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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
June 30, 2003
ARIS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
New York 22-1715274
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
463 SEVENTH AVENUE, NEW YORK, NEW YORK 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 473-4200
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 _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES _____ NO __X__
Number of shares of Common Stock outstanding 108,819,527
As of August 13, 2003
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as
of June 30, 2003 and December 31, 2002 3
b. Consolidated Condensed Statements of
Operations for the Six-Months Ended
June 30, 2003 and June 30, 2002 4
c. Consolidated Condensed Statements of
Operations for the Three-Months Ended
June 30, 2003 and June 30, 2002 5
d. Consolidated Condensed Statements of
Cash Flows for the Six-Months Ended
June 30, 2003 and June 30, 2002 6
e. Notes to Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, December 31,
ASSETS 2003 2002
----------- ------------
(Unaudited)
Current assets:
Cash $ -- $ --
Receivables, net 297 626
Receivable from related party -- 375
Inventories 327 183
Prepaid expenses and other current assets 30 3
-------- --------
Total current assets 654 1,187
Property and equipment, net 2,162 2,909
Goodwill, net 33,930 33,930
Other assets 312 310
-------- --------
TOTAL ASSETS $ 37,058 $ 38,336
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Borrowings under revolving credit facility $ 84 $ 456
Loans payable to related parties, including accrued interest 13,984 13,026
Current portion of long-term debt 17,142 9,642
Current portion of capitalized lease obligations 629 415
Accounts payable 4,872 3,620
Accounts payable to related parties 1,216 1,096
Accrued expenses and other current liabilities 7,005 8,175
-------- --------
Total current liabilities 44,932 36,430
Long-term debt, net of current portion -- 7,500
Capitalized lease obligations 226 569
Other liabilities 1,619 1,637
-------- --------
Total liabilities 46,777 46,136
-------- --------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.01 par value: 10,000 shares authorized; none
issued and outstanding -- --
Common stock, $.01 par value: 200,000 shares authorized
108,819 issued and outstanding at June 30, 2003
and December 31, 2002 1,088 1,088
Additional paid-in capital 86,146 86,146
Accumulated deficit (96,953) (95,027)
Unearned compensation -- (7)
-------- --------
Total stockholders' deficiency (9,719) (7,800)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 37,058 $ 38,336
======== ========
See accompanying notes to consolidated condensed financial statements
-3-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six- Six-
Months Ended Months Ended
June 30, June 30,
2003 2002
------------ ------------
REVENUES:
SALES TO CUSTOMERS $ 2,527 $ 1,687
ROYALTY INCOME 4,718 4,570
--------- ---------
TOTAL REVENUES 7,245 6,257
COST OF GOODS SOLD (974) (926)
--------- ---------
GROSS PROFIT 6,271 5,331
OPERATING EXPENSES:
SELLING AND ADMINISTRATIVE EXPENSES (7,322) (11,287)
IMPAIRMENT OF LONG-LIVED ASSETS -- (853)
RESTRUCTURING AND OTHER COSTS -- (509)
--------- ---------
LOSS FROM OPERATIONS (1,051) (7,318)
INTEREST EXPENSE, NET (869) (1,055)
--------- ---------
LOSS BEFORE INCOME TAX PROVISION (1,920) (8,373)
INCOME TAX (PROVISION) BENEFIT (6) 25
--------- ---------
NET LOSS $ (1,926) $ (8,348)
========= =========
NET LOSS PER SHARE $ (0.02) $ (0.10)
--------- ---------
PER SHARE DATA:
Weighted average shares outstanding - Basic 108,819 86,918
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
June 30, June 30,
2003 2002
------------ ------------
REVENUES:
SALES TO CUSTOMERS $ 1,433 $ 690
ROYALTY INCOME 2,602 2,482
--------- ---------
TOTAL REVENUES 4,035 3,172
COST OF GOODS SOLD (431) (323)
--------- ---------
GROSS PROFIT 3,604 2,849
OPERATING EXPENSES:
SELLING AND ADMINISTRATIVE EXPENSES (3,840) (5,899)
IMPAIRMENT OF LONG-LIVED ASSETS -- --
RESTRUCTURING AND OTHER COSTS -- 895
--------- ---------
LOSS FROM OPERATIONS (236) (2,155)
INTEREST EXPENSE, NET (408) (533)
--------- ---------
LOSS BEFORE INCOME TAX PROVISION (644) (2,688)
INCOME TAX (PROVISION) BENEFIT (3) (2)
--------- ---------
NET LOSS $ (647) $ (2,690)
========= =========
NET LOSS PER SHARE $ (0.01) $ (0.03)
--------- ---------
PER SHARE DATA:
Weighted average shares outstanding - Basic 108,819 88,783
See accompanying notes to consolidated condensed financial statements
-5-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six- Six-
Months Ended Months Ended
June 30, June 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,926) $(8,348)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 747 1,144
Non-cash stock transaction charged to expense -- 1,300
Non-cash stock based compensation 7 43
Provision for accrued restructuring charges -- 509
Write-off of receivables from licensee -- 1,959
Impairment on property and equipment -- 440
Impairment of goodwill -- 412
Change in assets and liabilities:
Decrease in receivables 704 925
Decrease in due from licensee -- 2,994
(Increase)/decrease in inventories (144) 313
(Increase)/decrease in prepaid expenses and other current assets (27) 204
(Increase)/decrease in other assets (2) 6
Increase/(decrease) in accounts payable 1,252 (737)
Increase in accounts payable to related parties 120 198
(Decrease)/increase in accrued expenses and other current liabilities (1,170) 1,255
Decrease in other liabilities (18) (782)
------- -------
Net cash (used in) provided by operating activities (457) 1,835
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (17)
------- -------
Net cash used in investing activities 0 (17)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital leases (129) (1,374)
Advances from related party 958 2,511
Decrease in borrowings under revolving credit facility (372) (3,020)
------- -------
Net cash provided by (used in) financing activities 457 (1,883)
------- -------
NET INCREASE (DECREASE) IN CASH 0 (65)
CASH, BEGINNING OF PERIOD 0 457
------- -------
CASH, END OF PERIOD $ 0 $ 392
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Issuance of common stock in settlement of accounts payable -- $ 2,250
See accompanying notes to consolidated condensed financial statements
-6-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of June 30, 2003 and
for the six and three- month periods ended June 30, 2003 and 2002 are unaudited
and reflect all adjustments consisting of normal recurring adjustments and
restructuring and other costs 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, 2002 was
derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. 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 Aris Industries, Inc. (the "Company",
the "Registrant" or "Aris") Annual Report on Form 10-K for the year ended
December 31, 2002. The operating results for the six and three-month periods
ended June 30, 2003 are not necessarily indicative of the operating results to
be expected for the year ending December 31, 2003.
