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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
525 SEVENTH AVENUE, NEW YORK, NY 10018
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-354-4600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10- K.
Yes X No
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Indicate by check mark whether the Registrant is an accelerated filer
(as defined Rule 12b-2 of the Act)
Yes No X
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As of March 15, 2004, 108,819,527 shares of the Registrant's Common
Stock were outstanding. The aggregate market value of the 24,379,414 shares of
voting stock of the Registrant held by non-affiliates of the Registrant at March
15, 2004 was $1,218,971.
Documents incorporated by reference: None.
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
PART I ..........................................................................................................
Item 1. Business...............................................................................1
Item 2. Properties.............................................................................3
Item 3. Legal Proceedings......................................................................4
Item 4. Submission of Matters to a Vote of Security Holders....................................7
PART II ..........................................................................................................
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters....................................................7
Item 6. Selected Financial Data................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...........................17
Item 8. Financial Statements and Supplementary Data...........................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................18
Item 9A. Controls and Procedures ..............................................................18
Part III ..........................................................................................................
Item 10. Directors and Executive Officers of the Registrant....................................18
Item 11. Executive Compensation................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management........................23
Item 13. Certain Relationships and Related Transactions........................................24
Item 14. Principal Accountant Fees and Services ...............................................27
PART IV ..........................................................................................................
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K........................28
SIGNATURES.......................................................................................................33
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PART I
ITEM 1. BUSINESS.
INTRODUCTION AND CURRENT BUSINESS
Aris Industries Inc. ("the Company"), is a New York corporation
organized in 1947. Aris currently has a license agreement for its Members
Only(R)trademark and is seeking to obtain new licenses in niche markets to
continue its licensing and brand management operations.
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"), a related party, 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.
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
transaction was approved by the Company's stockholders 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 the result of a default by an XOXO licensee and
claims arising from a transition agreement, the $2 million dollar escrow account
was reduced by approximately $1,498,000. These amounts have been offset against
the gain recorded on the sale.
The proceeds from the trademark sale were used to, (i) satisfy the
Company's outstanding obligations with CIT Commercial Services Group, Inc.
("CIT"), (ii) retire the $7,500,000 in Convertible Debentures issued to KC Aris
Fund I, L.P. ("KC"), (iii) pay-off the Company's Series A Junior Secured Note
with BNY Financial Corporation ("BNY"), (iv) satisfy secured loans and advances
to the Company from related parties, (v) satisfy liens placed against the
Company's XOXO(R) by CIT and (vi) reduce trade obligations.
The Global agreement required the Adamson license relating to XOXO
branded products to be terminated as of closing. Under the terms of the
trademark purchase agreement Adamson ceased shipping XOXO branded products as of
September 30, 2003. In addition, Adamson closed the XOXO Outlet Stores, which it
had been operating as part of the license agreement, in July 2003.
On December 22, 2003, pursuant to an Asset Purchase Agreement dated
December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly owned
subsidiary of the Company, and Adamson sold to a newly created limited liability
company, BP Clothing LLC ("BPLLC"), an unaffiliated Company, substantially all
of the operating assets, including licensed trademark rights and other
intangibles, inventory, machinery and equipment, rights under customer sales
orders and open
-1-
vendor purchase orders of BP and Adamson relating to the manufacture,
distribution and sale of the Baby Phat(R) line of clothing and related
accessories pursuant to a License Agreement by and between Phat Fashions LLC and
BP dated as of July 1, 1999 (the "License Agreement"). In connection with the
transaction, Phat Fashions LLC terminated the License Agreement with BP and
entered into a new license agreement with Buyer (the "New License"). Adamson had
been operating the business pursuant to a sublicense with BP.
The terms of the transaction, including the purchase price, were the
results of negotiations between representatives of BP and Adamson, and Buyer,
including Steven Feiner, a member of Buyer, who was, until closing, an Officer
and Director of the Company. Under the terms of the agreement, the Company is to
receive $7,500,000, less certain offsets. The terms of the transaction were
approved by the Board of Directors of the Company including all of the
independent directors of the Company.
In accordance with the purchase agreement, BP was to receive an initial
payment of $2,500,000 in cash at closing. This amount was reduced by
approximately $1,200,000 of offsets. In addition, Buyer issued a promissory note
payable to BP in the principal amount of $4,500,000, after additional offsets of
approximately $500,000, and has agreed to pay $2,000,000 to the Company in June
2004 and $2,500,000 at a rate of 1% of net sales each month commencing on July
18, 2004 and ending on the maturity date, June 30, 2005, or sooner if fully
paid.
The Adamson Agreement provided for royalties of 9% on sales under the
Company's XOXO(R) and Members Only(R) brands and 3.5% on sales of Baby Phat(R)
branded products. The Adamson Agreement expired on December 31, 2003.
The Company was incorporated in the State of New York in 1947.
Reference to the Company includes its subsidiaries, where applicable. The
Company's principal executive offices are located at 525 Seventh Avenue, New
York, NY. Its phone number at such offices is 212-354- 4600.
TRADEMARKS AND LICENSING
The Company has registered the trademark Members Only(R) in the United
States and 47 other countries, principally for use in connection with apparel
and other men's clothing.
The Company was the registered owner of the XOXO(R) and Fragile(R)
trademarks in the United States. It was also the registered owner of XOXO(R) in
24 other countries in various classifications. The Company sold all rights,
domestic and foreign, to XOXO(R) and Fragile(R) trademark as part of the sales
to Global.
The Company considers its Trademark to be of material importance to its
business.
XOXO(R) LICENSING
In addition to the Adamson agreement, the Company had granted domestic
licenses to use XOXO(R) and, in some cases, Fragile(R) for the manufacture and
sale of the following product categories: activewear essentials, outerwear,
footwear, swimwear, handbags, leather and suede sportswear, girls sportswear,
girls swimwear and girls outerwear. In addition, the Company had granted master
licenses for use of the XOXO(R) trademark in Mexico, Canada, Central America,
portions of South America, Japan and the Middle East. All of these domestic and
foreign licenses were assigned to Global as part of the trademark assets sale.
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MEMBERS ONLY(R) LICENSING
In January 2004, the Company entered into a license agreement for its
Members Only(R) trademark. Minimum royalties due the Company start at $250,000
in 2004 and increase to $360,000 for 2007. The Company is also entitled to
receive additional percentage royalties should sales exceed minimums.
LICENSE AGREEMENTS FOR TRADEMARKS OWNED BY OTHERS
BABY PHAT. The Company was party to a license agreement with Phat
Fashions LLC to manufacture and sell casual apparel for women in all fabrics,
excluding swimwear and accessories, under the Baby Phat(R) trademark for a term
which commenced on July 1, 1999 and expires on December 31, 2004. The Company
had assigned the Baby Phat(R) license to Adamson. The Company no longer is a
party to the license which was terminated in connection with the Asset Purchase
Agreement between the Company and BPLLC.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's licensed products are sold primarily to department and
specialty stores and national retail chains. Currently, substantially all of the
Company's revenues are derived from royalties.
COMPETITION
The Company's licensees sell products in markets which place a premium
on identifiable brand names. The Company's licensees compete with other apparel
manufacturers based on style, quality, value and brand recognition. The apparel
products sold by the Company's licensees , which are sold on the main selling
floors of its retail store customers, are facing increasing competition from the
expanded dedication of retail floor space to "designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to changes in
consumer buying patterns, weather conditions and other factors.
EMPLOYEES
As of December 31, 2003, the Company and its subsidiaries had
approximately 8 full time employees on its payroll. This is a reduction from the
25 full and part-time employees as of December 31, 2002 due the Company's
closing of the Company's remaining retail store in July 2003 and further
overhead reductions.
ITEM 2. PROPERTIES.
The Company currently has approximately 5,000 square feet of leased
space for its executive and sales offices at 525 Seventh Avenue in New York
City. The Company is still party to a lease of approximately 5,925 square feet
of office and showroom space at 1466 Broadway in New York City, which formerly
housed its XOXO and Baby Phat showrooms. The Company also leases approximately
212,939 square feet in Commerce, California that were formerly used for office,
showroom, manufacturing and distribution use in connection with the its XOXO and
Baby Phat businesses. BPLLC currently pays 100% of the rental expense for the
space in Commerce, and will continue to pay the rent for as long as it occupies
the premises. BPLLC is under no obligation to remain there and has not assumed
any lease obligations at 1466 Broadway. The Company had outlet stores in the
following locations at December 31, 2002: Virginia, Florida,
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California, New Jersey, New York, Nevada, Illinois and Pennsylvania of
approximately 37,921 square feet, as well a full-price retail store in New York
of approximately 4,596 square feet. Adamson was operating the outlet stores
through July of 2003. The Company has negotiated settlements with all of the
outlet landlords and has been released from all obligations under those leases.
The Company closed its remaining full priced retail store in July 2003 and has
reached a settlement with the landlord and is no longer liable under the lease.
In January 2002, the Company decided to scale back its retail
operations, and has closed three of its four full-price retail stores. The
Company recorded restructuring and impairment charges in fiscal 2002 aggregating
$2,510,000 to cover the exit costs from the three locations. During 2003, the
Company recorded additional charges of approximately $1,032,000 to cover future
rental costs for the two retail locations still under litigation.
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to
various legal actions the outcome of which the Company believes may have a
material adverse effect on its consolidated financial position and results of
operations at December 31, 2003. 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. On August 21, 2003, the Company and Fashion World-Santa agreed to
settle the dispute. The Company has agreed to pay Fashion World-Santa $900,000,
$20,000 of which was paid on signing and $20,000 is payable monthly on the 15th
of each month beginning in October 2003, and continuing for the next 44 months.
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 damages for commissions allegedly due under the agreement, and an
unstated amount of alleged damages regarding a claim of slander. The material
allegations of the complaint have been denied and the Company has filed
counterclaims 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 recently filed a motion for summary judgement. The Company
also intends to file a motion for summary judgement to dismiss a portion of her
claims.
JENNY'S GARMENTS INC. V. ARIS INDUSTRIES ET AL:
Jenny's Garments Inc.("Jenny") filed a compliant against Aris and
certain of its subsidiaries and current and former officers, as well as other
defendants, in the Supreme Court of New York State, New York County, on or about
December 23, 2003. The suit seeks recovery from Aris and other defendants in the
total amount of $843,947 for goods that were sold and delivered by Jenny to
defendants unrelated to Aris. The suit asserts claims for breach of contract,
quasi-contract and fraud and seeks compensatory and punitive damages. Aris
answered the
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complaint on or about February 17, 2004 denying liability and asserting various
affirmative defenses. The Company believes that there is a substantial
likelihood of defeating all claims asserted as neither Aris nor its subsidiaries
were the contracting parties for the goods.
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 and also committed trademark
infringement. The Company settled Campers World's claim by agreeing to pay
$100,000 over a twenty month period. The Company is defending PEI's claim on the
basis of a release PEI issued to the Company and its affiliates in June 2001.
MELVILLE REALTY COMPANY, INC. V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSORS TO LOLA INC.
Melville instituted an action in the Supreme Court of the State of New
York, County of NewYork 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 Europe Craft Imports, Inc., which is subsidiary of the Company,
pertaining to an alleged 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 alleged 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 pleaded
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.
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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GREEN 1466 BROADWAY LLC VS. XOXO CLOTHING COMPANY, INC. D/B/A XOXO F/K/A LOLA,
INC. D/B/A XOXO, INC.
Green 1466 Broadway LLC instituted a summary proceeding in the Civil Court of
the City of New York, County of New York, regarding office space at 1466
Broadway, New York, New York. This action was discontinued by a Stipulation of
Settlement. No money was paid by XOXO Clothing Company, Inc. for the
discontinuance.
