10-Q 1 c29837_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended (Commission File Number): 1-4814 September 30, 2003 ARIS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New York 22-1715274 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 463 SEVENTH AVENUE, NEW YORK, NEW YORK 10018 --------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (646) 473-4200 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES _____ NO [X] Number of shares of Common Stock outstanding 108,819,527 As of November 13, 2003 ARIS INDUSTRIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements a. Consolidated Condensed Balance Sheets as of September 30, 2003 and December 31, 2002 3 b. Consolidated Condensed Statements of Operations for the Nine-Months Ended September 30, 2003 and September 30, 2002 4 c. Consolidated Condensed Statements of Operations for the Three-Months Ended September 30, 2003 and September 30, 2002 5 d. Consolidated Condensed Statements of Cash Flows for the Nine-Months Ended September 30, 2003 and September 30, 2002 6 e. Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 ARIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)

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)

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)

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)

See accompanying notes to consolidated condensed financial statements -6- ARIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed financial statements as of September 30, 2003 and for the nine and three-month periods ended September 30, 2003 and 2002 are unaudited and reflect all adjustments consisting of normal recurring adjustments and restructuring and other costs which are, in the opinion of management, necessary for a fair presentation of financial position, operating results and cash flows for the periods. The consolidated condensed balance sheet as of December 31, 2002 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying consolidated condensed financial statements have been prepared in accordance with accounting standards appropriate for interim financial statements and should be read in conjunction with the financial statements and notes thereto included in Aris Industries, Inc. (the "Company", the "Registrant" or "Aris") Annual Report on Form 10-K for the year ended December 31, 2002. The operating results for the nine and three-month periods ended September 30, 2003 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2003. 2. FINANCIAL ACCOUNTING STANDARDS NO. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the consolidated financial statements. 3. LIQUIDITY RISKS These consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has continued to incur losses from operations and had a working capital deficit of $6,747,000 at September 30, 2003 as compared to a working capital deficit of $35,243,000 at December 31, 2002. As a result of the sale of the Company's XOXO(R) trademark and certain related 7 assets (see Note 4) the Company has satisfied all obligations that were previously outstanding under its credit facility and other debt instruments. During 2002, the Company completed its first full year as a licensor or sub-licensor of its owned or licensed trademarks. In April 2002, the Company terminated its license agreement with Grupo Xtra of New York, Inc. ("Grupo") and shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States Bankruptcy Court, Central District of California, terminated the Trademark License Agreement and ordered Grupo to immediately discontinue all use of trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R) and Members Only(R). Following the effectiveness of the termination of the Grupo Agreement, the Company reached an agreement with Adamson Apparel, Inc. ("Adamson") to license from the Company and its subsidiaries the XOXO(R) , Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo (Note 5). As a result of the trademark assets sale the Company repaid a substantial portion of its existing indebtedness and intends to finance its remaining operations through (i) continued negotiated settlements with trade creditors, (ii) substantially reducing its overhead and (iii) royalties from its remaining trademarks and license (See Note 4). There can be no assurance that the timing of cash receipts to be realized from working capital and operations will be sufficient to meet obligations as they become due. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 4. SALE OF XOXO TRADEMARK On May 7, 2003, the Company signed a definitive trademark purchase agreement with Global Brand Holdings, LLC ("Global") providing for the sale of the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets and accompanying goodwill for a total sum of $43 million in cash. The transaction was approved by the Company's stockholders at a special meeting held on Monday, June 30, 2003. On July 2, 2003, the Company completed the sale of the trade name and service mark. The Company received $43 million in cash at closing of which $2 million was set aside in one escrow account and $1 million was set aside in an additional escrow account, to secure certain post-closing obligations of the Company. The proceeds from the trademark sale were used to, (i) satisfy the Company's outstanding obligations with CIT Commercial Services Group, Inc. ("CIT"), (ii) retire the $7,500,000 in Convertible Debentures issued to KC Aris Fund I, L.P. ("KC") (See Note 6), (iii) pay- off the Company's Series A Junior Secured Note with BNY Financial Corporation ("BNY"), (iv) satisfy secured loans and advances to the Company from related parties (See Note 10), (v) satisfy liens placed against the Company's XOXO(R) by CIT and (vi) reduce trade obligations. 