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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
463 SEVENTH AVENUE, NEW YORK, NY 10018
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 646-473-4200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10- K.
Yes _X_ No ___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined Rule 12b-2 of the Act)
Yes No _X_
As of March 15, 2003, 108,819,527 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the 24,379,414 shares of voting
stock of the Registrant held by non-affiliates of the Registrant at March 15,
2003 was $2,437,941.
Documents incorporated by reference: None.
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
PART I .......................................................................
Item 1. Business.......................................................1
Item 2. Properties.....................................................4
Item 3. Legal Proceedings..............................................5
Item 4. Submission of Matters to a Vote of Security Holders............7
PART II .......................................................................
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters............................8
Item 6. Selected Financial Data........................................9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...19
Item 8. Financial Statements and Supplementary Data...................19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................19
Part III .......................................................................
Item 10. Directors and Executive Officers of the Registrant............20
Item 11. Executive Compensation........................................22
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................25
Item 13. Certain Relationships and Related Transactions................27
Item 14. Controls and Procedures ......................................29
PART IV .......................................................................
Item 15. Exhibits, Financial Statements Schedules and Reports
on Form 8-K...................................................30
SIGNATURES....................................................................35
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PART I
ITEM 1. BUSINESS.
INTRODUCTION AND CURRENT BUSINESS
Aris Industries Inc. ("the Company"), is a New York corporation organized
in 1947. Aris' current strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and overseeing the improvement in manufacturing efficiencies and cost controls
of its primary licensee. The Company attributes the strength of its brand names
to the quality, fit and design of its products which have developed a high
degree of consumer loyalty and a high level of repeat business.
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 Golf(R) and Baby Phat(R)
sportswear. In late 2001, Brook Brothers terminated Grupo's right to use its
trademark and subsequently purported to terminate the Company's license. 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"), an affiliate of 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. On July 19, 2002,
Grupo's filing was converted to a Chapter VII.
The Company's sportswear and jeanswear brands are distributed to
approximately 1,200 department and specialty stores in the United States,
including such leading retailers as Federated Department Stores, May Company,
Nordstroms and Saks Incorporated. The Company's brands are also distributed
overseas through its licensed distributors in Mexico, Canada, Central America,
Japan
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and the Middle East. The Company is in discussions with various groups to enter
into license or distributorship agreements in Central Europe, Australia, South
Africa, China and Southeast Asia.
The Adamson Agreement provides for royalties of 9% on sales under the
Company's XOXO(R) and Members Only(R) brands and 3.5% on sales of Baby Phat(R)
branded products in addition to payment of the Baby Phat minimum royalty. 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(R) and Members Only(R)
trademarks and, subject to Aris' rights as licensee with respect thereto, Baby
Phat(R) apparel.
Aris oversees the design, manufacture and marketing of a broad line of
young womens apparel, including jeanswear, mens outerwear and accessories sold
under a variety of internationally recognized brand names owned or licensed by
the Company. These products are sold under license agreements with thirteen
licensees who are required to pay royalties to the Company for sales made under
the the Company's XOXO(R), Fragile(R) and Members Only(R) labels. These licenses
provided $3,177,000 in royalties in 2002 and are required to pay minimum
royalties of $4,229,000 in 2003, which increase to $5,422,000 in 2005, including
potential renewals.
The Company was incorporated in the State of New York in 1947. Reference to
the Company includes its subsidiaries, where applicable. The Company's principal
executive offices are located at 463 Seventh Avenue, New York, NY. Its phone
number at such offices is 646-473-4200.
TRADEMARKS AND LICENSING
The Company has registered the trademark Members Only(R) in the United
States and 47 other countries, principally for use in connection with apparel
and other men's clothing.
The Company is the registered owner of the XOXO(R) and Fragile(R)
trademarks in the United States. It is also the registered owner of XOXO(R) in
24 other countries in various classifications, and has registrations pending in
23 other countries for XOXO(R) principally for use in connection with the
manufacture and sale of women's sportswear and accessories.
The Company considers its Trademarks to be of material importance to its
business.
XOXO(R) LICENSING
In addition to the Adamson agreement, the Company has granted domestic
licenses to use XOXO(R) and, in some cases, Fragile(R) for the manufacture and
sale of the following product categories: activewear essentials, outerwear,
footwear, swimwear, handbags, leather and suede sportswear, girls sportswear,
girls swimwear and girls outerwear. In addition, the Company has granted master
licenses for use of the XOXO(R) trademark in Mexico, Canada, Central America,
portions of South America, Japan and the Middle East. The Company is in
discussions with various groups to enter into license or distributorship
agreements in Central Europe, Australia, South Africa, China and Southeast Asia.
LICENSE AGREEMENTS FOR TRADEMARKS OWNED BY OTHERS
BABY PHAT. The Company is party to a license agreement with Phat Fashions
LLC to manufacture and sell casual apparel for women in all fabrics, excluding
swimwear and accessories, under the Baby Phat(R) trademark for a term which
commenced on July 1, 1999 and expires on December 31, 2004. The Company was
granted ten renewal terms of five years each. Pursuant to the agreement, the
Company is obligated to pay a royalty equal to 8% of its net sales of regularly
priced products, and 6% of net sales at outlet stores, or for items sold at 25%
or more below the
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Company's regular selling prices. Pursuant to the agreement, the Company's
minimum guaranteed royalties range from $960,000 in the first year of the
agreement to $1,920,000 in 2004. Its minimum advertising payments equal 3% of
the minimum sales requirements.
The Company has assigned the Baby Phat(R) license to Adamson. The Company
still oversees the design, sales and marketing of Baby Phat(R) products to be
sure that the product that is distributed is correct for the licensor. The
Company's Baby Phat(R) branded products are distributed in approximately 1,300
stores, primarily in specialty and department stores in the United States. The
Company remains responsible for the obligations under such agreement, but is
entitled to indemnification from Adamson if it fails to perform those
obligations.
The following table summarizes the Company's licenses and sub-licenses:
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LICENSEE DESCRIPTION
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Adamson Apparel, Inc. XOXO, Fragile and Members Only license and Baby
Phat sub-licensee for jeanswear and sportswear in
U.S., Puerto Rico, Caribbean Islands and Israel
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3743233 Canada Inc. XOXO clothing and accessories in Canada
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Accessory Exchange XOXO handbags and small leather goods including
backpacks and purses in the U.S, its territories
and possessions
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Al Sawani XOXO clothing and accessories in the Middle East
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Global Brand Marketing XOXO footwear worldwide
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Gottex Models Inc. XOXO and Fragile swimwear and beachwear in the
U.S., U.K., Spain , Germany, France, Italy,
Benelux and Hong Kong
- --------------------------------------------------------------------------------
Grupo Aviara, S.A. de C.V. XOXO and Fragile clothing and accessories in
Mexico
- --------------------------------------------------------------------------------
Itochu Corporation XOXO clothing and accessories in Japan
- --------------------------------------------------------------------------------
Kids Headquarters/Wear Me XOXO and Fragile clothing apparel for girls sizes
Apparel 0-16 in the U.S.
- --------------------------------------------------------------------------------
New Attachments XOXO lycra-type essentials and basics such as
leggings, t-shirts and tank tops in the U.S.
- --------------------------------------------------------------------------------
North Shore Sportswear XOXO junior outerwear, including textile and
leather outerwear in the U.S., its territories and
possessions
- --------------------------------------------------------------------------------
Robin International XOXO and Fragile outerwear and swimwear for girls
sizes 0-16 in the U.S., its territories and
possessions
- --------------------------------------------------------------------------------
Grupo Zbeda XOXO and Fragile clothing & accessories in certain
South & Central American territories
- --------------------------------------------------------------------------------
-3-
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's licensed products are sold primarily to department and
specialty stores and national retail chains. Currently, substantially all of the
Company's revenues are derived from royalties. During 2002, royalties from
Adamson represented 53.4% of the Company's royalty revenues.
COMPETITION
The Company's licensees sell products in markets which place a premium on
identifiable brand names. The Company's licensees compete with other apparel
manufacturers based on style, quality, value and brand recognition. The apparel
products sold by the Company's licensees , which are sold on the main selling
floors of its retail store customers, are facing increasing competition from the
expanded dedication of retail floor space to "designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to changes in
consumer buying patterns, weather conditions and other factors.
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries had approximately
25 full and part-time employees on its payroll. This is a reduction from the 71
full and part-time employees as of December 31, 2001 due the Company's closing
of three retail stores in the first quarter of 2002.
FOREIGN SALES
Although the Company's licensees sell products in Canada, Mexico, South and
Central America and Japan, royalties from such sales have not comprised a
significant portion of the Company's licensing income. The Company is in
discussions with various groups to enter into license or distributorship
agreements in Central Europe, Australia, South Africa, China and Southeast Asia.
ITEM 2. PROPERTIES.
The Company currently has approximately 20,000 square feet of leased space
for its executive and sales offices and showrooms at 463 Seventh Avenue in New
York City, approximately 11,615 square feet of office and showroom space at 1466
Broadway in New York City for XOXO and Baby Phat and approximately 212,939
square feet in Commerce and Los Angeles, California for office, showroom,
manufacturing and distribution use in connection with the XOXO and Baby Phat
businesses. Adamson pays 100% of the rental expense for the space at 1466
Broadway and California. The Company had outlet stores in the following
locations at December 31, 2002: Virginia, Florida, California, New Jersey, New
York, Nevada, Illinois and Pennsylvania of approximately 37,921 square feet, as
well a full-price retail store in New York of approximately 4,596 square feet.
Adamson has agreed to assume the leases for, and to operate, the outlet stores.
In January 2002, the Company decided to scale back its retail operations,
and has closed three of its four full-price retail stores. The Company recorded
restructuring and impairment charges in fiscal 2002 aggregating $2,510,000 to
cover the exit costs from the three locations.
-4-
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes may have a material
adverse effect on its consolidated financial position and results of operations
at December 31, 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 may 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.
FASHION WORLD-SANTA V. LOLA, INC.: On February 11, 2002, Fashion
World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the
Los Angeles Superior Court. That action sought to evict Lola, on grounds of
non-payment of rent, from an XOXO retail store located in Beverly Hills,
California. Lola is a party to a five-year lease for that store, and that lease
does not expire until April 2006. XOXO Clothing Company, Inc. responded to the
complaint as successor in interest to Lola, Inc., denying the material
allegations of the complaint, and asserting other affirmative defenses. On
February 27, 2002, XOXO vacated the property and returned possession of the
premises to the plaintiff. The matter is now set for trial on October 3, 2003,
and XOXO intends to contest the amount of the plaintiff's alleged damages and
the extent to which, if at all, the plaintiff has satisfied its duty to mitigate
its damages. On October 15, 2002, XOXO made a written settlement offer in the
amount of $400,002.99 but the plaintiff rejected the offer. Under the terms of
the lease, XOXO may potentially be liable for approximately $1.8 million in
rent, plus all of the plaintiff's attorney fees and other litigation expenses.
The Company believe that the figure should be substantially reduced as a result
of the plaintiff's obligation to mitigate its damages.
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 was 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
$200,000 payable over ten months commencing September 1, 2002.
CHRISTI WILSON V. ARIS: On July 31, 2002, Christi Wilson, a former employee
of the Company filed suit in the Supreme Court of the State of New York, County
of New York, claiming that her commission agreement was breached by the Company.
Ms. Wilson is seeking $900,000 in damages, representing commissions due under
the agreement, and an unstated amount of alleged damages regarding a claim of
slander. The material allegations of the complaint have been denied and the
Company has filed counterclaims for $2,000,000 alleging breach of contract,
breach of duty of good
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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. Subsequently Ms. Wilson has filed a motion to amend her
claim to increase the amount. This motion is pending before the Court.
CORONET GROUP, INC. V. EUROPE CRAFT IMPORTS, INC.: Coronet has sued Europe
Craft Imports, Inc., a wholly-owned subsidiary of the Company, in the Supreme
Court of the State of New York, County of New York, claiming that Europe Craft
breached a license agreement as Licensor of the Members Only trademark to
Coronet, and seeking damages in the amount of approximately $1,000,000. Europe
Craft has counterclaimed for unpaid future royalties under the agreement and
intends to vigorously dispute Coronet's claims. Discovery is complete and the
Company intends to move for summary judgement.
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 Arnold Simon alleging that Aris violated various license agreements
regarding PEI's trademarks. Aris has answered the Campers World complaint
denying the material allegations. In particular, Aris denies that it made the
sale to Campers World that is the subject of its complaint. Aris has yet to
answer PEI's cross-claim. Aris currently intends to vigorously defend the main
action and cross-claim and has recently filed a motion for summary judgement to
dismiss the trademark infringement claims brought by PEI.
MELVILLE REALTY COMPANY, INC.V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSORS TO LOLA INC. Melville instituted an action in the Supreme Court of
the State of New York, County of New York claiming that the Company is liable on
an alleged guaranty by Lola, Inc. on rent obligations of 8-3 Retailing Inc.
("8-3"), a subsidiary of Aris, pertaining to a sublease of a retail store at 732
Broadway, New York, New York. This action does not allege an acceleration of
rent obligations. This action seeks compensatory damages of $391,964, along with
sums "to become due pursuant to the terms of the Sublease". This litigation is
being vigorously defended.
426 WEST BROADWAY ASSOCIATES, L.P. V ARIS, 8-3, XOXO, 8-3 D/B/A XOXO, LOLA,
INC., XOXO OUTLETS INC., 8-3 A/K/A 8-3 RETAIL INC. A/K/A XOXO, ECI, XOXO
CLOTHING COMPANY, IN.
426 West Broadway Associates instituted an action in the Supreme Court of the
State of New York, County of New York claiming rent arrears on a retail store
located at 426 West Broadway, New York, New York. This action seeks compensatory
damages in the sum of $177,127 with interest from 2/1/02, and compensatory
damages on a claim of "anticipatory breach of lease agreement" (however, this is
alleged in lieu of a claim for accelerated rent, which the lease does not
contain or provide for as a remedy). This litigation is being vigorously
defended.
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BEK TEKSTIL has sued Aris and its subsidiaries allegedly for the nonpayment
of certain merchandise that it claims Aris wrongfully refused to accept and/or
pay for. The Company intends to defend the action on the grounds that it has no
evidence of having received the merchandise.
