SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
------
March 31, 2004
ARIS INDUSTRIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
525 SEVENTH AVENUE, NEW YORK, NEW YORK 10018
---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 354-4600
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES ___ NO X
---
Number of shares of Common Stock outstanding 108,819,527
As of May 14, 2004
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as of
March 31, 2004 and December 31, 2003 3
b. Consolidated Condensed Statements of Operations for
the Three-Months Ended March 31, 2004
and March 31, 2003 4
c. Consolidated Condensed Statements of Cash Flows for
the Three-Months Ended March 31,
2004 and March 31, 2003 5
d. Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31, December 31,
ASSETS 2004 2003
---------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $196 $953
Receivable from related party, net of allowance for
doubtful accounts of $3,190 and $2,000 160 1,761
Current portion of note receivable 2,000 2,000
Prepaid expenses and other current assets 3 361
---------------------------------------------
Total current assets 2,359 5,075
Property and equipment, net 623 679
Note receivable 2,500 2,500
Other assets 2,105 2,105
---------------------------------------------
TOTAL ASSETS $7,587 $10,359
=============================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Loans payable to related parties, including accrued interest $ 660 $660
Current portion of capitalized lease obligations 400 400
Accounts payable 4,325 4,631
Accounts payable to related parties 33 199
Accrued expenses and other current liabilities 4,950 5,253
---------------------------------------------
Total current liabilities 10,368 11,143
Capitalized lease obligations, net of current portion 376 424
Other liabilities 1,737 1,746
---------------------------------------------
Total liabilities 12,481 13,313
---------------------------------------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.01 par value: 10,000 shares authorized; none
issued and outstanding - -
Common stock, $.01 par value: 200,000 shares authorized
108,783 issued and outstanding at March 31, 2004
and December 31, 2003 1,088 1,088
Additional paid-in capital 86,146 86,146
Accumulated deficit (92,128) (90,188)
---------------------------------------------
Total stockholders' deficiency (4,894) (2,954)
---------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $7,587 $10,359
=============================================
See accompanying notes to consolidated condensed financial statements
-3-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) Three- Three-
Months Ended Months Ended
March 31, March 31,
2004 2003
----------------------- ----------------------
Revenue - royalty income $63 $2,116
Operating expenses - selling and administrative expenses (1,990) (2,846)
----------------------- ----------------------
Loss from operations (1,927) (730)
Interest expense, net (13) (461)
----------------------- ----------------------
Loss from continuing operations before income taxes (1,940) (1,191)
Income tax provision - (3)
----------------------- ----------------------
Loss from continuing operations (1,940) (1,194)
Discontinued operations - loss from discontinued operations - (85)
----------------------- ----------------------
Net loss ($1,940) ($1,279)
======================= ======================
Basic and diluted net loss per share:
Loss per share from continuing operations ($0.02) ($0.01)
Loss per share from discontinued operations - -
----------------------- ----------------------
Net loss per share ($0.02) ($0.01)
----------------------- ----------------------
Weighted average shares outstanding - basic and diluted 108,783 108,819
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three- Three-
(IN THOUSANDS, EXCEPT PER SHARE DATA) Months Ended Months Ended
March 31, March 31,
2004 2003
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations ($1,940) ($1,194)
Adjustments to reconcile net loss from continuing operations to net
cash (used in) provided by operating activities:
Depreciation and amortization 56 476
Non-cash stock based compensation - 7
Provision for doubtful accounts-related party 1,190 -
Change in assets and liabilities :
Decrease in receivables 411 748
Decrease / (increase) in prepaid expenses and other current assets 358 (1)
Increase in other assets - (2)
(Decrease) / increase in accounts payable (306) 436
(Decrease) / increase in accounts payable to related parties (166) 121
Decrease in accrued expenses and other current liabilities (303) (184)
Decrease in other liabilities (9) (31)
---------------------- ----------------------
Net cash (used in) provided by operating activities (709) 376
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital leases (48) (72)
Advances from related party - 385
Decrease in borrowings under revolving credit facility - (368)
---------------------- ----------------------
Net cash used in financing activities (48) (55)
---------------------- ----------------------
Net cash (used in) provided by continuing operations (757) 321
Net cash used in discontinued operations - (5)
---------------------- ----------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (757) 316
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 953 0
---------------------- ----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $196 $316
====================== ======================
-5-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of March 31, 2004
and for the three-month periods ended March 31, 2004 and 2003 are unaudited and
reflect all adjustments consisting of normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of financial
position, operating results and cash flows for the periods.