8 5. ADAMSON LICENSE AGREEMENT Following the effectiveness of the termination of the Grupo Agreement, the Company reached an agreement with Adamson Apparel, Inc. to license from the Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo. Adamson is a newly-formed New York corporation of which the majority owner is the Company's chairman and chief executive officer and principal stockholder. Adamson was initially capitalized with a $7 million investment. Adamson is utilizing many of the same employees that were employed by Grupo, all of whom were formerly employees of XOXO or one or more of the Company's subsidiaries. The Adamson Agreement has an initial term which expires on December 31, 2003, which may be automatically renewed for a further one year term, subject to agreement by both parties, to manufacture, market and distribute at wholesale, women's clothing, jeanswear and sportswear under the XOXO and Members Only trademarks and, subject to Aris' rights as licensee with respect thereto, Baby Phat apparel. The royalty rate for XOXO and Members Only products was 9% and is 3.5% for Baby Phat branded products. In addition, Adamson is also responsible for amounts due under the Company's license agreement with the licensor of Baby Phat. The Global agreement required the Adamson license relating to XOXO branded products to be terminated as of closing. Under the terms of the trademark purchase agreement Adamson ceased shipping XOXO branded products as of September 30, 2003. In addition, Adamson closed the XOXO Outlet Stores, which it had been operating as part of the license agreement, in August 2003. 6. SALE OF CONVERTIBLE DEBENTURES In February 2001, the Company issued $7,500,000 in Convertible Debentures which bore interest at 8.5% per annum and were convertible into shares of common stock at the rate of $.46 per share (See Note 4). 7. RESTRUCTURING AND OTHER COSTS Under Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") goodwill and other intangible assets with indefinite useful lives are no longer amortized. Instead such assets will be subject to reduction only when the carrying amount exceed their estimated fair value based on impairment tests established by SFAS 142 that will be made at least annually. In accordance with SFAS 142 the Company determined that the carrying value of goodwill associated with its Members Only(R) trademark to be impaired. As a result of this impairment the Company recorded a goodwill impairment charge of $14,641,000 during the quarter ended September 30, 2003. The Company's remaining retail store and all of the XOXO(R) outlet stores were closed in July of 2003. The Company recorded an impairment charge of $539,000 relating to property 9 and equipment previously used at those locations. The Company has negotiated favorable lease settlements with its retail landlord and nine of the ten outlet store landlords and has been released from all liabilities for these locations. The Company closed three of its four full price XOXO retail stores in the first quarter of fiscal 2002. The Company recorded restructuring and impairment charges aggregating $2,257,000 in the first quarter of 2002, consisting of an accrual of approximately $1,113,000 for 2002 rent, an additional $291,000 of lease termination costs relating to the 2000 restructuring reserve, property and equipment impairment write-downs of approximately $441,000 and goodwill impairment charges of approximately $412,000. The Company included in its accrual a liability for one year of store rent for each of the closed stores since each store lease contains a provision that the landlord will use its best efforts to re-lease the premises in the event that the premises are vacated by the Company. The Company accrued an additional year of rent covering these locations at December 31, 2002. However, no assurances can be given that the premises will be re-leased by December 31, 2003 and the Company will have to periodically review its accrual. In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's former premises at 1411 Broadway in New York. Under the terms of the settlement the Company paid $550,000 on June 26, 2002, to Trizec and was released from all obligations under its lease. As a result of this agreement the Company recorded a favorable reversal of a previously recorded restructuring reserve of approximately $895,000 in the second quarter of fiscal 2002. In connection with the Trizec settlement the Company recorded a liability for $200,000 representing a broker's fee in connection with securing a tenant for the space. This fee is being paid out over approximately two years. 8. PER SHARE DATA Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share has been computed for the quarter and nine-months ended September 30, 2003 by dividing the applicable net income by the weighted average number of common shares outstanding and potentially dilutive common shares. Options and warrants to purchase 10,136,345 and 11,346,845 shares of Common Stock were outstanding as of September 30, 2003 and 2002, respectively, but were not included in the computation of diluted earnings (loss) per share because the effect would be anti-dilutive. 