HITCH & TRAIL, INC. ET AL. have commenced an action against the Company in
the State Supreme Court for the County of New York, all of which have been
consolidated, seeking an aggregate of approximately $250,000 for merchandise
allegedly delivered to the Company and for commissions in connection therewith.
The Company intends to defend the action on the grounds that it has no evidence
of having received the merchandise in question.
NORWOOD COLLECTION L.P. has commenced an action against the Company seeking
approximately $92,000 it allegedly forwarded to the Company as an advance
payment for Brooks Brothers Golf merchandise. The Company contends that Grupo
Xtra of New York, Inc.sold the goods directly to Norwood and deposited such
check without producing the goods at issue or delivering them to Norwood. The
Company intends to defend the claims on that basis.
SANDY ALEXANDER INC. has commenced an action in the United States District
Court for the District of New Jersey, as Assignor of claims by Media Options for
approximately $200,000 (including interest and late penalties) that it claims is
owed by XOXO. The Company acknowledges that approximately $41,000 may be due,
but disputes the balance.
CORPORACION FABRIL has commenced an action against the Company in the
United States District Court for the Southern District of New York seeking
$146,431.50 for the delivery of merchandise it claims the Company did not pay
for. The Company intends to defend the action on the basis that it has no
evidence of having received the goods in question.
MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a
substantial amount of sewing. Martinez & Sons went bankrupt, and therefore
failed to pay employees. In December of 2000, XOXO settled with the DOL on
behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other
employees sued, and XOXO settled that case in the amount of $62,000. Some of the
claimants of the DOL settlement, as well as two other employees, filed a
complaint with the DLSE for unpaid wages totaling $22,318.62. They asserted that
they had not been paid any wages and claimed that they were owed more money than
paid in settlement with the DOL. The Company is in the process of investigating
these matters. The Company received a demand letter from a law firm claiming to
represent some of the same individuals involved in the Martinez & Sons DOL
settlement and the DLSE investigation. The attorney representing these 16 former
employees have demanded $660,000 from XOXO. The attorney for these individuals
has stated that he may file a claim under Business and Professions Code 17200 ET
SEQ. This statute allows individuals to sue for unfair business practices, and
penalties include treble damages. It is too premature at this time to assess
liability in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter (OTC) market
under the symbol AISI. Set forth below are the high and low bid prices for a
share of the Common Stock for each fiscal quarter during the prior two fiscal
years, as reported in published financial sources. Pursuant to the terms of the
Company's loan agreements, the Company has agreed not to declare or pay any
dividends (other than stock dividends) on the Common Stock without the prior
written consent of its lenders. The Company has not paid any dividends during
the last two fiscal years and does not intend to pay any cash dividends in the
foreseeable future. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
HIGH LOW
2001 First Quarter $0.7500 $0.3300
Second Quarter 0.5000 0.3100
Third Quarter 0.4500 0.2100
Fourth Quarter 0.3700 0.1500
2002 First Quarter $0.4500 $0.2200
Second Quarter 0.4500 0.1200
Third Quarter 0.2200 0.1200
Fourth Quarter 0.2000 0.0700
There were approximately 3,545 shareholders of record as of March 15, 2003.
RECENT SALES OF UNREGISTERED SECURITIES
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 for $10,000,000 to KC. Pursuant to the Debentures, which
mature in three years and bear interest at the rate of 8.5% per annum payable
quarterly in arrears, KC may convert the unpaid principal and any accrued
interest into shares of common stock at a conversion price of $.46 per share. KC
purchased only $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The issuance and sale of the Debenture were exempt from
registration under Section 4(2) of the Securities Act as a transaction not
involving a public offering.
In March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to Tarrant,
with a value of $1,050,000. The Company agreed that, in the event the market
value of such shares as of December 31, 2001 was less than $3,300,000, the
Company would (x) pay to Tarrant in cash an amount, or (y) issue to Tarrant
additional shares of common stock having a share value, equal to the difference
between $3,300,000 and the greater of the share value as of December 31, 2001
and $1,050,000. In February, 2002, the Company issued 6,617,647 shares of its
common stock in full satisfaction of its obligation under pursuant to the
Agreement. The issuance of shares to Tarrant was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
==============================================================================================================================
Year Ended Year Ended Year Ended Year Ended Year Ended
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
12/31/02 12/31/01 12/31/00 12/31/99(1) 12/31/98
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net sales $3,343 $46,808 $199,439 $175,359 $127,680
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
(Loss) income before extraordinary items (13,714) (5,432) (36,480) (10,583) (4,250)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net (loss) income (13,714) (3,434)(2) (36,480) (10,583) (3,728)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net (loss) earnings per share
before extraordinary items - basic (.15) (.07) (.46) (.19) (.29)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net (loss) earnings per share
before extraordinary items - diluted (.15) (.07) (.46) (.19) (.29)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net (loss) earnings per share - basic (.15) (.04) (.46) (.19) (.25)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net (loss) earnings per share - diluted (.15) (.04) (.46) (.19) (.25)
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Total assets 38,336 48,696 100,209 106,117 77,332
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Long-term debt 7,500 7,500 5,242 14,342 16,438
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Working capital/(deficit) (35,243) (28,334) (33,283) 7,419 9,551
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Stockholders' equity (deficiency) (7,800) 1,177 3,486 39,251 14,092
==============================================================================================================================
1. Includes results of operations and assets and liabilities of XOXO from its
acquisition on August 10, 1999.
2. Includes loss of $1,272,000 related to the Company's retail store
operations. The Company closed three of its four retail store locations in
the first quarter of 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the "Selected Financial
Data" included on this page, and pages F-1 through F-29, respectively, of this
Annual Report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including the ability of the Company to satisfy the conditions
and requirements of the credit facilities of the Company, the effect of national
and regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
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statements of historical facts included in this Annual Report, including,
without limitation, the statements under "Management's Discussion and Analysis
of Financial Condition," are forward- looking statements. Although the Company
believes that expectations reflected in such forward- looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures relating to contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses for the reporting period. The most significant
estimates relate to the recoverability of long-lived assets, valuation
allowances on deferred tax assets and estimates of future lease obligations.
Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company evaluates the carrying value of
its long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying assets when indications of impairment
are present. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value.
The Company closed three of its four full price XOXO retail stores in the
first quarter of fiscal 2002. The Company recorded an impairment charge of
$441,000 on write-downs of property and equipment at the closed locations. The
Company also recorded a goodwill impairment charge of approximately $412,000
related to the store closings. In 2001, the Company recorded an impairment
charge of $242,000 on leasehold improvements with respect to former office
spaces which are currently being sub-leased out. Estimated future cash flows
related to these premises indicated that the net assets are not recoverable. The
Company also recorded an impairment charge of $220,000 which represented the net
book value of various computer and other equipment that has become idle as a
result of the transition of the Company into a licensing and brand management
business.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 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 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 required the Company to complete a transitional goodwill
impairment test six months from the date of adoption. 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 in
2003. Had SFAS 142 been effective for the years ended December 31, 2001 and
2000, the application of the non- amortization provisions of the statement would
have reduced the Company's net loss by $1,809,000 and $1,868,000, respectively.
In addition, in August 2001, FASB issued
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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. SFAS
144 had no material impact on the Company's financial position, results of
operations or cash flows.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. However, as shown in the accompanying consolidated financial
statements, the Company has incurred losses for the three year period ended
December 31, 2002. As of December 31, 2002, the Company had a working capital
deficit of $35,243,000 and was not in compliance with certain covenants
contained in its credit facilities. On January 18, 2002, the Company entered
into a Forbearance Agreement with its lenders that indicated that they have no
current intention to take action with respect to such non-compliance but have
not waived the covenant violations. On February 25, 2003, the Company received a
letter from its lenders that indicated that they have no current intention to
take action with respect to such non-compliance but have not waived the covenant
violations. As of March 15, 2003, the Company has not made its January 1, 2003,
term loan payment aggregating $500,000.
The Company plans to finance its operations in 2003, through (i) royalties
which the Company is due under the Adamson license agreement based on a
percentage of net sales, (ii) minimum royalties of $4,229,000 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 will be sufficient at least
through December 31, 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
entity's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had a working capital deficit of
approximately $35,243,000 compared to a working capital deficit of approximately
$ 28,334,000 at December 31, 2001. The 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 $2,959,000 in fiscal 2002,
consisting of an accrual of approximately $2,510,000 for 2002 and 2003 rent, an
additional $493,000 of lease termination costs relating to the 2000
restructuring reserve, property and equipment write-downs of approximately
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$441,000 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 this
period, 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.
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, 2002, 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 balance due under the revolving line of credit as of
December 31, 2002 was $456,000. The Company also made its term loan payments in
the amount of $500,000, due July 1 and October 1, 2002. The balance due under
the Company's term loan after these payments was $4,000,000. On November 6, 2002
the Company received an additional extension of the forbearance. Under the terms
of the extension the Company has agreed to; (i) continue to make monthly
payments of $200,000 against its revolving line of credit, (ii) make principal
payments of $500,000 against its term loan on January, April and July 1 of 2003
with the remaining balance due July 31, 2003 and (iii) continue to make monthly
payments against certain other amounts due the lenders. The Company failed to
make the term loan payment due January 1, 2003. On February 25, 2003, the
Company received notification from its lenders that they would not take any
action despite the failure to make the payment.
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
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conditions, including, but not limited to, limitations on paying dividends,
making acquisitions and incurring additional indebtedness.
The Company was not in compliance, as of December 31, 2002 and 2001, with
certain covenants contained in its loan agreements. The Company's lenders, under
the January 18, 2002 and February 25, 2003 forbearance agreements, have
indicated that they have no current intention to take action with respect to
such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3 million
of indebtedness outstanding under the Financing Agreement. This guaranty, which
initially was to expire on December 6, 2000, has been extended until the loans
are repaid in full.
As a result of the Adamson Agreement, the Company no longer needed
financing to purchase inventory or to finance future accounts receivable. During
2002, the Company reduced its revolving line of credit from $4,485,000 to
$456,000 through the revenue generated under its license agreements and the sale
of inventory to Grupo pursuant to the Grupo Agreement. As of March 1, 2003, the
revolving line of credit has been further reduced to $87,000.
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 $7,060,000 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 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.
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 December
31, 2002. On October 23, 2001, the Company received
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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. On January 31, 2003, BNY agreed
to defer payment on the note until February 28, 2003 (the "Deferral Date"). As
of the date of this report the Company is continuing to negotiate with BNY but
has not received any further deferrals from BNY. 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 plans to finance its operations in 2003, through (i) royalties
which the Company is due under the Adamson license agreement based on a
percentage of net sales, (ii) minimum royalties of $4,229,000 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 this 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 December 31, 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.
CAPITAL EXPENDITURES. By virtue of the change in the nature of the
Company's operations, the Company's capital expenditures for 2002 were
immaterial.
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RESULTS OF OPERATIONS:
2002 COMPARED TO 2001
The Company reported a net loss of $13,714,000 for the twelve months ended
December 31, 2002 compared to a net loss of $3,434,000 for the twelve months
ended December 31, 2001. The Company's loss was partly 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 restructuring and impairment charges aggregating $2,959,000 in
2002, consisting of (i) an accrual of approximately $2,510,000 for 2002 and 2003
rent on the Company's three closed retail stores, (ii) property and equipment
write-downs of approximately $441,000, (iii) goodwill impairment charges of
approximately $412,000, (iv) offset by a net favorable reversal of $404,000 of a
previously recorded restructuring reserve under a settlement agreement with the
landlord of the Company's premises at 1411 Broadway in New York. The Company was
also required to record non-cash charges in the amount of $2,400,000 relating to
the issuance of 20,000,000 shares of the Company's common stock to two unrelated
third parties as consideration for their making an investment in Adamson. The
management of the Company believes that this was vital to the success of Aris.
The Company's loss in 2001 was, in part, attributable to a loss of
$1,272,000 related to its retail store operations. In January 2002 the Company
implemented a plan to close three of its four retail store locations , which
were unprofitable. In addition, the Company's loss was attributable to 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 reversals aggregating approximately
$5,600,000 of restructuring and inventory reserves related to previously
reserved inventory that was subsequently sold to Grupo at original cost and by
significant reduction of interest expense as the result of the Company's paying
down its revolving credit facility from $38,679,000 at December 31, 2000 to
$4,485,000 at December 31, 2001 along with a series of reductions in the prime
lending rate.
REVENUES.
SALES TO CUSTOMERS
The Company's net sales to customers decreased from $28,441,000 during the
twelve months ended December 31, 2001 to $3,343,000 during the twelve months
ended December 31, 2002. In 2002 the only sales to customers were made through
the Company's full price XOXO retail stores and its internet site. The decrease
of $25,098,000 was 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 twelve
months ended December 31, 2001.
SALES TO LICENSEE
Sales to licensee in the amount of $18,367,000 during the twelve months
ended December 31, 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 $11,389,000 during the twelve
months ended December 31, 2001, to $9,557,000 for the twelve months ended
December 31, 2002. This decrease
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was attributable to the default by Grupo which cost the Company approximately
$1,000,000 in additional royalties which were due under the Grupo agreement.
Additionally, this decrease was partly attributable to softness in the retail
environment which has impacted royalties earned under the new Adamson license.
