company, including all accrued interest
thereon (representing total indebtedness as of January 31, 1999 of $10,658,000),
in exchange for $4,000,000 in cash plus 5,892,856 shares of Common Stock and
512,113 shares of Series A Preferred Stock (which were converted into 5,121,130
shares of Common Stock). Effective July 1999, all of the Series A Preferred
Stock converted into common stock.
Upon the closing of the Simon Purchase Transaction, the directors of the
Company, other than Charles S. Ramat and Robert A. Katz, resigned; the size of
the Board was increased from five to six Directors; and Arnold Simon, David
Fidlon, Debra Simon and Howard Schneider were elected to the Board. Arnold Simon
is the Managing Member of The Simon Group and has the sole voting and investment
power with respect to the shares of the Company owned by The Simon Group.
-28-
<PAGE>
1999 Shareholders Agreement
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non- Simon Subject Shareholder on the closing of the Simon
Purchase Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same consideration per share of Common Stock to be
received by The Simon Group in such transfers. Such tag-along rights will also
apply to certain transfers by Arnold Simon or his affiliates of their beneficial
ownership in The Simon Group after six months from the closing of the Simon
Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
The Shareholders Agreement entered into June 30, 1993 between the Company,
Apollo, Charles S. Ramat and certain other non-Apollo subject shareholders
terminated by its terms as a result of the Simon Purchase Transaction.
1999 Equity Registration Rights Agreement
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three
-29-
<PAGE>
occasions, to demand that the Company register their Common Stock for sale under
the Securities Act of 1933, as amended (the "Securities Act"). This Agreement
supercedes the demand registration rights afforded Apollo pursuant to the 1993
Registration Rights Agreement, but does not eliminate the "piggyback
registration rights" of the other parties thereto who are no longer affiliates
of the Company.
Director's Indemnification Agreements
On the closing of the Simon Purchase Transaction, the Company entered into
an indemnification agreement with each of Arnold Simon, David Fidlon, Debra
Simon and Howard Schneider, and on June 30, 1993, the Company entered into an
indemnification agreement with each of Charles S. Ramat and Robert A. Katz,
pursuant to which the Company has agreed to indemnify each such Director to the
fullest extent permitted by law, and for the advancement of legal fees and other
expenses and to use its best efforts to maintain designated directors' and
officers' liability insurance coverage.
Agreement with Warnaco
Arnold Simon was party to various non-competition agreements with The
Warnaco Group, Inc. and Designer Holdings, Ltd. (collectively, "Warnaco") which
could have been deemed to have been violated by the consummation of Simon
Purchase Transaction. Warnaco consented to the Simon Purchase Transaction and to
the inapplicability of the restrictions to Arnold Simon in his various
capacities with the Company effective February 26, 1999 with respect to the
Company's current lines of business after June 1, 1999 in all respects pursuant
to a letter agreement in which the Company (i) issued 700,000 shares of Common
Stock to Warnaco and agreed to (ii) assume Warnaco's lease for certain premises
in New Bedford, Massachusetts on June 1, 1999, and (iii) offer employment to
Warnaco's workforce in New Bedford, Massachusetts and thereafter recognize the
union currently representing such workers as the representative of such
employees and negotiate in good faith with such union for a new collective
bargaining agreement with respect to such employees.
Vesting of Stock Options on Change in Control
At the closing of the Simon Purchase Transaction, all outstanding stock
options under the 1993 Stock Incentive Plan (including without limitation, those
held by executive officers of the Company), by the terms of the Plan, vested and
become immediately exercisable due to the change of control in ownership in the
Company resulting from the purchase of shares by The Simon Group.
The XOXO Shareholders Agreement
In connection with the XOXO Transaction, the Company, The Simon Group, LLC,
and each of the former shareholders of Lola, Inc. entered into a shareholders
agreement which provides that each Lola shareholder will vote his or her shares
for the election of directors nominated by Arnold Simon. The Agreement also
provides that during its term, Simon shall nominate and vote all of its shares
of common stock for the election of Gregg Fiene as a director of the Company
provided that at such time Mr. Fiene is employed as an executive officer of the
Company. The Agreement contains certain restrictions on the sale by Gregg Fiene
and one other former Lola shareholder of the Aris shares received in the XOXO
Transaction and provides for certain "tag-along" and "drag-along" rights in
connection with such shares. The Agreement also provides that in the event the
Company registers
-30-
<PAGE>
any shares of its Common Stock under the Securities Act of 1933, as amended,
each former Lola shareholder has the right to include a certain amount of his or
her shares in such registration statement. The term of the shareholders'
agreement is for ten years unless sooner terminated in accordance with its
terms.
During 1999, the Company reimbursed Mr. Simon for accounting and tax
services provided to Mr. Simon by Mr. Schneider's accounting firm in the amount
of $87,800. In addition, the Company paid Mr. Schneider's firm approximately
$28,000 for services rendered during 1999.
During 1999, the Company loaned Mr. Fidlon the sum of $250,000. Aris has
agreed to defer payment of the note until shares of Aris stock held in the LLC
that were allocated to Mr. Fidlon are sold.
In connection with the waiver and amendment, the Company's Principal
Stockholder will provide a personal Guarantee on $3 million of indebtedness
outstanding under the credit agreement expiring October 31, 2000.
-31-
<PAGE>
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 Accountants' Report Page
----
Independent Accountants' Report....................................F-l
Independent Auditor's Report ......................................F-2
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1999 and 1998.........................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997...................................F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997.............................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997..................................F-6
Notes to Consolidated Financial Statements.........................F-8
2. Financial Statement Schedule
The following financial statement
schedule should be read in conjunction
with the consolidated financial
statements in Item 8 of this Annual
Report on Form 10-K:
Schedule II - Valuation and Qualifying
Accounts.......................................S-1
All other schedules are omitted because they are not applicable or
because the required information is included in the financial
statements or notes thereto.
