SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended (Commission File Number): 1-4814
June 30, 2002 -------
ARIS INDUSTRIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
New York 22-1715274
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
463 Seventh Avenue, New York, New York 10018
---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 473-4200
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
NO ___ YES X
---
Number of shares of Common Stock outstanding 88,783,054
As of August 12, 2002
ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Condensed Balance Sheets as
of June 30, 2002 and December 31, 2001 ............ 3
b. Consolidated Condensed Statements of
Operations for the Six-Months Ended
June 30, 2002 and June 30, 2001 ................... 4
c. Consolidated Condensed Statements of
Operations for the Three-Months Ended
June 30, 2002 and June 30, 2001 ................... 5
d. Consolidated Condensed Statements of
Cash Flows for the Six-Months Ended
June 30, 2002 and June 30, 2001 ................... 6
e. Notes to Consolidated Condensed Financial
Statements ........................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................. 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .......................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 21
Item 2. Changes in Securities and Use of Proceeds .................. 22
Item 3. Defaults upon Senior Securities ............................ 22
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 22
Item 5. Other Information .......................................... 22
Item 6. Exhibits and Reports on Form 8-K ........................... 22
SIGNATURES ................................................................ 23
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
June 30, December 31,
ASSETS 2002 2001
-------- ------------
Current assets:
Cash ............................................................. $ 392 $ 457
Receivables, net ................................................. 227 1,152
Receivable from related party .................................... 828 828
Due from licensee ................................................ -- 4,953
Inventories ...................................................... 176 489
Prepaid expenses and other current assets ........................ 65 269
------- -------
Total current assets ............................. 1,688 8,148
Property and equipment, net ......................................... 4,165 5,730
Goodwill, net ....................................................... 33,930 34,342
Other assets ........................................................ 470 476
------- -------
TOTAL ASSETS ............................. $40,253 $48,696
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Borrowings under revolving credit facility ....................... $ 1,465 $ 4,485
Loans payable to related parties, including accrued interest ..... 11,571 9,060
Current portion of long-term debt ................................ 18,342 11,842
Current portion of capitalized lease obligations ................. 530 690
Accounts payable ................................................. 4,063 7,050
Accounts payable to related parties .............................. 1,083 885
Accrued expenses and other current liabilities ................... 4,234 2,470
------- -------
Total current liabilities ........................... 41,288 36,482
Long-term debt ...................................................... -- 7,500
Capitalized lease obligations ....................................... 736 950
Other liabilities ................................................... 1,805 2,587
------- -------
Total liabilities ............................... 43,829 47,519
------- -------
Commitments and contingencies
Stockholders' Equity (Deficiency):
Preferred stock, $.01 par value: 10,000 shares authorized; none
issued and outstanding ........................................ -- --
Common stock, $.01 par value: 200,000 shares authorized
88,783 issued and outstanding at June 30, 2002
and 82,165 issued and outstanding at December 31, 2001 ......... 888 822
Additional paid-in capital ....................................... 85,246 81,760
Accumulated deficit .............................................. (89,661) (81,313)
Unearned compensation ............................................ (49) (92)
------- -------
Total stockholders' equity (deficiency) .................... (3,576) 1,177
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ............. $40,253 $48,696
======= =======
See accompanying notes to consolidated condensed financial statements
-3-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six- Six-
Months Ended Months Ended
June 30, June 30,
2002 2001
------------ ------------
REVENUES:
SALES TO CUSTOMERS ..................................... $ 1,687 $ 24,325
SALES TO LICENSEE ...................................... -- 9,478
ROYALTY INCOME ......................................... 4,570 5,471
COMMISSION INCOME ...................................... -- 660
-------- --------
TOTAL REVENUES ............................................ 6,257 39,934
-------- --------
COST OF GOODS SOLD:
COST OF SALES TO CUSTOMERS ............................. (926) (17,424)
COST OF SALES TO LICENSEE .............................. -- (7,478)
-------- --------
TOTAL COST OF GOODS SOLD .................................. (926) (24,902)
-------- --------
GROSS PROFIT .............................................. 5,331 15,032
OPERATING INCOME (EXPENSES):
SELLING AND ADMINISTRATIVE EXPENSES .................... (11,287) (18,874)
IMPAIRMENT OF LONG LIVED ASSETS ........................ (853) --
RESTRUCTURING AND OTHER COSTS .......................... (509) 1,679
-------- --------
LOSS FROM OPERATIONS ...................................... (7,318) (2,163)
INTEREST EXPENSE, NET ..................................... (1,055) (1,851)
-------- --------
LOSS BEFORE INCOME TAX PROVISION AND EXTRAORDINARY ITEM ... (8,373) (4,014)
INCOME TAX BENEFIT (PROVISION) ......................... 25 (97)
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM ............................ (8,348) (4,111)
EXTRAORDINARY ITEM:
GAIN ON EXTINGUISHMENT OF DEBT ......................... -- 1,891
-------- --------
NET LOSS .................................................. ($ 8,348) ($ 2,220)
======== ========
BASIC LOSS PER SHARE:
LOSS BEFORE EXTRAORDINARY ITEM ......................... ($ 0.10) ($ 0.05)
EXTRAORDINARY ITEM ..................................... $ 0.00 $ 0.02
======== ========
NET LOSS .................................................. ($ 0.10) ($ 0.03)
======== ========
PER SHARE DATA:
Weighted average shares outstanding - Basic ............ 86,918 81,668
See accompanying notes to consolidated condensed financial statements
-4-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three- Three-
Months Ended Months Ended
June 30, June 30,
2002 2001
------------ ------------
REVENUES:
SALES TO CUSTOMERS .............................................. $ 690 $ 3,637
SALES TO LICENSEE ............................................... -- 3,920
ROYALTY INCOME .................................................. 2,482 3,649
COMMISSION INCOME ............................................... -- --
-------- --------
TOTAL REVENUES ..................................................... 3,172 11,206
-------- --------
COST OF GOODS SOLD:
COST OF SALES TO CUSTOMERS ...................................... (323) (1,551)
COST OF SALES TO LICENSEE ....................................... -- (3,093)
-------- --------
TOTAL COST OF GOODS SOLD ........................................... (323) (4,644)
-------- --------
GROSS PROFIT ....................................................... 2,849 6,562
OPERATING INCOME (EXPENSES):
SELLING AND ADMINISTRATIVE EXPENSES ............................. (5,899) (5,676)
IMPAIRMENT OF LONG LIVED ASSETS ................................. -- --
RESTRUCTURING AND OTHER COSTS ................................... 895 13
-------- --------
(LOSS) INCOME FROM OPERATIONS ...................................... (2,155) 899
INTEREST EXPENSE, NET .............................................. (533) (636)