The Company also wrote off royalty receivable as the result of a default by one
of its XOXO licensees.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 2002
was $10,761,000 or 83.4% of revenues compared to $24,728,000 or 42.0% of
revenues for the twelve months ended December 31, 2001. Gross profit as a
percentage of revenues for the twelve months ended December 31, 2002, represents
a full year as a licensing and brand management business as compared to the
twelve months ended December 31, 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 $19,427,000 or 150.6% of revenue for the twelve months ended December 31,
2002 as compared to $28,071,000 or 47.7% of revenue for the twelve months ended
December 31, 2001. Selling and Administrative expenses as a percentage of
revenues for the twelve months ended December 31, 2002 have been adversely
affected by the Grupo default. As a result of the default the Company was forced
to write off receivables from Grupo for shared operating expenses and incurred
$1,023,000 in charges that were Grupo's direct obligation. In addition, the
Company was liable for excess royalties due under the Baby Phat license for 2001
which Grupo failed to pay in 2002. The total charge to the Company for these
items was approximately $3,023,000 which, when combined with a $1,000,000
shortfall in minimum royalty income, resulted in the percentage of selling and
administrative expenses to revenue being abnormally high. The Company also was
required to record non-cash charges in the amount of $2,400,000 relating to the
issuance of 20,000,000 shares of the Company's common stock to two unrelated
third parties as consideration for their investment in Adamson. 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 twelve months ended
December 31, 2001, reflect the blended nature of the Company's business
operations into a licensing and brand management business. Under the terms of
the Grupo Agreement, effective March 1, 2001 Grupo assumed the majority of the
Company's responsibilities for Selling and Administrative expenses except for
expenses relating to the Company's corporate functions and costs incurred in the
operation of the Company's New Bedford warehouse, which closed on June 22, 2001.
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 of the
store closings, the Company recorded restructuring and impairment charges
aggregating $2,959,000 during the twelve months ended December 31, 2002,
consisting of (i) an accrual of approximately $2,510,000 for 2002 and 2003 rent
on the Company's three closed retail stores, (ii) property and equipment
write-downs of approximately $441,000, (iii) goodwill impairment charges of
approximately $412,000, (iv) offset by a net favorable reversal of $404,000 of a
previously recorded restructuring reserve under a settlement agreement with the
landlord of the Company's premises at 1411 Broadway in New York
During the twelve months ended December 31, 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 twelve months ended December 31,
2002 was $2,086,000 as compared to $3,215,000 for the twelve months ended
December 31, 2001. This
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decrease was primarily attributable to the continuing reduction in borrowings
under the Company's financing agreement along with reductions in the prime
lending rate.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS. The Company had
approximately $113,000,000 of net operating loss carryforwards ("NOL") at
December 31, 2002. The NOL's expire in varying amounts between 2005 and 2022. As
a result of the change in control of the Company in 1999, the utilization of
approximately $57,000,000 of these NOL's are limited by Section 382 of the
Internal Revenue Code to approximately $1,500,000 annually for five years.
Accordingly, the Company expects that a significant portion of these NOL's will
expire. The remaining NOL's were incurred subsequent to the Simon Purchase
Transaction and are not subject to the limitation.
2001 COMPARED TO 2000
The Company reported a net loss of $3,434,000 for the twelve months ended
December 31, 2001 compared to a net loss of $36,480,000 for the twelve months
ended December 31, 2000. The Company's loss was, in part, attributable to a loss
of $1,272,000 related to its retail store operations. In January 2002 the
Company implemented a plan to close three of its four retail store locations ,
which were unprofitable, and will take a charge in the first quarter of 2002. In
addition, the Company's loss was attributable to 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 reversals aggregating approximately $5,600,000 of
restructuring and inventory reserves related to previously reserved inventory
that was subsequently sold to Grupo at original cost and by significant
reduction of interest expense as the result of the Company's paying down its
revolving credit facility from $38,679,000 at December 31, 2000 to $4,485,000 at
December 31, 2001 along with a series of reductions in the prime lending rate.
The Company's results in 2000 were negatively impacted by the termination of the
Company's "Fubu" license which resulted in the Company's incurring substantial
markdowns in order to liquidate remaining inventory. In addition, the Company
also incurred markdowns on its Perry Ellis product lines in connection with the
termination of the Company's relationship with Perry Ellis. The loss in 2000
also included restructuring and other charges of $7,040,000 consisting of (i)
severance costs, and (ii) occupancy charges relating to termination of leases as
part of the consolidation of facilities along with the write-off of the related
abandoned assets pertaining to terminated facilities. In addition, the Company
incurred $1,862,000 in start-up costs associated with new licensing arrangements
some of which have subsequently been cancelled. Additionally, interest expense
increased due to interest on the Company's $10,000,000 term loan dated August
10, 1999, an increase in borrowings on the Company's revolving credit facility
and increases in the borrowing rate from 7.75% to 9.5% by December 31, 2000.
REVENUES.
SALES TO CUSTOMERS
The Company's net sales to customers decreased from $199,439,000 during the
twelve months ended December 31, 2000 to $28,441,000 during the twelve months
ended December 31, 2001. This decrease of $170,998,000 was due to the Company's
transition from a manufacturing and distributing operation into a licensing and
brand management business along with the discontinuance of formerly licensed
product lines. This transition to a licensing company substantially reduced
sales but increased royalty revenues derived from the Company's Members Only,
XOXO and Fragile trademarks.
SALES TO LICENSEE
The decrease in sales to customers during the twelve months ended December
31, 2001 was partially offset by non-recurring sales of $18,367,000 of inventory
to the Company's new licensee under its Agreement to purchase inventory from the
Company at cost.
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ROYALTY INCOME
The Company's royalty income increased from $2,737,000 during the twelve
months ended December 31, 2000 to $11,389,000 for the twelve months ended
December 31, 2001. This increase was primarily attributable to $8,423,000 in
royalty income earned under the Company's license Agreement with Grupo. For the
calendar year 2001 the guaranteed minimum royalty due from Grupo was $8,100,000.
In addition to the Grupo Agreement, royalty revenues derived from the license of
the Company's Members Only, XOXO and Fragile trademarks in the following
categories of mens sportswear, mens tailored suits and sportcoats, eyeglasses,
activewear essentials, shoes, swimwear, handbags, leather and suede sportswear,
girls sportswear, girls swimwear, girls outerwear and school supplies, increased
from $2,737,000 for the twelve months ended December 31, 2000 to $2,966,000
during the twelve months ended December 31, 2001. This increase is due to the
Company's ongoing program of expanding its licensing base.
COMMISSION INCOME
During the twelve months ended December 31, 2001 the Company earned
$660,000 in selling commissions from Grupo on sales of Members Only products.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 2001
was $24,728,000 or 42.0% of revenues compared to $57,937,000 or 28.7% of
revenues for the twelve months ended December 31, 2000. Gross profit as a
percentage of revenues was positively impacted by an increase in royalty income
as the Company completed its third full quarter as a licensing and brand
management business and a reduction in the Company's reserve for inventory
obsolescence of approximately $4,000,000 related to the sale at original cost of
previously reserved inventory.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and Administrative expenses
were $28,071,000 or 47.7% of revenue for the twelve months ended December 31,
2001 as compared to $78,703,000 or 38.9% of revenue for the twelve months ended
December 31, 2000. The increase in Selling and Administrative expenses as a
percentage of revenues is attributable to the Company's transition into a
licensing and brand management business. Under the terms of the 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.
START-UP COSTS. During the twelve months ended December 31, 2000, the
Company incurred $1,862,000 of start-up costs relating to various license
agreements. These start-up costs consisted of salaries, samples and related
supplies directly attributable to newly licensed operations. The Company did not
incur such costs during fiscal 2001.
RESTRUCTURING AND OTHER COSTS. During the twelve months ended December 31,
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.
During 2000, the Company recorded charges of $7,040,000 associated with the
restructuring of its operations. The Company, through September 30, 2000,
recorded a restructuring charge of $1,315,000. The charges consisted of employee
severance and other costs. During the fourth quarter of 2000, the Company's
board of directors approved and the Company announced a revised restructuring
plan which includes moving and consolidating its headquarters, showrooms and
warehouses into its existing XOXO facilities located in California. This plan
resulted in a charge of $5,725,000. The charge consisted of property and
equipment write-downs of $1,538,000, net of
-18-
salvage costs, and lease termination costs of $4,187,000. At December 31, 2000,
the Company had a remaining liability of $4,187,000 related to lease termination
costs which amounts are included in accrued expenses. As of December 31, 2001,
the remaining restructuring liability was approximately $567,000.
INTEREST EXPENSE. Interest expense for the twelve months ended December 31,
2001 was $3,215,000 as compared to $6,779,000 for the twelve months ended
December 31, 2000. This decrease was primarily attributable to a reduction in
borrowings under the Company's financing agreement, from $38,679,000 at December
31, 2000 to $4,485,000 at December 31, 2001, as a result of the transition into
a licensing and brand management business, as previously discussed, along with
reductions in the prime lending rate offset by interest incurred on the
$7,500,000 Convertible Debentures financing during the period and related party
loans.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact on
its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL DATA.
(UNAUDITED)(IN THOUSANDS EXCEPT PER SHARE DATA)
Per Share
---------
Quarter Total Revenues Gross Profit Net Income/(Loss) Basic
2002
First $3,085 $2,479 $(5,658) $(0.07)
Second 3,172 2,849 (2,690) (0.03)
Third 3,149 2,816 (1,190) (0.01)
Fourth 3,494 2,617 (4,176) (0.04)
------- ------- --------
$12,900 $10,761 $(13,714)
======= ======= ========
2001
First $28,728 $8,470 $(3,075) $(0.03)
Second 11,206 6,562 855 0.01
Third 8,922 5,921 199 0.00
Fourth 10,001 3,775 (1,413) (0.02)
------- ------- --------
$58,857 $24,728 $(3,434)
======= ======= ========
The financial statements listed in the accompanying Index at Part IV, Item
14(a)1 are filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
-19-
On July 10, 2001, the Company engaged J.H. Cohn LLP ("JHC") as the
Registrant's independent accountants for 2001, replacing PricewaterhouseCoopers
LLP (the "Former Accountants") as the Registrant's independent auditors. The
change was approved by the Registrant's board of directors.
The Former Accountants' report on the Registrant's consolidated financial
statements for the year ended December 31, 2000, did not contain any adverse
opinion or disclaimer of opinion and was not qualified as to audit scope or
accounting principles.
During 2000 there were no disagreements between the Registrant and the
Former Accountants on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, nor were there
any "Reportable Events" within the meaning of Item 304(a)(1)(iv) of Regulation
S-K . Prior to its engagement as the Company's independent accountant, JHC had
not been consulted by the Company with respect to the application of accounting
principles to a specific transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
The Former Accountants filed a letter with the Commission agreeing with the
foregoing statement.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and principal occupations of the
current members of the Board of Directors and the executive officers of the
Company, their positions with the Company, their business experience during the
last five years and the year each was first elected a director of the Company.
Directors hold office until the next Annual Meeting of Shareholders and until
their respective successors are elected and qualify, provided that vacancies
occurring in the Board of Directors may be filled by vote of the Directors.
Officers of the Company serve at the pleasure of the Board of Directors of the
Company.
================================================================================
NAME AGE POSITION
- --------------------------------------------------------------------------------
Arnold H. Simon 57 Director, Chairman, Chief Executive Officer and
President of the Company.
- --------------------------------------------------------------------------------
Debra Simon 46 Director.
- --------------------------------------------------------------------------------
Howard Schneider 75 Director.
- --------------------------------------------------------------------------------
Mark Weiner 48 Director.
- --------------------------------------------------------------------------------
Paul Spector 60 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary.
- --------------------------------------------------------------------------------
Gregg Fiene 51 Vice Chairman and Director of the Company and Chief
Executive Officer of XOXO Clothing Company
- --------------------------------------------------------------------------------
Steven Feiner 35 Director and President of XOXO.
================================================================================
-20-
ARNOLD H. SIMON became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 31 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in the Simon Group. Mr.
Simon is married to Debra Simon.
DEBRA SIMON became a Director of the Company on March 18, 1999. Ms. Simon
was Executive Vice-President and a Director of Designer Holdings Ltd. from March
1994 until December 1997, and was Vice-President of Rio Sportswear, Inc. from
1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
HOWARD SCHNEIDER became a Director of the Company on March 18, 1999. Mr.
Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
MARK S. WEINER became a Director of the Company on June 17, 2000. He is
currently, and for more than the past five years has been, president of
Financial Innovations, Inc., a private marketing and merchandising company. Mr.
Weiner was deputy treasurer of the Democratic National Committee from 1989 to
1993 and currently serves as treasurer of the Democratic National Governors
Association.
PAUL SPECTOR has been Senior Vice President and Chief Financial Officer of
the Company since May 1992 and Treasurer and Secretary of the Company since
August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the
Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
GREGG FIENE has been vice chairman of the Company's board of directors and
chief executive officer of the Company's XOXO subsidiary since August 10, 1999.
For more than five years prior to its acquisition by the Company, Mr. Fiene was
the chairman and chief executive officer and a principal shareholder of the
predecessor to XOXO.
STEVEN FEINER was appointed to the Board on March 23, 2000 to fill the
vacancy created by the death of David Fidlon. Mr. Feiner was appointed president
of XOXO in June 2000. Prior thereto, Mr. Feiner had been for more than the prior
five years, the owner and operator of various privately held apparel concerns.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the
-21-
Company with respect to the fiscal year ended December 31, 2002, no persons
failed to file any such form in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
of the Company as of December 31, 2002 who received compensation in excess of
$100,000.
- -------------------------- ----------- ----------------------------------------------------- ---------------- ------------------
Long-Term
Annual Compensation Compensation
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
Securities
Other Underlying
Name and Fiscal Annual Stock All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation($)
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
Arnold H. Simon, 2002 750,000 -- 79,668(4) -- --
Chairman, Chief 2001 750,000 -- 107,983(3) -- --
Executive Officer of the 2000 734,615 -- 177,611(2) 1,250,000 52,275(1)
Company and President
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
Steven Feiner, 2002 250,000(7)(8) --
President of XOXO 2001 355,771(5)(6) --
2000 -- 900,000
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
Gregg Fiene, 2002 8,654(7)(8) --
Vice Chairman, Chief 2001 230,768(6) -- --
Executive Officer of 2000 749,996 -- 500,000
XOXO
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
Paul Spector, 2002 200,000 --
Chief Financial Officer 2001 176,250 100,000
2000 155,000 25,000
- -------------------------- ----------- ------------------- -------------- ------------------ ---------------- ------------------
(1) Represents pro rata share of premiums for a life insurance policy a portion
of which Mr. Simon has the right to designate the beneficiary.
(2) Includes $147,775 in tax and accounting services and $29,836 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(3) Includes $43,950 in tax and accounting services and $64,033 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(4) Includes $79,668 in automobile expenses paid on behalf of Mr. Simon
pursuant to his employment agreement.
(5) Mr. Feiner became an employee of the Company on June 13, 2000.