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.
BRISTOL INDUSTRIAL I, LLC commenced an action against Sheila Clothing
Company, Inc. (formerly known as XOXO Clothing Company, Inc.) for breach of a
lease for an industrial warehouse space in the City of Commerce, California. The
landlord previously filed an action for unlawful detainer when Sheila defaulted
on its payment of rent in June 2003, and at that time Sheila agreed to give up
possession of the premises and the landlord agreed to dismiss its unlawful
detainer action. However, the landlord later commenced this action for breach of
lease, alleging lost rent because of its alleged inability to re-let the
premises through the end of the lease term, which expired December 31, 2003. The
landlord is suing Sheila as lessor and Aris as guarantor of the lease.
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.
CORPORACION FABRIL ("Cofaco") had 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. On March 29, 2004, the Company and Cofaco agreed to compromise
and settle the claims raised in the suit. Aris agreed to pay Cofaco $100,000 in
$5,000 installments beginning in March 2004 with the final payment due in
October 2005.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter (OTC)
market under the symbol AISI. Set forth below are the high and low bid prices
for a share of the Common Stock for each fiscal quarter during the prior two
fiscal years, as reported in published financial sources. Pursuant to the terms
of the Company's loan agreements, the Company has agreed not to declare or pay
any dividends (other than stock dividends) on the Common Stock without the prior
written consent of its lenders. The Company has not paid any dividends during
the last two fiscal years and does not intend to pay any cash dividends in the
foreseeable future. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
HIGH LOW
2002 First Quarter $0.4500 $0.2200
Second Quarter 0.4500 0.1200
Third Quarter 0.2200 0.1200
Fourth Quarter 0.2000 0.0700
2003 First Quarter $0.1100 $0.0900
Second Quarter 0.1600 0.0500
Third Quarter 0.0900 0.0400
Fourth Quarter 0.1200 0.0300
There were approximately 3,333 shareholders of record as of March 15,
2004.
RECENT SALES OF UNREGISTERED SECURITIES
In March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to Tarrant,
with a value of $1,050,000. The Company agreed that, in the event the market
value of such shares as of December 31, 2001 was less than $3,300,000, the
Company would (x) pay to Tarrant in cash an amount, or (y) issue to Tarrant
additional shares of common stock having a share value, equal to the difference
between $3,300,000 and the greater of the share value as of December 31, 2001
and $1,050,000. In February, 2002, the Company issued 6,617,647 shares of its
common stock in full satisfaction of its obligation under pursuant to the
Agreement. The issuance of shares to Tarrant was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Year Ended Year Ended Year Ended Year Ended Year Ended
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12/31/03 12/31/02 12/31/01 12/31/00 12/31/99(1)
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Royalty income $6,144 $9,557 $11,389 $2,737 $2,571
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Income (loss) - continuing
operations 6,135 (8,365) (13,601) 2,692 2,522
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Income (loss) - discontinued (1,296) (5,349)(2) 8,169 (39,172) (13,105)
operations
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Net income (loss) 4,839 (13,714) (3,434) (36,480) (10,583)
- -------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share -
basic and diluted:
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Net earnings (loss) per share - .05 (.09) (.17) .03 .05
continuing operations
- -------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share - (.01) (.06) .11 (.49) (.24)
discontinued operations
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Net earnings (loss) per share .04 (.15) (.04) (.46) (.19)
- -------------------------------------------------------------------------------------------------------------------------
Total assets 10,359 38,336 48,696 100,209 106,117
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Long-term debt -0- 7,500 7,500 5,242 14,342
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Working capital/(deficit) (6,068) (35,243) (28,334) (33,283) 7,419
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Stockholders' equity (deficiency) (2,954) (7,800) 1,177 3,486 39,251
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1. Includes results of operations and assets and liabilities of XOXO from its
acquisition on August 10, 1999.
2. Includes loss of $1,272,000 related to the Company's retail store operations.
The Company closed three of its four retail store locations in the first quarter
of 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements, including the notes thereto, and the
"Selected Financial Data" included on this page, and pages F-1 through F- 25,
respectively, of this Annual 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-
-8-
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.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures relating to contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses for the reporting period. The most significant
estimates relate to the recoverability of long-lived assets, valuation
allowances on deferred tax assets, collectability of receivables and estimates
of future lease obligations. Actual results could differ from those estimates.
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.
The Company moved to a significantly smaller office location in the
fourth quarter of 2003. In connection with this move in 2003 the Company
recorded an impairment charge of $345,000 on write-downs of property and
equipment no longer in use. The Company also recorded an impairment charge of
$220,000 in 2001 which represented the net book value of various computer and
other equipment that has become idle as a result of the transition of the
Company into a licensing and brand management business.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 when the liability is
incurred. SFAS No. 146 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.
Since the Company has elected to continue to use the provisions of APB
25 in accounting for stock options granted to employees, it is required by
Statement of Financial Accounting
-9-
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation and SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure",
to present additional pro forma information showing effects on its historical
results of operations of the use of a method that estimates the fair value of
the options at the grant date and then amortizes the fair value to expense over
the options' vesting period.
BASIS OF PRESENTATION
The accompanying consolidated 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. However, as shown in the accompanying consolidated financial
statements, the Company has incurred losses from operations for the three year
period ended December 31, 2003. As of December 31, 2003, the Company had a
working capital deficit of $6,068,000.
As a result of the trademark assets sale and the sale of the BP
license, the Company has repaid a substantial portion of its existing
indebtedness. The Company intends to finance its remaining operations through
(i) royalties which the Company is due from the license of its Members Only
trademark, (ii) payments of escrow funds due from the trademark assets sale and
collection of the balance of proceeds from the sale of licensed trademark
rights, (iii) continued reduction of the Company's overhead and, (iv) continued
negotiated settlements with its trade creditors.
The Company believes that its financing plan will be sufficient at
least through December 31, 2004, to sustain its operations. However, 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 entity's ability to
continue as a going concern. The consolidated 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, the Company had a working capital deficit of
approximately $6,068,000 compared to a working capital deficit of approximately
$35,243,000 at December 31, 2002. The decrease in the working capital deficit
was primarily due to the proceeds received from the sale of its major operating
assets as explained below. The Company's working capital was negatively impacted
by its loss from operations. During the year ended December 31, 2003, the
Company financed its working capital requirements principally through licensing
revenue from Adamson and the Company's other licensees along with proceeds
received from the trademark assets sale and the Asset Purchase Agreement and a
loan from its chief executive officer.
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
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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. The royalty due
from Adamson is based on a percentage of net sales.
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
transaction was approved by the Company's stockholders at a special meeting held
on 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 the result of a default by an XOXO licensee and
claims arising from a transition agreement, the $2 million dollar escrow account
was reduced by approximately $1,498,000. These amounts have been offset against
the gain recorded on the sale.
On July 2, 2003, the Company repaid all of its indebtedness for
borrowed money.
The Company's chief executive officer had personally guaranteed $3
million of indebtedness outstanding under a financing agreement with CIT. This
guarantee expired upon re- payment of the Company's obligations to CIT.
On December 22, 2003, pursuant to an Asset Purchase Agreement dated
December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly owned
subsidiary of the Company, and Adamson sold to a newly created limited liability
company, BP Clothing LLC ("BPLLC"), an unaffiliated company, substantially all
of the operating assets, including licensed trademark rights and other
intangibles, inventory, machinery and equipment, rights under customer sales
orders and open vendor purchase orders of BP and Adamson relating to the
manufacture, distribution and sale of the Baby Phat(R) line of clothing and
related accessories pursuant to a License Agreement by and between Phat Fashions
LLC and BP dated as of July 1, 1999 (the "License Agreement"). In connection
with the transaction, Phat Fashions LLC terminated the License Agreement with BP
and entered into a new license agreement with Buyer (the "New License"). Adamson
had been operating the business pursuant to a sublicense with BP.
The terms of the transaction, including the purchase price, were the
results of negotiations between representatives of BP and Adamson, and Buyer,
including Steven Feiner, a member of Buyer, who was, until closing, an Officer
and Director of the Company. Under the terms of the agreement, the Company is to
receive $7,500,000, less certain offsets. The terms of the transaction were
approved by the Board of Directors of the Company including all of the
independent directors of the Company.
In accordance with the purchase agreement, BP was to receive an initial
payment of $2,500,000 in cash at closing. This amount was reduced by
approximately $1,200,000 of offsets. In addition, Buyer issued a promissory note
payable to BP in the principal amount of $4,500,000, after additional offsets of
approximately $500,000, and has agreed to pay $2,000,000 to the Company in June
2004 and $2,500,000 at a rate of 1% of net sales each month commencing on July
18, 2004 and ending on the maturity date, June 30, 2005, or sooner if fully
paid.
As a result of the trademark assets sale and the sale of the BP
license, the Company has repaid a substantial portion of its existing
indebtedness. The Company intends to finance its
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remaining operations through (i) royalties which the Company is due from the
license of its Members Only trademark is $250,000 in 2004 and increases to
$360,000 for 2007, (ii) payments of escrow funds due from the trademark assets
sale and collection of the balance of proceeds from the sale of licensed
trademark rights, (iii) continued reduction of the Company's overhead and, (iv)
continued negotiated settlements with its other creditors.
The Company believes that this financing plan will be sufficient, at
least through December 31, 2004, to sustain its operations as a licensing and
brand management business. However, 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 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.
-12-
CAPITAL EXPENDITURES. By virtue of the change in the nature of the Company's
operations, the Company's capital expenditures for 2003 were nil.
RESULTS OF OPERATIONS:
2003 COMPARED TO 2002
The Company reported net income of $4,839,000 for the year ended
December 31, 2003, which consisted of $6,135,000 of income from continuing
operations and a loss of $1,296,000 from discontinued operations. This is
compared to a net loss of $13,714,000 for the year ended December 31, 2002,
which consist of a loss of $8,365,000 from continuing operations and a loss of
$5,349,000 from discontinued operations.
The Company's income from continuing operations for the twelve-months
ended December 31, 2003 was primarily attributable to gains realized by the
Company on the sale of its XOXO(R) trademark and the sale of its Baby Phat
sub-license. These gains was offset by impairment charges recorded relating to
goodwill associated with the Company's Members Only(R) trademark and capitalized
assets no longer in use. The Company's loss from discontinued operations consist
primarily of rent accruals related to its closed retail stores and goodwill and
asset impairment charges relating to its former retail and outlet store
operations.
The Company's loss from continuing operations for the twelve-months
ended December 31, 2002 was partly attributable to the default by Grupo of its
license agreement. 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
$1,023,000 in charges that were Grupo's direct obligation. The Company was also
required to record non-cash charges in the amount of $2,400,000 relating to the
issuance of 20,000,000 shares of the Company's common stock to two unrelated
third parties as consideration for their making an investment in Adamson. The
Company's loss from discontinued operations consist primarily of rent accruals
for its closed retail stores, goodwill and asset impairment charges related to
its former retail stores along with losses incurred by those stores before
closing in the first quarter of 2002.
REVENUES-CONTINUING OPERATIONS
The Company's royalty income decreased from $9,557,000 during the
twelve-months ended December 31, 2002 to $6,144,000 for the twelve-months ended
December 31, 2003. This decrease was attributable to the trademark asset sale.
