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
September 30, 2002 ------
ARIS INDUSTRIES, INC.
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(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.)
463 SEVENTH AVENUE, NEW YORK, NEW YORK 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 473-4200
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding 98,788,267
As of November 12, 2002
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as
of September 30, 2002 and December 31,
2001 ...................................................... 3
b. Consolidated Condensed Statements of
Operations for the Nine-Months Ended
September 30, 2002 and September 30, 2001 ................. 4
c. Consolidated Condensed Statements of
Operations for the Three-Months Ended
September 30, 2002 and September 30, 2001 ................. 5
d. Consolidated Condensed Statements of
Cash Flows for the Nine-Months Ended
September 30, 2002 and September 30, 2001 ................. 6
e. Notes to Consolidated Condensed Financial
Statements ................................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................ 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ......................................... 21
Item 4. Controls and Procedures.................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 22
Item 2. Changes in Securities and Use of Proceeds ................. 23
Item 3. Defaults upon Senior Securities ........................... 23
Item 4. Submission of Matters to a Vote of
Security Holders .......................................... 23
Item 5. Other Information ......................................... 23
Item 6. Exhibits and Reports on Form 8-K .......................... 23
SIGNATURES ................................................................. 24
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash .......................................................... $ 63 $ 457
Receivables, net .............................................. 182 1,152
Receivable from related party ................................. 828 828
Due from licensee ............................................. -- 4,953
Inventories ................................................... 156 489
Prepaid expenses and other current assets ..................... 27 269
-------- --------
Total current assets .................... 1,256 8,148
Property and equipment, net ...................................... 3,560 5,730
Goodwill, net .................................................... 33,930 34,342
Other assets ..................................................... 458 476
-------- --------
TOTAL ASSETS .......................... $ 39,204 $ 48,696
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Borrowings under revolving credit facility .................... $ 853 $ 4,485
Loans payable to related parties, including accrued interest .. 12,454 9,060
Current portion of long-term debt ............................. 10,142 11,842
Current portion of capitalized lease obligations .............. 647 690
Accounts payable .............................................. 3,211 7,050
Accounts payable to related parties ........................... 1,160 885
Accrued expenses and other current liabilities ................ 5,659 2,470
-------- --------
Total current liabilities ................. 34,126 36,482
Long-term debt ................................................... 7,500 7,500
Capitalized lease obligations .................................... 600 950
Other liabilities ................................................ 1,723 2,587
-------- --------
Total liabilities ..................... 43,949 47,519
-------- --------
Commitments and contingencies
Stockholders' Equity (Deficiency):
Preferred stock, $.01 par value: 10,000 shares authorized; none
issued and outstanding ..................................... -- --
Common stock, $.01 par value: 200,000 shares authorized
98,783 issued and outstanding at September 30, 2002
and 82,165 issued and outstanding at December 31, 2001 ...... 988 822
Additional paid-in capital .................................... 85,146 81,760
Accumulated deficit ........................................... (90,851) (81,313)
Unearned compensation ......................................... (28) (92)
-------- --------
Total stockholders' equity (deficiency) .......... (4,745) 1,177
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) .......... $ 39,204 $ 48,696
======== ========
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)
Nine- Nine-
Months Ended Months Ended
September 30, September 30,
2002 2001
------------- -------------
Revenues:
Sales to customers ................................. $ 2,460 $ 25,831
Sales to licensee .................................. -- 13,285
Royalty income ..................................... 6,946 9,080
Commission income .................................. -- 660
-------- --------
Total revenues ........................................ 9,406 48,856
-------- --------
Cost of goods sold:
Cost of sales to customers ......................... (1,259) (17,419)
Cost of sales to licensee .......................... -- (10,484)
-------- --------
Total cost of goods sold .............................. (1,259) (27,903)
-------- --------
Gross profit .......................................... 8,147 20,953
Operating income (expenses):
Selling and administrative expenses ................ (14,564) (23,937)
Impairment of long lived assets .................... (853) --
Restructuring and other costs ...................... (709) 1,679
-------- --------
Loss from operations .................................. (7,979) (1,305)
Interest expense, net ................................. (1,567) (2,611)
-------- --------
Loss before income tax provision and extraordinary item (9,546) (3,916)
Income tax benefit (provision) ..................... 8 (103)
-------- --------
Loss before extraordinary item ........................ (9,538) (4,019)
Extraordinary item:
Gain on extinguishment of debt ..................... -- 1,998
-------- --------
Net loss .............................................. ($ 9,538) ($ 2,021)
======== ========
Basic loss per share:
Loss before extraordinary item ..................... ($ 0.11) ($ 0.05)
Extraordinary item ................................. $ 0.00 $ 0.02
======== ========
Net loss .............................................. ($ 0.11) ($ 0.03)
======== ========
Per share data:
Weighted average shares outstanding - Basic ........ 87,184 81,836
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
September 30, September 30,
2002 2001
------------- --------------
Revenues:
Sales to customers .......................................... $ 773 $ 1,506
Sales to licensee ........................................... -- 3,807
Royalty income .............................................. 2,376 3,609
Commission income ........................................... -- --
-------- --------
Total revenues ................................................. 3,149 8,922
-------- --------
Cost of goods sold:
Cost of sales to customers .................................. (333) 5
Cost of sales to licensee ................................... -- (3,006)
-------- --------
Total cost of goods sold ....................................... (333) (3,001)
-------- --------
Gross profit ................................................... 2,816 5,921
Operating income (expenses):
Selling and administrative expenses ......................... (3,277) (5,063)
Impairment of long lived assets ............................. -- --
Restructuring and other costs ............................... (200) --
-------- --------
(Loss) income from operations .................................. (661) 858
Interest expense, net .......................................... (512) (760)
-------- --------
(Loss) income before income tax provision and extraordinary item (1,173) 98
Income tax (provision) benefit .............................. (17) (6)
-------- --------
(Loss) income before extraordinary item ........................ (1,190) 92
Extraordinary item:
Gain on extinguishment of debt .............................. -- 107