(6) Mr. Feiner and Mr. Fiene received $394,229 and $519,232, respectively, in
salary from Grupo in connection with Grupo's assumption of XOXO's
operations
(7) Mr. Feiner and Mr. Fiene received $134,617 and $201,922, respectively, in
salary from Grupo in connection with Grupo's assumption of XOXO's
operations
(8) Mr. Feiner and Mr. Fiene received $340,389 and $510,574, respectively, in
salary from Adamson in connection with Adamson's assumption of XOXO's
operations
-22-
OPTION GRANTS
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the last fiscal year. No SARs
were granted during the last fiscal year.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
% OF OPTIONS/ WEIGHTED OF STOCK APPRECIATION
SARS GRANTED AVERAGE FOR OPTION TERM ($)
OPTIONS/SARS TO EMPLOYEES EXERCISE EXPIRATION --------------------------
NAME GRANTED DURING FISCAL YEAR PRICE/SHARE DATE 5% PER YEAR 10% PER YEAR
- ---- ------------ ------------------ ----------- ---------- ----------- ------------
Arnold H. Simon -- -- -- -- -- --
Paul Spector -- -- -- -- -- --
Gregg Fiene -- -- -- -- -- --
Steven Feiner -- -- -- -- -- --
EXERCISED/UNEXERCISED STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 2002 of
unexercised options, as well as options exercised by such executive officers
during the 2002 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Shares
Acquired Number of Securities Underlying Value of Unexercised
on Exercise Value Realized Unexercised Options at FY-End (#) In-the-Money Options at FY-End ($)
NAME (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- -------- ---------------------------------------------------------------- ----------------------------------
Arnold H. Simon -0- -0- 2,250,000/ -0- $-0-/$-0-
Paul Spector -0- -0- 223,334/66,666 $-0-/$-0-
Gregg Fiene -0- -0- 1,650,000/ -0- $-0-/$-0-
Steven Feiner -0- -0- 1,800,000/ -0- $-0-/$-0-
- ----------
(1) The value of unexercised in-the-money options was calculated by determining
the difference between the closing price of the Company's common stock on
December 31, 2001 and the exercise price of the options.
COMPENSATION OF DIRECTORS
In April 2000, the Company suspended cash fees to outside directors (i.e.,
those directors not employed by the Company or any of its subsidiaries). Each of
these directors was also entitled to receive reimbursement for expenses incurred
in attending meetings of the Board or committees thereof on which they serve. In
addition, each outside director was entitled to receive $500 per meeting of the
Committees of the Board to which they are assigned. No executive officer
received additional
-23-
compensation for service as a Director. During 2000, each outside director was
granted options to purchase 100,000 shares of the Company's common stock.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement effective as of March 1, 1999 with
Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief
executive officer of the Company and its subsidiaries. The term of the agreement
was for three years, and was to expire on February 28, 2002. Mr. Simon's
agreement has been extended through February 28, 2005. Pursuant to the
agreement, Mr. Simon's base salary is $750,000 per annum, subject to annual
review for increase (but not decrease) at the discretion of the Board. In
addition, the agreement provides for annual bonuses equal to 2% of adjusted
EBITDA if adjusted EBITDA is between $5 million and $10 million, and 3% of
adjusted EBITDA if adjusted EBITDA is in excess of $10 million.
The agreement entitles Mr. Simon to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, if the
Company's principal office or Mr. Simon's own office is relocated to a location
not within Manhattan, or if there are certain changes of control. In the event
of termination of Mr. Simon for good reason or if he is terminated without
cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Simon with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
The Company is party to an employment agreement with Joseph Purritano
effective as of June 7, 1999, pursuant to which Mr. Purritano is to serve as
Executive Vice President in charge of sales for the Company and its subsidiaries
for a 3-year term expiring on June 6, 2002. Pursuant to the agreement, Mr.
Purritano is to receive an annual base salary of $500,000 in the first year of
the term, $550,000 per annum in the second year of the term, and $600,000 in the
third year of the term. If the Company does not renew the Agreement, Mr.
Purritano is entitled to receive his base salary for an additional year. In June
2002, the Company notified Mr. Purritano that it would not renew the Agreement.
The Company and Mr. Purritano agreed that he would receive 50% of his base
salary through June of 2003.
In connection with the acquisition of XOXO, the Company entered into an
employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to
which Mr. Fiene is to serve as Vice Chairman of the Board of Directors of the
Company, Chief Executive Officer of the Company's XOXO subsidiary and all
divisions of the Company (present and future) engaged in the female apparel
industry and related ancillary industries, and as chief executive officer,
president, or in such other senior executive position with respect to any of the
Company's current or future subsidiaries as he and the Chairman of the Board of
Directors of the Company shall mutually determine. Pursuant to the agreement,
Mr. Fiene's base salary is $750,000 per annum, and he is entitled to an annual
bonus if the Company meets certain EBITDA targets. The term of Mr. Fiene's
agreement is for five years, ending on August 9, 2004. In the event Mr. Fiene is
terminated without cause, or if he terminates for "good reason", which includes
any diminution of his duties under the agreement, certain changes of control, he
is entitled to a lump sum payment equal to his highest annual base salary during
the term multiplied by 2.99, and a lump sum payment in an amount equal to his
average annual bonus with respect to the immediately preceding three fiscal
years multiplied by 2.99.
In June, 2000, the Company entered into an employment agreement expiring
February 28, 2003 with Steven Feiner to serve as Executive Vice President of the
Company at an annual base salary of $150,000, subject to annual review, and an
annual bonus equal to 1% of adjusted EBITDA if adjusted
-24-
EBITDA is between $5 million and $10 million, and 1.5% of adjusted EBITDA if
adjusted EBITDA is in excess of $10 million. The Company has raised Mr. Feiner's
salary to $750,000. The agreement was extended through February 28, 2005. The
agreement entitles Mr. Feiner to terminate the agreement for a "good reason",
which includes any diminution of his duties under the agreement, the Company's
failure to perform its obligations under the agreement, or if there are certain
changes of control. In the event the termination of Mr. Feiner is for good
reason or if he is terminated without cause, Mr. Feiner is entitled to a lump
sum payment in an amount equal to his highest annual base salary during the term
of the agreement multiplied by 2.99 and a lump sum payment in an amount equal to
the average bonus paid or payable to Mr. Feiner with respect to the
then-immediately- preceding three fiscal years multiplied by 2.99
Mr. Paul Spector, the Company's Senior Vice President and Chief Financial
Officer, is contractually entitled to a severance payment if he is terminated by
the Company for reasons other than cause. The severance payment will equal
one-half of Mr. Spector's annual salary at the time of termination.
401(K) PLAN
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation and Stock Option Committee (the
"Committee") as of December 31, 2002 were Messrs. Simon, Schneider and Weiner.
Other than Mr. Simon, neither Committee member was (i) during the twelve months
ended December 31, 2002, an officer or employee of the Company or any of its
subsidiaries or (ii) formerly an officer of the Company or any of its
subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of March 15, 2003 by persons who are either (i) beneficial owners of 5% or more
of the Common Stock, (ii) named executive officers or directors of the Company,
and (iii) and all executive officers and directors as a group.
================================================================================
Name and Address Shares of Percent
of Beneficial Owner (1) Common Stock of Class
- ------------------------------------------------- ------------------- ----------
Arnold Simon 44,745,045(2)(3) 39.1%
463 Seventh Avenue
New York, New York 10018
- --------------------------------------------------------------------------------
-25-
================================================================================
Name and Address Shares of Percent
of Beneficial Owner (1) Common Stock of Class
- ------------------------------------------------- ------------------- ----------
Apollo Aris Partners, L.P. 16,818,806(3) 14.7%
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- ------------------------------------------------- ------------------- ----------
John S. Scaduto 10,000,000 8.7%
1700 Beacon Lane
Point Pleasent, N.J. 08742
- ------------------------------------------------- ------------------- ----------
National Retail Systems Inc. 10,000,000 8.7%
2820 16th Street
North Bergen, N.J. 07047
- ------------------------------------------------- ------------------- ----------
Paul Spector 223,334(5) *
463 Seventh Avenue
New York, New York 10018
- ------------------------------------------------- ------------------- ----------
Gregg Fiene 4,510,000(5) 3.9%
6000 Sheila Street
Commerce, CA 90040
- ------------------------------------------------- ------------------- ----------
Debra Simon 100,000(5)(6) *
463 Seventh Avenue
New York, NY 10018
- ------------------------------------------------- ------------------- ----------
Howard Schneider 100,000(5) *
Schneider Schechter & Yoss
1979 Marcus Avenue, Suite 232
Lake Success, NY 11042
- ------------------------------------------------- ------------------- ----------
Mark Weiner 100,000(5) *
Weingeroff Enterprises
1 Weingeroff Boulevard
Cranson, RI 02910
- ------------------------------------------------- ------------------- ----------
Tarrant Apparel Group 8,117,647 7.1%
3151 East Washington Blvd.
Los Angeles, Ca. 90023
- ------------------------------------------------- ------------------- ----------
Steven Feiner 1,800,000(5) 1.6%
6000 Sheila Street
Commerce, CA 90040
- ------------------------------------------------- ------------------- ----------
All persons who are executive officers or 51,578,379(5) 45.0
directors of the Company, as a group (7 persons)
================================================================================
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
-26-
(2) Includes 9,170,204 shares of Common Stock which were sold to two
unaffiliated third parties by The Simon Group LLC, but over which Mr.
Simon has voting and certain dispositive power. Includes 35,574,841
shares owned by The Simon Group. Arnold Simon, the Managing Member of
The Simon Group, has sole voting and investment power with respect to
the shares of the Company held of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999
Equity Registration Rights Agreement described in Item 13 below,
containing certain voting and other arrangements as to shares covered
thereby.
(4) Excludes shares owned by The Simon Group, in which such person holds a
membership interest. Such person has no power or authority to vote or
dispose of any shares held by The Simon Group, LLC, and disclaims
beneficial ownership of such shares.
(5) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(223,334), and Gregg Fiene (1,650,000), Debra Simon (100,000), Howard
Schneider (100,000), Mark Weiner (100,000) and Steven Feiner
(1,800,000).
(6) Mrs. Simon disclaims beneficial ownership of shares beneficially owned
by Arnold H. Simon.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the latter part of 2000, First AHS Corporation, a company wholly
owned by Mr. Simon, opened up letters of credit for merchandise that the Company
required for sale to fulfill its orders. When the goods subject to those letters
of credit were received, First AHS sold them to the Company at cost. Currently,
the Company owes First AHS approximately $7,060,000 in connection with these
purchases and sales. In addition, Mr. Simon guaranteed $7 million of First AHS's
obligations to the Company's lenders in connection with the letter of credit
facility.
During 2001, the Company had sales of approximately $828,000 to Humane,
Inc., a company wholly owned by Steven Feiner. As of December 31, 2002 and 2001,
the Company had receivables from Humane of $375,000 and $828,000, respectively.
During 2000 and continuing to the present, Mr. Simon has guaranteed $3
million of the Company's indebtedness to its principal lender under its
financing agreement.
During 2000, the Company had sales of approximately $14,286,000 to Humane,
Inc. In addition, Humane acted as agent for the Company in connection with sales
of certain of the Company's products to retailers in the United States. As of
December 31, 2000, the Company had receivables from Humane of $787,000 and
incurred commissions of $572,259 during 2000.
As of December 31, 2002, the Company had trade payables of $996,566 to its
chief executive officer, $99,862 to Humane, Inc. and $40,400 to Schneider,
Schecter and Yoss.
In late January 2001, Mr. Simon loaned the Company $2,000,000. During the
first half of 2002 Mr. Simon made additional loans to the Company totaling
$1,500,000. All of the loans bears interest at prime plus 1/4% per annum and are
repayable upon demand by Mr. Simon.
1999 SHAREHOLDERS AGREEMENT
-27-
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase
Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same consideration per share of Common Stock to be
received by The Simon Group in such transfers. Such tag-along rights will also
apply to certain transfers by Arnold Simon or his affiliates of their beneficial
ownership in The Simon Group after six months from the closing of the Simon
Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
1999 EQUITY REGISTRATION RIGHTS AGREEMENT
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
THE XOXO SHAREHOLDERS AGREEMENT
In connection with the XOXO Transaction, the Company, The Simon Group, LLC,
and each of the former shareholders of Lola, Inc. entered into a shareholders
agreement which provides that each
-28-
Lola shareholder will vote his or her shares for the election of directors
nominated by Arnold Simon. The Agreement also provides that during its term,
Simon shall nominate and vote all of its shares of common stock for the election
of Gregg Fiene as a director of the Company provided that at such time Mr. Fiene
is employed as an executive officer of the Company. The Agreement contains
certain restrictions on the sale by Gregg Fiene and one other former Lola
shareholder of the Aris shares received in the XOXO Transaction and provides for
certain "tag-along" and "drag-along" rights in connection with such shares. The
Agreement also provides that in the event the Company registers any shares of
its Common Stock under the Securities Act of 1933, as amended, each former Lola
shareholder has the right to include a certain amount of his or her shares in
such registration statement. The term of the shareholders' agreement is for ten
years unless sooner terminated in accordance with its terms.
During 2001 and 2000, the Company reimbursed Mr. Simon for accounting and
tax services provided to Mr. Simon by Mr. Schneider's accounting firm in the
amount of $43,950 and $147,775, respectively. In addition, Mr. Schneider's firm
provided services to the Company amounting to approximately $45,050 in 2000.
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 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 as
defined in Rules 13a-14(c)and 15d-14(C) under the Securities Exchange Act of
1934 (the "Exchange Act"). 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
December 31, 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 December 31, 2002.
-29-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Accountants' Report PAGE
Report of Independent Public Accountants ..........................F-1
Report of Independent Public Accountants .........................F-1A
Financial Statements:
Consolidated Balance Sheets as of
December 31, 2002 and 2001.........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000...................................F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended December 31, 2002, 2001 and 2000...............F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000...................................F-5
Notes to Consolidated Financial Statements.........................F-7
2. Financial Statement Schedule
The following financial statement schedule
should be read in conjunction with the
consolidated financial statements in Item 8
of this Annual Report on Form 10-K:
Schedule II- Valuation and Qualifying
Accounts.........................................S-1
All other schedules are omitted because they are not applicable or
because the required information is included in the financial
statements or notes thereto.