The consolidated condensed balance sheet as of December 31, 2003 was
derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The accompanying consolidated condensed financial statements have been
prepared in accordance with accounting standards appropriate for interim
financial statements and should be read in conjunction with the financial
statements and notes thereto included in Aris Industries, Inc. (the "Company",
the "Registrant" or "Aris") Annual Report on Form 10-K for the year ended
December 31, 2003. The operating results for the three-month period ended March
31, 2004 are not necessarily indicative of the operating results to be expected
for the year ending December 31, 2004.
2. LIQUIDITY RISKS
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
The Company has continued to incur losses from operations and had a
working capital deficit of $8,009,000 at March 31, 2004 as compared to a working
capital deficit of $6,068,000 at December 31,
6
2003. As a result of the sale of the Company's XOXO(R) trademark and certain
related assets, the Company has satisfied all obligations that were previously
outstanding under its credit facility and certain other debt instruments.
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. 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. The Company collected the remaining balance of this escrow account
in April 2004. The remaining escrow account does not expire until the third
anniversary of the transaction date.
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 Apparel, Inc. ("Adamson"), a related
party, sold to a newly created limited liability company, BP Clothing LLC (the
"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 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 sub-license with BP.
In accordance with the Asset 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.
In May 2004 the Company and Buyer restructured the $2,000,000 payment
due in June 2004. As a result of this restructuring the Company will receive the
$2,000,000 in weekly installments which vary from $100,000 to $200,000 and
commence on May 13, 2004 and continue through August 15, 2004. The payment
structure of the final $2,500,000 is unchanged.
In 2004, the Company began licensing its Members Only(R) trademark,
which is its only remaining trademark.
As a result of the trademark assets sale and the sale of the BP
license, the Company has repaid a substantial portion of its 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
7
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 its financing plan will be sufficient, at
least through March 31, 2005, to sustain its operations. There can be no
assurance that the timing of cash receipts to be realized from working capital
and operations will be sufficient to meet obligations as they become due. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated condensed financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
3. 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 three-months ended March 31, 2003
include all sales, commissions, cost of goods sold and selling and
administrative expenses recorded in connection with the Company's former retail
operations.
The summary of the operating results of the discontinued operations is
as follows (000 omitted):
Three-Months Ended
March 31, 2003
Revenues $1,094
Cost of goods sold (543)
------
Gross profit 551
Selling and administrative
expenses (636)
------
Loss from discontinued
operations $ (85)
======
8
4. PER SHARE DATA
Basic loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during each
period.
Options and warrants to purchase 6,478,345 and 10,136,345 shares of
common stock were outstanding as of March 31, 2004 and 2003, respectively, but
were not included in the computation of diluted loss per share because the
effect of their assumed exercise would be anti-dilutive.
5. STOCK INCENTIVE PLAN
The Company has a stock incentive plan which is described more fully in
Note 7 of the Company's Annual Report on Form 10-K for 2003. The Company
accounts for this plan using the intrinsic value method under the recognition
and measurement principles of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES", and related interpretations. No stock-based employee compensation
cost is reflected in net loss for the three-months ended March 31, 2004 and 2003
as all options granted under the plan have an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation
and amortized the cost over the vesting period (in thousands, except per share
data):
Three-Months Ended Three-Months Ended
March 31, 2004 March 31, 2003
Net loss, as reported $(1,940) $(1,279)
Deduct: Total stock-based employee 145
compensation expenses determined
under fair value based method for all
awards
------ ------
Net loss , pro forma (1,940) (1,424)
====== ======
Net loss per share-basic and diluted
As reported $(0.02) $ (0.01)
Pro forma (0.02) (0.01)
9
6. RELATED PARTY TRANSACTIONS
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 March 31, 2004.
