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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
March 31, 2003
ARIS INDUSTRIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
New York 22-1715274
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
463 SEVENTH AVENUE, NEW YORK, NEW YORK 10018
--------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 473-4200
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
Number of shares of Common Stock outstanding 108,819,527
As of May 13, 2003
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as
of March 31, 2003 and December 31, 2002 3
b. Consolidated Condensed Statements of
Operations for the Three-Months Ended
March 31, 2003 and March 31, 2002 4
c. Consolidated Condensed Statements of
Cash Flows for the Three-Months Ended
March 31, 2003 and March 31, 2002 5
d. Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31, December 31,
ASSETS 2003 2002
------------ ------------
(Unaudited)
Current assets:
Cash $316 --
Receivables, net 253 626
Receivable from related party -- 375
Inventories 383 183
Prepaid expenses and other current assets 4 3
------------ ------------
Total current assets 956 1,187
Property and equipment, net 2,356 2,909
Goodwill, net 33,930 33,930
Other assets 312 310
------------ ------------
TOTAL ASSETS $37,554 $38,336
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Borrowings under revolving credit facility $88 $456
Loans payable to related parties,
including accrued interest 13,411 13,026
Current portion of long-term debt 17,142 9,642
Current portion of capitalized
lease obligations 536 415
Accounts payable 4,259 3,620
Accounts payable to related parties 1,217 1,096
Accrued expenses and other current liabilities 7,991 8,175
------------ ------------
Total current liabilities 44,644 36,430
Long-term debt, net of current portion -- 7,500
Capitalized lease obligations 376 569
Other liabilities 1,606 1,637
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Total liabilities 46,626 46,136
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Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.01 par value:
10,000 shares authorized; none issued
and outstanding -- --
Common stock, $.01 par value:
200,000 shares authorized 108,819 issued
and outstanding at March 31, 2003 and
December 31, 2002 1,088 1,088
Additional paid-in capital 86,146 86,146
Accumulated deficit (96,306) (95,027)
Unearned compensation -- (7)
------------ ------------
Total stockholders' deficiency (9,072) (7,800)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $37,554 $38,336
============ ============
See accompanying notes to consolidated condensed financial statements
-3-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
March 31, March 31,
2003 2002
------------ ------------
REVENUES:
SALES TO CUSTOMERS $1,094 $997
ROYALTY INCOME 2,116 2,088
------------ ------------
TOTAL REVENUES 3,210 3,085
COST OF GOODS SOLD (543) (603)
------------ ------------
GROSS PROFIT 2,667 2,482
OPERATING EXPENSES:
SELLING AND ADMINISTRATIVE EXPENSES (3,482) (5,388)
IMPAIRMENT OF LONG-LIVED ASSETS -- (853)
RESTRUCTURING AND OTHER COSTS -- (1,404)
------------ ------------
LOSS FROM OPERATIONS (815) (5,163)
INTEREST EXPENSE, NET (461) (522)
------------ ------------
LOSS BEFORE INCOME TAX PROVISION (1,276) (5,685)
INCOME TAX (PROVISION) BENEFIT (3) 27
------------ ------------
NET LOSS ($1,279) ($5,658)
============ ============
NET LOSS PER SHARE ($0.01) ($0.07)
============ ============
PER SHARE DATA:
Weighted average shares outstanding - Basic 108,819 85,033
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
March 31, March 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,279) ($5,658)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 553 587
Non-cash stock based compensation 7 21
Provision for accrued restructuring
charges -- 1,404
Write-off of receivables from licensee -- 1,959
Impairment on property and equipment -- 441
Impairment of goodwill -- 412
Change in assets and liabilities:
Decrease in receivables 748 1,013
Decrease in due from licensee -- 2,994
(Increase) / decrease in inventories (200) 223
(Increase) / decrease in prepaid
expenses and other current assets (1) 200
Increase in other assets (2) (7)
Increase / (decrease) in accounts
payable 639 (943)
Increase in accounts payable to
related parties 121 61
Increase / (decrease) in accrued
expenses and other current liabilities (184) 275
Decrease in other liabilities (31) (115)
------------ ------------
Net cash provided by
operating activities 371 2,867
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (4)
------------ ------------
Net cash used in
investing activities 0 (4)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital
leases (72) (728)
Advances from related party 385 250
Decrease in borrowings under revolving
credit facility (368) (2,692)
------------ ------------
Net cash used in
financing activities (55) (3,170)
------------ ------------
NET INCREASE (DECREASE) IN CASH 316 (307)
CASH, BEGINNING OF PERIOD 0 457
------------ ------------
CASH, END OF PERIOD $316 $150
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES
Issuance of common stock in settlement
of accounts payable -- $2,250
See accompanying notes to consolidated condensed financial statements
-5-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of March 31, 2003
and for the three- month periods ended March 31, 2003 and 2002 are unaudited and
reflect all adjustments consisting of normal recurring adjustments,
restructuring and other costs which are, in the opinion of management, necessary
for a fair presentation of financial position, operating results and cash flows
for the periods.