(b) REPORTS ON FORM 8-K
There were none filed during the fourth calendar quarter ended December 31,
2002.
-30-
(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit No. Description Exhibit to Document
- ----------- ----------- Referenced in
Footnote No.
------------
3.3 Restated Certificate of Incorporation filed (3)
on June 30, 1993
3.4 Amended and Restated By-Laws effective June (3)
30, 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 (3)
as of June 30, 1993 between Registrant and
BNY Financial Corporation.
10.68 Series A Junior Secured Note dated as of (3)
June 30, 1993 issued by Registrant to BNY
Financial Corporation.
10.72 Secondary Pledge Agreement dated as of (3)
June 30, 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 (10)
Aris Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of (17)
February 26, 1999, between Aris Industries,
Inc., Apollo Aris Partners, L.P., AIF, L.P.,
The Simon Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of (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.
10.113 Equity Registration Rights Agreement, dated (17)
as of 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.
-31-
Filed as Indicated
Exhibit No. Description Exhibit to Document
- ----------- ----------- Referenced in
Footnote No.
------------
10.115 Financing Agreement dated February 26, 1999 (18)
by and among the Company and its Subsidiaries
and CIT Commercial Group, Inc. and the other
Financial Industries named therein.
10.116 Agreement and Plan of Merger dated July 19, (19)
1999 by and among Aris Industries, Inc., XOXO
Acquisition Corp. and Lola, Inc. and its
shareholders ("Agreement and Plan of
Merger"). The exhibits and schedules to the
Agreement and Plan of Merger are listed on
the last page of such Agreement. Such
exhibits and schedules have not been filed by
the Registrant, who hereby undertakes to file
such exhibits and schedules upon request of
the Commission.
10.117 Amendment No. 1 to Agreement and Plan of (19)
Merger.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO
and Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg
Fiene, Michele Bohbot and Lynne Hanson, dated
August 10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft
Imports, Inc., ECI Sportswear, Inc., Stetson
Clothing Company, Inc., XOXO; the Financial
Institutions from time to time party to the
Financing Agreement, as Lenders; and The CIT
Group/Commercial Services, Inc. as Agent,
dated August 10, 1999.
10.122** Amended and Restated 1993 Stock Option Plan (16)
10.123** Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of (21)
its subsidiaries and Grupo Xtra dated
January, 2001
-32-
Filed as Indicated
Exhibit No. Description Exhibit to Document
- ----------- ----------- Referenced in
Footnote No.
------------
10.126 Form Securities Purchase Agreement Dated as (21)
of 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 (20)
23. Consent of J.H Cohn LLP (23)
23.1 Consent of PricewaterhouseCoopers LLP (23)
99.1 Certification under Section 906 of the (23)
Sarbanes/Oxley Act
99.2 Certification under Section 906 of the (23)
Sarbanes/Oxley Act
- ----------
(1) Filed as the indicated Exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended February 2, 1991
and incorporated herein by reference.
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated
June 30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with the
Commission on May 27, 1999, and incorporated herein by reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
-33-
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed
with the Commission on or about April 13, 1999 and incorporated
herein by reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999.
(20) Omitted.
(21) Filed as the indicated Exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 2000
and incorporated herein by reference.
(22) Filed as an exhibit to Form 10Q for the Quarter Ended
September 30, 2002
(23) Filed herewith
- ----------
* The Schedules and Exhibits to such Agreements have not been filed by the
Company, who hereby undertakes to file such schedules and exhibits upon
request of the Commission.
** Management contract or compensatory plan or arrangement.
-34-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By:/S/ ARNOLD H. SIMON
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /S/PAUL SPECTOR
Paul Spector
Senior Vice President
Chief Financial Officer
By: /S/VINCENT F. CAPUTO
Vincent F. Caputo
Principal Accounting Officer
Date: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/ARNOLD SIMON March 31, 2003
- -------------------------------------
Arnold Simon, Chairman of the Board
and Chief Executive Officer; Director
/S/STEVEN FEINER March 31, 2003
- -------------------------------------
Steven Feiner, Director
/S/GREGG FIENE March 31, 2003
- -------------------------------------
Gregg Fiene, Director
/S/DEBRA SIMON March 31, 2003
- -------------------------------------
Debra Simon, Director
/S/HOWARD SCHNEIDER March 31, 2003
- -------------------------------------
Howard Schneider, Director
/S/MARK WEINER March 31, 2003
- -------------------------------------
Mark Weiner, Director
-35-
CERTIFICATIONS
In connection with the Annual Report of Aris Industries, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Arnold Simon Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed the report;
(2) To the best of my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading:
(3) To the best of my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition and results of operations of the Company as of, and for, the
periods presented in the Report;
(4) I:
(a) am responsible for establishing internal controls;
(b) have designed such internal controls to ensure that material
information relating to the Company is made known to me, particularly
during the period of January 1, 2002 through December 31, 2002;
(c) have evaluated the effectiveness of the Company's internal controls as
of a date within 90 days prior to the Report; and
(d) have presented in the Report my conclusions about the effectiveness of
my internal controls based on my evaluation of that date;
(5) I have disclosed to the Company's auditors and the board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize, and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls;
(6) I have indicated in the 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 my evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses; and
(7) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934.
Date: March 31, 2003
/s/ Arnold Simon
Chief Executive Officer
In connection with the Annual Report of Aris Industries, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Vincent F. Caputo Principal Accounting Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906
of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed the report;
(2) To the best of my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading:
(3) To the best of my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition and results of operations of the Company as of, and for, the
periods presented in the Report;
(4) I:
(a) am responsible for establishing internal controls;
(b) have designed such internal controls to ensure that material
information relating to the Company is made known to me, particularly
during the period of January 1, 2002 through December 31, 2002;
(c) have evaluated the effectiveness of the Company's internal controls as
of a date within 90 days prior to the Report; and
(d) have presented in the Report my conclusions about the effectiveness of
my internal controls based on my evaluation of that date;
(5) I have disclosed to the Company's auditors and the board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize, and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls;
(6) I have indicated in the 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 my evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses; and
(7) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934.
Date: March 31, 2003
/s/ Vincent F. Caputo
Principal Accounting Officer
In connection with the Annual Report of Aris Industries, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Paul Spector Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed the report;
(2) To the best of my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading:
(3) To the best of my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition and results of operations of the Company as of, and for, the
periods presented in the Report;
(4) I:
(a) am responsible for establishing internal controls;
(b) have designed such internal controls to ensure that material
information relating to the Company is made known to me, particularly
during the period of January 1, 2002 through December 31, 2002;
(c) have evaluated the effectiveness of the Company's internal controls as
of a date within 90 days prior to the Report; and
(d) have presented in the Report my conclusions about the effectiveness of
my internal controls based on my evaluation of that date;
(5) I have disclosed to the Company's auditors and the board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize, and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls;
(6) I have indicated in the 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 my evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses; and
(7) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934.
Date: March 31, 2003
/s/ Paul Spector
Chief Financial Officer
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Aris Industries, Inc.
We have audited the accompanying 2002 and 2001 consolidated financial statements
and the 2002 and 2001 financial statement schedules of ARIS INDUSTRIES. INC. AND
SUBSIDIARIES listed in the index appearing under Item 15 of this Form 10-K.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aris Industries,
Inc. and Subsidiaries as of December 31, 2002 and 2001, and their results of
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the 2002 and 2001 financial statement schedules referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's operations have generated
recurring losses and the Company has a working capital deficiency as of December
31, 2002. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ J.H. COHN LLP
Roseland, New Jersey
March 7, 2003
F-1A
PWC Opinion
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Aris Industries, Inc.
In our opinion, the consolidated statements of operations, of stockholders'
equity and of cash flows for the year ended December 31, 2000 (appearing on
pages F-3 through F-28 of the Aris Industries, Inc. Annual Report to
Shareholders, which has been incorporated by reference in this Form 10-K)
present fairly, in all material respects, the results of operations and cash
flows of Aris Industries, Inc. and its Subsidiaries for year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an op9inion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has incurred recurring losses and negative
cash flows from operations and has a working capital deficit at December 31,
2000. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
New York, New York
March 28, 2001
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 457
Receivables, net 626 1,152
Receivable from related party, net 375 828
Due from licensee -- 4,953
Inventories 183 489
Prepaid expenses and other current assets 3 269
-------- --------
TOTAL CURRENT ASSETS 1,187 8,148
Property and equipment, net 2,909 5,730
Goodwill, net 33,930 34,342
Other assets 310 476
-------- --------
TOTAL ASSETS $ 38,336 $ 48,696
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Borrowings under revolving credit facility $ 456 $ 4,485
Loans payable to related parties 13,026 9,060
Current portion of long-term debt 9,642 11,842
Current portion of capitalized lease obligations 415 690
Accounts payable 3,620 7,050
Accounts payable to related parties 1,096 885
Accrued expenses and other current liabilities 8,175 2,470
-------- --------
TOTAL CURRENT LIABILITIES 36,430 36,482
Long-term debt 7,500 7,500
Capitalized lease obligations 569 950
Other liabilities 1,637 2,587
-------- --------
TOTAL LIABILITIES 46,136 47,519
-------- --------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, par value $.01,
authorized 10,000 shares, none issued
Common stock, par value $.01, 200,000 shares
authorized, 108,783 shares issued and
outstanding at December 31, 2002 and
82,165 shares issued and outstanding
at December 31, 2001 1,088 822
Additional paid-in capital 86,146 81,760
Accumulated deficit (95,027) (81,313)
Unearned compensation (7) (92)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (7,800) 1,177
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 38,336 $ 48,696
======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2002 2001 2000
--------- --------- ---------
Revenues:
Sales to customers $ 3,343 $ 28,441 $ 199,439
Sales to licensee -- 18,367 --
Royalty income 9,557 11,389 2,737
Commission income -- 660 --
--------- --------- ---------
Total revenues 12,900 58,857 202,176
--------- --------- ---------
Cost of goods sold:
Cost of sales to customers 2,139 19,057 144,239
Cost of sales to licensee -- 15,072 --
--------- --------- ---------
Total cost of goods sold 2,139 34,129 144,239
--------- --------- ---------
Gross Profit 10,761 24,728 57,937
OPERATING EXPENSES:
Selling and administrative expenses 19,427 28,071 78,703
Start-up costs -- -- 1,862
Impairment of long lived assets 853 462 --
Restructuring and other charges 2,106 (1,679) 7,040
--------- --------- ---------
Loss before interest expense, income tax
provision and extraordinary item (11,625) (2,126) (29,668)
Interest expense 2,086 3,215 6,779
--------- --------- ---------
Loss before income tax provision
and extraordinary item (13,711) (5,341) (36,447)
Income tax provision 3 91 33
--------- --------- ---------
Loss before extraordinary item (13,714) (5,432) (36,480)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt, net -- 1,998 --
--------- --------- ---------
NET LOSS $ (13,714) $ (3,434) $ (36,480)
========= ========= =========
BASIC NET LOSS PER SHARE:
Loss before extraordinary item $ (0.15) $ (0.07) $ (0.46)
Extraordinary item -- .03 --
--------- --------- ---------
Net loss $ (0.15) $ (0.04) $ (0.46)
========= ========= =========
PER SHARE DATA:
Weighted average shares outstanding - basic 92,092 81,919 79,777
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
----------- ----------- ------------- -------------- --------------- --------------
BALANCE AT DECEMBER 31, 1999 79,434 $ 795 $ 80,323 $ (41,399) $ (468) $ 39,251
Stock options exercised 231 2 114 -- -- 116
Common stock issued in connection with
settlement of FUBU royalty obligations 1,000 10 290 -- -- 300
Issuance of stock options to consultants -- -- 300 -- (300) --
Cancellation of compensatory stock options
issued to employees -- -- (274) -- 274 --
Amortization of unearned compensation on
stock options -- -- -- -- 299 299
Net loss -- -- -- (36,480) -- (36,480)
----------- ----------- ------------- -------------- --------------- --------------
BALANCE, DECEMBER 31, 2000 80,665 807 80,753 (77,879) (195) 3,486
Common stock issued in connection with
settlement of Tarrant obligation 1,500 15 1,035 1,050
Cancellation of compensatory stock options
issued to employees (28) 28 --
Amortization of unearned compensation on
stock options -- -- -- -- 75 75
Net loss -- -- -- (3,434) -- (3,434)
----------- ----------- ------------- -------------- --------------- --------------
BALANCE, DECEMBER 31, 2001 82,165 822 81,760 (81,313) (92) 1,177
Common stock issued in connection with
settlement of Tarrant obligation 6,618 66 2,186 2,252
Common stock issued in connection with
Adamson capitalization 20,000 200 2,200 -- 2,400
Amortization of unearned compensation on
stock options -- -- -- -- 85 85
Net loss -- -- -- (13,714) -- (13,714)
----------- ----------- ------------- -------------- --------------- --------------
BALANCE, DECEMBER 31, 2002 108,783 $ 1,088 $ 86,146 $ (95,027) $ (7) $ (7,800)
=========== =========== ============= ============== =============== ==============
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2002 2001 2000
Cash flows from operating activities:
Net (loss) $(13,714) $ (3,434) $(36,480)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt -- (1,998) --
Gain on settlement of licensing royalty obligations -- -- (1,500)
Write off of receivables from licensee 1,959 -- --
Loss on disposal of property and equipment -- -- 1,538
Depreciation and amortization of property and equipment 2,390 4,262 4,115
Amortization of goodwill -- 1,809 1,868
Amortization of deferred financing costs -- -- 864
Provision for allowances on receivables -- -- 1,807
Provision for obsolescence on inventory -- -- 3,912
Provision for restructuring charges 2,106 (1,679) 4,187
Impairment of goodwill 412 -- --
Impairment of property and equipment 441 462 --
Non-cash stock transaction charged to expense 2,400 -- --
Non-cash stock based compensation 85 75 299
Changes in assets and liabilities:
Decrease (increase) in receivables 526 31,908 (1,691)
Decrease in receivables from related party 453
Decrease (increase) in due from licensee 2,994 (4,953) --
Decrease (increase) in inventories 306 15,430 (1,598)
Decrease in prepaid expenses and other current assets 266 1,090 1,150
Decrease in other assets 166 64 517
(Decrease) increase in accounts payable (1,180) (15,371) 12,652
Increase in accounts payable to related parties 211 -- --
Increase (decrease) in accrued expenses and
other current liabilities 3,599 (6,806) 4,563
(Decrease) increase in other liabilities (950) (578) 895
-------- -------- --------
Net cash provided by (used in) operating activities 2,470 20,281 (2,902)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (8) (491) (4,608)
-------- -------- --------
Net cash used in investing activities (8) (491) (4,608)
-------- -------- --------
Cash flows from financing activities:
Book overdraft -- -- (889)
Stock options exercised -- -- 116
Proceeds from long-term debt -- 7,500 --
Proceeds of loans from related parties 3,966 9,060 --
Deferred financing costs paid -- -- (430)
Payments of long-term debt and capitalized leases (2,856) (4,088) (3,201)
(Decrease) increase in borrowings under revolving
credit facility (4,029) (34,194) 13,194
-------- -------- --------
Net cash (used in) provided by financing activities (2,919) (21,722) 8,790
-------- -------- --------
(Decrease) increase in cash and cash equivalents (457) (1,932) 1,280
Cash and cash equivalents, beginning of year 457 2,389 1,109
-------- -------- --------
Cash and cash equivalents, end of year $ -- $ 457 $ 2,389
======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2002 2001 2000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,984 $2,606 $6,267
====== ====== ======
Income taxes $ 4 $ 69 $ 33
====== ====== ======
Supplemental schedule of non-cash investing
and financing activities:
Issuance of common stock in settlement
of accounts payable $2,250 $1,050
====== ======
Issuance of common stock in connection with
settlement of Fubu royalty obligations $ == $ == $ 300
====== ====== ======
Capitalized lease obligations $ == $ == $ 256
====== ====== ======
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Aris Industries, Inc. and Subsidiaries (collectively, the "Company" or
"Aris") has been engaged in the business of designing, manufacturing and
marketing men's and boys' outerwear and activewear, women's sportswear,
loungewear and swimwear under a variety of tradenames which are owned and
licensed from others. These products were distributed and marketed in the
United States, primarily in department stores, specialty stores and
national retail chains, as well as Company-owned retail and outlet stores.