2. FINANCIAL ACCOUNTING STANDARDS NO. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES"
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This Statement also established that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on the
consolidated financial statements.
3. LIQUIDITY RISKS
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
The Company has continued to incur losses from operations and had a
working capital deficit of $44,278,000 at June 30, 2003 as compared to a working
capital deficit of $35,243,000 at
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December 31, 2002. In addition, the Company was not in compliance with certain
covenants contained in its credit facility. However, the Company has been
advised by its lenders that they are willing to work with the Company to
structure the remaining payments in a manner the Company should be able to make.
Amounts outstanding under the revolving credit facility were reduced from
$456,000 at December 31, 2002 to $84,000 as of June 30, 2003.
During 2002, the Company completed its first full year as a licensor or
sub-licensor of its owned or licensed trademarks. In April 2002, the Company
terminated its license agreement with Grupo Xtra of New York, Inc. ("Grupo") and
shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the
Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson") to license from the Company and its subsidiaries the XOXO(R) ,
Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by
Grupo (Note 4).
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global Brand Holdings, LLC ("Global") providing for the sale of
the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN
AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets
and accompanying goodwill for a total sum of $43 million in cash (Note 13). The
trademark purchase agreement was approved by the Company's board of directors
and the board of managers of Global. The transaction was approved by the
Company's shareholders at a special meeting held on Monday, June 30, 2003. On
July 2, 2003, the Company completed the sale of the trade name and service mark.
The Company received $43 million in cash at closing of which $2 million was set
aside in one escrow account and $1 million was set aside in an additional escrow
account, to secure certain post- closing obligations of the Company.
As a result of the trademark assets sale, the Company repaid a
substantial portion of its existing indebtedness and intends to finance its
remaining operations through (i) continued negotiated settlements with trade
creditors, (ii) substantially reducing its overhead and (iii) royalties from its
remaining trademarks and license.
There can be no assurance that the timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated condensed
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
-8-
4. ADAMSON LICENSE AGREEMENT
Following the effectiveness of the termination of the Grupo Agreement,
the Company reached an agreement with Adamson Apparel, Inc. to license from the
Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R)
trademarks that had been previously licensed by Grupo. Adamson is a newly-formed
New York corporation of which the majority owner is the Company's chairman and
chief executive officer and principal stockholder. Adamson was initially
capitalized with a $7 million investment. Adamson is utilizing many of the same
employees that were employed by Grupo, all of whom were formerly employees of
XOXO or one or more of the Company's subsidiaries.
The Adamson Agreement has an initial term which expires on December 31,
2003, which may be automatically renewed for a further one year term, subject to
agreement by both parties, to manufacture, market and distribute at wholesale,
women's clothing, jeanswear and sportswear under the XOXO and Members Only
trademarks and, subject to Aris' rights as licensee with respect thereto, Baby
Phat apparel. The royalty rate for XOXO and Members Only products is 9% and 3.5%
for Baby Phat branded products. In addition, Adamson is also responsible for
amounts due under the Company's license agreement with the licensor of Baby
Phat.
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global providing for the sale of the trade name and service mark
XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and
FRAGILE(R) along with certain related assets and accompanying goodwill for a
total sum of $43 million in cash (Notes 3 and 13). The Global agreement requires
the Adamson license to be terminated as of closing. Under the terms of the
trademark purchase agreement Adamson will cease shipping XOXO branded products
as of September 30, 2003.
5. SALE OF CONVERTIBLE DEBENTURES
In February 2001, the Company entered into a Securities Purchase
Agreement with KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to
issue Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share. KC
only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. On August 5, 2002, KC sent the
Company a notice of default arising from the Company's failure to pay interest
in the amount of approximately $321,000 that was due on January 31 and April 30,
2002. On September 3, 2002, the Company reached an agreement with KC and the
default was rescinded. The Company agreed to pay KC $50,000 every three weeks
starting on September 3, 2002 and continuing until all interest due KC is
brought up to date under the terms of the Debentures. As of June 30, 2003 the
Company owed KC approximately $325,000 in accrued interest in addition to the
$7,500,000 in principal which are included in current liabilities.
6. DEBT
The Company's 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 $5,642,000 in principal, as
of June 30, 2003. On October 31, 2002, the Company
-9-
received a forbearance on the principal balance of BNY's Note, $5,642,000, until
December 2, 2002. On January 31, 2003, BNY agreed to defer payment on the note
until February 28, 2003 (the "Deferral Date"). The Company has continued its
negotiations with BNY. As of June 30, 2003 the Company was indebted to BNY in
the amount of approximately $5,810,000 including accrued interest.