-------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION AND EXTRAORDINARY ITEM ... (2,688) 263
INCOME TAX PROVISION ............................................ (2) (17)
-------- --------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM ............................ (2,690) 246
EXTRAORDINARY ITEM:
GAIN ON EXTINGUISHMENT OF DEBT .................................. -- 609
-------- --------
NET (LOSS) INCOME .................................................. ($ 2,690) $ 855
======== ========
BASIC LOSS PER SHARE:
LOSS BEFORE EXTRAORDINARY ITEM .................................. ($ 0.03) $ 0.00
======== ========
EXTRAORDINARY ITEM .............................................. $ 0.00 $ 0.01
======== ========
NET LOSS ........................................................... ($ 0.03) $ 0.01
======== ========
PER SHARE DATA:
Weighted average shares outstanding - Basic ..................... 88,783 82,165
Weighted average shares outstanding - Diluted ................... 88,783 82,736
See accompanying notes to consolidated condensed financial statements
-5-
ARIS INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six- Six-
Months Ended Months Ended
June 31, June 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................... ($ 8,348) ($ 2,220)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization .................................................. 1,144 3,230
Non-cash stock transaction charged to expense .................................. 1,300 --
Non-cash stock based compensation .............................................. 43 29
Amortization of prepaid service costs .......................................... -- 332
Extraordinary gain on extinguishment of debt ................................... -- (1,891)
Provision for / (reversal) of accrued restructuring charges .................... 509 (1,679)
Write-off receivables from licensee ............................................ 1,959 --
Impairment on property and equipment ........................................... 440 --
Impairment of goodwill ......................................................... 412 --
Change in assets and liabilities:
Decrease in receivables ........................................................ 925 28,384
Decrease in due from licensee .................................................. 2,994 --
Decrease in inventories ........................................................ 313 7,957
Decrease in prepaid expenses and other current assets .......................... 204 793
Decrease in other assets ....................................................... 6 49
Decrease in accounts payable ................................................... (737) (10,512)
Increase in accounts payable to related parties ................................ 198 --
Increase / (decrease) in accrued expenses and other current liabilities ........ 1,255 (5,603)
Decrease in other liabilities .................................................. (782) (140)
-------- --------
Net cash provided by operating activities ....................... 1,835 18,729
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................... (17) (385)
-------- --------
Net cash used in investing activities ........................... (17) (385)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital leases .................................... (1,374) (2,070)
Proceeds from issuance of convertible debentures ................................... -- 7,500
Proceeds of loan from related party ................................................ 2,511 8,927
Decrease in borrowings under revolving credit facility ............................. (3,020) (34,072)
-------- --------
Net cash used in financing activities ........................... (1,883) (19,715)
-------- --------
NET DECREASE IN CASH ................................................................... (65) (1,371)
CASH, BEGINNING OF PERIOD .............................................................. 457 2,389
-------- --------
CASH, END OF PERIOD .................................................................... $ 392 $ 1,018
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Issuance of common stock in settlement of accounts payable ......................... $ 2,250 3,300
Reclassification of long term debt to current ...................................... $ 7,500 --
See accompanying notes to consolidated condensed financial statements
-6-
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements as of June 30, 2002 and for the
six and three-month periods ended June 30, 2002 and 2001, are unaudited and
reflect all adjustments consisting of normal recurring adjustments and
extraordinary gains, restructuring and other costs (See Note 8) which are, in
the opinion of management, necessary for a fair presentation of financial
position, operating results and cash flows for the periods.
The consolidated condensed balance sheet as of December 31, 2001 was derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles. The accompanying consolidated
condensed financial statements have been prepared in accordance with accounting
standards appropriate for interim financial statements and should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. The
operating results for the six and three-month periods ended June 30, 2002 are
not necessarily indicative of the operating results to be expected for the year
ending December 31, 2002.
2. FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS"
Under Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") goodwill and other intangible assets with indefinite useful
lives are no longer amortized. Instead such assets will be subject to reduction
only when the carrying amount exceed their estimated fair value based on
impairment tests established by SFAS 142 that will be made at least annually.
The Company implemented the provisions of SFAS 142 effective January 1, 2002,
and discontinued amortization effective as of that date. For the six-months
ended June 30, 2001, amortization relating to goodwill was approximately
$904,000.
3. LIQUIDITY RISKS
These consolidated condensed financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business.
As of June 30, 2002 the Company had a working capital deficit of $39,600,000 as
compared to a working capital deficit of $28,334,000 at December 31, 2001. In
addition, the Company was not in compliance with certain covenants contained in
its credit facility. However, the Company has been advised by its lenders that
they are willing to work with the Company to structure the remaining payments in
a manner the Company should be able to make. Amounts outstanding under the
revolving credit facility were reduced from $4,485,000 at December 31, 2001 to
$1,465,000 as of June 30, 2002.
-7-
During 2001, Aris Industries, Inc. (the "Company", the "Registrant" or "Aris")
substantially completed its transformation from a manufacturer and importer of
outerwear, sportswear and loungewear to a licensor or sublicensor of its owned
or licensed trademarks. In early 2001, Aris entered into an agreement (the
"Grupo Agreement"), which became effective March 1, 2001, with Grupo Xtra of New
York, Inc. ("Grupo"), an unaffiliated third party, giving Grupo the exclusive
right in the United States, Puerto Rico, the Caribbean Islands and Israel to
manufacture and sell, subject to Aris' design and quality approvals, women's
clothing, jeanswear and sportswear under the XOXO(R) and Fragile(R) trademarks
and sportswear and outerwear under the Members Only(R) trademark. In addition,
Aris granted Grupo the right to manufacture and sell products covered by its
license agreements for Brooks Brothers Golfwear and Baby Phat sportswear. In
late 2001, Brook Brothers terminated Grupo's right to use its trademark and
subsequently purported to terminate the Company's license period. Grupo was also
granted the right to operate the Company's XOXO outlet stores, which the Company
used to provide a channel for disposing of excess and irregular inventory. In
exchange, Grupo agreed to purchase substantially all of Aris's inventory of such
products, pay royalties based on its sales of such products and assume certain
of Aris's overhead obligations and contracts. Grupo completed the purchase of
such inventory in January 2002.