In addition, the Company has granted licenses to use Company-owned
tradenames for the manufacture and sale of various products.
On January 17, 2001, effective March 1, 2001, the Company entered into a
multi-year licensing agreement (the "Agreement") with Grupo Xtra of New
York, Inc. ("Grupo"). Under the terms of the Agreement, Grupo had the
exclusive rights in the United States, Puerto Rico, Israel and the
Caribbean Islands to license for production, marketing, advertising and
distribution all products under the tradenames owned by the Company, which
include XOXO(R), Fragile(R) and Members Only(R), as well as tradenames
currently licensed by the Company, which include both Baby Phat and Brooks
Brothers Golf (collectively, the "Licensed Products"). Grupo was also
granted the right to operate the Company's XOXO outlet stores. In exchange,
Grupo agreed to purchase substantially all of Aris' inventory of such
products, pay royalties based on its sales of such products and assume
certain of Aris' 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 2001, it continued to be late in making
payments to the Company and the Company believes that Grupo has 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. On July 19, 2002, Grupo's filing was
converted to a Chapter VII.
The Adamson Agreement provides for royalties of 9% on sales under the
Company's XOXO(R) and Members Only(R) brands and 3.5% on sales of Baby
Phat(R) branded products in addition to payment of the Baby Phat minimum
royalty. 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. Under the Adamson
Agreement, Adamson has the right to manufacture, market and distribute at
wholesale, women's clothing, jeanswear and sportswear under the XOXO(R) and
Members Only(R) trademarks and, subject to Aris' rights as licensee with
respect thereto, Baby Phat(R) apparel.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As a result of these agreements, the Company has transitioned into a
licensing and brand management business. During 2001, the Company
substantially reduced its workforce, terminated its production and sales
operations and closed its warehousing and shipping facility in New Bedford,
Massachusetts. However, the Company maintained control of and continued to
operate its four full price XOXO retail store locations.
In an effort to improve the overall profitability of the Company, the
Company closed three of its four full price retail stores in the first
quarter of fiscal 2002. The Company closed its two retail locations on
Broadway in Lower Manhattan along with its retail store on Rodeo Drive in
Los Angeles. The Company recorded charges of approximately $3,363,000
consisting of a accruals for 2002 and 2003 rent, property and equipment
write-downs and goodwill impairment charges. The Company included in its
accrual a liability for store rent through the end of 2003 for each of the
closed stores. 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 the period covered by the
accrual and the Company will have to periodically review its accrual. The
Company could incur significantly higher rent charges should a future
review warrant an additional accrual.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. However, as shown in the accompanying
consolidated financial statements, the Company has incurred losses for the
three-year period ended December 31, 2002. As of December 31, 2002, the
Company had a working capital deficit of $35,243,000 and was not in
compliance with certain covenants contained in its credit facility.
The Company plans to finance its operations in 2003, through (i) royalties
which the Company is due under the Adamson license agreement based on a
percentage of net sales, (ii) minimum royalties of $4,229,000 from its
other licensees, (iii) negotiation of extended payment terms of existing
finance agreements and (iv) continued negotiated settlements with its other
creditors.
The Company believes that its financing plan will be sufficient at least
through December 31, 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 entity's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Aris
Industries, Inc. and its wholly-owned subsidiaries after elimination of all
significant inter-company transactions and balances.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures relating to
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses for the reporting period.
The most significant estimates relate to the recoverability of long-lived
assets, valuation allowances on deferred tax assets and estimates of future
rent obligations. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less, when acquired, to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits.
INVENTORIES
Inventories are stated at the lower of cost (weighted average basis) or
market and consist solely of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the term of the
lease or the improvement. Expenditures for maintenance, repairs and minor
renewals are expensed as incurred. When property or equipment is sold or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the gain or loss realized on
disposition is reflected in operations.
GOODWILL
Goodwill represents the excess of purchase price over the fair values of
identifiable net assets of businesses acquired, which includes intangible
assets related to certain tradenames and licensing arrangements. In June
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB No. 17, "Intangible Assets". It changed the accounting for goodwill
from an amortization method to an impairment only approach. Under the
non-amortization approach, goodwill and indefinite-lived intangibles are
not amortized into results of operations, but instead will be reviewed for
impairment and written down and charged to results of operations only in
the period or periods in which their recorded values are determined to be
more than their fair value.
The Company has adopted the provisions of SFAS No.142 effective January 1,
2002. In accordance with SFAS No. 142 the Company had an independent
appraisal of its goodwill completed within six months of the date of
adoption. It was determined that, except for a write-down of $412,000
relating to the closing of three retail stores, no impairment currently
exists. The adoption of these statements resulted in reduced annual
amortization expense, as amortization of goodwill is no longer recorded
after January 1, 2002. Additionally, future years impairment reviews may
result in periodic write-downs. Had SFAS No. 142 been effective for the
years ended December 31 2001 and 2000, the application of the
non-amortization provisions of the statement would have reduced the
Company's net loss by $1,809,000 and $1,868,000, respectively.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LONG-LIVED ASSETS
The Company reviews long-lived assets, other than goodwill, for impairment
whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company
evaluates the carrying value of its long-lived assets in relation to the
operating performance and future undiscounted cash flows of the underlying
assets when indications of impairment are present. If an impairment is
determined to exist, any related impairment loss is calculated based on
fair value.
The Company closed three of its four full price XOXO retail stores in the
first quarter of 2002. In connection with the closings, the Company
recorded an impairment charge of $441,000 on write-downs of property and
equipment at the closed locations. In 2001, the Company recorded an
impairment charge of $242,000 on leasehold improvements with respect to
former office spaces, which are currently being sub-leased out. Estimated
future cash flows related to these premises indicated that the net assets
are not recoverable. The Company also recorded an impairment charge of
$220,000 which represented the net book value of various computer and other
equipment that has become idle as a result of the transition of the Company
into a licensing and brand management business.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, approximate fair value due to the short
maturity of these assets and liabilities. The interest on substantially all
of the Company's borrowings are adjusted regularly to reflect current
market rates. Accordingly, the carrying amounts of such borrowing
approximate fair value. The fair value of the Company's subordinated
long-term debt of $7,500,000 was determined using valuation techniques that
considered cash flows discounted at current market rates. The estimated
fair value of this instrument at December 31, 2002 approximated $6,455,376.
REVENUE RECOGNITION
Revenues from sales at Company owned stores are recognized at the time of
sale of the merchandise.
Royalty, commission and licensing income is based upon a percentage of the
licensee's net sales, as defined in the underlying agreements, and is
recognized as earned, provided that collectability is reasonably assured.
START-UP COSTS
Start-up costs are expensed as incurred. During 2000, the Company incurred
$1,862,000 for start-up costs relating to various licensing agreements.
These start-up costs consist of salaries, samples and related supplies
directly attributable to newly licensed operations.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $777,000 in 2002, $1,847,000 in 2001 and $5,547,000 in 2000.
LOSS PER SHARE
Basic net loss per common share is computed using the weighted average
number of shares of
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
common stock outstanding during each year. Potentially dilutive securities
have been excluded from the computation as their effect is anti-dilutive.
If the Company had reported net income, diluted earnings per share would
have included the shares used in the computation of basic net loss per
share plus common equivalent shares. In 2002, 2001 and 2000, convertible
debentures, options and warrants to purchase 26,349,024, 24,971,701 and
6,474,877 shares of common stock, respectively, were anti-dilutive and were
excluded from the calculation of diluted weighted average shares
outstanding.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS No. 146
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force ("ETIF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized 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 Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
consolidated financial statements.
4. RESTRUCTURING AND OTHER CHARGES
As of December 31, 2002, the Company had accrued a liability of $2,573,000
in connection with the closing of three of its four full price retail
stores in the first quarter of 2002. During 2002, the Company recorded
restructuring charges of $2,106,000 which consisted of $2,510,000 of
charges for 2002 and 2003 rental costs at its three closed retail stores
offset by a recovery of $404,000 on a previously recorded reserve covering
the Company's former location at 1411 Broadway. The Company reached an
agreement with its former landlord at 1411 Broadway and was released from
all obligations under the lease in June 2002 in exchange for a cash payment
of $550,000. Each store lease contains a provision that the landlord will
use its best efforts to re-lease the premises in the event that the
premises are vacated by the Company. However, no assurances can be given
that the premises will be re-leased by the end of 2003. The Company could
incur significantly higher rent charges should a future review warrant an
additional accrual.
As of December 31, 2000, the Company had accrued a liability of $4,187,000
in connection with a restructuring of its operations which included moving
and consolidating its headquarters, showrooms and warehouses into existing
XOXO facilities in California. At December 31, 2001, the unpaid portion of
the restructuring reserve aggregated $567,167, as a result of cash payments
made and a
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
reversal of approximately $1,679,000 in accrued rental costs resulting from
the settlement of the Company's lease obligation on its New Bedford,
Massachusetts, warehouse.
During 2000, the Company recorded charges of $7,040,000 associated with the
restructuring of its operations. The charges consisted of employee
severance costs and other administrative facility costs. During the fourth
quarter of 2000, the Company's board of directors approved and the Company
announced a revised restructuring plan which includes moving and
consolidating its headquarters, showrooms and warehouses into its existing
XOXO facilities located in California. This plan resulted in a charge of
$5,725,000. The charge consisted of property and equipment write-downs of
$1,538,000, net of salvage costs, and lease termination costs of
$4,187,000. At December 31, 2000, the Company had a remaining liability of
$4,187,000 related to lease termination costs which amounts are included in
accrued expenses.
During March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to
Tarrant, with a value of $1,050,000. The Company agreed that, in the event
the market value of such shares as of December 31, 2001 was less than
$3,300,000, the Company would either, at its option (x) pay to Tarrant in
cash an amount, or (y) issue to Tarrant additional shares of common stock
having a share value, equal to the difference between $3,300,000 and the
greater of the share value as of December 31, 2001 and $1,050,000. In
January 2002, the Company completed the settlement agreement with Tarrant
by issuing to Tarrant an additional 6,617,647 shares of its common stock,
such shares having a value equal to $2,250,000. The issuance of these
shares is reflected on the Company's financial statements for the first
quarter of 2002 as a reduction in accounts payable offset by an increase in
stockholders equity.
5. RECEIVABLES
Receivables consist of the following (in thousands):
DECEMBER 31,
2002 2001
Due from factor $ -- $ 112
Royalty and licensee receivables (See Note 1) 606 1,151
Trade receivables 20 903
------ ------
626 2,166
Less allowances for sales returns, discounts,
credits and doubtful accounts -- 1,014
------ ------
$ 626 $1,152
------ ------
6. DUE FROM LICENSEE
Under the terms of the Grupo Agreement, Grupo agreed to purchase
substantially all of the Company's remaining inventory at March 1, 2001. In
addition, Grupo also agreed to assume a
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
substantial portion of the Company's contractual commitments relating to
the operations assumed by Grupo as well as to reimburse the Company for
certain operating expenses relating to shared facilities. As of December
31, 2001, the Company had a receivable of $4,953,000 under the terms of the
Grupo Agreement which consisted of $3,186,000 due for inventory purchased
and $1,767,000 for shared operating expenses. The Company received payment
in full of the amount due for inventory in January 2002. As a result of the
default by Grupo and subsequent bankruptcy filing the Company was forced to
write off the outstanding amounts due for shared operating expenses. There
are no amounts due from Adamson as of December 31, 2002, since Adamson is
remitting payment for shared expenses directly to the appropriate vendors.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 2002 2001
Furniture, fixtures and equipment 3 - 7 $12,476 $12,946
Leasehold improvements 5 - 10 3,403 4,263
------- -------
15,879 17,209
Less accumulated depreciation and amortization 12,970 11,479
------- -------
$ 2,909 $ 5,730
======= =======
As of December 31, 2002 and 2001, property and equipment include amounts
for equipment leased under capital leases with an original cost of
$2,554,000 and $3,292,000, respectively. As of December 31, 2002 and 2001,
accumulated depreciation and amortization include $1,943,000 and
$1,889,000, respectively, associated with these leased assets.
