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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
September 30, 2003
ARIS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York 22-1715274
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES _____ NO [X]
Number of shares of Common Stock outstanding 108,819,527
As of November 13, 2003
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as of September
30, 2003 and December 31, 2002 3
b. Consolidated Condensed Statements of
Operations for the Nine-Months Ended
September 30, 2003 and September 30, 2002 4
c. Consolidated Condensed Statements of
Operations for the Three-Months Ended
September 30, 2003 and September 30, 2002 5
d. Consolidated Condensed Statements of
Cash Flows for the Nine-Months Ended
September 30, 2003 and September 30, 2002 6
e. Notes to Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
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 22
SIGNATURES 23
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
ASSETS 2003 2002
------------- ------------
(Unaudited)
Current assets:
Cash $ 243 $ --
Receivables, net -- 626
Receivable from related party 3,740 375
Inventories 218 183
Prepaid expenses and other current assets -- 3
-------- --------
Total current assets 4,201 1,187
Property and equipment, net 1,173 2,909
Goodwill, net -- 33,930
Other assets 3,796 310
-------- --------
TOTAL ASSETS $ 9,170 $ 38,336
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Borrowings under revolving credit facility $ -- $ 456
Loans payable to related parties, including accrued interest -- 13,026
Current portion of long-term debt -- 9,642
Current portion of capitalized lease obligations 899 415
Accounts payable 4,399 3,620
Accounts payable to related parties 259 1,096
Accrued expenses and other current liabilities 5,391 8,175
-------- --------
Total current liabilities 10,948 36,430
Long-term debt, net of current portion -- 7,500
Capitalized lease obligations 5 569
Other liabilities 1,426 1,637
-------- --------
Total liabilities 12,379 46,136
-------- --------
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 September 30, 2003
and December 31, 2002 1,088 1,088
Additional paid-in capital 86,146 86,146
Accumulated deficit (90,443) (95,027)
Unearned compensation -- (7)
-------- --------
Total stockholders' deficiency (3,209) (7,800)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 9,170 $ 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)
Nine- Nine-
Months Ended Months Ended
September 30, September 30,
2003 2002
------------- -------------
REVENUES:
SALES TO CUSTOMERS $ 3,482 $ 2,460
ROYALTY INCOME 5,743 6,946
--------- ---------
TOTAL REVENUES 9,225 9,406
COST OF GOODS SOLD (1,300) (1,259)
--------- ---------
GROSS PROFIT 7,925 8,147
OPERATING EXPENSES:
SELLING AND ADMINISTRATIVE EXPENSES (10,207) (14,564)
IMPAIRMENT OF GOODWILL (14,641) (412)
IMPAIRMENT OF PROPERTY AND EQUIPMENT (539) (441)
RESTRUCTURING AND OTHER COSTS -- (709)
--------- ---------
LOSS FROM OPERATIONS (17,462) (7,979)
INTEREST EXPENSE, NET (973) (1,567)
GAIN ON SALE OF TRADEMARK, NET 23,027 --
--------- ---------
INCOME/(LOSS) BEFORE INCOME TAX PROVISION 4,592 (9,546)
INCOME TAX (PROVISION) BENEFIT (8) 8
--------- ---------
NET INCOME/(LOSS) $ 4,584 ($ 9,538)
========= =========
BASIC INCOME (LOSS) PER SHARE $ 0.04 ($ 0.11)
--------- ---------
DILUTED INCOME (LOSS) PER SHARE $ 0.04 ($ 0.11)
--------- ---------
PER SHARE DATA:
Weighted average shares outstanding - Basic 108,819 87,184
Weighted average shares outstanding - Diluted 108,819 87,184
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
September 30, September 30,
2003 2002
------------- -------------
REVENUES:
SALES TO CUSTOMERS $ 955 $ 773
ROYALTY INCOME 1,025 2,376
--------- ---------
TOTAL REVENUES 1,980 3,149
COST OF GOODS SOLD (326) (333)
--------- ---------
GROSS PROFIT 1,654 2,816
OPERATING EXPENSES:
SELLING AND ADMINISTRATIVE EXPENSES (2,885) (3,277)
IMPAIRMENT OF GOODWILL (14,641) --
IMPAIRMENT OF PROPERTY AND EQUIPMENT (539) --
RESTRUCTURING AND OTHER COSTS -- (200)
--------- ---------
LOSS FROM OPERATIONS (16,411) (661)
INTEREST EXPENSE, NET (104) (512)
GAIN ON SALE OF TRADEMARK, NET 23,027 --
--------- ---------
INCOME/(LOSS) BEFORE INCOME TAX PROVISION 6,512 (1,173)
INCOME TAX (PROVISION) BENEFIT (2) (17)
--------- ---------
NET INCOME/(LOSS) $ 6,510 ($ 1,190)
========= =========
BASIC INCOME (LOSS) PER SHARE $ 0.06 ($ 0.01)
--------- ---------
DILUTED INCOME (LOSS) PER SHARE $ 0.06 ($ 0.01)
--------- ---------
PER SHARE DATA:
Weighted average shares outstanding - Basic 108,819 95,522
Weighted average shares outstanding - Diluted 108,819 95,522
See accompanying notes to consolidated condensed financial statements
-5-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine- Nine-