-------- --------
Net (loss) income .............................................. ($ 1,190) $ 199
======== ========
Basic loss per share:
Loss before extraordinary item .............................. ($ 0.01) $ 0.00
Extraordinary item .......................................... $ 0.00 $ 0.00
======== ========
Net loss ....................................................... ($ 0.01) $ 0.00
======== ========
Per share data:
Weighted average shares outstanding - Basic ................. 95,522 82,165
Weighted average shares outstanding - Diluted ............... 95,522 82,736
See accompanying notes to consolidated condensed financial statements
-5-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine- Nine-
Months Ended Months Ended
September 30, September 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... ($ 9,538) ($ 2,021)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ......................................... 1,760 4,645
Non-cash stock transaction charged to expense ......................... 1,300 --
Non-cash stock based compensation ..................................... 64 29
Extraordinary gain on extinguishment of debt .......................... -- (1,998)
Provision for / (reversal) of accrued restructuring charges ........... 709 (1,679)
Write-off receivables from licensee ................................... 1,959 --
Impairment on property and equipment .................................. 440 --
Impairment of goodwill ................................................ 412 --
Change in assets and liabilities:
Decrease in receivables ............................................... 970 30,139
Decrease in due from licensee ......................................... 2,994 --
Decrease in inventories ............................................... 333 10,492
Decrease in prepaid expenses and other current assets ................. 242 1,038
Decrease in other assets .............................................. 18 51
Decrease in accounts payable .......................................... (1,789) (13,919)
Increase in accounts payable to related parties ....................... 275 --
Increase / (decrease) in accrued expenses and other current liabilities 2,680 (6,262)
Decrease in other liabilities ......................................... (864) (521)
-------- --------
Net cash provided by operating activities .............. 1,965 19,994
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (28) (406)
-------- --------
Net cash used in investing activities .................. (28) (406)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital leases ............................. (2,093) (2,817)
Proceeds from issuance of convertible debentures ............................ -- 7,500
Proceeds of loan from related party ......................................... 3,394 9,060
Decrease in borrowings under revolving credit facility ...................... (3,632) (34,929)
-------- --------
Net cash used in financing activities .................. (2,331) (21,186)
-------- --------
NET DECREASE IN CASH ............................................................ (394) (1,598)
CASH, BEGINNING OF PERIOD ....................................................... 457 2,389
-------- --------
CASH, END OF PERIOD ............................................................. $ 63 $ 791
======== ========
Supplemental Schedule of Non-Cash Financing Activities
Issuance of common stock in settlement of accounts payable .................. $ 2,250 $ 3,300
-------- --------
See accompanying notes to consolidated condensed financial statements
-6-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of September 30, 2002 and for
the nine and three- month periods ended September 30, 2002 and 2001, are
unaudited and reflect all adjustments consisting of normal recurring adjustments
and extraordinary gains, restructuring and other costs (See Note 8) 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, 2001 was derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles. The accompanying consolidated
condensed financial statements have been prepared in accordance with accounting
standards appropriate for interim financial statements and should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. The
operating results for the nine and three-month periods ended September 30, 2002
are not necessarily indicative of the operating results to be expected for the
year ending December 31, 2002.
2. FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS"
Under Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") goodwill and other intangible assets with indefinite useful
lives are no longer amortized. Instead such assets will be subject to reduction
only when the carrying amount exceed their estimated fair value based on
impairment tests established by SFAS 142 that will be made at least annually.
The Company implemented the provisions of SFAS 142 effective January 1, 2002,
and discontinued amortization effective as of that date. For the nine-months
ended September 30, 2001, amortization relating to goodwill was approximately
$1,356,000.
3. LIQUIDITY RISKS
These consolidated condensed financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business.
As of September 30, 2002 the Company had a working capital deficit of
$32,870,000 as compared to a working capital deficit of $28,334,000 at December
31, 2001. In addition, the Company was not in compliance with certain covenants
contained in its credit facility. However, the Company has been advised by its
lenders that they are willing to work with the Company to structure the
remaining payments in a manner the Company should be able to make. Amounts
outstanding under the revolving credit facility were reduced from $4,485,000 at
December 31, 2001 to $853,000 as of September 30, 2002.
-7-
During 2001, Aris Industries, Inc. (the "Company", the "Registrant" or "Aris")
substantially completed its transformation from a manufacturer and importer of
outerwear, sportswear and loungewear to a licensor or sublicensor of its owned
or licensed trademarks. In early 2001, Aris entered into an agreement (the
"Grupo Agreement"), which became effective March 1, 2001, with Grupo Xtra of New
York, Inc. ("Grupo"), an unaffiliated third party, giving Grupo the exclusive
right in the United States, Puerto Rico, the Caribbean Islands and Israel to
manufacture and sell, subject to Aris' design and quality approvals, women's
clothing, jeanswear and sportswear under the XOXO(R) and Fragile(R) trademarks
and sportswear and outerwear under the Members Only(R) trademark. In addition,
Aris granted Grupo the right to manufacture and sell products covered by its
license agreements for Brooks Brothers Golfwear and Baby Phat sportswear. In
late 2001, Brook Brothers terminated Grupo's right to use its trademark and
subsequently purported to terminate the Company's license period. Grupo was also
granted the right to operate the Company's XOXO outlet stores, which the Company
used to provide a channel for disposing of excess and irregular inventory. In
exchange, Grupo agreed to purchase substantially all of Aris's inventory of such
products, pay royalties based on its sales of such products and assume certain
of Aris's overhead obligations and contracts. Grupo completed the purchase of
such inventory in January 2002.
Grupo was frequently late in fulfilling its payment obligations under the
Agreement. Following the end of the 2001, it continued to be late in making
payments to the Company and violated the Agreement in other ways. In March 2002,
the Company sent Grupo notices of termination of the Agreement.
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") 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 (see Note 4). On July 19 Grupo's filing was converted to a Chapter VII.
The Company plans to finance its operations through, (i) royalties which the
Company is due under the Adamson license agreement based on a percentage of net
sales, (ii) minimum royalties of $3,383,000 from its other licensees, (iii)
negotiation of extended payment term of existing finance agreements and (iv)
continued negotiated settlements with its other creditors.