-32-
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Aris Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 32 present fairly, in all material
respects, the financial position of Aris Industries, Inc. and Subsidiaries at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under item 14(a)(2) on page 32
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audit. We conducted our audit of these statements in accordance with auditing
standards generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------------
New York, New York
March 30, 2000, except for Note 8(a)
for which the date is April 11, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Aris Industries, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Aris Industries,
Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements 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 resonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aris Industries, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 31, 1999
Parsippany, New Jersey
F-2
<PAGE>
Aris Industries, Inc. and Subsidiaries 2
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,109 $ 1,112
Receivables, net 34,004 26,326
Inventories 18,233 26,371
Prepaid expenses and other current assets 2,509 1,753
--------- ---------
Total current assets 55,855 55,562
Property and equipment, net 10,752 1,094
Goodwill, net 37,894 19,325
Other assets 1,616 1,351
--------- ---------
Total assets $ 106,117 $ 77,332
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving credit facility $ 25,485 $ 33,900
Current portion of long-term debt 2,600 1,040
Current portion of capitalized lease obligations 1,755 43
Accounts payable 14,591 6,690
Accrued expenses and other current liabilities 4,005 4,338
--------- ---------
Total current liabilities 48,436 46,011
Long-term debt 14,342 16,438
Capitalized lease obligations 1,818 98
Other liabilities 2,270 693
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01,
authorized 10 shares, none issued
Common stock, par value $.01, authorized 100,000 shares
(50,000 shares in 1998); 79,434 shares issued and
outstanding at December 31, 1999 and 14,956 shares issued
and outstanding at December 31, 1998 794 151
Additional paid-in capital 80,324 44,757
Accumulated deficit (41,399) (30,816)
Unearned compensation (468) --
--------- ---------
Total stockholders' equity 39,251 14,092
--------- ---------
Total liabilities and stockholders' equity $ 106,117 $ 77,332
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Aris Industries, Inc. and Subsidiaries 3
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 175,359 $ 127,680 $ 94,539
Cost of sales 124,825 98,140 67,497
--------- --------- ---------
Gross profit 50,534 29,540 27,042
Commission and licensing income 2,571 1,570 1,732
--------- --------- ---------
Income before operating expenses, interest expense,
income tax provision (benefit) and extraordinary item 53,105 31,110 28,774
Operating expenses:
Selling and administrative expenses 48,057 29,950 23,474
Start-up costs 2,235 -- --
Restructuring and other charges 8,961 -- --
--------- --------- ---------
(Loss) income before interest expense, income tax
provision (benefit) and extraordinary item (6,148) 1,160 5,300
Interest expense, net (4,185) (5,220) (3,105)
--------- --------- ---------
(Loss) income before income tax provision (benefit)
and extraordinary item (10,333) (4,060) 2,195
Income tax provision (benefit) 250 190 (138)
--------- --------- ---------
(Loss) income before extraordinary item (10,583) (4,250) 2,333
Extraordinary item:
Gain on early extinguishment of debt, net -- 522 --
--------- --------- ---------
Net (loss) income $ (10,583) $ (3,728) $ 2,333
========= ========= =========
Basic (loss) earnings per share:
(Loss) income before extraordinary item $ (0.19) $ (0.29) $ 0.18
Extraordinary item -- .04 --
--------- --------- ---------
Net (loss) income $ (0.19) $ (0.25) $ 0.18
========= ========= =========
Diluted (loss) earnings per share:
(Loss) income before extraordinary item $ (0.19) $ (0.29) $ 0.16
Extraordinary item -- .04 --
--------- --------- ---------
Net (loss) income $ (0.19) $ (0.25) $ 0.16
========= ========= =========
Per share data:
Weighted average shares outstanding - basic 55,374 14,912 13,245
Weighted average shares outstanding - diluted 55,374 14,912 14,338
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Aris Industries, Inc. and Subsidiaries 4
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
-------- -------- ------------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 11,852 $ 119 $ 44,057 $(29,421) $ 14,755
Common stock issued 3,000 30 690 -- 720
Stock options exercised 53 1 5 -- 6
Net income -- -- -- 2,333 2,333
-------- -------- ------------------- -------- --------
Balance at December 31, 1997 14,905 150 44,752 (27,088) 17,814
Stock options exercised 51 1 5 6
Net loss -- -- -- (3,728) (3,728)
-------- -------- ------------------- -------- --------
Balance, December 31, 1998 14,956 151 44,757 (30,816) 14,092
Common stock issued in connection with Simon
Transaction, net of transaction costs of $1,468 57,009 569 24,108 -- 24,677
Stock options exercised 969 9 429 -- 438
Common stock issued in connection with Lola, Inc.