Months Ended Months Ended
September 30, September 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,584 ($ 9,538)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,197 1,760
Non-cash stock transaction charged to expense -- 1,300
Non-cash stock based compensation 7 64
Provision for accrued restructuring charges -- 709
Gain on sale of trademark (23,027) --
Write-off of receivables from licensee -- 1,959
Impairment on property and equipment 539 440
Impairment of goodwill 14,641 412
Change in assets and liabilities :
(Increase) / decrease in receivables (2,739) 970
Decrease in due from licensee -- 2,994
(Increase) / decrease in inventories (35) 333
Decrease in prepaid expenses and other current assets 3 242
(Increase) / decrease in other assets (3,486) 18
Increase / (decrease) in accounts payable 779 (1,789)
(Decrease) / increase in accounts payable to related parties (837) 275
(Decrease) / increase in accrued expenses and other current liabilities (2,784) 2,680
Decrease in other liabilities (211) (864)
-------- --------
Net cash (used in) provided by operating activities (11,369) 1,965
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (28)
Proceeds from sale of trademark 42,316 --
-------- --------
Net cash provided by (used in) investing activities 42,316 (28)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt, other debt and capital leases (19,658) (2,093)
Advances from (repayments to) related parties (10,590) 3,394
Decrease in borrowings under revolving credit facility (456) (3,632)
-------- --------
Net cash used in financing activities (30,704) (2,331)
-------- --------
NET INCREASE (DECREASE) IN CASH 243 (394)
CASH, BEGINNING OF PERIOD 0 457
-------- --------
CASH, END OF PERIOD $ 243 $ 63
======== ========
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
-6-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of September 30,
2003 and for the nine and three-month periods ended September 30, 2003 and 2002
are unaudited and reflect all adjustments consisting of normal recurring
adjustments and 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 nine and three-month periods
ended September 30, 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 adoption of SFAS No. 146 did not have a material impact on the
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 $6,747,000 at September 30, 2003 as compared to a
working capital deficit of $35,243,000 at December 31, 2002. As a result of the
sale of the Company's XOXO(R) trademark and certain related
7
assets (see Note 4) the Company has satisfied all obligations that were
previously outstanding under its credit facility and other debt instruments.
During 2002, the Company completed its first full year as a licensor or
sub-licensor of its owned or licensed trademarks. In April 2002, the Company
terminated its license agreement with Grupo Xtra of New York, Inc. ("Grupo") and
shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the
Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson") 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 5).
As a result of the trademark assets sale the Company repaid a
substantial portion of its existing indebtedness and intends to finance its
remaining operations through (i) continued negotiated settlements with trade
creditors, (ii) substantially reducing its overhead and (iii) royalties from its
remaining trademarks and license (See Note 4).
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.
4. SALE OF XOXO TRADEMARK
On May 7, 2003, the Company signed a definitive trademark purchase
agreement with Global Brand Holdings, LLC ("Global") providing for the sale of
the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN
AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets
and accompanying goodwill for a total sum of $43 million in cash. The
transaction was approved by the Company's stockholders at a special meeting held
on Monday, June 30, 2003. On July 2, 2003, the Company completed the sale of the
trade name and service mark. The Company received $43 million in cash at closing
of which $2 million was set aside in one escrow account and $1 million was set
aside in an additional escrow account, to secure certain post-closing
obligations of the Company.
The proceeds from the trademark sale were used to, (i) satisfy the
Company's outstanding obligations with CIT Commercial Services Group, Inc.
("CIT"), (ii) retire the $7,500,000 in Convertible Debentures issued to KC Aris
Fund I, L.P. ("KC") (See Note 6), (iii) pay- off the Company's Series A Junior
Secured Note with BNY Financial Corporation ("BNY"), (iv) satisfy secured loans
and advances to the Company from related parties (See Note 10), (v) satisfy
liens placed against the Company's XOXO(R) by CIT and (vi) reduce trade
obligations.