The Company believes that its financing plan in conjunction with a refinancing
of its term loan, Series A Junior Secured Note and the KC Convertible
Debentures, will be sufficient, at least through September 30, 2003, to sustain
its operations as a licensing and brand management business and to payoff
indebtedness under the credit facility and the term loan, 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
or that the Company will be able to refinance any of its debt or extend the
payment terms thereof. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated condensed financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
-8-
4. ADAMSON LICENSE AGREEMENT
Following the effectiveness of the termination of the Grupo Agreement, the
Company reached an agreement with Adamson Apparel, Inc. to license from the
Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R)
trademarks that had been previously licensed by Grupo. Adamson is a newly-formed
New York corporation of which the majority owner is the Company's chairman and
chief executive officer and principal stockholder. Adamson was initially
capitalized with a $7 million investment. Adamson is utilizing many of the same
employees that were employed by Grupo, all of whom were formerly employees of
XOXO or one or more of the Company's subsidiaries.
The Adamson Agreement has an initial term which expires on December 31, 2003,
which may be automatically renewed for a further one year term, subject to
agreement by both parties, to manufacture, market and distribute at wholesale,
women's clothing, jeanswear and sportswear under the XOXO and Members Only
trademarks and, subject to Aris' rights as licensee with respect thereto, Baby
Phat apparel. The royalty rate for XOXO and Members Only products is 9% and 3.5%
for Baby Phat in addition to amounts due to the licensor of Baby Phat.
The royalty due from Adamson for 2002 is based on a percentage of net sales. The
Company has been informed that Adamson purchased from Grupo's lender all of
Grupo's inventory of XOXO(R) and Baby Phat(R) apparel and also purchased from
the lender Grupo's order file. The Company received approximately $4,458,000 in
royalties from Adamson during the nine-month period ended September 30, 2002.
5. SALE OF CONVERTIBLE DEBENTURES
In February 2001, the Company entered into a Securities Purchase Agreement with
KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to issue
Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share. KC
only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. At December 31, 2001, the
Company was delinquent in paying the quarterly interest payments due on July 31
and October 31, 2001. The Company made the quarterly interest payment due July
31, 2001 in January 2002 and KC had agreed not to call a default if the Company
paid the October 31, 2001 payment by March 29, 2002. On April 10, 2002, the
chief executive officer of the Company received a letter from the general
partner ("GP") of KC stating that the limited partners ("LP") of KC have
instructed the GP of KC to give the Company until April 17, 2002, to pay the
overdue 2001 interest and until May 10, 2002, to pay the remaining overdue 2002
interest. The LP's had instructed the GP, in the event that these deadlines are
not met, to take all necessary measures to put the Company in default and
collect upon the debt. On May 10, 2002, the Company paid the interest payment
due October 31, 2001, aggregating approximately $163,000. On August 5, 2002 KC
sent the Company a notice of default arising from the Company's failure to pay
interest in the amount of approximately $321,000 that was due on January 31 and
April 30, 2002. On September 3, 2002, the Company reached an agreement with KC
and the default was rescinded. The Company agreed to pay KC $50,000 every three
weeks starting on September 3, 2002 and continuing until all interest due KC is
brought up to date under the terms of the Debentures. The Company is current in
-9-
its payments to KC as of the date of this filing. Accordingly, the Company has
reclassified the $7,500,000 Debenture back into long term debt from current
liabilities.
6. PAYABLES REDUCTION
During the nine-months ended September 30, 2001 the Company continued the
process of negotiating settlements with its vendors. The Company reached
agreements with vendors for amounts due which resulted in a net gain of
$1,998,000 during the period. These gains are reflected as an extraordinary item
within the accompanying statements of operations.
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 with a market
value of $1,050,000. The Company agreed that, in the event the market value of
such shares as of December 31, 2001 is less than $3,300,000, the Company will
either, at its option (x) pay to such vendor in cash an amount, or (y) issue to
such vendor 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 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.
7. DEBT
The Company's indebtedness consists, in part, of its obligations to BNY
Financial Corporation ("BNY") under the Series A Junior Secured Note Agreement
dated June 30, 1993, pursuant to which BNY is owed $5,642,000, as of September
30, 2002. On October 23, 2001, the Company received a forbearance from BNY
relating to the $1,100,000 principal payment due November 5, 2001. Under the
terms of the forbearance, the Company paid BNY $500,000 in principal along with
the normally scheduled interest payment on November 5, 2001 and received a
deferral until March 3, 2002 on the balance of $600,000 principal due. On
February 21, 2002, the Company received a further forbearance on the $600,000
principal payment that was due on March 3, 2002. BNY agreed to defer this
principal amount as follows; $50,000 due on July 1, 2002; $100,000 due on July
31, 2002 and $450,000 due on September 3, 2002. The Company paid the principal
payments due on July 1 and July 31, 2002. On August 29, 2002, the Company and
BNY agreed to defer $400,000 of the $450,000 principal payment due on September
3, 2002, until November 3, 2002. The Company paid the $50,000 due September 3,
2002 and is current in its interest payments through October 31, 2002. On
October 31, 2002, the Company received a forbearance on the balance of BNY's
Note, $5,642,000, until December 2, 2002. The Company is currently negotiating
with BNY for a restructuring of the payment term of the note. Although BNY has
indicated a willingness to work with the Company, there can be no assurance that
BNY will agree to any such restructuring.