8. FINANCING
The following amounts represent borrowings outstanding (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31,
2002 2001
Revolving Credit Facility (a) $ 456 $ 4,485
======= =======
Long-term debt:
Term Loan (a) $ 4,000 $ 6,000
Convertible Debentures (b) 7,500 7,500
Series A Junior Secured Note (c) 5,642 5,842
------- -------
17,142 19,342
Less current portion 9,642 11,842
------- -------
$ 7,500 $ 7,500
------- -------
a. During February 1999, the Company entered into a Financing Agreement
with CIT Commercial Services Group, Inc. ("CIT") and certain other
financial institutions, whereby such lenders agreed to provide a
revolving credit facility up to $65,000,000 for working capital loans
and letters of credit financing. In connection with the acquisition of
XOXO, the Company's Financing Agreement was amended to increase the
revolving credit facility to $80,000,000, and provide a term loan of
$10,000,000. The Company is no longer able to borrow under the credit
facility.
Availability under the revolving credit facility was based on a
formula of eligible receivables and inventory, as defined. At December
31, 2002 and 2001, outstanding letters of credit amounted to $750,000
and $1,145,000, respectively, and there was no availablity for use
under the credit facility at December 31, 2002. For revolving credit
loans, interest was initially accrued at the bank's prime rate. At the
Company's option, borrowings under this facility can be in the form of
either credit loans or Eurodollar loans. For Eurodollar loans,
interest was initially accrued at a rate per annum equal to the
Eurodollar rate (as defined) plus 2.5%.
The term loan bears interest at prime plus three-quarter percent
(4.25% at December 31, 2002) and is payable in quarterly installments
of $500,000, plus interest, with a final payment of $5,500,000
originally due on February 26, 2002. The Company is required to make
certain mandatory prepayments based upon "excess cash flows" as
defined in the amendment to the agreement.
In April 2000, the Company entered into an amendment of its Financing
Agreement, under which the lenders waived compliance with certain
covenant violations at December 31, 1999, and increased the interest
rates on the Company's revolving credit facility to prime plus
one-quarter percent. The amendment also provided for an overadvance
facility based on seasonal needs.
In connection with the amendments, the Company's chief executive
officer agreed to provide a personal guarantee on $3 million of
indebtedness outstanding under the Financing Agreement. This guaranty,
which initially was to expire on December 6, 2000, has been extended
until all borrowings are re-paid in full.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Borrowings under the credit agreement are collateralized by
substantially all of the assets of the Company. The agreement contains
restrictive covenants that, among other requirements, restrict: the
payment of dividends, additional indebtedness, leases, capital
expenditures, investments and the sale of assets or merger of the
Company with another entity. The covenants also require the Company to
meet certain financial ratios and maintain minimum levels of net
worth. At December 31, 2002, the Company was not in compliance with
certain covenants in the amended financing agreement.
On January 18, 2002, the Company entered into a forbearance agreement
with CIT as agent for the lenders under the Company's Financing
Agreement. Under the terms of the forbearance agreement the following
occurred; (i) the Company received $3,000,000 from Grupo of which
$2,500,000 was applied against the revolving line of credit and the
remaining $500,000 was applied against the term loan, (ii) the Company
was required to reduce the balance of the revolving credit facility
and certain other amounts due the lenders on a monthly basis through
July 31, 2002 at which time the balances were to be repaid in full. If
the outstanding balance of the revolving credit facility and certain
other amounts due the lenders at the end of any month exceeds the
required monthly ending balance, as defined in the forbearance
agreement, the Company has fifteen days to cure the excess principal
before its lenders would take action against the Company, (iii) the
Company was required to make installments payments against its term
loan 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 payment period for the Company's
revolving line of credit and term loan. In conjunction with these
negotiations the Company, on May 10, 2002, paid the $500,000 quarterly
term loan payment which was originally due on April 1, 2002. In
addition, the Company verbally agreed to pay the lenders $200,000 at
the end of each month to reduce its revolving line of credit balance.
The balance due under the revolving line of credit as of December 31,
2002 was $456,000. The Company also made its term loan payments in the
amount of $500,000, due July 1 and October 1, 2002. The balance due
under the Company's term loan after these payments was $4,000,000. On
November 6, 2002 the Company received an additional extension of the
forbearance agreement. 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 failed to make the term loan payment due January 1, 2003.
On February 25, 2003, the Company received notification from its
lenders that they would not take any action despite the failure to
make the payment.
In addition, under the forbearance agreement, CIT has not waived any
defaults, which had existed as of December 31, 2002.
b. 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
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The
letter stated that the limited partners ("LP") of KC have instructed
the GP 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 were 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.
c. On June 30, 1993, the Company entered into a Series A Junior Secured
Note Agreement with BNY Financial Corporation ("BNY") pursuant to
which BNY received a nine-year, $7,000,000 note. On September 17,
1997, the Company and BNY entered into an amendment of the BNY note
which provided that scheduled interest accruing under the note for the
period February 1, 1996 through January 31, 1998 be deferred and added
to the principal. The note bears interest at 7% per annum. 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
December 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. On January 31, 2003, BNY agreed to defer payment on the note
until February 28, 2003 (the "Deferral Date"). As of the date of this
report the Company is continuing to negotiate with BNY but has not
received any further deferrals from BNY. Although BNY has indicated a
willingness to work with the Company, there can be no assurance that
BNY will agree to any further deferrals. BNY is also entitled to
receive mandatory prepayments based upon "excess cash flows" of the
Company, as defined in the Company's note agreements with BNY.
Annual maturities of long-term debt are as follows (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2003 $ 9,642
2004 7,500
-------
$17,142
=======
9. STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the
Company's Board of Directors (or a committee thereof), to award to
employees and directors of, and consultants to, the Company and its
subsidiaries: (i) options to acquire common stock at prices determined when
the options are granted, (ii) stock appreciation rights (entitling the
holder to a payment equal to the appreciation in market value of a
specified number of shares of common stock over a specified period), (iii)
restricted shares of common stock whose vesting is subject to terms and
conditions specified at the time of grant, and (iv) performance shares of
common stock that are granted upon achievement of specified performance
goals. Options granted pursuant to the Plan may be either "incentive stock
options" within the meaning of Section 422A of the United States Internal
Revenue Code of 1986, as amended, or non-qualified options. In April 1999,
the Company's Board of Directors approved an amendment to the Plan to allow
for the granting of options to purchase an additional 3,500,000 shares
under the Plan for a total of 7,000,000 shares. Additionally, in 2000, the
Company received approval from its board of directors and shareholders to
increase the number of shares for which options may be granted to
10,000,000.
The Plan provides that options which are cancelled or expire remain subject
to future grant under the Plan. In general, options granted provide for
vesting in three equal annual installments from the date of grant and are
exercisable for a period of 10 years from the grant date.
Transactions in stock options under the Plan are summarized as follows:
2002 2001 2000
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
Outstanding, January 1 10,762,500 $1.15 13,225,600 $1.20 8,621,316 $1.70
Granted -- -- 275,000 0.31 5,698,500 0.58
Exercised -- -- -- -- (231,166) 0.50
Expired/Cancelled (1,210,500) 1.85 (2,738,100) 1.32 (863,050) 1.97
----------- ----------- -----------
Outstanding, December 31 9,552,000 $1.05 10,762,500 $1.15 13,225,600 $1.20
=========== ===== =========== ===== =========== =====
Options Exercisable, December 31 9,460,333 $1.07 8,083,008 $1.13 5,890,532 $1.29
----------- ----- ----------- ----- ----------- -----
Stock options outstanding and exercisable at December 31, 2002 are as
follows:
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
RANGE OF SHARES AVERAGE REMAINING
EXERCISE UNDER PRICE CONTRACTUAL
PRICES OPTION PER SHARE LIFE IN YEARS
--------------- --------- --------- -------------
Outstanding:
under $1.0 0 5,089,000 $ 0.49 6.7
$1.00 - $1 .50 1,915,000 1.30 5.8
$1.51 - $2 .00 2,548,000 2.00 6.6
-----
9,552,000 $ 1.05 6.5
========= ========= =====
Exercisable:
under $1.0 0 4,997,333 $ 0.50 6.8
$1.00 - $1 .50 1,915,000 1.30 5.8
$1.51 - $2 .00 2,548,000 2.00 6.6
-----
9,460,333 $ 1.07 6.5
========= ========= =====
The Plan provides for the immediate vesting of outstanding options upon a
change of control of the Company.
The Company applies the intrinsic value method in accounting for its
stock-based compensation plan. Had the Company measured compensation under
the fair value based method for stock options granted, the Company's
pro-forma net (loss) and pro-forma net (loss) per share-basic would have
been as follows (in thousands, except per share data):
2002 2001 2000
---------- ---------- ----------
Net loss
As reported $ (13,714) $ (3,434) $ (36,480)
Pro forma (15,708) (7,172) (40,857)
Net loss per share-basic
As reported $ (0.15) $ (0.04) $ (0.46)
Pro forma (0.17) (0.09) (0.51)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes Option pricing model with the following assumptions
for fiscal 2002, 2001 and 2000, respectively: Risk-free interest rates of
4.0%, 5.7% and 5.8%; dividend yield of 0% for each year; expected lives of
5 years for each year; and, volatility of 112%, 121% and 180%.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002, 2001
and 2000 consist of
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
state and local income taxes.
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is summarized as follows:
YEAR ENDED DECEMBER 31,
2002 2001 2000
Federal statutory income tax rate (34)% (34)% (34)%
State and local income taxes (6) 2 --
Goodwill amortization -- 1 1
Valuation allowance 40 32 32
Other, individually less than 5% -- 1 1
------ ------ ------
0% 2% --
====== ====== ======
The components of deferred tax assets and liabilities are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------
2002 2001
Deferred tax assets:
Current:
Restructuring charge $ 1,107 $ 240
Inventories -- 7
Allowance for sales returns, discounts,
credits and doubtful accounts -- 418
Accruals 267 290
Other -- --
--------- ---------
1,374 955
--------- ---------
Noncurrent:
Net operating loss carryforwards 48,681 45,456
Goodwill 1,163 1,285
Alternative minimum tax credit carryforward 846 846
Other tax credit carryforwards 37 37
Other 605 605
--------- ---------
51,332 48,229
--------- ---------
52,706 49,184
Valuation allowance (52,706) (48,823)
--------- ---------
Total deferred tax assets $ -- $ 361
--------- ---------
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
Deferred tax liabilities:
Property and equipment $ -- $ 361
------- -------
Total deferred tax liabilities $ -- $ 361
------- -------
Net deferred tax asset $ -- $ --
------- -------
The Company's valuation allowance increased to $52,706,000 as of December
31, 2002 from $48,823,000 as of December 31, 2001. For the year ended
December 31, 2001, the Company's valuation allowance decreased from
$50,322,000 as of December 31, 2000 to $48,823,000 as of December 31, 2001.
At December 31, 2002, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $113,000,000
which expire during fiscal 2005 through 2022. In addition, the Company has
certain state net operating loss carryforwards available, which expire at
various times in accordance with governing state tax statutes. As a result
of a change in control of the Company in 1999, the utilization of net
operating loss carryforwards generated prior to the change are limited by
Section 382 of the Internal Revenue Code to approximately $1,500,000
annually through 2019. Accordingly, the Company expects that a significant
portion of the net operating loss carryforwards will expire unused.
11. EXTRAORDINARY GAIN
During the year ended December 31, 2001, the Company recorded extraordinary
gains of approximately $1,998,000 which consisted of the following: (i)
settlements with vendors for liabilities totaling approximately $2,345,000,
which the Company agreed to pay approximately $1,063,000 in cash, (ii)
settlement with Perry Ellis International on royalty payables totaling
approximately $1,416,000 which the Company agreed to pay $900,000 in cash
and (iii) in connection with the closing of the New Bedford location in
2001 the Company agreed to settle a union obligation of approximately
$750,000 by paying $550,000 in cash.
12. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS
Future minimum rental payments under capital leases and non-cancelable
operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2002 are as follows (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDING OPERATING SUB-RENTS ADAMSON NET RENT CAPITAL
DECEMBER 31, LEASES REIMBURSEMENT LEASES
------- ------- ------- ------ -----
2003 $ 5,560 $ (970) $(2,374) $2,216 $ 530
2004 5,004 (1,048) (2,046) 1,910 576
2005 4,300 (1,192) (1,498) 1,610 --
2006 3,129 (1,192) (908) 1,029 --
2007 1,693 (1,187) (95) 411 --
Thereafter 1,398 (1,385) -- 13 --
------- ------- ------- ------ ------
Total minimum lease payments $21,084 $(6,974) $(6,921) $7,189 1,106
======= ======= ======= ======
Less amount representing interest 122
------
Present value of minimum lease payments (including
short-term portion of $415) $ 984
======
The Company has various operating leases in effect primarily for retail and
outlet stores, offices and warehouses. The store leases expire over the
next four years, the office leases expire over the next six years and the
warehouse leases expire over the next four years. The store leases contain
clauses whereby the stores are assessed additional rents based on a
percentage of sales. For the years ended December 31, 2002, 2001 and 2000,
the stores were not charged rent as a percentage of sales. Most of the
operating leases contain renewal options to extend the lease terms. The
Company subleases one of its former office locations and as part of the
Adamson Agreement, Adamson has agreed to pay rents related to the outlets
stores, warehouse and a majority of the current office space directly to
the landlord. Total rental expense under all operating leases was
approximately $4,538,000, $5,485,000 and $6,782,000 for fiscal 2002, 2001
and 2000, respectively. During 2002, Adamson was responsible for
approximately $1,844,000 in rental costs associated with the Company's
office and warehouse space and its outlet stores. In 2001, the Company
received reimbursements from Grupo totaling approximately $2,818,000
covering rent expense for office, warehouse and outlet store rents that
were Grupo's responsibility as per the Agreement.