The consolidated condensed balance sheet as of December 31, 2002 was
derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The accompanying consolidated condensed financial statements have been
prepared in accordance with accounting standards appropriate for interim
financial statements and should be read in conjunction with the financial
statements and notes thereto included in Aris Industries, Inc. (the "Company",
the "Registrant" or "Aris") Annual Report on Form 10-K for the year ended
December 31, 2002. The operating results for the three-month period ended March
31, 2003 are not necessarily indicative of the operating results to be expected
for the year ending December 31, 2003.
2. FINANCIAL ACCOUNTING STANDARDS NO. 146, "ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES"
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This Statement also established that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not expect that the adoption of SFAS No. 146 will have a
material impact on its consolidated financial statements.
3. LIQUIDITY RISKS
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
The Company has continued to incur losses from operations and had a
working capital deficit of $43,688,000 at March 31, 2003 as compared to a
working capital deficit of $35,243,000 at December 31, 2002. In addition, the
Company was not in compliance with certain covenants
6
contained in its credit facility. However, the Company has been advised by its
lenders that they are willing to work with the Company to structure the
remaining payments in a manner the Company should be able to make. Amounts
outstanding under the revolving credit facility were reduced from $456,000 at
December 31, 2002 to $88,000 as of March 31, 2003.
During 2002, the Company completed its first full year as a licensor
or sublicensor of its owned or licensed trademarks. In April 2002, the Company
terminated its license agreement with Grupo Xtra of New York, Inc. ("Grupo") and
shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the
Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson") to license from the Company and its subsidiaries the XOXO(R) ,
Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by
Grupo (Note 4).
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global Brand Holdings, LLC ("Global") providing for the sale of
the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN
AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets
and accompanying goodwill for a total sum of $43 million in cash (Note 13). The
Company intends to use the proceeds of the trademark asset sale to pay off its
debt obligations and provide working capital.
The trademark purchase agreement has been approved by the Company's
board of directors and the board of managers of Global. The transaction is
subject to customary conditions, including the approval of the Company's
shareholders
Assuming that the trademark assets sale is consummated the Company
plans to repay existing indebtedness and to finance its operations through, (i)
continued negotiated settlements with trade creditors, (ii) substantially
reducing its overhead and (iii) royalties from its remaining trademarks and
license.
There can be no assurance that the trademark assets sale will be
consummated or 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.
4. ADAMSON LICENSE AGREEMENT
Following the effectiveness of the termination of the Grupo Agreement,
the Company reached an agreement with Adamson Apparel, Inc. to license from the
Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R)
trademarks that had been previously licensed by Grupo. Adamson is a newly-formed
New York corporation of which the majority owner is the Company's chairman and
chief executive officer and principal stockholder. Adamson was initially
capitalized with a $7 million investment. Adamson is utilizing many of the same
employees that were
7
employed by Grupo, all of whom were formerly employees of XOXO or one or more of
the Company's subsidiaries.
The Adamson Agreement has an initial term which expires on December
31, 2003, which may be automatically renewed for a further one year term,
subject to agreement by both parties, to manufacture, market and distribute at
wholesale, women's clothing, jeanswear and sportswear under the XOXO and Members
Only trademarks and, subject to Aris' rights as licensee with respect thereto,
Baby Phat apparel. The royalty rate for XOXO and Members Only products is 9% and
3.5% for Baby Phat in addition to amounts due to the licensor of Baby Phat. On
May 7, 2003, the Company signed a definitive trademark purchase agreement with
Global providing for the sale of the trade name and service mark XOXO(R) and the
trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along
with certain related assets and accompanying goodwill for a total sum of $43
million in cash (Notes 3 and 13). The Global agreement requires the Adamson
license to be terminated as of closing.