8
5. ADAMSON LICENSE AGREEMENT
Following the effectiveness of the termination of the Grupo Agreement,
the Company reached an agreement with Adamson Apparel, Inc. to license from the
Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R)
trademarks that had been previously licensed by Grupo. Adamson is a newly-formed
New York corporation of which the majority owner is the Company's chairman and
chief executive officer and principal stockholder. Adamson was initially
capitalized with a $7 million investment. Adamson is utilizing many of the same
employees that were employed by Grupo, all of whom were formerly employees of
XOXO or one or more of the Company's subsidiaries.
The Adamson Agreement has an initial term which expires on December 31,
2003, which may be automatically renewed for a further one year term, subject to
agreement by both parties, to manufacture, market and distribute at wholesale,
women's clothing, jeanswear and sportswear under the XOXO and Members Only
trademarks and, subject to Aris' rights as licensee with respect thereto, Baby
Phat apparel. The royalty rate for XOXO and Members Only products was 9% and is
3.5% for Baby Phat branded products. In addition, Adamson is also responsible
for amounts due under the Company's license agreement with the licensor of Baby
Phat.
The Global agreement required the Adamson license relating to XOXO
branded products to be terminated as of closing. Under the terms of the
trademark purchase agreement Adamson ceased shipping XOXO branded products as of
September 30, 2003. In addition, Adamson closed the XOXO Outlet Stores, which it
had been operating as part of the license agreement, in August 2003.
6. SALE OF CONVERTIBLE DEBENTURES
In February 2001, the Company issued $7,500,000 in Convertible
Debentures which bore interest at 8.5% per annum and were convertible into
shares of common stock at the rate of $.46 per share (See Note 4).
7. RESTRUCTURING AND OTHER COSTS
Under Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") goodwill and other intangible assets with
indefinite useful lives are no longer amortized. Instead such assets will be
subject to reduction only when the carrying amount exceed their estimated fair
value based on impairment tests established by SFAS 142 that will be made at
least annually. In accordance with SFAS 142 the Company determined that the
carrying value of goodwill associated with its Members Only(R) trademark to be
impaired. As a result of this impairment the Company recorded a goodwill
impairment charge of $14,641,000 during the quarter ended September 30, 2003.
The Company's remaining retail store and all of the XOXO(R) outlet stores were
closed in July of 2003. The Company recorded an impairment charge of $539,000
relating to property
9
and equipment previously used at those locations. The Company has negotiated
favorable lease settlements with its retail landlord and nine of the ten outlet
store landlords and has been released from all liabilities for these locations.
The Company closed three of its four full price XOXO retail stores in
the first quarter of fiscal 2002. The Company recorded restructuring and
impairment charges aggregating $2,257,000 in the first quarter of 2002,
consisting of an accrual of approximately $1,113,000 for 2002 rent, an
additional $291,000 of lease termination costs relating to the 2000
restructuring reserve, property and equipment impairment 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 by December 31,
2003 and the Company will have to periodically review its accrual.
In June of 2002, the Company reached a settlement agreement with
TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's former premises at
1411 Broadway in New York. Under the terms of the settlement the Company paid
$550,000 on June 26, 2002, to Trizec and was released from all obligations under
its lease. As a result of this agreement the Company recorded a favorable
reversal of a previously recorded restructuring reserve of approximately
$895,000 in the second quarter of fiscal 2002.
In connection with the Trizec settlement the Company recorded a
liability for $200,000 representing a broker's fee in connection with securing a
tenant for the space. This fee is being paid out over approximately two years.
8. PER SHARE DATA
Basic earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during each period. Diluted earnings per share has been computed for
the quarter and nine-months ended September 30, 2003 by dividing the applicable
net income by the weighted average number of common shares outstanding and
potentially dilutive common shares.
Options and warrants to purchase 10,136,345 and 11,346,845 shares of
Common Stock were outstanding as of September 30, 2003 and 2002, respectively,
but were not included in the computation of diluted earnings (loss) per share
because the effect would be anti-dilutive.
9. STOCK INCENTIVE PLAN
The Company has a stock incentive plan which is described more fully in
Note 9 of the Company's Annual Report on Form 10-K for 2002. The Company
accounts for this plan using the intrinsic value method under the recognition
and measurement principles of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES", and related interpretations. No stock-based employee compensation
cost is reflected in net income (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 income
(loss) and income (loss) per share if the Company
10
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)
- --------------------------------------------------------------------------------
Nine-Months Ended Nine-Months Ended
September 30, 2003 September 30, 2002
- --------------------------------------------------------------------------------
Net income (loss), as reported $ 4,584 $ (9,538)
- --------------------------------------------------------------------------------
Deduct: Total stock-based 435 1,496
employee compensation expenses
determined under fair value based
method for all awards
- --------------------------------------------------------------------------------
Net income (loss), pro forma 4,149 (11,034)
- --------------------------------------------------------------------------------
Net income (loss) per share-basic
- --------------------------------------------------------------------------------
As reported $ 0.04 $ (0.11)
- --------------------------------------------------------------------------------
Pro forma 0.04 (0.13)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Three-Months Ended Three-Months Ended
September 30, 2003 September 30, 2002
- --------------------------------------------------------------------------------
Net income (loss) as reported $ 6,510 $ (1,190)
- --------------------------------------------------------------------------------
Deduct: Total stock-based 145 498
employee compensation expenses
determined under fair value based
method for all awards
- --------------------------------------------------------------------------------
Net income (loss), pro forma 6 365 (1,688)
- --------------------------------------------------------------------------------
Net income (loss) per share-basic
- --------------------------------------------------------------------------------
As reported $ 0.06 $ (0.01)
- --------------------------------------------------------------------------------
Pro forma 0.06 (0.02)
- --------------------------------------------------------------------------------
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 (See Note 4).