On January 18, 2002, the Company entered into a forbearance agreement
with CIT as agent for the lenders under the Company's Financing Agreement. Under
the terms of the forbearance agreement the following occurred: (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company was required to reduce the balance of the revolving
credit facility and certain other amounts due the lenders on a monthly basis
through July 31, 2002 at which time the balances were to be repaid in full. If
the outstanding balance of the revolving credit facility and certain other
amounts due the lenders at the end of any month exceeds the required monthly
ending balance, as defined in the forbearance agreement, the Company has fifteen
days to cure the excess principal before its lenders will take action against
the Company, (iii) the Company was required to make installments of $500,000 on
April 1 and July 1, 2002 and the remaining balance was due on October 31, 2002
and (iv) the Company's chief executive officer agreed to extend the $3,000,000
personal guaranty to remain in effect until all obligations under the
forbearance agreement are paid in full. The Company did not make the April 1,
2002, term loan payment. The Company and CIT negotiated an amendment of the
forbearance agreement to extend the payout period for the Company's revolving
line of credit and term loan. In conjunction with these negotiations the
Company, on May 10, 2002, paid the $500,000 quarterly term loan payment which
was originally due on April 1, 2002. In addition, the Company verbally agreed to
pay the lenders $200,000 at the end of each month to reduce its revolving line
of credit balance. The balance due under the revolving line of credit as of
December 31, 2002 was $456,000. The Company also made its term loan payments in
the amount of $500,000, due July 1 and October 1, 2002. The balance due under
the Company's term loan after these payments was $4,000,000. On November 6,
2002, the Company received an additional extension of the forbearance. Under the
terms of the extension the Company has agreed to: (i) continue to make monthly
payments of $200,000 against its revolving line of credit, (ii) make principal
payments of $500,000 against its term loan on January, April and July 1 of 2003
with the remaining balance due July 31, 2003 and (iii) continue to make monthly
payments against certain other amounts due the lenders. As of June 30, 2003 the
Company's outstanding obligations to CIT included approximately $84,000 under
its revolving line of credit and $4,000,000 in principal under its term loan.
The obligations under the Financing Agreement are collateralized by
substantially all of the assets of the Company. The Financing Agreement contains
various financial and other covenants and conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of June 30, 2003 and December 31,
2002, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 and February 25, 2003 forbearance
agreements, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3
million of indebtedness outstanding under the Financing Agreement. This
guaranty, which initially was to expire on December
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6, 2000, will expire upon re-payment of the Company's obligations to CIT.
7. RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in the
first quarter of fiscal 2002. The Company recorded charges aggregating
$2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $291,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $441,000 and goodwill impairment charges
of approximately $412,000. The Company included in its accrual a liability for
one year of store rent for each of the closed stores since each store lease
contains a provision that the landlord will use its best efforts to re-lease the
premises in the event that the premises are vacated by the Company. The Company
accrued an additional year of rent covering these locations at December 31,
2002. However, no assurances can be given that the premises will be re-leased
within one year and the Company will have to periodically review its accrual.
In June of 2002, the Company reached a settlement agreement with
TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's premises at 1411
Broadway in New York. Under the terms of the settlement the Company paid
$550,000 on June 26, 2002, to Trizec and was released from all obligations under
its lease. As a result of this agreement the Company recorded a favorable
reversal of a previously recorded restructuring reserve of approximately
$895,000 in the second quarter of fiscal 2002.
8. PER SHARE DATA
Basic loss per common share is computed by dividing net loss available for
common shareholders by the weighted average number of shares of common stock
outstanding during each period.
Options and warrants to purchase 10,136,345 and 11,346,845 shares of Common
Stock were outstanding as of June 30, 2003 and 2002, respectively, but were not
included in the computation of diluted loss per share because the effect would
be anti-dilutive. In addition, conversion rights under the Convertible
Debentures to convert the Debentures into 16,304,345 shares of Common Stock were
not included in the computation of diluted loss per share because the result
would be anti- dilutive.
9. STOCK INCENTIVE PLAN
The Company has a stock incentive plan which is described more fully in
Note 9 of the Company's Annual Report on Form 10-K for 2002. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. No stock-based employee compensation cost is reflected in net
loss, as all options granted under the plan have an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation.
(in thousands, except per share data)
-11-
Six-Months Ended Six-Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss
As reported $ (1,926) $ (8,348)
Pro forma (2,216) (9,345)
Net loss per share-basic
As reported $ (0.02) $ (0.10)
Pro forma (0.02) (0.11)
Three-Months Ended Three-Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net loss
As reported $ (647) $ (2,690)
Pro forma (792) (3,188)
Net loss per share-basic
As reported $ (0.01) $ (0.03)
Pro forma (0.01) (0.04)
10. RELATED PARTY TRANSACTIONS
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 "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, AHS purchased inventory
which was to be held at the Company's warehouse facilities. Such inventory was
sold to the Company at cost when the Company was ready to ship the merchandise
to the customer. As of June 30, 2003, the Company owed AHS $7,090,000. In
connection with the Letter of Credit Agreement, the chief executive officer of
the Company guaranteed up to $7,000,000 of AHS obligations to the Company's
principal commercial lender, and pledged collateral in that amount to such
lender. The obligations to First AHS were secured by certain of the Company's
inventory and proceeds thereafter.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. In 2002 , the Company's chief executive officer loaned the
Company an additional $1,500,000. The loans are payable on demand and bear
interest at prime plus one quarter percent.
The Company's chief executive officer personally guaranteed $3,000,000 of
indebtedness outstanding under the Financing Agreement. This guaranty, which
initially was to expire on December 6, 2000, will expire upon re-payment of the
Company's obligations to CIT.
Adamson is a newly-formed New York corporation which is majority owned by
the Company's chairman and chief executive officer and principal stockholder
(Note 4). As of June 30, 2003, the Company was indebted to Adamson in the amount
of $3,281,000, which is payable on demand and bears no interest.
At December 31, 2002 the Company had receivables of $375,000 from Humane
Inc, a company wholly owned by Steven Feiner a director and officer of the
Company. During the three-months ended March 31, 2003 Humane returned these
goods to the Company. The Company recorded a markdown of approximately $180,000
on this merchandise and it is included in the Company's inventory as of June 30,
2003.