Grupo was frequently late in fulfilling its payment obligations under the
Agreement. Following the end of the 2001, it continued to be late in making
payments to the Company and violated the Agreement in other ways. In March 2002,
the Company sent Grupo notices of termination of the Agreement.
In April 2002, the Company terminated its license agreement with Grupo and
shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the
Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R), Baby Phat(R), Brooks Brothers Golf(R), Fragile(R)
and Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson") to license from the Company and its subsidiaries the XOXO(R),
Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by
Grupo (see Note 4).
The Company plans to finance its operations through, (i) royalties which the
Company is due under the Adamson license agreement based on a percentage of net
sales, (ii) minimum royalties of $3,383,000 from its other licensees, (iii)
negotiation of extended payment term of existing finance agreements and (iv)
continued negotiated settlements with its other creditors.
The Company believes that its financing plan in conjunction with a refinancing
of its term loan, Series A Junior Secured Note and the KC Convertible
Debentures, assuming the default is cured (See Note 5), will be sufficient, at
least through June 30, 2003, to sustain its operations as a licensing and brand
management business and to payoff indebtedness under the credit facility and the
term loan, however, there can be no assurance that the timing of cash receipts
to be realized from working capital and operations will be sufficient to meet
obligations as they become due or that the Company will be able to refinance any
of its debt or extend the payment terms thereof. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated condensed financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
-8-
4. ADAMSON LICENSE AGREEMENT
Following the effectiveness of the termination of the Grupo Agreement, the
Company reached an agreement with Adamson Apparel, Inc. to license from the
Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R)
trademarks that had been previously licensed by Grupo. Adamson is a newly-formed
New York corporation of which the majority owner is the Company's chairman and
chief executive officer and principal stockholder. Adamson was initially
capitalized with a $7 million investment. Adamson is utilizing many of the same
employees that were employed by Grupo, all of whom were formerly employees of
XOXO or one or more of the Company's subsidiaries.
The Adamson Agreement has an initial term which expires on December 31, 2003,
which may be automatically renewed for a further one year term, subject to
agreement by both parties, to manufacture, market and distribute at wholesale,
women's clothing, jeanswear and sportswear under the XOXO and Members Only
trademarks and, subject to Aris' rights as licensee with respect thereto, Baby
Phat apparel. The royalty rate for XOXO and Members Only products is 9% and 7%
for Baby Phat in addition to amounts due to the licensor of Baby Phat.
The royalty due from Adamson for 2002 is based on a percentage of net sales. The
Company has been informed that Adamson purchased from Grupo's lender all of
Grupo's inventory of XOXO(R) and Baby Phat(R) apparel and also purchased from
the lender Grupo's order file. The Company received approximately $1,651,000 in
royalties from Adamson during the six-month period ended June 30, 2002.
5. SALE OF CONVERTIBLE DEBENTURES
In February 2001, the Company entered into a Securities Purchase Agreement with
KC Aris Fund I, L.P. ("KC") pursuant to which the Company 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. KC
has only purchased $7,500,000 of Debentures, convertible into 16,304,347 shares
of Common Stock. The Company used the proceeds to pay down a portion of the
borrowings under its revolving credit facility. At December 31, 2001, the
Company was delinquent in paying the quarterly interest payments due on July 31
and October 31, 2001. The Company made the quarterly interest payment due July
31, 2001 in January 2002 and KC had agreed not to call a default if the Company
paid the October 31, 2001 payment by March 29, 2002. On April 10, 2002, the
chief executive officer of the Company received a letter from the general
partner ("GP") of KC stating that the limited partners ("LP") of KC have
instructed the GP of KC to give the Company until April 17, 2002, to pay the
overdue 2001 interest and until May 10, 2002, to pay the remaining overdue 2002
interest. The LP's 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. On May 10, 2002, the Company paid the interest payment
due October 31, 2001, aggregating approximately $163,000. On August 5, 2002 KC
sent the Company a notice of default arising from the Company's failure to pay
interest in the amount of approximately $321,000 that was due on January 31 and
April 30, 2002. Accordingly, the Company has reclassified the $7,500,000
Debenture from long term debt to current. The Company is continuing to negotiate
with KC for modification of the terms of the Convertible Debentures.
-9-
6. PAYABLES REDUCTION
During the six-months ended June 30, 2001 the Company continued the process of
negotiating settlements with its vendors. The Company reached agreements with
vendors for amounts due which resulted in a net gain of $1,891,000 during the
period. These gains are reflected as an extraordinary item within the
accompanying statements of operations.
In March 2001, in settlement of a disputed claim with Tarrant Apparel Group,
Inc., the Company issued 1,500,000 shares of its common stock with a market
value of $1,050,000. The Company agreed that, in the event the market value of
such shares as of December 31, 2001 is less than $3,300,000, the Company will
either, at its option (x) pay to such vendor in cash an amount, or (y) issue to
such vendor additional shares of common stock having a share value equal to the
difference between $3,300,000 and the greater of the share value as of December
31, 2001 and $1,050,000. In February 2002, the Company issued 6,617,647 shares
of its common stock pursuant to the Agreement. The issuance of shares to Tarrant
was exempt from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering.
7. DEBT
The Company's indebtedness consists, in part, of its obligations to BNY
Financial Corporation ("BNY") under the Series A Junior Secured Note Agreement
dated June 30, 1993, pursuant to which BNY is owed $5,842,000, as of June 30,
2002. On October 23, 2001, the Company received a forbearance from BNY relating
to the $1,100,000 principal payment due November 5, 2001. Under the terms of the
forbearance, the Company paid BNY $500,000 in principal along with the normally
scheduled interest payment on November 5, 2001 and received a deferral until
March 3, 2002 on the balance of $600,000 principal due. On February 21, 2002,
the Company received a further forbearance on the $600,000 principal payment
that was due on March 3, 2002. BNY 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 Company paid the principal payments due on July 1
and July 31, 2002. The balance of BNY's Note, $5,242,000, is payable on November
3, 2002. The Company intends to negotiate with BNY for a restructuring of the
payment term of the note. There can be no assurance that BNY will agree to any
such restructuring.