acquisition 6,500 65 9,685 -- 9,750
Issuance of stock options in connection with
Lola, Inc. acquisition -- -- 805 -- 805
Issuance of stock options to employees/consultants -- -- 540 -- $ (540) --
Amortization of unearned compensation on
stock options -- -- -- -- 72 72
Net loss -- -- -- (10,583) -- (10,583)
-------- -------- ------------------- -------- --------
Balance, December 31, 1999 79,434 $ 794 $ 80,324 $(41,399) $ (468) $ 39,251
======== ======== =================== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Aris Industries, Inc. and Subsidiaries 5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(10,583) $ (3,728) $ 2,333
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Extraordinary gain on early extinguishment of debt -- (522) --
Loss on disposal of property and equipment 733 -- --
Depreciation and amortization of property and equipment 1,515 601 470
Amortization of goodwill 1,037 1,110 876
Amortization of deferred financing costs 79 -- --
Deferred income taxes 137 151 (212)
Provision for allowances on receivables 2,773 -- --
Impairment of goodwill 3,749 -- --
Issuance of notes in lieu of interest 108 276 1,830
Non-cash stock based compensation 72 -- --
Changes in assets and liabilities:
Increase in receivables (11,393) (52) (18,860)
Decrease (increase) in inventories 17,923 (6,873) (6,693)
(Increase) decrease in prepaid expenses and
other current assets (575) 390 445
(Increase) decrease in other assets (241) 1,187 (3)
Decrease in accounts payable (2,685) (2,626) (1,036)
Decrease in accrued expenses and
other current liabilities (4,811) (500) (935)
Increase (decrease) in other liabilities 510 (748) (133)
-------- -------- --------
Net cash used in operating activities (1,652) (11,334) (21,918)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (4,289) (233) (461)
Acquisition of businesses, net of cash acquired (10,320) (2,659) (839)
-------- -------- --------
Net cash used in investing activities (14,609) (2,892) (1,300)
-------- -------- --------
Cash flows from financing activities:
Book overdraft 1,544 -- --
Proceeds from issuance of common stock 20,000 -- 6
Common stock issuance costs paid (1,468) -- --
Stock options exercised 438 6 --
Proceeds from long-term debt 10,000 -- --
Deferred financing costs paid (406) -- --
Payments of long-term debt and capitalized leases (5,435) (1,335) (299)
(Decrease) increase in borrowings under revolving
credit facility (8,415) 15,295 18,605
-------- -------- --------
Net cash provided by financing activities 16,258 13,966 18,312
-------- -------- --------
Decrease in cash and cash equivalents (3) (260) (4,906)
Cash and cash equivalents, beginning of year 1,112 1,372 6,278
-------- -------- --------
Cash and cash equivalents, end of year $ 1,109 $ 1,112 $ 1,372
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Aris Industries, Inc. and Subsidiaries 6
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,242 $ 4,229 $ 1,284
======== ======== ========
Income taxes $ 254 $ 63 $ 49
======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
Acquisition of business:
Fair value of the assets acquired $ 40,568
Liabilities assumed 19,540
Common stock and stock options issued 10,555
Cash acquired 153
--------
Cash paid for acquisition, net $ 10,320
========
Capitalized lease obligations $ 1,995
========
Exchange of Series B Junior Secured Note for common stock $ 4,864
========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
Aris Industries, Inc. and Subsidiaries 7
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Aris
Industries, Inc. and all its wholly-owned subsidiaries (collectively, the
"Company") after elimination of all significant intercompany accounts and
transactions.
Nature of Operations
The Company designs, manufactures, imports and sells sportswear, outerwear
and loungewear under a variety of tradenames which are owned and licensed
from others.
Under the tradenames owned, the Company designs and imports various lines
of men's and boys' outerwear and activewear, women's sportswear, loungewear
and swimwear, all under the Members Only tradename. Additionally, the
Company sells women's sportswear under the XOXO and Fragile tradenames.
These tradenames are also licensed by the Company to others.
For those tradenames licensed from others, the Company designs and imports
outerwear and loungewear under the Perry Ellis and Perry Ellis America
tradenames and boys' sportswear and activewear under the FUBU tradename.
During fiscal 1999, the Company entered into other licensing arrangements
to sell sportswear under the Baby Phat, Stetson and Cynthia Rowley
tradenames. In addition, the Company signed an agreement with Brooks
Brothers Golf to sell golf related apparel to pro shops. Sales in
connection with these arrangements are expected to begin in 2000 and 2001.
The Company's products are marketed nationally in department stores,
specialty stores and national retail chains. The Company also operates XOXO
retail and outlet stores.
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 and 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. The most significant
estimates relate to the allowances for sales returns, discounts, credits
and doubtful accounts, inventory valuation allowances, recoverability of
long-lived assets and valuation allowances on deferred tax assets. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits.
Inventories
Inventories are stated at the lower of cost (weighted average basis) or
market.
F-8
<PAGE>
Aris Industries, Inc. and Subsidiaries 8
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the life of the
lease or the improvement. Expenditures for maintenance, repairs and minor
renewals are expensed as incurred. When property or equipment is sold or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the gain or loss realized on
disposition is reflected in operations.
Goodwill
Goodwill represents the excess of purchase price over the fair values of
identifiable net assets of businesses acquired, which includes intangible
assets related to certain licensing agreements. Goodwill is amortized on a
straight-line basis over periods of 20 to 40 years.
At December 31, 1999 and 1998, goodwill is stated net of accumulated
amortization of $7,995,000 and $7,135,000, respectively.
Long-lived Assets
The Company continually evaluates the recoverability of long-lived assets,
which include property, equipment and goodwill, in relation to the
operating performance and future undiscounted net cash flows derived from
these assets. If the sum of the expected future cash flows is less than the
carrying amount, an impairment loss is recognized.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, approximates fair value due to the short
maturity of these assets and liabilities. The interest on substantially all
of the Company's borrowings are adjusted regularly to reflect current
market rates. Accordingly, the carrying amounts approximate fair value. The
fair value of the Company's subordinated long-term debt was determined
using valuation techniques that considered cash flows discounted at current
market rates. The estimated fair value of this instrument at December 31,
1999 approximated $6,236,000.
Revenue Recognition
Revenue from the sale of merchandise is recognized at the date of shipment
to the customer. Allowances for sales returns, discounts and credits are
provided when the sale is recorded.
Commission and licensing income is based upon a percentage of the
licensee's net sales, as defined in the underlying agreements, and is
recognized as earned.
Start-up Costs
Start-up costs are expensed as incurred. Such costs are directly related to
the start-up operations under new licensing agreements entered into in 1999
(approximately $1,181,000) and consisted of salaries, samples and supplies.
Also included in start-up expenses are costs incurred at the Company's new
distribution facility prior to the commencement of its operations
(approximately $1,054,000).