On January 18, 2002, the Company entered into a forbearance agreement with CIT
as agent for the lenders under the Company's Financing Agreement. Under the
terms of the forbearance agreement the following occurred; (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company is required to reduce the balance of the revolving credit
facility and certain other amounts due the lenders on a monthly basis through
July 31, 2002 at which time the balances were to be repaid in full. If the
outstanding balance of the revolving credit facility and certain other amounts
due the lenders at the end of any month exceeds the required monthly ending
balance, as
-10-
defined in the forbearance agreement, the Company has fifteen days to cure the
excess principal before its lenders will take action against the Company, (iii)
the Company was required to make installments of $500,000 on April 1 and July 1,
2002 and the remaining balance was due on October 31, 2002 and (iv) the
Company's chief executive officer agreed to extend the $3,000,000 personal
guaranty to remain in effect until all obligations under the forbearance
agreement are paid in full. The Company did not make the April 1, 2002, term
loan payment. The Company and CIT negotiated an amendment of the forbearance
agreement to extend the payout period for the Company's revolving line of credit
and term loan. In conjunction with these negotiations the Company, on May 10,
2002, paid the $500,000 quarterly term loan payment which was originally due on
April 1, 2002. In addition, the Company verbally agreed to pay the lenders
$200,000 at the end of each month to reduce its revolving line of credit
balance. The Company has made these payments in each of May, June, July, August
and September 2002. The balance due under the revolving line of credit after
these payments was $853,000. The Company also made its term loan payments in the
amount of $500,000, due July 1 and October 1, 2002. The balance due under the
Company's term loan after these payments was $4,000,000. On November 6, 2002 the
Company received an additional extension of the forbearance. Under the terms of
the extension the Company has agreed to; (i) continue to make monthly payments
of $200,000 against its revolving line of credit, (ii) make principal payments
of $500,000 against its term loan on January, April and July 1 of 2003 with the
remaining balance due July 31, 2003 and (iii) continue to make monthly payments
against certain other amounts due the lenders. The Company is current in its
payments through the date of this filing.
The obligations under the Financing Agreement are collateralized by
substantially all of the assets of the Company. The Financing Agreement contains
various financial and other covenants and conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of September 30, 2002 and December 31,
2001, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 forbearance agreement and subsequent
extensions, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3 million of
indebtedness outstanding under the Financing Agreement.
8. RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in the first
quarter of fiscal 2002. The Company recorded charges aggregating $2,257,000 in
the first quarter of 2002, consisting of an accrual of approximately $1,113,000
for 2002 rent, an additional $292,000 of lease termination costs relating to the
2000 restructuring reserve, property and equipment write-downs of approximately
$440,000 and goodwill impairment charges of approximately $412,000. The Company
included in its accrual a liability for one year of store rent for each of the
closed stores since each store lease contains a provision that the landlord will
use its best efforts to re-lease the premises in the event that the premises are
vacated by the Company. However, no assurances can be given that the premises
will be re-leased within one year and the Company will have to periodically
review its accrual.
In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig,
LLC ("Trizec"), the landlord of the Company's premises at 1411 Broadway in New
York. Under the terms
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of the settlement the Company paid $550,000 on June 26, 2002, to Trizec and was
released from all obligations under its lease. As a result of this agreement the
Company recorded a favorable reversal of a previously recorded restructuring
reserve of approximately $895,000 in the second quarter of fiscal 2002.
In connection with the Trizec settlement the Company recorded a liability for
$200,000 representing a brokers fee in connection with securing a tenant for the
space. This fee is being paid out over approximately two years.
During the nine-months ended September 30, 2001, the Company recorded a gain in
restructuring relating to a reversal of approximately $1,679,000 in accrued
rental costs resulting from a settlement of the Company's lease obligation on
its New Bedford, Massachusetts, warehouse. Under the settlement agreement, the
Company was released from all obligations under the lease in exchange for cash
payments of $850,000. The Company made the final payment under the settlement
agreement in September 2001.
9. PER SHARE DATA
Basic (loss) income per common share is computed by dividing net (loss) income
available for common shareholders, by the weighted average number of shares of
common stock outstanding during each period.
Options and warrants to purchase 11,346,845 and 12,239,245 shares of Common
Stock were outstanding as of September 30, 2002 and 2001, respectively, but were
not included in the computation of diluted earnings per share because the effect
would be anti-dilutive. In addition, conversion rights under the Convertible
Debentures to convert the Debentures into 16,304,345 shares of Common Stock were
not included in the computation of diluted earnings per share because the result
would be anti-dilutive.
10. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by the
Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, AHS purchased inventory
which was to be held at the Company's warehouse facilities. Such inventory was
sold to the Company at cost when the Company is ready to ship the merchandise to
the customer. As of September 30, 2002, the Company owes AHS $7,090,000. In
connection with the Letter of Credit Agreement, the chief executive officer has
guaranteed up to $7,000,000 of AHS obligations to the Company's principal
commercial lender.
During January 2001, the Company's chief executive officer loaned the Company
$2,000,000. In March 2002, the Company's chief executive officer loaned the
Company an additional $250,000. During the quarter ended June 30, 2002, the
Company's chief executive officer loaned the Company an additional $1,250,000.
The loans are payable on demand and bear interest at prime plus one quarter
percent.
The Company's chief executive officer personally guaranteed $3,000,000 of
indebtedness outstanding under the Financing Agreement.
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Adamson is a newly-formed New York corporation which is majority owned by the
Company's chairman and chief executive officer and principal stockholder (see
Note 4). A minority shareholder of Adamson, who invested $3,500,000 in Adamson,
was issued 10,000,000 shares of the Company's common stock as consideration for
him making the investment in Adamson resulting in a non-cash charge of
$1,300,000. As of September 30, 2002, the Company was indebted to Adamson in the
amount of $1,864,000, which is payable on demand and bears no interest.
In connection with Adamson's purchase of the inventory formerly owned by Grupo
from CIT, Grupo's lender, XOXO guaranteed $3,500,000 of the deferred purchase
price for such inventory and granted CIT a security interest in its trademarks
as collateral for such guarantee.