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11. BUSINESS SEGMENTS
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", our principal segments are grouped between
the generation of revenues from royalties and retail sales. The licensing
segment derives its revenues from royalties associated from the use of the
Company's brand names, principally XOXO, Fragile and Members Only and, subject
to Aris' rights as a licensee with respect thereto, Baby Phat. The Retail
segment is comprised of one full-price retail store and an internet sales site
which principally sell XOXO and Baby Phat branded products.
Segment information for the six and three- month periods ended June 30,
2003 and 2002, for both segments are set forth below. Corporate overhead is
included in the licensing segment data.
Retail Segment Financial
Information Three Months Ended Three Months Ended
(in thousands) June 30, 2003 June 30, 2002
------------------------ ------------------ ------------------
Revenues $ 1,433 $ 690
Cost of Goods Sold 431 323
Selling and administrative expenses 824 877
Net income (loss) 178 (510)
Licensing Segment Financial
Information Three Months Ended Three Months Ended
(in thousands) June 30, 2003 June 30, 2002
--------------------------- ------------------ ------------------
Revenues $ 2,602 $ 2,482
Selling and administrative expenses 3,016 5,022
Restructuring and other costs -- (895)
Interest expense 408 533
Income tax provision/(benefit) 3 (2)
Net loss (825) (2,180)
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Retail Segment Financial
Information Six Months Ended Six Months Ended
(in thousands) June 30, 2003 June 30, 2002
------------------------ ---------------- ----------------
Revenues $ 2,527 $ 1,687
Cost of Goods Sold 974 926
Selling and administrative expenses 1,327 1,666
Impairment of long lived assets -- 853
Restructuring and other costs -- 1,404
Net income (loss) 226 (3,162)
Licensing Segment Financial
Information Six Months Ended Six Months Ended
(in thousands) June 30, 2003 June 30, 2002
--------------------------- ---------------- ----------------
Revenues $ 4,718 $ 4,570
Selling and administrative expenses 5,995 9,621
Restructuring and other costs -- (895)
Interest expense 869 1,055
Income tax provision/(benefit) 6 (25)
Net loss (2,152) (5,186)
12. 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, the Company may
not be able to satisfy an adverse judgement in certain of these actions, which
may have a material adverse effect on its financial position, results of
operations and cash flows.
13. SUBSEQUENT EVENTS
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global Brand Holdings, LLC ("Global") providing for the sale of
the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN
AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets
and accompanying goodwill for a total sum of $43 million in cash. The trademark
purchase agreement was approved by the Company's board of directors and the
board of managers of Global. The transaction was approved by the Company's
shareholders at a special meeting held on Monday, June 30, 2003.
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On July 2, 2003, the Company completed the sale of the trade name and mark. The
Company received $43 million in cash at closing of which $2 million was set
aside in one escrow account and $1 million was set aside in an additional escrow
account, to secure certain post-closing obligations of the Company. The balance
of the proceeds were used to repay certain existing indebtedness of the Company
and other liabilities.
As a result of the trademark assets sale, the Company will record a non-cash
book gain of approximately $20,000,000 in the third quarter of 2003.
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 six and three-month periods ended
June 30, 2003 and 2002 should be read in conjunction with the consolidated
condensed financial statements, including the notes thereto, included on pages 3
through 13 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
the ability of the Company to satisfy the conditions and requirements of the
credit facilities of the Company, the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within prevailing retail environment, customer acceptance of
both new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this Annual Report, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition,"
are forward- looking statements. Although the Company believes that expectations
reflected in such forward- looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("ETIF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized
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when the liability is incurred. This Statement also established that fair value
is the objective for initial measurement of the liability. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
impact on the consolidated financial statements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
As of June 30, 2003, the Company had a working capital deficit of
approximately $44,278,000 compared to a working capital deficit of approximately
$35,243,000 at December 31, 2002. The increase in the working capital deficit
was primarily due to the reclassification of the $7,500,000 of KC Aris
Debentures from long-term debt into current liabilities since they mature in
February 2004. In addition, the Company's working capital was negatively
impacted by its loss in the first half of fiscal 2003. During the six-months
ended June 30, 2003, the Company financed its working capital requirements
principally through licensing revenue from Adamson and the Company's other
licensees.
In April 2002, the Company terminated its license agreement with
Grupo and shortly thereafter Grupo filed for bankruptcy protection under Chapter
XI of the Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United
States Bankruptcy Court, Central District of California, terminated the
Trademark License Agreement and ordered Grupo to immediately discontinue all use
of trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson"), where the majority stockholder is the Company's chief executive
officer, to license from the Company and its subsidiaries the XOXO(R), Members
Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo
(Note 4). The royalty due from Adamson is based on a percentage of net sales.
On January 18, 2002, the Company entered into a forbearance
agreement with CIT as agent for the lenders under the Company's Financing
Agreement. Under the terms of the forbearance agreement the following occurred:
(i) the Company received $3,000,000 from Grupo of which $2,500,000 was applied
against the revolving line of credit and the remaining $500,000 was applied
against the term loan, (ii) the Company was required to reduce the balance of
the revolving credit facility and certain other amounts due the lenders on a
monthly basis through July 31, 2002 at which time the balances were to be repaid
in full. If the outstanding balance of the revolving credit facility and certain
other amounts due the lenders at the end of any month exceeds the required
monthly ending balance, as defined in the forbearance agreement, the Company has
fifteen days to cure the excess principal before its lenders will take action
against the Company, (iii) the Company was required to make installments of
$500,000 on April 1 and July 1, 2002 and the remaining balance was due on
October 31, 2002 and (iv) the Company's chief executive officer agreed to extend
the $3,000,000 personal guaranty to remain in effect until all obligations under
the forbearance agreement are paid in full. The Company did not make the April
1, 2002, term loan payment. The Company and CIT negotiated an amendment of the
forbearance agreement to extend the payout period for the Company's revolving
line of credit and term loan. In conjunction with these negotiations the
Company,
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on May 10, 2002, paid the $500,000 quarterly term loan payment which was
originally due on April 1, 2002. In addition, the Company verbally agreed to pay
the lenders $200,000 at the end of each month to reduce its revolving line of
credit balance. The balance due under the revolving line of credit as of
December 31, 2002 was $456,000. The Company also made its term loan payments in
the amount of $500,000, due July 1 and October 1, 2002. The balance due under
the Company's term loan after these payments was $4,000,000. On November 6, 2002
the Company received an additional extension of the forbearance. Under the terms
of the extension the Company has agreed to: (i) continue to make monthly
payments of $200,000 against its revolving line of credit, (ii) make principal
payments of $500,000 against its term loan on January, April and July 1 of 2003
with the remaining balance due July 31, 2003 and (iii) continue to make monthly
payments against certain other amounts due the lenders. As of June 30, 2003 the
Company's outstanding obligations to CIT included approximately $84,000 under
its revolving line of credit and $4,000,000 in principal under its term loan.