F-9
<PAGE>
Aris Industries, Inc. and Subsidiaries 9
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $3,190,000 in 1999, $1,941,000 in 1998 and $2,348,000 in 1997.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated 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 are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax will not be realized.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
2. The Simon Transaction
On February 26, 1999, the Company issued (i) 24,107,145 shares of common
stock of the Company and 2,093,790 shares of Series A Preferred Stock of
the Company (which shares were converted into 20,937,900 shares of common
stock on July 29, 1999), for $20,000,000 and (ii) redeemed the Series B
Junior Secured Note (which represented a total indebtedness of $10,658,000)
in exchange for $4,000,000 in cash and an aggregate of 5,892,856 shares of
common stock and 512,113 shares of Series A Preferred Stock (which shares
were converted into 5,121,130 shares of common stock on July 29, 1999),
(the "Simon Purchase Transaction"). In connection with the Simon Purchase
Transaction, the Company also issued 700,000 shares of common stock to a
third party as a condition to its consent to the transaction. In addition,
the Company paid approximately $1,468,000 in cash and issued 250,000 shares
of common stock to cover the costs associated with the transaction and paid
approximately $830,000 of principal and interest on its Series A Junior
Secured Note (see Note 8). As a result of this transaction, the Company
received net proceeds of approximately $13,702,000.
3. Acquisition
On August 10, 1999, the Company completed the acquisition of Lola, Inc.
("Lola"), a California corporation, with and into Europe Craft Imports,
Inc. ("ECI"), a New Jersey corporation, that is wholly owned by the
Company. Concurrent with the closing, 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 consisted
principally of the manufacture and sale of women's apparel and accessories
principally under the "XOXO" name.
In connection with the acquisition, Lola's shareholders received
$10,000,000 in cash, 6,500,000 shares of the Company's common stock, valued
at $1.50 per share at the time of the acquisition, and options to purchase
1,150,000 shares of the Company's common stock (valued at $805,000). In
addition, the Company incurred acquisition expenses which approximated
$473,000. The acquisition was accounted for under the purchase method of
accounting, and, accordingly, the operating results have been included in
the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the fair values of
assets acquired and liabilities assumed amounted to $22,649,000 and has
been recorded as goodwill. In conjunction with the merger, the
F-10
<PAGE>
Aris Industries, Inc. and Subsidiaries 10
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Company obtained a $10,000,000 term loan and increased its line of credit
from $65,000,000 to $80,000,000 with a financial institution (see Note 8).
The table below reflects unaudited pro forma combined results of the
Company as if the acquisition of Lola had taken place on January 1, 1998
(in thousands, except per share data):
1999 1998
Net sales $ 221,804 $ 202,014
Net loss (15,001) (4,928)
Net loss per diluted share (0.25) (0.25)
The unaudited pro forma results of operations have been prepared for
comparative purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill and increased
interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in the
future.
4. Restructuring and Other Charges
During fiscal 1999, the Company recorded special charges of $5,212,000
associated with the restructuring of its corporate office and distribution
facilities. These charges before taxes include employee severance costs of
$2,583,000, asset write-downs of $733,000, and rent and other exit costs of
$1,896,000.
In connection with the Simon Purchase Transaction (see Note 2), the Company
was required to obtain consents from the licensor of its Perry Ellis
licenses. As a condition to granting its consent, such licensor required
that the term of its licenses be shortened. Based on the negative future
undiscounted net cash flows expected to be derived from these licenses over
their revised terms, intangible assets associated with the acquisition of
these licenses of $3,749,000 (included in goodwill) was deemed impaired and
written-off.
F-11
<PAGE>
Aris Industries, Inc. and Subsidiaries 11
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Receivables
Receivables consist of the following (in thousands):
December 31,
1999 1998
Due from factor $36,866 $29,318
Trade receivables 4,472 1,569
------- -------
41,338 30,887
Less allowances for sales returns, discounts, credits
and doubtful accounts 7,334 4,561
------- -------
$34,004 $26,326
======= =======
The Company has an agreement with a commercial finance company which
provides for the factoring of certain trade receivables. The receivables
are factored without recourse as to credit risk but with recourse for any
claims by the customer for adjustments in the normal course of business
relating to pricing errors, vendor allowances, shortages, damaged goods,
etc. All factored receivables and related proceeds are the property of the
commercial finance company. The Company is charged a factoring commission
of .4% of factored trade receivables. The Company receives payment based
upon the actual maturity dates of the receivables. The Company holds no
collateral with respect to amounts due from the commercial finance company.
6. Inventory
Inventory consists of the following (in thousands):
December 31,
1999 1998
Raw materials $ 2,997 $ --
Work-in-process 1,196 --
Finished goods 14,040 26,371
------- -------
$18,233 $26,371
======= =======
Finished goods inventory includes in-transit amounts of approximately
$4,036,000 and $5,576,000 at December 31, 1999 and 1998, respectively.
F-12
<PAGE>
Aris Industries, Inc. and Subsidiaries 12
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31,
in Years 1999 1998
<S> <C> <C> <C>
Furniture, fixtures and equipment 3 - 7 $12,381 $ 5,222
Leasehold improvements 5 - 10 4,615 1,058
------- -------
16,996 6,280
Less accumulated depreciation and amortization 6,244 5,186
------- -------
$10,752 $ 1,094
======= =======
</TABLE>
As of December 31, 1999 and 1998, property and equipment include amounts
for equipment leased under capital leases with an original cost of
$4,185,000 and $343,000, respectively. As of December 31, 1999 and 1998,
accumulated depreciation and amortization include $726,000 and $223,000,
respectively, associated with these leased assets.
8. Financing
The following amounts represent borrowings outstanding (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Revolving Credit Facility (a) $25,485 $33,900
------- -------
Long-term debt:
Term Loan (a) $10,000 $ --
Series A Junior Secured Note (b) 6,942 7,982
Series B Junior Secured Note, less unamortized discount of
$506,000 at December 31, 1998 (c) -- 9,496
------- -------
16,942 17,478
Less current portion 2,600 1,040
------- -------
$14,342 $16,438
======= =======
</TABLE>
a. During February 1999, the Company entered into a credit agreement with
CIT Commercial Services Group, Inc. ("CIT") and other financial
institutions, for a revolving credit facility which provides for loans
and letters of credit up to $65,000,000 in the aggregate. Availability
under the
F-13
<PAGE>
Aris Industries, Inc. and Subsidiaries 13
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
credit facility is based on a formula of eligible receivables and
inventory, as defined. Availability for the unused portion of the credit
facility at December 31, 1999 was $6,426,000. For revolving credit loans,
interest accrues at a rate per annum equal to the Eurodollar rate (as
defined) plus 2.5%, or at the prime rate, at the option of the Company. The
effective interest rate at December 31, 1999 was 8.5%. Borrowings under the
credit agreement is collateralized by substantially all of the assets of
the Company. The credit agreement contains restrictive covenants that,
among other requirements, restrict the payment of dividends, additional
indebtedness, leases, capital expenditures, investments and sale of assets
or merger of the Company with another entity. The covenants also require
the Company to meet certain financial ratios and maintain minimum levels of
net worth. The revolving credit agreement is scheduled to expire on
February 26, 2002.