9. STOCK INCENTIVE PLAN The Company has a stock incentive plan which is described more fully in Note 9 of the Company's Annual Report on Form 10-K for 2002. The Company accounts for this plan using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and income (loss) per share if the Company 10 had applied the fair value recognition provisions of FASB Statement No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", to stock-based employee compensation. (in thousands, except per share data) -------------------------------------------------------------------------------- Nine-Months Ended Nine-Months Ended September 30, 2003 September 30, 2002 -------------------------------------------------------------------------------- Net income (loss), as reported $ 4,584 $ (9,538) -------------------------------------------------------------------------------- Deduct: Total stock-based 435 1,496 employee compensation expenses determined under fair value based method for all awards -------------------------------------------------------------------------------- Net income (loss), pro forma 4,149 (11,034) -------------------------------------------------------------------------------- Net income (loss) per share-basic -------------------------------------------------------------------------------- As reported $ 0.04 $ (0.11) -------------------------------------------------------------------------------- Pro forma 0.04 (0.13) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Three-Months Ended Three-Months Ended September 30, 2003 September 30, 2002 -------------------------------------------------------------------------------- Net income (loss) as reported $ 6,510 $ (1,190) -------------------------------------------------------------------------------- Deduct: Total stock-based 145 498 employee compensation expenses determined under fair value based method for all awards -------------------------------------------------------------------------------- Net income (loss), pro forma 6 365 (1,688) -------------------------------------------------------------------------------- Net income (loss) per share-basic -------------------------------------------------------------------------------- As reported $ 0.06 $ (0.01) -------------------------------------------------------------------------------- Pro forma 0.06 (0.02) -------------------------------------------------------------------------------- 10. RELATED PARTY TRANSACTIONS In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by the Company's chief executive officer, entered into an agreement (the "Letter of Credit Agreement") with the Company's principal commercial lender to facilitate the opening of up to $17,500,000 in letters of credit for inventory for the Company. Pursuant to the Letter of Credit Agreement, AHS purchased inventory which was to be held at the Company's warehouse facilities. Such inventory was sold to the Company at cost when the Company was ready to ship the merchandise to the customer (See Note 4). During January 2001, the Company's chief executive officer loaned the Company $2,000,000. In 2002 , the Company's chief executive officer loaned the Company an additional $1,500,000. The loans are payable on demand and bear interest at prime plus one quarter percent (See Note 4). Adamson is majority owned by the Company's chairman and chief executive officer and principal stockholder (Note 5). As of September 30, 2003, Adamson was indebted to the Company in the amount of $3,740,000, which is payable on demand and bears no interest. 11 11. BUSINESS SEGMENTS In accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", our principal segments are grouped between the generation of revenues from royalties and retail sales. The licensing segment derives its revenues from royalties associated from the use of the Company's brand names, principally XOXO, Fragile and Members Only and, subject to Aris' rights as a licensee with respect thereto, Baby Phat. The Retail segment is comprised of one full-price retail store and an internet sales site which principally sell XOXO and Baby Phat branded products. As a result of the trademark assets sale, the Company closed the remaining retail stores in July 2003 and will not receive royalties on sales of XOXO branded products after September 30, 2003 (See Note 4). Segment information for the nine and three- month periods ended September 30, 2003 and 2002, for both segments are set forth below. Corporate overhead is included in the licensing segment data. -------------------------------------------------------------------------------- Retail Segment Financial Three Months Ended Three Months Ended Information September 30, 2003 September 30, 2002 (in thousands) -------------------------------------------------------------------------------- Revenues $955 $773 -------------------------------------------------------------------------------- Cost of Goods Sold 326 333 -------------------------------------------------------------------------------- Selling and administrative expenses 889 549 -------------------------------------------------------------------------------- Impairment of long-lived assets 539 --- -------------------------------------------------------------------------------- Net loss (799) (109) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Licensing Segment Financial Three Months Ended Three Months Ended Information September 30, 2003 September 30, 2002 (in thousands) -------------------------------------------------------------------------------- Revenues $1,025 $2,376 -------------------------------------------------------------------------------- Selling and administrative expenses 1,996 2,728 -------------------------------------------------------------------------------- Restructuring and other costs --- 200 -------------------------------------------------------------------------------- Impairment of long-lived assets 14,641 --- -------------------------------------------------------------------------------- Gain on sale of trademark, net (23,027) --- -------------------------------------------------------------------------------- Interest expense 104 512 -------------------------------------------------------------------------------- Income tax provision 2 17 -------------------------------------------------------------------------------- Net income (loss) 7,309 (1,081) -------------------------------------------------------------------------------- 12 -------------------------------------------------------------------------------- Retail Segment