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 (See Note 4).
Adamson is majority owned by the Company's chairman and chief executive
officer and principal stockholder (Note 5). As of September 30, 2003, Adamson
was indebted to the Company in the amount of $3,740,000, which is payable on
demand and bears no interest.
11
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. As a result of the
trademark assets sale, the Company closed the remaining retail stores in July
2003 and will not receive royalties on sales of XOXO branded products after
September 30, 2003 (See Note 4).
Segment information for the nine and three- month periods ended
September 30, 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 September 30, 2003 September 30, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $955 $773
- --------------------------------------------------------------------------------
Cost of Goods Sold 326 333
- --------------------------------------------------------------------------------
Selling and administrative expenses 889 549
- --------------------------------------------------------------------------------
Impairment of long-lived assets 539 ---
- --------------------------------------------------------------------------------
Net loss (799) (109)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Licensing Segment Financial Three Months Ended Three Months Ended
Information September 30, 2003 September 30, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $1,025 $2,376
- --------------------------------------------------------------------------------
Selling and administrative expenses 1,996 2,728
- --------------------------------------------------------------------------------
Restructuring and other costs --- 200
- --------------------------------------------------------------------------------
Impairment of long-lived assets 14,641 ---
- --------------------------------------------------------------------------------
Gain on sale of trademark, net (23,027) ---
- --------------------------------------------------------------------------------
Interest expense 104 512
- --------------------------------------------------------------------------------
Income tax provision 2 17
- --------------------------------------------------------------------------------
Net income (loss) 7,309 (1,081)
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
Retail Segment Financial Nine Months Ended Nine Months Ended
Information September 30, 2003 September 30, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $3,482 $2,460
- --------------------------------------------------------------------------------
Cost of Goods Sold 1,300 1,259
- --------------------------------------------------------------------------------
Selling and administrative expenses 2,413 2,584
- --------------------------------------------------------------------------------
Impairment of long lived assets 539 853
- --------------------------------------------------------------------------------
Restructuring and other costs --- 1,404
- --------------------------------------------------------------------------------
Net loss (770) (3,640)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Licensing Segment Financial Nine Months Ended Nine Months Ended
Information September 30, 2003 September 30, 2002
(in thousands)
- --------------------------------------------------------------------------------
Revenues $5,743 $6,946
- --------------------------------------------------------------------------------
Selling and administrative expenses 7,794 11,980
- --------------------------------------------------------------------------------
Impairment of long-lived assets 14,641 ---
- --------------------------------------------------------------------------------
Restructuring and other costs --- (695)
- --------------------------------------------------------------------------------
Gain on sale of trademark (23,027) ---
- --------------------------------------------------------------------------------
Interest expense 973 1,567
- --------------------------------------------------------------------------------
Income tax provision/(benefit) 8 (8)
- --------------------------------------------------------------------------------
Net loss 5,354 (5,898)
- --------------------------------------------------------------------------------
The Company generated revenues of $1,762,000 and $797,000 from retail
sales for the year ended December 31, 2002 and nine-months ended September 30,
2003, respectively. The Company received royalty revenues of $4,531,000 and
$2,818,000 from Adamson's sales of XOXO branded products for the year ended
December 31, 2002 and nine-months ended September 30, 2003, respectively. The
Company also received royalty revenues of $3,177,000 and $2,002,000 directly
from its XOXO licensees for the year ended December 31, 2002 and nine-months
ended September 30, 2003, respectively. These revenues will no longer be
available to the Company as a result of the trademark assets sale (See Note 4).
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,
13
which may have a material adverse effect on its financial position, results of
operations and cash flows. The following actions, to which the Company is a
party, have been updated since the Company's last filing.