11. 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 or
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 nine and three-month periods ended
September 30, 2002 and 2001 should be read in conjunction with the consolidated
condensed financial statements, including the notes thereto, included on pages 3
through 12 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
the ability of the Company to satisfy the conditions and requirements of the
credit facilities of the Company, the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within prevailing retail environment, customer acceptance of
both new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this Annual Report, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition,"
are forward- looking statements. Although the Company believes that expectations
reflected in such forward- looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
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ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142 AND 144
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". The Company has adopted the provisions of SFAS 142 effective
January 1, 2002. Under SFAS 142, goodwill and other intangible assets with
indefinite useful lives are no longer be systematically amortized. Instead such
assets will be subject to reduction when their carrying amounts exceed their
estimated fair values based on impairment tests that will be made at least
annually. SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company expects that
the adoption of SFAS 142 will reduce annual amortization expense by
approximately $1.8 million. Additionally, based on expected cash flows under the
Adamson and other license agreements, the Company does not expect to incur
goodwill and other intangible asset impairment charges associated with the
adoption of this statement other than the $0.4 million charge taken in the first
quarter of 2002 related to the closing of the retail stores. In accordance with
SFAS 142 the Company recently had an independent appraisal of its goodwill and
it was determined that no impairment currently exists. However, no assurance can
be given that a potential future impairment charge will not be required and the
Company will re-appraise its goodwill next year. In addition, in August 2001,
FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144, addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Among other things, SFAS 144,
provides guidance on the implementation of previous pronouncements related to
when and how to measure impairment losses and how to account for discontinued
operations. Management does not believe that the adoption of SFAS 144 will have
a material impact on the Company's financial position, results of operations or
cash flows. For the nine- months ended September 30, 2001, the Company's net
loss would have decreased by $1,356,000 of amortization relating to goodwill.
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 September 30, 2002, the Company had a working capital deficit of
approximately $32,870,000 compared to a working capital deficit of approximately
$28,334,000 at December 31, 2001. The
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increase in the working capital deficit was due to the default by Grupo under
its license agreement which resulted in the Company not receiving approximately
$1,000,000 in license royalties and writing off approximately $1,959,000 in
operating expense reimbursements. In addition, the Company recorded charges
aggregating $2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $440,000 and goodwill impairment charges
of approximately $412,000 for retail stores closed during the first quarter
offset partially by a recovery of $895,000 in lease termination costs and other
accrued rent in connection with the settlement with the Company's former
landlord at 1411 Broadway. During the nine-months ended September 30, 2002, the
Company financed its working capital requirements principally through licensing
revenue from Adamson, Grupo and the Company's other licensees along with
additional loans 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 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
(see Note 4). The royalty due from Adamson is based on a percentage of net
sales. The Company has been informed that Adamson purchased from Grupo's lender
all of Grupo's inventory of XOXO(R) and Baby Phat(R) apparel and also purchased
from the lender Grupo's order file. On July 19 Grupo's filing was converted to a
Chapter VII.
On January 18, 2002, the Company entered into a forbearance agreement with CIT
as agent for the lenders under the Company's Financing Agreement. Under the
terms of the forbearance agreement the following occurred; (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company is required to reduce the balance of the revolving credit
facility and certain other amounts due the lenders on a monthly basis through
July 31, 2002 at which time the balances were to be repaid in full. If the
outstanding balance of the revolving credit facility and certain other amounts
due the lenders at the end of any month exceeds the required monthly ending
balance, as defined in the forbearance agreement, the Company has fifteen days
to cure the excess principal before its lenders will take action against the
Company, (iii) the Company was required to make installments of $500,000 on
April 1 and July 1, 2002 and the remaining balance was due on October 31, 2002
and (iv) the Company's chief executive officer agreed to extend the $3,000,000
personal guaranty to remain in effect until all obligations under the
forbearance agreement are paid in full. The Company did not make the April 1,
2002, term loan payment. The Company and CIT negotiated an amendment of the
forbearance agreement to extend the payout period for the Company's revolving
line of credit and term loan. In conjunction with these negotiations the
Company, on May 10, 2002, paid the $500,000 quarterly term loan payment which
was originally due on April 1, 2002. In addition, the Company verbally agreed to
pay the lenders $200,000 at the end of each month to reduce its revolving line
of credit balance. The Company has made these payments in each of May, June,
July, August and September 2002. The balance due under the revolving line of
credit after these payments was $853,000. The Company also made its term loan
payments in the amount of $500,000, due July 1 and
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October 1, 2002. The balance due under the Company's term loan after these
payments was $4,000,000. On November 6, 2002 the Company received an additional
extension of the forbearance. Under the terms of the extension the Company has
agreed to; (i) continue to make monthly payments of $200,000 against its
revolving line of credit, (ii) make principal payments of $500,000 against its
term loan on January, April and July 1 of 2003 with the remaining balance due
July 31, 2003 and (iii) continue to make monthly payments against certain other
amounts due the lenders. The Company is current in its payments through the date
of this filing.
The obligations under the Financing Agreement are collateralized by
substantially all of the assets of the Company. The Financing Agreement contains
various financial and other covenants and conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of September 30, 2002 and December 31,
2001, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 forbearance agreement and related
extensions, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3 million of
indebtedness outstanding under the Financing Agreement. This guaranty, which
initially was to expire on December 6, 2000, has been extended until the loans
are repaid in full.
As a result of its change to a licensing operation, the Company no longer needs
financing to purchase inventory or to finance future accounts receivable. During
2001, the Company reduced its revolving line of credit from $38,679,000 to
$4,485,000 through the collection of accounts receivable and the sale of
inventory to Grupo pursuant to the Grupo Agreement. As of September 30, 2002,
the revolving line of credit has been further reduced to approximately $853,000.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned by the
Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, the chief executive officer
entered into a guaranty agreement limited to $7,000,000 of the reimbursement of
AHS' obligations under the Letter of Credit Agreement. AHS owes its lender
approximately $7,090,000 under the Letter of Credit Agreement, and the Company
owes AHS the same amount.
In February 2001, the Company entered into a Securities Purchase Agreement with
KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to issue
Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share. KC
only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. At December 31, 2001, the
Company was delinquent in paying the quarterly interest payments due on July 31
and October 31, 2001. The Company made the quarterly interest payment due July
31, 2001 in January 2002 and KC had agreed not to call a default if the Company
paid the October 31, 2001 payment by March 29, 2002. On April 10, 2002, the
chief executive officer of the Company received a letter from the general
partner ("GP") of KC stating that the limited partners ("LP") of KC have
instructed the GP of KC to give the Company until April 17, 2002, to pay the
overdue 2001
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interest and until May 10, 2002, to pay the remaining overdue 2002 interest. The
LP's had instructed the GP, in the event that these deadlines are not met, to
take all necessary measures to put the Company in default and collect upon the
debt. On May 10, 2002, the Company paid the interest payment due October 31,
2001, aggregating approximately $163,000. On August 5, 2002 KC sent the Company
a notice of default arising from the Company's failure to pay interest in the
amount of approximately $321,000 that was due on January 31 and April 30, 2002.
