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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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463 SEVENTH AVENUE, NEW YORK, NY 10018
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(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 646-473-4200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
Yes X No
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As of March 15, 2002, 88,944,719 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the 24,379,414 shares of voting
stock of the Registrant held by non-affiliates of the Registrant at March 15,
2002 was $5,851,059.
Documents incorporated by reference: None.
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
Page
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PART I ................................................................
Item 1. Business............................................... 1
Item 2. Properties............................................. 5
Item 3. Legal Proceedings...................................... 5
Item 4. Submission of Matters to a Vote of Security Holders.... 7
PART II ................................................................
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.................... 7
Item 6. Selected Financial Data................................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk ..................................... 18
Item 8. Financial Statements and Supplementary Data............ 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 18
Part III ................................................................
Item 10. Directors and Executive Officers of the Registrant..... 19
Item 11. Executive Compensation................................. 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 25
Item 13. Certain Relationships and Related Transactions......... 27
PART IV ................................................................
Item 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K.................................... 30
SIGNATURES............................................................... 35
-i-
PART I
ITEM 1. BUSINESS.
INTRODUCTION AND CURRENT BUSINESS
Aris Industries Inc. ("the Company"), is a New York corporation organized
in 1947. Aris' current strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and overseeing the improvement in manufacturing efficiencies and cost controls
of its primary licensee. The Company attributes the strength of its brand names
to the quality, fit and design of its products which have developed a high
degree of consumer loyalty and a high level of repeat business. Consistent with
this strategy, the Company has and will eliminate those businesses which
generate a profit contribution below the Company's desired return. Since 1999
the Company has eliminated several under-performing brands including FUBU(R) and
Perry Ellis(R).
During 2001, Aris Industries, Inc. (the "Company", the "Registrant" or
"Aris") continued its transformation from a manufacturer and importer of
outerwear, sportswear and loungewear to a licensor or sublicensor of its owned
or licensed trademarks. In early 2001, Aris entered into an agreement (the
"Grupo Agreement"), which became effective March 1, 2001, with Grupo Xtra of New
York, Inc. ("Grupo"), an unaffiliated third party, giving Grupo the exclusive
right in the United States, Puerto Rico, the Caribbean Islands and Israel to
manufacture and sell, subject to Aris' design and quality approvals, women's
clothing, jeanswear and sportswear under the XOXO(R) and Fragile(R) trademarks
and sportswear and outerwear under the Members Only(R) trademark. In addition,
Aris granted Grupo the right to manufacture and sell products covered by its
license agreements for Brooks Brothers Golfwear and Baby Phat sportswear. Grupo
was also granted the right to operate the Company's XOXO outlet stores, which
the Company used to provide a channel for disposing of excess and irregular
inventory. In exchange, Grupo agreed to purchase substantially all of Aris's
inventory of such products, pay royalties based on its sales of such products
and assume certain of Aris's overhead obligations and contracts. Grupo completed
the purchase of such inventory at the end of 2001.
The Company's sportswear and jeanswear brands are distributed to
approximately 1,200 department and specialty stores in the United States,
including such leading retailers as Federated Department Stores, May Company,
Nordstroms and Saks Incorporated. The Company's brands are also distributed
overseas through its licensed distributors in Mexico, Canada, Central America,
Japan and the Middle East. The Company is in discussions with various groups to
enter into license or distributorship agreements in Central Europe, Australia,
South Africa, China and Southeast Asia.
The Grupo Agreement provides for royalties ranging from 7% to 9% of Grupo's
net sales, with reductions for certain sales of "closeouts, seconds or
irregulars." Minimum annual royalties were $8,100,000 for 2001 and increase by
14% per year until they reach $13,500,000. The term of the Grupo Agreement is
for five years, with options by Grupo for four additional five year periods.
Grupo and the Company are in the process of reconciling the amount of royalties
due for net sales in 2001.
Grupo was frequently late in fulfilling its payment obligations under the
Agreement. Following the end of the year, it continued to be late in making
payments to the Company and has violated the Agreement in other ways. In March
2002, the Company sent Grupo notices of termination of the Agreement. Under the
Agreement, as amended, the Company is required to give Grupo thirty days
-1-
notice of any termination. The Company has the option to terminate the Agreement
and re-license the brands to other interested parties or take back the license
and operate it as a separate wholesale company using current management and a
cash infusion, if available. The Company is currently negotiating with Grupo to
take back the license and operate it as a separate wholesale company.
Aris oversees the design, manufacture and marketing of a broad line of
young womens apparel, including jeanswear, mens outerwear and accessories sold
under a variety of internationally recognized brand names owned or licensed by
the Company. These products are sold under license agreements with sixteen
licensees who are required to pay royalties to the Company for sales made under
the Company's XOXO(R), Fragile(R) and Members Only(R) labels. These licenses
provided $3,065,000 in royalties in 2001 and are required to pay minimum
royalties of $3,383,000 in 2002, which increase to $7,069,000 in 2005, including
potential renewals.
The Company was incorporated in the State of New York in 1947. Reference to
the Company includes its subsidiaries, where applicable. The Company's principal
executive offices are located at 463 Seventh Avenue, New York, NY. Its phone
number at such offices is 646-473-4200.
TRADEMARKS AND LICENSING
The Company has registered the trademark Members Only(R) in the United
States and 47 other countries, principally for use in connection with apparel
and other men's clothing.
The Company is the registered owner of the XOXO(R) and Fragile(R)
trademarks in the United States. It is also the registered owner of XOXO(R) in
24 other countries in various classifications, and has registrations pending in
23 other countries for XOXO(R) principally for use in connection with the
manufacture and sale of women's sportswear and accessories.
The Company considers its Trademarks to be of material importance to its
business.
MEMBERS ONLY LICENSING
In addition to the Grupo Agreement, the Company has granted licenses of the
Members Only(R) trademark for the manufacture and sale of eyewear.
XOXO(R) LICENSING
In addition to the Grupo agreement, the Company has granted domestic
licenses to use XOXO(R) and, in some cases, Fragile(R) for the manufacture and
sale of the following product categories: eyewear, activewear essentials,
outerwear, footwear, swimwear, handbags, leather and suede sportswear, girls
sportswear, girls swimwear, girls outerwear, school supplies and cell phone
accessories. In addition, the Company has granted master licenses for use of the
XOXO(R) trademark in Mexico, Canada, Central America, portions of South America,
Japan and the Middle East. The Company is in discussions with various groups to
enter into license or distributorship agreements in Central Europe, Australia,
South Africa, China and Southeast Asia.
LICENSE AGREEMENTS FOR TRADEMARKS OWNED BY OTHERS
Baby Phat. The Company is party to a license agreement with Phat Fashions
LLC to manufacture and sell casual apparel for women in all fabrics, excluding
swimwear and accessories, under the Baby Phat(R) trademark for a term which
commenced on July 1, 1999 and expires on December 31, 2004. The Company was
granted ten renewal terms of five years each. Pursuant to the agreement, the
Company is obligated to pay a royalty equal to 8% of its net sales of regularly
priced products, and 6% of net sales at outlet stores, or for items sold at 25%
or more below the Company's regular selling prices. Pursuant to the agreement,
the Company's minimum guaranteed
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royalties range from $960,000 in the first year of the agreement to $1,920,000
in 2004. Its minimum advertising payments equal 3% of the minimum sales
requirements.
The Company has assigned the Baby Phat license to Grupo. The Company still
oversees the design, sales and marketing of Baby Phat products to be sure that
the product that is distributed is correct for the licensor. The Company's Baby
Phat branded products are distributed in approximately 1,300 stores, primarily
in specialty and department stores in the United States. The Company remains
responsible for the obligations under such agreement, but is entitled to
indemnification from Grupo if it fails to perform those obligations.
Grupo failed to timely report its net sales of Baby Phat products for the
year ended December 31, 2001, and failed to make certain payments required under
the Baby Phat License Agreement. As a result, Phat Fashions sent a notice
terminating the Baby Phat Licensing Agreement. Management is currently in
discussion with Phat Fashions regarding a cure of Grupo's breaches and, although
no assurances can be given, is confident that the notice of termination will be
rescinded.
Brooks Brothers Golf. At the end of 2001, Grupo discontinued use of the
Brooks Brother Golf trademark and Brooks Brothers terminated the Company's
license.
The following table summarizes the Company's licenses and sub-licenses:
LICENSEE DESCRIPTION
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Grupo Xtra of New York, Inc. XOXO, Fragile and Members Only license and
Baby Phat sub-licensee for jeanswear and
sportswear in U.S., Puerto Rico, Caribbean
Islands and Israel
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3743233 Canada Inc. XOXO clothing and accessories in Canada
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Accessory Exchange XOXO handbags and small leather goods
including backpacks and purses in the U.S,
its territories and possessions
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Al Sawani XOXO clothing and accessories in the Middle East
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Global Brand Marketing XOXO footwear worldwide
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Gottex Models Inc. XOXO and Fragile swimwear and beachwear in
the U.S., U.K., Spain, Germany, France,
Italy, Benelux and Hong Kong
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Grupo Aviara, S.A. de C.V. XOXO and Fragile clothing and accessories
in Mexico
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Itochu Corporation XOXO clothing and accessories in Japan
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Kids Headquarters/Wear Me XOXO and Fragile clothing apparel for girls
Apparel sizes 0-16 in the U.S.
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Koba Eyewear XOXO, Fragile and Members Only eyewear in the
U.S., Canada, Europe, Hong Kong and Korea
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New Attachments XOXO lycra-type essentials and basics such
as leggings, t-shirts and tank tops in
the U.S.
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North Shore Sportswear XOXO junior outerwear, including textile and
leather outerwear in the U.S., its territories
and possessions
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Plymouth Inc. XOXO arts & crafts school and stationery
supplies in the U.S. and Canada
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Robin International XOXO and Fragile outerwear and swimwear for
girls sizes 0-16 in the U.S., its territories
and possessions
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Grupo Zbeda XOXO and Fragile clothing & accessories in
certain South & Central American territories
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Motorola XOXO telephone components and accessories for
use with or part of a wireless device worldwide
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DESIGN, MANUFACTURING AND IMPORTATION
The following discusses the Company's business as conducted prior to the
Grupo Agreement.
Many of the Company's products were manufactured overseas by independent
factories, each of which was required to satisfy the Company's quality and
delivery standards, pursuant to design samples and specifications provided by
the Company. The Company imported products from Hong Kong, Korea, China,
Guatemala, the Philippines, Bangladesh, Sri Lanka, Indonesia, India, Taiwan,
United Arab Emirates, Cambodia, Nepal, Mexico, Thailand and the Dominican
Republic. In addition, XOXO utilized its own cutting facilities in California
and contracted with unaffiliated domestic third parties to finish its garments.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's licensed products are sold primarily to department and
specialty stores and national retail chains. The Company had sales to two
customers, namely Federated Department Stores and May Department Stores, that
represented 15% and 11%, respectively, of net sales for the year ended December
31, 2000. Currently, substantially all of the Company's revenues are derived
from royalties. During 2001, royalties from Grupo represented 74% of the
Company's royalty revenues.
COMPETITION
The Company's licensees sell products in markets which place a premium on
identifiable brand names. The Company's licensees compete with other apparel
manufacturers based on style, quality, value and brand recognition. The apparel
products sold by the Company's licensees, which are sold on the main selling
floors of its retail store customers, are facing increasing competition from the
expanded dedication of retail floor space to "designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to changes in
consumer buying patterns, weather conditions and other factors.
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EMPLOYEES
As of December 31, 2001, the Company and its subsidiaries had approximately
71 full and part-time employees on its payroll, principally in its retail
stores. This is a reduction from the 683 full and part-time employees as of
December 31, 2000 due the Company's transformation from a manufacturing and
distributing operation into a licensing operation.
FOREIGN SALES
Although the Company's licensees sell products in Canada, Mexico, South and
Central America and Japan, royalties from such sales have not comprised a
significant portion of the Company's licensing income. The Company is in
discussions with various groups to enter into license or distributorship
agreements in Central Europe, Australia, South Africa, China and Southeast Asia.
ITEM 2. PROPERTIES.
The Company currently has approximately 20,000 square feet of leased space
for its executive and sales offices and showrooms at 463 Seventh Avenue in New
York City, approximately 11,615 square feet of office and showroom space at 1466
Broadway in New York City for XOXO and Baby Phat and approximately 212,939
square feet in Commerce and Los Angeles, California for office, showroom,
manufacturing and distribution use in connection with the XOXO and Baby Phat
businesses. Grupo pays 100% of the rental expense for the space at 1466 Broadway
and California. The Company had outlet stores in the following locations at
December 31, 2001: Virginia, Florida, California, New Jersey, New York, Nevada,
Illinois and Pennsylvania of approximately 37,921 square feet, as well as
full-price retail stores in New York and California of approximately 14,700
square feet. Grupo has agreed to assume the leases for, and to operate, the
outlet stores. The Company has the option to terminate the Grupo Agreement and
re-license the brands to other interested parties or to take back the license
and operate the Company as a separate wholesale company using current management
and a cash infusion, if available. The Company is currently negotiating with
Grupo to take back the license and to operate the Company as a separate
wholesale company.
In January 2002, the Company decided to scale back its retail operations,
and has closed three of its four full-price retail stores subsequent to 2001.
The Company will record a restructuring charge in the first quarter of 2002 to
cover the exit costs from the three locations.
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial position and results of operations
at December 31, 2001. In addition, the Company is subject to the following:
Dorfman and Heimsohen v. Aris Industries, Inc.: An action was commenced in
the United States District Court by the plaintiffs, claiming they were dismissed
as sales representatives in violation of the Age Discrimination and Employment
Act. The Company denied the allegations of the complaint and vigorously defended
the action. During the first quarter of 2002, the Company agreed to settle the
action for $45,000, payable over five months.
Coronet Group, Inc. v. Europe Craft Imports, Inc.: Coronet has sued Europe
Craft Imports, Inc., a wholly-owned subsidiary of the Company, in the Supreme
Court of the State of New York, County of New York, claiming that Europe Craft
breached a license agreement as Licensor of the Members Only trademark to
Coronet, and seeking damages in the amount of approximately $1,000,000. Europe
Craft has counterclaimed for unpaid future royalties under the agreement and
intends to vigorously dispute Coronet's claims. The case is in the later stages
of pre-trial discovery. The Company intends to vigorously defend the action and
pursue its claim against Coronet.
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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. In particular, Aris denies
that it made the sale to Campers World that is the subject of its complaint.
Aris has yet to answer PEI's cross-claim. Aris currently intends to vigorously
defend the main action and cross-claim.
1411 TrizecHahn-Swig, LLC v. Aris: On March 1, 2001, TrizecHahnSwig, LLC,
the landlord of the Company's premises at 1411 Broadway, commenced a non-payment
proceeding against the Company in the Civil Court of the City of New York. The
proceeding sought rent arrears and possession of the premises. On December 19,
2001 said action was dismissed by Order by Honorable Robert Sackett, J.C.C.
Aris commenced an action against TrizecHahnSwig, LLC, in the Supreme Court of
the State of New York, County of New York, seeking a declaratory judgement that
the 1411 lease terminated as of January 31, 2001. This action was dismissed by
order of Honorable Sheila Abdus-Salaam, J.S.C. on May 22, 2001. Aris is
appealing this dismissal in the Apellate Division of the Supreme Court of the
State of New York, First Department. This appeal is pending. The Company has
surrendered possession of the premises at 1411 Broadway. In January 2002
TrizecHahnSwig, LLC, commenced a new action against Aris in the Supreme Court of
the State of New York, County of New York seeking rent arrears in the amount of
$703,000. The Company is defending this action, has noticed a motion to dismiss
and will defend the action and raise counter-claims. TrizecHahnSwig, LLC, has
offered to settle this matter in exchange for a payment of $1,000,000 by the
Company. The Company is currently evaluating this offer.