Financial Nine Months Ended Nine Months Ended Information September 30, 2003 September 30, 2002 (in thousands) -------------------------------------------------------------------------------- Revenues $3,482 $2,460 -------------------------------------------------------------------------------- Cost of Goods Sold 1,300 1,259 -------------------------------------------------------------------------------- Selling and administrative expenses 2,413 2,584 -------------------------------------------------------------------------------- Impairment of long lived assets 539 853 -------------------------------------------------------------------------------- Restructuring and other costs --- 1,404 -------------------------------------------------------------------------------- Net loss (770) (3,640) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Licensing Segment Financial Nine Months Ended Nine Months Ended Information September 30, 2003 September 30, 2002 (in thousands) -------------------------------------------------------------------------------- Revenues $5,743 $6,946 -------------------------------------------------------------------------------- Selling and administrative expenses 7,794 11,980 -------------------------------------------------------------------------------- Impairment of long-lived assets 14,641 --- -------------------------------------------------------------------------------- Restructuring and other costs --- (695) -------------------------------------------------------------------------------- Gain on sale of trademark (23,027) --- -------------------------------------------------------------------------------- Interest expense 973 1,567 -------------------------------------------------------------------------------- Income tax provision/(benefit) 8 (8) -------------------------------------------------------------------------------- Net loss 5,354 (5,898) -------------------------------------------------------------------------------- The Company generated revenues of $1,762,000 and $797,000 from retail sales for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. The Company received royalty revenues of $4,531,000 and $2,818,000 from Adamson's sales of XOXO branded products for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. The Company also received royalty revenues of $3,177,000 and $2,002,000 directly from its XOXO licensees for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. These revenues will no longer be available to the Company as a result of the trademark assets sale (See Note 4). 12. CONTINGENCIES The Company, in the ordinary course of its business, is the subject of, or a party to, various pending or threatened legal actions. While it is not possible at this time to predict the outcome of any litigation, the Company may not be able to satisfy an adverse judgement in certain of these actions, 13 which may have a material adverse effect on its financial position, results of operations and cash flows. The following actions, to which the Company is a party, have been updated since the Company's last filing. Fashion World-Santa v. Lola, Inc.: --------------------------------- On February 11, 2002, Fashion World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action sought to evict Lola, on grounds of non- payment of rent, from an XOXO retail store located in Beverly Hills, California. Lola is a party to a five-year lease for that store, and that lease does not expire until April 2006. XOXO Clothing Company, Inc. responded to the complaint as successor in interest to Lola, Inc. On August 21, 2003, the Company and Fashion World-Santa agreed to settle the dispute. The Company has agreed to pay Fashion World-Santa $900,000, $20,000 was paid on signing and the Company has agreed to pay $20,000 monthly on the 15th of each month beginning in October 2003, and continuing for the next 44 months. Christi Wilson v. Aris: ---------------------- On July 31, 2002, Christi Wilson, a former employee of the Company filed suit in the Supreme Court of the State of New York, County of New York, claiming that her commission agreement was breached by the Company. Ms.Wilson is seeking damages for commissions allegedly due under the agreement, and an unstated amount of alleged damages regarding a claim of slander. The material allegations of the complaint have been denied and the Company has filed counterclaims alleging breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, theft of trade secrets and tortious interference with prospective economic advantage. Discovery in this matter is ongoing. The Court recently dismissed a substantial part of Ms. Wilson's slander claim and granted her motion to amend her claim to increase the amount of damages ARIS INDUSTRIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following analysis of the financial condition and results of operations of Aris Industries, Inc. (the "Company") for the nine and three-month periods ended September 30, 2003 and 2002 should be read in conjunction with the consolidated condensed financial statements, including the notes thereto, included on pages 3 through 13 of this report. FORWARD LOOKING STATEMENTS This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including the ability of the Company to satisfy the conditions and requirements of the credit facilities of the Company, the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within prevailing retail environment, customer acceptance of both new designs and newly-introduced 14 product lines, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition," are forward- looking statements. Although the Company believes that expectations reflected in such forward- looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146 In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("ETIF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the consolidated financial statements. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES These consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2003, the Company had a working capital deficit of approximately $6,747,000 compared to a working capital deficit of approximately $35,243,000 at December 31, 2002. The decrease in the working capital deficit was primarily due to the proceeds from the trademark assets sale. The Company's working capital was negatively impacted by its loss from operations. During the nine-months ended September 30, 2003, the Company financed its working capital requirements principally through licensing revenue from Adamson and the Company's other licensees along with the proceeds from the trademark assets sale. In April 2002, the Company terminated its license agreement with Grupo and shortly thereafter Grupo filed for bankruptcy protection under Chapter XI of the Bankruptcy Code. On April 25, 2002, Judge E. Robles of the United States Bankruptcy Court, Central District of California, terminated the Trademark License Agreement and ordered Grupo to immediately discontinue all use of trademark bearing XOXO(R) , Baby Phat(R), Brooks Brothers Golf(R), Fragile(R) and Members Only(R). Following the effectiveness of the termination of the Grupo Agreement, the Company reached an agreement with Adamson Apparel, Inc. ("Adamson"), where the majority stockholder is the Company's chief executive officer, to license from the Company and its subsidiaries the XOXO(R), Members Only(R) and Baby Phat(R) trademarks that had been previously licensed by Grupo (Note 5). The royalty due from Adamson is based on a percentage of net sales. 15 On May 7, 2003, the Company signed a definitive trademark purchase agreement with Global Brand Holdings, LLC ("Global") providing for the sale of the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets and accompanying goodwill for a total sum of $43 million in cash (Note 4). The transaction was approved by the Company's stockholders at a special meeting held on Monday, June 30, 2003. On July 2, 2003, the Company completed the sale of the trade name and service mark. The Company received $43 million in cash at closing of which $2 million was set aside in one escrow account and $1 million was set aside in an additional escrow account, to secure certain post-closing obligations of the Company. On July 2, 2003, the Company repaid all of its indebtedness for borrowed money. The Company's chief executive officer had personally guaranteed $3 million of indebtedness outstanding under a financing agreement with CIT. This guaranty expired upon re-payment of the Company's obligations to CIT. As a result of the trademark assets sale the Company repaid a substantial portion of its existing indebtedness and intends to finance its remaining operations through (i) continued negotiated settlements with trade creditors, (ii) substantially reducing its overhead and (iii) royalties from its remaining trademarks and license. There can be no assurance that the timing of cash receipts to be realized from working capital and operations will be sufficient to meet obligations as they become due. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. RESULTS OF OPERATIONS The Company reported net income of $6,510,000 and $4,584,000 for the three and nine- month periods ended September 30, 2003 compared to net losses of $1,190,000 and $9,538,000 for the three and nine-month periods ended September 30, 2002. During the three-months ended September 30, 2003, the Company's income was primarily attributable to the gain realized by the Company on the sale of its XOXO(R) trademark and related assets. This gain was offset by impairment charges recorded relating to goodwill associated with the Company's Members Only(R) trademark and property and equipment used by the Company's retail and outlet stores which were closed during the quarter. In addition, the Company continued to incur operating losses as royalties generated by its XOXO(R) trademark wound down as the result of the trademark asset sale. During the three-months ended September 30, 2002, the Company's loss was partly attributable to the default by Grupo of its license agreement. As a result of the default by Grupo, the Company incurred $220,000 in charges that were Grupo's direct obligation. In addition, the Company recorded a $200,000 restructuring charge representing a broker's fee in connection with securing a tenant in connection with the Trizec settlement. The Company also recorded a write off of royalty receivable as the result of a default by one of its XOXO licensees. 16 During the nine-months ended September 30, 2003, the Company's income was primarily attributable to the gain realized by the Company on the sale of its XOXO(R) trademark and related assets. This gain was offset by impairment charges recorded relating to goodwill associated with the Company's Members Only(R) trademark and property and equipment used by the Company's retail and outlet stores which were closed during the third quarter of fiscal 2003. In addition, the Company continued to incur operating losses as royalties generated by its XOXO(R) trademark wound down as the result of the trademark asset sale. During the nine-months ended September 30, 2002, the Company's loss was largely attributable to the default by Grupo of its license agreement and the closing by the Company of three retail store locations. As a result of the default by Grupo the Company did not receive approximately $1,000,000 in license royalties and wrote off approximately $1,959,000 in operating expense reimbursements and incurred $1,023,000 in charges that were Grupo's direct obligation. In addition, the Company recorded restructuring charges aggregating $2,257,000 