5. SALE OF CONVERTIBLE DEBENTURES
In February 2001, the Company entered into a Securities Purchase
Agreement with KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to
issue Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share. KC
only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. On August 5, 2002, KC sent the
Company a notice of default arising from the Company's failure to pay interest
in the amount of approximately $321,000 that was due on January 31 and April 30,
2002. On September 3, 2002, the Company reached an agreement with KC and the
default was rescinded. The Company agreed to pay KC $50,000 every three weeks
starting on September 3, 2002 and continuing until all interest due KC is
brought up to date under the terms of the Debentures. The Company is current in
its payments to KC as of the date of this filing.
6. DEBT
The Company's indebtedness consists, in part, of its obligations to
BNY Financial Corporation ("BNY") under the Series A Junior Secured Note
Agreement dated June 30, 1993, pursuant to which BNY is owed $5,642,000 in
principal, as of March 31, 2003. On October 31, 2002, the Company received a
forbearance on the principal balance of BNY's Note, $5,642,000, until December
2, 2002. On January 31, 2003, BNY agreed to defer payment on the note until
February 28, 2003 (the "Deferral Date"). As of the date of this filing 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.
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
8
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 conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of March 31, 2003 and December
31, 2002, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 and February 25, 2003 forbearance
agreements, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3
million of indebtedness outstanding under the Financing Agreement. This
guaranty, which initially was to expire on December 6, 2000, 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 May 1, 2003, the
revolving line of credit has been paid in full. The Company plans to use the
proceeds of the XOXO trademark sale to retire existing indebtedness.
7. RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in
the first quarter of fiscal 2002. The Company recorded charges aggregating
$2,257,000 in the first quarter of 2002, consisting
9
of an accrual of approximately $1,113,000 for 2002 rent, an additional $292,000
of lease termination costs relating to the 2000 restructuring reserve, property
and equipment write-downs of approximately $441,000 and goodwill impairment
charges of approximately $412,000. The Company included in its accrual a
liability for one year of store rent for each of the closed stores since each
store lease contains a provision that the landlord will use its best efforts to
re-lease the premises in the event that the premises are vacated by the Company.
The Company accrued an additional year of rent covering these locations at
December 31, 2002. However, no assurances can be given that the premises will be
re-leased within one year and the Company will have to periodically review its
accrual.
8. PER SHARE DATA
Basic loss per common share is computed by dividing net loss available for
common shareholders by the weighted average number of shares of common stock
outstanding during each period.
Options and warrants to purchase 10,136,345 and 11,346,845 shares of Common
Stock were outstanding as of March 31, 2003 and 2002, respectively, but were not
included in the computation of diluted loss per share because the effect would
be anti-dilutive. In addition, conversion rights under the Convertible
Debentures to convert the Debentures into 16,304,345 shares of Common Stock were
not included in the computation of diluted loss per share because the result
would be anti- dilutive.
9. STOCK INCENTIVE PLAN
At March 31, 2003 the Company has a stock incentive plan which is described
more fully in Note 9 of the Company's Annual Report on Form 10K for the year
ended December 31, 2002. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. No stock-based employee
compensation cost is reflected in net loss, as all options granted under the
plan have an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
loss and loss per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to stock-based employee compensation. (in thousands, except per share data)
- --------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
- --------------------------------------------------------------------------------
Net loss
- --------------------------------------------------------------------------------
As reported $(1,279) $(5,658)
- --------------------------------------------------------------------------------
Pro forma (1,424) (6,157)
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Net loss per share-basic
- --------------------------------------------------------------------------------
As reported $(0.01) $(0.07)
- --------------------------------------------------------------------------------
Pro forma (0.01) (0.07)
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10
10. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by
the Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, AHS purchased inventory
which was to be held at the Company's warehouse facilities. Such inventory was
sold to the Company at cost when the Company was ready to ship the merchandise
to the customer. As of March 31, 2003, the Company owes AHS $7,090,000. 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.
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. In 2002 , the Company's chief executive officer loaned the
Company an additional $1,500,000. The loans are payable on demand and bear
interest at prime plus one quarter percent.