Guy Kinberg v. Aris: In December 2001, Guy Kinberg, the former head of
production for the Company, commenced an action in the Supreme Court of the
State of New York, County of New York, claiming that his termination by the
Company breached his employment agreement. Kinberg is seeking $1,200,000 in
damages, representing salary and severance under the agreement. The Company
believes it had cause to terminate the agreement and intends to vigorously
defend the action.
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.
-6-
Minolta Business Solutions, Inc. v. XOXO: On August 28, 2001, Minolta
Business Solutions, Inc. ("Minolta") filed a complaint in the Los Angeles
Superior Court alleging breach of contract and various related claims against
XOXO. Minolta and XOXO had entered into a three-year lease whereby Minolta would
provide color copier equipment to XOXO. The lease was cancelled because XOXO was
not satisfied with Minolta's copier equipment, and Minolta now claims that XOXO
still owes it $49,038.97 as a result of that cancellation. XOXO disputes that
any amount is owed to Minolta at all, and intends to defend the matter
vigorously. The matter is set for trial on August 5, 2002, and the prevailing
party may be liable to pay the other party's attorneys' fees and other
litigation expenses.
Fashion World-Santa v. Lola, Inc.: On February 11, 2002, Fashion
World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the
Los Angeles Superior Court. That action sought to evict Lola, on grounds of
non-payment of rent, from an XOXO retail store located in Beverly Hills,
California. Lola is a party to a five-year lease for that store, and that lease
does not expire until April 2006. XOXO Clothing Company, Inc. responded to the
complaint as successor in interest to Lola, Inc., denying the material
allegations of the complaint, and asserting other affirmative defenses. On
February 27, 2002, XOXO vacated the property and returned possession of the
premises to the plaintiff. On March 11, 2002, the Superior Court set the matter
for trial on April 8, 2002, although it is not expected that this trial date
will be continued now that possession of the premises is not at issue. XOXO
wishes to pursue a settlement with the plaintiff but also intends to contest the
plaintiff's allegations and defend the action if necessary. Under the terms of
the lease, XOXO may potentially be liable for approximately $1.8 million in
future rent, plus attorneys' fees and costs, but that figure should be reduced
substantially as a result of the plaintiff's obligation to mitigate its damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter (OTC) market
under the symbol AISI. Set forth below are the high and low bid prices for a
share of the Common Stock for each fiscal quarter during the prior two fiscal
years, as reported in published financial sources. Pursuant to the terms of the
Company's loan agreements, the Company has agreed not to declare or pay any
dividends (other than stock dividends) on the Common Stock without the prior
written consent of its lenders. The Company has not paid any dividends during
the last two fiscal years and does not intend to pay any cash dividends in the
foreseeable future. The price quotations set forth below reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
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High Low
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2000 First Quarter $2.0000 $1.0000
Second Quarter 1.0625 0.7500
Third Quarter 0.9375 0.4000
Fourth Quarter 0.4000 0.1400
2001 First Quarter $0.7500 $0.3300
Second Quarter 0.5000 0.3100
Third Quarter 0.4500 0.2100
Fourth Quarter 0.3700 0.1500
There were approximately 3,610 shareholders of record as of March 15, 2002.
RECENT SALES OF UNREGISTERED SECURITIES
In February 2001, the Company entered into a Securities Purchase Agreement
with KC Aris Fund I, L.P. ("KC") pursuant to which the Company was to issue
Convertible Debentures for $10,000,000 to KC. Pursuant to the Debentures, which
mature in three years and bear interest at the rate of 8.5% per annum payable
quarterly in arrears, KC may convert the unpaid principal and any accrued
interest into shares of common stock at a conversion price of $.46 per share. KC
purchased only $7,500,000 of Debentures, convertible into 16,304,347 shares of
Common Stock. The issuance and sale of the Debenture were exempt from
registration under Section 4(2) of the Securities Act as a transaction not
involving a public offering.
In March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to Tarrant,
with a value of $1,050,000. The Company agreed that, in the event the market
value of such shares as of December 31, 2001 is less than $3,300,000, the
Company will either, at its option (x) pay to Tarrant in cash an amount, or (y)
issue to Tarrant additional shares of common stock having a share value, equal
to the difference between $3,300,000 and the greater of the share value as of
December 31, 2001 and $1,050,000. In February, 2002, the Company issued
6,617,647 shares of its common stock pursuant to the Agreement. The issuance of
shares to Tarrant was exempt from registration under Section 4(2) of the
Securities Act as a transaction not involving a public offering.
-8-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except for per share data)
Year Ended Year Ended Year Ended Year Ended Year Ended
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12/31/01 12/31/00 12/31/99(2) 12/31/98(1) 12/31/97
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Net sales $46,808 $199,439 $175,359 $127,680 $94,359
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(Loss) income before extraordinary
items (5,432) (36,480) (10,583) (4,250) 2,333
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Net (loss) income (3,434)(3) (36,480) (10,583) (3,728) 2,333
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Net (loss) earnings per share
before extraordinary items-basic (.07) (.46) (.19) (.29) .18
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Net (loss) earnings per share
before extraordinary items- (.07) (.46) (.19) (.29) .16
diluted
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Net (loss) earnings per share- (.04) (.46) (.19) (.25) .18
basic
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Net (loss) earnings per share- (.04) (.46) (.19) (.25) .16
diluted
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Total assets 48,696 100,209 106,117 77,332 73,837
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Long-term debt 7,500 5,242 14,342 16,438 16,930
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Working capital/(deficit) (28,334) (33,283) 7,419 9,551 11,738
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Stockholders' equity 1,177 3,486 39,251 14,092 17,814
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1. Includes results of operations and assets and liabilities of Davco from its
acquisition on July 15, 1997.
2. Includes results of operations and assets and liabilities of XOXO from its
acquisition on August 10, 1999.
3. Includes loss of $1,272,000 related to the Company's retail store
operations. The Company closed three of its four retail store locations in
the first quarter of 2002. .
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the "Selected Financial
Data" included on page 9, and pages F-1 through F-29, respectively, of this
Annual Report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including the ability of the Company to satisfy the conditions
and requirements of the credit facilities of the Company, the effect of national
and regional economic conditions, the overall level of consumer spending, the
performance of the Company's products
-9-
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures relating to contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses for the reporting period. The most significant
estimates relate to the allowances for sales returns, discounts, credits and
doubtful accounts, inventory valuation allowances, recoverability of long-lived
assets and valuation allowances on deferred tax assets. Actual results could
differ from those estimates.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company evaluates the carrying value of
its long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying assets when indications of impairment
are present. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value.
In 2001, the Company recorded an impairment charge of $242,000 on leasehold
improvements with respect to former office spaces which are currently being
sub-leased out. Estimated future cash flows related to these premises indicated
that the net assets are not recoverable. The Company also recorded an impairment
charge of $220,000 which represented the net book value of various computer and
other equipment that has become idle as a result of the transition of the
Company into a licensing and brand management business. In 1999, the Company
recorded an impairment charge of $3,749,000 with respect to goodwill associated
with its Perry Ellis licenses as a result of a change in the terms of the
licenses. At December 31, 2001 and 2000, goodwill consists of the costs
associated with the acquisition of the Company's XOXO(R) and Members Only(R)
tradenames. On January 17, 2001, effective March 1, 2001, the Company entered
into the Agreement and commenced a transition to a licensing and brand
management business. Based on the expected cash flows from this business, the
Company concluded that the carrying amount of goodwill would be fully recovered
over its remaining amortization periods. However, the Company will continue to
evaluate the actual and expected results from this business and reassess its
conclusions with respect to any potential impairment of goodwill in 2002. If it
is determined that goodwill is impaired, then an impairment charge will be
recorded to reduce goodwill to its fair value. Such charge could have a material
adverse effect on the Company's financial position and results of operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". The
-10-
Company will be required to adopt the provisions of SFAS 142 effective January
1, 2002. Under SFAS 142, goodwill and other intangible assets with indefinite
useful lives will no longer be systematically amortized. Instead such assets
will be subject to reduction when their carrying amounts exceed their estimated
fair values based on impairment tests that will be made at least annually. SFAS
142 also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption. The Company expects that the adoption
of SFAS 142 will reduce annual amortization expense by approximately $1.8
million. Additionally, based on expected cash flows under the Grupo and other
license agreements, the Company does not expect to incur goodwill and other
intangible asset impairment charges associated with the adoption of this
statement other than a $0.4 million charge in the first quarter of 2002 related
to the closing of the retail stores. However, no assurance can be given that, in
the event the Company does terminate its license agreement with Grupo, a
potential future impairment charge will not be required. In addition, in August
2001, FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144, addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Among other things, SFAS 144,
provides guidance on the implementation of previous pronouncements related to
when and how to measure impairment losses and how to account for discontinued
operations. Management does not believe that the adoption of SFAS 144 will have
a material impact on the Company's financial position, results of operations or
cash flows.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. However, as shown in the accompanying consolidated financial
statements, the Company has incurred losses for the three year period ended
December 31, 2001. As of December 31, 2001, the Company had a working capital
deficit of $28,334,000 and was not in compliance with certain covenants
contained in its credit facilities. On January 18, 2002, the Company entered
into a Forbearance Agreement with its lenders that indicated that they have no
current intention to take action with respect to such non-compliance but have
not waived the covenant violations. As of April 15, 2002, the Company has not
made its March 31, 2002 payment against its revolving line of credit or its
April 1, 2002, term loan payment aggregating $1,002,000. Accordingly, the
Company is in default of the Forbearance Agreement. The Company and CIT are
currently negotiating the Company's financing.
The Company plans to finance its operations in 2002, through (i) cash received
from the realization of receivables, inventory and due from licensee aggregating
$7,422,000, at December 31, 2001, (ii) negotiated reductions and or extended
payment terms with creditors of the Company, (iii) negotiation of extended
payment term of existing finance agreements and (iv) minimum royalties of
$12,617,000 which the Company is due under the Grupo Agreement and from its
additional licensees.
The Company believes that its financing plan will be sufficient at least through
December 31, 2002, to sustain its operations as a licensing and brand management
business and to payoff indebtedness under the credit facility and the term loan.
However, there can be no assurance that the timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
entity's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company has the option to terminate the Grupo Agreement and
re-license the brands to other interested parties or to take back the license
and operate the Company as a separate wholesale company using current management
and a cash infusion, if available. The Company is currently negotiating with
Grupo to take back the license to operate the Company as a separate wholesale
company.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had a working capital deficit of
approximately $28,334,000 as compared to a working capital deficit of
approximately $33,283,000 at December
-11-
31, 2000. The reduction in the working capital deficit was due to the proceeds
received by the Company from the sale of Debentures, the reversal of the
restructuring reserve relating to the Company's New Bedford warehouse facility,
settlement of trade obligations at a discount and a benefit from the sale of
inventory that had been deemed obsolete and written down and was subsequently
sold to Grupo at original cost. This was partially offset by the Company's net
loss for the year ended December 31, 2001 and the classification of the BNY debt
as current at December 31, 2001 in accordance with the terms of the note. During
this period, the Company financed its working capital requirements and capital
expenditures principally through its credit facilities, sale of Debentures, a
loan from its principal stockholder, the ongoing purchase of the Company's
inventory by Grupo along with licensing revenue from Grupo and the Company's
other licensees.
On January 18, 2002, the Company entered into a forbearance agreement with
CIT. 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 CIT's revolving line of credit and the remaining $500,000 was applied
against the term loan, (ii) the Company is required to reduce the balance of the
revolving credit facility and certain other amounts due CIT on a monthly basis
through July 31, 2002 at which time the balances are to be repaid in full. If
the outstanding balance of the revolving credit facility and certain other
amounts due CIT 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 is required to make installments of $500,000 on April
and July 1, 2002 and the remaining balance is 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. As of April 15, 2002, the Company has not made its
March 31, 2002 payment against its revolving line of credit or its April 1,
2002, term loan payment aggregating $1,002,000. Accordingly, the Company is in
default of the Forbearance Agreement. The Company and CIT are currently
negotiating the Company's financing.
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 December 31, 2001, with certain
covenants contained in its loan agreements. The Company's lenders, under the
January 18, 2002 forbearance agreement, 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 Grupo Agreement, the Company no longer needed financing
to purchase inventory or to finance future accounts receivable. During 2001, the
Company reduced its revolving line of credit from $38,679,000 to $4,485,000
through the collection of accounts receivable and the sale of inventory to Grupo
pursuant to the Grupo Agreement. As of March 1, 2002, the revolving line of
credit has been further reduced to approximately $1,752,000.
In June 2000, First A.H.S. Acquisition Corp. ("AHS") a company owned by the
Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, the chief executive officer
entered into a guaranty agreement limited to $7,000,000 of the reimbursement of
AHS'
-12-
obligations under the Letter of Credit Agreement. AHS owes its lender
approximately $7,060,000 under the Letter of Credit Agreement, and the Company
owes AHS the same amount.
In February 2001, the Company entered into a Securities Purchase Agreement
with KC Aris Fund I, L.P. ("KC") pursuant to which the Company is 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. To
date, KC has purchased $7,500,000 of Debentures, convertible into 16,304,347
shares of Common Stock. The Company used the proceeds to pay down a portion of
the borrowings under its revolving credit facility. At December 31, 2001, the
Company was delinquent in paying the quarterly interest payments due on July 31
and October 31, 2001. The Company made the quarterly interest payment due July
31, 2001 in January 2002 and KC has agreed not to call a default if the Company
pays the October 31, 2001 payment on March 29, 2002. As of April 15, 2002, the
Company has not paid the interest payment due October 31, 2001, aggregating
approximately $163,000, and KC has not called a default but no assurance can be
given that KC will not call a default. In the event that KC calls a default, the
balance of $7,500,000 will become due and payable on demand. On April 10, 2002,
the chief executive officer of the Company received a letter from the general
partner ("GP") of KC stating that the limited partners ("LP") of KC have
instructed the GP of KC to give the Company until April 17, 2002, to pay the
overdue 2001 interest and until May 10, 2002, to pay the remaining overdue 2002
interest. The LP's have instructed the GP, in the event that these deadlines are
not met, to take all necessary measures to put the Company in default and
collect upon the debt.
If the Company does not terminate Grupo's license, it intends to finance
its ongoing operations from royalty revenues from Grupo and other licenses. If
the Grupo license is terminated the Company will re-license the brands to other
interested parties or take the license back and operate it as a separate
wholesale company using current management and a cash infusion. The Company is
currently negotiating with Grupo to take back the license and operate it as a
separate wholesale company.
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 $5,842,000. On October 23,
2001, the Company received a forbearance from BNY relating to the $1,100,000
principal payment due November 5, 2001. Under the terms of the forbearance, the
Company paid BNY $500,000 in principal along with the normally scheduled
interest payment on November 5, 2001 and received a deferral until March 3, 2002
on the balance of $600,000 principal due. On February 21, 2002, the Company
received a further forbearance on the $600,000 principal payment that was due on
March 3, 2002. BNY has agreed to defer this principal amount as follows; $50,000
due on July 1, 2002; $100,000 due on July 31, 2002 and $450,000 due on September
3, 2002. The balance of BNY's Note, $5,242,000, is payable on November 3, 2002.
CAPITAL EXPENDITURES. By virtue of the change in the nature of the
Company's operations, the Company's capital expenditures for 2001 were
immaterial.
