SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
June 30, 2000
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 22-1715274
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1411 BROADWAY, NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 642-4300
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding 79,686,265
As of August 11, 2000
<PAGE>
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited)
a. Consolidated Condensed Balance Sheets as
of June 30, 2000 and December 31, 1999 3
b. Consolidated Condensed Statements of
Operations for the Six-Months Ended June
30, 2000 and June 30, 1999 4
c. Consolidated Condensed Statements of
Operations for the Three-Months Ended
June 30, 2000 and June 30, 1999 5
d. Consolidated Condensed Statements of Cash
Flows for the Six-Months Ended June 30,
2000 and June 30, 1999 6
e. Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
<TABLE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 362 $ 1,109
Receivables, net 28,630 34,004
Inventories 28,551 18,233
Prepaid expenses and other current assets 1,560 2,509
--------- ---------
Total current assets 59,103 55,855
Property and equipment, net 12,681 10,752
Goodwill, net 37,088 37,894
Other assets 2,073 1,616
--------- ---------
TOTAL ASSETS $ 110,945 $ 106,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility $ 36,527 $ 25,485
Current portion of long-term debt 2,600 2,600
Current portion of capitalized lease obligations 988 1,755
Accounts payable 20,906 14,591
Accrued expenses and other current liabilities 5,002 4,005
--------- ---------
Total current liabilities 66,023 48,436
Long-term debt 13,342 14,342
Capitalized lease obligations 2,127 1,818
Other liabilities 2,472 2,270
--------- ---------
Total liabilities 83,964 66,866
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value: 10,000 shares authorized; none
issued and outstanding -- --
Common stock, $.01 par value: 100,000 shares authorized
79,544 issued and outstanding at June 30, 2000
and 79,434 issued and outstanding at December 31, 1999 795 794
Additional paid-in capital 80,571 80,324
Accumulated deficit (54,021) (41,399)
Unearned compensation (364) (468)
--------- ---------
Total stockholders' equity 26,981 39,251
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,945 $ 106,117
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements
-3-
<PAGE>
<TABLE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Six- Six-
(in thousands, except per share data) Months Ended Months Ended
June 30, June 30,
2000 1999
-------------- --------------
<S> <C> <C>
Net Sales $ 87,086 $ 53,457
Cost of Sales (56,768) (39,889)
-------- --------
Gross Profit 30,318 13,568
Commission and Licensing Income 1,161 536
-------- --------
Income before operating expenses, interest expense and income
tax (provision) benefit 31,479 14,104
Operating expenses:
Selling and administrative expenses (38,641) (15,508)
Start-up costs (1,633) --
Restructuring and other costs (1,253) (8,001)
-------- --------
Loss before interest expense and income tax
(provision) benefit (10,048) (9,405)
Interest expense, net (2,503) (1,589)
-------- --------
Loss before income tax (provision) benefit (12,551) (10,994)
Income tax (provision) benefit (71) 587
-------- --------
Net loss ($12,622) ($10,407)
======== ========
Basic net loss per share: ($ 0.16) ($ 0.29)
-------- --------
Diluted net loss per share: ($ 0.16) ($ 0.29)
-------- --------
Per share data:
Weighted average shares outstanding - Basic 79,513 36,487
Weighted average shares outstanding - Diluted 79,513 36,487
</TABLE>
See accompanying notes to consolidated condensed financial statements
-4-
<PAGE>
<TABLE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three- Three-
(in thousands, except per share data) Months Ended Months Ended
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Net Sales $ 44,200 $ 25,324
Cost of Sales (29,034) (18,416)
-------- --------
Gross Profit 15,166 6,908
Commission and Licensing Income 596 294
-------- --------
Income before operating expenses, interest expense and income
tax (provision) benefit 15,762 7,202
Operating expenses:
Selling and administrative expenses (19,318) (8,095)
Start-up costs (603) --
Restructuring and other costs (129) (1,850)
-------- --------
Loss before interest expense and income tax
(provision) benefit (4,288) (2,743)
Interest expense, net (1,230) (601)
-------- --------
Loss before income tax (provision) benefit (5,518) (3,344)
Income tax (provision) benefit (10) 261
-------- --------
Net loss ($ 5,528) ($ 3,083)
======== ========
Basic net loss per share: ($ 0.07) ($ 0.07)
-------- --------
Diluted net loss per share: ($ 0.07) ($ 0.07)
-------- --------
Per share data:
Weighted average shares outstanding - Basic 79,541 46,035
Weighted average shares outstanding - Diluted 79,541 46,035