Adamson is majority owned by the Company's chairman and chief executive
officer and principal stockholder. As of March 31, 2004, Adamson was indebted
to the Company in the amount of $3,350,000 which is payable on demand and bears
no interest. All but $160,000 of this amount has been reserved at March 31,
2004, including $1,190,000 which was reserved in the three-month ended March 31,
2004.
7. CONTINGENCIES
The Company, in the ordinary course of its business, is the subject of,
or a party to, various pending or threatened legal actions. While it is not
possible at this time to predict the outcome of any litigation, the Company may
not be able to satisfy an adverse judgement in certain of these actions, which
may have a material adverse effect on its financial position, results of
operations and cash flows.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") for the three-month periods ended March
31, 2004 and 2003 should be read in conjunction with the consolidated condensed
financial statements, including the notes thereto, included on pages 3 through
10 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
the ability of the Company to satisfy the conditions and requirements of the
credit facilities of the Company, the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within prevailing retail environment, customer acceptance of
both new designs and newly-introduced product lines, and financial difficulties
10
encountered by customers. All statements other than statements of historical
facts included in this Annual Report, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition,"
are forward-looking statements. Although the Company believes that expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting 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. This Statement also established that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on the
consolidated financial statements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
As of March 31, 2004, the Company had a working capital deficit of
approximately $8,009,000 compared to a working capital deficit of approximately
$6,068,000 at December 31, 2003. The increase in the working capital deficit was
primarily due to the Company's loss from operations. During the three-months
ended March 31, 2004, the Company financed its working capital requirements
principally through licensing revenue from its Members Only license along with
the proceeds from the Asset Purchase Agreement relating to the sale of it's Phat
Farm license in December 2003 (see Note 2).
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. 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. The Company collected the remaining balance of this escrow account
in April 2004. The remaining escrow account does not expire until the third
anniversary of the transaction date.
11
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 Apparel, Inc. ("Adamson"), a related
party, sold to a newly created limited liability company, BP Clothing LLC (the
"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 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 sub-license with BP.
In accordance with the Asset 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.
In May 2004 the Company and Buyer restructured the $2,000,000
payment due in June 2004. As a result of this restructuring the Company will
receive the $2,000,000 in weekly installments which vary from $100,000 to
$200,000 and commence on May 13, 2004 and continue through August 15, 2004. The
payment structure of the final $2,500,000 is unchanged.
In 2004, the Company began licensing its Members Only(R) trademark,
which is its only remaining trademark.
As a result of the trademark assets sale and the sale of the BP
license, the Company has repaid a substantial portion of its 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 other creditors.
There can be no assurance that the timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated condensed
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
RESULTS OF OPERATIONS
The Company reported a net loss of $1,940,000 for the three-month
period ended March 31, 2004 compared to a net loss of $1,279,000 for the
three-month period ended March 31, 2004.
12
During the three-months ended March 31, 2004, the Company's loss was
attributable to a significant reduction in revenues as the result of the sale,
in 2003, of the Company's XOXO trademark and licensing operations and its Baby
Phat sub-license (see Note 2). In addition, the Company reserved $1,190,000 as
an allowance against receivables from Adamson.
During the three-months ended March 31, 2003, the Company's loss was
attributable to an increase in legal expenses, the write-off of previously
recognized XOXO license royalties and a soft retail environment which affected
sales at Adamson and negatively impacted the Company's royalty revenue.
ROYALTY INCOME - CONTINUING OPERATIONS
The Company's royalty income decreased from $2,116,000 during the
three-months ended March 31, 2003 to $63,000 for the three-months ended March
31, 2004. This decrease was attributable to the sale, in 2003, of the Company's
XOXO trademark and licensing operations and its Baby Phat sub-license (see Note
2).
SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS
Selling and Administrative expenses were $1,990,000 for the
three-months ended March 31, 2004 as compared to $2,846,000 for the three-months
ended March 31, 2003. Selling and Administrative expenses for the three-months
ended March 31, 2004 were adversely affected by the sale, in 2003, of the
Company's XOXO trademark and licensing operations and its Baby Phat sub- license
(see Note 2). The Company's royalty revenue for the current quarter was derived
only from its Members Only license. In addition, the Company reserved $1,190,000
as an allowance against receivables from Adamson. Selling and Administrative
expenses for the three-months ended March 31, 2003 continued to be negatively
impacted by legal expenses incurred in the Company's defense of various
lawsuits, the abandonment in 2002 of three retail locations and the ongoing
negotiations with its creditors to settle outstanding amounts due them. This was
partially offset as the Company continued to benefit from Adamson's assumption
of Grupo's responsibility for most of the Company's operating overhead.
DISCONTINUED OPERATIONS
Discontinued operations for the three-months ended March 31, 2003
include all sales, commissions, cost of goods sold and selling and
administrative expenses recorded in connection with the Company's former retail
operations.
INTEREST EXPENSE
Interest expense for the three-months ended March 31, 2004 was
$13,000 as compared to $461,000 for the three-months ended March 31, 2003. This
decrease was attributable to the
13
satisfaction of the Company's indebtedness under its credit facility and other
interest bearing instruments in 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are effective. During the first quarter of 2004, there
were no changes in the Company's internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to
various legal actions the outcome of which the Company believes may have a
material adverse effect on its consolidated financial position and results of
operations. Several of these actions stem from Grupo incurring expenses in the
Company's name. Although the Company did not authorize these expenses, the
Company mat be subject to liability for them. Because of Grupo's bankruptcy
filing, it is unlikely that the Company will be able to recover any of these
amount from Grupo. In addition, the following updates information regarding
certain litigation to which the Company is subject:
FASHION WORLD-SANTA V. LOLA, INC.:
---------------------------------
On February 11, 2002, Fashion World-Santa filed an unlawful
detainer action against Lola, Inc. ("Lola") in the Los Angeles Superior
Court. That action sought to evict Lola, on grounds of non- payment of
rent, from an XOXO retail store located in Beverly Hills, California. Lola
is a party to a five-year lease for that store, and that lease does not
expire until April 2006. XOXO Clothing Company, Inc. responded to the
complaint as successor in interest to Lola, Inc. 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.
14
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 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
15
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
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.
16
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 24, 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.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: May 18, 2004 By /S/
-------------------------------
Paul Spector
Chief Financial Officer / Treasurer
19
(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to
Exhibit Description Document
------- ----------- Referenced in
No. 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.
20
Filed as Indicated
Exhibit to
Exhibit Description Document
------- ----------- Referenced in
No. Footnote No.
--- ------------------
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group,
L.L.C. and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by (18)
and among the Company and its Subsidiaries and
CIT Commercial Group, Inc. and the other
Financial Industries named therein.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene, Michele
Bohbot and Lynne Hanson, dated August 10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing Agreement,
as Lenders; and The CIT Group/Commercial
Services, Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
10.123 Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
21
Filed as Indicated
Exhibit to
Exhibit Description Document
------- ----------- Referenced in
No. 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 (21)
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) Omitted (2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30, 1993 and
incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated September 30, 1996
and incorporated herein by reference.
(11) Omitted. (13) Omitted (14) Omitted (15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with
the Commission on May 27, 1999, and incorporated herein by
reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated February 26, 1999
and incorporated herein by reference.
22
(18) Filed as Exhibit 10.115 to the Annual Report on Form
10-K filed with the Commission on or about April 13,
1999 and incorporated herein by reference.
(19) Filed as Exhibit to the Report on Form 8-K dated
August 24, 1999.
(20) Omitted.
(21) Filed as Exhibit to Annual Report on Form 10-K filed
with the Commission on April 15, 2002.
(22) Filed as an Exhibit to Form 10Q for the Quarter Ended
September 30, 2002
(23) Filed as an Exhibit to Form 8K filed May 8, 2003
(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.
23