In connection with the XOXO transaction (see Note 3), the credit agreement
was amended to increase the revolving credit facility to $80,000,000, and
provide a term loan of $10,000,000. The term loan bears interest at prime
plus one-half percent (8.5% at December 31, 1999) and is payable in
quarterly installments of $500,000, plus interest, commencing January 1,
2000, with a final payment of $5,500,000 due on February 26, 2002. The
Company is required to make certain mandatory prepayments based upon
"excess cash flows." as defined in the amendment to the credit agreement.
At December 31, 1999, the Company was not in compliance with certain
covenants under the credit agreement. On April 11, 2000, the lenders waived
compliance with these covenant requirements for 1999 and agreed to amend
the covenants for the year ended December 31, 2000 to provide for the
Company to operate within its fiscal 2000 business plan. In connection with
the waiver and amendment, the Company's principal stockholder agreed to
provide a personal guarantee on $3 million of indebtedness outstanding
under the credit agreement through October 31, 2000.
At December 31, 1999, letters of credit amounting to approximately
$12,300,000 were outstanding.
During fiscal 1998, the Company had a $75,000,000 line of credit which
accrued interest at the prime rate plus 0.25% (8% at December 31, 1998). In
connection with the Simon Purchase Transaction, the line of credit was
terminated and replaced with the revolving credit facility described above.
b. On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY Financial Corporation ("BNY"), pursuant to which BNY
received a nine-year, $7 million note. On September 17, 1997, the Company
and BNY entered into an amendment of the BNY note which provided that
scheduled interest accruing under the note for the period February 1, 1996
through January 31, 1998 be deferred and added to the principal. The note
bears interest at 7% per annum and requires annual principal payments of
$600,000 and $1,100,000 for fiscal 2000 and 2001, respectively with a final
payment of approximately $5,242,000 due in November 2002. BNY is also
entitled to receive mandatory prepayments based upon "excess cash flows" of
the Company, as defined in the Company's note agreements with BNY.
c. 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"). In connection with the Simon
Purchase Transaction (see Note 2), the Company redeemed in full its
outstanding obligation of $10,658,000 under the Apollo Note.
F-14
<PAGE>
Aris Industries, Inc. and Subsidiaries 14
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Annual maturities of long-term debt are as follows (in thousands):
2000 $ 2,600
2001 3,100
2002 11,242
-------
$16,942
=======
9. Stock Incentive Plan
The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the
Company's Board of Directors (or a committee thereof), to award to
employees and directors of, and consultants to, the Company and its
subsidiaries: (i) options to acquire Common Stock at prices determined when
the options are granted, (ii) stock appreciation rights (entitling the
holder to a payment equal to the appreciation in market value of a
specified number of shares of Common Stock over a specified period), (iii)
restricted shares of Common Stock whose vesting is subject to terms and
conditions specified at the time of grant, and (iv) performance shares of
Common Stock that are granted upon achievement of specified performance
goals. Options granted pursuant to the Plan may be either "incentive stock
options" within the meaning of Section 422A of the United States Internal
Revenue Code of 1986, as amended, or non-qualified options. In April 1999,
the Company's Board of Directors approved an amendment to the Plan to allow
for the granting of options to purchase an additional 3,500,000 shares
under the Plan for a total of 7,000,000 shares. Additionally, on March 23,
2000, the Company's Board of Directors approved a further amendment,
subject to shareholder approval, increasing the number of shares for which
options may be granted to 10,000,000.
The Plan provides that options which are cancelled or expire remain subject
to future grant under the Plan. In general, options granted provide for
vesting in three equal annual installments from the date of grant and are
exercisable for a period of 10 years from the grant date.
Transactions in stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 1,803,000 $0.76 1,695,000 $0.70 962,500 $0.37
Granted 7,888,350 1.73 280,000 0.96 910,000 0.97
Exercised (968,834) 0.45 (51,333) 0.13 (52,500) 0.10
Expired/Cancelled (101,200) 1.61 (120,667) 0.66 (125,000) 0.48
---------- ----- ---------- ----- ---------- -----
Outstanding, December 31 8,621,316 $1.70 1,803,000 $0.76 1,695,000 $0.70
========== ===== ========== ===== ========== =====
Options Exercisable, December 31 2,959,166 $1.05 622,666 $0.45 584,997 $0.47
========== ===== ========== ===== ========== =====
</TABLE>
F-15
<PAGE>
Aris Industries, Inc. and Subsidiaries 15
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock options outstanding and exercisable at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Shares Average Remaining
Exercise Under Price Contractual
Prices Option Per Share Life in Years
-------- --------- --------- -------------
<S> <C> <C> <C>
Outstanding:
under $1.00 1,014,166 $ 0.57 7.1
$1.00 - $1.50 1,945,000 1.33 8.6
$1.51 - $2.00 5,662,150 2.00 9.6
--------- ------ ---
8,621,316 $ 1.70 9.0
========== ====== ===
Exercisable:
under $1.00 1,014,166 $ 0.57 7.1
$1.00 - $1.50 1,945,000 1.33 8.6
--------- ------ ---
2,959,166 $ 1.05 7.9
--------- ------ ---
</TABLE>
The Plan provides for the immediate vesting of outstanding options upon a
change of control of the Company. Accordingly, on the date of the Simon
Purchase Transaction, 1,803,000 options became fully vested and
exercisable.