</TABLE>
See accompanying notes to consolidated condensed financial statements
-5-
<PAGE>
<TABLE>
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six- Six-
(In thousands, except per share data) Months Ended Months Ended
June 30, June 30,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($12,622) ($10,407)
-------- --------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,740 537
Issuance of notes in lieu of interest -- 108
Non-cash stock based compensation 293 --
Impairment of goodwill and other intangibles -- 3,750
Change in assets and liabilities :
Decrease in receivables 5,374 5,787
(Increase) / decrease in inventories (10,318) 7,330
Decrease / (increase) in prepaid expenses and other current assets 918 (373)
(Increase) / decrease in other assets (694) 9
Increase / (decrease) in accounts payable 6,315 (1,919)
Increase / (decrease) in accrued expenses and other current liabilities 997 (4,228)
Increase in other liabilities 202 99
-------- --------
Total Adjustments 5,827 11,100
-------- --------
Net cash (used in) provided by operating activities (6,795) 693
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,417) (709)
-------- --------
Net cash used in investing activities (3,417) (709)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital leases (1,636) (4,583)
Book overdraft 860
Stock options exercised 59 20
Proceeds from the issuance of common -- 20,000
Common stock issuance costs paid -- (1,451)
Increase (decrease) in borrowings under revolving credit facility 11,042 (15,370)
-------- --------
Net cash provided by (used in) financing activities 9,465 (524)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (747) (540)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,109 1,112
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 362 $ 572
======== ========
Non-Cash Investing and Financing Activities:
Capital Lease Obligations Incurred $ 209 $ 1,128
Exchange of Series B Secured Notes for Common Stock -- 4,846
</TABLE>
See accompanying notes to consolidated condensed financial statements
-6-
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements as of June 30, 2000 and for the
three and six month periods ended June 30, 2000 and 1999, are unaudited and
reflect all adjustments consisting of normal recurring adjustments except for
restructuring and other costs (See Note 6) which are, in the opinion of
management, necessary for a fair presentation of financial position, operating
results and cash flows for the periods.
The consolidated condensed balance sheet as of December 31, 1999 was derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles. The accompanying consolidated
condensed financial statements have been prepared in accordance with accounting
standards appropriate for interim financial statements and should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. The
operating results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of the operating results for the year ending December
31, 2000.
2. LIQUIDITY AND BUSINESS RISKS
The Company's results through June 30, 2000 are within expectations. Based on
expected operating results for the remainder of fiscal 2000, as well as the
personal guarantees and collateral from the Company's chief executive officer,
the Company anticipates it will have adequate liquidity and capital to meet its
requirements for the fiscal year 2000.
3. 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").
7
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS
On August 10, 1999, the Company consummated the merger of Lola, Inc. ("Lola"), a
California corporation, with and into Europe Craft Imports, Inc. ("ECI"), a New
Jersey corporation (the "Merger"), which 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 $22,774,000 and
has been recorded as goodwill. The goodwill is being amortized over a twenty
year useful life using the straight line method. In conjunction with the merger,
the 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.
5. DEBT
The Company's long-term indebtedness consists, in part, of its obligations to
BNY Financial Corporation ("BNY")under the Series A Junior Secured Note
Agreement dated June 30, 1993,as amended, pursuant to which BNY is currently
owed $6,942,000 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.
The Company entered into a Financing Agreement with The CIT Commercial Services
Group, Inc. 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 collateralized by liens
on substantially all of the assets of the
8
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Company. For revolving credit loans, interest will accrue at the bank's prime
rate. For Eurodollar loans, interest will accrue at a rate per annum equal to
the Eurodollar rate (as defined) 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.