As a result of the sale the Company received no royalty income from its former
XOXO licensees after July 2, 2003 the effective date of the transaction. In
addition, royalties under the Adamson license were reduced as Adamson wound down
its distribution of XOXO branded products in accordance with the trademark asset
sale. The Company also wrote-off royalty receivables in the first quarter of
2003 as the result of defaults by two XOXO licensees. The Company received
royalty revenues of $4,531,000 from Adamson's sales of XOXO branded products for
the year ended December 31, 2002 as compared to $2,818,000 for the yaer ended
December 31, 2003. The Company also received royalty revenues of $3,177,000
directly from its XOXO licensees for the year ended December 31, 2002 as
compared to $2,002,000 for the year ended December 31, 2003. These revenues will
no longer be available to the Company as a result of the trademark assets sale.
As a result of the Asset
-13-
Purchase Agreement dated December 22, 2003, the Company will also no longer
receive any royalty income from Adamson in regards to its Baby Phat sub-license.
SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS
Selling and Administrative expenses were $11,716,000 or 190.7% of
revenue for the twelve months ended December 31, 2003 as compared to $15,832,000
or165.7% of revenue for the twelve months ended December 31, 2002. Selling and
Administrative expenses as a percentage of revenues for the twelve months ended
December 31, 2003 continue to be negatively impacted by legal expenses incurred
in connection with the Company's defense of various lawsuits along with the
reduction in royalty revenue as a result of the trademark assets sale. In
addition, the Company reserved $2,000,000 as an allowance against receivables
from Adamson. Selling and Administrative expenses for the twelve-months ended
December 31, 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 $1,023,000 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 in 2002. The
total charge to the Company for these items was approximately $3,023,000 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 non-cash charges in the
amount of $2,400,000 relating to the issuance of 20,000,000 shares of the
Company's common stock to two unrelated third parties as consideration for their
investment in Adamson.
DISCONTINUED OPERATIONS
Discontinued operations for the years ended December 31, 2003 and 2002
include all sales, commissions, cost of goods sold and selling and
administrative expenses recorded in connection with the Company's former retail
and outlet store operations, import and wholesale operations and all sales to
licensee. Additionally, certain restructuring charges, goodwill and long-lived
assets impairment charges have also been reclassified as discontinued
operations.
For the year ended December 31, 2003 the Company included in
discontinued operations a goodwill impairment charge of $368,000, long-lived
assets impairment charges of $483,000 and a restructuring charge of $1,032,000.
Goodwill and long-lived assets relating to the XOXO retail store and the XOXO
outlet stores, which were being operated by the Company's former licensee
Adamson, were determined to be impaired after the closing of the trademark sale
to Global. The $1,032,000 restructuring charge represents an additional years
rent accrual for two of the Company's four former XOXO retail stores which were
closed in 2002 and are still the subject of litigation with the landlord. 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.
However, no assurances can be given that the premises will be re-leased by the
end of 2004. The Company could incur significantly higher rent charges should a
future review warrant an additional accrual. The Company reached a settlement
agreement with the remaining retail store closed in 2002 and settled with the
landlord and was released from its lease on the remaining store closed in July
2003. The Company also included a $500,000 gain on the forgiveness of
indebtedness realized on the settlement of accounts payable.
For the year ended December 31, 2002 the Company has reclassified into
discontinued operations a goodwill impairment charge of $412,000, long-lived
assets impairment charges of $441,000 and a restructuring charge of $2,507,000.
Goodwill and long-lived assets relating to the
-14-
four XOXO retail stores, three of which were closed in the first quarter of
2002, were determined to be impaired. The $2,507,000 restructuring charge
represents an accrual of rental charges for 2002 and 2003 for its three closed
retail stores.
INTEREST EXPENSE
Interest expense for the twelve months ended December 31, 2003 was
$987,000 as compared to $2,086,000 for the twelve months ended December 31,
2002. This decrease was primarily attributable to the satisfaction of the
Company's indebtedness under its credit facility and other interest bearing
instruments.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
The Company had approximately $94,000,000 of net operating loss
carryforwards ("NOL") at December 31, 2003. The NOL's expire in varying amounts
between 2005 and 2022. As a result of the change in control of the Company in
1999, the utilization of approximately $57,000,000 of these NOL's are limited by
Section 382 of the Internal Revenue Code to approximately $1,500,000 annually
for five years. Accordingly, the Company expects that a significant portion of
these NOL's will expire. The remaining NOL's were incurred subsequent to the
Simon Purchase Transaction and are not subject to the limitation.
2002 COMPARED TO 2001
The Company reported a net loss of $13,714,000 for the twelve months
ended December 31, 2002, which consisted of a loss of $8,365,000 from continuing
operations and a loss of $5,349,000 from discontinued operations. This is
compared to a net loss of $3,434,000 for the twelve months ended December 31,
2001, which consist of a loss of $13,601,000 from continuing operations, income
of $8,685,000 from discontinued operations and extraordinary gain of $1,482,000.
The Company's loss from continuing operations for the twelve-months
ended December 31, 2002 was partly attributable to the default by Grupo of its
license agreement. 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
$1,023,000 in charges that were Grupo's direct obligation. The Company was also
required to record non-cash charges in the amount of $2,400,000 relating to the
issuance of 20,000,000 shares of the Company's common stock to two unrelated
third parties as consideration for their making an investment in Adamson. The
Company's loss from discontinued operations consist primarily of rent accruals
for its closed retail stores, goodwill and asset impairment charges related to
its former retail stores along with losses incurred by those stores before
closing in the first quarter of 2002.
The Company's loss from continuing operations for the twelve-months
ended December 31, 2001 was partly attributable to phase-out costs associated
with the consolidation of its facilities, reductions of its workforce and legal
expenses incurred as the Company continued its negotiated settlements with
vendors. The Company's income from discontinued operations consist primarily of
reversals aggregating approximately $5,600,000 of restructuring and inventory
reserves related to previously reserved inventory that was subsequently sold to
Grupo at original cost.
-15-
REVENUES-CONTINUING OPERATIONS
The Company's royalty income decreased from $11,389,000 during the
twelve months ended December 31, 2001, to $9,557,000 for the twelve months ended
December 31, 2002. This decrease was attributable to the default by Grupo which
cost the Company approximately $1,000,000 in additional royalties which were due
under the Grupo agreement. Additionally, this decrease was partly attributable
to softness in the retail environment which has impacted royalties earned under
the new Adamson license. The Company also wrote off royalty receivable as the
result of a default by one of its XOXO licensees.
SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS
Selling and Administrative expenses were $15,832,000 or 165.7% of revenue for
the twelve months ended December 31, 2002 as compared to $21,297,000 or187.0% of
revenue for the twelve months ended December 31, 2001. Selling and
Administrative expenses as a percentage of revenues for the twelve months ended
December 31, 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 $1,023,000 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 in 2002. The
total charge to the Company for these items was approximately $3,023,000 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 non-cash charges in the
amount of $2,400,000 relating to the issuance of 20,000,000 shares of the
Company's common stock to two unrelated third parties as consideration for their
investment in Adamson. Selling and administrative expenses as a percentage of
revenue for the twelve months ended December 31, 2001, reflect the blended
nature of the Company's business operations into a licensing and brand
management business. Under the terms of the Grupo Agreement, effective March 1,
2001 Grupo assumed the majority of the Company's responsibilities for Selling
and Administrative expenses except for expenses relating to the Company's
corporate functions and costs incurred in the operation of the Company's New
Bedford warehouse, which closed on June 22, 2001.
DISCONTINUED OPERATIONS
Discontinued operations for the years ended December 31, 2002 and 2001
include all sales, commissions, cost of goods sold and selling and
administrative expenses recorded in connection with the Company's former retail
and outlet store operations, import and wholesale operations and all sales to
licensee. Additionally, certain restructuring charges, goodwill and long-lived
assets impairment charges have also been reclassified as discontinued
operations.
For the year ended December 31, 2002 the Company has reclassified into
discontinued operations a goodwill impairment charge of $412,000, long-lived
assets impairment charges of $441,000 and a restructuring charge of $2,507,000.
Goodwill and long-lived assets relating to the four XOXO retail stores, three of
which were closed in the first quarter of 2002, were determined to be impaired.
The $2,507,000 restructuring charge represents an accrual of rental charges for
2002 and 2003 for its three closed retail stores.
-16-
For the year ended December 31, 2001 the Company has reclassified into
discontinued operations a long-lived assets impairment charge of $242,000 and a
restructuring recovery of $1,679,000. The asset impairment charge related to
assets at the Company's former office location which were abandoned. In 2000,
the Company had reserved $4,187,000 in connection with a restructuring of its
operations. In 2001, the Company reversed $1,679,000 in accrued rental costs
resulting from the settlement of the Company's lease obligation on its New
Bedford, Massachusetts, warehouse.
INTEREST EXPENSE
Interest expense for the twelve months ended December 31, 2002 was $2,086,000
as compared to $3,404,000 for the twelve months ended December 31, 2001. This
decrease was primarily attributable to reductions of the Company's indebtedness
under its credit facility.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact
on its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL DATA.
(UNAUDITED)(IN THOUSANDS EXCEPT PER SHARE DATA)
Per Share
---------
Quarter Royalty Net Income/(Loss) Basic
Revenues
2003
First $2,116 $(1,279) $(0.01)
Second 2,602 (647) (0.01)
Third 1,025 6,510 0.06
Fourth 401 255 0.00
--- ---
$6,144 $4,839
====== ======
2002
First $2,088 $(5,658) $(0.07)
Second 2,482 (2,690) (0.03)
Third 2,376 (1,190) (0.01)
Fourth 2,611 (4,176) (0.04)
----- ------
$9,557 $(13,714)
====== ========
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The financial statements listed in the accompanying Index at Part IV,
Item 15(a)1 are filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, we carried out an evaluation under the
supervision and with the participation of our the chief executive officer and
chief financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e)
of the Securities Exchange Act of 1934, as amended). Based upon that evaluation,
our chief executive officer and chief financial officer, concluded that our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information required to be disclosed in our periodic reports
to the Securities and Exchange Commission. During the fourth quarter of 2003,
there were no changes in our internal control over financial reporting that have
materially affected, or reasonably likely to materially affect, our internal
controls over financial reporting.
There have been no significant changes in our internal control or in
other factors which could significantly affect our internal control over
financial reporting subsequent to such evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and principal occupations of the
current members of the Board of Directors and the executive officers of the
Company, their positions with the Company, their business experience during the
last five years and the year each was first elected a director of the Company.
Directors hold office until the next Annual Meeting of Shareholders and until
their respective successors are elected and qualify, provided that vacancies
occurring in the Board of Directors may be filled by vote of the Directors.
Officers of the Company serve at the pleasure of the Board of Directors of the
Company.
- -----------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------
Arnold H. Simon 58 Director, Chairman, Chief Executive Officer and
President of the Company.
- -----------------------------------------------------------------------------------------------------------
Debra Simon 47 Director. (Resigned August 1, 2003)
- -----------------------------------------------------------------------------------------------------------
Howard Schneider 76 Director.
- -----------------------------------------------------------------------------------------------------------
Mark Weiner 49 Director.
- -----------------------------------------------------------------------------------------------------------
Paul Spector 61 Senior Vice President, Chief Financial Officer, Treasurer
and Secretary.