On January 18, 2002, the Company entered into a forbearance agreement with CIT
as agent for the lenders under the Company's Financing Agreement. Under the
terms of the forbearance agreement the following occurred; (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company is required to reduce the balance of the revolving credit
facility and certain other amounts due the lenders on a monthly basis through
July 31, 2002 at which time the balances were to be repaid in full. If the
outstanding balance of the revolving credit facility and certain other amounts
due the lenders at the end of any month exceeds the required monthly ending
balance, as defined in the forbearance agreement, the Company has fifteen days
to cure the excess principal before its lenders will take action against the
Company, (iii) the Company was required to make installments of $500,000 on
April 1 and July 1, 2002 and the remaining balance 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. The Company did not make the April 1,
2002, term loan payment. The Company and CIT are currently
-10-
negotiating an amendment of the forbearance agreement to extend the payout
period for the Company's revolving line of credit and term loan. In conjunction
with these negotiations the Company, on May 10, 2002, paid the $500,000
quarterly term loan payment which was originally due on April 1, 2002. In
addition, the Company verbally agreed to pay the lenders $200,000 at the end of
each month to reduce its revolving line of credit balance. The Company has made
these payments in each of May, June and July 2002. The Company also made its
term loan payment in the amount of $500,000, due July 1, 2002. The Company is
currently negotiating with its lenders to refinance the remaining $4,500,000
balance of its term loan which is due October 31, 2002 and the balance of
$1,465,000 on the Company's revolving line of credit.
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 June 30, 2002 and December 31, 2001,
with certain covenants contained in its loan agreements. The Company's lenders,
under the January 18, 2002 forbearance agreement, have indicated that they have
no current intention to take action with respect to such non-compliance but have
not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3 million of
indebtedness outstanding under the Financing Agreement.
8. RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in the first
quarter of fiscal 2002. The Company recorded charges aggregating $2,257,000 in
the first quarter of 2002, consisting of an accrual of approximately $1,113,000
for 2002 rent, an additional $292,000 of lease termination costs relating to the
2000 restructuring reserve, property and equipment write-downs of approximately
$440,000 and goodwill impairment charges of approximately $412,000. The Company
included in its accrual a liability for one year of store rent for each of the
closed stores since each store lease contains a provision that the landlord will
use its best efforts to re-lease the premises in the event that the premises are
vacated by the Company. However, no assurances can be given that the premises
will be re-leased within one year and the Company will have to periodically
review its accrual.
In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig,
LLC ("Trizec"), the landlord of the Company's premises at 1411 Broadway in New
York. Under the terms of the settlement the Company paid $550,000 on June 26,
2002, to Trizec and was released from all obligations under its lease. As a
result of this agreement the Company recorded a favorable reversal of a
previously recorded restructuring reserve of approximately $895,000 in the
second quarter of fiscal 2002.
During the six-months ended June 30, 2001, the Company recorded a gain in
restructuring relating to a reversal of approximately $1,679,000 in accrued
rental costs resulting from a settlement of the Company's lease obligation on
its New Bedford, Massachusetts, warehouse. Under the settlement agreement, the
Company was released from all obligations under the lease in exchange for cash
payments of $850,000. The Company made the final payment under the settlement
agreement in September 2001.
-11-
9. PER SHARE DATA
Basic (loss) income per common share is computed by dividing net (loss) income
available for common shareholders, by the weighted average number of shares of
common stock outstanding during each period.
Options and warrants to purchase 11,346,845 and 12,252,695 shares of Common
Stock were outstanding as of June 30, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the effect
would be anti-dilutive. In addition, conversion rights under the Convertible
Debentures to convert the Debentures into approximately 16,000,000 shares of
Common Stock were not included in the computation of diluted earnings per share
because the result would be anti-dilutive.
10. RELATED PARTY TRANSACTIONS
In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by the
Company's chief executive officer, entered into an agreement (the "Letter of
Credit Agreement") with the Company's principal commercial lender to facilitate
the opening of up to $17,500,000 in letters of credit for inventory for the
Company. Pursuant to the Letter of Credit Agreement, AHS purchased inventory
which was to be held at the Company's warehouse facilities. Such inventory was
sold to the Company at cost when the Company is ready to ship the merchandise to
the customer. As of June 30, 2002, the Company owes AHS $7,090,000. In
connection with the Letter of Credit Agreement, the chief executive officer has
guaranteed up to $7,000,000 of AHS obligations to the Company's principal
commercial lender.
During January 2001, the Company's chief executive officer loaned the Company
$2,000,000. In March 2002, the Company's chief executive officer loaned the
Company an additional $250,000. During the quarter ended June 30, 2002, the
Company's chief executive officer loaned the Company an additional $1,100,000.
The loans are payable on demand and bear interest at prime plus one quarter
percent.
The Company's chief executive officer personally guaranteed $3,000,000 of
indebtedness outstanding under the Financing Agreement.
Adamson is a newly-formed New York corporation which is majority owned by the
Company's chairman and chief executive officer and principal stockholder (see
Note 4). A minority shareholder of Adamson, who invested $3,500,000 in Adamson,
is to be issued 10,000,000 shares of the Company's common stock as consideration
for him making the investment in Adamson. As of June 30, 2002, the Company was
indebted to Adamson in the amount of $1,131,000, which is payable on demand and
bears no interest.
In connection with Adamson's purchase of the inventory formerly owned by Grupo
from CIT, Grupo's lender, XOXO guaranteed $3,500,000 of the deferred purchase
price for such inventory and granted CIT a security interest in its trademarks
as collateral for such guarantee.
11. CONTINGENCIES
The Company, in the ordinary course of its business, is the subject of, or a
party to, various pending
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or threatened legal actions. While it is not possible at this time to predict
the outcome of any litigation, the Company may not be able to satisfy an adverse
judgement in certain of these actions, which may have a material adverse effect
on its financial position, results of operations or cash flows.
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following analysis of the financial condition and results of operations of
Aris Industries, Inc. (the "Company") for the six and three-month periods ended
June 30, 2002 and 2001 should be read in conjunction with the consolidated
condensed financial statements, including the notes thereto, included on pages 3
through 12 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
the ability of the Company to satisfy the conditions and requirements of the
credit facilities of the Company, the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within prevailing retail environment, customer acceptance of
both new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this Annual Report, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition,"
are forward- looking statements. Although the Company believes that expectations
reflected in such forward- looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 142 AND 144
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". The Company has adopted the provisions of SFAS 142 effective
January 1, 2002. Under SFAS 142, goodwill and other intangible assets with
indefinite useful lives are no longer be systematically amortized. Instead such
assets will be subject to reduction when their carrying amounts exceed their
estimated fair values based on impairment tests that will be made at least
annually. SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company expects that
the adoption of SFAS 142 will reduce annual amortization expense by
approximately $1.8 million. Additionally, based on expected cash flows under the
Adamson and other license agreements, the Company does not expect to incur
goodwill and other intangible asset impairment charges associated with the
adoption of this statement other than the $0.4 million charge taken in the first
quarter of 2002 related to the closing of the retail stores. In accordance with
SFAS
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142 the Company recently had an independent appraisal of its goodwill and it was
determined that no impairment currently exists. However, no assurance can be
given that a potential future impairment charge will not be required and the
Company will re-appraise its goodwill next year. In addition, in August 2001,
FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144, addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Among other things, SFAS 144,
provides guidance on the implementation of previous pronouncements related to
when and how to measure impairment losses and how to account for discontinued
operations. Management does not believe that the adoption of SFAS 144 will have
a material impact on the Company's financial position, results of operations or
cash flows. For the six-months ended June 30, 2001, the Company's net loss would
have decreased by $904,000 of amortization relating to goodwill.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business.