In connection with the XOXO transaction (See Note 3), the Company's loan
agreement was amended in August 1999 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.
During April 2000, the Company entered into an amendment of its Financing
Agreement with CIT Commercial Services Group, Inc. and certain other financial
institutions, under which the lenders waived compliance with certain covenant
requirements for 1999 which the Company was not in compliance with and amended
the covenants for the year ended December 31, 2000. In addition, the amendment
provides an overdraft facility based on seasonal needs. The amendment also
increased the interest rate on the Company's revolving credit facility to prime
plus one-quarter percent and increased the interest rate on the Company's term
loan to prime plus three-quarter percent. In connection with the waivers and
amendment, the Company's chief executive officer agreed to provide a personal
guarantee on $3 million of indebtedness outstanding under the Financing
Agreement through the later of October 31, 2000 or the date on which the Company
does not have over-advances under its revolving line of credit.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned by the
Company's chief executive officer entered into an agreement (the "L/C
Agreement") with the Company's principal commercial lender to facilitate the
opening of up to $17,500,000 in letters of credit for inventory of products the
Company will eventually sell. Pursuant to the L/C Agreement, the chief executive
officer entered into a guaranty agreement limited to $7,000,000 of the
reimbursement of AHS' obligations under the L/C Agreement. It is contemplated
that AHS will retain title to the inventory until such time as the Company ships
such inventory to its customers at which time title will transfer the inventory
to the Company who will pay AHS for the inventory at its cost.
6. START-UP COSTS OF NEW LICENSING OPERATIONS
During the six-months ended June 30, 2000, the Company incurred $1,633,000 of
start-up costs relating to various license agreements for which product launches
are scheduled for later in fiscal years 2000 and 2001. These start-up costs
consist of salaries, samples and related supplies directly attributable to newly
licensed operations. The
9
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Company expects to continue to incur such costs during the remainder of fiscal
2000 and fiscal 2001 in connection with several of its new license arrangements.
7. RESTRUCTURING AND OTHER COSTS
During the six-months ended June 30, 2000 the Company recorded charges of
$1,253,000 associated with the continuing restructuring of its corporate office
and distribution facilities. These charges before taxes relate primarily to
employee severance costs.
During the first quarter ended March 31, 1999 in connection with the Simon
Purchase Transaction, 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 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 $3,750,000 (included in goodwill) was deemed impaired and
written-off. In addition, the Company made a severance payment of approximately
$2,401,000 pursuant to the Retention Agreement between the Company and its
former president.
Additionally, during the second quarter ended June 30, 1999, the Company
commenced a restructuring of its operations and recorded a restructuring charge
of $1,850,000. The major components of the restructuring charges relate to
severance pay, estimated costs to exit and sub-lease certain facilities and
impairment charges related to fixed assets at the vacated facilities.
8. INVENTORIES
June 30, 2000 December 31, 1999
-------------- -----------------
(In Thousands) (In Thousands)
Finished Goods $ 21,913 $ 14,040
Work-in process 2,982 1,196
Raw materials 3,656 2,997
------- ------
$ 28,551 $ 18,233
=========== ==========
.
10
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
9. PER SHARE DATA
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.