LICENSE AGREEMENTS
The Company has been granted several licensing agreements to manufacture
and distribute men's, women's and boys' outerwear, sportswear and
activewear products bearing the licensors' labels. The agreements expire
at various dates through 2005. The Company was required to make royalty and
advertising payments based on a percentage of sales, as defined in the
respective agreements, subject to minimum payment thresholds. Royalty and
advertising expenses under licensing agreements totaled $218,542 and
$7,990,845 for the years ended December 31, 2001 and 2000, respectively. As
of December 31, 2002 and 2001, the Company has one remaining license
agreement to manufacture and sell casual apparel for women, excluding
swimwear and accessories, under the Baby Phat(R) label. The Company is
required to make royalty and advertising payments based on a percentage of
sales as defined in the license agreement.
Future minimum royalty and advertising payments required under the
remaining license agreement are as follows (in thousands):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDING
DECEMBER 31,
2003 $ 1,920
2004 1,920
-------
Total minimum royalty payments $ 3,840
=======
As described in Note 1, the Company has sublicensed its remaining license
to Adamson.
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior
executives for periods of three to five years, expiring no later than
August 2004. Under the agreements, the executives are entitled to a
specified salary over the contract period. Bonuses are payable based upon
profitability and cash flows of the Company for each period. The estimated
future minimum obligation under these contracts as of December 31, 2002 is
$1,800,000 in 2003, $1,500,000 in 2004 and $250,000 in 2005. In addition,
upon certain events of termination or change in control of the Company,
certain of these agreements contain lump sum payment provisions, as defined
within the respective agreements.
LITIGATION
The Company, in the ordinary course of its business, is the subject of, or
a party to, various pending or threatened legal actions involving private
interests. While it is not possible at this time to predict the outcome of
these legal actions, in the opinion of management, the dispositions of
these matters could have a material adverse effect on the Company's
financial statements. As of December 31, 2002 the Company is a party to the
following significant legal actions:
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.
FASHION WORLD-SANTA V. LOLA, INC.: On February 11, 2002, Fashion
World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola")
in the Los Angeles Superior Court. That action sought to evict Lola, on
grounds of non-payment of rent, from an XOXO retail store located in
Beverly Hills, California. Lola is a party to a five-year lease for that
store, and that lease does not expire until April 2006. XOXO Clothing
Company, Inc. responded to the complaint as successor in interest to Lola,
Inc., denying the material allegations of the complaint, and asserting
other affirmative defenses. On February 27, 2002, XOXO vacated the property
and returned possession of the premises to the plaintiff. The matter is now
set for trial on October 3, 2003, and XOXO intends to contest the amount of
the plaintiff's alleged damages and the extent to which, if at all, the
plaintiff has satisfied its duty to mitigate its damages. On October 15,
2002, XOXO made a written settlement offer in the amount of $400,002.99 but
the plaintiff rejected the offer. Under the terms of the lease, XOXO may
potentially be liable for approximately $1.8 million in rent, plus all of
the plaintiff's attorney fees and other litigation expenses. The Company
believe that the figure should be substantially reduced as a result of the
plaintiff's obligation to mitigate its damages.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 was 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 $200,000 payable over ten months
commencing September 1, 2002.
CHRISTI WILSON V. ARIS: On July 31, 2002, Christi Wilson, a former employee
of the Company filed suit in the Supreme Court of the State of New York,
County of New York, claiming that her commission agreement was breached by
the Company. Ms. Wilson is seeking $900,000 in damages, representing
commissions due under the agreement, and an unstated amount of alleged
damages regarding a claim of slander. The material allegations of the
complaint have been denied and the Company has filed counterclaims for
$2,000,000 alleging breach of contract, breach of duty of good faith and
fair dealing, breach of fiduciary duty, theft of trade secrets and tortious
interference with prospective economic advantage. Discovery in this matter
is ongoing. Ms. Wilson subsequently has filed a motion to amend her claim
to increase the amount. This motion is pending before the Court.
CORONET GROUP, INC. V. EUROPE CRAFT IMPORTS, INC.: Coronet has sued Europe
Craft Imports, Inc., a wholly-owned subsidiary of the Company, in the
Supreme Court of the State of New York, County of New York, claiming that
Europe Craft breached a license agreement as Licensor of the Members Only
trademark to Coronet, and seeking damages in excess of $1,000,000. Europe
Craft has counter-claimed for unpaid future royalties under the agreement
and intends to vigorously dispute Coronet's claims. Discovery is complete
and the Company intends to move for summary judgement.
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 CEO
alleging that Aris violated various license agreements regarding PEI's
trademarks. Aris has answered the Campers World complaint denying the
material allegations. In particular, Aris denies that it made the sale to
Campers World that is the subject of its complaint. Aris has yet to answer
PEI's cross-claim. Aris currently intends to vigorously defend the main
action and cross-claim and has recently filed a motion for summary
judgement to dismiss the trademark infringement claims brought by PEI.
MELVILLE REALTY COMPANY, INC.V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSORS TO LOLA INC. Melville instituted an action in the Supreme Court
of the State of New York, County of New York claiming that the Company is
liable on an alleged guaranty by Lola, Inc. on rent obligations of 8-3
Retailing Inc. ("8-3"), a subsidiary of Aris, pertaining to a sublease of a
retail store at 732 Broadway, New York, New York. This action does not
allege an acceleration of rent obligations. This action seeks compensatory
damages of $391,964, along with sums "to become due pursuant to the terms
of the Sublease". This litigation is being vigorously defended.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
426 WEST BROADWAY ASSOCIATES, L.P. V ARIS, 8-3, XOXO, 8-3 D/B/A XOXO, LOLA,
INC., XOXO OUTLETS INC., 8-3 A/K/A 8-3 RETAIL INC. A/K/A XOXO, ECI, XOXO
CLOTHING COMPANY, IN.
426 West Broadway Associates instituted an action in the Supreme Court of
the State of New York, County of New York claiming rent arrears on a retail
store located at 426 West Broadway, New York, New York. This action seeks
compensatory damages in the sum of $177,127 with interest from 2/1/02, and
compensatory damages on a claim of "anticipatory breach of lease agreement"
(however, this is alleged in lieu of a claim for accelerated rent, which
the lease does not contain or provide for as a remedy). This litigation is
being vigorously defended.
BEK TEKSTIL has sued Aris and its subsidiaries allegedly for the nonpayment
of certain merchandise that it claims Aris wrongfully refused to accept
and/or pay for. The Company intends to defend the action on the grounds
that it has no evidence of having received the merchandise.
HITCH & TRAIL, INC. ET AL. have commenced an action against the Company in
the State Supreme Court for the County of New York, all of which have been
consolidated, seeking an aggregate of approximately $250,000 for
merchandise allegedly delivered to the Company and for commissions in
connection therewith. The Company intends to defend the action on the
grounds that it has no evidence of having received the merchandise in
question.
NORWOOD COLLECTION L.P. has commenced an action against the Company seeking
approximately $92,000 it allegedly forwarded to the Company as an advance
payment for Brooks Brothers Golf merchandise. The Company contends that
Grupo Xtra of New York, Inc. sold the goods directly to Norwood and
deposited such check without producing the goods at issue or delivering
them to Norwood. The Company intends to defend the claims on that basis.
SANDY ALEXANDER INC. has commenced an action in the United States District
Court for the District of New Jersey, as Assignor of claims by Media
Options for approximately $200,000 (including interest and late penalties)
that it claims is owed by XOXO. The Company acknowledges that approximately
$41,000 may be due, but disputes the balance.
CORPORACION FABRIL has commenced an action against the Company in the
United States District Court for the Southern District of New York seeking
$146,431.50 for the delivery of merchandise it claims the Company did not
pay for. The Company intends to defend the action on the basis that it has
no evidence of having received the goods in question.
MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a
substantial amount of sewing. Martinez & Sons went bankrupt, and therefore
failed to pay employees. In December of 2000, XOXO settled with the DOL on
behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other
employees sued, and XOXO settled that case in the amount of $62,000. Some
of
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
13. RETIREMENT PLANS
The Company participates in a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants vest
immediately in their own contributions and after seven years of service in
employer contributions. The Company made no contributions in 2002, 2001 and
2000.
14. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by
the Company's chief executive officer, entered into an agreement (the
"Letter of Credit Agreement") with the Company's principal commercial
lender to facilitate the opening of up to $17,500,000 in letters of credit
for the purchase of inventory. Pursuant to the Letter of Credit Agreement,
AHS purchased inventory which was held at the Company's warehouse
facilities. Such inventory was sold to the Company at cost when the Company
was ready to ship the merchandise to the customer. As of and for the year
ended December 31, 2002, the Company owes AHS $7,060,000 and incurred
$355,000 in interest expense. As of and for the year ended December 31
2001, the Company purchased $2,981,000 from AHS and owes AHS $7,060,000 and
incurred interest expense of approximately $535,000. As a result of the
Company's change to a licensing operation, effective March 1, 2001, the
Company no longer purchases inventory. As of and for the year ended
December 31, 2000, the Company purchased $19,482,988 from AHS, owed AHS
$8,579,000 and AHS was holding $2,981,000 of inventory which the Company
purchased in 2001. In connection with the Letter of Credit Agreement, the
Chief Executive Officer of the Company has guaranteed up to $7,000,000 of
AHS obligations to the Company's principal commercial lender.
The Company has utilized the services of Schneider, Schecter & Yoss, an
accounting firm, of which Howard Schneider, a director of the Company, is a
partner. During 2002, 2001 and 2000, total fees paid were $43,950, $43,950
and $192,825, respectively.
During 2001 and 2000, the Company had sales of approximately $828,000 and
$14,286,000, respectively, to Humane Incorporated ("Humane") of which
Steven Feiner, a director of the Company, is the owner. As of December 31,
2002, 2001 and 2000, the Company had receivables from Humane of
approximately $375,000, 828,000 and $787,000, respectively. In addition,
Humane acted as a sales agent for the Company in connection with sales of
certain of the Company's products
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
in the United States. Commissions earned for 2000 were $572,259.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. In 2002 the Company's CEO made additional loans to the
Company totaling $1,500,000. All of the loans are payable on demand and
bears interest at prime plus 1/4%. Interest expense was approximately
$147,000 and $157,000 for the years ended December 31, 2002 and 2001,
respectively.
In addition, as of December 31, 2002, the Company had trade payables of
$999,566 to its chief executive officer, $99,862 to Humane, $29,409 and
$40,400 to Schneider, Schecter and Yoss.
15. BUSINESS SEGMENT DATA
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", the Company's principal business
segments are grouped between the generation of revenues from royalties and
retail store operations. The Company has two reportable business segments.
Manufacturing /licensing and retail store operations. Prior to March 1,
2001 the Company was engaged in the business of manufacturing and
distributing men's and boy's outerwear and women's sportswear under a
variety of tradenames which are owned or licensed from others. On March 1,
2001, the Company changed into a licensing business which derives its
revenues from royalties associated with the use of the Company's brand
names, principally XOXO(R), Fragile(R) and Members Only(R) and, subject to
Aris' rights as a licensee with respect thereto, Baby Phat(R) and Brooks
Brothers Golf(R). The Retail Store segment was comprised of four full-price
retail stores which principally sell products under the XOXO(R) brand name.
The Company has no inter-segment sales. All general corporate assets are
allocated to the manufacturing/licensing segment.
Segment information for the years are set forth below.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Manufacturing Retail
& Licensing Stores Total
--------- ------- ---------
YEAR ENDED DECEMBER 31, 2002:
Net revenues $ 9,557 $ 3,343 $ 12,900
Interest expense 2,086 -- 2,086
Depreciation & amortization 2,301 89 2,390
Impairment of long-lived assets -- 853 853
Restructuring gain (charge) 404 (2,510) (2,106)
Net loss (9,860) (3,854) (13,714)
Segment assets 38,135 201 38,336
Goodwill 33,930 -- 33,930
Capital expenditures 8 -- 8
YEAR ENDED DECEMBER 31, 2001:
Net revenues $ 52,531 $ 6,326 $ 58,857
Interest expense 3,215 -- 3,215
Depreciation & amortization 5,656 415 6,071
Impairment of long-lived assets 462 -- 462
Restructuring gain 1,679 -- 1,679
Extraordinary gain 1,998 -- 1,998
Net loss (2,162) (1,272) (3,434)
Segment assets 46,594 2,102 48,696
Goodwill 33,930 412 34,342
Capital expenditures 491 -- 491
YEAR ENDED DECEMBER 31, 2000:
Net revenues $ 196,195 $ 5,981 $ 202,176
Interest expense 6,779 -- 6,779
Depreciation & amortization 5,567 416 5,983
Restructuring and other charges 1,862 -- 1,862
Net loss (36,286) (194) (36,480)
Segment assets 97,901 2,308 100,209
Goodwill 35,726 425 36,151
Capital expenditures 4,265 343 4,608
Prior to 2001, the Company was organized and managed as one business
segment that offered distinct men's, women's and boys' apparel products to
its customers. Its operations were conducted domestically and substantially
all of its net sales were derived from domestic customers. Additionally,
all of the Company's assets are located within the United States. In 2001,
74% of the Company's royalty and licensing revenues were generated by its
principal licensee, Grupo. In addition, 100% of the Company's sales to
licensee were from the sales of the Company's inventory to Grupo. The
Company had sales to two customers that represent 15% and 11% of net sales
for the year ended December 31, 2000.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ----------- ----------- -----------
Year ended December 31, 2002:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 1,014,000 $ -- $ 561,000(1) $ 453,000
Restructuring reserves 567,000 2,510,000 504,000(3) 2,573,000
----------- ----------- ----------- -----------
Year ended December 31, 2001:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 9,141,000 $ -- $ 8,127,000(1) $ 1,014,000
Inventory reserves 6,017,000 -- 6,017,000(2) --
Restructuring reserves 4,187,000 -- 3,620,000(3) 567,000
----------- ----------- ----------- -----------
Year ended December 31, 2000:
Allowance for sales returns, discounts,
credits and doubtful accounts $ 7,334,000 $ 1,807,000 $ -- $ 9,141,000
Inventory reserves 2,105,000 3,912,000 -- 6,017,000
Restructuring reserves -- 4,187,000 -- 4,187,000
----------- ----------- ----------- -----------
(1) Write-off of receivables.
(2) Write-off of inventory.
(3) Cash amounts paid and reserve recovery