As of June 30, 2002, the Company had a working capital deficit of approximately
$39,600,000 compared to a working capital deficit of approximately $28,334,000
at December 31, 2001. The increase in the working capital deficit was due to the
default by Grupo under its license agreement which resulted in the Company not
receiving approximately $1,000,000 in license royalties, writing off
approximately $1,959,000 in operating expense reimbursements and the
reclassification of the KC Convertible Debentures to current liabilities from
long term debt (see note 5). In addition, the Company recorded charges
aggregating $2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $440,000 and goodwill impairment charges
of approximately $412,000 for retail stores closed during the first quarter
offset partially by a recovery of $895,000 in lease termination costs and other
accrued rent in connection with the settlement with the Company's former
landlord at 1411 Broadway. During the six-months ended June 30, 2002, the
Company financed its working capital requirements principally through licensing
revenue from Adamson, Grupo and the Company's other licensees along with
additional loans from its chief executive officer.
In April 2002, the Company terminated its license agreement with Grupo and
shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the
Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States
Bankruptcy Court, Central District of California, terminated the Trademark
License Agreement and ordered Grupo to immediately discontinue all use of
trademark bearing XOXO(R), Baby Phat(R), Brooks Brothers Golf(R), Fragile(R) and
Members Only(R). Following the effectiveness of the termination of the Grupo
Agreement, the Company reached an agreement with Adamson Apparel, Inc.
("Adamson"), where the majority stockholder is the Company's chief executive
officer, to license from the Company and its subsidiaries the XOXO(R), Members
Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo
(see Note 4). The royalty due from Adamson is based on a percentage of net
sales. The Company has been informed that Adamson purchased from Grupo's lender
all of Grupo's inventory of XOXO(R) and Baby Phat(R) apparel and also purchased
from the lender Grupo's order file.
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On January 18, 2002, the Company entered into a forbearance agreement with CIT
as agent for the lenders under the Company's Financing Agreement. Under the
terms of the forbearance agreement the following occurred; (i) the Company
received $3,000,000 from Grupo of which $2,500,000 was applied against the
revolving line of credit and the remaining $500,000 was applied against the term
loan, (ii) the Company is required to reduce the balance of the revolving credit
facility and certain other amounts due the lenders on a monthly basis through
July 31, 2002 at which time the balances were to be repaid in full. If the
outstanding balance of the revolving credit facility and certain other amounts
due the lenders at the end of any month exceeds the required monthly ending
balance, as defined in the forbearance agreement, the Company has fifteen days
to cure the excess principal before its lenders will take action against the
Company, (iii) the Company was required to make installments of $500,000 on
April 1 and July 1, 2002 and the remaining balance 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. The Company did not make the April 1,
2002, term loan payment. The Company and CIT are currently negotiating an
amendment of the forbearance agreement to extend the payout period for the
Company's revolving line of credit and term loan. In conjunction with these
negotiations the Company, on May 10, 2002, paid the $500,000 quarterly term loan
payment which was originally due on April 1, 2002. In addition, the Company
verbally agreed to pay the lenders $200,000 at the end of each month to reduce
its revolving line of credit balance. The Company has made these payments in
each of May, June and July 2002. The Company also made its term loan payment in
the amount of $500,000, due July 1, 2002. The Company is currently negotiating
with its lenders to refinance the remaining $4,500,000 balance of its term loan
which is due October 31, 2002 and the balance of $1,465,000 on the Company's
revolving line of credit.
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 June 30, 2002 and December 31, 2001,
with certain covenants contained in its loan agreements. The Company's lenders,
under the January 18, 2002 forbearance agreement, have indicated that they have
no current intention to take action with respect to such non-compliance but have
not waived the covenant violations.
The Company's chief executive officer has personally guaranteed $3 million of
indebtedness outstanding under the Financing Agreement. This guaranty, which
initially was to expire on December 6, 2000, has been extended until the loans
are repaid in full.
As a result of its change to a licensing operation, the Company no longer needs
financing to purchase inventory or to finance future accounts receivable. During
2001, the Company reduced its revolving line of credit from $38,679,000 to
$4,485,000 through the collection of accounts receivable and the sale of
inventory to Grupo pursuant to the Grupo Agreement. As of June 30, 2002, the
revolving line of credit has been further reduced to approximately $1,465,000.
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
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entered into a guaranty agreement limited to $7,000,000 of the reimbursement of
AHS' obligations under the Letter of Credit Agreement. AHS owes its lender
approximately $7,090,000 under the Letter of Credit Agreement, and the Company
owes AHS the same amount.
In February 2001, the Company entered into a Securities Purchase Agreement with
KC Aris Fund I, L.P. ("KC") pursuant to which the Company 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. KC
purchased only $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. 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. On May 10, 2002, the Company paid the
interest payment due October 31, 2001, aggregating approximately $163,000. On
August 5, 2002 KC sent the Company a notice of default arising from the
Company's failure to pay interest in the amount of approximately $321,000 that
was due on January 31 and April 30, 2002. Accordingly, the Company has
reclassified the $7,500,000 Debenture from long term debt to current. The
Company is continuing to negotiate with KC for modification of the terms of the
Convertible Debentures.
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, as of June 30,
2002. On October 23, 2001, the Company received a forbearance from BNY relating
to the $1,100,000 principal payment due November 5, 2001. Under the terms of the
forbearance, the Company paid BNY $500,000 in principal along with the normally
scheduled interest payment on November 5, 2001 and received a deferral until
March 3, 2002 on the balance of $600,000 principal due. On February 21, 2002,
the Company received a further forbearance on the $600,000 principal payment
that was due on March 3, 2002. BNY 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 Company paid the principal payments due on July 1
and July 31, 2002. The balance of BNY's Note, $5,242,000, is payable on November
3, 2002. The Company intends to negotiate with BNY for a restructuring of the
payment term of the note. There can be no assurance that BNY will agree to any
such restructuring.