--------------------------------------------------------------------------------
Six-Months Ended June 30, 2000 June 30, 1999
(In thousands (In thousands
except per except per
share data) share data)
--------------------------------------------------------------------------------
NUMERATOR:
Net loss ............................ $(12,622) $(10,407)
---------- --------
DENOMINATOR:
Basic weighted average shares
outstanding ....................... 79,513 36,487
EFFECT OF DILUTED
SECURITIES:
Stock Options -- --
---------- --------
Diluted weighted average
shares outstanding .................... 79,513 36,487
======== ========
Basic net (loss) per share ............ $ (0.16) $ (0.29)
========= ========
Diluted net (loss) per share .......... $ (0.16) $ (0.29)
========= ========
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Three-Months Ended June 30, 2000 June 30, 1999
(In thousands (In thousands
except per except per
share data) share data)
--------------------------------------------------------------------------------
NUMERATOR:
Net loss ............................ $ (5,528) $ (3,083)
---------- --------
DENOMINATOR:
Basic weighted average shares
outstanding ....................... 79,541 46,035
EFFECT OF DILUTED
SECURITIES:
Stock Options -- --
-------- --------
Diluted weighted average
shares outstanding .................... 79,541 46,035
======== ========
Basic net (loss) per share ............ $ (0.07) $ (0.07)
======== ========
--------------------------------------------------------------------------------
11
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
Three-Months Ended June 30, 2000 June 30, 1999
(In thousands (In thousands
except per except per
share data) share data)
--------------------------------------------------------------------------------
Diluted net (loss) per share .......... $ (0.07) $ (0.07)
========= ========
--------------------------------------------------------------------------------
Options and warrants to purchase 10,947,145 and 3,309,677 shares of Common Stock
were outstanding as of June 30, 2000 and June 30, 1999, respectively, but were
not included in the computation of diluted earnings per share because the effect
would be anti-dilutive.
10. COMMITMENTS AND CONTINGENCIES
Licensing Agreements
The Company has been granted several license 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. Future minimum royalty and advertising payments
required under the license agreements are as follows (in thousands):
2000..................... $ 3,093
2001..................... 4,524
2002..................... 5,554
2003..................... 6,445
2004..................... 5,380
Thereafter .............. 9,939
-------
Total minimum royalty
and advertising payments $34,935
=======
In April 2000, Perry Ellis International and the Company mutually agreed not to
continue the "Perry Ellis America" Jeanswear license after the Year 2000.
Simultaneous with this agreement the Company and Perry Ellis International
agreed to renew the Company's Loungewear License Agreement through December 31,
2003.
Contingencies
The Company, in the ordinary course of its business, is the subject of, or a
party to, various pending or threatened legal actions. While it is not possible
at this time to predict the outcome of any litigation, in the opinion of
management any ultimate liability arising from these actions will not have a
material effect on the Company's financial position, results of operations or
cash flows.
12
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") for the three and six month periods ended
June 30, 2000 and June 30, 1999 should be read in conjunction with the
consolidated condensed financial statements, including the notes thereto,
included on pages 3 through 12 of this report.
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had a working capital deficit of approximately
$6,920,000 as compared to a working capital surplus of approximately $7,419,000
at December 31, 1999. The decrease in working capital was primarily due to the
Company's net loss incurred in the six-months ended June 30, 2000. In addition,
the working capital was negatively impacted by the build up of inventory for new
start-up brands which are scheduled to start shipping in the fourth quarter of
fiscal 2000. During the six months ended June 30, 2000, the Company financed its
working capital requirements and capital expenditures principally through its
credit facilities.
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 collateralized by liens on
13
<PAGE>
substantially all of the assets of the Company. For revolving credit loans,
interest will accrue at the bank's prime rate. For Eurodollar loans, interest
will accrue at a rate per annum equal to the Eurodollar rate plus 2.5%. The
agreement evidencing the line of credit contains various financial and other
covenants and conditions, including, but not limited to, limitations on paying
dividends, making acquisitions and incurring additional indebtedness.
In connection with the XOXO transaction, the Company's Financing 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, which is paid monthly,
at prime plus one- half percent and principal is payable in quarterly
installments of $500,000, 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.