The obligations under the Financing Agreement are collateralized by
substantially all of the assets of the Company. The Financing Agreement contains
various financial and other covenants and conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of June 30, 2003 and December
31, 2002, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 and February 25, 2003 forbearance
agreements, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3
million of indebtedness outstanding under the Financing Agreement. This
guaranty, which initially was to expire on December 6, 2000, will expire upon
re-payment of the Company's obligations to CIT.
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 "Letter
of Credit Agreement") with the Company's principal commercial lender to
facilitate the opening of up to $17,500,000 in letters of credit for inventory
for the Company. Pursuant to the Letter of Credit Agreement, the chief executive
officer entered into a guaranty agreement limited to $7,000,000 of the
reimbursement of AHS' obligations under the Letter of Credit Agreement. As of
June 30, 2003, the Company owes AHS $7,090,000.
In February 2001, the Company entered into a Securities Purchase
Agreement with KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to
issue Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share. KC
only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. On August 5, 2002 KC, sent the
Company a notice of default arising from the Company's failure to pay interest
in the amount of approximately $321,000 that was due on January 31 and April 30,
2002. On September 3, 2002, the Company reached an agreement with KC and the
default was rescinded. The Company agreed to pay KC $50,000 every three weeks
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starting on September 3, 2002 and continuing until all interest due KC is
brought up to date under the terms of the Debentures. As of June 30, 2003 the
Company owed KC approximately $325,000 in accrued interest in addition to the
$7,500,000 in principal which are included in current liabilities.
The Company's 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 $5,642,000 in
principal, as of March 31, 2003. On October 31, 2002, the Company received a
forbearance on the principal balance of BNY's Note, $5,642,000, until December
2, 2002. On January 31, 2003, BNY agreed to defer payment on the note until
February 28, 2003 (the "Deferral Date"). The Company has continued its
negotiations with BNY. As of June 30, 2003 the Company was indebted to BNY in
the amount of approximately $5,810,000 including accrued interest.
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global Brand Holdings, LLC ("Global") providing for the sale of
the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN
AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets
and accompanying goodwill for a total sum of $43 million in cash (Note 13). The
trademark purchase agreement was approved by the Company's board of directors
and the board of managers of Global. The transaction was approved by the
Company's shareholders at a special meeting held on Monday, June 30, 2003. On
July 2, 2003, the Company had completed the sale of the trade name and service
mark. The Company received $43 million in cash at closing of which $2 million
was set aside in one escrow account and $1 million was set aside in an
additional escrow account, to secure certain post- closing obligations of the
Company.
The Company will record a non-cash book gain of approximately
$20,000,000 in the third quarter of 2003 as a result of the trademark assets
sale.
As a result of the trademark assets sale, the Company repaid a
substantial portion of its existing indebtedness and intends to finance its
remaining operations through (i) continued negotiated settlements with trade
creditors, (ii) substantially reducing its overhead and (iii) royalties from its
remaining trademarks and license.
There can be no assurance that the timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated condensed
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
RESULTS OF OPERATIONS
The Company reported net losses of $647,000 and $1,926,000 for the
three and six-month periods ended June 30, 2003 compared to net losses of
$2,690,000 and $8,348,000 for the three and six-month periods ended June 30,
2002.
During the three-months ended June 30, 2003, the Company's loss was
primarily attributable to continuing soft retail environment which affected
sales at Adamson and negatively impacted the
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Company's royalty revenue along with legal expenses incurred in connection with
ongoing legal proceedings to which the Company is a party. During the
three-months ended June 30, 2002, the Company's loss was largely attributable to
the default by Grupo under its license agreement. As a result of the default by
Grupo, the Company did not receive any license royalties due in April and
incurred $803,000 in charges that were Grupo's direct obligation. In addition,
the Company was required to record a non-cash charge in the amount of $1,300,000
relating to the commitment to issue 10,000,000 shares of the Company's common
stock to an unrelated third party as consideration for him making an investment
in Adamson. The management of the Company believes that this was vital to the
success of Aris. This was offset by a recovery of $895,000 under a settlement
agreement with the landlord of the Company's premises at 1411 Broadway in New
York.
During the six-months ended June 30, 2003, the Company's loss was
attributable to legal expenses incurred in connection with ongoing legal
proceedings to which the Company is a party, the write-off of previously
recognized XOXO license royalties and a soft retail environment which affected
sales at Adamson and negatively impacted the Company's royalty revenue. During
the six-months ended June 30, 2002, the Company's loss was largely attributable
to the default by Grupo of its license agreement and the closing by the Company
of three retail store locations. As a result of the default by Grupo the Company
did not receive approximately $1,000,000 in license royalties and wrote off
approximately $1,959,000 in operating expense reimbursements and incurred
$803,000 in charges that were Grupo's direct obligation. In addition, the
Company recorded charges aggregating $2,257,000 in the first quarter of 2002,
consisting of an accrual of approximately $1,113,000 for 2002 rent, an
additional $292,000 of lease termination costs relating to the 2000
restructuring reserve, property and equipment write-downs of approximately
$440,000 and goodwill impairment charges of approximately $412,000. The Company
was required to record a non-cash charge in the amount of $1,300,000 relating to
the commitment to issue 10,000,000 shares of the Company's common stock to an
unrelated third party as consideration for him making an investment in Adamson.