- -----------------------------------------------------------------------------------------------------------
Gregg Fiene 52 Vice Chairman and Director of the Company and Chief
Executive Officer of XOXO Clothing Company
(Resigned September 19, 2003)
- -----------------------------------------------------------------------------------------------------------
Steven Feiner 36 Director and President of XOXO. (Resigned December
22, 2003)
- -----------------------------------------------------------------------------------------------------------
ARNOLD H. SIMON became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until
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December 1997, Mr. Simon was president of Rio Sportswear, Inc., and from 1994
until December 1997, he was President, Chief Executive Officer and a Director of
Designer Holdings Ltd., which he founded. Mr. Simon has an aggregate of 31 years
of experience in the apparel industry. Mr. Simon is the Managing Member of The
Simon Group and has sole voting and investment power with respect to the shares
of the Company owned by The Simon Group. Mr. Simon currently owns a majority of
the membership interests in the Simon Group. Mr. Simon is married to Debra
Simon.
DEBRA SIMON became a Director of the Company on March 18, 1999. Ms.
Simon was Executive Vice-President and a Director of Designer Holdings Ltd. from
March 1994 until December 1997, and was Vice-President of Rio Sportswear, Inc.
from 1985 until 1997. Ms. Simon is the wife of Arnold H. Simon. Ms. Simon
resigned from the board on August 1, 2003.
HOWARD SCHNEIDER became a Director of the Company on March 18, 1999.
Mr. Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
MARK S. WEINER became a Director of the Company on June 17, 2000. He is
currently, and for more than the past five years has been, president of
Financial Innovations, Inc., a private marketing and merchandising company. Mr.
Weiner was deputy treasurer of the Democratic National Committee from 1989 to
1993 and currently serves as treasurer of the Democratic National Governors
Association.
PAUL SPECTOR has been Senior Vice President and Chief Financial Officer
of the Company since May 1992 and Treasurer and Secretary of the Company since
August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the
Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
GREGG FIENE has been vice chairman of the Company's board of directors
and chief executive officer of the Company's XOXO subsidiary since August 10,
1999. For more than five years prior to its acquisition by the Company, Mr.
Fiene was the chairman and chief executive officer and a principal shareholder
of the predecessor to XOXO. Mr. Fiene resigned as an officer and director of the
Company on September 19, 2003.
STEVEN FEINER was appointed to the Board on March 23, 2000 to fill the
vacancy created by the death of David Fidlon. Mr. Feiner was appointed president
of XOXO in June 2000. Prior thereto, Mr. Feiner had been for more than the prior
five years, the owner and operator of various privately held apparel concerns.
Mr. Feiner resigned as an officer and director of the Company on December 22,
2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
-19-
To the Company's knowledge, based solely on the Company's review of
Forms 3 (Initial Statement of Beneficial Ownership of Securities), Forms 4
(Statement of Changes in Beneficial Ownership) and Forms 5 (Annual Statement of
Changes in Beneficial Ownership) furnished to the Company with respect to the
fiscal year ended December 31, 2003, no persons failed to file any such form in
a timely manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid to the Chief
Executive Officer of the Company and the four most highly compensated executive
officers of the Company as of December 31, 2003 who received compensation in
excess of $100,000.
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Other Securities
Name and Fiscal Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation Stock Compensation($)
($) Options(#)
- ------------------------------------------------------------------------------------------------------------------------------------
Arnold H. Simon, 2003 750,000 -- 79,668(2) -- --
Chairman, Chief 2002 750,000 -- 79,668(2) -- --
Executive Officer of the 2001 750,000 -- 107,983(1) -- --
Company and President
- ------------------------------------------------------------------------------------------------------------------------------------
Steven Feiner, 2003 250,000(6) --
President of XOXO 2002 250,000(4)(5) --
2001 355,771(3) --
- ------------------------------------------------------------------------------------------------------------------------------------
Gregg Fiene, 2003 --(6) --
Vice Chairman, Chief 2002 8,654(4)(5) -- --
Executive Officer of 2001 230,768(3) -- --
XOXO
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Spector, 2003 200,000 --
Chief Financial Officer 2002 200,000 --
2001 176,250 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes $43,950 in tax and accounting services and $64,033 in
automobile expenses paid on behalf of Mr. Simon pursuant to
his employment agreement.
(2) Includes $79,668 in automobile expenses paid on behalf of Mr.
Simon pursuant to his employment agreement.
(3) Mr. Feiner and Mr. Fiene received $394,229 and $519,232,
respectively, in salary from Grupo in connection with Grupo's
assumption of XOXO's operations
(4) Mr. Feiner and Mr. Fiene received $134,617 and $201,922,
respectively, in salary from Grupo in connection with Grupo's
assumption of XOXO's operations
(5) Mr. Feiner and Mr. Fiene received $340,389 and $510,574,
respectively, in salary from Adamson in connection with
Adamson's assumption of XOXO's operations
(6) Mr. Feiner and Mr. Fiene received 500,000 and $750,000,
respectively, in salary from Adamson in connection with
Adamson's assumption of XOXO's operations
-20-
OPTION GRANTS
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the last fiscal year. No SARs
were granted during the last fiscal year.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
% OF OPTIONS/ WEIGHTED OF STOCK APPRECIATION
SARS GRANTED AVERAGE FOR OPTION TERM ($)
OPTIONS/SARS TO EMPLOYEES EXERCISE EXPIRATION -------------------
NAME GRANTED DURING FISCAL YEAR PRICE/SHARE DATE 5% per year 10% per year
- ---- ------- ------------------ ----------- ---- ----------- ------------
Arnold H. Simon - - - - - -
Paul Spector - - - - - -
Gregg Fiene - - - - - -
Steven Feiner - - - - - -
EXERCISED/UNEXERCISED STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 2003 of
unexercised options, as well as options exercised by such executive officers
during the 2002 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
-----------------------------------------------
Shares
Acquired Number of Securities Underlying Value of Unexercised
on Exercise Value Realized Unexercised Options at FY-End (#) In-the-Money Options at FY-End ($)
NAME (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ----- ----------- -------------- --------------------------------- -----------------------------------
Arnold H. Simon -0- -0- 2,250,000/-0- $-0-/$-0-
Paul Spector -0- -0- 290,000/-0- $-0-/$-0-
Gregg Fiene -0- -0- 1,650,000/-0- $-0-/$-0-
Steven Feiner -0- -0- 1,800,000/-0- $-0-/$-0-
- --------------
(1) The value of unexercised in-the-money options was calculated by
determining the difference between the closing price of the Company's
common stock on December 31, 2001 and the exercise price of the
options.
COMPENSATION OF DIRECTORS
In April 2000, the Company suspended cash fees to outside directors
(i.e., those directors not employed by the Company or any of its subsidiaries).
Each of these directors was also entitled to receive reimbursement for expenses
incurred in attending meetings of the Board or committees thereof on which they
serve. In addition, each outside director was entitled to receive $500 per
meeting of the Committees of the Board to which they are assigned. No executive
officer received additional
-21-
compensation for service as a Director. During 2000, each outside director was
granted options to purchase 100,000 shares of the Company's common stock.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement effective as of March 1, 1999
with Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief
executive officer of the Company and its subsidiaries. The term of the agreement
was for three years, and was to expire on February 28, 2002. Mr. Simon's
agreement has been extended through February 28, 2005. Pursuant to the
agreement, Mr. Simon's base salary is $750,000 per annum, subject to annual
review for increase (but not decrease) at the discretion of the Board. In
addition, the agreement provides for annual bonuses equal to 2% of adjusted
EBITDA if adjusted EBITDA is between $5 million and $10 million, and 3% of
adjusted EBITDA if adjusted EBITDA is in excess of $10 million.
The agreement entitles Mr. Simon to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, if the
Company's principal office or Mr. Simon's own office is relocated to a location
not within Manhattan, or if there are certain changes of control. In the event
of termination of Mr. Simon for good reason or if he is terminated without
cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Simon with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
In connection with the acquisition of XOXO, the Company entered into an
employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to
which Mr. Fiene is to serve as Vice Chairman of the Board of Directors of the
Company, Chief Executive Officer of the Company's XOXO subsidiary and all
divisions of the Company (present and future) engaged in the female apparel
industry and related ancillary industries, and as chief executive officer,
president, or in such other senior executive position with respect to any of the
Company's current or future subsidiaries as he and the Chairman of the Board of
Directors of the Company shall mutually determine. Pursuant to the agreement,
Mr. Fiene's base salary is $750,000 per annum, and he is entitled to an annual
bonus if the Company meets certain EBITDA targets. The term of Mr. Fiene's
agreement is for five years, ending on August 9, 2004. Effective September 19,
2003, the Company and Mr Fiene agreed to terminate his employment agreement. As
a result Mr. Fiene resigned as an officer and director of the Company.
In June, 2000, the Company entered into an employment agreement
expiring February 28, 2003 with Steven Feiner to serve as Executive Vice
President of the Company at an annual base salary of $150,000, subject to annual
review, and an annual bonus equal to 1% of adjusted EBITDA if adjusted EBITDA is
between $5 million and $10 million, and 1.5% of adjusted EBITDA if adjusted
EBITDA is in excess of $10 million. The Company has raised Mr. Feiner's salary
to $750,000. The agreement was extended through February 28, 2005. The agreement
entitles Mr. Feiner to terminate the agreement for a "good reason", which
includes any diminution of his duties under the agreement, the Company's failure
to perform its obligations under the agreement, or if there are certain changes
of control. In connection with the Asset Purchase Agreement between the Company
and BPLLC, Mr. Feiner resigned as an officer and director of the Company on
December 22, 2003.
Mr. Paul Spector, the Company's Senior Vice President and Chief
Financial Officer, is contractually entitled to a severance payment if he is
terminated by the Company for reasons other than cause. The severance payment
will equal one-half of Mr. Spector's annual salary at the time of termination.
-22-
401(K) PLAN
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation and Stock Option Committee
(the "Committee") as of December 31, 2002 were Messrs. Simon, Schneider and
Weiner. Other than Mr. Simon, neither Committee member was (i) during the twelve
months ended December 31, 2002, an officer or employee of the Company or any of
its subsidiaries or (ii) formerly an officer of the Company or any of its
subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock
as of March 15, 2003 by persons who are either (i) beneficial owners of 5% or
more of the Common Stock, (ii) named executive officers or directors of the
Company, and (iii) and all executive officers and directors as a group.
- --------------------------------------------------------------------------------
Name and Address Percent
of Beneficial Owner(1) Shares of Common Stock of Class
- --------------------------------------------------------------------------------
Arnold Simon 44,745,045(2)(3) 39.1%
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------
Apollo Aris Partners, L.P. 16,818,806(3) 14.7%
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- --------------------------------------------------------------------------------
John S. Scaduto 10,000,000 8.7%
1700 Beacon Lane
Point Pleasent, N.J. 08742
- --------------------------------------------------------------------------------
National Retail Systems Inc. 10,000,000 8.7%
2820 16th Street
North Bergen, N.J. 07047
- --------------------------------------------------------------------------------
Paul Spector 290,000(5) *
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------
Gregg Fiene 4,510,000(5) 3.9%
6000 Sheila Street
Commerce, CA 90040
- --------------------------------------------------------------------------------
Howard Schneider 100,000(5) *
Schneider Schechter & Yoss
1979 Marcus Avenue, Suite 232
Lake Success, NY 11042
- --------------------------------------------------------------------------------
-23-
- --------------------------------------------------------------------------------
Name and Address Percent
of Beneficial Owner(1) Shares of Common Stock of Class
- --------------------------------------------------------------------------------
Mark Weiner 100,000(5) *
Weingeroff Enterprises
1 Weingeroff Boulevard
Cranson, RI 02910
- --------------------------------------------------------------------------------
Tarrant Apparel Group 8,117,647 7.1%
3151 East Washington Blvd.
Los Angeles, Ca. 90023
- --------------------------------------------------------------------------------
All persons who are executive 45,235,045(5) 45.0%
officers or directors of the
Company, as a group (7 persons)
- --------------------------------------------------------------------------------
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated
above, each person has sole voting and investment power.