-13-
RESULTS OF OPERATIONS:
2001 Compared to 2000
The Company reported a net loss of $3,434,000 for the twelve months ended
December 31, 2001 compared to a net loss of $36,480,000 for the twelve months
ended December 31, 2001. The Company's loss was, in part, attributable to a loss
of $1,272,000 related to its retail store operations. In January 2002 the
Company implemented a plan to close three of its four retail store locations,
which were unprofitable, and will take a charge in the first quarter of 2002. In
addition, the Company's loss was attributable to phase-out costs associated with
the consolidation of its facilities, reduction of its workforce and legal
expenses incurred as the Company continues its negotiated settlements with its
vendors, offset by reversals aggregating approximately $5,600,000 of
restructuring and inventory reserves related to previously reserved inventory
that was subsequently sold to Grupo at original cost and by significant
reduction of interest expense as the result of the Company's paying down its
revolving credit facility from $38,679,000 at December 31, 2000 to $4,485,000 at
December 31, 2001 along with a series of reductions in the prime lending rate.
The Company's results in 2000 were negatively impacted by the termination of the
Company's "Fubu" license which resulted in the Company's incurring substantial
markdowns in order to liquidate remaining inventory. In addition, the Company
also incurred markdowns on its Perry Ellis product lines in connection with the
termination of the Company's relationship with Perry Ellis. The loss in 2000
also included restructuring and other charges of $7,040,000 consisting of (i)
severance costs, and (ii) occupancy charges relating to termination of leases as
part of the consolidation of facilities along with the write-off of the related
abandoned assets pertaining to terminated facilities. In addition, the Company
incurred $1,862,000 in start-up costs associated with new licensing arrangements
some of which have subsequently been cancelled. Additionally, interest expense
increased due to interest on the Company's $10,000,000 term loan dated August
10, 1999, an increase in borrowings on the Company's revolving credit facility
and increases in the borrowing rate from 7.75% to 9.5% by December 31, 2000.
REVENUES.
Sales to Customers
The Company's net sales to customers decreased from $199,439,000 during the
twelve months ended December 31, 2000 to $28,441,000 during the twelve months
ended December 31, 2001. This decrease of $170,998,000 was due to the Company's
transition from a manufacturing and distributing operation into a licensing and
brand management business along with the discontinuance of formerly licensed
product lines. This transition to a licensing company substantially reduced
sales but increased royalty revenues derived from the Company's Members Only,
XOXO and Fragile trademarks.
Sales to Licensee
The decrease in sales to customers during the twelve months ended December
31, 2001 was partially offset by non-recurring sales of $18,367,000 of inventory
to the Company's new licensee under its Agreement to purchase inventory from the
Company at cost.
Royalty Income
The Company's royalty income increased from $2,737,000 during the twelve
months ended December 31, 2000 to $11,389,000 for the twelve months ended
December 31, 2001. This increase was primarily attributable to $8,423,000 in
royalty income earned under the Company's license Agreement with Grupo. For the
calendar year 2001 the guaranteed minimum royalty due from Grupo was $8,100,000.
In addition to the Grupo Agreement, royalty revenues derived from the license of
the Company's Members Only, XOXO and Fragile trademarks in the following
categories of mens sportswear, mens tailored suits and sportcoats, eyeglasses,
activewear essentials, shoes, swimwear,
-14-
handbags, leather and suede sportswear, girls sportswear, girls swimwear, girls
outerwear and school supplies, increased from $2,737,000 for the twelve months
ended December 31, 2000 to $2,966,000 during the twelve months ended December
31, 2001. This increase is due to the Company's ongoing program of expanding its
licensing base.
Commission Income
During the twelve months ended December 31, 2001 the Company earned
$660,000 in selling commissions from Grupo on sales of Members Only products.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 2001
was $24,728,000 or 42.0% of revenues compared to $57,937,000 or 28.7% of
revenues for the twelve months ended December 31, 2000. Gross profit as a
percentage of revenues was positively impacted by an increase in royalty income
as the Company completed its third full quarter as a licensing and brand
management business and a reduction in the Company's reserve for inventory
obsolescence of approximately $4,000,000 related to the sale at original cost of
previously reserved inventory.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and Administrative expenses
were $28,071,000 or 47.7% of revenue for the twelve months ended December 31,
2001 as compared to $78,703,000 or 38.9% of revenue for the twelve months ended
December 31, 2000. The increase in Selling and Administrative expenses as a
percentage of revenues is attributable to the Company's transition into a
licensing and brand management business. Under the terms of the Agreement,
effective March 1, 2001 Grupo assumed the majority of the Company's
responsibilities for Selling and Administrative expenses except for expenses
relating to the Company's corporate functions and costs incurred in the
operation of the Company's New Bedford warehouse, which closed on June 22, 2001.
START-UP COSTS. During the twelve months ended December 31, 2000, the
Company incurred $1,862,000 of start-up costs relating to various license
agreements. These start-up costs consisted of salaries, samples and related
supplies directly attributable to newly licensed operations. The Company did not
incur such costs during fiscal 2001.
RESTRUCTURING AND OTHER COSTS. During the twelve months ended December 31,
2001, the Company recognized a recovery of approximately $1,679,000 of
restructuring charges that were accrued in the fourth quarter of 2000 relating
to the remaining rent due under the Company's lease of its New Bedford,
Massachusetts warehouse. Under the terms of the settlement agreement reached
with its landlord, the Company was released from all obligations under the lease
in exchange for cash payments of $850,000.
During 2000, the Company recorded charges of $7,040,000 associated with the
restructuring of its operations. The Company, through September 30, 2000,
recorded a restructuring charge of $1,315,000. The charges consisted of employee
severance and other costs. During the fourth quarter of 2000, the Company's
board of directors approved and the Company announced a revised restructuring
plan which includes moving and consolidating its headquarters, showrooms and
warehouses into its existing XOXO facilities located in California. This plan
resulted in a charge of $5,725,000. The charge consisted of property and
equipment write-downs of $1,538,000, net of salvage costs, and lease termination
costs of $4,187,000. At December 31, 2000, the Company had a remaining liability
of $4,187,000 related to lease termination costs which amounts are included in
accrued expenses. As of December 31, 2001, the remaining restructuring liability
was approximately $567,000.
INTEREST EXPENSE. Interest expense for the twelve months ended December 31,
2001 was $3,215,000 as compared to $6,779,000 for the twelve months ended
December 31, 2000. This
-15-
decrease was primarily attributable to a reduction in borrowings under the
Company's financing agreement, from $38,679,000 at December 31, 2000 to
$4,485,000 at December 31, 2001, as a result of the transition into a licensing
and brand management business, as previously discussed, along with reductions in
the prime lending rate offset by interest incurred on the $7,500,000 Convertible
Debentures financing during the period and related party loans.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS. The Company had
approximately $105,000,000 of net operating loss carryforwards ("NOL") at
December 31, 2001. The NOL's expire in varying amounts between 2001 and 2021. As
a result of the change in control of the Company caused by the Simon Purchase
Transaction, the utilization of approximately $57,000,000 of these NOL's are
limited by Section 382 of the Internal Revenue Code to approximately $1,500,000
annually. Accordingly, the Company expects that a significant portion of these
NOL's will expire. The remaining NOL's were incurred subsequent to the Simon
Purchase Transaction and are not subject to the limitation.
2000 Compared to 1999
NET INCOME. The Company reported a net loss of $ 36,480,000 for the twelve
months ended December 31, 2000 compared to a net loss of $ 10,583,000 for the
twelve months ended December 31, 1999. The Company's results in 2000 were
negatively impacted by the termination of the Company's "Fubu" license which
resulted in the Company's incurring substantial markdowns in order to liquidate
remaining inventory. In addition, the Company also incurred markdowns on its
Perry Ellis product lines in connection with the termination of the Company's
relationship with Perry Ellis. The loss in 2000 also included restructuring and
other charges of $7,040,000 consisting of (i) severance costs, and (ii)
occupancy charges relating to termination of leases as part of the consolidation
of facilities along with the write-off of the related abandoned assets
pertaining to terminated facilities. In addition, the Company incurred
$1,862,000 in start-up costs associated with new licensing arrangements some of
which have subsequently been cancelled. Additionally, interest expense increased
due to interest on the Company's $10,000,000 term loan dated August 10, 1999, an
increase in borrowings on the Company's revolving credit facility and increases
in the borrowing rate from 7.75% to 9.5% by December 31, 2000.
The loss in 1999 included restructuring and other charges, consisting of
(i) $2,401,000 in severance payments pursuant to the Retention Agreement between
the Company and its former President, (ii) a nonrecurring charge of $3,749,000
in connection with the write-off of impaired goodwill, and, (iii) additional
charges of $2,811,000 relating to the consolidation of the Company's operations
and facilities. The 1999 loss also included start-up costs associated with new
licensing arrangements of $2,235,000. Additionally, due to the adverse retail
environment the Company gave accommodations, in the form of markdowns, to
customers to help them alleviate the generally poor sales at the retail level.
This loss was partially offset by an improvement in operations attributable to
increased sales and margins along with a reduction of interest expense due to
the conversion of Apollo debt to equity and the reduction of borrowing due to
the infusion of funds from the Simon Purchase Transaction
NET SALES. The Company's net sales increased from $175,359,000 during the
twelve months ended December 31, 1999 to $199,439,000 during the twelve months
ended December 31, 2000. This increase of $24,080,000 was due to an increase in
sales of XOXO products of $55,262,000, including XOXO outlet and retail store
sales (XOXO was acquired by the Company on August 10, 1999 and its sales were
included in 1999 revenues only from that date). In addition, the Company's net
sales were positively impacted by $9,946,000 in sales attributable to the roll
out of the Company's new "Baby Phat" product line and $2,505,000 attributable to
the roll out of the Company's "Brooks Brothers Golf" product line. These
increases in sales were offset by sales decreases of $23,365,000
-16-
in the "Fubu" product line, $12,442,000 in the Company's "Members Only" product
lines, $6,381,000 in private label sales and $1,445,000 related to "Perry Ellis"
and other discontinued product lines.
GROSS PROFIT. Gross Profit for the twelve months ended December 31, 2000
was $55,200,000 or 27.7% of net sales compared to $50,534,000 or 28.8 % for the
twelve months ended December 31, 1999. Gross profit was positively impacted by
sales of higher margin XOXO branded products for the entire year along with
higher margins on the Company's "Baby Phat" product lines. These increases were
offset by the significant markdowns taken in liquidating the Company's "FUBU"
product lines. In addition, the Company also incurred markdowns on its Perry
Ellis product lines in connection with the termination of the Company's
relationship with Perry Ellis. Margins on the Company's own Members Only product
line were negatively impacted by warming temperatures throughout the country
during its peak selling season which resulted in increased inventory levels
requiring the Company to markdown excess inventory to facilitate its sale.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $78,703,000 or 39.5% of net sales for the twelve months ended December 31,
2000 compared to $48,057,000 or 27.4% of net sales for the twelve months ended
December 31, 1999. The increase in selling and administrative expenses was
attributable to the inclusion of XOXO's selling and administrative expenses
which included approximately $4,055,000 of depreciation and goodwill
amortization including XOXO retail and outlet store operations. In addition,
selling and administrative expenses increased due to the inclusion of the XOXO
retail and outlet stores which have incurred significant expenses as a
percentage of sales due to the stores' limited market exposure in the short time
that they have been operating. Also, the Company incurred $2,021,000 of selling
and administrative expenses attributable to the Company's "Brooks Brothers Golf"
and "Baby Phat" product lines.
START-UP COSTS. During the twelve months ended December 31, 2000 the
Company incurred start-up costs of $1,862,000 relating to various license
agreements for newly launched and terminated product lines. These start-up costs
consist of salaries, samples and related supplies directly attributable to newly
licensed operations.
During the twelve months ended December 31, 1999 the Company incurred
$1,181,000 of start-up costs relating to various license agreements without any
related revenue. These start-up costs consist of salaries, samples and related
supplies directly attributable to the newly licensed operations. In addition,
the Company incurred $1,054,000 of start up costs in connection with the
relocation of its warehouse facilities.
INTEREST EXPENSE. Interest expense for the twelve months ended December 31,
2000 increased by $2,594,000 or 62% compared to the twelve months ended December
31, 1999. This increase was due to interest on the Company's $10,000,000 Term
Loan dated August 10, 1999, an increase in borrowings on the Company's revolving
credit facility, and increases in the prime lending rate from 7.75% as of
December 31, 1999 to 9.5% as of December 31, 2000. In addition, the amendment to
the Company's financing agreement increased the interest rate on the Company's
revolving credit facility from prime to prime plus one-quarter percent and
increased the interest rate on the Company's term loan from prime plus one-half
to prime plus three-quarter percent.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact on
its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL DATA.
(Unaudited) (in thousands except per share data)
Per Share
---------
Quarter Total Revenues Gross Profit Net Income/(Loss) Basic
- ------ -------------- ------------ ----------------- --------
2001
First $ 28,728 $ 8,470 $ (3,075) $(0.03)
Second 11,206 6,562 855 0.01
Third 8,922 5,921 199 0.00
Fourth 10,001 3,775 (1,413) (0.02)
-------- ------- --------
$ 58,857 $24,728 $ (3,434)
======== ======= ========
2000
First $ 43,451 $15,152 $(7,094) $(0.09)
Second 44,796 15,166 (5,528) (0.07)
Third 59,014 16,513 (3,362) (0.04)
Fourth 54,915 11,106 (20,496) (0.26)
-------- ------- --------
$202,176 $57,937 $(36,480)
======== ======= ========
The financial statements listed in the accompanying Index at Part IV, Item
14(a)1 are filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 10, 2001, the Company engaged J.H. Cohn LLP ("JHC") as the
Registrant's independent accountants for 2001, replacing PricewaterhouseCoopers
LLP (the "Former Accountants") as the Registrant's independent auditors. The
change was approved by the Registrant's board of directors.
The Former Accountants' report on the Registrant's consolidated financial
statements for the 1999 and 2000 did not contain any adverse opinion or
disclaimer of opinion and was not qualified as to audit scope or accounting
principles.
During 1999 and 2000 there were no disagreements between the Registrant and
the Former Accountants on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, nor were there
any "Reportable Events" within the meaning of Item 304(a)(1)(iv) of Regulation
S-K.
Prior to its engagement as the Company's independent accountant, JHC had
not been consulted by the Company with respect to the application of accounting
principles to a specific transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
The Former Accountants filed a letter with the Commission agreeing with the
foregoing statement.
-18-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages and principal occupations of the
current members of the Board of Directors and the executive officers of the
Company, their positions with the Company, their business experience during the
last five years and the year each was first elected a director of the Company.
Directors hold office until the next Annual Meeting of Shareholders and until
their respective successors are elected and qualify, provided that vacancies
occurring in the Board of Directors may be filled by vote of the Directors.
Officers of the Company serve at the pleasure of the Board of Directors of the
Company.
NAME AGE POSITION
- --------------------------------------------------------------------------------
Arnold H. Simon 56 Director, Chairman, Chief Executive Officer and
President of the Company.
- --------------------------------------------------------------------------------
Debra Simon 45 Director.
- --------------------------------------------------------------------------------
Howard Schneider 74 Director.
- --------------------------------------------------------------------------------
Mark Weiner 47 Director.
- --------------------------------------------------------------------------------
Paul Spector 59 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary.
- --------------------------------------------------------------------------------
Gregg Fiene 50 Vice Chairman and Director of the Company and Chief
Executive Officer of XOXO Clothing Company
- --------------------------------------------------------------------------------
Steven Feiner 34 Director and President of XOXO.
- --------------------------------------------------------------------------------
Joseph Purritano 43 Vice President - Sales.