The Company's chief executive officer personally guaranteed $3,000,000 of
indebtedness outstanding under the Financing Agreement.
Adamson is a newly-formed New York corporation which is majority owned by
the Company's chairman and chief executive officer and principal stockholder
(see Note 4). As of March 31, 2003, the Company was indebted to Adamson in the
amount of $2,804,000, which is payable on demand and bears no interest.
At December 31, 2002 the Company had receivables of $375,000 from Humane
Inc., a company wholly owned by Steven Fetner a director and officer of the
Company. During the three-months ended March 31, 2003 Humane returned these
goods to the Company. The Company recorded a markdown of approximately $180,000
on this merchandise and it is included in the Company's inventory as of March
31, 2003.
11. BUSINESS SEGMENTS
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", our principal segments are grouped between
the generation of revenues from royalties and retail sales. The licensing
segment derives its revenues from royalties associated from the use of the
Company's brand names, principally XOXO, Fragile and Members Only and, subject
to Aris' rights as a licensee with respect thereto, Baby Phat. The Retail
segment is comprised of one full-price retail store and an internet sales site
which principally sell XOXO and Baby Phat branded products.
Segment information for the three- month periods ended March 31, 2003 and
2002, for both segments are set forth below. Corporate overhead is included in
the licensing segment data.
- --------------------------------------------------------------------------------
Retail Segment Financial Three Months Ended Three Months Ended
Information March 31, 2003 March 31, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $1,094 $997
- --------------------------------------------------------------------------------
Cost of Goods Sold 543 603
- --------------------------------------------------------------------------------
Selling and administrative expenses 636 767
- --------------------------------------------------------------------------------
Impairment of long lived assets --- 853
- --------------------------------------------------------------------------------
Restructuring and other costs --- 1,113
- --------------------------------------------------------------------------------
Net loss (85) (2,339)
- --------------------------------------------------------------------------------
11
- --------------------------------------------------------------------------------
Licensing Segment Financial Three Months Ended Three Months Ended
Information March 31, 2003 March 31, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $2,116 $2,088
- --------------------------------------------------------------------------------
Cost of Goods Sold --- ---
- --------------------------------------------------------------------------------
Selling and administrative expenses 2,846 4,621
- --------------------------------------------------------------------------------
Impairment of long lived assets --- ---
- --------------------------------------------------------------------------------
Restructuring and other costs --- 291
- --------------------------------------------------------------------------------
Interest expense 461 522
- --------------------------------------------------------------------------------
Income tax provision/(benefit) 3 (27)
- --------------------------------------------------------------------------------
Net loss (1,194) (3,319)
- --------------------------------------------------------------------------------
12. CONTINGENCIES
The Company, in the ordinary course of its business, is the subject of, or
a party to, various pending or threatened legal actions. While it is not
possible at this time to predict the outcome of any litigation, the Company may
not be able to satisfy an adverse judgement in certain of these actions, which
may have a material adverse effect on its financial position, results of
operations and cash flows.
13. SUBSEQUENT EVENTS
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global providing for the sale of the trade name and service mark
XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and
FRAGILE(R) along with certain related assets and accompanying goodwill for $43
million in cash.
The trademark purchase agreement has been approved by the Company's board
of directors and the board of managers of Global. The transaction is subject to
customary conditions, including the approval of the Company's shareholders.
The Company's chief executive officer, and an entity controlled by him,
which collectively beneficially own approximately 43% of the Company's
outstanding common stock, have entered into a voting agreement with Global
providing that such shares shall be voted in favor of the transaction.
12
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") for the three-month periods ended March
31, 2003 and 2002 should be read in conjunction with the consolidated condensed
financial statements, including the notes thereto, included on pages 3 through
12 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
the ability of the Company to satisfy the conditions and requirements of the
credit facilities of the Company, the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within prevailing retail environment, customer acceptance of
both new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this Annual Report, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition,"
are forward- looking statements. Although the Company believes that expectations
reflected in such forward- looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("ETIF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
13
As of March 31, 2003, the Company had a working capital deficit of
approximately $43,688,000 compared to a working capital deficit of approximately
$35,243,000 at December 31, 2002. The increase in the working capital deficit
was primarily due to the reclassification of the $7,500,000 of KC Aris
Debentures from long-term debt into current liabilities since they mature in
February 2004. In addition, the Company's working capital was negatively
impacted by its loss in the quarter. During the three-months ended March 31,
2003, the Company financed its working capital requirements principally through
licensing revenue from Adamson and the Company's other licensees.