The Company believes that its financing plan in conjunction with a refinancing
of its term loan, Series A Junior Secured Note and the KC Convertible
Debentures, assuming the default is cured, will be sufficient, at least through
June 30, 2003, to sustain its operations as a licensing and brand management
business and to payoff indebtedness under the credit facility and the term loan,
however, there can be no assurance that the timing of cash receipts to be
realized from working capital and operations will be sufficient to meet
obligations as they become due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated condensed
financial statements do not include any
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adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern
RESULTS OF OPERATIONS
The Company reported net losses of $2,690,000 and $8,348,000 for the three and
six-month periods ended June 30, 2002 compared to a net profit of $855,000 and a
net loss of $2,220,000 for the three and six-month periods ended June 30, 2001.
During the three-months ended June 30, 2002, the Company's loss was largely
attributable to the default by Grupo of its license agreement. As a result of
the default by Grupo, the Company did not receive any license royalties due in
April and incurred $803,000 in charges that were Grupo's direct obligation. In
addition, the Company was required to record a non-cash charge in the amount of
$1,300,000 relating to the commitment to issue 10,000,000 shares of the
Company's common stock to an unrelated third party as consideration for him
making an investment in Adamson. The management of the Company believes that
this was vital to the success of Aris. This was offset by a recovery $895,000
under a settlement agreement with the landlord of the Company's premises at 1411
Broadway in New York. Under the terms of the settlement the Company paid
$550,000 and was released from all obligations under its lease. As a result of
this agreement the Company recorded a favorable reversal of previously recorded
restructuring reserve of approximately $895,000.
During the six-months ended June 30, 2002, the Company's loss was largely
attributable to the default by Grupo of its license agreement and the closing by
the Company of three retail store locations. As a result of the default by Grupo
the Company did not receive approximately $1,000,000 in license royalties and
wrote off approximately $1,959,000 in operating expense reimbursements and
incurred $803,000 in charges that were Grupo's direct obligation. In addition,
The Company recorded charges aggregating $2,257,000 in the first quarter of
2002, consisting of an accrual of approximately $1,113,000 for 2002 rent, an
additional $292,000 of lease termination costs relating to the 2000
restructuring reserve, property and equipment write-downs of approximately
$440,000 and goodwill impairment charges of approximately $412,000. The Company
was required to record a non-cash charge in the amount of $1,300,000 relating to
the commitment to issue 10,000,000 shares of the Company's common stock to an
unrelated third party as consideration for him making an investment in Adamson.
The management of the Company believes that this was vital to the success of
Aris. This was offset by the favorable reversal of a previously recorded
restructuring reserve of approximately $895,000 under a settlement agreement
with the landlord of the Company's premises at 1411 Broadway in New York during
the three-months ended June 30, 2002.
During the three-months ended June 30, 2001, the Company's profitability was
attributable to increased licensing revenue due to the Grupo agreement and
additional licensees of the Company along with the gains recognized in
connection with reversals of inventory reserves related to previously reserved
inventory that was subsequently sold to Grupo at its original cost, the
settlements reached between the Company and the union representing its employees
at the New Bedford warehouse facility and a settlement between the Company and
Perry Ellis International ("PEI") of royalties due under the Company's cancelled
PEI licenses. This was offset by costs associated with the closing of the
Company's New Bedford, Massachusetts, warehouse and shipping facility, which
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was closed on June 22, 2001, legal expenses incurred as the Company continues
its negotiated settlements with its vendors and expenses incurred in connection
with the consolidation of the Company's office space.
During the six-months ended June 30, 2001, the Company's loss was, in part,
attributable to its transition from a manufacturing operation into a licensing
and brand management business. This resulted in phase-out costs associated with
the consolidation of its facilities, reduction of its workforce and legal
expenses incurred as the Company continues its negotiated settlements with its
vendors, offset by reversals of restructuring and inventory reserves related to
previously reserved inventory that was subsequently sold to Grupo at original
cost.
REVENUES
Sales to Customers
The Company's net sales to customers during the three and six-month periods
decreased from $3,637,000 and $24,325,000 respectively, for the three and
six-month periods ended June 30, 2001, to $690,000 and $1,687,000 respectively,
during the three and six-month periods ended June 30, 2002. In 2002 the only
sales to customers were made through the Company's full price XOXO retail
stores. These decreases of $2,947,000 and $22,638,000 respectively, were
attributable to the nature of the Company's business operation as a licensing
business during the entire first and second quarters of 2002 as compared to the
transition from a manufacturing and wholesaling business to a licensing during
the first six months of 2001. The Grupo agreement was effective March 1, 2001.
In addition, sales to customers decreased as the result of the Company's closing
of three of its full price retail stores in the first quarter of 2002.
Sales to Licensee
Sales to licensee in the amount of $3,920,000 and $9,478,000 respectively,
during the three and six- month periods ended June 30, 2001 represented the
sales of inventory to Grupo, under Grupo's Agreement to purchase essentially all
of the Company's March 1, 2001 inventory at cost.
Royalty Income
The Company's royalty income decreased from $3,649,000 during the three-months
ended June 30, 2001, to $2,482,000 for the three-months ended June 30, 2002.
This decrease was attributable to the default by Grupo. The Company did not
receive any royalty income for the entire month of April 2002.
The Company's royalty income decreased from $5,471,000 during the six-months
ended June 30, 2001, to $4,570,000 for the six-months ended June 30, 2002. This
decrease was attributable to the default by Grupo which cost the Company
approximately $1,000,000 in additional royalties which were due under the Grupo
agreement. This was partially offset by increases in royalty income from the
Company's additional licensees.
GROSS PROFIT
Gross Profit for the three-months ended June 30, 2002 was $2,849,000 or 89.8% of
revenues compared to $6,562,000 or 58.6% of revenues for the three-months ended
June 30, 2001. Gross profit as a percentage of revenues for the three-months
ended June 30, 2002, represents a full quarter as a licensing and brand
management business as compared to the three-months ended June 30, 2001, during
which the Company was in transition from a manufacturing and wholesaling
business to a
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licensing and brand management business.