- --------------------------------------------------------------------------------
ARNOLD H. SIMON became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 30 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in the Simon Group. Mr.
Simon is married to Debra Simon.
DEBRA SIMON became a Director of the Company on March 18, 1999. Ms. Simon
was Executive Vice-President and a Director of Designer Holdings Ltd. from March
1994 until December 1997, and was Vice-President of Rio Sportswear, Inc. from
1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
HOWARD SCHNEIDER became a Director of the Company on March 18, 1999. Mr.
Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
-19-
MARK S. WEINER became a Director of the Company on June 17, 2000. He is
currently, and for more than the past five years has been, president of
Financial Innovations, Inc., a private marketing and merchandising company. Mr.
Weiner was deputy treasurer of the Democratic National Committee from 1989 to
1993 and currently serves as treasurer of the Democratic National Governors
Association.
PAUL SPECTOR has been Senior Vice President and Chief Financial Officer of
the Company since May 1992 and Treasurer and Secretary of the Company since
August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the
Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
GREGG FIENE has been vice chairman of the Company's board of directors and
chief executive officer of the Company's XOXO subsidiary since August 10, 1999.
For more than five years prior to its acquisition by the Company, Mr. Fiene was
the chairman and chief executive officer and a principal shareholder of the
predecessor to XOXO.
STEVEN FEINER was appointed to the Board on March 23, 2000 to fill the
vacancy created by the death of David Fidlon. Mr. Feiner was appointed president
of XOXO in June 2000. Prior thereto, Mr. Feiner had been for more than the prior
five years, the owner and operator of various privately held apparel concerns.
JOSEPH PURRITANO has been Vice President of Sales of the Company since June
1999. From 1993 to 1997, Mr. Purritano was vice president of Calvin Klein
Jeanswear and from 1997 until June 1999, he was president of Calvin Klein
Jeanswear, which was acquired by Warnaco Group, Inc. in 1997.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the Company with respect to the fiscal year
ended December 31, 2001, no persons failed to file any such form in a timely
manner.
-20-
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
of the Company as of December 31, 2001 who received compensation in excess of
$100,000.
-21-
Long-Term
Annual Compensation Compensation
---------------------------------------------------------------------------------------
Securities
Other Underlying
Name and Fiscal Annual Stock All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation($)
- ------------------------------------------------------------------------------------------------------------------------------------
Arnold H. Simon, 2001 750,000 -- 107,983(7) -- --
Chairman, Chief 2000 734,615 -- 177,611(6) 1,250,000 52,275 (5)
Executive Officer of the 1999 634,615(1) 181,000 189,800(4) 1,000,000 26,137 (5)
Company and President
- ------------------------------------------------------------------------------------------------------------------------------------
Steven Feiner, 2001 355,771(8)(9) --
President of XOXO 2000 -- 900,000
1999 -- 150,000
- ------------------------------------------------------------------------------------------------------------------------------------
Gregg Fiene, 2001 230,768(9)
Vice Chairman, Chief 2000 749,996 -- 500,000
Executive Officer of 1999 281,250(2) -- 1,150,000
XOXO Clothing
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph Purritano, 2001 579,038
Vice President - Sales 2000 529,230 -- -- --
1999 288,462(3) 250,000 (3) -- 750,000
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Spector, 2001 176,250 100,000
Chief Financial Officer 2000 155,000 25,000
1999 140,000 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents salary from date of Simon Purchase Transaction, February 26,
1999.
(2) Represents salary since date of XOXO Transaction, August 10, 1999.
(3) Mr. Purritano joined the Company on June 10, 1999, and received a "signing"
bonus at that time.
(4) Includes $87,800 in tax and accounting services and $102,000 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement.
(5) Represents pro rata share of premiums for a life insurance policy a portion
of which Mr. Simon has the right to designate the beneficiary.
(6) Includes $147,775 in tax and accounting services and $29,836 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement
(7) Includes $43,950 in tax and accounting services and $64,033 in automobile
expenses paid on behalf of Mr. Simon pursuant to his employment agreement
(8) Mr. Feiner became an employee of the Company on June 13, 2000.
(9) Mr. Feiner and Mr. Fiene received $394,229 and $519,232, respectively, in
salary from Grupo in connection with Grupo's assumption of XOXO's
operations.
-22-
Option Grants
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the last fiscal year. No SARs
were granted during the last fiscal year.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
% of Options/ Weighted OF STOCK APPRECIATION
SARs Granted Average FOR OPTION TERM ($)
Options/SARs to Employees Exercise Expiration -----------------------------
NAME Granted during Fiscal Year Price/Share Date 5% per year 10% per year
- ---- ------- ------------------ ----------- ----------- ----------- ------------
Arnold H. Simon ......... -- -- -- -- -- --
Paul Spector ............ 100,000 67% $0.31 6/1/2011 $19,500 $49,411
Gregg Fiene ............. -- -- -- -- -- --
Joseph Purritano ........ -- -- -- -- -- --
Steven Feiner ........... -- -- -- -- -- --
Exercised/Unexercised Stock Options and Fiscal Year End Option Values
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 2001 of
unexercised options, as well as options exercised by such executive officers
during the 2001 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
-----------------------------------------------
Shares
Acquired Number of Securities Underlying Value of Unexercised
on Exercise Value Realized Unexercised Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- -------- ---------------------------------------------------------------- ----------------------------------
Arnold H. Simon ........ -0- -0- 1,666,667/583,333 $-0-/$-0-
Paul Spector ........... -0- -0- 214,999/75,001 $-0-/$-0-
Gregg Fiene ............ -0- -0- 1,483,333/166,667 $-0-/$-0-
Joseph Purritano ....... -0- -0- 500,000/250,000 $-0-/$-0-
Steven Feiner .......... -0- -0- 1,500,000/300,000 $-0-/$-0-
- --------------
(1) The value of unexercised in-the-money options was calculated by determining
the difference between the closing price of the Company's common stock on
December 31, 2001 and the exercise price of the options.
-23-
Compensation of Directors
In April 2000, the Company suspended cash fees to outside directors (i.e.,
those directors not employed by the Company or any of its subsidiaries). Each of
these directors was also entitled to receive reimbursement for expenses incurred
in attending meetings of the Board or committees thereof on which they serve. In
addition, each outside director was entitled to receive $500 per meeting of the
Committees of the Board to which they are assigned. No executive officer
received additional compensation for service as a Director. During 2000, each
outside director was granted options to purchase 100,000 shares of the Company's
common stock.
Employment Agreements
The Company has an employment agreement effective as of March 1, 1999 with
Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief
executive officer of the Company and its subsidiaries. The term of the agreement
is for three years, which expired on February 28, 2002. Pursuant to the
agreement, Mr. Simon's base salary is $750,000 per annum, subject to annual
review for increase (but not decrease) at the discretion of the Board. In
addition, the agreement provides for annual bonuses equal to 2% of adjusted
EBITDA if adjusted EBITDA is between $5 million and $10 million, and 3% of
adjusted EBITDA if adjusted EBITDA is in excess of $10 million.
The agreement entitles Mr. Simon to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, if the
Company's principal office or Mr. Simon's own office is relocated to a location
not within Manhattan, or if there are certain changes of control. In the event
of termination of Mr. Simon for good reason or if he is terminated without
cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his
highest annual base salary during the term of the agreement multiplied by 2.99
and a lump sum payment in an amount equal to the average bonus paid or payable
to Mr. Simon with respect to the then-immediately-preceding three fiscal years
multiplied by 2.99.
The Company is party to an employment agreement with Joseph Purritano
effective as of June 7, 1999, pursuant to which Mr. Purritano is to serve as
Executive Vice President in charge of sales for the Company and its subsidiaries
for a 3-year term expiring on June 6, 2002. Pursuant to the agreement, Mr.
Purritano is to receive an annual base salary of $500,000 in the first year of
the term, $550,000 per annum in the second year of the term, and $600,000 in the
third year of the term. In addition, he is entitled to an annual bonus based
upon the Company achieving certain EBITDA targets. As inducement to join the
Company, the Company agreed to grant Mr. Purritano 750,000 options to purchase
shares under the Company's stock option plan, and further paid Mr. Purritano a
bonus of $250,000.
Mr. Purritano has the right to terminate the agreement for "good reason",
which includes the assignment of any duties or responsibilities inconsistent in
any material respect with the contemplated scope of Mr. Purritano's services,
the Company's failure to substantially perform any material term of his
employment agreement, relocation of the Company's principal office or Mr.
Purritano's own office to a location not within Manhattan, a "change of control"
as defined in the agreement. In the event Mr. Purritano terminates the Agreement
for good reason or if his employment is terminated without cause, Mr. Purritano
is entitled to a lump sum payment in an amount equal to 100% of his annual base
salary then in effect. If the Company does not renew the Agreement, Mr.
Purritano is entitled to receive his base salary for an additional year.
In connection with the acquisition of XOXO, the Company entered into an
employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to
which Mr. Fiene is to serve as Vice
-24-
Chairman of the Board of Directors of the Company, Chief Executive Officer of
the Company's XOXO subsidiary and all divisions of the Company (present and
future) engaged in the female apparel industry and related ancillary industries,
and as chief executive officer, president, or in such other senior executive
position with respect to any of the Company's current or future subsidiaries as
he and the Chairman of the Board of Directors of the Company shall mutually
determine. Pursuant to the agreement, Mr. Fiene's base salary is $750,000 per
annum, and he is entitled to an annual bonus if the Company meets certain EBITDA
targets. The term of Mr. Fiene's agreement is for five years, ending on August
9, 2004. In the event Mr. Fiene is terminated without cause, or if he terminates
for "good reason", which includes any diminution of his duties under the
agreement, certain changes of control, he is entitled to a lump sum payment
equal to his highest annual base salary during the term multiplied by 2.99, and
a lump sum payment in an amount equal to his average annual bonus with respect
to the immediately preceding three fiscal years multiplied by 2.99.
In June, 2000, the Company entered into an employment agreement expiring
February 28, 2003 with Steven Feiner to serve as Executive Vice President of the
Company at an annual base salary of $150,000, subject to annual review, and an
annual bonus equal to 1% of adjusted EBITDA if adjusted EBITDA is between $5
million and $10 million, and 1.5% of adjusted EBITDA if adjusted EBITDA is in
excess of $10 million. The Company has raised Mr. Feiner's salary to $500,000.
The agreement entitles Mr. Feiner to terminate the agreement for a "good
reason", which includes any diminution of his duties under the agreement, the
Company's failure to perform its obligations under the agreement, or if there
are certain changes of control. In the event the termination of Mr. Feiner is
for good reason or if he is terminated without cause, Mr. Feiner is entitled to
a lump sum payment in an amount equal to his highest annual base salary during
the term of the agreement multiplied by 2.99 and a lump sum payment in an amount
equal to the average bonus paid or payable to Mr. Feiner with respect to the
then-immediately-preceding three fiscal years multiplied by 2.99
Mr. Paul Spector, the Company's Senior Vice President and Chief Financial
Officer, is contractually entitled to a severance payment if he is terminated by
the Company for reasons other than cause. The severance payment will equal
one-half of Mr. Spector's annual salary at the time of termination.
401(k) Plan
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee (the
"Committee") as of December 31, 2001 were Messrs. Simon, Schneider and Weiner.
Other than Mr. Simon, neither Committee member was (i) during the twelve months
ended December 31, 2001, an officer or employee of the Company or any of its
subsidiaries or (ii) formerly an officer of the Company or any of its
subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of March 15, 2002 by persons who are either (i) beneficial owners of 5% or more
of the Common Stock, (ii) named executive officers or directors of the Company,
and (iii) and all executive officers and directors as a group.
-25-
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
- ----------------------------------------------------------------------------------------------
Arnold Simon 44,745,045(2)(3) 48.2%
463 Seventh Avenue
New York, New York 10018
- ----------------------------------------------------------------------------------------------
Apollo Aris Partners, L.P. 16,818,806(3) 18.1%
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
- ----------------------------------------------------------------------------------------------
Paul Spector 164,999(5) *
463 Seventh Avenue
New York, New York 10018
- ----------------------------------------------------------------------------------------------
Gregg Fiene 4,343,333(5) 4.7%
6000 Sheila Street
Commerce, CA 90040
- ----------------------------------------------------------------------------------------------
Joseph Purritano 500,000(4)(5) *
463 Seventh Avenue
New York, NY 10018
- ----------------------------------------------------------------------------------------------
Debra Simon 66,667(5)(6) *
463 Seventh Avenue
New York, NY 10018
- ----------------------------------------------------------------------------------------------
Howard Schneider 66,667(5) *
Schneider Schechter & Yoss
1979 Marcus Avenue, Suite 232
Lake Success, NY 11042
- ----------------------------------------------------------------------------------------------
Mark Weiner 66,667(5) *
Weingeroff Enterprises
1 Weingeroff Boulevard
Cranson, RI 02910
- ----------------------------------------------------------------------------------------------
Tarrant Apparel Group 8,117,647 8.7%
3151 East Washington Blvd.
Los Angeles, Ca. 90023
- ----------------------------------------------------------------------------------------------
Steven Feiner 1,500,000(5) 1.6%
6000 Sheila Street
Commerce, CA 90040
- ----------------------------------------------------------------------------------------------
All persons who are executive officers or 51,453,378(5) 55.4%
directors of the Company, as a group (8 persons)
- ----------------------------------------------------------------------------------------------
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
-26-
(2) Includes 9,170,204 shares of Common Stock which were sold to two
unaffiliated third parties by The Simon Group LLC, but over which Mr. Simon
has voting and certain dispositive power. Includes 35,574,841 shares owned
by The Simon Group. Arnold Simon, the Managing Member of The Simon Group,
has sole voting and investment power with respect to the shares of the
Company held of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999 Equity
Registration Rights Agreement described in Item 13 below, containing
certain voting and other arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which such person holds a
membership interest. Such person has no power or authority to vote or
dispose of any shares held by The Simon Group, LLC, and disclaims
beneficial ownership of such shares.
(5) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(164,999), and Gregg Fiene (1,483,333), Joseph Purritano (500,000), Debra
Simon (66,667), Howard Schneider (66,667), Mark Weiner (66,667) and Steven
Feiner (1,500,000).
(6) Mrs. Simon disclaims beneficial ownership of shares beneficially owned by
Arnold H. Simon.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the latter part of 2000, First AHS Corporation, a company wholly
owned by Mr. Simon, opened up letters of credit for merchandise that the Company
required for sale to fulfill its orders. When the goods subject to those letters
of credit were received, First AHS sold them to the Company at cost. Currently,
the Company owes First AHS approximately $7,060,000 in connection with these
purchases and sales. In addition, Mr. Simon guaranteed $7 million of First AHS's
obligations to the Company's lenders in connection with the letter of credit
facility.
During 2000 and continuing to the present, Mr. Simon has guaranteed $3
million of the Company's indebtedness to its principal lender under its
financing agreement.
During 2001, the Company had sales of approximately $828,000 to Humane,
Inc., a company wholly owned by Steven Feiner. As of December 31, 2001, the
Company had receivables from Humane of $828,000.
During 2000, the Company had sales of approximately $14,286,000 to Humane,
Inc. In addition, Humane acted as agent for the Company in connection with sales
of certain of the Company's products to retailers in the United States. As of
December 31, 2000, the Company had receivables from Humane of $787,000 and
incurred commissions of $572,259 during 2000 and $593,734 in 1999.
As of December 31, 2001, the Company had trade payables of $758,523 to its
chief executive officer, $92,081 to Humane, Inc. and $5,200 to Schneider,
Schecter and Yoss.