During April 2000, the Company entered into an amendment of its Financing
Agreement with CIT Commercial Services Group, Inc. and certain other financial
institutions, under which the lenders waived compliance with certain covenant
requirements for 1999 which the Company was not in compliance with and amended
the covenants for the year ended December 31, 2000. In addition, the amendment
provides an overdraft facility based on seasonal needs. The amendment also
increased the interest rate on the Company's revolving credit facility to prime
plus one-quarter percent and increased the interest rate on the Company's term
loan to prime plus three-quarter percent. In connection with the waivers and
amendment, the Company's chief executive officer agreed to provide a personal
guarantee on $3 million of indebtedness outstanding under the Financing
Agreement through the later of October 31, 2000 or the date on which the Company
does not have over-advances under its revolving line of credit.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned by the
Company's chief executive officer entered into an agreement (the "L/C
Agreement") with the Company's principal commercial lender to facilitate the
opening of up to $17,500,000 in letters of credit for inventory of products the
Company will eventually sell. Pursuant to the L/C Agreement, the chief executive
officer entered into a guaranty agreement limited to $7,000,000 of the
reimbursement of AHS' obligations under the L/C Agreement. It is contemplated
that AHS will retain title to the inventory until such time as the Company ships
such inventory to its customers at which time title will transfer the inventory
to the Company who will pay AHS for the inventory at its cost.
The Company's long-term indebtedness consists, in part, of its obligations to
BNY Financial Corporation ("BNY")under the Series A Junior Secured Note
Agreement dated June 30, 1993, pursuant to which BNY is owed $6,942,000,
including $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
14
<PAGE>
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.
The Company's results through June 30, 2000 are within expectations. Based on
expected operating results for the remainder of fiscal 2000, as well as the
personal guarantees and collateral from the Company's chief executive officer,
the Company anticipates it will have adequate liquidity and capital to meet its
requirements for the fiscal year 2000.
RESULTS OF OPERATIONS
The Company reported net losses of $5,528,000 and $12,622,000 for the three and
six month periods ended June 30, 2000 respectively, compared to net losses of
$3,083,000 and $10,407,000 for the three and six month periods ended June 30,
1999.
The increase in the loss for the three month period ended June 30, 2000 was
primarily due to increases in interest expense and start-up costs of $603,000
associated with new licensing arrangements for which product launches are
scheduled for later in fiscal 2000 and 2001, which the Company had not yet
incurred in last years comparable quarter. In addition, the Company opened four
new XOXO outlet stores, in addition to the eight new stores opened since the
acquisition of XOXO on August 10, 1999, which incurred significant selling and
administrative expenses resulting in operating losses.
For the three-months ended June 30, 1999, the net loss was primarily
attributable to the Company's restructuring and other charges of $1,850,000
relating to the consolidation of operations and facilities. Such charges
consisted of severance pay, estimated costs to exit and sub-lease facilities and
impairment charges related to fixed assets at the vacated facilities.
The increase in the net loss for the six month period ended June 30, 2000 was
primarily due to increases in interest expense and start-up costs of $1,633,000
associated with new licensing arrangements for which product launches are
scheduled for later in fiscal 2000 and 2001, which the Company had not yet
incurred in last years comparable period. In addition, the Company opened twelve
XOXO outlet stores, since the acquisition of XOXO on August 10, 1999, which
incurred significant selling and administrative expenses resulting in operating
losses.
For the six-months ended June 30, 1999 the net loss was primarily attributable
to the Company's restructuring and other charges of $8,001,000 which consisted
of (i) $2,401,000 relating to a
15
<PAGE>
severance payment made pursuant to a Retention Agreement between the Company and
its former President, (ii) a non-recurring charge of $3,750,000 in connection
with the write off of impaired goodwill (See Note 6 to the Financial Statements)
and (iii) additional charges of $1,850,000 relating to the consolidation of
operations and facilities.
NET SALES
The Company's net sales increased from $25,324,000 during the three-months ended
June 30, 1999 to $44,200,000 during the three-months ended June 30, 2000. This
increase of $18,876,000 was primarily due to the inclusion of XOXO's sales (XOXO
was acquired by the Company on August 10, 1999) of $21,403,000, including XOXO
outlet and retail store sales. In addition, the Company's net sales were
positively impacted by $2,848,000 in sales attributable to the roll out of the
Company's new "Baby Phat" product line and a sales increase in the Company's own
"Members Only" branded product line of $1,409,000. These increases in sales were
offset by a slow down in sales of the Company's "FUBU" product line of
$6,403,000, which was negatively impacted due to a negative retail environment,
along with a decrease of $381,000 attributable to discontinued lines and private
label sales.