Fashion World-Santa v. Lola, Inc.:
- ---------------------------------
On February 11, 2002, Fashion World-Santa filed an unlawful detainer action
against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action
sought to evict Lola, on grounds of non- payment of rent, from an XOXO retail
store located in Beverly Hills, California. Lola is a party to a five-year lease
for that store, and that lease does not expire until April 2006. XOXO Clothing
Company, Inc. responded to the complaint as successor in interest to Lola, Inc.
On August 21, 2003, the Company and Fashion World-Santa agreed to settle the
dispute. The Company has agreed to pay Fashion World-Santa $900,000, $20,000 was
paid on signing and the Company has agreed to pay $20,000 monthly on the 15th of
each month beginning in October 2003, and continuing for the next 44 months.
Christi Wilson v. Aris:
- ----------------------
On July 31, 2002, Christi Wilson, a former employee of the Company filed suit in
the Supreme Court of the State of New York, County of New York, claiming that
her commission agreement was breached by the Company. Ms.Wilson is seeking
damages for commissions allegedly due under the agreement, and an unstated
amount of alleged damages regarding a claim of slander. The material allegations
of the complaint have been denied and the Company has filed counterclaims
alleging breach of contract, breach of duty of good faith and fair dealing,
breach of fiduciary duty, theft of trade secrets and tortious interference with
prospective economic advantage. Discovery in this matter is ongoing. The Court
recently dismissed a substantial part of Ms. Wilson's slander claim and granted
her motion to amend her claim to increase the amount of damages
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") for the nine and three-month periods ended
September 30, 2003 and 2002 should be read in conjunction with the consolidated
condensed financial statements, including the notes thereto, included on pages 3
through 13 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
14
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 adoption of SFAS No. 146 did not have a material impact on the
consolidated financial statements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business.
As of September 30, 2003, the Company had a working capital deficit
of approximately $6,747,000 compared to a working capital deficit of
approximately $35,243,000 at December 31, 2002. The decrease in the working
capital deficit was primarily due to the proceeds from the trademark assets
sale. The Company's working capital was negatively impacted by its loss from
operations. During the nine-months ended September 30, 2003, the Company
financed its working capital requirements principally through licensing revenue
from Adamson and the Company's other licensees along with the proceeds from the
trademark assets sale.
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 5). The royalty due from Adamson is based on a percentage of net sales.
15
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 4). The
transaction was approved by the Company's stockholders at a special meeting held
on Monday, June 30, 2003. On July 2, 2003, the Company completed the sale of the
trade name and service mark. The Company received $43 million in cash at closing
of which $2 million was set aside in one escrow account and $1 million was set
aside in an additional escrow account, to secure certain post-closing
obligations of the Company.
On July 2, 2003, the Company repaid all of its indebtedness for
borrowed money.
The Company's chief executive officer had personally guaranteed $3
million of indebtedness outstanding under a financing agreement with CIT. This
guaranty expired upon re-payment of the Company's obligations to CIT.
As a result of the trademark assets sale the Company repaid a
substantial portion of its existing indebtedness and intends to finance its
remaining 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 timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated condensed
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
RESULTS OF OPERATIONS
The Company reported net income of $6,510,000 and $4,584,000 for the
three and nine- month periods ended September 30, 2003 compared to net losses of
$1,190,000 and $9,538,000 for the three and nine-month periods ended September
30, 2002.
During the three-months ended September 30, 2003, the Company's
income was primarily attributable to the gain realized by the Company on the
sale of its XOXO(R) trademark and related assets. This gain was offset by
impairment charges recorded relating to goodwill associated with the Company's
Members Only(R) trademark and property and equipment used by the Company's
retail and outlet stores which were closed during the quarter. In addition, the
Company continued to incur operating losses as royalties generated by its
XOXO(R) trademark wound down as the result of the trademark asset sale. During
the three-months ended September 30, 2002, the Company's loss was partly
attributable to the default by Grupo of its license agreement. As a result of
the default by Grupo, the Company incurred $220,000 in charges that were Grupo's
direct obligation. In addition, the Company recorded a $200,000 restructuring
charge representing a broker's fee in connection with securing a tenant in
connection with the Trizec settlement. The Company also recorded a write off of
royalty receivable as the result of a default by one of its XOXO licensees.