The Company applies the intrinsic value method in accounting for its
stock-based compensation plan. Had the Company measured compensation under
the fair value based method for stock options granted, the Company's net
(loss) income and net (loss) income per share-diluted would have been as
follows (in thousands, except per share data):
1999 1998 1997
Net (loss) income
As reported $(10,583) $(3,728) $ 2,333
Pro forma (14,774) (3,956) 2,249
Net (loss) income per share - diluted
As reported $ (0.19) $ (0.25) $ 0.16
Pro forma (0.27) (0.27) 0.16
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes Option pricing model with the following assumptions
for fiscal 1999, 1998 and 1997, respectively: Risk-free interest rates of
5.8%, 5.5% and 6.2%; dividend yield of 0% for each year; expected lives of
5 years for each year; and, volatility of 180%, 150% and 150%.
F-16
<PAGE>
Aris Industries, Inc. and Subsidiaries 16
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Earnings Per Share
Basic (loss) income per common share is computed by dividing net (loss)
income available for common shareholders, by the weighted average number of
shares of common stock outstanding during each period. Diluted (loss)
income per share is computed assuming the conversion of stock options and
warrants with a market value greater than the exercise price.
The computation of basic and diluted (loss) income per share for each year
were as follows (in thousands except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Net (loss) income $(10,583) $ (3,728) $ 2,333
-------- -------- --------
Denominator:
Basic weighted average shares outstanding 55,374 14,912 13,245
Effect of diluted securities:
Employee stock options -- -- 1,093
-------- -------- --------
Diluted weighted average shares outstanding 55,374 14,912 14,338
======== ======== ========
Basic (loss) earnings per share $ (0.19) $ (0.25) $ 0.18
======== ======== ========
Diluted (loss) earnings per share $ (0.19) $ (0.25) $ 0.16
======== ======== ========
</TABLE>
In 1999, 1998 and 1997, 3,543,511, 1,140,000 and 1,407,500 options and
warrants, respectively, were anti-dilutive and were excluded from the
calculation of diluted weighted average shares outstanding. The diluted
earnings per share computation was made using the treasury stock method.
11. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
December 31,
1999 1998 1997
Current:
Federal $ -- $ -- $ 46
State and local 113 39 28
----- ----- -----
113 39 74
----- ----- -----
Deferred:
Federal -- 75 (34)
State and local 137 76 (178)
----- ----- -----
137 151 (212)
----- ----- -----
$ 250 $ 190 $(138)
===== ===== =====
F-17
<PAGE>
Aris Industries, Inc. and Subsidiaries 17
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is summarized as follows:
December 31,
1999 1998 1997
Federal statutory income tax rate (34)% (34)% 34%
State and local income taxes 1 1 1
Goodwill amortization 3 7 10
Recognition of NOL benefit (36)
Change in Valuation allowance 34 28 (16)
Other, individually less than 5% -- 3 1
----- ----- -----
4% 5% (6)%
===== ===== =====
The components of deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
<S> <C> <C>
Deferred tax assets:
Current:
Restructuring charge $ 723 $ --
Goodwill 1,440 --
Inventories 89 371
Allowance for sales returns, discounts, credits and
doubtful accounts 1,318 1,979
Other 416 310
-------- --------
3,986 2,660
-------- --------
Noncurrent:
Net operating loss carryforwards 33,365 30,719
Alternative minimum tax credit carryforward 846 846
Other tax credit carryforwards 50 37
Other 447 1,205
-------- --------
34,708 32,807
-------- --------
38,694 35,467
Valuation allowance (38,321) (34,573)
-------- --------
Total deferred tax assets $ 373 $ 894
======== ========
</TABLE>
F-18
<PAGE>
Aris Industries, Inc. and Subsidiaries 18
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Goodwill $ -- $694
Other 373 63
---- ----
Total deferred tax liabilities $373 $757
==== ====
Net deferred tax asset $ -- $137
==== ====
At December 31, 1998, prepaid expenses and other current assets included
$150,000 of net deferred tax assets and other liabilities included $13,000
of net noncurrent deferred tax liabilities. The valuation allownace on
deferred taxes increased by $3,748,000 in 1999 and $1,862,000 in 1998.
At December 31, 1999, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $80,000,000
which expire during fiscal 2000 through 2018. As a result of the change in
control of the Company caused by the Simon Purchase Transaction, the
utilization of these net operating loss carryforwards are limited by
Section 382 of the Internal Revenue Code to approximately $1,500,000
annually. Accordingly, the Company expects that a significant portion of
these net operating loss carryforwards will expire. In addition, the
Company's alternative minimum tax credit carryovers are subject to similar
restrictions but do not expire.
12. 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, 1999 are as follows (in thousands):
Year Ending Operating Capital
December 31, Leases Leases
2000 $ 3,673 $ 1,347
2001 3,792 1,249
2002 3,836 678
2003 3,867 533
2004 3,525 329
Thereafter 8,765 --
------- -------
Total minimum lease payments $27,458 4,136
=======
Less amount representing interest 563
-------
Present value of minimum lease payments (including
short-term portion of $1,755) $ 3,573
=======
F-19
<PAGE>
Aris Industries, Inc. and Subsidiaries 19
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company has various operating leases in effect primarily for retail and
outlet stores, offices and warehouses. The store leases expire over the
next ten years, the office leases expire over the next ten years and the
warehouse leases expire over the next four years. The store leases contain
clauses whereby the stores are assessed additional rents based on a
percentage of sales. For the years ended December 31, 1999, 1998 and 1997,
the stores were not charged rent as a percentage of sales. Most of the
operating leases contain renewal options to extend the lease terms. Total
rental expense under all operating leases was approximately $4,385,000,
$2,282,000 and $1,769,000 for fiscal 1999, 1998 and 1997, respectively.