in the first quarter of 2002, consisting of an accrual of approximately $1,113,000 for 2002 rent, an additional $292,000 of lease termination costs relating to the 2000 restructuring reserve, property and equipment impairment write-downs of approximately $440,000 and goodwill impairment charges of approximately $412,000. The Company was required to record a non-cash charge in the amount of $1,300,000 relating to the issuance of 10,000,000 shares of the Company's common stock to an unrelated third party as consideration for him making an investment in Adamson. The management of the Company believes that this was vital to the success of Aris. The Company also recorded a $200,000 restructuring charge representing a broker's fee in connection with securing a tenant in connection with the Trizec settlement and recorded a write off of royalty receivable as the result of a default by one of its XOXO licensees. This was offset by the favorable reversal of a previously recorded restructuring reserve of approximately $895,000 under a settlement agreement with the landlord of the Company's premises at 1411 Broadway in New York during the three-months ended June 30, 2002. REVENUES SALES TO CUSTOMERS The Company's net sales to customers increased from $773,000 and $2,460,000 during the three and nine-month period ended September 30, 2002, respectively, to $955,000 and $3,482,000 during the three and nine-month periods ended September 30, 2003, respectively. This increase was attributable to increased retail sales at the Company's internet sales operation due to the inclusion of the Company's Baby Phat(R) branded products to the site. This was offset by a decrease in sales at the Company's retail store operations as the Company closed its remaining retail store in August 2003. The Company generated revenues of $1,762,000 and $797,000 from retail sales for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. These revenues will no longer be available to the Company as a result of the trademark assets sale (See Note 4). ROYALTY INCOME The Company's royalty income decreased from $2,376,000 during the three-months ended September 30, 2002 to $1,025,000 for the three-months ended September 30, 2003. This decrease was attributable to the trademark asset sale. As a result of the sale the Company received no royalty income from its former XOXO licensees during the quarter. In addition, royalties under the Adamson license were reduced as Adamson wound down its distribution of XOXO branded products in accordance with the trademark asset sale. 17 The Company's royalty income decreased from $6,946,000 during the nine-months ended September 30, 2002 to $5,743,000 for the nine-months ended September 30, 2003. This decrease was attributable to the trademark asset sale. As a result of the sale the Company received no royalty income from its former XOXO licensees after July 2, 2003 the effective date of the transaction. In addition, royalties under the Adamson license were reduced as Adamson wound down its distribution of XOXO branded products in accordance with the trademark asset sale. The Company also wrote-off royalty receivables in the first quarter of 2003 as the result of defaults by two XOXO licensees. The Company received royalty revenues of $4,531,000 and $2,818,000 from Adamson's sales of XOXO branded products for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. The Company also received royalty revenues of $3,177,000 and $2,002,000 directly from its XOXO licensees for the year ended December 31, 2002 and nine-months ended September 30, 2003, respectively. These revenues will no longer be available to the Company as a result of the trademark assets sale (See Note 4). GROSS PROFIT Gross profit for the three-months ended September 30, 2003 was $1,654,000 or 83.5% of revenues compared to $2,816,000 or 89.4% of revenues for the three-months ended September 30, 2002. Gross profit as a percentage of revenues for the three-months ended September 30, 2003 was negatively impacted by the closing of the Company's retail store along with a reduction in royalty income as the result of the trademark asset sale and lower revenues generated under the Company's license agreement with Adamson. Gross profit for the nine-months ended September 30, 2003 was $7,925,000 or 85.9% of revenues compared to $8,147,000 or 86.6% of revenues for the nine-months ended September 30, 2002. Gross profit as a percentage of revenues for the nine-months ended September 30, 2003 was positively impacted by increased retail sales at the Company's internet site. This was offset by the closing of the Company's retail store along with a reduction in royalty income as the result of the trademark asset sale and lower revenues generated under the Company's license agreement with Adamson. SELLING AND ADMINISTRATIVE EXPENSES Selling and Administrative expenses were $2,885,000 or 145.7% of revenues for the three- months ended September 30, 2003 as compared to $3,277,000 or 104.1% of revenues for the three- months ended September 30, 2002. Selling and Administrative expenses as a percentage of revenues for the three-months ended September 30, 2003 were adversely affected by the trademark assets sale which resulted in a reduction of royalty revenues. Selling and Administrative expenses as a percentage of revenue for the three-months ended September 30, 2002 were adversely affected by the Grupo default. As a result of the default the Company was forced to incur operating expenses that were previously shared with Grupo while receiving no royalty income. The Company also incurred $803,000 in charges that were Grupo's direct obligation. In addition, the Company was required to record a non-cash charge in the amount of $1,300,000 relating to the commitment to issue 10,000,000 shares of the Company's common stock to an unrelated third party as consideration for an investment by the third party in Adamson. 