16
During the nine-months ended September 30, 2003, the Company's
income was primarily attributable to the gain realized by the Company on the
sale of its XOXO(R) trademark and related assets. This gain was offset by
impairment charges recorded relating to goodwill associated with the Company's
Members Only(R) trademark and property and equipment used by the Company's
retail and outlet stores which were closed during the third quarter of fiscal
2003. In addition, the Company continued to incur operating losses as royalties
generated by its XOXO(R) trademark wound down as the result of the trademark
asset sale. During the nine-months ended September 30, 2002, the Company's loss
was largely attributable to the default by Grupo of its license agreement and
the closing by the Company of three retail store locations. As a result of the
default by Grupo the Company did not receive approximately $1,000,000 in license
royalties and wrote off approximately $1,959,000 in operating expense
reimbursements and incurred $1,023,000 in charges that were Grupo's direct
obligation. In addition, the Company recorded restructuring charges aggregating
$2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment impairment write-downs of approximately $440,000 and goodwill
impairment charges of approximately $412,000. The Company was required to record
a non-cash charge in the amount of $1,300,000 relating to the issuance of
10,000,000 shares of the Company's common stock to an unrelated third party as
consideration for him making an investment in Adamson. The management of the
Company believes that this was vital to the success of Aris. The Company also
recorded a $200,000 restructuring charge representing a broker's fee in
connection with securing a tenant in connection with the Trizec settlement and
recorded a write off of royalty receivable as the result of a default by one of
its XOXO licensees. This was offset by the favorable reversal of a previously
recorded restructuring reserve of approximately $895,000 under a settlement
agreement with the landlord of the Company's premises at 1411 Broadway in New
York during the three-months ended June 30, 2002.
REVENUES
SALES TO CUSTOMERS
The Company's net sales to customers increased from $773,000 and
$2,460,000 during the three and nine-month period ended September 30, 2002,
respectively, to $955,000 and $3,482,000 during the three and nine-month periods
ended September 30, 2003, respectively. 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 a decrease in sales at the Company's retail store operations as the
Company closed its remaining retail store in August 2003. The Company generated
revenues of $1,762,000 and $797,000 from retail sales for the year ended
December 31, 2002 and nine-months ended September 30, 2003, respectively. These
revenues will no longer be available to the Company as a result of the trademark
assets sale (See Note 4).
ROYALTY INCOME
The Company's royalty income decreased from $2,376,000 during the
three-months ended September 30, 2002 to $1,025,000 for the three-months ended
September 30, 2003. This decrease was attributable to the trademark asset sale.
As a result of the sale the Company received no royalty income from its former
XOXO licensees during the quarter. In addition, royalties under the Adamson
license were reduced as Adamson wound down its distribution of XOXO branded
products in accordance with the trademark asset sale.
17
The Company's royalty income decreased from $6,946,000 during the
nine-months ended September 30, 2002 to $5,743,000 for the nine-months ended
September 30, 2003. This decrease was attributable to the trademark asset sale.
As a result of the sale the Company received no royalty income from its former
XOXO licensees after July 2, 2003 the effective date of the transaction. In
addition, royalties under the Adamson license were reduced as Adamson wound down
its distribution of XOXO branded products in accordance with the trademark asset
sale. The Company also wrote-off royalty receivables in the first quarter of
2003 as the result of defaults by two XOXO licensees. The Company received
royalty revenues of $4,531,000 and $2,818,000 from Adamson's sales of XOXO
branded products for the year ended December 31, 2002 and nine-months ended
September 30, 2003, respectively. The Company also received royalty revenues of
$3,177,000 and $2,002,000 directly from its XOXO licensees for the year ended
December 31, 2002 and nine-months ended September 30, 2003, respectively. These
revenues will no longer be available to the Company as a result of the trademark
assets sale (See Note 4).
GROSS PROFIT
Gross profit for the three-months ended September 30, 2003 was
$1,654,000 or 83.5% of revenues compared to $2,816,000 or 89.4% of revenues for
the three-months ended September 30, 2002. Gross profit as a percentage of
revenues for the three-months ended September 30, 2003 was negatively impacted
by the closing of the Company's retail store along with a reduction in royalty
income as the result of the trademark asset sale and lower revenues generated
under the Company's license agreement with Adamson.
Gross profit for the nine-months ended September 30, 2003 was
$7,925,000 or 85.9% of revenues compared to $8,147,000 or 86.6% of revenues for
the nine-months ended September 30, 2002. Gross profit as a percentage of
revenues for the nine-months ended September 30, 2003 was positively impacted by
increased retail sales at the Company's internet site. This was offset by the
closing of the Company's retail store along with a reduction in royalty income
as the result of the trademark asset sale and lower revenues generated under the
Company's license agreement with Adamson.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $2,885,000 or 145.7% of
revenues for the three- months ended September 30, 2003 as compared to
$3,277,000 or 104.1% of revenues for the three- months ended September 30, 2002.
Selling and Administrative expenses as a percentage of revenues for the
three-months ended September 30, 2003 were adversely affected by the trademark
assets sale which resulted in a reduction of royalty revenues. Selling and
Administrative expenses as a percentage of revenue for the three-months ended
September 30, 2002 were adversely affected by the Grupo default. As a result of
the default the Company was forced to incur operating expenses that were
previously shared with Grupo while receiving no royalty income. The Company also
incurred $803,000 in charges that were Grupo's direct obligation. In addition,
the Company was required to record a non-cash charge in the amount of $1,300,000
relating to the commitment to issue 10,000,000 shares of the Company's common
stock to an unrelated third party as consideration for an investment by the
third party in Adamson.