The management of the Company believes that this was vital to the success of
Aris. This was offset by the favorable reversal of a previously recorded
restructuring reserve of approximately $895,000 under a settlement agreement
with the landlord of the Company's premises at 1411 Broadway in New York during
the three-months ended June 30, 2002.
REVENUES
Sales to Customers
- ------------------
The Company's net sales to customers increased from $690,000 and
$1,687,000 during the three and six-month period ended June 30, 2002,
respectively, to $1,433,000 and $2,527,000 during the three and six-month
periods ended June 30, 2003, respectively. This increase was attributable to
increased retail sales at the Company's internet sales operation due to the
inclusion of the Company's Baby Phat(R) branded products to the site. This was
offset by a decrease in sales at the Company's retail store operations as the
result of the closing of three of the Company's four retail stores in the first
quarter of 2002.
Royalty Income
- --------------
The Company's royalty income increased from $2,482,000 during the
three-months ended June 30, 2002 to $2,602,000 for the three-months ended June
30, 2003. This increase was attributable to an overall increase in royalties
from the Company's XOXO licenses as the result of a one time fee
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paid by its children's wear licensee as a buyout of their license. This was
offset by lower revenues generated under the Company's license agreement with
Adamson. In addition to a soft retail environment, Adamson began closing out
sales of XOXO branded styles as a result of the trademarks asset purchase. This
led to lower net sales and a corresponding reduction in royalties which are
based on net sales.
The Company's royalty income increased from $4,570,000 during the
six-months ended June 30, 2002 to $4,718,000 for the six-months ended June 30,
2003. This increase was attributable to an overall increase in royalties from
the Company's XOXO licenses as the result of a one time fee paid by its
children's wear licensee as a buyout of their license. This was offset by lower
revenues generated under the Company's license agreement with Adamson. In
addition to a soft retail environment, Adamson began closing out sales of XOXO
branded styles as a result of the trademarks asset purchase. This led to lower
net sales and a corresponding reduction in royalties which are based on net
sales. The Company also wrote-off royalty receivables in the first quarter of
2003 as the result of defaults by two XOXO licensees.
GROSS PROFIT
Gross profit for the three-months ended June 30, 2003 was $3,604,000
or 89.3% of revenues compared to $2,849,000 or 89.8% of revenues for the
three-months ended June 30, 2002. Gross profit as a percentage of revenues for
the three-months ended June 30, 2003 was positively impacted by increased retail
sales at the Company's internet site. This was offset by lower revenues
generated under the Company's license agreement with Adamson.
Gross profit for the six-months ended June 30, 2003 was $6,271,000 or
86.6% of revenues compared to $5,331,000 or 85.2% of revenues for the six-months
ended June 30, 2002. Gross profit as a percentage of revenues for the six-months
ended June 30, 2003 was positively impacted by increased retail sales at the
Company's internet site. This was offset by lower revenues generated under the
Company's license agreement with Adamson and the write-off of royalties
receivable as the result of defaults by two of the Company's XOXO licensees.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $3,840,000 or 95.2% of
revenues for the three- months ended June 30, 2003 as compared to $5,899,000 or
186.0% of revenues for the three-months ended June 30, 2002. Selling and
Administrative expenses as a percentage of revenues for the three- months ended
June 30, 2002 were adversely affected by the Grupo default. As a result of the
default the Company was forced to incur operating expenses that were previously
shared with Grupo while receiving no royalty income. The Company also incurred
$803,000 in charges that were Grupo's direct obligation. In addition, the
Company was required to record a non-cash charge in the amount of $1,300,000
relating to the commitment to issue 10,000,000 shares of the Company's common
stock to an unrelated third party as consideration for an investment by the
third party in Adamson.
Selling and Administrative expenses were $7,322,000 or 116.8% of
revenue for the six- months ended June 30, 2003 as compared to $11,287,000 or
180.4% of revenue for the six-months ended June 30, 2002. Selling and
Administrative expenses as a percentage of revenue for the six- months ended
June 30, 2003 continue to be negatively impacted by legal expenses incurred in
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connection with the Company's defense of various lawsuits. Selling and
Administrative expenses as a percentage of revenues for the six-months ended
June 30, 2002 have been adversely affected by the Grupo default. As a result of
the default the Company was forced to write off receivables from Grupo for
shared operating expenses and incurred $803,000 in charges that were Grupo's
direct obligation. In addition, the Company was liable for excess royalties due
under the Baby Phat license for 2001 which Grupo failed to pay. The total charge
to the Company for these items was approximately $2,803,000 which, when combined
with a $1,000,000 shortfall in minimum royalty income, resulted in the
percentage of selling and administrative expenses to revenue being abnormally
high. The Company also was required to record a non-cash charge in the amount of
$1,300,000 relating to the commitment to issue 10,000,000 shares of the
Company's common stock to an unrelated third party as consideration for an
investment by the third party in Adamson.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company evaluates the carrying value of
its long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying assets when indications of impairment
are present. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value. During the six-month period ended June
30, 2002, the Company recorded an impairment charge of $853,000 relating to
property and equipment and goodwill associated with its retail store operations.
The Company closed three of its four retail stores during the three-months ended
March 31, 2002, and recorded the impairment charge in connection with the
closing.
RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in
the first quarter of fiscal 2002. As a result, the Company recorded
restructuring charges aggregating $1,404,000 in the first quarter of 2002,
consisting of an accrual of approximately $1,113,000 for 2002 rent and
additional $291,000 of lease termination costs relating to the 2000
restructuring reserve.