License Agreements
The Company has been granted several licensing agreements to manufacture
and distribute men's, women's and boys' outerwear, sportswear and
activewear products bearing the licensors' labels. The agreements expire at
various dates through 2011. The Company is required to make royalty and
advertising payments based on a percentage of sales, as defined in the
respective agreements, subject to minimum payment thresholds. Royalty
expenses under these licensing agreements totaled $6,920,000, $5,600,000
and $2,480,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum royalty and advertising payments required under the license
agreements are as follows (in thousands):
Year ending
December 31,
2000 $ 4,845
2001 4,209
2002 5,098
2003 5,896
2004 6,094
Thereafter 15,294
-------
Total minimum royalty payments $41,436
=======
Employment Contracts
The Company has entered into employment contracts with certain senior
executives for periods of three to five years, expiring no later than
August 2004. Under the agreements, the covered individuals are entitled to
a specified salary over the contract period. Bonuses are payable based upon
profitability and cash flows of the Company for each period. The estimated
future minimum obligation under these contracts as of December 31, 1999 is
$8,100,000. In addition, upon certain events of termination or change in
control of the Company, certain of these agreements contain lump sum
payment provisions, as defined within the respective agreements.
Litigation
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 it is not possible at this time to predict the outcome of
these legal actions, in the opinion of management, the dispositions of
these matters
F-20
<PAGE>
Aris Industries, Inc. and Subsidiaries 20
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
will not have a material adverse effect on financial position, results of
operations or cash flows.
13. Retirement Plans
The Company participates in a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants vest
immediately in their own contributions and after seven years of service in
employer contributions. The Company made no contributions for fiscal 1999,
1998 and 1997.
The Company's union employees, at its newly-leased (June 1999) warehouse
and distribution facility in New Bedford, Massachusetts, participate in a
multi-employer defined benefit pension plan. The Company's obligations with
respect to the plan will be determined by its collection bargaining
agreement with the union which is presently being negotiated.
14. Business Segment Data
The Company is organized and managed as one business segment that offers
distinct men's, women's and boys' apparel products to its customers. Its
operations are conducted domestically and substantially all of its net
sales are derived from domestic customers. Additionally, all of the
Company's assets are located within the United States. The Company had
sales to one customer that represent 4%, 13% and 10% of net sales for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-21
<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 charged to Balance
at beginning costs and at end
Classification of period expenses Deductions of period
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 4,561,000 $ 9,935,000(1) $ 7,162,000(2) $ 7,334,000
Inventory reserves 2,558,000 597,000 1,050,000(3) 2,105,000
----------- ----------- ----------- -----------
$ 7,119,000 $10,532,000 $ 8,212,000 $ 9,439,000
=========== =========== =========== ===========
Year ended December 31, 1998:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 1,832,000 $10,440,000 $ 7,711,000(2) $ 4,561,000
Inventory reserve for obsolescence 268,000 1,240,000 -- 1,508,000
Reserve for price allowances 880,000 1,075,000 905,000(3) 1,050,000
----------- ----------- ----------- -----------
$ 2,980,000 $12,755,000 $ 8,616,000 $ 7,119,000
=========== =========== =========== ===========
Year ended December 31, 1997:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 1,803,000 $ 2,738,000 $ 2,709,000(2) $ 1,832,000
Inventory reserve for obsolescence -- 268,000 -- 268,000
Reserve for price allowances 961,000 732,000 813,000(3) 880,000
----------- ----------- ----------- -----------
$ 2,764,000 $ 3,738,000 $ 3,522,000 $ 2,980,000
=========== =========== =========== ===========
</TABLE>
(1) Includes allowances in connection with the XOXO acquisition
(2) Write-off of receivables
(3) Write-off of inventory
S-1
<PAGE>
3. Exhibits
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index included in Item 14(c) below, numbered in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
There were none filed during the fourth calendar quarter ended December 31,
1999.
(c) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------
<S> <C> <C>
2. Second Amended Joint Plan of Reorganization (3)
dated March 26, 1993, as amended May 11 and
June 9, 1993
3.3 Restated Certificate of Incorporation filed on June (3)
30, 1993
3.4 Amended and Restated By-Laws effective June 30, (3)
1993
3.5 Amendment to the Restated Certificate of (20)
Incorporation filed with the Secretary of State on
July 29, 1999
4.1 Specimen Certificate Evidencing Common Stock. (1)
10.67 Series A Junior Secured Note Agreement dated as (3)
of June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.76 Equity Registration Rights Agreement dated as of (3)
June 30, 1993 among Registrant and the Holders of
Registrable Shares Referred to Therein.
10.79 Severance Agreement dated April 3, 1991 between (3)
Registrant and Paul Spector.
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------
<S> <C> <C>
10.80 1993 Stock Incentive Plan of Registrant, as (3)
amended by Amendment No. 1 thereto dated June
24, 1993.
10.81 Form of Indemnification Agreement dated as of (3)
June 30, 1993 between Registrant and each
member of Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.101 Amendment dated May 5, 1997 to Series A Junior (11)
Secured Note Agreement dated as of June 30, 1993
between Registrant and BNY Financial
Corporation.
10.103 Amendment dated June 18, 1997 to Series A Junior (13)
Secured Note Agreement dated as of June 30, 1993
between Registrant and BNY Financial
Corporation.
10.105 Asset Purchase Agreement dated as of July 15, (14)
1997 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 (14)
among 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.
10.109 Amendment executed September 12, 1997 to Series (15)
A and Series B Junior Secured Note Agreements
dated as of June 30, 1993 between Registrant, BNY
Financial Corporation and AIF, L.P.
10.111 Securities Purchase Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Arnold Simon.
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------
<S> <C> <C>
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
10.114 Retention Agreement dated as of February 18, 1999 (17)
by and between Aris Industries, Inc. and Charles S.
Ramat.
10.115 Financing Agreement dated February 26, 1999 by (18)
and among the Company and its Subsidiaries and
CIT Commercial Group, Inc. and the other
Financial Institutions named therein.