(2) Includes 9,170,204 shares of Common Stock which were sold to
two unaffiliated third parties by The Simon Group LLC, but
over which Mr. Simon has voting and certain dispositive power.
Includes 35,574,841 shares owned by The Simon Group. Arnold
Simon, the Managing Member of The Simon Group, has sole voting
and investment power with respect to the shares of the Company
held of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement
and 1999 Equity Registration Rights Agreement described in
Item 13 below, containing certain voting and other
arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which such person
holds a membership interest. Such person has no power or
authority to vote or dispose of any shares held by The Simon
Group, LLC, and disclaims beneficial ownership of such shares.
(5) Includes options to purchase the following numbers of shares
of Common Stock of the Company under the 1993 Stock Incentive
Plan which are exercisable or will become exercisable within
60 days: Paul Spector (223,334), Howard Schneider (100,000)
and Mark Weiner (100,000).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 the
purchase of inventory. Pursuant to the Letter of Credit Agreement, AHS purchased
inventory which was 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. All amounts owed AHS were repaid during the year.
-24-
The Company has utilized the services of Schneider, Schecter & Yoss, an
accounting firm, of which Howard Schneider, a director of the Company, is a
partner. During 2002 and 2001, total fees paid were $43,950 and $43,950,
respectively.
During fiscal 2001 the Company had sales of approximately $828,000 to
Humane Incorporated ("Humane") of which Steven Feiner, a director of the
Company, is the owner. As of December 31, 2002, the Company had receivables from
Humane of approximately $375,000. Steven Feiner resigned as a director of the
Company in December 2003.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. In 2002 the Company's chief executive officer made
additional loans to the Company totaling $1,500,000. All of the loans are
payable on demand and bears interest at prime plus 1/4%. These loans were repaid
in 2003.
In the fourth quarter of 2003, the Company's chief executive officer
loaned the Company $660,000. This loan is payable on demand and bears interest
at prime plus 1/4%. This loan was outstanding as of December 31, 2003.
In addition, as of December 31, 2003, the Company had trade payables of
$15,287 to its chief executive officer, $99,862 to Humane and $75,400 to
Schneider, Schecter and Yoss
1999 SHAREHOLDERS AGREEMENT
At the Closing of the Simon Purchase Transaction, the Company, The
Simon Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement
(the "1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and
their permitted transferees ("Non-Simon Subject Shareholders") are required to
give The Simon Group a right of first offer to match the proposed sale price on
any transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase
Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non- Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same consideration per share of Common Stock to be
received by The Simon Group in such transfers. Such tag-along rights will also
apply to certain
-25-
transfers by Arnold Simon or his affiliates of their beneficial ownership in The
Simon Group after six months from the closing of the Simon Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right
to "bring along" the Non-Simon Subject Shareholders which are parties thereto in
a non-public transfer by The Simon Group of 100% of its ownership of Common
Stock, at the same consideration per share of Common Stock to be received by The
Simon Group in such transfer, provided that such consideration is entirely in
cash or in "Marketable Securities" (of issuers listed on the New York Stock
Exchange, American Stock Exchange or NASDAQ National Market with a market
capitalization for such marketable securities of more than $500,000,000), or a
combination thereof.
1999 EQUITY REGISTRATION RIGHTS AGREEMENT
At the Closing of the Simon Purchase Transaction, the Company entered
into an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to
which the Company granted registration rights with respect to the Common Stock
held by The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
THE XOXO SHAREHOLDERS AGREEMENT
In connection with the XOXO Transaction, the Company, The Simon Group,
LLC, and each of the former shareholders of Lola, Inc. entered into a
shareholders agreement which provides that each Lola shareholder will vote his
or her shares for the election of directors nominated by Arnold Simon. The
Agreement also provides that during its term, Simon shall nominate and vote all
of its shares of common stock for the election of Gregg Fiene as a director of
the Company provided that at such time Mr. Fiene is employed as an executive
officer of the Company. The Agreement contains certain restrictions on the sale
by Gregg Fiene and one other former Lola shareholder of the Aris shares received
in the XOXO Transaction and provides for certain "tag- along" and "drag-along"
rights in connection with such shares. The Agreement also provides that in the
event the Company registers any shares of its Common Stock under the Securities
Act of 1933, as amended, each former Lola shareholder has the right to include a
certain amount of his or her shares in such registration statement. The term of
the shareholders' agreement is for ten years unless sooner terminated in
accordance with its terms.
During 2001 and 2000, the Company reimbursed Mr. Simon for accounting
and tax services provided to Mr. Simon by Mr. Schneider's accounting firm in the
amount of $43,950 and $147,775, respectively. In addition, Mr. Schneider's firm
provided services to the Company amounting to approximately $45,050 in 2000.
-26-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES BILLED TO THE COMPANY BY ITS INDEPENDENT AUDITORS
The following is a summary of the fees billed to us by J.H. Cohn LLP for
professional services rendered for the fiscal years ended December 31, 2003 and
2002.
- --------------------------------------------------------------------------------
Fee Category 2003 2002
- --------------------------------------------------------------------------------
Audit $ 95,861 $165,513
- --------------------------------------------------------------------------------
Audit-related (1) 3,125 - 0 -
- --------------------------------------------------------------------------------
Other Tax services (2) 300 - 0 -
- --------------------------------------------------------------------------------
Total Fees $ 99,286 $165,513
- --------------------------------------------------------------------------------
(1) Audit Fees consist principally of assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements but not reported under the caption "Audit Fees".
These fees include review of registration statements and participation at board
of director and audit committee meetings.
(2) Tax Services - consist of fees for tax compliance, tax advice and planning.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS
At present, our audit committee approves each engagement for audit or
non-audit services before we engage our independent auditor to provide
those services. Our audit committee has not established any
pre-approval policies or procedures that would allow our management to
engage our independent auditor to provide any specified services with
only an obligation to notify the audit committee of the engagement for
those services. None of the services provided by our independent
auditors for fiscal 2003 was obtained in reliance on the waiver of the
pre-approval requirement afforded in SEC Regulations.
-27-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Report of Independent Public Accountants. PAGE
Report of Independent Public Accountants ......................................................F-1
Financial Statements:
Consolidated Balance Sheets as of
December 31, 2003 and 2002.....................................................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001...............................................................F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years
Ended December 31, 2003, 2002 and 2001.........................................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001...............................................................F-5
Notes to Consolidated Financial Statements.....................................................F-7
2. Financial Statement Schedule
The following financial statement schedule should be read in
conjunction with the consolidated financial statements in Item
8 of this Annual Report on Form 10-K:
Schedule II- Valuation and Qualifying
Accounts.....................................................................S-1
All other schedules are omitted because they are not
applicable or because the required information is included in
the financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
Form 8K filed December 22, 2003 - Acquisition and Disposition of Assets
-28-
(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- 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 (3)
of June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of (3)
June 30, 1993 between Registrant and each member of
Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
-29-
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- Footnote No.
------------
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.
10.116 Agreement and Plan of Merger dated July 19, 1999 (19)
by and among Aris Industries, Inc., XOXO
Acquisition Corp. and Lola, Inc. and its
shareholders ("Agreement and Plan of Merger").
The exhibits and schedules to the Agreement and Plan of
Merger are listed on the last page of such Agreement. Such
exhibits and schedules have not been filed by the
Registrant, who hereby undertakes to file such exhibits and
schedules upon request of the Commission.
10.117 Amendment No. 1 to Agreement and Plan of (19)
Merger.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene, Michele
Bohbot and Lynne Hanson, dated August 10, 1999.
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
-30-
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- Footnote No.
------------
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)
10.129 Asset Purchase Agreement (24)
21. List of Subsidiaries (20)
23. Consent of J.H Cohn LLP (25)
31.1 Certification of Chief Executive Officer pursuant to (25)
Section 302 of the Sarbanes/Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to (25)
Section 302 of the Sarbanes/Oxley Act of 2002
32 Certification under Section 906 of the (25)
Sarbanes/Oxley Act
- ----------------
(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) 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.
-31-
(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 the indicated Exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31,
2000 and incorporated herein by reference.
(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
(24) Filed as an Exhibit to Form 8K filed December 22, 2003
(25) 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.
** Management contract or compensatory plan or arrangement.
-32-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By: /S/ Arnold H. Simon
--------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /S/Paul Spector
--------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /S/Vincent F. Caputo
--------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/Arnold Simon April 9, 2004
- ---------------------------
Arnold Simon, Chairman of the Board
and Chief Executive Officer; Director
/S/Howard Schneider April 9, 2003
- ---------------------------
Howard Schneider, Director
/S/Mark Weiner April 9, 2003
- ---------------------------
Mark Weiner, Director
-33-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Aris Industries, Inc.