The Company's net sales increased from $53,457,000 during the six-months ended
June 30, 1999 to $87,086,000 during the six-months ended June 30, 2000. This
increase of $33,629,000 was primarily due to the inclusion of XOXO's sales (XOXO
was acquired by the Company on August 10, 1999) of $44,030,000, including XOXO
outlet and retail store sales. In addition, the Company's net sales were
positively impacted by $4,044,000 in sales attributable to the roll out of the
Company's new "Baby Phat" product line. These increases in sales were offset by
a decrease in the "FUBU" product line of $11,846,000, which was negatively
impacted due to a negative retail environment, $1,075,000 in the "Members Only"
product lines and $1,524,000 attributable to discontinued lines and private
label sales.
GROSS PROFIT
Gross Profit for the three-months ended June 30, 2000 was $15,166,000 or 34.3%
of net sales compared to $6,908,000 or 27.3% of net sales for the three-months
ended June 30, 1999. Gross profit was positively impacted by sales of higher
margin XOXO (XOXO was acquired by the Company on August 10, 1999) and sales of
"Baby Phat" products. Sales of the "Baby Phat" product line commenced in April
2000. In addition, margins on "Perry Ellis" branded products improved compared
to last year when the Company liquidated prior season inventory at reduced
prices. Gross profit margins were negatively impacted by lower margins on the
Company's "FUBU" and "Members Only" product lines. Last year's gross profit was
also negatively impacted due to the liquidation of inventories on discontinued
divisions.
Gross Profit for the six-months ended June 30, 2000 was $30,318,000 or 34.8% of
net sales compared to $13,568,000 or 25.4% of net sales
16
<PAGE>
for the six-months ended June 30, 1999. Gross profit was positively impacted by
sales of higher margin XOXO (XOXO was acquired by the Company on August 10,
1999) and "Baby Phat" products. Sales of the "Baby Phat" product line commenced
in April 2000. In addition, margins on "Perry Ellis" branded products improved
compared to last year when the Company liquidated prior season inventory at
reduced prices. Gross profit margins were negatively impacted by lower margins
on the Company's "FUBU" and "Members Only" product lines. Last years gross
profit was also negatively impacted due to the liquidation of inventories on
discontinued divisions.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $19,318,000 or 43.7% of net sales for
the three-months ended June 30, 2000 compared to $8,095,000 or 32.0% of net
sales for the three-months ended June 30, 1999. The increase in Selling and
Administrative expenses is attributable to the inclusion of XOXO's Selling and
Administrative expenses (XOXO was acquired on August 10, 1999) which include
approximately $936,000 of depreciation and goodwill amortization including XOXO
store operations. In addition, Selling and Administrative expenses have
increased due to the inclusion of the XOXO Retail and Outlet Stores which have
incurred significant selling and administrative expenses that exceeded their
sales due to the store's limited market exposure in the short time that they
have been operating. Also, the Company incurred $654,000 of selling and
administrative expenses attributable to the Company's "Brooks Brothers" golfwear
product line which started limited shipping in June 2000.
Selling and Administrative expenses were $38,641,000 or 44.4% of net sales for
the six-months ended June 30, 2000 compared to $15,508,000 or 29.0% of net sales
for the six-months ended June 30, 1999. The increase in Selling and
Administrative expenses is attributable to the inclusion of XOXO's Selling and
Administrative expenses (XOXO was acquired on August 10, 1999) which include
approximately $1,858,000 of depreciation and goodwill amortization including
XOXO store operations. In addition, Selling and Administrative expenses have
increased due to the inclusion of the XOXO Retail and Outlet Stores which have
incurred significant selling and administrative expenses that exceeded their
sales due to the store's limited market exposure in the short time that they
have been operating. Also, the Company incurred $654,000 of selling and
administrative expenses attributable to the Company's "Brooks Brothers" golfwear
product line which started limited shipping in June 2000.