In late January 2001, Mr. Simon loaned the Company $2,000,000. Such loan
bears interest at prime plus 1/4% per annum and is repayable upon demand by Mr.
Simon.
-27-
1999 Shareholders Agreement
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase
Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same consideration per share of Common Stock to be
received by The Simon Group in such transfers. Such tag-along rights will also
apply to certain transfers by Arnold Simon or his affiliates of their beneficial
ownership in The Simon Group after six months from the closing of the Simon
Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
1999 Equity Registration Rights Agreement
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
The XOXO Shareholders Agreement
In connection with the XOXO Transaction, the Company, The Simon Group, LLC,
and each of the former shareholders of Lola, Inc. entered into a shareholders
agreement which provides that each
-28-
Lola shareholder will vote his or her shares for the election of directors
nominated by Arnold Simon. The Agreement also provides that during its term,
Simon shall nominate and vote all of its shares of common stock for the election
of Gregg Fiene as a director of the Company provided that at such time Mr. Fiene
is employed as an executive officer of the Company. The Agreement contains
certain restrictions on the sale by Gregg Fiene and one other former Lola
shareholder of the Aris shares received in the XOXO Transaction and provides for
certain "tag-along" and "drag-along" rights in connection with such shares. The
Agreement also provides that in the event the Company registers any shares of
its Common Stock under the Securities Act of 1933, as amended, each former Lola
shareholder has the right to include a certain amount of his or her shares in
such registration statement. The term of the shareholders' agreement is for ten
years unless sooner terminated in accordance with its terms.
During 2001 and 2000, the Company reimbursed Mr. Simon for accounting and
tax services provided to Mr. Simon by Mr. Schneider's accounting firm in the
amount of $43,950 and $147,775, respectively. In addition, Mr. Schneider's firm
provided services to the Company amounting to approximately $45,050 in 2000.
-29-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Accountants' Report Page
----
Report of Independent Accountants....................................F-1
Report of Independent Accountants...................................F-1A
Financial Statements:
Consolidated Balance Sheets as of
December 31, 2001 and 2000..........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999....................................F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999..............................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999....................................F-5
Notes to Consolidated Financial Statements..........................F-7
2. Financial Statement Schedule
The following financial statement schedule should be read in conjunction
with the consolidated financial statements in Item 8 of this Annual
Report on Form 10-K:
Schedule II- Valuation and Qualifying
Accounts...............................................S-1
All other schedules are omitted because they are not applicable or
because the required information is included in the financial statements
or notes thereto.
(b) Reports on Form 8-K
There were none filed during the fourth calendar quarter ended December 31,
2001.
-30-
(c) INDEX TO EXHIBITS
-----------------
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
3.3 Restated Certificate of Incorporation filed on (3)
June 30, 1993
3.4 Amended and Restated By-Laws effective June 30, (3)
1993
3.5 Amendment to the Restated Certificate of (20)
Incorporation filed with the Secretary of State on
July 29, 1999
3.6 Amendment to the Restated Certificate of (21)
Incorporation filed with the Secretary of State in
January 2001
10.67 Series A Junior Secured Note Agreement dated as (3)
of June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of (3)
June 30, 1993 between Registrant and each member
of Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of (17)
February 26, 1999, between Aris Industries, Inc.,
Apollo Aris Partners, L.P., AIF, L.P., The Simon
Group, L.L.C. and Charles S. Ramat.
-31-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
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.
10.116 Agreement and Plan of Merger dated July 19, 1999 (19)
by and among Aris Industries, Inc., XOXO
Acquisition Corp. and Lola, Inc. and its
shareholders ("Agreement and Plan of Merger").
The exhibits and schedules to the Agreement and Plan of
Merger are listed on the last page of such Agreement. Such
exhibits and schedules have not been filed by the
Registrant, who hereby undertakes to file such exhibits and
schedules upon request of the Commission.
10.117 Amendment No. 1 to Agreement and Plan of (19)
Merger.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene, Michele
Bohbot and Lynne Hanson, dated August 10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing
Agreement, as Lenders; and The CIT
Group/Commercial Services, Inc. as Agent, dated
August 10, 1999.
10.122** Amended and Restated 1993 Stock Option Plan (16)
10.123** Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
-32-
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
- ----------- ----------- -------------------
10.126 Form Securities Purchase Agreement Dated as of (21)
February, 2001 between the Company and KC Aris
Fund I, L.P.
21. List of Subsidiaries (20)
23. Consent of J.H Cohn LLP (22)
23.1 Consent of PricewaterhouseCoopers LLP (22)
- ----------------
(1) Filed as the indicated Exhibit to the Annual Report of the Company on
Form 10-K for the fiscal year ended February 2, 1991 and incorporated
herein by reference.
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June
30, 1993 and incorporated herein by reference.
(4)-(9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with the
Commission on May 27, 1999, and incorporated herein by reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with
the Commission on or about April 13, 1999 and incorporated herein by
reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999.
(20) Omitted.
(21) Filed as the indicated Exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31,
2000 and incorporated herein by reference.
-33-
(22) Filed herewith
- -------------
* The Schedules and Exhibits to such Agreements have not been filed by the
Company, who hereby undertakes to file such schedules and exhibits upon
request of the Commission.
** Management contract or compensatory plan or arrangement.
-34-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By: /s/ ARNOLD H. SIMON
---------------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /s/ PAUL SPECTOR
---------------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /s/ VINCENT F. CAPUTO
---------------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ ARNOLD SIMON April 15, 2002
- -------------------------------
Arnold Simon, Chairman of the Board
and Chief Executive Officer; Director
/s/ STEVEN FEINER April 15, 2002
- --------------------------------
Steven Feiner, Director
/s/ GREGG FIENE April 15, 2002
- --------------------------------
Gregg Fiene, Director
/s/ DEBRA SIMON April 15, 2002
- -------------------------------
Debra Simon, Director
/s/ HOWARD SCHNEIDER April 15, 2002
- ----------------------------------------
Howard Schneider, Director
/s/ MARK WEINER April 15, 2002
- ----------------------------------
Mark Weiner, Director
-35-
ARIS INDUSTRIES, INC. F-1
AND SUBSIDIARIES
Financial Statements
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Aris Industries, Inc.
We have audited the 2001 consolidated financial statements and the 2001
financial statement schedule of ARIS INDUSTRIES. INC. AND SUBSIDIARIES listed in
the index appearing under Item 14(a) of this Form 10-K. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aris Industries,
Inc. and Subsidiaries as of December 31, 2001, and their results of operations
and cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
2001 financial statement schedule referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's operations have generated
recurring losses and the Company has a working capital deficiency as of December
31, 2001. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ J.H. COHN LLP
Roseland, New Jersey
March 13, 2002, except for Notes 1, 8, 11 and 15
which are as of April 15, 2002
F-1A
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Aris Industries, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2000 and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 2000 (appearing on pages F-2
through F-29 of the Aris Industries, Inc. Annual Report on Form 10-K for the
year ended December 31, 2001) present fairly, in all material respects, the
financial position, result of operations and cash flows of Aris Industries, Inc.
and Subsidiaries at December 31, 2000, and for each of the two years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has incurred recurring losses and negative
cash flows from operations and has a working capital deficit at December 31,
2000. These materials raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
New York, New York
March 28, 2001
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 457 $ 2,389
Receivables, net ................................... 1,152 33,888
Receivable from related party ...................... 828 787
Due from licensee .................................. 4,953 --
Inventories ........................................ 489 15,919
Prepaid expenses and other current assets .......... 269 572
--------- ---------
TOTAL CURRENT ASSETS .......................... 8,148 53,555
Property and equipment, net ........................... 5,730 9,963
Goodwill, net ......................................... 34,342 36,151
Other assets .......................................... 476 540
--------- ---------
TOTAL ASSETS .................................. $ 48,696 $ 100,209
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility ......... $ 4,485 $ 38,679
Loans payable to related parties ................... 9,060 --
Current portion of long-term debt .................. 11,842 9,700
Current portion of capitalized lease obligations ... 690 1,150
Accounts payable ................................... 7,050 26,354
Accounts payable to related parties ................ 885 --
Accrued expenses and other current liabilities ..... 2,470 10,955
--------- ---------
TOTAL CURRENT LIABILITIES ..................... 36,482 86,838
Long-term debt ........................................ 7,500 5,242
Capitalized lease obligations ......................... 950 1,478
Other liabilities ..................................... 2,587 3,165
--------- ---------
TOTAL LIABILITIES ............................. 47,519 96,723
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01,
authorized 10,000 shares, none issued
Common stock, par value $.01, 200,000 shares
authorized, 82,165 shares issued and
outstanding at December 31, 2001
and 80,665 shares issued and outstanding at
December 31, 2000................................. 822 807
Additional paid-in capital ......................... 81,760 80,753
Accumulated deficit ................................ (81,313) (77,879)
Unearned compensation .............................. (92) (195)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .................... 1,177 3,486
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 48,696 $ 100,209
========= =========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Sales to customers ....................... $ 28,441 $ 199,439 $ 175,359
Sales to licensee ........................ 18,367 -- --
Royalty income ........................... 11,389 2,737 2,571
Commission income ........................ 660 -- --
--------- --------- ---------
Total revenues ................................ 58,857 202,176 177,930
Cost of goods sold:
Cost of sales to customers ............... 19,057 144,239 124,825
Cost of sales to licensee ................ 15,072 -- --
--------- --------- ---------
Total cost of goods sold ...................... 34,129 144,239 124,825
--------- --------- ---------
Gross Profit .................................. 24,728 57,937 53,105
OPERATING EXPENSES:
Selling and administrative expenses ........ 28,071 78,703 48,057
Start-up costs ............................. -- 1,862 2,235
Impairment of long lived assets ............ 462 -- --
Restructuring and other charges ............ (1,679) 7,040 8,961
--------- --------- ---------
Loss before interest expense, income tax
provision and extraordinary item ........... (2,126) (29,668) (6,148)
Interest expense, net ......................... 3,215 6,779 4,185
--------- --------- ---------
Loss before income tax provision
and extraordinary item ..................... (5,341) (36,447) (10,333)
Income tax provision .......................... 91 33 250
--------- --------- ---------
Loss before extraordinary item ................ (5,432) (36,480) (10,583)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt, net ........ 1,998 -- --
--------- --------- ---------
NET LOSS ................................ $ (3,434) $ (36,480) $ (10,583)
========= ========= =========
BASIC NET LOSS PER SHARE:
Loss before extraordinary item ............. $ (0.07) $ (0.46) $ (0.19)
Extraordinary item ......................... .03 -- --
--------- --------- ---------
Net loss ................................... $ (0.04) $ (0.46) $ (0.19)
========= ========= =========
PER SHARE DATA:
Weighted average shares outstanding-basic 81,919 79,777 55,374
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARES F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
-------- -------- ---------- ----------- ------------ ---------
Balance at December 31, 1998 ..................... 14,956 $ 151 $ 44,757 $(30,816) $ 14,092
Common stock issued in connection with Simon
Transaction, net of transaction costs of 1,468 57,009 570 24,107 -- 24,677
Stock options exercised .......................... 969 9 429 -- 438
Common stock issued in connection with Lola, Inc.
acquisition ................................... 6,500 65 9,685 -- 9,750
Issuance of stock options in connection with
Lola, Inc. acquisition ........................ -- -- 805 -- 805
Issuance of stock options to employees/consultants -- -- 540 -- (540) --
Amortization of unearned compensation on
stock options ................................. -- -- -- -- 72 72
Net loss ......................................... -- -- -- (10,583) -- (10,583)
------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 ....................... 79,434 795 80,323 (41,399) (468) 39,251
Stock options exercised .......................... 231 2 114 -- -- 116
Common stock issued in connection with
settlement of FUBU royalty obligations ........ 1,000 10 290 -- -- 300
Issuance of stock options to consultants ......... -- -- 300 -- (300) --
Cancellation of compensatory stock options
issued to employees ........................... -- -- (274) -- 274 --
Amortization of unearned compensation on
stock options ................................. -- -- -- -- 299 299
Net loss ......................................... -- -- -- (36,480) -- (36,480)
------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 ....................... 80,665 807 80,753 (77,879) (195) 3,486
Common stock issued in connection with
settlement of Tarrant obligation .............. 1,500 15 1,035 1,050
Cancellation of compensatory stock options
issued to employees ........................... (28) 28 --
Amortization of unearned compensation on
stock options ................................. -- -- -- -- 75 75
Net loss ......................................... -- -- -- (3,434) -- (3,434)
------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 ....................... 82,165 $ 822 $ 81,760 $(81,313) $ (92) $ 1,177
======= ======== ======== ======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net (loss) ................................................... $ (3,434) $(36,480) $(10,583)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt .............. (1,998) -- --
Gain on settlement of licensing royalty obligations ....... -- (1,500) --
Impairment on property and equipment ...................... 462 -- --
Loss on disposal of property and equipment ................ -- 1,538 733
Depreciation and amortization of property and equipment ... 4,262 4,115 1,515
Amortization of goodwill .................................. 1,809 1,868 1,037
Amortization of deferred financing costs .................. -- 864 79
Provision for allowances on receivables ................... -- 1,807 2,773
Provision for obsolescence on inventory ................... -- 3,912 (453)
Provision for restructuring charges ....................... (1,679) 4,187 --
Impairment of goodwill .................................... -- -- 3,749
Issuance of notes in lieu of interest ..................... -- -- 108
Deferred income taxes ..................................... -- -- 137
Non-cash stock based compensation ......................... 75 299 72
Changes in assets and liabilities:
Decrease (increase) in receivables ...................... 31,908 (1,691) (11,393)
Increase in due from licensee ........................... (4,953) -- --
Decrease (increase) in inventories ...................... 15,430 (1,598) 18,376
Decrease (increase) in prepaid expenses and
other current assets ................................... 1,090 1,150 (575)
Decrease (increase) in other assets ..................... 64 517 (241)
(Decrease) increase in accounts payable ................. (15,371) 12,652 (2,685)
(Decrease) increase in accrued expenses and
other current liabilities .............................. (6,806) 4,563 (4,811)
(Decrease) increase in other liabilities ................ (578) 895 510
-------- -------- --------
Net cash provided by (used in) operating activities .. 20,281 (2,902) (1,652)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ......................................... (491) (4,608) (4,289)
Acquisition of businesses, net of cash acquired .............. -- -- (10,320)
-------- -------- --------
Net cash used in investing activities ................ (491) (4,608) (14,609)
-------- -------- --------
Cash flows from financing activities:
Book overdraft ............................................... -- (889) 1,544
Proceeds from issuance of common stock ....................... -- -- 20,000
Common stock issuance costs paid ............................. -- -- (1,468)
Stock options exercised ...................................... -- 116 438
Proceeds from long-term debt ................................. 7,500 -- 10,000
Proceeds of loans from related parties ....................... 9,060 -- --
Deferred financing costs paid ................................ -- (430) (406)
Payments of long-term debt and capitalized leases ............ (4,088) (3,201) (5,435)
(Decrease) increase in borrowings under revolving
credit facility ............................................ (34,194) 13,194 (8,415)
-------- -------- --------
Net cash (used in) provided by financing activities .. (21,722) 8,790 16,258
-------- -------- --------
(Decrease) increase in cash and cash equivalents ................ (1,932) 1,280 (3)
Cash and cash equivalents, beginning of year .................... 2,389 1,109 1,112
-------- -------- --------
Cash and cash equivalents, end of year .......................... $ 457 $ 2,389 $ 1,109
======== ======== ========
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................................... $ 2,606 $ 6,267 $ 4,242
======= ======= =======
Income taxes ................................................... $ 69 $ 33 $ 254
======= ======= =======
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock in settlement of accounts payable ..... $ 1,050
=======
Issuance of common stock in connection with
settlement of Fubu royalty obligations ........................ $ -- $ 300
======== =======
Capitalized lease obligations .................................. $ -- $ 256 $ 1,995
======== ======== =======
Acquisition of business:
Fair value of the assets acquired ............................. $40,568
Liabilities assumed ........................................... 19,540
Common stock and stock options issued ......................... 10,555
Cash acquired ................................................. 153
-------
Cash paid for acquisition, net .............................. $10,320
-------
Exchange of Series B Junior Secured Note for common stock ...... $ 4,864
=======
See notes to consolidated financial statements.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Aris Industries, Inc. and Subsidiaries (collectively, the "Company" or
"Aris") has been engaged in the business of designing, manufacturing and
marketing men's and boys' outerwear and activewear, women's sportswear,
loungewear and swimwear under a variety of tradenames which are owned and
licensed from others. These products were distributed and marketed in the
United States, primarily in department stores, specialty stores and
national retain chains, as well as Company-owned retail and outlet stores.