10.116 Agreement and Plan of Merger dated July 19, 1999 (19)
by and among Aris Industries, Inc., XOXO
Acquisition Corp. and Lola, Inc. and its
shareholders ("Agreement and Plan of Merger").
The exhibits and schedules to the Agreement and Plan of
Merger are listed on the last page of such Agreement.
Such exhibits and schedules have not been filed by the
Registrant, who hereby undertakes to file such exhibits
and schedules upon request of the Commission.
10.117 Amendment No. 1 to Agreement and Plan of (19)
Merger.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene,
Michele Bohbot and Lynne Hanson,
dated August 10, 1999.
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------
<S> <C> <C>
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing
Agreement, as Lenders; and The CIT
Group/Commercial Services, Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
21. List of Subsidiaries (20)
23. Consent of PricewaterhouseCoopers LLP (20)
23.1 Consent of Deloitte & Touche LLP
27. Financial Data Schedule (20)
</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) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June
30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
(12) Omitted.
(13) Filed as the indicated Exhibit to the Report on Form 8-K dated June
18, 1997 and incorporated herein by reference.
(14) Filed as the indicated Exhibit to the Report on Form 8-K dated July
15, 1997 and incorporated herein by reference.
(15) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 12, 1997 and incorporated herein by reference.
-36-
<PAGE>
(16) Filed as Annex A to the Company's Proxy Statement filed with the
Commission on May 27, 1999, and incorporated herein by reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with
the Commission on or about April 13, 1999 and incorporated herein by
reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999.
(20) Filed herewith.
-37-
<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/ Arnold H. Simon
----------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /S/Paul Spector
----------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /S/Vincent F. Caputo
----------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/ Arnold Simon April 14, 2000
- -------------------------------------
Arnold Simon, Chairman of the Board
and Chief Executive Officer; Director
/S/ Steven Feiner April 14, 2000
- -------------------------------------
Steven Feiner, Director
/S/ Gregg Fiene April 14, 2000
- -------------------------------------
Gregg Fiene, Director
/S/ Robert Katz April 14, 2000
- -------------------------------------
Robert Katz, Director
/S/ Debra Simon April 14, 2000
- -------------------------------------
Debra Simon, Director
/S/ Howard Schneider April 14, 2000
- -------------------------------------
Howard Schneider, Director
/S/ Mark Weiner April 14, 2000
- -------------------------------------
Mark Weiner, Director
-38-
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ARIS INDUSTRIES, INC.
(Under Section 805 of the Business Corporation Law)
We, the undersigned, being the President and Assistant Secretary,
respectively, of Aris Industries, Inc., hereby certify that:
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is ARIS INDUSTRIES, INC.
SECOND: The Certificate of Incorporation of the Corporation was filed with
the Department of State on March 6, 1947 under the name Uniroy of Hempstead,
Inc. The Restated Certificate of Incorporation of the Corporation was filed on
June 30, 1993.
THIRD: The amendment of the Certificate of Incorporation of the Corporation
effected by this Certificate of Amendment is to increase the number of shares of
common stock, par value $.01 per share, that the Corporation is authorized to
issue, from 50,000,000 to 100,000,000 shares.
FOURTH: To accomplish the foregoing amendment, Article "THIRD" of the
Certificate of Incorporation of the Corporation with respect to capital stock of
the Corporation is amended by deleting Paragraphs 1(a) and (b) and replacing
them with the following:
<PAGE>
1. The aggregate number of shares of the capital stock which the
Corporation shall have authority to issue is One Hundred Ten Million
(110,000,000) shares, consisting of:
(a) One Hundred Million (100,000,000) shares of Common Stock, par
value $.01 per share (the "Common Stock"); and
(b) Ten Million (10,000,000) shares of Preferred Stock, par value
$.01 per share (the "Preferred Stock").
FIFTH: The foregoing amendment of the Certificate of Incorporation of the
Corporation was authorized by the Board of Directors of the Corporation, at a
duly called and convened meeting on April 12, 1999, followed by the affirmative
vote of a majority of all outstanding shares of the Corporation entitled to vote
at a duly called and convened meeting of shareholders on June 17, 1999.
IN WITNESS WHEREOF, we have subscribed this document on the set forth
below, and do hereby affirm, under the penalty of perjury on this 27th day of
July, 1999.
/s/ David Fidlon
-----------------------------------------
David Fidlon, President
/s/ Robert W. Forman
-----------------------------------------
Robert W. Forman, Assistant Secretary
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Europe Craft Imports, Inc. New Jersey
ECI Sportswear, Inc. New York
XOXO Clothing Company, Incorporated Delaware
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.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-63411) of Aris Industries, Inc. of our report
dated March 30, 2000, except for Note 8(a) for which the date is April 11, 2000,
relating to the financial statements and financial statement schedule, which
appears in this Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
April 14, 2000
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-63411 of Aris Industries, Inc. and Subsidiaries on Form S-8 of our report
dated March 31, 1999 appearing in this Annual Report on Form 10-K of Aris
Industries, Inc. and Subsidiaries for the fiscal year ended December 31, 1999.
/s/ Deloitte & Touche LLP
April 14, 2000
Parsippany, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,109,000
<SECURITIES> 0
<RECEIVABLES> 34,004,000
<ALLOWANCES> 0
<INVENTORY> 18,233,000
<CURRENT-ASSETS> 55,855,000
<PP&E> 16,996,000
<DEPRECIATION> (6,244,000)
<TOTAL-ASSETS> 106,117,000
<CURRENT-LIABILITIES> 48,436,000
<BONDS> 0
<COMMON> 794,000
0
0
<OTHER-SE> 38,457,000
<TOTAL-LIABILITY-AND-EQUITY> 106,117,000
<SALES> 175,359,000
<TOTAL-REVENUES> 177,930,000
<CGS> 124,825,000
<TOTAL-COSTS> 59,253,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,185,000
<INCOME-PRETAX> (10,333,000)
<INCOME-TAX> 250,000
<INCOME-CONTINUING> (10,583,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,583,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