In April 2002, the Company terminated its license agreement with Grupo
and shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of
the Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson"), where the majority stockholder is the Company's chief executive
officer, to license from the Company and its subsidiaries the XOXO(R), Members
Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo
(Note 4). The royalty due from Adamson is based on a percentage of net sales.
On January 18, 2002, the Company entered into a forbearance agreement
with CIT as agent for the lenders under the Company's Financing Agreement. Under
the terms of the forbearance agreement the following occurred: (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company was required to reduce the balance of the revolving
credit facility and certain other amounts due the lenders on a monthly basis
through July 31, 2002 at which time the balances were to be repaid in full. If
the outstanding balance of the revolving credit facility and certain other
amounts due the lenders at the end of any month exceeds the required monthly
ending balance, as defined in the forbearance agreement, the Company has fifteen
days to cure the excess principal before its lenders will take action against
the Company, (iii) the Company was required to make installments of $500,000 on
April 1 and July 1, 2002 and the remaining balance was due on October 31, 2002
and (iv) the Company's chief executive officer agreed to extend the $3,000,000
personal guaranty to remain in effect until all obligations under the
forbearance agreement are paid in full. The Company did not make the April 1,
2002, term loan payment. The Company and CIT negotiated an amendment of the
forbearance agreement to extend the payout period for the Company's revolving
line of credit and term loan. In conjunction with these negotiations the
Company, 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
14
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 conditions, including, but not limited
to, limitations on paying dividends, making acquisitions and incurring
additional indebtedness.
The Company was not in compliance, as of March 31, 2003 and December
31, 2002, with certain covenants contained in its loan agreements. The Company's
lenders, under the January 18, 2002 and February 25, 2003 forbearance
agreements, have indicated that they have no current intention to take action
with respect to such non-compliance but have not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3
million of indebtedness outstanding under the Financing Agreement. This
guaranty, which initially was to expire on December 6, 2000, 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 May 1, 2003, the
revolving line of credit has been paid in full.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned
by the Company's chief executive officer, entered into an agreement (the "Letter
of Credit Agreement") with the Company's principal commercial lender to
facilitate the opening of up to $17,500,000 in letters of credit for inventory
for the Company. Pursuant to the Letter of Credit Agreement, the chief executive
officer entered into a guaranty agreement limited to $7,000,000 of the
reimbursement of AHS' obligations under the Letter of Credit Agreement. AHS owes
its lender approximately $7,090,000 under the Letter of Credit Agreement, and
the Company owes AHS the same amount.
In February 2001, the Company entered into a Securities Purchase
Agreement with KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to
issue Convertible Debentures in the aggregate sum of $10,000,000. The Debentures
mature in three years, bear interest at 8.5% per annum, payable quarterly, and
are convertible into shares of common stock at the rate of $.46 per share.
Accordingly, the Company has reclassified the $7,500,000 Debenture into current
liabilities from long-term debt. KC only purchased $7,500,000 of Debentures,
convertible into 16,304,347 shares of Common Stock. The Company used the
proceeds to pay down a portion of the borrowings under its revolving credit
facility. On August 5, 2002 KC, sent the Company a notice of default arising
from the Company's failure to pay interest in the amount of approximately
$321,000 that was due on January 31 and April 30, 2002. On September 3, 2002,
the Company reached an agreement with KC and the default was rescinded. The
Company agreed to pay KC $50,000 every three weeks starting on September 3, 2002
and continuing until all interest due KC is brought up to date under the terms
of the Debentures. 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 in
principal, as of March 31, 2003. On October 31, 2002, the Company
15
received a forbearance on the principal balance of BNY's Note, $5,642,000, until
December 2, 2002. On January 31, 2003, BNY agreed to defer payment on the note
until February 28, 2003 (the "Deferral Date"). As of the date of this filing 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.
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global providing for the sale of the trade name and service mark
XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and
FRAGILE(R) along with certain related assets and accompanying goodwill for a
total sum of $43 million in cash (Notes 3 and 13). The Company intends to use
the proceeds of the trademark assets sale to pay off its debt obligations and
provide working capital.