On September 3, 2002, the Company reached an agreement with KC and the default
was rescinded. The Company agreed to pay KC $50,000 every three weeks starting
on September 3, 2002 and continuing until all interest due KC is brought up to
date under the terms of the Debentures. The Company is current in its payments
to KC as of the date of this filing. Accordingly, the Company has reclassified
the $7,500,000 Debenture back into long term debt from current liabilities.
The Company's indebtedness consists, in part, of its obligations to BNY
Financial Corporation ("BNY") under the Series A Junior Secured Note Agreement
dated June 30, 1993, pursuant to which BNY is owed $5,642,000, as of September
30, 2002. On October 23, 2001, the Company received a forbearance from BNY
relating to the $1,100,000 principal payment due November 5, 2001. Under the
terms of the forbearance, the Company paid BNY $500,000 in principal along with
the normally scheduled interest payment on November 5, 2001 and received a
deferral until March 3, 2002 on the balance of $600,000 principal due. On
February 21, 2002, the Company received a further forbearance on the $600,000
principal payment that was due on March 3, 2002. BNY agreed to defer this
principal amount as follows; $50,000 due on July 1, 2002; $100,000 due on July
31, 2002 and $450,000 due on September 3, 2002. The Company paid the principal
payments due on July 1 and July 31, 2002. On August 29, 2002, the Company and
BNY agreed to defer $400,000 of the $450,000 principal payment due on September
3, 2002, until November 3, 2002. The Company paid the $50,000 due September 3,
2002 and is current in its interest payments through October 31, 2002. On
October 31, 2002, the Company received a forbearance on the balance of BNY's
Note, $5,642,000, until December 2, 2002. The Company is currently negotiating
with BNY for a restructuring of the payment term of the note. Although BNY has
indicated a willingness to work with the Company, there can be no assurance that
BNY will agree to any such restructuring.
The Company believes that its financing plan in conjunction with a refinancing
of its term loan, Series A Junior Secured Note and the KC Convertible Debentures
will be sufficient, at least through September 30, 2003, to sustain its
operations as a licensing and brand management business and to payoff
indebtedness under the credit facility and the term loan, 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 condensed financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern
RESULTS OF OPERATIONS
The Company reported net losses of $1,190,000 and $9,538,000 for the three and
nine-month periods ended September 30, 2002 compared to a net profit of $199,000
and a net loss of $2,021,000 for the three and nine-month periods ended
September 30, 2001.
-17-
During the three-months ended September 30, 2002, the Company's loss was partly
attributable to the default by Grupo of its license agreement. As a result of
the default by Grupo, the Company incurred $220,000 in charges that were Grupo's
direct obligation. In addition, the Company recorded a $200,000 restructuring
charge representing a brokers fee in connection with securing a tenant in
connection with the Trizec settlement. The Company also recorded a write off of
royalty receivable as the result of a default by one of its XOXO licensees.
During the nine-months ended September 30, 2002, the Company's loss was largely
attributable to the default by Grupo of its license agreement and the closing by
the Company of three retail store locations. As a result of the default by Grupo
the Company did not receive approximately $1,000,000 in license royalties and
wrote off approximately $1,959,000 in operating expense reimbursements and
incurred $1,023,000 in charges that were Grupo's direct obligation. In addition,
The Company recorded charges aggregating $2,257,000 in the first quarter of
2002, consisting of an accrual of approximately $1,113,000 for 2002 rent, an
additional $292,000 of lease termination costs relating to the 2000
restructuring reserve, property and equipment write-downs of approximately
$440,000 and goodwill impairment charges of approximately $412,000. The Company
was required to record a non-cash charge in the amount of $1,300,000 relating to
the issuance of 10,000,000 shares of the Company's common stock to an unrelated
third party as consideration for him making an investment in Adamson. The
management of the Company believes that this was vital to the success of Aris.
The Company also recorded a $200,000 restructuring charge representing a brokers
fee in connection with securing a tenant in connection with the Trizec
settlement and recorded a write off of royalty receivable as the result of a
default by one of its XOXO licensees. This was offset by the favorable reversal
of a previously recorded restructuring reserve of approximately $895,000 under a
settlement agreement with the landlord of the Company's premises at 1411
Broadway in New York during the three-months ended June 30, 2002.
During the three-months ended September 30, 2001, the Company's profitability
was attributable to increased licensing revenue due to the Grupo Agreement and
additional licensees of the Company along with the gains recognized in
connection with reversals of inventory reserves related to previously
marked-down inventory that was subsequently sold to Grupo at original cost and
the Company reversed approximately $333,000 of charges previously included in
cost of goods sold through June 30, 2001, relating to the amortization of the
Company's stock issuable under the Grupo Agreement that was subsequently
rescinded. This was offset by costs associated with the closing of the Company's
New Bedford, Massachusetts, warehouse and shipping facility, which was closed on
June 22, 2001, legal expenses incurred as the Company continues its negotiated
settlements with its vendors and expenses incurred in connection with the
consolidation of the Company's office space.
The Company's loss for the nine-month period ended September 30, 2001, was, in
part, attributable to its transition from a manufacturing operation to a
licensing and brand management business. This resulted in phase-out costs
associated with the consolidation of its facilities, reduction of its workforce
and legal expenses incurred as the Company continues its negotiated settlements
with its vendors, offset by the reversals of restructuring and inventory
reserves related to previously reserved inventory that was subsequently sold to
Grupo at original cost.
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REVENUES
Sales to Customers
The Company's net sales to customers during the three and nine-month periods
decreased from $1,506,000 and $25,831,000 respectively, for the three and
nine-month periods ended September 30, 2001, to $773,000 and $2,460,000
respectively, during the three and nine-month periods ended September 30, 2002.