We have audited the accompanying consolidated financial statements and financial
statement schedule of Aris Industries. Inc. and Subsidiaries listed in the index
appearing under Item 15a of this Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aris Industries,
Inc. and Subsidiaries as of December 31, 2003 and 2002, and their results of
operations and cash flows for each of the years in the three-year period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's operations have generated
recurring operating losses and the Company has a working capital deficiency as
of December 31, 2003. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ J.H. Cohn LLP
Roseland, New Jersey
March 4, 2004, except for the second to last
paragraph of Note 10 which is as of
March 29, 2004
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 953 $ --
Receivables, net -- 626
Receivable from related party, net of allowance
for doubtful accounts of $2,000 and $453 1,761 375
Current portion of note receivable 2,000 --
Inventories -- 183
Prepaid expenses and other current assets 361 3
-------- --------
TOTAL CURRENT ASSETS 5,075 1,187
Property and equipment, net 679 2,909
Goodwill, net -- 33,930
Note receivable 2,500 --
Other assets 2,105 310
-------- --------
TOTAL ASSETS $ 10,359 $ 38,336
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Borrowings under revolving credit facility $ -- $ 456
Loans payable to related parties, including accrued interest 668 13,026
Current portion of long-term debt -- 9,642
Current portion of capitalized lease obligations 400 415
Accounts payable 4,631 3,620
Accounts payable to related parties 191 1,096
Accrued expenses and other current liabilities 5,253 8,175
-------- --------
TOTAL CURRENT LIABILITIES 11,143 36,430
Long-term debt -- 7,500
Capitalized lease obligations 424 569
Other liabilities 1,746 1,637
-------- --------
TOTAL LIABILITIES 13,313 46,136
-------- --------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, par value $.01, 10,000 shares
authorized, none issued
Common stock, par value $.01, 200,000 shares authorized,
108,783 shares issued and outstanding 1,088 1,088
Additional paid-in capital 86,146 86,146
Accumulated deficit (90,188) (95,027)
Unearned compensation -- (7)
-------- --------
TOTAL STOCKHOLDERS' DEFICIENCY (2,954) (7,800)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 10,359 $ 38,336
======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2003 2002 2001
-------- -------- --------
REVENUE - ROYALTY INCOME $ 6,144 $ 9,557 $ 11,389
OPERATING EXPENSES :
Selling and administrative expenses (11,716) (15,832) (21,297)
Impairment of goodwill (14,273) -- --
Impairment of long lived assets (345) -- (220)
-------- -------- --------
Loss from operations (20,190) (6,275) (10,128)
Interest expense (987) (2,086) (3,404)
Gain on sale of trademark and license 27,323 -- --
-------- -------- --------
Income (loss) from continuing operations before
income taxes 6,146 (8,361) (13,532)
Income tax provision (11) (4) (69)
-------- -------- --------
Income (loss) from continuing operations 6,135 (8,365) (13,601)
DISCONTINUED OPERATIONS :
Income (loss) from discontinued operations (1,296) (5,349) 8,169
-------- -------- --------
Income (loss) before extraordinary item 4,839 (13,714) (5,432)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt, net -- -- 1,998
-------- -------- --------
NET INCOME (LOSS) $ 4,839 $(13,714) $ (3,434)
======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.05 $ (0.09) $ (0.17)
Income (loss) from discontinued operations (.01) (.06) .11
Extraordinary item -- -- .02
-------- -------- --------
Net income (loss) per basic share $ 0.04 $ (0.15) $ (0.04)
======== ======== ========
PER SHARE DATA:
Weighted average shares outstanding - basic 108,783 92,092 81,919
Weighted average shares outstanding - diluted 109,306 92,092 81,919
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
-------- -------- -------- ----------- ------------ --------
BALANCE AT DECEMBER 31, 2000 80,665 $ 807 $ 80,753 $(77,879) $ (195) $ 3,486
Common stock issued in connection with
settlement of Tarrant obligation 1,500 15 1,035 1,050
Cancellation of compensatory stock options
issued to employees (28) 28 --
Amortization of unearned compensation on
stock options -- -- -- -- 75 75
Net loss -- -- -- (3,434) -- (3,434)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 82,165 822 81,760 (81,313) (92) 1,177
Common stock issued in connection with
settlement of Tarrant obligation 6,618 66 2,186 2,252
Common stock issued in connection with
Adamson capitalization 20,000 200 2,200 -- 2,400
Amortization of unearned compensation on
stock options -- -- -- -- 85 85
Net loss -- -- -- (13,714) -- (13,714)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 108,783 1,088 86,146 (95,027) (7) (7,800)
Amortization of unearned compensation on
stock options -- -- -- -- 7 7
Net income -- -- -- 4,839 -- 4,839
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2003 108,783 $ 1,088 $ 86,146 $(90,188) $ -- $ (2,954)
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2003 2002 2001
Cash flows from operating activities:
Net income (loss) from continuing operations $ 6,135 $ (8,365) $(13,601)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Gain on sale of trademark and license (27,323) -- --
W rite off of receivables from licensee -- 1,959 --
Depreciation and amortization of property and equipment 1,094 1,994 3,419
Amortization of goodwill -- -- 1,809
Impairment of goodwill 14,273 -- --
Impairment of property and equipment 345 -- 220
Provision for doubtful accounts - related party 2,000 -- --
Non-cash stock transaction charged to expense -- 2,400 --
Non-cash stock based compensation 7 85 75
Changes in assets and liabilities:
Decrease in receivables 606 526 32,736
Increase in receivables from related party (3,761) -- --
Decrease (increase) in due from licensee -- 2,994 (4,953)
Decrease in prepaid expenses and other
current assets 3 172 490
(Increase) decrease in other assets (1,831) 166 64
Increase (decrease) in accounts payable 1,011 (147) (11,585)
(Decrease) increase in accounts payable to related parties (905) 211 885
(Decrease) increase in accrued expenses and
other current liabilities (3,822) 3,196 (2,128)
Decrease (increase) in other liabilities 225 (702) (578)
-------- -------- --------
Net cash (used in) provided by operating activities (11,943) 4,489 6,853
-------- -------- --------
Cash flows from investing activities:
Capital expenditures -- (8) (491)
Proceeds from sale of trademark and license 42,360 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 42,360 (8) (491)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 7,500
(Repayments to) advances from related parties (12,358) 3,966 9,060
Payments of long-term debt and capitalized leases (17,302) (2,856) (4,088)
Decrease in borrowings under revolving
credit facility (456) (4,029) (34,194)
-------- -------- --------
Net cash used in financing activities (30,116) (2,919) (21,722)
-------- -------- --------
Net cash provided by (used in) continuing operations 301 1,562 (15,360)
Net cash provided by (used in) discontinued operations 652 (2,019) 13,428
-------- -------- --------
Net increase (decrease) in cash 953 (457) (1,932)
Cash and cash equivalents, beginning of year -- 457 2,389
-------- -------- --------
Cash and cash equivalents, end of year $ 953 $ -- $ 457
======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2003 2002 2001
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 979 $1,984 $2,606
====== ====== ======
Income taxes $ 11 $ 4 $ 69
====== ====== ======
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock in settlement of accounts payable $ -- $2,250 $1,050
====== ====== ======
Note receivable on sale of license $4,500 $ -- $ --
====== ====== ======
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
In 2001 and prior, Aris Industries, Inc. and Subsidiaries (collectively,
the "Company" or "Aris") was primarily a licensor or sub-licensor of a
broad line of high quality junior's sportswear including jeans, shirts,
skirts and sweaters as well as men's outerwear. During 2002, the Company
completed its first full year as a licensor or sub-licensor of its owned or
licensed trademarks. The Company licensed its trademark portfolio
domestically and internationally for apparel and other products that it did
not sell. These products were distributed and marketed by the Company's
licensees in the United States, primarily in department stores, specialty
stores and national retail chains as well as Company-owned retail stores.
In addition, the Company had granted licenses to use Company-owned
trademarks for the manufacture and sale of various products.
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 trademarks 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"), an affiliate of Arnold H. Simon, Chief Executive Officer of
the Company, 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.
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 transaction was approved by the Company's stockholders 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 a default by an XOXO licensee and claims arising from a
transition agreement, the $2 million escrow account and the gain on sale
were reduced by approximately $1,498,000.
On December 22, 2003, pursuant to an Asset Purchase Agreement dated
December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly
owned subsidiary of the Company, and Adamson, sold to a newly created
limited liability company, BP Clothing LLC ("Buyer"), an unaffiliated
company, substantially all of the operating assets, including licensed
trademark rights and other intangibles, inventory, machinery and equipment,
rights under customer sales orders and open vendor purchase orders of BP
and Adamson relating to the manufacture, distribution and sale of the Baby
Phate line of clothing and related accessories pursuant to a License
Agreement by and between Phat Fashions LLC and BP dated as of July 1, 1999
(the "License Agreement"). In connection with the transaction, Phat
Fashions LLC terminated the License Agreement with BP and entered into a
new license agreement with Buyer (the "New License"). Adamson had been
operating the business pursuant to a sublicense with BP.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The terms of the transaction, including the purchase price, were the
results of negotiations between representatives of BP, Adamson and the
Buyer, including Steven Feiner, a member of Buyer, who was, until closing,
an Officer and Director of the Company. In accordance with the purchase
agreement, BP was to receive an initial payment of $2,500,000 in cash at
closing. This amount was reduced by approximately $1,200,000 of offsets. In
addition, Buyer issued a promissory note payable to BP in the principal
amount of $4,500,000, after additional offsets of approximately $500,000,
and has agreed to pay $2,000,000 to the Company in June 2004 and $2,500,000
at a rate of 1% of net sales each month commencing on July 18, 2004 and
ending on the maturity date, June 30, 2005, or sooner if fully paid. The
terms of the transaction were approved by the Board of Directors of the
Company including all of the independent directors of the Company.
In 2004 the Company began licensing its Members Only(R) trademark, which is
its only remaining trademark, and is actively seeking new licenses. In
addition, the Company closed its remaining XOXO(R) retail store in July
2003 in connection with the trademark assets sale to Global.
2. BASIS OF PRESENTATION
The accompanying consolidated 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. However, as shown in the accompanying
consolidated financial statements, the Company has incurred losses from
operations in each of the three years ended December 31, 2003, 2002 and
2001. As of December 31, 2003, the Company had a working capital deficit of
$6,068,000.
As a result of the trademark assets sale and the sale of the BP license,
the Company has repaid a substantial portion of its existing indebtedness.
The Company intends to finance its remaining operations through (i)
royalties which the Company is due from the license of its Members Only
trademark, (ii) payments of escrow funds due from the trademark assets sale
and collection of the balance of proceeds from the sale of licensed
trademark rights, (iii) continued reduction of the Company's overhead and,
(iv) continued negotiated settlements with its trade creditors.
The Company believes that its financing plan will be sufficient at least
through December 31, 2004, to sustain its operations. However, 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 entity's
ability to continue as a going concern. The consolidated 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Aris
Industries, Inc. and its wholly-owned subsidiaries after elimination of all
significant inter-company transactions and balances.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the reported amounts of assets and liabilities and disclosures relating to
contingent assets and liabilities at the dates of the financial statements,
and the reported amounts of revenues and expenses for the reporting
periods. The most significant estimates relate to the recoverability of
long-lived assets, valuation allowances on deferred tax assets,
collectability of receivables and estimates of future rent obligations.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less, when acquired, to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits.
INVENTORIES
Inventories were stated at the lower of cost (weighted average basis) or
market and consisted solely of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the term of the
lease or the improvement. Expenditures for maintenance, repairs and minor
renewals are expensed as incurred. When property or equipment is sold or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the gain or loss realized on
disposition is reflected in operations.
GOODWILL
Goodwill represents the excess of purchase price over the fair values of
identifiable net assets of businesses acquired, which includes intangible
assets related to certain trade names and licensing arrangements. In June
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB No. 17, "Intangible Assets". It changed the accounting for goodwill
from an amortization method to an impairment only approach. Under the
non-amortization approach, goodwill and indefinite-lived intangibles are
not amortized into results of operations, but instead will be reviewed for
impairment and written down and charged to results of operations only in
the period or periods in which their recorded values are determined to be
more than their fair value.
The Company has adopted the provisions of SFAS No.142 effective January 1,
2002. In accordance with SFAS No. 142, in 2003, the Company determined that
the carrying value of goodwill associated with its Members Only(R)
trademark was impaired. As a result of this impairment the Company recorded
a goodwill impairment charge of $14,273,000 during the year ended December
31, 2003. Additionally, $19,289,000 of goodwill related to the Company's
XOXO acquisition was written off against the proceeds of the sale of the
XOXO trade name and service mark to Global. In 2002, the Company recorded
an impairment charge of $412,000 on goodwill, which charge is included in
discontinued operations (see Note 4). Had SFAS No. 142 been effective for
the year ended December 31 2001, the application of the non-amortization
provisions of the statement would have reduced the Company's net loss by
$1,809,000.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table shows the changes to goodwill for the years ended
December 31, 2003, 2002 and 2001 (in thousands):
GOODWILL
--------
BALANCE AT JANUARY 1, 2001 $ 36,151
Amortization of goodwill (1,809)
--------
BALANCE, DECEMBER 31, 2001 34,342
Impairment of goodwill included in
discontinued operations (Note 4) (412)
--------
BALANCE, DECEMBER 31, 2002 33,930
Impairment of goodwill included in:
continuing operations (14,273)
discontinued operations (Note 4) (368)
Sale of XOXO trademark (19,289)
--------
BALANCE, DECEMBER 31, 2003 $ --
========
LONG-LIVED ASSETS
The Company reviews long-lived assets, other than goodwill, 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.
The Company moved to a significantly smaller office location in the fourth
quarter of 2003. In connection with this move, the Company recorded an
impairment charge of $345,000 on write-downs of property and equipment no
longer in use. The Company also recorded an impairment charge in 2001 of
$220,000, which represented the net book value of various computer and
other equipment that had become idle as a result of the transition of the
Company into a licensing and brand management business.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, approximate fair value due to the short
maturity of these assets and liabilities.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The Company carries its accounts receivable at cost, less an allowance for
doubtful accounts. On a periodic basis the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections.