START-UP COSTS OF NEW LICENSING OPERATIONS
During the three and six month periods ended June 30, 2000, the Company incurred
$603,000 and $1,633,000 respectively, of start-up costs relating to various
license agreements for which product launches are scheduled for later in fiscal
year's 2000 and 2001. These
17
<PAGE>
start-up costs consist of salaries, samples and related supplies directly
attributable to newly licensed operations. The Company expects to continue to
incur such costs during the remainder of fiscal 2000 and 2001 in connection with
several of its new license arrangements.
RESTRUCTURING AND OTHER COSTS
During the three and six month periods ended June 30, 2000 the Company recorded
charges of $129,000 and $1,253,000 respectively, associated with the continuing
restructuring of its corporate office and distribution facilities. These charges
before taxes relate primarily to employee severance costs.
During the three and six month periods ended June 30, 1999 the Company recorded
charges of $1,850,000 and $8,001,000 respectively which consisted of (i)
$2,401,000 relating to a severance payment made pursuant to a Retention
Agreement between the Company and its former President, (ii) a non-recurring
charge of $3,750,000 in connection with the write off of impaired goodwill (See
Note 6) and (iii) additional charges of $1,850,000 relating to the consolidation
of operations and facilities.
INTEREST EXPENSE
Interest expense for the three-months ended June 30, 2000 increased by $629,000
or 104.7% compared to the three-month period ended June 30, 1999. This increase
was due to interest on the Company's $10,000,000 Term Loan dated August 10,
1999, the date of the XOXO acquisition, an increase in borrowings on the
Company's revolving credit facility, as well as increases in the prime lending
rate from 7.75% as of June 30, 1999 to 9.50% as of June 30, 2000. In addition,
the amendment to the Company's Financing Agreement increased the interest rate
on the Company's revolving credit facility from prime to prime plus one-quarter
percent and increased the interest rate on the Company's term loan from prime
plus one-half percent to prime plus three-quarter percent.
Interest expense for the six-months ended June 30, 2000 increased by $914,000 or
57.6% compared to the six-month period ended June 30, 1999. This increase was
due to interest on the Company's $10,000,000 Term Loan dated August 10, 1999,
the date of the XOXO acquisition, an increase in borrowings on the Company's
working capital facility, as well as increases in the prime lending rate from
7.75% as of June 30, 1999 to 9.50% as of June 30, 2000. In addition, the
amendment to the Company's Financing Agreement increased the interest rate on
the Company's revolving credit facility from prime to prime plus one-quarter
percent and increased the interest rate on the Company's term loan from prime
plus one-half percent to prime plus three-quarter percent.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
18
<PAGE>
Not Applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
None
ITEM 2 CHANGES IN SECURITIES
----------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
No reports were filed under Form 8-K
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: August 11, 2000 By /s/
--------------------------------------
Paul Spector
Chief Financial Officer / Treasurer
20
<PAGE>
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 dated March (3)
26, 1993, as amended May 11 and June 9, 1993
(Note: Annexes omitted)
3.3 Restated Certificate of Incorporation filed on June 30, 1993 (3)
3.4 Amended and Restated By-Laws effective June 30, 1993 (3)
3.5 Amended and Restated Certificate of Incorporation filed on (22)
July 29, 1999 increasing the authorized shares
4.1 Specimen Certificate Evidencing Common Stock. (1)
10.67 Series A Junior Secured Note Agreement dated as of June (3)
30, 1993 between Registrant and BNY Financial
Corporation.
10.68 Series A Junior Secured Note dated as of June 30, 1993 (3)
issued by Registrant to BNY Financial Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, 1993 (3)
between Registrant, BNY Financial Corporation and AIF II,
L.P.
10.76 Equity Registration Rights Agreement dated as of June 30, (3)
1993 among Registrant and the Holders of Registered Shares
Referred to Therein.
10.79 Severance Agreement dated April 3, 1991 between (3)
Registrant and Paul Spector.
10.80 1993 Stock Incentive Plan of Registrant, as amended by (3)
Amendment No. 1 thereto dated June 24, 1993.