In 2002 the only sales to customers were made through the Company's full price
XOXO retail stores. These decreases of $733,000 and $23,371,000 respectively,
were attributable to the nature of the Company's business operation as a
licensing business in fiscal 2002 as compared to the transition from a
manufacturing and wholesaling business to a licensing during the first nine
months of 2001. The Grupo agreement was effective March 1, 2001. In addition,
sales to customers decreased as the result of the Company's closing of three of
its full price retail stores in the first quarter of 2002.
Sales to Licensee
Sales to licensee in the amount of $3,807,000 and $13,285,000 respectively,
during the three and nine- month periods ended September 30, 2001 represented
the sales of inventory to Grupo, under Grupo's Agreement to purchase essentially
all of the Company's March 1, 2001 inventory at cost.
Royalty Income
The Company's royalty income decreased from $3,609,000 during the three-months
ended September 30, 2001, to $2,376,000 for the three-months ended September 30,
2002. This decrease was partly attributable to softness in the retail
environment which has impacted royalties earned under the new Adamson license.
In addition, the Company wrote off royalty receivable as the result of a default
by one of its XOXO licensees.
The Company's royalty income decreased from $9,080,000 during the nine-months
ended September 30, 2001, to $6,946,000 for the nine-months ended September 30,
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. In addition, the Company wrote off royalty receivable as
the result of a default by one of its XOXO licensees. .
GROSS PROFIT
Gross Profit for the three-months ended September 30, 2002 was $2,816,000 or
89.4% of revenues compared to $5,921,000 or 66.4% of revenues for the
three-months ended September 30, 2001. Gross profit as a percentage of revenues
for the three-months ended September 30, 2002, represents a full quarter as a
licensing and brand management business as compared to the three-months ended
September 30, 2001, during which the Company was still in transition from a
manufacturing and wholesaling business to a licensing and brand management
business.
Gross Profit for the nine-months ended September 30, 2002 was $8,147,000 or
86.6% of revenues compared to $20,953,000 or 42.9% of revenues for the
nine-months ended September 30, 2001. Gross profit as a percentage of revenues
for the nine-months ended September 30, 2002, represents a full nine-month
period as a licensing and brand management business as compared to the
nine-months
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ended September 30, 2001, during which the Company was in transition from a
manufacturing and wholesaling business to a licensing and brand management
business.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $3,277,000 or 104.1% of revenue for the
three-months ended September 30, 2002 as compared to $5,063,000 or 56.7% of
revenue for the three-months ended September 30, 2001. Selling and
Administrative expenses as a percentage of revenues for the three-months ended
September 30, 2002 have been adversely affected by the Grupo default. The
Company incurred $220,000 in charges that were Grupo's direct obligation. In
addition, the Company is continuing to incur legal expenses in connection with
the Grupo bankruptcy, abandonment of its three retail store locations in the
first quarter of 2002 and the Company's ongoing negotiations with its creditors
to settle outstanding amounts due them. Selling and administrative expenses as a
percentage of revenue for the three-months ended September 30, 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.
Selling and Administrative expenses were $14,564,000 or 154.8% of revenue for
the nine-months ended September 30, 2002 as compared to $23,937,000 or 49.0% of
revenue for the nine-months ended September 30, 2001. Selling and Administrative
expenses as a percentage of revenues for the nine-months ended September 30,
2002 have been adversely affected by the Grupo default. As a result of the
default the Company was forced to write off receivables from Grupo for shared
operating expenses and incurred $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. 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 a non-cash charge in the amount of
$1,300,000 relating to the issuance of 10,000,000 shares of the Company's common
stock to an unrelated third party as consideration for an investment by the
third party in Adamson. The management of the Company believes that this was
vital to the success of Aris. Selling and administrative expenses as a
percentage of revenue for the nine-months ended September 30, 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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. The Company evaluates the carrying value of its
long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying assets when indications of impairment
are present. If an impairment is determined to exist, any related impairment
loss is calculated based on fair
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value. During the nine-month period ended September 30, 2002, the Company
recorded an impairment charge of $853,000 relating to property and equipment and
goodwill associated with its retail store operations. The Company closed three
of its four retail stores during the three-months ended March 31, 2002, and
recorded the impairment charge in connection with the closing.
RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in the first
quarter of fiscal 2002. As a result, the Company recorded charges aggregating
$2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $440,000 and goodwill impairment charges
of approximately $412,000.
In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig,
LLC ("Trizec"), the landlord of the Company's premises at 1411 Broadway in New
York. Under the terms of the settlement the Company paid $550,000 to its former
landlord at 1411 Broadway and was released from all obligations under its lease.
As a result of this agreement the Company recorded a favorable reversal of
previously recorded restructuring reserve of approximately $895,000.
In connection with the Trizec settlement the Company recorded a liability for
$200,000 representing a brokers fee in connection with securing a tenant for the
space. This fee is being paid out over approximately two years and was recorded
in July of 2002.
During the nine-month period ended September 30, 2001, the Company recognized a
recovery of approximately $1,679,000 of restructuring charges that were accrued
in the fourth quarter of 2000 relating to the remaining rent due under the
Company's lease of its New Bedford, Massachusetts warehouse. Under the terms of
the settlement agreement reached with its landlord, the Company was released
from all obligations under the lease in exchange for cash payments of $850,000.
INTEREST EXPENSE
Interest expense for the three-months ended September 30, 2002 was $512,000 as
compared to $760,000 for the three-months ended September 30, 2001. This
decrease was primarily attributable to the continuing reduction in borrowings
under the Company's financing agreement along with reductions in the prime
lending rate..
Interest expense for the nine-months ended September 30, 2002 was $1,567,000 as
compared to $2,611,000 for the nine-months ended September 30, 2001. This
decrease was primarily attributable to the continuing reduction in borrowings
under the Company's financing agreement along with reductions in the prime
lending rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002 an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to September 30,
2002.
-21-
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
at September 30, 2002. 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:
1411 TRIZECHAHN-SWIG, LLC V. ARIS: On June 28, 2002, the Company reached a
settlement agreement with TrizecHahnSwig, LLC, the landlord of the Company's
premises at 1411 Broadway, under which the Company was released from all
obligations under its lease in exchange for a cash payment of $550,000.