In addition, the Company has granted licenses to use Company-owned
tradenames for the manufacture and sale of various products.
On January 17, 2001, effective March 1, 2001, the Company entered into a
multi-year licensing agreement (the "Agreement") with Grupo Xtra of New
York, Inc. ("Grupo"). Under the terms of the Agreement, Grupo has the
exclusive rights in the United States, Puerto Rico, Israel and the
Caribbean Islands to license for production, marketing, advertising and
distribution all products under the tradenames owned by the Company, which
include XOXO(R), Fragile(R) and Members Only(R), as well as tradenames
currently licensed by the Company, which include both Baby Phat and Brooks
Brothers Golf (collectively, the "Licensed Products"). Grupo was also
granted the right to operate the Company's XOXO outlet stores. In exchange,
Grupo agreed to purchase substantially all of Aris' inventory of such
products, pay royalties based on its sales of such products and assume
certain of Aris' overhead obligations and contracts.
The Agreement has an initial term of five years and can be extended for
four additional five-year periods, provided Grupo is in substantial
compliance with its obligations under the Agreement. The Agreement provides
for minimum royalties, which aggregate $53,360,000 over its initial
five-year term. The Agreement is subject to early termination under certain
circumstances.
Grupo was frequently late in fulfilling its payment obligations under the
Agreement. Following the end of 2001, it continued to be late in making
payments to the Company and the Company believes that Grupo has violated
the Agreement in other ways. In March 2002, the Company sent Grupo notices
of termination of the Agreement. Under the Agreement, as amended, the
Company is required to give Grupo thirty days notice of any termination.
The Company has the option to terminate the Agreement and re-license the
brands to other interested parties or take back the license and operate it
as a separate wholesale company using current management and a cash
infusion, if available. The Company is currently negotiating with Grupo to
take back the license and operate it as a separate company.
As a result of the Agreement, the Company commenced a transition to a
licensing and brand management business. During 2001, the Company
substantially reduced its workforce, terminated its production and sales
operations and closed its warehousing and shipping facility in New Bedford,
Massachusetts. However, the Company maintained control of and continued to
operate its four full price XOXO retail store locations (See Note 19).
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. However, as shown in the accompanying
consolidated financial statements, the Company has incurred losses for the
three year period ended December 31,
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
2001. As of December 31, 2001, the Company had a working capital deficit of
$28,334,000 and was not in compliance with certain covenants contained in
its credit facilities.
The Company plans to finance its operations in 2002, through (i) cash
received from the realization of receivables, inventory and due from
licensee aggregating $7,422,000, at December 31, 2001, (ii) negotiated
reductions and or extended payment terms with creditors of the Company,
(iii) negotiation of extended payment term of existing finance agreements
and (iv) minimum royalties of $12,617,000 which the Company is due under
the Grupo Agreement and from its additional licensees.
The Company believes that its financing plan will be sufficient at least
through December 31, 2002, to sustain its operations as a licensing and
brand management business and to payoff indebtedness under the credit
facility and the term loan, however, there can be no assurance that the
timing of cash receipts to be realized from working capital and operations
will be sufficient to meet obligations as they become due. These factors
raise substantial doubt about the entity's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Aris
Industries, Inc. and its wholly-owned subsidiaries after elimination of all
significant intercompany transactions and balances.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures relating to
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses for the reporting period.
The most significant estimates relate to the allowances for sales returns,
discounts, credits and doubtful accounts, inventory valuation allowances,
recoverability of long-lived assets and valuation allowances on deferred
tax assets. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits.
INVENTORIES
Inventories are stated at the lower of cost (weighted average basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the term of the
lease or the improvement. Expenditures for maintenance, repairs and minor
renewals are expensed as incurred. When property or equipment is sold or
otherwise disposed of, the related
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
cost and accumulated depreciation are removed from the respective accounts
and the gain or loss realized on disposition is reflected in operations.
GOODWILL
Goodwill represents the excess of purchase price over the fair values of
identifiable net assets of businesses acquired, which includes intangible
assets related to certain tradenames and licensing arrangements. Goodwill
is amortized on a straight-line basis over periods of 20 and 40 years.
At December 31, 2001 and 2000, goodwill is stated net of accumulated
amortization of $11,672,885 and $9,863,513, respectively.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company evaluates the carrying
value of its long-lived assets in relation to the operating performance and
future undiscounted cash flows of the underlying assets when indications of
impairment are present. If an impairment is determined to exist, any
related impairment loss is calculated based on fair value.
In 2001, the Company recorded an impairment charge of $242,000 on leasehold
improvements with respect to former office spaces which are currently being
sub-leased out. Estimated future cash flows related to these premises
indicated that the net assets are not recoverable. The Company also
recorded an impairment charge of $220,000 which represented the net book
value of various computer and other equipment that has become idle as a
result of the transition of the Company into a licensing and brand
management business. In 2000 and 1999, the Company recorded an impairment
charges of $1,538,000 and $3,749,000, respectively, relating to property
and equipment write downs and goodwill associated with its Perry Ellis
licenses as a result of a change in the terms of the licenses (see Note 6).
At December 31, 2001 and 2000, goodwill consists of the costs associated
with the acquisition of the Company's XOXO(R) and Members Only(R)
tradenames. On January 17, 2001, effective March 1, 2001, the Company
entered into the Agreement and commenced a transition to a licensing and
brand management business. Based on the expected cash flows from this
business, the Company concluded that the carrying amount of goodwill would
be fully recovered over its remaining amortization periods. However, the
Company will continue to evaluate the actual and expected results from this
business and reassess its conclusions with respect to any potential
impairment of goodwill in 2002. If it is determined that goodwill is
impaired, then an impairment charge will be recorded to reduce goodwill to
its fair value. Such charge could have a material adverse effect on the
Company's financial position and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, approximate fair value due to the short
maturity of these assets and liabilities. The interest on substantially all
of the Company's borrowings are adjusted regularly to reflect current
market rates. Accordingly, the carrying amounts of such borrowing
approximate fair value. The fair value of the Company's subordinated
long-term debt of $7,500,000 was determined using valuation techniques that
considered cash flows discounted at current market rates. The estimated
fair value of this instrument at December 31, 2001 approximated $6,300,000.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
Prior to the Agreement with Grupo, the Company assigned a substantial
portion of its receivables to a factor which assumes the credit risk with
respect to collection of non-recourse receivables. Ongoing customer credit
evaluations are performed with respect to the Company's trade receivables
not factored and collateral is not required.
REVENUE RECOGNITION
Revenue from the sale of merchandise is recognized at the date of shipment
to the customer. Allowances for sales returns, discounts and credits are
provided when the sale is recorded.
Royalty, commission and licensing income is based upon a percentage of the
licensee's net sales, as defined in the underlying agreements, and is
recognized as earned.
START-UP COSTS
Start-up costs are expensed as incurred. During 2000 and 1999, the Company
incurred $1,862,000 and $1,181,000, respectively, for start-up costs
relating to various licensing agreements. These start-up costs consist of
salaries, samples and related supplies directly attributable to newly
licensed operations. During 1999, the Company also incurred approximately
$1,054,000 of start-up expenses for its new distribution facility prior to
the commencement of operations.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $1,847,000 in 2001, $5,547,000 in 2000 and $3,190,000 in 1999.
LOSS PER SHARE
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during each year. Potentially
dilutive securities have been excluded from the computation as their effect
is anti-dilutive. If the Company had reported net income, diluted earnings
per share would have included the shares used in the computation of basic
net loss per share plus common equivalent shares. In 2001, 2000 and 1999,
convertible debentures, options and warrants to purchase 24,971,701,
6,474,877 and 3,543,511 shares of common stock, respectively, were
anti-dilutive and were excluded from the calculation of diluted weighted
average shares outstanding.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". The Company will be required to adopt the
provisions of SFAS 142 effective January 1, 2002. Under SFAS 142, goodwill
and other intangible assets with indefinite useful lives will no longer be
systematically amortized. Instead such assets will be subject to reduction
when their carrying amounts exceed their
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
estimated fair values based on impairment tests that will be made at least
annually. SFAS 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company
expects that the adoption of SFAS 142 will reduce annual amortization
expense by approximately $1.8 million. Additionally, based on expected cash
flows under the Grupo and other license agreements, the Company does not
expect to incur goodwill and other intangible asset impairment charges
associated with the adoption of this statement other than a $0.4 million
charge in the first quarter of 2002 related to the closing of three retail
stores. However, no assurance can be given that, in the event the Company
does terminate its license agreement with Grupo, a potential future
impairment charge will not be required. In addition, in August 2001, FASB
issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144, addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Among other things,
SFAS 144, provides guidance on the implementation of previous
pronouncements related to when and how to measure impairment losses and how
to account for discontinued operations. Management does not believe that
the adoption of SFAS 144 will have a material impact on the Company's
financial position or results of operations.
4. THE SIMON TRANSACTION
On February 26, 1999, the Company issued (i) 24,107,145 shares of common
stock of the Company and 2,093,790 shares of Series A Preferred Stock of
the Company (which shares were converted into 20,937,900 shares of common
stock on July 29, 1999), for $20,000,000 and (ii) redeemed the Series B
Junior Secured Note (which represented a total indebtedness of $10,658,000)
in exchange for $4,000,000 in cash and an aggregate of 5,892,856 shares of
common stock and 512,113 shares of Series A Preferred Stock (which shares
were converted into 5,121,130 shares of common stock on July 29, 1999),
(the "Simon Purchase Transaction"). In connection with the Simon Purchase
Transaction, the Company also issued 700,000 shares of common stock to a
third party as a condition to its consent to the transaction. In addition,
the Company paid approximately $1,468,000 in cash, issued 250,000 shares of
common stock to cover the costs associated with the transaction and paid
principal and interest of $4,830,000 on its existing debt facilities. As a
result of this transaction, the Company received net proceeds of
approximately $13,702,000.
5. ACQUISITION
On August 10, 1999, the Company completed the acquisition of Lola, Inc.
("Lola"), a California corporation, with and into Europe Craft Imports,
Inc. ("ECI"), a New Jersey corporation, that is wholly owned by the
Company. Concurrent with the closing, ECI contributed all of the assets
formerly owned by Lola to XOXO Clothing Company, Incorporated, a Delaware
corporation ("XOXO") that is wholly owned by ECI. Lola's business consisted
principally of the manufacture and sale of women's apparel and accessories
principally under the XOXO(R) name.
In connection with the acquisition, Lola's shareholders received
$10,000,000 in cash, 6,500,000 shares of the Company's common stock, valued
at $1.50 per share at the time of the acquisition, and options to purchase
1,150,000 shares of the Company's common stock (valued at $805,000). In
addition, the Company incurred acquisition expenses which approximated
$473,000. The acquisition was accounted for under the purchase method of
accounting, and, accordingly, the operating results have been included in
the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the fair values of
assets acquired and liabilities assumed
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
amounted to $22,774,000 and has been recorded as goodwill. In conjunction
with the merger, the Company obtained a $10,000,000 term loan and increased
its line of credit from $65,000,000 to $80,000,000 with a financial
institution (see Note 11).
The table below reflects unaudited pro forma combined results of the
Company as if the acquisition of Lola had taken place on January 1, 1999
(in thousands, except per share data):
Net sales .................................................... $ 221,804
Net loss ..................................................... $ (15,001)
Net loss per basic share ..................................... $ (0.25)
The unaudited pro forma results of operations have been prepared for
informational purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill and increased
interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in the
future.
6. RESTRUCTURING AND OTHER CHARGES
As of December 31, 2000, the Company had accrued a liability of $4,187,000
in connection with a restructuring of its operations which included moving
and consolidating its headquarters, showrooms and warehouses into existing
XOXO facilities in California. At December 31, 2001, the unpaid portion of
the restructuring reserve aggregated $567,167, as a result of cash payments
made and a reversal of approximately $1,679,000 in accrued rental costs
resulting from the settlement of the Company's lease obligation on its New
Bedford, Massachusetts, warehouse.
During 2000, the Company recorded charges of $7,040,000 associated with the
restructuring of its operations. The Company, through September 30, 2000,
recorded a restructuring charge of $1,315,000. The charges consisted of
employee severance costs and other administrative facility costs. During
the fourth quarter of 2000, the Company's board of directors approved and
the Company announced a revised restructuring plan which includes moving
and consolidating its headquarters, showrooms and warehouses into its
existing XOXO facilities located in California. This plan resulted in a
charge of $5,725,000. The charge consisted of property and equipment
write-downs of $1,538,000, net of salvage costs, and lease termination
costs of $4,187,000. At December 31, 2000, the Company had a remaining
liability of $4,187,000 related to lease termination costs which amounts
are included in accrued expenses.
During 1999, the Company recorded charges of $5,212,000 associated with the
restructuring of its corporate office and distribution facilities. These
charges before taxes include employee severance costs of $2,583,000, asset
write-downs of $733,000, and rent and other exit costs of $1,896,000.
In connection with the Simon Purchase Transaction (see Note 4), the Company
was required to obtain consents from the licensor of its Perry Ellis
licenses. As a condition to granting its consent, such licensor required
that the term of its licenses be shortened. Based on the negative future
undiscounted net cash flows expected to be derived from these licenses over
their revised terms, the remaining intangible assets associated with the
acquisition of these licenses of $3,749,000 (included in goodwill) was
deemed impaired and written-off in 1999.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
7. RECEIVABLES
Receivables consist of the following (in thousands):
DECEMBER 31,
------------------
2001 2000
------- -------
Due from factor ..................................... $ 112 $37,693
Royalty and licensee receivables (See Note 1) ....... 1,151 --
Trade receivables ................................... 903 5,336
------- -------
2,166 43,029
Less allowances for sales returns, discounts, credits
and doubtful accounts ............................. 1,014 9,141
------- -------
$ 1,152 $33,888
======= =======
As a licensing and brand management business the Company no longer requires
the services of a commercial finance company. The Company had an agreement
with a commercial finance company which provided for the factoring of
certain trade receivables. The receivables were factored without recourse
as to credit risk but with recourse for any claims by the customer for
adjustments in the normal course of business relating to pricing errors,
vendor allowances, shortages, damaged goods, and other claims. All factored
receivables and related proceeds are the property of the commercial finance
company.
8. DUE FROM LICENSEE
Under the terms of the Agreement, Grupo agreed to purchase substantially
all of the Company's remaining inventory at March 1, 2001. In addition,
Grupo also agreed to assume a substantial portion of the Company's
contractual commitments relating to the operations assumed by Grupo as well
as to reimburse the Company for certain operating expenses relating to
shared facilities. As of December 31, 2001, the Company had a receivable of
$4,953,000 under the terms of the Agreement which consisted of $3,186,000
due for inventory purchased and $1,767,000 for shared operating expenses.