10.99 Warrant dated September 30, 1996 issued by Aris Industries, (10)
Inc. to Heller Financial, Inc.
10.101 Amendment dated May 5, 1997 to Series A Junior Secured (11)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.103 Amendment dated June 18, 1997 to Series A Junior Secured (13)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated Exhibit
to Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------
<S> <C> <C>
10.105 Asset Purchase Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., as Seller, Steven Arnold and
Christopher Healy as Shareholders of Seller, and Aris
Management Corp. (n/k/a ECI Sportswear, Inc.) , as
Purchaser.
10.106 Shareholders Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., Steven Arnold, Christopher Healy,
Aris Management Corp. (n/k/a ECI Sportswear, Inc.), the
Registrant, Apollo Aris Partners, L.P. and Charles S. Ramat.
10.107 Amendment dated July 18, 1997 to Series A Junior Secured (14)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.109 Amendment executed September 12, 1997 to Series A and (15)
Series B Junior Secured Note Agreements dated as of June
30, 1993 between Registrant, BNY Financial Corporation
and AIF, L.P.
10.111 Securities Purchase 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 Arnold
Simon.
10.112 Shareholders Agreement, dated as of February 26, 1999, (17)
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 February (17)
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 by and (17)
between Aris Industries, Inc. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by and (18)
among the Company and its Subsidiaries and CIT
Commercial Group, Inc. and the other Financial Industries
named therein.
10.116 Employment Agreement effective as of March 1, 1999 with (19)
Arnold Simon
10.117 Employment Agreement effective as of March 1, 1999 with (19)
David Fidlon
10.118 Agreement of Lease made as of April 22, 1999 by and (19)
between Erika Realty Trust, as Landlord, and Registrant, as
Tenant, for premises located at 89 West Rodney French
Blvd., New Bedford, Ma.
10.119 First Amendment to CIT Financing Agreement dated as of (20)
March 25, 1999.
10.120 Employment Agreement effective as of June 7, 1999 with (20)
Joseph Purritano
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated Exhibit
to Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------
<S> <C> <C>
10.121 Agreement and Plan of Merger dated July 19, 1999 by and (21)
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.
10.122 Amendment No. 1 to Agreement and Plan of Merger (21)
10.123 Employment Agreement by and among the Registrant, ECI, (21)
ECI Sportswear, Inc. and XOXO and Gregg Fiene, dated
August 10, 1999
10.124 Employment Agreement by and among the Registrant, ECI, (21)
ECI Sportswear, Inc. and XOXO and Hollis Fiene, dated
August 10, 1999
10.125 Shareholders' Agreement by and among the Registrant, The (21)
Simon Group, LLC, Gregg Fiene, Michele Bohbot and Lynn
Hanson, dated August 10, 1999
10.126 Amendment No. 2 to Financing Agreement by and among (21)
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
10.127 Amended and Restated 1993 Stock Option Plan (16)
10.128 Amendment No. 3 to Financing Agreement by and among (23)
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 February
15, 2000
10.129 Waiver and Consent to Financing Agreement by and among (23)
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 April 1,
2000.
10.130 Amendment No. 4 to Financing Agreement by and among (23)
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 April 30,
2000.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
10.131 Employment Agreement effective as of May 26, 2000 with (24)
Maurice Dickson
10.132 Employment Agreement effective as of June 13, 2000 with (24)
Steven Feiner
</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.
(16) Files 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 the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference.
(19) Filed as the indicated Exhibit to the Report on Form 10-Q dated March
31, 1999 and incorporated herein by reference.
(20) Filed as the indicated Exhibit to the Report on Form 10Q dated June
30, 1999 and incorporated herein by reference.
(21) Filed as the indicated Exhibit to the Report on Form 8-K dated August
10, 1999 and incorporated herein by reference
(22) Filed as the indicated Exhibit to the Report on Form 10Q dated
September 30, 1999 and incorporated herein by reference.
(23) Filed as the indicated Exhibit to the Report on Form 10Q dated March
31, 2000 and incorporated herein by reference.
24
<PAGE>
(24) Filed herewith.
25