Gross Profit for the six-months ended June 30, 2002 was $5,331,000 or 85.2% of
revenues compared to $15,032,000 or 37.6% of revenues for the six-months ended
June 30, 2001. Gross profit as a percentage of revenues for the six-months ended
June 30, 2002, represents a full six-month period as a licensing and brand
management business as compared to the six-months ended June 30, 2001, during
which the Company was in transition from a manufacturing and wholesaling
business to a licensing and brand management business.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses were $5,899,000 or 186.0% of revenue for the
three-months ended June 30, 2002 as compared to $5,676,000 or 50.7% of revenue
for the three-months ended June 30, 2001. Selling and Administrative expenses as
a percentage of revenues for the three-months ended June 30, 2002 have been
adversely affected by the Grupo default. As a result of the default the Company
was forced to incur operating expenses that were previously shared with Grupo
while receiving no royalty income. The Company also incurred $803,000 in charges
that were Grupo's direct obligation. In addition, the Company was required to
record a non-cash charge in the amount of $1,300,000 relating to the commitment
to issue 10,000,000 shares of the Company's common stock to an unrelated third
party as consideration for an investment by the third party in Adamson. The
management of the Company believes that this was vital to the success of Aris.
Selling and administrative expenses as a percentage of revenue for the
three-months ended June 30, 2001, reflect the blended nature of the Company's
business operations into a licensing and brand management business. Under the
terms of the Grupo Agreement, effective March 1, 2001 Grupo assumed the majority
of the Company's responsibilities for Selling and Administrative expenses except
for expenses relating to the Company's corporate functions and costs incurred in
the operation of the Company's New Bedford warehouse, which closed on June 22,
2001.
Selling and Administrative expenses were $11,287,000 or 180.4% of revenue for
the six-months ended June 30, 2002 as compared to $18,874,000 or 47.3% of
revenue for the six-months ended June 30, 2001. Selling and Administrative
expenses as a percentage of revenues for the six-months ended June 30, 2002 have
been adversely affected by the Grupo default. As a result of the default the
Company was forced to write off receivables from Grupo for shared operating
expenses and incurred $803,000 in charges that were Grupo's direct obligation.
In addition, the Company was liable for excess royalties due under the Baby Phat
license for 2001 which Grupo failed to pay. The total charge to the Company for
these items was approximately $2,803,000 which, when combined with a $1,000,000
shortfall in minimum royalty income, resulted in the percentage of selling and
administrative expenses to revenue being abnormally high. The Company also was
required to record a non-cash charge in the amount of $1,300,000 relating to the
commitment to issue 10,000,000 shares of the Company's common stock to an
unrelated third party as consideration for an investment by the third party in
Adamson. The management of the Company believes that this was vital to the
success of Aris. Selling and administrative expenses as a percentage of revenue
for the six-months ended June 30, 2001, reflect the blended nature of the
Company's business operations into a licensing and brand management business.
Under the terms of the Grupo Agreement, effective March 1, 2001 Grupo assumed
the majority of the Company's responsibilities for Selling and Administrative
expenses except for expenses relating to the Company's corporate functions and
costs incurred in the operation of the Company's New Bedford warehouse, which
closed on June 22, 2001.
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IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. The Company evaluates the carrying value of its
long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying assets when indications of impairment
are present. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value. During the six-month period ended June
30, 2002, the Company recorded an impairment charge of $853,000 relating to
property and equipment and goodwill associated with its retail store operations.
The Company closed three of its four retail stores during the three-months ended
March 31, 2002, and recorded the impairment charge in connection with the
closing.
RESTRUCTURING AND OTHER COSTS
The Company closed three of its four full price XOXO retail stores in the first
quarter of fiscal 2002. As a result, the Company recorded charges aggregating
$2,257,000 in the first quarter of 2002, consisting of an accrual of
approximately $1,113,000 for 2002 rent, an additional $292,000 of lease
termination costs relating to the 2000 restructuring reserve, property and
equipment write-downs of approximately $440,000 and goodwill impairment charges
of approximately $412,000.
In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig,
LLC ("Trizec"), the landlord of the Company's premises at 1411 Broadway in New
York. Under the terms of the settlement the Company paid $550,000 to its former
landlord at 1411 Broadway and was released from all obligations under its lease.
As a result of this agreement the Company recorded a favorable reversal of
previously recorded restructuring reserve of approximately $895,000.
During the six-month period ended June 30, 2001, the Company recognized a
recovery of approximately $1,679,000 of restructuring charges that were accrued
in the fourth quarter of 2000 relating to the remaining rent due under the
Company's lease of its New Bedford, Massachusetts warehouse. Under the terms of
the settlement agreement reached with its landlord, the Company was released
from all obligations under the lease in exchange for cash payments of $850,000.
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INTEREST EXPENSE
Interest expense for the three-months ended June 30, 2002 was $533,000 as
compared to $636,000 for the three-months ended June 30, 2001. This decrease was
primarily attributable to the continuing reduction in borrowings under the
Company's financing agreement along with reductions in the prime lending rate..
Interest expense for the six-months ended June 30, 2002 was $1,055,000 as
compared to $1,851,000 for the six-months ended June 30, 2001. This decrease was
primarily attributable to the continuing reduction in borrowings under the
Company's financing agreement along with reductions in the prime lending rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes may have a material
adverse effect on its consolidated financial position and results of operations
at June 30, 2002. Several of these actions stem from Grupo incurring expenses in
the Company's name. Although the Company did not authorize these expenses, the
Company mat be subject to liability for them. Because of Grupo's bankruptcy
filing, it is unlikely that the Company will be able to recover any of these
amount from Grupo. In addition, the following updates information regarding
certain litigation to which the Company is subject:
1411 TrizecHahn-Swig, LLC v. Aris: On June 28, 2002, the Company reached a
settlement agreement with TrizecHahnSwig, LLC, the landlord of the Company's
premises at 1411 Broadway, under which the Company was released from all
obligations under its lease in exchange for a cash payment of $550,000.
Minolta Business Solutions, Inc. v. XOXO: On August 28, 2001, Minolta
Business Solutions, Inc. ("Minolta") filed a complaint in the Los Angeles
Superior Court alleging breach of contract and various related claims against
XOXO. Minolta and XOXO had entered into a three-year lease whereby Minolta would
provide color copier equipment to XOXO. The lease was cancelled because XOXO was
not satisfied with Minolta's copier equipment, and Minolta now claims that XOXO
still owes it $49,038.97 as a result of that cancellation. XOXO disputes that
any amount is owed to Minolta at all, and intends to defend the matter
vigorously. The matter is set for trial on August 5, 2002, and the prevailing
party may be liable to pay the other party's attorneys' fees and other
litigation expenses. In April 2002, the Company reached a settlement agreement
with Minolta for $17,500.