REVENUE RECOGNITION
Royalty and licensing income is based upon a percentage of the licensee's
net sales, as defined in the underlying agreements, and is recognized as
earned, provided that collectability is reasonably assured.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $302,000 in 2003, $777,000 in 2002 and $1,847,000 in 2001.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing the net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing the
net income by the weighted average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in
the diluted computation represent shares issuable upon assumed exercise of
stock options and warrants using the treasury stock method. Potentially
dilutive securities have been excluded from the computation in 2002 and
2001 as their effect is anti-dilutive. If the Company had reported net
income in 2002 and 2001, diluted earnings per share would have included the
shares used in the computation of basic net loss per share plus common
equivalent shares. In 2002 and 2001, convertible debentures, options and
warrants to purchase 26,349,024 and 24,971,701 shares of common stock,
respectively, were anti-dilutive and were excluded from the calculation of
diluted weighted average shares outstanding.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
RECLASSIFICATIONS
Certain amounts in the 2002 and 2001 consolidated financial statements have
been reclassified to conform to the 2003 presentation.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans under
the intrinsic value method per Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees", whereby compensation cost
is recorded for the excess, if any, of the quoted market price of the
common shares over the exercise price at the date of grant for all employee
stock options issued.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Since the Company has elected to continue to use the provisions of APB 25
in accounting for stock options granted to employees, it is required by
Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for
Stock-Based Compensation and SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", to present additional pro forma
information showing effects on its historical results of operations of the
use of a method that estimates the fair value of the options at the grant
date and then amortizes the fair value to expense over the options' vesting
period. Had the Company elected to recognize compensation expense based
upon the fair value at the grant dates for awards under these plans, net
income (loss) and net income (loss) per share would have been decreased or
increased to the pro forma amounts shown in the table below (in thousands,
except per share data):
2003 2002 2001
-------- -------- --------
Net income (loss) as reported $ 4,839 $(13,714) $ (3,434)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards 580 1,994 3,738
-------- -------- --------
Net income (loss), pro forma $ 4,259 $(15,708) $ (7,172)
======== ======== ========
Basic and diluted net income (loss) per share:
As reported $ 0.04 $ (0.15) $ (0.04)
======== ======== ========
Pro forma $ 0.04 $ (0.17) $ (0.09)
======== ======== ========
4. DISCONTINUED OPERATIONS
The Company had been engaged in the business of designing, manufacturing
and marketing men's and boy's outerwear and women's sportswear, loungewear
and swimwear under a variety of trademarks which were owned or licensed
from others. During 2001, the Company substantially completed its
transformation from a manufacturer, importer and wholesaler to a licensor
or sub-licensor of its owned or licensed trademarks. 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. On
December 22, 2003, the Company sold its rights to use the Baby Phat(R)
trademark pursuant to a License Agreement by and between Phat Fashions LLC
and BP dated as of July 1, 1999. As a result of the transformation into a
licensing operation and the sale of the Company's owned and licensed
trademarks, operating results relating to manufacturing, wholesaling and
retailing have been excluded from the results from continuing operations
and are classified as discontinued operations for all periods presented in
accordance with the requirements of SFAS144 "Accounting for Impairment or
Disposal of Long-Lived Assets".
Discontinued operations for the years ended December 31, 2003, 2002 and
2001 include all sales, commissions, cost of goods sold and selling and
administrative expenses recorded in connection with
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the Company's former retail and outlet store operations, import and
wholesale operations and all sales to licensee. Additionally, certain
restructuring charges, goodwill and long-lived asset impairment charges and
portions of extraordinary gains have also been reclassified as discontinued
operations.
The summary of the operating results of the discontinued operations is as
follows:
2003 2002 2001
-------- -------- --------
(in thousands)
Revenue: $ 4,830 $ 3,343 $ 47,468
Cost of goods sold 1,760 2,139 34,129
-------- -------- --------
Gross profit 3,070 1,204 13,339
Operating expenses:
Selling and administrative expenses 2,483 3,193 6,774
Impairment of goodwill 368 412 --
Impairment of long lived assets 483 441 242
Restructuring and other charges 1,032 2,507 (1,679)
-------- -------- --------
Income (loss) from operations (1,296) (5,349) 8,002
Interest expense -- -- (189)
-------- -------- --------
Income (loss) before income taxes (1,296) (5,349) 8,191
Income tax provision -- -- 22
-------- -------- --------
Income (loss) $ (1,296) $ (5,349) $ 8,169
======== ======== ========
For the year ended December 31, 2003, included in discontinued operations
is a goodwill impairment charge of $368,000, long-lived assets impairment
charges of $483,000 and a restructuring charge of $1,032,000. Goodwill and
long-lived assets relating to the XOXO(R) retail store and the XOXO(R)
outlet stores, which were being operated by the Company's former licensee,
Adamson, were determined to be impaired after the closing of the trademark
sale to Global. The $1,032,000 restructuring charge represents an
additional year's rent accrual for two of the Company's four former XOXO(R)
retail stores, which were closed in 2002 and are still the subject of
litigation with the landlord. 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. However, no assurances
can be given that the premises will be re-leased by the end of 2004. The
Company could incur additional rent charges of up to $235,000 should a
future review warrant an additional accrual. The Company reached a
settlement agreement for the third retail store closed in 2002. The Company
settled with the landlord of its fourth retail store that closed in July
2003 and was released from all obligations under the lease. The Company
also included a $500,000 gain on the settlement of indebtedness realized on
the settlement of accounts payable in 2003.
For the year ended December 31, 2002 the Company has reclassified into
discontinued operations a goodwill impairment charge of $412,000,
long-lived assets impairment charges of $441,000 and a
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
restructuring charge of $2,507,000. Goodwill and long-lived assets relating
to the four XOXO(R) retail stores, three of which were closed in the first
quarter of 2002, were determined to be impaired. The $2,507,000
restructuring charge represents an accrual of rental charges for 2002 and
2003 for its three closed retail stores.
For the year ended December 31, 2001 the Company has reclassified into
discontinued operations a long-lived assets impairment charge of $242,000
and a restructuring recovery of $1,679,000. The asset impairment charge
related to assets at the Company's former office location which were
abandoned. In 2000, the Company had reserved $4,187,000 in connection with
a restructuring of its operations. In 2001, the Company reversed $1,679,000
in accrued rental costs resulting from the settlement of the Company's
lease obligation on its New Bedford, Massachusetts, warehouse.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 2003 2002
Furniture, fixtures and equipment 3 - 7 $ 6,063 $12,476
Leasehold improvements 5 - 10 931 3,403
------- -------
6,994 15,879
Less accumulated depreciation and amortization 6,315 12,970
------- -------
$ 679 $ 2,909
======= =======
As of December 31, 2003 and 2002, property and equipment include amounts
for equipment leased under capital leases with an original cost of
$2,554,000. As of December 31, 2003 and 2002, accumulated depreciation and
amortization include $2,354,000 and $1,943,000, respectively, associated
with these leased assets.
6. FINANCING
The following amounts represent borrowings outstanding (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31,
2003 2002
Revolving Credit Facility (a) $ -- $ 456
======= =======
Long-term debt:
Term Loan (a) $ -- $ 4,000
Convertible Debentures (b) -- 7,500
Series A Junior Secured Note (c) -- 5,642
------- -------
-- 17,142
Less current portion -- 9,642
------- -------
$ -- $ 7,500
======= =======
a. During February 1999, the Company 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 up to $65,000,000 for working capital loans
and letters of credit financing. In connection with the acquisition of
XOXO, the Company's Financing Agreement was amended to increase the
revolving credit facility to $80,000,000, and provide a term loan of
$10,000,000. The Company repaid all amounts outstanding under the
Financing Agreement out of the proceeds of the trademark assets sale
to Global. Accordingly, the Financing Agreement is no longer in
effect.
The Company's chief executive officer had personally guaranteed $3
million of indebtedness outstanding under the Financing Agreement.
This guarantee expired upon re-payment of the Company's obligations to
CIT.
b. In February 2001, the Company issued $7,500,000 in Convertible
Debentures which bore interest at 8.5% per annum and were convertible
into shares of common stock at the rate of $.46 per share. All amounts
outstanding under these debentures , including accrued interest, were
repaid in full and the debentures were retired.
c. On June 30, 1993, the Company entered into a Series A Junior Secured
Note Agreement with BNY Financial Corporation ("BNY") pursuant to
which BNY received a nine-year, $7,000,000 note. The Company repaid
all amounts outstanding under the BNY note out of the proceeds of the
trademark assets sale to Global.
7. STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the
Company's Board of Directors (or a committee thereof), to award to
employees and directors of, and consultants to, the Company and its
subsidiaries: (i) options to acquire common stock at prices determined
when the options are granted, (ii) stock appreciation rights
(entitling the holder to a payment equal to the
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
appreciation in market value of a specified number of shares of common
stock over a specified period), (iii) restricted shares of common
stock whose vesting is subject to terms and conditions specified at
the time of grant, and (iv) performance shares of common stock that
are granted upon achievement of specified performance goals. Options
granted pursuant to the Plan may be either "incentive stock options"
within the meaning of Section 422A of the United States Internal
Revenue Code of 1986, as amended, or non-qualified options. In April
1999, the Company's Board of Directors approved an amendment to the
Plan to allow for the granting of options to purchase an additional
3,500,000 shares under the Plan for a total of 7,000,000 shares.
Additionally, in 2000, the Company received approval from its board of
directors and shareholders to increase the number of shares for which
options may be granted to 10,000,000.
The Plan provides that options which are cancelled or expire remain
subject to future grant under the Plan. In general, options granted
provide for vesting in three equal annual installments from the date
of grant and are exercisable for a period of 10 years from the grant
date.
Transactions in stock options under the Plan are summarized as
follows:
2003 2002 2001
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
Outstanding, January 1 9,552,000 $ 1.15 10,762,500 $ 1.15 13,225,600 $ 1.20
Granted -- -- -- -- 275,000 0.31
Exercised -- -- -- -- -- --
Expired/Cancelled (3,658,000) 1.03 (1,210,500) 1.85 (2,738,100) 1.32
---------- ---------- ---------
Outstanding, Decem ber 31 5,894,000 $ 1.09 9,552,000 $ 1.05 10,762,500 $ 1.15
========== ======== ========== ======== ========== ========
Options Exercisable, December 31 5,894,000 $ 1.09 9,460,333 $ 1.07 8,083,008 $ 1.13
========== ======== ========== ======== ========== ========
Stock options outstanding and exercisable at December 31, 2003 are as follows:
WEIGHTED
WEIGHTED AVERAGE
RANGE OF SHARES UNDER AVERAGE REMAINING
EXERCISE OPTION PRICE CONTRACTUAL
PRICES AND EXERCISABLE PER SHARE LIFE IN YEARS
---------------- ----------------- --------- --------------
Outstanding:
under $1.00 3,269,000 $ 0.58 5.7
$1.00 - $1.50 765,000 1.00 3.5
$1.51 - $2.00 1,860,000 2.00 5.6
-----------------
5,894,000 $ 1.09 5.4
================= ========= ==============
The Plan provides for the immediate vesting of outstanding options
upon a change of control of the Company.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. INCOME TAXES
The provision for income taxes for the years ended December 31, 2003, 2002
and 2001 consists of state and local income taxes.