In June of 2002, the Company reached a settlement agreement with
TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's premises at 1411
Broadway in New York. Under the terms of the settlement the Company paid
$550,000 to its former landlord at 1411 Broadway and was released from all
obligations under its lease. As a result of this agreement the Company recorded
a favorable reversal of previously recorded restructuring reserve of
approximately $895,000
INTEREST EXPENSE
Interest expense for the three-months ended June 30, 2003 was $408,000
as compared to $533,000 for the three-months ended June 30, 2002. This decrease
was primarily attributable to the continuing reduction in borrowings under the
Company's financing agreement.
Interest expense for the six-months ended June 30, 2003 was $869,000
as compared to $1,055,000 for the six-months ended June 30, 2002. This decrease
was primarily attributable to the continuing reduction in borrowings under the
Company's financing agreement
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are effective. During the second quarter of 2003, there
were no changes in the Company's internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to
various legal actions the outcome of which the Company believes may have a
material adverse effect on its consolidated financial position and results of
operations. Several of these actions stem from Grupo incurring expenses in the
Company's name. Although the Company did not authorize these expenses, the
Company mat be subject to liability for them. Because of Grupo's bankruptcy
filing, it is unlikely that the Company will be able to recover any of these
amount from Grupo. In addition, the following updates information regarding
certain litigation to which the Company is subject:
FASHION WORLD-SANTA V. LOLA, INC.:
On February 11, 2002, Fashion World-Santa filed an unlawful detainer
action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That
action sought to evict Lola, on grounds of non- payment of rent, from an
XOXO retail store located in Beverly Hills, California. Lola is a party to
a five-year lease for that store, and that lease does not expire until
April 2006. XOXO Clothing Company, Inc. responded to the complaint as
successor in interest to Lola, Inc., denying the material allegations of
the complaint, and asserting other affirmative defenses. On February 27,
2002, XOXO vacated the property and returned possession of the premises to
the plaintiff. The matter is now set for trial on October 3, 2003, and
XOXO intends to contest the amount of the plaintiff's alleged damages and
the extent to which, if at all, the plaintiff has satisfied its duty to
mitigate its damages. On October 15, 2002, XOXO made a written settlement
offer in the amount of $400,002.99 but the plaintiff rejected the offer.
Under the terms of the lease, XOXO may potentially be liable for
approximately $1.8 million in rent, plus all of the plaintiff's attorney
fees and other litigation expenses. The Company believe that the figure
should be substantially reduced as a result of the plaintiff's obligation
to mitigate its damages.
CHRISTI WILSON V. ARIS:
On July 31, 2002, Christi Wilson, a former employee of the Company filed
suit in the Supreme Court of the State of New York, County of New York,
claiming that her commission agreement was breached by the Company.
Ms.Wilson is seeking $900,000 in damages, representing commissions due
under the agreement, and an unstated amount of alleged damages regarding a
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claim of slander. The material allegations of the complaint have been
denied and the Company has filed counterclaims for $2,000,000 alleging
breach of contract, breach of duty of good faith and fair dealing, breach
of fiduciary duty, theft of trade secrets and tortious interference with
prospective economic advantage. Discovery in this matter is ongoing. Ms.
Wilson subsequently has filed a motion to amend her claim to increase the
amount. This motion is pending before the court.
CORONET GROUP, INC. V. EUROPE CRAFT IMPORTS, INC.:
Coronet has sued Europe Craft Imports, Inc., a wholly-owned subsidiary of
the Company, in the Supreme Court of the State of New York, County of New
York, claiming that Europe Craft breached a license agreement as Licensor
of the Members Only trademark to Coronet, and seeking damages in excess of
$1,000,000. Europe Craft has counter-claimed for unpaid future royalties
under the agreement and intends to vigorously dispute Coronet's claims.
This matter has been settled with no payment due by either party.
CAMPERS WORLD INTERNATIONAL, INC. V. PERRY ELLIS INTERNATIONAL AND ARIS
INDUSTRIES, INC.:
Campers World instituted an action in the United States District Court for
the Southern District of New York in January 2002 against Perry Ellis
International, Inc. ("PEI") and the Company. The complaint alleges that
Campers World purchased approximately 460,000 pairs of PEI jeans from Aris
for approximately $4,600,000 and subsequently sold those jeans to Costco.
PEI thereafter informed Costco that the sale by Campers World to it was an
unauthorized use of PEI's trademarks and that Aris was not authorized to
sell the jeans to Campers World or to permit it to allow Campers World to
sell jeans to Costco. Campers World seeks return of the purchase price and
other damages from Aris. PEI has also asserted a cross-claim against Aris
and its subsidiaries and the Company's chief executive officer alleging
that Aris violated various license agreements regarding PEI's trademarks.
Aris has answered the Campers World complaint denying the material
allegations. In particular, Aris denies that it made the sale to Campers
World that is the subject of its complaint. Aris has also denied the
material allegations of PEI's cross- claim, and filed a motion for summary
judgement to dismiss the trademark infringement claims brought by PEI.
That motion was recently denied. Aris intends to vigorously defend the
claims and cross-claims.
MELVILLE REALTY COMPANY, INC.V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSOR TO LOLA INC.
Melville instituted an action in the Supreme Court of the State of New
York, County of New York claiming that the Company is liable on an alleged
guaranty by Lola, Inc. on rent obligations of 8-3 Retailing Inc. ("8-3"),
a subsidiary of Aris, pertaining to a sublease of a retail store at 732
Broadway, New York, New York. This action does not allege an acceleration
of rent obligations. This action seeks compensatory damages of $391,964,
along with sums "to become due pursuant to the terms of the Sublease".
This litigation is being vigorously defended.
426 WEST BROADWAY ASSOCIATES, L.P. V ARIS, 8-3, XOXO, 8-3 D/B/A XOXO,
LOLA, INC., XOXO OUTLETS INC., 8-3 A/K/A 8-3 RETAIL INC. A/K/A XOXO, ECI,
XOXO CLOTHING COMPANY, IN.