The trademark purchase agreement has been approved by the Company's
board of directors and the board of managers of Global. The transaction is
subject to customary conditions, including the approval of the Company's
shareholders
Assuming that the trademark assets sale is consummated the Company
plans to repay existing indebtedness and to finance its operations through, (i)
continued negotiated settlements with creditors, (ii) substantially reducing its
overhead and (iii) royalties from its remaining trademarks and sub-license.
There can be no assurance that the trademark assets sale will be
consummated or that the timing of cash receipts to be realized from working
capital and operations will be sufficient to meet obligations as they become
due. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated condensed financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
RESULTS OF OPERATIONS
The Company reported a net loss of $1,279,000 for the three-month
period ended March 31, 2003 compared to a net loss of $5,658,000 for the three
month period ended March 31, 2002.
During the three-months ended March 31, 2003, the Company's loss was
attributable to an increase in legal expenses, the write-off of previously
recognized XOXO license royalties and a soft retail environment which affected
sales at Adamson and negatively impacted the Company's royalty revenue. During
the three-months ended March 31, 2002, the Company's loss was largely
attributable to the default by Grupo of its license agreement and the closing by
the Company of three retail store locations. Under 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. In addition,
the Company recorded charges aggregating $2,258,000 in the first quarter of
2002, consisting of an accrual of approximately $1,113,000 for 2002 store rent,
property and equipment write-downs of approximately $441,000 and goodwill
impairment charges of approximately $412,000 and an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve.
16
REVENUES
SALES TO CUSTOMERS
The Company's net sales to customers increased from $997,000 during
the three-month period ended March 31, 2002 to $1,094,000 during the three-month
period ended March 31, 2003. This increase was attributable to increased retail
sales at the Company's internet sales operation due to the inclusion of the
Company's Baby Phat(R) branded products to the site. This was offset by the
closing of three of the Company's four retail stores in the first quarter of
2002.
ROYALTY INCOME
The Company's royalty income increased from $2,088,000 during the
three-months ended March 31, 2002 to $2,116,000 for the three-months ended March
31, 2003. This increase was attributable to an overall increase in royalty
revenue under the Adamson license as compared to royalty revenue earned in the
comparable period of 2002 under the terminated Grupo agreement. Under the
default by Grupo, the Company did not receive approximately $1,000,000 in
minimum license royalties. This was offset as the Company wrote off royalties
receivable as the result of defaults by two of its XOXO licensees.
GROSS PROFIT
Gross profit for the three-months ended March 31, 2003 was $2,667,000
or 83.1% of revenues compared to $2,482,000 or 80.5% of revenues for the
three-months ended March 31, 2002. Gross profit as a percentage of revenues for
the three-months ended March 31, 2003 was positively impacted by increased
retail sales at the Company's internet site. This was offset by the soft retail
environment which affected sales at Adamson which negatively impacted the
Company's royalty revenue. In addition, the Company wrote off royalties
receivable as the result of defaults by two of its XOXO licensees.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $3,482,000 or 108.5% of
revenues for the three-months ended March 31, 2003 as compared to $5,388,000 or
174.7% of revenues for the three-months ended March 31, 2002. Selling and
Administrative expenses as a percentage of revenue for the three-months ended
March 31, 2003 continue to be negatively impacted by legal expenses incurred in
the Company's defense of various lawsuits, the abandonment in 2002 of three
retail locations and the ongoing negotiations with its creditors to settle
outstanding amounts due them. This was partially offset as the Company continued
to benefit from Adamson's assumption of Grupo's responsibility for most of the
Company's operating overhead. Selling and Administrative expenses as a
percentage of revenues for the three-months ended March 31, 2002 were adversely
affected by the Grupo default. The Company incurred $220,000 in charges that
were Grupo's direct obligation. In addition, the Company incurred legal expenses
in connection with the Grupo bankruptcy, abandonment of its three retail store
locations in the first quarter of 2002 and the Company's ongoing negotiations
with its creditors to settle outstanding amounts due them.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable.
17
The Company evaluates the carrying value of its long-lived assets in relation to
the operating performance and future undiscounted cash flows of the underlying
assets when indications of impairment are present. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value. During the three-month period ended March 31, 2002, the Company recorded
an impairment charge of $853,000 relating to property and equipment and goodwill
associated with its retail store operations.The Company closed three of its four
retail stores during the three-months ended March 31, 2002, and recorded the
impairment charge in connection with the closing.
RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores
during the three-month period ended March 31, 2002. As a result, the Company
recorded charges aggregating $2,258,000, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $441,000 and goodwill impairment charges
of approximately $412,000.
INTEREST EXPENSE
Interest expense for the three-months ended March 31, 2003 was
$461,000 as compared to $522,000 for the three-months ended March 31, 2002. This
decrease was primarily attributable to the continuing reduction in borrowings
under the Company's financing agreement..
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective as of March 31,
2003. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to March 31, 2003.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to
various legal actions the
18
outcome of which the Company believes may have a material adverse effect on its
consolidated financial position and results of operations. Several of these
actions stem from Grupo incurring expenses in the Company's name. Although the
Company did not authorize these expenses, the Company mat be subject to
liability for them. Because of Grupo's bankruptcy filing, it is unlikely that
the Company will be able to recover any of these amount from Grupo. In addition,
the following updates information regarding certain litigation to which the
Company is subject:
FASHION WORLD-SANTA V. LOLA, INC.:
---------------------------------
On February 11, 2002, Fashion World-Santa filed an unlawful detainer action
against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action
sought to evict Lola, on grounds of non- payment of rent, from an XOXO
retail store located in Beverly Hills, California. Lola is a party to a
five-year lease for that store, and that lease does not expire until April
2006. XOXO Clothing Company, Inc. responded to the complaint as successor
in interest to Lola, Inc., denying the material allegations of the
complaint, and asserting other affirmative defenses. On February 27, 2002,
XOXO vacated the property and returned possession of the premises to the
plaintiff. The matter is now set for trial on October 3, 2003, and XOXO
intends to contest the amount of the plaintiff's alleged damages and the
extent to which, if at all, the plaintiff has satisfied its duty to
mitigate its damages. On October 15, 2002, XOXO made a written settlement
offer in the amount of $400,002.99 but the plaintiff rejected the offer.
Under the terms of the lease, XOXO may potentially be liable for
approximately $1.8 million in rent, plus all of the plaintiff's attorney
fees and other litigation expenses. The Company believe that the figure
should be substantially reduced as a result of the plaintiff's obligation
to mitigate its damages.
CHRISTI WILSON V. ARIS:
----------------------
On July 31, 2002, Christi Wilson, a former employee of the Company filed
suit in the Supreme Court of the State of New York, County of New York,
claiming that her commission agreement was breached by the Company.
Ms.Wilson is seeking $900,000 in damages, representing commissions due
under the agreement, and an unstated amount of alleged damages regarding a
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
19
thereafter informed Costco that the sale by Campers World to it was an
unauthorized use of PEI's trademarks and that Aris was not authorized to
sell the jeans to Campers World or to permit it to allow Campers World to
sell jeans to Costco. Campers World seeks return of the purchase price and
other damages from Aris. PEI has also asserted a cross-claim against Aris
and its subsidiaries and the Company's chief executive officer alleging
that Aris violated various license agreements regarding PEI's trademarks.
Aris has answered the Campers World complaint denying the material
allegations. In particular, Aris denies that it made the sale to Campers
World that is the subject of its complaint. Aris has also denied the
material allegations of PEI's cross- claim, and recently filed a motion for
summary judgement to dismiss the trademark infringement claims brought by
PEI. Aris intends to vigorously defend the claims and cross-claims.
MELVILLE REALTY COMPANY, INC.V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS
SUCCESSOR TO LOLA INC.
---------------------------------------------------------------------------
Melville instituted an action in the Supreme Court of the State of New
York, County of New York claiming that the Company is liable on an alleged
guaranty by Lola, Inc. on rent obligations of 8-3 Retailing Inc. ("8-3"), a
subsidiary of Aris, pertaining to a sublease of a retail store at 732
Broadway, New York, New York. This action does not allege an acceleration
of rent obligations. This action seeks compensatory damages of $391,964,
along with sums "to become due pursuant to the terms of the Sublease". This
litigation is being vigorously defended.
426 WEST BROADWAY ASSOCIATES, L.P. V ARIS, 8-3, XOXO, 8-3 D/B/A XOXO, LOLA,
INC., XOXO OUTLETS INC., 8-3 A/K/A 8-3 RETAIL INC. A/K/A XOXO, ECI, XOXO
CLOTHING COMPANY, IN.