MINOLTA BUSINESS SOLUTIONS, INC. V. XOXO: On August 28, 2001, Minolta
Business Solutions, Inc. ("Minolta") filed a complaint in the Los Angeles
Superior Court alleging breach of contract and various related claims against
XOXO. Minolta and XOXO had entered into a three-year lease whereby Minolta would
provide color copier equipment to XOXO. The lease was cancelled because XOXO was
not satisfied with Minolta's copier equipment, and Minolta now claims that XOXO
still owes it $49,038.97 as a result of that cancellation. XOXO disputes that
any amount is owed to Minolta at all, and intends to defend the matter
vigorously. The matter is set for trial on August 5, 2002, and the prevailing
party may be liable to pay the other party's attorneys' fees and other
litigation expenses. In April 2002, the Company reached a settlement agreement
with Minolta for $17,500.
FASHION WORLD-SANTA V. LOLA, INC.: On February 11, 2002, Fashion
World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the
Los Angeles Superior Court. That action sought to evict Lola, on grounds of
non-payment of rent, from an XOXO retail store located in Beverly Hills,
California. Lola is a party to a five-year lease for that store, and that lease
does not expire until April 2006. XOXO Clothing Company, Inc. responded to the
complaint as successor in interest to Lola, Inc., denying the material
allegations of the complaint, and asserting other affirmative defenses. On
February 27, 2002, XOXO vacated the property and returned possession of the
premises to the plaintiff. On March 11, 2002, the Superior Court set the matter
for trial on April 8, 2002, although it is not expected that this trial date
will be continued now that possession of the premises is not at issue. The
Superior Court has vacated the date originally set for trial of this action. It
is expected that this action will be tried in or about late 2002 or early 2003,
if it cannot be settled before that time. XOXO wishes to pursue a settlement
with the plaintiff but also intends to contest the plaintiff's allegations and
defend the action if necessary. Under the terms of the lease, XOXO may
potentially be liable for approximately $1.8 million in future rent, plus
attorneys' fees and costs, but that figure should be reduced substantially as a
result of the plaintiff's obligation to mitigate its damages. On July 31, 2002,
the Company received a proposed settlement offer from Fashion World-Santa in the
amount of $953,000. A mediation meeting held on September 11, 2002 produced no
agreement. On October 15, 2002, XOXO Clothing Company served a 998 Settlement
Offer in the amount of $400,002.99 on Fashion World-Santa. Fashion-World-Santa
has until November 14, 2002 to respond.
GUY KINBERG V. ARIS: In December 2001, Guy Kinberg, the former head of
production for the Company, commenced an action in the Supreme Court of the
State of New York, County of New York, claiming that his termination by the
Company breached his employment agreement. Mr. Kinberg is seeking $1,200,000 in
damages, representing salary and severance under the agreement. On July 30,
2002, Mr. Kinberg was awarded a judgment in the amount of $883,509 in the
Supreme Court, New York County. On August 8, 2002, a settlement was made with
Mr. Kinberg in the amount of $300,000, with $100,000 payable on execution and
$20,000 payable over ten months commencing September 1, 2002.
-22-
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. The Company believes that all commissions due Ms. Wilson were
paid and intends to vigorously defend this action.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
-23-
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: November 12 2002 By /s/
---------------------------------------
Paul Spector
Chief Financial Officer / Treasurer
-24-
Date: November 11, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, Arnold Simon, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of Aris Industries, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
(4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(i) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
(5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit Committee
of the Registrant's Board of Directors or persons performing the equivalent
function):
(i) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
(6) The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated this 12th day of November 2002.
/s/ ARNOLD SIMON
--------------------------------------------
Arnold Simon
Chairman and Chief Executive Officer
Date: November 11, 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, Paul Spector, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of Aris Industries, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
(4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(i) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
(5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit Committee
of the Registrant's Board of Directors or persons performing the equivalent
function):
(i) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
(6) The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated this 12th day of November 2002.
/s/ PAUL SPECTOR
-------------------------------------------
Paul Spector
Chief Financial Officer
Date: November 11, 2002
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, Vincent F. Caputo, certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of Aris Industries, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
(4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(i) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
(5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit Committee
of the Registrant's Board of Directors or persons performing the equivalent
function):
(i) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
(6) The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated this 12th day of November 2002.
/s/ VINCENT F. CAPUTO
--------------------------------------------
Vincent F. Caputo
Principal Accounting Officer
(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- --------------------
3.3 Restated Certificate of Incorporation filed on June (3)
30, 1993
3.4 Amended and Restated By-Laws effective June 30, (3)
1993
3.5 Amendment to the Restated Certificate of (20)
Incorporation filed with the Secretary of State on
July 29, 1999
3.6 Amendment to the Restated Certificate of (21)
Incorporation filed with the Secretary of State in
January 2001
10.67 Series A Junior Secured Note Agreement dated as of (3)
June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of June (3)
30, 1993 between Registrant and each member of
Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
-25-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- --------------------
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by (18)
and among the Company and its Subsidiaries and
CIT Commercial Group, Inc. and the other Financial
Industries named therein.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene,
Michele Bohbot and Lynne Hanson, dated August
10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing Agreement,
as Lenders; and The CIT Group/Commercial
Services, Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
10.123 Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
10.126 Form Securities Purchase Agreement Dated as of (21)
February, 2001 between the Company and KC Aris
Fund I, L.P.
10.127 Trademark License Agreement Adamson Apparel, (22)
Inc.
21. List of Subsidiaries (21)
99.1 Certification under Section 906 of the (22)
Sarbanes/Oxley Act
-26-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- --------------------
99.2 Certification under Section 906 of the (22)
Sarbanes/Oxley Act
- ----------------
(1) Omitted
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated
June 30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with
the Commission on May 27, 1999, and incorporated herein by
reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K
filed with the Commission on or about April 13, 1999 and
incorporated herein by reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24,
1999.
(20) Omitted.
(21) Filed as Exhibit to Annual Report on Form 10-K filed with the
Commission on April 15, 2002.
(22) Filed as an exhibit to Form 10Q for the Quarter Ended
September 30, 2002
-----------------------------
* 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.
-27-