426 West Broadway Associates instituted an action in the Supreme Court of
the State of New York, County of New York claiming rent arrears on a
retail store located at 426 West Broadway, New York, New York. This action
seeks compensatory damages in the sum of $177,127 with interest from
2/1/02, and compensatory damages on a claim of "anticipatory breach of
lease agreement" (however, this is alleged in lieu of a claim for
accelerated rent, which the lease does not contain or provide for as a
remedy). This litigation is being vigorously defended
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BEK TEKSTIL has sued Aris and its subsidiaries allegedly for the
nonpayment of certain merchandise that it claims Aris wrongfully refused
to accept and/or pay for. The Company intends to defend the action on the
grounds that it has no evidence of having received the merchandise.
HITCH & TRAIL, INC. ET AL. have commenced an action against the Company in
the State Supreme Court for the County of New York, all of which have been
consolidated, seeking an aggregate of approximately $250,000 for
merchandise allegedly delivered to the Company and for commissions in
connection therewith. The Company intends to defend the action on the
grounds that it has no evidence of having received the merchandise in
question.
NORWOOD COLLECTION L.P. has commenced an action against the Company
seeking approximately $92,000 it allegedly forwarded to the Company as an
advance payment for Brooks Brothers Golf merchandise. The Company contends
that Grupo Xtra of New York, Inc. sold the goods directly to Norwood and
deposited such check without producing the goods at issue or delivering
them to Norwood. The Company intends to defend the claims on that basis.
SANDY ALEXANDER INC. has commenced an action in the United States District
Court for the District of New Jersey, as Assignor of claims by Media
Options for approximately $200,000 (including interest and late penalties)
that it claims is owed by XOXO. The Company acknowledges that
approximately $41,000 may be due, but disputes the balance. This matter
has been settled. Aris has agreed to pay $40,000 in twelve monthly
installments of $3,333.
GARSON INTERNATIONAL: The Company filed a complaint against Garson for its
failure to pay approximately $95,000 due under an amendment to the license
agreement. Garson has filed a counter-claim against the Company alleging
that the Company interfered with its rights under a license agreement. The
Company believes that Garson's counter-claim is without merit and was
interposed solely for the purpose of fostering a settlement.
CORPORACION FABRIL has commenced an action against the Company in the
United States District Court for the Southern District of New York seeking
$146,431.50 for the delivery of merchandise it claims the Company did not
pay for. The Company intends to defend the action on the basis that it has
no evidence of having received the goods in question.
MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a
substantial amount of sewing. Martinez & Sons went bankrupt, and therefore
failed to pay employees. In December of 2000, XOXO settled with the DOL on
behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other
employees sued, and XOXO settled that case in the amount of $62,000. Some
of the claimants of the DOL settlement, as well as two other employees,
filed a complaint with the DLSE for unpaid wages totaling $22,318.62. They
asserted that they had not been paid any wages and claimed that they were
owed more money than paid in settlement with the DOL. The Company is in
the process of investigating these matters. The Company received a demand
letter from a law firm claiming to represent some of the same individuals
involved in the Martinez & Sons DOL settlement and the DLSE investigation.
The attorney representing these 16 former employees have demanded $660,000
from XOXO. The attorney for these individuals has stated that he may file
a claim under Business and Professions Code 17200 ET SEQ. This statute
allows individuals to sue for unfair business practices, and penalties
include treble damages. It is too premature at this time to assess
liability in this matter.
Europe Craft Imports, Inc. vs. Corporate Realty Income Fund I, LP and 475
Fifth Avenue Limited Partnership.
Europe Craft Imports commenced legal action during July 2003 against the
defendant in the Supreme Court of the State of New York, County of New
York, in which Europe Craft Imports seeks declaratory relief claiming all
or a portion of a New York City commercial lease has been rescinded or
terminated by the acts or omissions by defendants action. Europe Craft
Imports also seeks monetary damages.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of Stockholders was held on June 30, 2003. Stockholders
approved the sale of certain trademark assets including the trade name and
service mark XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND
ABROAD(R), LOLA(R)and FRAGILE(R) along with certain related assets and
accompanying goodwill in accordance with the Trademark Purchase Agreement,
dated as of May 7, 2003, among Aris, Global Brand Holdings, LLC, Stanley
Cayre and Eli Hamway.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8K filed May 8, 2003 - Trademark Purchase Agreement
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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 13, 2003 By /s/ Paul Spector
-------------------------------
Paul Spector
Chief Financial Officer / Treasurer
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(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
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
3.6 Amendment to the Restated Certificate of (21)
Incorporation filed with the Secretary of State in
January 2001
10.67 Series A Junior Secured Note Agreement dated as of (3)
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.
10.81 Form of Indemnification Agreement dated as of June (3)
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.
10.111 Securities Purchase 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 Arnold Simon.
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.
-27-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
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.
10.115 Financing Agreement dated February 26, 1999 by (18)
and among the Company and its Subsidiaries and
CIT Commercial Group, Inc. and the other Financial
Industries named therein.
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.
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)
10.123 Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
10.126 Form Securities Purchase Agreement Dated as of (21)
February, 2001 between the Company and KC Aris
Fund I, L.P.
10.127 Trademark License Agreement Adamson Apparel, (22)
Inc.
10.128 Trademark Purchase Agreement (23)
21 List of Subsidiaries (21)
-28-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
31.1 Certification of Chief Executive Officer pursuant to (24)
Section 302 of the Sarbanes/Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to (24)
Section 302 of the Sarbanes/Oxley Act of 2002
32 Certification under Section 906 of the (24)
Sarbanes/Oxley Act
- ----------------
(1) Omitted
(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) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(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) Omitted.
(21) Filed as Exhibit to Annual Report on Form 10-K filed with the
Commission on April 15, 2002.
(22) Filed as an Exhibit to Form 10Q for the Quarter Ended September
30, 2002
(23) Filed as an Exhibit to Form 8K filed May 8, 2003
-29-
(24) Filed herewith
- -----------
* The Schedules and Exhibits to such Agreements have not been filed by the
Company, who hereby undertakes to file such schedules and exhibits upon
request of the Commission.
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