18
Selling and Administrative expenses were $10,207,000 or 110.6% of
revenue for the nine- months ended September 30, 2003 as compared to $14,564,000
or 154.8% of revenue for the nine- months ended September 30, 2002. Selling and
Administrative expenses as a percentage of revenue for the nine-months ended
September 30, 2003 continue to be negatively impacted by legal expenses incurred
in connection with the Company's defense of various lawsuits along with the
reduction in royalty revenue as a result of the trademark assets sale. Selling
and Administrative expenses as a percentage of revenues for the nine-months
ended September 30, 2002 have been adversely affected by the Grupo default. As a
result of the default the Company was forced to write off receivables from Grupo
for shared operating expenses and incurred $803,000 in charges that were Grupo's
direct obligation. In addition, the Company was liable for excess royalties due
under the Baby Phat license for 2001 which Grupo failed to pay. The total charge
to the Company for these items was approximately $2,803,000 which, when combined
with a $1,000,000 shortfall in minimum royalty income, resulted in the
percentage of selling and administrative expenses to revenue being abnormally
high. The Company also was required to record a non-cash charge in the amount of
$1,300,000 relating to the commitment to issue 10,000,000 shares of the
Company's common stock to an unrelated third party as consideration for an
investment by the third party in Adamson.
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. Goodwill is evaluated for impairment at
least annually. 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.
In accordance with SFAS 142 the Company determined that the carrying
value of goodwill associated with its Members Only(R) trademark to be impaired.
As a result of this impairment the Company recorded an impairment charge of
$14,641,000 during the quarter ended September 30, 2003. In addition, the
Company's remaining retail store and all of the XOXO(R) outlet stores were
closed in August of 2003. The Company recorded an impairment charge of $539,000
relating to property and equipment previously used at those locations.
During the nine-month period ended September 30, 2002, the Company recorded an
impairment charge of $441,000 relating to property and equipment and an
impairment charge of $412,000 relating to 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 charges in
connection with the closing.
RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores
in the first quarter of fiscal 2002. As a result, the Company recorded
restructuring charges aggregating $1,404,000 in the first quarter of 2002,
consisting of an accrual of approximately $1,113,000 for 2002 rent and
additional $291,000 of lease termination costs relating to the 2000
restructuring reserve.
In June of 2002, the Company reached a settlement agreement with
TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's premises at 1411
Broadway in New York. Under the terms
19
of the settlement the Company paid $550,000 to its former landlord at 1411
Broadway and was released from all obligations under its lease. As a result of
this agreement the Company recorded a favorable reversal of previously recorded
restructuring reserve of approximately $895,000
In connection with the Trizec settlement the Company recorded a
liability for $200,000 representing a broker's fee in connection with securing a
tenant for the space. This fee is being paid out over approximately two years
and was recorded in July of 2002.
GAIN ON SALE OF TRADEMARK
On July 2, 2003, the Company completed the sale of the trade name
and service mark. The Company received $43 million in cash at closing. This was
offset by a write-off of approximately $19,289,000 in goodwill relating to the
XOXO(R) trademark and approximately $684,000 of legal and other fees incurred in
connection with the transaction, resulting in a net gain of $23,027,000.
INTEREST EXPENSE
Interest expense for the three-months ended September 30, 2003 was
$104,000 as compared to $512,000 for the three-months ended September 30, 2002.
This decrease was primarily attributable to the satisfaction of the Company's
indebtedness under its credit facility and other interest bearing instruments.
Interest expense for the nine-months ended September 30, 2003 was
$973,000 as compared to $1,567,000 for the nine-months ended September 30, 2002.
This decrease was primarily attributable to the satisfaction of the Company's
indebtedness under its credit facility and other interest bearing instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are effective. During the third quarter of 2003, there
were no changes in the Company's internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
20
The Company, in the ordinary course of its business, is party to
various legal actions the outcome of which the Company believes may have a
material adverse effect on its consolidated financial position and results of
operations. Several of these actions stem from Grupo incurring expenses in the
Company's name. Although the Company did not authorize these expenses, the
Company mat be subject to liability for them. Because of Grupo's bankruptcy
filing, it is unlikely that the Company will be able to recover any of these
amount from Grupo. In addition, the following updates information regarding
certain litigation to which the Company is subject:
Fashion World-Santa v. Lola, Inc.:
---------------------------------
On February 11, 2002, Fashion World-Santa filed an unlawful detainer
action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That
action sought to evict Lola, on grounds of non- payment of rent, from an
XOXO retail store located in Beverly Hills, California. Lola is a party to
a five-year lease for that store, and that lease does not expire until
April 2006. XOXO Clothing Company, Inc. responded to the complaint as
successor in interest to Lola, Inc. On August 21, 2003, the Company and
Fashion World-Santa agreed to settle the dispute. The Company has agreed to
pay Fashion World-Santa $900,000, $20,000 was paid on signing and the
Company has agreed to pay $20,000 monthly on the 15th of each month
beginning in October 2003, and continuing for the next 44 months.