---------------------------------------------------------------------------
426 West Broadway Associates instituted an action in the Supreme Court of
the State of New York, County of New York claiming rent arrears on a retail
store located at 426 West Broadway, New York, New York. This action seeks
compensatory damages in the sum of $177,127 with interest from 2/1/02, and
compensatory damages on a claim of "anticipatory breach of lease agreement"
(however, this is alleged in lieu of a claim for accelerated rent, which
the lease does not contain or provide for as a remedy). This litigation is
being vigorously defended
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
20
GARSON INTERNATIONAL: The Company filed a complaint against Garson for its
failure to pay approximately $95,000 due under an amendment to the license
agreement. Garson has filed a counter-claim against the Company alleging
that the Company interfered with its rights under a license agreement. The
Company believes that Garson's counter-claim is without merit and was
interposed solely for the purpose of fostering a settlement.
CORPORACION FABRIL has commenced an action against the Company in the
United States District Court for the Southern District of New York seeking
$146,431.50 for the delivery of merchandise it claims the Company did not
pay for. The Company intends to defend the action on the basis that it has
no evidence of having received the goods in question.
MARTINEZ & Sons: Martinez & Sons was a contractor with whom XOXO did a
substantial amount of sewing. Martinez & Sons went bankrupt, and therefore
failed to pay employees. In December of 2000, XOXO settled with the DOL on
behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other
employees sued, and XOXO settled that case in the amount of $62,000. Some
of the claimants of the DOL settlement, as well as two other employees,
filed a complaint with the DLSE for unpaid wages totaling $22,318.62. They
asserted that they had not been paid any wages and claimed that they were
owed more money than paid in settlement with the DOL. The Company is in the
process of investigating these matters. The Company received a demand
letter from a law firm claiming to represent some of the same individuals
involved in the Martinez & Sons DOL settlement and the DLSE investigation.
The attorney representing these 16 former employees have demanded $660,000
from XOXO. The attorney for these individuals has stated that he may file a
claim under Business and Professions Code 17200 ET SEQ. This statute allows
individuals to sue for unfair business practices, and penalties include
treble damages. It is too premature at this time to assess liability in
this matter.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8K filed May 8, 2003 - Trademark Purchase Agreement
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: May 13 2003 By /s/ Paul Spector
-------------------------------
Paul Spector
Chief Financial Officer / Treasurer
22
CERTIFICATIONS
I, Arnold Simon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aris Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 13, 2003
/s/ Arnold Simon
- -------------------------
Arnold Simon
Chief Executive Officer
23
I, Paul Spector, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aris Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 13, 2003
/s/ Paul Spector
- ---------------------------
Paul Spector
Chief Financial Officer
24
I, Vincent F. Caputo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aris Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 13, 2003
/s/ Vincent F. Caputo
- ----------------------------
Vincent F. Caputo
Principal Accounting Officer
25
(c) INDEX TO EXHIBITS
Filed as Indicate
Exhibit to Documen
Referenced in
Exhibit No. Description 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 June (3)
30, 1993 issued by Registrant to BNY
Financial Corporation.
10.72 Secondary Pledge Agreement dated as of June (3)
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 February (17)
26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The
Simon Group, L.L.C. and Charles S. Ramat.
26
Filed as Indicate
Exhibit to Documen
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------------
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.
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.
10.118 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
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.
10.128 Trademark Purchase Agreement (23)
21 List of Subsidiaries (21)
27
Filed as Indicate
Exhibit to Documen
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- ------------------
99.1 Certification under Section 906 of the (24)
Sarbanes/Oxley Act
99.2 Certification under Section 906 of the (24)
Sarbanes/Oxley Act
- ----------------
(1) Omitted
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June
30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with the
Commission on May 27, 1999, and incorporated herein by reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with
the Commission on or about April 13, 1999 and incorporated herein by
reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999.
(20) Omitted.
(21) Filed as Exhibit to Annual Report on Form 10-K filed with the
Commission on April 15, 2002.
(22) Filed as an Exhibit to Form 10Q for the Quarter Ended September 30,
2002
(23) Filed as an Exhibit to Form 8K filed May 8, 2003
(24) Filed herewith
28
- ----------------
* 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.
29