The Company received payment in full of the amount due for inventory in
January 2002. Payments for reimbursement of shared operating expenses are
received on an ongoing basis. The Company has the option to terminate the
Grupo Agreement and re-license the brands to other interested parties or to
take back the license and operate the Company as a separate wholesale
company using current management and a cash infusion, if available. The
Company is currently negotiating with Grupo to take back the license and to
operate the Company as a separate wholesale company.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
9. INVENTORY
Inventories consist of the following (in thousands):
DECEMBER 31,
-----------------------
2001 2000
------- -------
Raw materials . ......................... $ -- $ 3,784
Work-in-process ......................... -- 3,515
Finished goods .......................... 489 8,620
------- -------
$ 489 $15,919
======= =======
At December 31, 2001, finished goods inventory consists of inventory at the
Company's retail locations.
10. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------
IN YEARS 2001 2000
------------ -------- --------
Furniture, fixtures and equipment .......................... 3 - 7 $ 12,946 $ 13,868
Leasehold improvements ..................................... 5 - 10 4,263 4,993
-------- --------
17,209 18,861
Less accumulated depreciation and amortization ............. 11,479 8,898
-------- --------
$ 5,730 $ 9,963
======== ========
As of December 31, 2001 and 2000, property and equipment include amounts
for equipment leased under capital leases with an original cost of
$3,292,000 and $4,363,000, respectively. As of December 31, 2001 and 2000,
accumulated depreciation and amortization include $1,889,000 and
$1,426,000, respectively, associated with these leased assets.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
11. FINANCING
The following amounts represent borrowings outstanding (in thousands):
DECEMBER 31,
-----------------------
2001 2000
------- --------
Revolving Credit Facility (a) ..... $ 4,485 $38,679
Long-term debt:
Term Loan (a) .................. $ 6,000 $ 8,000
Convertible Debentures (b) ..... 7,500 --
Series A Junior Secured Note (c) 5,842 6,942
------- -------
19,342 14,942
Less current portion .............. 11,842 9,700
------- -------
$ 7,500 $ 5,242
======= ========
a. During February 1999, the Company entered into a Financing Agreement with
CIT Commercial Services Group, Inc. ("CIT") and certain other financial
institutions, whereby such lenders agreed to provide a revolving credit
facility up to $65,000,000 for working capital loans and letters of credit
financing. In connection with the XOXO transaction (see Note 5), the
Company's Financing Agreement was amended to increase the revolving credit
facility to $80,000,000, and provide a term loan of $10,000,000. The
Company is no longer able to borrow under the credit facility.
Availability under the revolving credit facility is based on a formula of
eligible receivables and inventory, as defined. At December 31, 2001 and
2000, outstanding letters of credit amounted to $1,145,000 and $1,490,000,
respectively, and there was no availablity for use under the credit
facility at December 31, 2001. For revolving credit loans, interest was
initially accrued at the bank's prime rate. At the Company's option,
borrowings under this facility can be in the form of either credit loans or
Eurodollar loans. For Eurodollar loans, interest was initially accrued at a
rate per annum equal to the Eurodollar rate (as defined) plus 2.5%.
The term loan bears interest at prime plus three-quarter percent (5.75% at
December 31, 2001) and is payable in quarterly installments of $500,000,
plus interest, with a final payment of $5,500,000 originally due on
February 26, 2002. The Company is required to make certain mandatory
prepayments based upon "excess cash flows" as defined in the amendment to
the agreement.
In April 2000, the Company entered into an amendment of its Financing
Agreement, under which the lenders waived compliance with certain covenant
violations at December 31, 1999, and increased the interest rates on the
Company's revolving credit facility to prime plus one-quarter percent. The
amendment also provided for an overadvance facility based on seasonal
needs.
In connection with the amendments, the Company's chief executive officer
agreed to provide a personal guarantee on $3 million of indebtedness
outstanding under the Financing Agreement. This guaranty, which initially
was to expire on December 6, 2000, has been extended until all borrowings
are re-paid in full.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
Borrowings under the credit agreement are collateralized by substantially
all of the assets of the Company. The agreement contains restrictive
covenants that, among other requirements, restrict: the payment of
dividends, additional indebtedness, leases, capital expenditures,
investments and the sale of assets or merger of the Company with another
entity. The covenants also require the Company to meet certain financial
ratios and maintain minimum levels of net worth. At December 31, 2001 and
2000, the Company was not in compliance with certain covenants in the
amended financing agreement.
On January 18, 2002, the Company entered into a forbearance agreement with
CIT. 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 CIT's the revolving line of credit and the remaining
$500,000 was applied against the term loan, (ii) the Company is required to
reduce the balance of the revolving credit facility and certain other
amounts due CIT on a monthly basis through July 31, 2002 at which time the
balances are to be repaid in full. If the outstanding balance of the
revolving credit facility and certain other amounts due CIT 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 is required to make installments of $500,000 on April and July
1, 2002 and the remaining balance is 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. As of April 15, 2002, the Company has not made
its March 31, 2002 payment against its revolving line of credit or its
April 1, 2002, term loan payment aggregating $1,002,000. Accordingly, the
Company is in default of the Forbearance Agreement. The Company and CIT are
currently negotiating the Company's financing.
In addition, under the forbearance agreement, CIT has not waived any
defaults which had existed as of December 31, 2001.
b. In February 2001, the Company entered into a Securities Purchase
Agreement with KC Aris Fund I, L.P. ("KC") pursuant to which the Company is
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. To date, KC has purchased $7,500,000 of Debentures,
convertible into 16,304,347 shares of Common Stock. The Company used the
proceeds to pay down a portion of the borrowings under its revolving credit
facility. At December 31, 2001, the Company was delinquent in paying the
quarterly interest payments due on July 31 and October 31, 2001. The
Company made the quarterly interest payment due July 31, 2001 in January
2002 and KC has agreed not to call a default if the Company pays the
October 31, 2001 payment on March 29, 2002. As of April 15, 2002, the
Company has not paid the interest payment due October 31, 2001, aggregating
approximately $163,000, and KC has not called a default but no assurance
can be given that KC will not call a default. In the event that KC calls a
default, the balance of $7,500,000 will become due and payable on demand.
On April 10, 2002, the chief executive officer of the Company received a
letter from the general partner ("GP") of KC stating that the limited
partners ("LP") of KC have instructed the GP of KC to give the Company
until April 17, 2002, to pay the overdue 2001 interest and until May 10,
2002, to pay the remaining overdue 2002 interest. The LP's have instructed
the GP, in the event that these deadlines are not met, to take all
necessary measures to put the Company in default and collect upon the debt.
c. On June 30, 1993, the Company entered into a Series A Junior Secured Note
Agreement with BNY Financial Corporation ("BNY"), pursuant to which BNY
received a nine-year, $7,000,000
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
note. On September 17, 1997, the Company and BNY entered into an amendment
of the BNY note which provided that scheduled interest accruing under the
note for the period February 1, 1996 through January 31, 1998 be deferred
and added to the principal. The note bears interest at 7% per annum. On
October 30, 2001 the Company received a forbearance from BNY relating to
the $1,100,000 principal payment which was due on November 5, 2001. Under
the terms of the forbearance, the Company paid BNY $500,000 in principal
along with normally scheduled interest on November 5, 2001, and received a
deferral on the balance of $600,000 until March 3, 2002. On February 21,
2002, the Company received a forbearance on the $600,000 principal payment
that was due on March 3, 2002. BNY has agreed to defer the $600,000 as
follows; $50,000 due on July 1, 2002; $100,000 due on July 31, 2002 and
$450,000 due on September 3, 2002 and the remaining balance $5,242,000 is
due on November 3, 2002. BNY is also entitled to receive mandatory
prepayments based upon "excess cash flows" of the Company, as defined in
the Company's note agreements with BNY.
Annual maturities of long-term debt are as follows (in thousands):
2002 ...................................... $ 11,842
2004 ...................................... 7,500
--------
$ 19,342
========
12. STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the
Company's Board of Directors (or a committee thereof), to award to
employees and directors of, and consultants to, the Company and its
subsidiaries: (i) options to acquire common stock at prices determined when
the options are granted, (ii) stock appreciation rights (entitling the
holder to a payment equal to the appreciation in market value of a
specified number of shares of common stock over a specified period), (iii)
restricted shares of common stock whose vesting is subject to terms and
conditions specified at the time of grant, and (iv) performance shares of
common stock that are granted upon achievement of specified performance
goals. Options granted pursuant to the Plan may be either "incentive stock
options" within the meaning of Section 422A of the United States Internal
Revenue Code of 1986, as amended, or non-qualified options. In April 1999,
the Company's Board of Directors approved an amendment to the Plan to allow
for the granting of options to purchase an additional 3,500,000 shares
under the Plan for a total of 7,000,000 shares. Additionally, in 2000, the
Company received approval from its board of directors and shareholders to
increase the number of shares for which options may be granted to
10,000,000.
The Plan provides that options which are cancelled or expire remain subject
to future grant under the Plan. In general, options granted provide for
vesting in three equal annual installments from the date of grant and are
exercisable for a period of 10 years from the grant date.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
Transactions in stock options under the Plan are summarized as follows:
2001 2000 1999
---------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
----------- -------- ---------- -------- ----------- --------
Outstanding, January 1 ........... 13,225,600 $ 1.20 8,621,316 $ 1.70 1,803,000 $ 0.76
Granted ....................... 275,000 0.31 5,698,500 0.58 7,888,350 1.73
Exercised ..................... -- -- (231,166) 0.50 (968,834) 0.45
Expired/Cancelled ............. (2,738,100) 1.32 (863,050) 1.97 (101,200) 1.61
---------- -------- ---------- -------- --------- --------
Outstanding, December 31 ........ 10,762,500 $ 1.15 13,225,600 $ 1.20 8,621,316 $ 1.70
---------- -------- ---------- -------- --------- --------
Options Exercisable, December 31.. 8,083,008 $ 1.13 5,890,532 $ 1.29 2,959,166 $ 1.05
---------- -------- ---------- -------- --------- --------
Stock options outstanding and exercisable at December 31, 2001 are as
follows:
WEIGHTED
WEIGHTED AVERAGE
RANGE OF SHARES AVERAGE REMAINING
EXERCISE UNDER PRICE CONTRACTUAL
PRICES OPTION PER SHARE LIFE IN YEARS
-------- ---------- --------- -------------
Outstanding:
under $1.00 ............ 5,194,000 $ 0.53 7.8
$1.00 - $1.50 ............ 1,915,000 1.30 6.8
$1.51 - $2.00 ............ 3,653,500 2.00 7.6
---------- ------ ---
10,762,500 $ 1.15 7.5
========== ====== ===
Exercisable:
under $1.00 ............ 4,085,669 $ 0.55 7.8
$1.00 - $1.50 ............ 1,531,666 1.25 6.6
$1.51 - $2.00 ............ 2,465,673 2.00 7.6
--------- ------ ---
8,083,008 $ 1.13 7.5
========= ====== ===
The Plan provides for the immediate vesting of outstanding options upon a
change of control of the Company. Accordingly, on the date of the Simon
Purchase Transaction, options to purchase 1,803,000 shares of common stock
became fully vested and exercisable.
The Company applies the intrinsic value method in accounting for its
stock-based compensation plan. Had the Company measured compensation under
the fair value based method for stock options granted, the Company's
pro-forma net (loss) and pro-forma net (loss) per share-basic would have
been as follows (in thousands, except per share data):
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
2001 2000 1999
------- -------- --------
Net loss
As reported .................. $(3,434) $(36,480) $(10,583)
Pro forma .................... (7,172) (40,857) (14,774)
Net loss per share-basic
As reported .................. $ (0.04) $ (0.46) $ (0.19)
Pro forma .................... (0.09) (0.51) (0.27)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes Option pricing model with the following assumptions
for fiscal 2001, 2000 and 1999, respectively: Risk-free interest rates of
5.7%, 5.8% and 5.5%; dividend yield of 0% for each year; expected lives of
5 years for each year; and, volatility of 121%, 180% and 150%.
13. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
---- ---- ----
Current:
Federal............................ $ -- $ -- $ --
State and local.................... 91 33 113
---- ---- -----
91 33 113
---- ---- -----
Deferred:
Federal............................. -- -- --
State and local.................... -- -- 137
---- ---- -----
-- -- 137
---- ---- -----
$ 91 $ 33 $ 250
==== ==== ====
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
---- ---- ----
Federal statutory income tax rate.. (34)% (34)% (34)%
State and local income taxes ...... 2 -- 1
Goodwill amortization ............. 1 1 3
Valuation allowance ............... 32 32 32
Other, individually less than 5%... 1 1 --
---- ---- ----
2% -- 2%
==== ==== ====
The components of deferred tax assets and liabilities are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
Deferred tax assets:
Current:
Restructuring charge ....................... $ 240 $ 1,801
Inventories ................................ 7 2,891
Allowance for sales refunds, discounts,
credits and doubtful accounts ............ 418 3,930
Accruals ................................... 290 1,304
Other ...................................... -- 78
-------- --------
955 10,004
-------- --------
Noncurrent:
Net operating loss carryforwards ........... 45,456 37,998
Goodwill ................................... 1,285 1,408
Alternative minimum tax credit carryforward 846 846
Other tax credit carryforwards ............. 37 37
Other ...................................... 605 605
-------- --------
48,229 40,894
-------- --------
49,184 50,898
Valuation allowance .......................... (48,823) (50,322)
-------- --------
Total deferred tax assets..................... $ 361 $ 576
======== ========
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
Deferred tax liabilities:
Property and equipment........................ $361 $576
Total deferred tax liabilities............ $361 $576
Net deferred tax asset.................... $-- $--
The Company's valuation allowance decreased from $50,322,000 as of December
31, 2000 to $48,823,000 as of December 31, 2001. For the year ended
December 31, 2000, the Company's valuation allowance increased from
$38,821,000 as of December 31, 1999 to $50,322,000 as of December 31, 2000.
At December 31, 2001, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $105,000,000
which expire during fiscal 2002 through 2021.
In addition, the Company has certain state net operating loss carryforwards
available which expire at various times in accordance with governing state
tax statutes. As a result of the change in control of the Company caused by
the Simon Purchase Transaction, the utilization of net operating loss
carryforwards generated prior to the this transaction are limited by
Section 382 of the Internal Revenue Code to approximately $1,500,000
annually through 2019. Accordingly, the Company expects that a significant
portion of the net operating loss carryforwards will expire unused.