Christi Wilson v. Aris:
----------------------
On July 31, 2002, Christi Wilson, a former employee of the Company filed
suit in the Supreme Court of the State of New York, County of New York,
claiming that her commission agreement was breached by the Company.
Ms.Wilson is seeking damages for commissions allegedly due under the
agreement, and an unstated amount of alleged damages regarding a claim of
slander. The material allegations of the complaint have been denied and the
Company has filed counterclaims alleging breach of contract, breach of duty
of good faith and fair dealing, breach of fiduciary duty, theft of trade
secrets and tortious interference with prospective economic advantage.
Discovery in this matter is ongoing. The Court recently dismissed a
substantial part of Ms. Wilson's slander claim and granted her motion to
amend her claim to increase the amount of damages.
Campers World International, Inc. v. Perry Ellis International and Aris
Industries, Inc.:
---------------------------------------------------------------------------
Campers World instituted an action in the United States District Court for
the Southern District of New York in January 2002 against Perry Ellis
International, Inc. ("PEI") and the Company. The complaint alleges that
Campers World purchased approximately 460,000 pairs of PEI jeans from Aris
for approximately $4,600,000 and subsequently sold those jeans to Costco.
PEI thereafter informed Costco that the sale by Campers World to it was an
unauthorized use of PEI's trademarks and that Aris was not authorized to
sell the jeans to Campers World or to permit it to allow Campers World to
sell jeans to Costco. Campers World seeks return of the purchase price and
other damages from Aris. PEI has also asserted a cross-claim against Aris
and its subsidiaries and the Company's chief executive officer alleging
that Aris violated various license agreements regarding PEI's trademarks.
Aris has answered the Campers World complaint denying the material
allegations. Aris' motion for summary judgement to dismiss the trademark
infringement claims brought by PEI, was recently denied. 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.
---------------------------------------------------------------------------
21
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.
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.
22
Europe Craft Imports, Inc. vs. Corporate Realty Income Fund I, LP and 475
Fifth Avenue Limited Partnership
---------------------------------------------------------------------------
Europe Craft Imports commenced legal action during July 2003 against the
defendant in the Supreme Court of the State of New York, County of New
York, in which Europe Craft Imports seeks declaratory relief claiming all
or a portion of a New York City commercial lease has been rescinded or
terminated by the acts or omissions by defendants action. Europe Craft
Imports also seeks monetary damages.
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 July 15, 2003 - Acquisition and Disposition of Assets
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: November 13, 2003 By /s/ Paul Spector
-----------------------------------
Paul Spector
Chief Financial Officer / Treasurer
24
(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- Footnote No.
------------
3.3 Restated Certificate of Incorporation filed on June (3)
30, 1993
3.4 Amended and Restated By-Laws effective June 30, (3)
1993
3.5 Amendment to the Restated Certificate of (20)
Incorporation filed with the Secretary of State on
July 29, 1999
3.6 Amendment to the Restated Certificate of (21)
Incorporation filed with the Secretary of State in
January 2001
10.67 Series A Junior Secured Note Agreement dated as of (3)
June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of June (3)
30, 1993 between Registrant and each member of
Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
25
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- Footnote No.
------------
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by (18)
and among the Company and its Subsidiaries and
CIT Commercial Group, Inc. and the other Financial
Industries named therein.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene, Michele
Bohbot and Lynne Hanson, dated August 10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing Agreement,
as Lenders; and The CIT Group/Commercial
Services, Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
10.123 Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
10.126 Form Securities Purchase Agreement Dated as of (21)
February, 2001 between the Company and KC Aris
Fund I, L.P.
10.127 Trademark License Agreement Adamson Apparel, (22)
Inc.
10.128 Trademark Purchase Agreement (23)
21 List of Subsidiaries (21)
26
Filed as Indicated
Exhibit to Document
Exhibit No. Description Referenced in
----------- ----------- Footnote No.
------------
31.1 Certification of Chief Executive Officer pursuant to (24)
Section 302 of the Sarbanes/Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to (24)
Section 302 of the Sarbanes/Oxley Act of 2002
32 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
27
(24) 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.
28