Fashion World-Santa v. Lola, Inc.: On February 11, 2002, Fashion
World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the
Los Angeles Superior Court. That action sought to evict Lola, on grounds of
non-payment of rent, from an XOXO retail store located in Beverly Hills,
California. Lola is a party to a five-year lease for that store, and that lease
does not expire until April 2006. XOXO Clothing Company, Inc. responded to the
complaint as successor in interest to Lola,
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Inc., denying the material allegations of the complaint, and asserting other
affirmative defenses. On February 27, 2002, XOXO vacated the property and
returned possession of the premises to the plaintiff. On March 11, 2002, the
Superior Court set the matter for trial on April 8, 2002, although it is not
expected that this trial date will be continued now that possession of the
premises is not at issue. The Superior Court has vacated the date originally set
for trial of this action. It is expected that this action will be tried in or
about late 2002 or early 2003, if it cannot be settled before that time. XOXO
wishes to pursue a settlement with the plaintiff but also intends to contest the
plaintiff's allegations and defend the action if necessary. Under the terms of
the lease, XOXO may potentially be liable for approximately $1.8 million in
future rent, plus attorneys' fees and costs, but that figure should be reduced
substantially as a result of the plaintiff's obligation to mitigate its damages.
On July 31, 2002, the Company received a proposed settlement offer from Fashion
World-Santa in the amount of $953,000. A mediation meeting has been set for
September 11, 2002.
Guy Kinberg v. Aris: In December 2001, Guy Kinberg, the former head of
production for the Company, commenced an action in the Supreme Court of the
State of New York, County of New York, claiming that his termination by the
Company breached his employment agreement. Mr. Kinberg is seeking $1,200,000 in
damages, representing salary and severance under the agreement. On July 30,
2002, Mr. Kinberg was awarded a judgment in the amount of $883,509 in the
Supreme Court, New York County. On August 8, 2002, a settlement was made with
Mr. Kinberg in the amount of $300,000, with $100,000 payable on execution and
$20,000 payable over ten months commencing September 1, 2002.
Christi Wilson v. Aris: On July 31, 2002, Christi Wilson, a former employee
of the Company filed suit in the Supreme Court of the State of New York, County
of New York, claiming that her commission agreement was breached by the Company.
Ms. Wilson is seeking $900,000 in damages, representing commissions due under
the agreement. The Company believes that all commissions due Ms. Wilson were
paid and intends to vigorously defend this action.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
(Registrant)
Date: August 12 2002 By /s/ PAUL SPECTOR
-------------------------------
Paul Spector
Chief Financial Officer / Treasurer
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(c) INDEX TO EXHIBITS
Filed as Indicated
Exhibit to Document
Referenced in
Exhibit No. Description Footnote No.
----------- ----------- ------------------
3.3 Restated Certificate of Incorporation filed on June (3)
30, 1993
3.4 Amended and Restated By-Laws effective June 30, (3)
1993
3.5 Amendment to the Restated Certificate of (20)
Incorporation filed with the Secretary of State on
July 29, 1999
3.6 Amendment to the Restated Certificate of (21)
Incorporation filed with the Secretary of State in
January 2001
10.67 Series A Junior Secured Note Agreement dated as of (3)
June 30, 1993 between Registrant and BNY
Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, (3)
1993 issued by Registrant to BNY Financial
Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, (3)
1993 between Registrant, BNY Financial
Corporation and AIF II, L.P.
10.81 Form of Indemnification Agreement dated as of June (3)
30, 1993 between Registrant and each member of
Registrant's Board of Directors.
10.99 Warrant dated September 30, 1996 issued by Aris (10)
Industries, Inc. to Heller Financial, Inc.
10.111 Securities Purchase Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris
Partners, L.P., AIF, L.P., The Simon Group, L.L.C.
and Charles S. Ramat.
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.
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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.
10.118 Employment Agreement by and among the (19)
Registrant, Europe Craft Imports, Inc., ECI
Sportswear, Inc., XOXO and Gregg Fiene, dated
August 10, 1999.
10.119 Employment Agreement by and among the (19)
Registrant, ECI, ECI Sportswear, Inc., XOXO and
Gregg Fiene, dated August 10, 1999.
10.120 Shareholders' Agreement by and among the (19)
Registrant, The Simon Group, LLC, Gregg Fiene, Michele
Bohbot and Lynne Hanson, dated August 10, 1999.
10.121 Amendment No. 2 to Financing Agreement by and (19)
among Aris Industries, Inc., Europe Craft Imports,
Inc., ECI Sportswear, Inc., Stetson Clothing
Company, Inc., XOXO; the Financial Institutions
from time to time party to the Financing Agreement,
as Lenders; and The CIT Group/Commercial
Services, Inc. as Agent, dated
August 10, 1999.
10.122 Amended and Restated 1993 Stock Option Plan (16)
10.123 Employment Agreement with Steven Feiner (21)
10.125 Agreement between the Company and certain of its (21)
subsidiaries and Grupo Xtra dated January, 2001
10.126 Form Securities Purchase Agreement Dated as of (21)
February, 2001 between the Company and KC Aris
Fund I, L.P.
21. List of Subsidiaries (21)
10.127 Trademark License Agreement Adamson Apparel, (22)
Inc.
99.1 Certification under Section 906 of the (22)
Sarbanes/Oxley Act
99.2 Certification under Section 906 of the (22)
Sarbanes/Oxley Act
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- ----------------
(1) Omitted
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated
June 30, 1993 and incorporated herein by reference.
(4) - (9) Omitted.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated
September 30, 1996 and incorporated herein by reference.
(11) Omitted.
(13) Omitted
(14) Omitted
(15) Omitted
(16) Filed as Annex A to the Company's Proxy Statement filed with
the Commission on May 27, 1999, and incorporated herein by
reference.
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated
February 26, 1999 and incorporated herein by reference.
(18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K
filed with the Commission on or about April 13, 1999 and
incorporated herein by reference.
(19) Filed as Exhibit to the Report on Form 8-K dated August 24,
1999.
(20) Omitted.
(21) Filed as Exhibit to Annual Report on Form 10-K filed with the
Commission on April 15, 2002.
(22) Filed as an exhibit to Form 10Q for the Quarter Ended June 30,
2002
- ----------------
* The Schedules and Exhibits to such Agreements have not been filed by the
Company, who hereby undertakes to file such schedules and exhibits upon
request of the Commission.
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