14. EXTRAORDINARY GAIN
During the year ended December 31, 2001, the Company recorded extraordinary
gains of approximately $1,998,000 which consisted of the following: (i)
settlements with vendors for liabilities totaling approximately $2,345,000,
which the Company agreed to pay approximately $1,063,000 in cash, (ii)
settlement with Perry Ellis International on royalty payables totaling
approximately $1,416,000 which the Company agreed to pay $900,000 in cash
and (iii) in connection with the closing of the New Bedford location in
2001 the Company agreed to settle a union obligation of approximately
$750,000 by paying $550,000 in cash.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum rental payments under capital leases and noncancelable
operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2001 are as follows (in thousands):
YEAR ENDING OPERATING GRUPO CAPITAL
DECEMBER 31, LEASES SUB-RENTS REIMBURSEMENT NET RENT LEASES
------------ --------- --------- ------------- ------- -------
2002 ................................... $ 6,563 $ (938) $ (3,697) $ 1,928 $ 855
2003 ................................... 6,645 (969) (3,729) 1,947 610
2004 ................................... 6,163 (1,067) (3,485) 1,611 492
2005 ................................... 5,533 (1,191) (3,031) 1,311 3
2006 ................................... 4,362 (1,190) (2,441) 731 --
Thereafter ............................. 6,174 (2,571) (2,571) 1,032 --
-------- -------- -------- -------- -------
Total minimum lease payments ........... $ 35,440 $ (7,926) $(18,954) $ 8,560 1,960
======== ======== ======== ======== =======
Less amount representing interest ......................................................... 320
-------
Present value of minimum lease payments (including
short-term portion of $690) ............................................................. $ 1,640
=======
The Company has various operating leases in effect primarily for retail and
outlet stores, offices and warehouses (see Note 19). The store leases
expire over the next nine years, the office leases expire over the next
nine years and the warehouse leases expire over the next four years. The
store leases contain clauses whereby the stores are assessed additional
rents based on a percentage of sales. For the years ended December 31,
2001, 2000 and 1999, the stores were not charged rent as a percentage of
sales. Most of the operating leases contain renewal options to extend the
lease terms. The Company subleases one of its former office locations and
as part of the Grupo Agreement, the Company receives reimbursement from
Grupo for rents related to the outlets stores, warehouse and a majority of
the current office space. Total rental expense under all operating leases
was approximately $5,485,000, $6,782,000 and $4,385,000 for fiscal 2001,
2000 and 1999, respectively. The Company received reimbursements from Grupo
totaling approximately $2,818,000 covering rent expense for office,
warehouse and outlet store rents that were Grupo's responsibility as per
the Agreement.The Company has the option to terminate the Grupo Agreement
and re-license the brands to other interested parties or to take back the
license and operate the Company as a separate wholesale company using
current management and a cash infusion, if available. The Company is
currently negotiating with Grupo to take back the license to operate the
Company as a separate wholesale company.
LICENSE AGREEMENTS
The Company has been granted several licensing agreements to manufacture
and distribute men's, women's and boys' outerwear, sportswear and
activewear products bearing the licensors' labels. The agreements expire at
various dates through 2004. The Company is required to make royalty and
advertising payments based on a percentage of sales, as defined in the
respective agreements, subject to minimum payment thresholds. Royalty and
advertising expenses under licensing agreements totaled $218,542,
$7,990,845 and $6,920,000 for the years ended December 31, 2001, 2000 and
1999, respectively. As of December 31, 2001, the Company has one remaining
license agreement to manufacture and sell casual apparel for women,
excluding swimwear and accessories, under the Baby Phat(R) label. The
Company is required to make royalty and advertising payments based on a
percentage of sales as defined in the license agreement.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
Future minimum royalty and advertising payments required under the
remaining license agreement are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
-------------
2002 ....................................................... $ 1,920
2003 ....................................................... 1,920
2004 ....................................................... 1,920
-------
Total minimum royalty payments .................................. $ 5,760
=======
As described in Notes 1 and 17, the Company has sublicensed its remaining
licenses to Grupo and Grupo is responsible for these minimum royalty
payments.
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior
executives for periods of three to five years, expiring no later than
August 2004. Under the agreements, the executives are entitled to a
specified salary over the contract period. Bonuses are payable based upon
profitability and cash flows of the Company for each period. The estimated
future minimum obligation under these contracts as of December 31, 2001 is
$1,392,000 in 2002, $775,000 in 2003 and $500,000 in 2004. In addition,
upon certain events of termination or change in control of the Company,
certain of these agreements contain lump sum payment provisions, as defined
within the respective agreements.
LITIGATION
The Company, in the ordinary course of its business, is the subject of, or
a party to, various pending or threatened legal actions involving private
interests. While it is not possible at this time to predict the outcome of
these legal actions, in the opinion of management, the dispositions of
these matters could have a material adverse effect on the Company's
financial statements. As of December 31, 2001 the Company is a party to the
following significant legal actions:
Coronet Group, Inc. v. Europe Craft Imports, Inc.: Coronet has sued Europe
Craft Imports, Inc., a wholly-owned subsidiary of the Company, in the
Supreme Court of the State of New York, County of New York, claiming that
Europe Craft breached a license agreement as Licensor of the Members Only
trademark to Coronet, and seeking damages in the amount of approximately
$1,000,000. Europe Craft has counter-claimed for unpaid future royalties
under the agreement and intends to vigorously dispute Coronet's claims. The
case is in the later stages of pre-trial discovery. The Company intends to
vigorously defend the action and pursue its claim against Coronet.
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 Aris' chief executive
officer alleging that Aris violated various license agreements regarding
PEI's trademarks. Aris has answered the Campers
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
World complaint denying the material allegations. In particular, Aris
denies that it made the sale to Campers World that is the subject of its
complaint. Aris has yet to answer PEI's cross-claim. Aris currently intends
to vigorously defend the main action and cross-claim.
1411 TrizecHahn-Swig, LLC v. Aris: On March 1, 2001, TrizecHahnSwig, LLC,
the landlord of the Company's premises at 1411 Broadway, commenced a
non-payment proceeding against the Company in the Civil Court of the City
of New York. The proceeding sought rent arrears and possession of the
premises. On December 19, 2001 said action was dismissed by Order by
Honorable Robert Sackett, J.C.C.. Aris commenced an action against
TrizecHahnSwig, LLC, in the Supreme Court of the State of New York, County
of New York, seeking a declaratory judgement that the 1411 lease terminated
as of January 31, 2001. This action was dismissed by order of Honorable
Sheila Abdus-Salaam, J.S.C. on May 22, 2001. Aris is appealing this
dismissal in the Apellate Division of the Supreme Court of the State of New
York, First Department. This appeal is pending. The Company has surrendered
possession of the premises at 1411 Broadway. In January 2002
TrizecHahnSwig, LLC, commenced a new action against Aris in the Supreme
Court of the State of New York, County of New York seeking rent arrears in
the amount of $703,000. The Company is defending this action, has noticed a
motion to dismiss and will defend the action and raise counter-claims.
TrizecHahnSwig, LLC, has offered to settle this matter in exchange for a
payment of $1,000,000 by the Company. The Company is currently evaluating
this offer.
Guy Kinberg v. Aris: In December 2001, Guy Kinberg, the former head of
production for the Company, commenced an action in the Supreme Court of the
State of New York, County of New York, claiming that his termination by the
Company breached his employment agreement. Kinberg is seeking $1,200,000 in
damages, representing salary and severance under the agreement. The Company
believes it had cause to terminate the agreement and intends to vigorously
defend the action.
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 has 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 and
treble damages. It is too premature at this time to assess liability in
this matter.
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
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
2006. XOXO Clothing Company, Inc. responded to the complaint as successor
in interest to Lola, Inc., denying the material allegations of the
complaint, and asserting other affirmative defenses. On February 27, 2002,
XOXO vacated the property and returned possession of the premises to the
plaintiff. On March 11, 2002, the Superior Court set the matter for trial
on April 8, 2002, although it is not expected that this trial date will be
continued now that possession of the premises is not at issue. XOXO wishes
to pursue a settlement with the plaintiff but also intends to contest the
plaintiff's allegations and defend the action if necessary. Under the terms
of the lease, XOXO may potentially be liable for approximately $1.8 million
in future rent (See Note 19), plus attorneys' fees and costs, but that
figure is expected to be reduced substantially as a result of the
plaintiff's obligation to mitigate its damages.
16. RETIREMENT PLANS
The Company participates in a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate. Employer contributions are discretionary. Participants vest
immediately in their own contributions and after seven years of service in
employer contributions. The Company made no contributions in 2001, 2000 and
1999.
17. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by
the Company's chief executive officer, entered into an agreement (the
"Letter of Credit Agreement") with the Company's principal commercial
lender to facilitate the opening of up to $17,500,000 in letters of credit
for the purchase of inventory. Pursuant to the Letter of Credit Agreement,
AHS will purchase inventory which will be held at the Company's warehouse
facilities. Such inventory will be sold to the Company at cost when the
Company is ready to ship the merchandise to the customer. As of and for the
year ending December 31, 2001, the Company purchased $2,981,000 from AHS
and owes AHS $7,060,000 and incurred interest expense of approximately
$535,000. As a result of the Company's change to a licensing operation,
effective March 1, 2001, the Company no longer purchases inventory. As of
and for the year ended December 31, 2000, the Company purchased $19,482,988
from AHS, owed AHS $8,579,000 and AHS was holding $2,981,000 of inventory
which the Company purchased in 2001. In connection with the Letter of
Credit Agreement, the Chief Executive Officer of the Company has guaranteed
up to $7,000,000 of AHS obligations to the Company's principal commercial
lender.
The Company has utilized the services of Schneider, Schecter & Yoss, an
accounting firm, of which Howard Schneider, a director of the Company, is a
partner. During 2001, 2000 and 1999, total fees paid were $43,950, $192,825
and $115,800, respectively.
During 2001 and 2000, the Company had sales of approximately $828,000 and
$14,286,000, respectively, to Humane Incorporated ("Humane") of which
Steven Feiner, a director of the Company, is the owner. As of December 31,
2001 and 2000, the Company had receivables from Humane of approximately
$828,000 and $787,000, respectively. In addition, Humane acted as a sales
agent for the Company in connection with sales of certain of the Company's
products in the United States. Commissions earned for 2000 and 1999 were
$572,259 and $593,734, respectively.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
During January 2001, the Company's chief executive officer loaned the
Company $2,000,000. The loan is payable on demand and bears interest at
prime plus 1/4%. Interest expense was approximately $157,000 for the year
ended December 31, 2001.
In addition, as of December 31, 2001, the Company had trade payables of
$758,523 to its chief executive officer, $92,081 to Humane, $29,409 to
Steven Feiner and $5,200 to Schneider, Schecter and Yoss.
18. BUSINESS SEGMENT DATA
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", the Company's principal business
segments are grouped between the generation of revenues from royalties and
retail store operations. The Company has two reportable business segments.
Manufacturing /licensing and retail store operations. Prior to March 1,
2001 the Company was engaged in the business of manufacturing and
distributing men's and boy's outerwear and women's sportswear under a
variety of tradenames which are owned or licensed from others. On March 1,
2001, the Company changed into a licensing business which derives its
revenues from royalties associated with the use of the Company's brand
names, principally XOXO(R), Fragile(R) and Members Only(R) and, subject to
Aris' rights as a licensee with respect thereto, Baby Phat(R) and Brooks
Brothers Golf(R). The Retail Store segment was comprised of four full-price
retail stores which principally sell products under the XOXO(R) brand name
(See Note 19). The Company has no inter-segment sales. All general
corporate assets are allocated to the manufacturing/licensing segment.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
Segment information for the years are set forth below.
Manufacturing Retail
& Licensing Stores Total
------------ --------- ---------
Year Ended December 31, 2001:
Net revenues ..................... $ 52,531 $ 6,326 $ 58,857
Interest expense ................. 3,215 -- 3,215
Depreciation & amortization ...... 5,656 415 6,071
Impairment of long-lived assets .. 462 -- 462
Restructuring gain ............... 1,679 -- 1,679
Extraordinary gain ............... 1,998 -- 1,998
Net loss ......................... (2,162) (1,272) (3,434)
Segment assets ................... 46,594 2,102 48,696
Goodwill ......................... 33,930 412 34,342
Capital expenditures ............. 491 -- 491
Year Ended December 31, 2000:
Net revenues ..................... $ 196,195 $ 5,981 $ 202,176
Interest expense ................. 6,779 -- 6,779
Depreciation & amortization ...... 5,567 416 5,983
Restructuring and other charges .. 1,862 -- 1,862
Net loss ......................... (36,286) (194) (36,480)
Segment assets ................... 97,901 2,308 100,209
Goodwill ......................... 35,726 425 36,151
Capital expenditures ............. 4,265 343 4,608
Year Ended December 31, 1999:
Net revenues ..................... $ 175,204 $ 2,726 $ 177,930
Interest expense ................. 4,185 -- 4,185
Depreciation & amortization ...... 2,434 118 2,552
Restructuring and other charges .. 2,235 -- 2,235
Net loss ......................... (10,450) (133) (10,583)
Segment assets ................... 102,998 3,119 106,117
Capital expenditures ............. 4,039 250 4,289
Prior to 2001, the Company was organized and managed as one business
segment that offered distinct men's, women's and boys' apparel products to
its customers. Its operations were conducted domestically and substantially
all of its net sales were derived from domestic customers. Additionally,
all of the Company's assets are located within the United States. In 2001,
74% of the Company's royalty and licensing revenues were generated by its
principal licensee, Grupo. In addition, 100% of the Company's sales to
licensee were from the sales of the Company's inventory to Grupo. The
Company had sales to two customers that represent 15% and 11% of net sales
for the year ended December 31, 2000. The Company had sales to one customer
that represent 4% of net sales for the year ended December 31, 1999.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
19. SUBSEQUENT EVENTS
In an effort to improve the overall profitability of the Company, the
Company closed three of its four full price retail stores in the first
quarter of fiscal 2002. The Company closed its two retail locations on
Broadway in Lower Manhattan along with its retail store on Rodeo Drive in
Los Angeles. The Company will record a charge in the first quarter of 2002
of approximately $1,932,000 (unaudited) consisting of an accrual for 2002
rent, property and equipment write-downs and goodwill impairment charges.
The Company will include 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 release the
premises in the event that the premises are vacated by the Company.
However, no assurances can be given that the premises will be re-leased
within one year and the Company will have to periodically review its
accrual. The Company could incur significantly higher rent charges should a
future review warrant an additional accrual.
During March 2001, in settlement of a disputed claim with Tarrant Apparel
Group, Inc., the Company issued 1,500,000 shares of its common stock to
Tarrant, with a value of $1,050,000. The Company agreed that, in the event
the market value of such shares as of December 31, 2001 was less than
$3,300,000, the Company would either, at its option (x) pay to Tarrant in
cash an amount, or (y) issue to Tarrant additional shares of common stock
having a share value, equal to the difference between $3,300,000 and the
greater of the share value as of December 31, 2001 and $1,050,000. In
January 2002, the Company completed the settlement agreement with Tarrant
by issuing to Tarrant an additional 6,617,647 shares of its common stock,
such shares having a value equal to $2,250,000. The issuance of these
shares will be reflected on the Company's financial statements for the
first quarter of 2002 as a reduction in accounts payable offset by an
increase in stockholders equity.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------ ---------- ------------ ----------
Year ended December 31, 2001:
Allowance for sales returns, discounts,
credits and doubtful accounts ....... $9,141,000 $ -- $ 8,127,000 (2) $1,014,000
Inventory reserves .................... 6,017,000 -- 6,017,000 (4) --
Restructuring reserves ................ 4,187,000 -- 3,620,000 (5) 567,000
---------- ---------- ----------- ----------
Year ended December 31, 2000:
Allowance for sales returns, discounts,
credits and doubtful accounts ....... $7,334,000 $1,807,000 $ -- $9,141,000
Inventory reserves .................... 2,105,000 3,912,000 -- 6,017,000
Restructuring reserves ................ -- 4,187,000 -- 4,187,000
---------- ---------- ----------- ----------
Year ended December 31, 1999:
Allowance for sales returns, discounts,
credits and doubtful accounts ....... $4,561,000 $ 9,935,000 (1) $ 7,162,000 (2) $7,334,000
Inventory reserves .................... 2,558,000 597,000 1,050,000 (3) 2,105,000
---------- ---------- ----------- ----------
(1) Includes assumed allowances in connection with the XOXO acquisition.
(2) Write-off of receivables.
(3) Write-off of inventory.
(4) Sale of inventory.
(5) Cash amounts paid and reserve recovery