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is summarized as follows:
YEAR ENDED DECEMBER 31,
2003 2002 2001
Federal statutory income tax rate (34)% (34)% (34)%
State and local income taxes (6) (6) 2
Goodwill amortization/impairment 100 -- 1
Valuation allowance (60) 40 32
Other, individually less than 5% -- -- 1
--- --- ---
0% 0% 2%
=== === ===
The components of deferred tax assets and liabilities are as follows (in
thousands):
YEAR ENDED
DECEMBER 31,
-----------------
2003 2002
Deferred tax assets/(liabilities)
Current:
Restructuring charge $ 1,498 $ 1,107
Allowance for sales returns, discounts, credits and
doubtful accounts 800 --
Accruals 129 267
Other -- --
------- -------
2,427 1,374
------- -------
Noncurrent:
Net operating loss carryforwards 43,570 48,681
Goodwill -- 1,163
Alternative minimum tax credit carryforward 846 846
Other tax credit carryforwards 37 37
Installment sale (1,800) --
Other 157 605
------- -------
42,810 51,332
------- -------
45,237 52,706
Valuation allowance (45,237) 52,706)
------- -------
Total deferred tax assets $ -- $ --
======= =======
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's valuation allowance decreased to $47,045,000 as of December
31, 2003 from $52,706,000 as of December 31, 2002. For the year ended
December 31, 2002, the Company's valuation allowance increased from
$48,823,000 as of December 31, 2001 to $52,706,000 as of December 31, 2002.
At December 31, 2003, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $94,000,000
which expire during fiscal 2005 through 2022. In addition, the Company has
certain state net operating loss carryforwards available, which expire at
various times in accordance with governing state tax statutes. As a result
of a change in control of the Company in 1999, the utilization of net
operating loss carryforwards generated prior to the change are limited by
Section 382 of the Internal Revenue Code to approximately $1,500,000
annually through 2019. Accordingly, the Company expects that a significant
portion of the net operating loss carryforwards will expire unused.
9. EXTRAORDINARY GAIN
During the year ended December 31, 2001, the Company recorded extraordinary
gains of approximately $1,998,000 which consisted of the following: (i)
settlements with vendors for liabilities totaling approximately $2,345,000,
which the Company agreed to pay approximately $1,063,000 in cash, (ii)
settlement with Perry Ellis International on royalty payables totaling
approximately $1,416,000 which the Company agreed to pay $900,000 in cash
and (iii) in connection with the closing of the New Bedford location in
2001 the Company agreed to settle a union obligation of approximately
$750,000 by paying $550,000 in cash.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum rental payments under capital leases and non-cancelable
operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2003 are as follows (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDING OPERATING SUB-RENTS NET RENT CAPITAL
DECEMBER 31, LEASES LEASES
2004 $ 2,879 $ (623) $ 2,256 $ 404
2005 2,680 (637) 2,043 196
2006 1,968 (637) 1,331 192
2007 1,259 (632) 627 40
2008 1,198 (632) 566 -
Thereafter 200 (105) 95 -
-------- --------- --------------------
Total minimum lease payments $ 10,184 $ (3,266) $ 6,918 832
======== ========= =======
Less amount representing interest 8
--------
Present value of minimum lease payments $ 824
========
The Company had various operating leases in effect for retail and outlet
stores, offices and warehouses. During 2003, the Company negotiated
settlements with outlet store landlords and has been released from all
future obligations under the leases. During 2003, the Company also
negotiated settlements with two of its former retail store landlords. Aris
has been released from all future obligations under the lease of its former
XOXO retail store at Roosevelt Field and is making settlement payments to
its former Rodeo Drive landlord. The Company remains in litigation with its
remaining two retail landlords. Aris has included in discontinued
operations (see Note 4) a rent accrual of $1,032,000 in 2003, to cover 2004
rent for these stores and a rent accrual of $2,507,000 in 2002 to cover
2002 and 2003 rent for these stores. Aris also negotiated a release from
approximately $2,000,000 in future rental obligations for its former office
location at 463 Seventh Avenue. The remaining office leases expire over the
next five years and the warehouse leases expire over the next two years.
Total rental expense under all operating leases was approximately
$2,445,000, $4,538,000 and $5,485,000 for fiscal 2003, 2002 and 2001,
respectively. During 2003 and 2002, Adamson was responsible for
approximately $1,715,000 and $1,844,000, respectively, in rental costs
associated with the Company's office and warehouse space and its outlet
stores. In 2001, the Company received reimbursements from Grupo totaling
approximately $2,818,000 covering rent expense for office, warehouse and
outlet store rents that were Grupo's responsibility as per the Grupo
Agreement.
LICENSE AGREEMENTS
As of December 31, 2003 the Company is not a party to any license
agreements and has no future commitments (see Note 1). The Company's
license agreement with Phat Fashions LLC for the use of the Baby Phat(R)
was terminated on December 22, 2003 in connection with the Asset Purchase
Agreement with BP Clothing LLC (see Note 1). In January 2004, the Company
entered into a license agreement for its Members Only(R) trademark. Minimum
royalties due the Company start at $250,000 in 2004 and increase to
$360,000 for 2007.
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior
executives for periods of three to five years, expiring no later than
February 2005. Under the agreements, the executives are
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
entitled to a specified salary over the contract period. Bonuses are
payable based upon profitability and cash flows of the Company for each
period. The estimated future minimum obligation under these contracts as of
December 31, 2003 is $750,000 in 2004 and $125,000 in 2005. In addition,
upon certain events of termination or change in control of the Company,
certain of these agreements contain lump sum payment provisions, as defined
within the respective agreements.
LITIGATION
The Company, in the ordinary course of its business, is the subject of, or
a party to, various pending or threatened legal actions involving private
interests. While it is not possible at this time to predict the outcome of
these legal actions, in the opinion of management, the dispositions of
these matters could have a material adverse effect on the Company's
financial statements. As of December 31, 2003 the Company is a party to the
following significant legal actions:
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 August 21, 2003, the Company and Fashion
World-Santa agreed to settle the dispute. The Company has agreed to pay
Fashion World-Santa $900,000, $20,000 of which was paid on signing and
$20,000 is payable monthly on the 15th of each month beginning in October
2003 and continuing for the next 44 months.
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 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 recently filed a motion for summary judgement. The
Company also intends to file a motion for summary judgement to dismiss a
portion of her claims.
JENNY'S GARMENTS INC. V. ARIS INDUSTRIES ET AL: Jenny's Garments
Inc.("Jenny") filed a compliant against Aris and certain of its
subsidiaries and current and former officers, as well as other defendants,
in the Supreme Court of New York State, New York County, on or about
December 23, 2003. The suit seeks recovery from Aris and other defendants
in the total amount of $843,947 for goods that were sold and delivered by
Jenny to defendants unrelated to Aris. The suit asserts claims for breach
of contract, quasi-contract and fraud and seeks compensatory and punitive
damages. Aris answered the complaint on or about February 17, 2004 denying
liability and asserting various affirmative defenses. The Company believes
that there is a substantial likelihood of defeating all claims asserted as
neither Aris nor its subsidiaries were the contracting parties for the
goods.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and also committed trademark infringement. The
Company settled Campers World's claim by agreeing to pay $100,000 over a
twenty month period. The Company is defending PEI's claim on the basis of a
release PEI issued to the Company and its affiliates in June 2001.
MELVILLE REALTY COMPANY, INC. V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSORS 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 Europe Craft Imports, Inc. which is
a subsidiary of the Company, pertaining to a alleged 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
alleged 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 February 2,
2002, 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.
EUROPE CRAFT IMPORTS, INC. VS. CORPORATE REALTY INCOME FUNDS I AND 475
FIFTH AVENUE LIMITED PARTNERSHIP.
Europe Craft Imports, Inc. instituted an action in the Supreme Court of the
State of New York, claiming that a lease for office space at 475 Fifth
Avenue, New York, New York, was terminated in whole or in part by the
action of the defendants. Declaratory relief and compensatory damages are
being sought by Europe Craft Imports, Inc., a subsidiary of the Company.
The defendants have counter claimed for cross-declaratory relief, claiming
the lease is valid and was not terminated by the defendants' actions. This
litigation is being pursued and the counter claim vigorously defended.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GREEN 1466 BROADWAY LLC VS. XOXO CLOTHING COMPANY, INC. D/B/A XOXO F/K/A
LOLA, INC. D/B/A XOXO, INC.
Green 1466 Broadway LLC instituted a summary proceeding in the Civil Court
of the City of New York, County of New York, regarding office space at 1466
Broadway, New York, New York. This action was discontinued by a Stipulation
of Settlement. No money was paid by XOXO Clothing Company, Inc. for the
discontinuance.
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.
BRISTOL INDUSTRIAL I, LLC commenced an action against Sheila Clothing
Company, Inc. (formerly known as XOXO Clothing Company, Inc.) for breach of
a lease for an industrial warehouse space in the City of Commerce,
California. The landlord previously filed an action for unlawful detainer
when Sheila defaulted on its payment of rent in June 2003, and at that time
Sheila agreed to give up possession of the premises and the landlord agreed
to dismiss its unlawful detainer action. However, the landlord later
commenced this action for breach of lease, alleging lost rent because of
its alleged inability to re-let the premises through the end of the lease
term, which expired December 31, 2003. The landlord is suing Sheila as
lessor and Aris as guarantor of the lease.
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.
CORPORACION FABRIL ("Cofaco") had 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. On March 29, 2004, the Company and Cofaco agreed to
compromise and settle the claims raised in the suit. Aris agreed to pay
Cofaco $100,000 in $5,000 installments beginning in March 2004 with the
final payment due in October 2005.
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.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. RETIREMENT PLANS
The Company participates in a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants vest
immediately in their own contributions and after seven years of service in
employer contributions. The Company made no contributions in 2003, 2002 or
2001.
12. 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 the purchase of inventory. Pursuant to the Letter of Credit Agreement,
AHS purchased inventory which was 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. All amounts owed AHS
were repaid during 2003.
The Company has utilized the services of Schneider, Schecter & Yoss, an
accounting firm, of which Howard Schneider, a director of the Company, is a
partner. During 2002 and 2001, total fees paid were $43,950 and $43,950,
respectively.
During fiscal 2001 the Company had sales of approximately $828,000 to
Humane Incorporated ("Humane") of which Steven Feiner, a director of the
Company, is the owner. As of December 31, 2002, the Company had receivables
from Humane of approximately $375,000 which have been repaid. Steven Feiner
resigned as a director of the Company in December 2003.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. In 2002 the Company's chief executive officer made
additional loans to the Company totaling $1,500,000. All of the loans were
payable on demand and bore interest at prime plus 1/4%. These loans were
repaid in 2003.
In the fourth quarter of 2003, the Company's chief executive officer loaned
the Company $660,000. This loan is payable on demand and bears interest at
prime plus 1/4%. This loan was outstanding as of December 31, 2003.
In addition, as of December 31, 2003, the Company had trade payables of
$15,287 to its chief executive officer, $99,862 to Humane and $75,400 to
Schneider, Schecter and Yoss.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
Year ended December 31, 2003:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 453,000 $2,000,000 $ 453,000(1) $2,000,000
Restructuring reserves 2,573,000 1,032,000 80,000(3) 3,525,000
---------- ---------- ---------- ----------
Year ended December 31, 2002:
Allowance for sales returns, discounts,
credits and doubtful accounts $1,014,000 $ -- $ 561,000(1) $ 453,000
Restructuring reserves 567,000 2,510,000 504,000(3) 2,573,000
---------- ---------- ---------- ----------
Year ended December 31, 2001:
Allowance for sales returns, discounts,
credits and doubtful accounts $9,141,000 $ -- $8,127,000(1) $1,014,000
Inventory reserves 6,017,000 -- 6,017,000(2) --
Restructuring reserves 4,187,000 -- 3,620,000(3) 567,000
---------- ---------- ---------- ----------
(1) Write-off of receivables.
(2) Write-off of inventory.
(3) Cash amounts paid and reserve recovery.