18 Selling and Administrative expenses were $10,207,000 or 110.6% of revenue for the nine- months ended September 30, 2003 as compared to $14,564,000 or 154.8% of revenue for the nine- months ended September 30, 2002. Selling and Administrative expenses as a percentage of revenue for the nine-months ended September 30, 2003 continue to be negatively impacted by legal expenses incurred in connection with the Company's defense of various lawsuits along with the reduction in royalty revenue as a result of the trademark assets sale. Selling and Administrative expenses as a percentage of revenues for the nine-months ended September 30, 2002 have been adversely affected by the Grupo default. As a result of the default the Company was forced to write off receivables from Grupo for shared operating expenses and incurred $803,000 in charges that were Grupo's direct obligation. In addition, the Company was liable for excess royalties due under the Baby Phat license for 2001 which Grupo failed to pay. The total charge to the Company for these items was approximately $2,803,000 which, when combined with a $1,000,000 shortfall in minimum royalty income, resulted in the percentage of selling and administrative expenses to revenue being abnormally high. The Company also was required to record a non-cash charge in the amount of $1,300,000 relating to the commitment to issue 10,000,000 shares of the Company's common stock to an unrelated third party as consideration for an investment by the third party in Adamson. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Goodwill is evaluated for impairment at least annually. The Company evaluates the carrying value of its long-lived assets in relation to the operating performance and future undiscounted cash flows of the underlying assets when indications of impairment are present. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. In accordance with SFAS 142 the Company determined that the carrying value of goodwill associated with its Members Only(R) trademark to be impaired. As a result of this impairment the Company recorded an impairment charge of $14,641,000 during the quarter ended September 30, 2003. In addition, the Company's remaining retail store and all of the XOXO(R) outlet stores were closed in August of 2003. The Company recorded an impairment charge of $539,000 relating to property and equipment previously used at those locations. During the nine-month period ended September 30, 2002, the Company recorded an impairment charge of $441,000 relating to property and equipment and an impairment charge of $412,000 relating to goodwill associated with its retail store operations. The Company closed three of its four retail stores during the three-months ended March 31, 2002, and recorded the impairment charges in connection with the closing. RESTRUCTURING AND OTHER COSTS The Company closed three of its four full price XOXO retail stores in the first quarter of fiscal 2002. As a result, the Company recorded restructuring charges aggregating $1,404,000 in the first quarter of 2002, consisting of an accrual of approximately $1,113,000 for 2002 rent and additional $291,000 of lease termination costs relating to the 2000 restructuring reserve. In June of 2002, the Company reached a settlement agreement with TrizecHahnSwig, LLC ("Trizec"), the landlord of the Company's premises at 1411 Broadway in New York. Under the terms 19 of the settlement the Company paid $550,000 to its former landlord at 1411 Broadway and was released from all obligations under its lease. As a result of this agreement the Company recorded a favorable reversal of previously recorded restructuring reserve of approximately $895,000 In connection with the Trizec settlement the Company recorded a liability for $200,000 representing a broker's fee in connection with securing a tenant for the space. This fee is being paid out over approximately two years and was recorded in July of 2002. GAIN ON SALE OF TRADEMARK On July 2, 2003, the Company completed the sale of the trade name and service mark. The Company received $43 million in cash at closing. This was offset by a write-off of approximately $19,289,000 in goodwill relating to the XOXO(R) trademark and approximately $684,000 of legal and other fees incurred in connection with the transaction, resulting in a net gain of $23,027,000. INTEREST EXPENSE Interest expense for the three-months ended September 30, 2003 was $104,000 as compared to $512,000 for the three-months ended September 30, 2002. This decrease was primarily attributable to the satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments. Interest expense for the nine-months ended September 30, 2003 was $973,000 as compared to $1,567,000 for the nine-months ended September 30, 2002. This decrease was primarily attributable to the satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable ITEM 4. CONTROLS AND PROCEDURES At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective. During the third quarter of 2003, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 20 The Company, in the ordinary course of its business, is party to various legal actions the outcome of which the Company believes may have a material adverse effect on its consolidated financial position and results of operations. Several of these actions stem from Grupo incurring expenses in the Company's name. Although the Company did not authorize these expenses, the Company mat be subject to liability for them. Because of Grupo's bankruptcy filing, it is unlikely that the Company will be able to recover any of these amount from Grupo. In addition, the following updates information regarding certain litigation to which the Company is subject: Fashion World-Santa v. Lola, Inc.: --------------------------------- On February 11, 2002, Fashion World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action sought to evict Lola, on grounds of non- payment of rent, from an XOXO retail store located in Beverly Hills, California. Lola is a party to a five-year lease for that store, and that lease does not expire until April 2006. XOXO Clothing Company, Inc. responded to the complaint as successor in interest to Lola, Inc. On August 21, 2003, the Company and Fashion World-Santa agreed to settle the dispute. The Company has agreed to pay Fashion World-Santa $900,000, $20,000 was paid on signing and the Company has agreed to pay $20,000 monthly on the 15th of each month beginning in October 2003, and continuing for the next 44 months. Christi Wilson v. Aris: ---------------------- On July 31, 2002, Christi Wilson, a former employee of the Company filed suit in the Supreme Court of the State of New York, County of New York, claiming that her commission agreement was breached by the Company. Ms.Wilson is seeking damages for commissions allegedly due under the agreement, and an unstated amount of alleged damages regarding a claim of slander. The material allegations of the complaint have been denied and the Company has filed counterclaims alleging breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, theft of trade secrets and tortious interference with prospective economic advantage. Discovery in this matter is ongoing. The Court recently dismissed a substantial part of Ms. Wilson's slander claim and granted her motion to amend her claim to increase the amount of damages. Campers World International, Inc. v. Perry Ellis International and Aris Industries, Inc.: --------------------------------------------------------------------------- Campers World instituted an action in the United States District Court for the Southern District of New York in January 2002 against Perry Ellis International, Inc. ("PEI") and the Company. The complaint alleges that Campers World purchased approximately 460,000 pairs of PEI jeans from Aris for approximately $4,600,000 and subsequently sold those jeans to Costco. PEI thereafter informed Costco that the sale by Campers World to it was an unauthorized use of PEI's trademarks and that Aris was not authorized to sell the jeans to Campers World or to permit it to allow Campers World to sell jeans to Costco. Campers World seeks return of the purchase price and other damages from Aris. PEI has also asserted a cross-claim against Aris and its subsidiaries and the Company's chief executive officer alleging that Aris violated various license agreements regarding PEI's trademarks. Aris has answered the Campers World complaint denying the material allegations. Aris' motion for summary judgement to dismiss the trademark infringement claims brought by PEI, was recently denied. Aris intends to vigorously defend the claims and cross-claims. Melville Realty Company, Inc.v XOXO, Europe Craft Imports and Aris, as successor to Lola Inc. --------------------------------------------------------------------------- 21 Melville instituted an action in the Supreme Court of the State of New York, County of New York claiming that the Company is liable on an alleged guaranty by Lola, Inc. on rent obligations of 8-3 Retailing Inc. ("8-3"), a subsidiary of Aris, pertaining to a sublease of a retail store at 732 Broadway, New York, New York. This action does not allege an acceleration of rent obligations. This action seeks compensatory damages of $391,964, along with sums "to become due pursuant to the terms of the Sublease". This litigation is being vigorously defended. 426 West Broadway Associates, L.P. v Aris, 8-3, XOXO, 8-3 d/b/a XOXO, Lola, Inc., XOXO Outlets Inc., 8-3 a/k/a 8-3 Retail Inc. a/k/a XOXO, ECI, XOXO Clothing Company, In. --------------------------------------------------------------------------- 426 West Broadway Associates instituted an action in the Supreme Court of the State of New York, County of New York claiming rent arrears on a retail store located at 426 West Broadway, New York, New York. This action seeks compensatory damages in the sum of $177,127 with interest from 2/1/02, and compensatory damages on a claim of "anticipatory breach of lease agreement" (however, this is alleged in lieu of a claim for accelerated rent, which the lease does not contain or provide for as a remedy). This litigation is being vigorously defended. BEK TEKSTIL has sued Aris and its subsidiaries allegedly for the nonpayment of certain merchandise that it claims Aris wrongfully refused to accept and/or pay for. The Company intends to defend the action on the grounds that it has no evidence of having received the merchandise. HITCH & TRAIL, INC. ET AL. have commenced an action against the Company in the State Supreme Court for the County of New York, all of which have been consolidated, seeking an aggregate of approximately $250,000 for merchandise allegedly delivered to the Company and for commissions in connection therewith. The Company intends to defend the action on the grounds that it has no evidence of having received the merchandise in question. NORWOOD COLLECTION L.P. has commenced an action against the Company seeking approximately $92,000 it allegedly forwarded to the Company as an advance payment for Brooks Brothers Golf merchandise. The Company contends that Grupo Xtra of New York, Inc. sold the goods directly to Norwood and deposited such check without producing the goods at issue or delivering them to Norwood. The Company intends to defend the claims on that basis. CORPORACION FABRIL has commenced an action against the Company in the United States District Court for the Southern District of New York seeking $146,431.50 for the delivery of merchandise it claims the Company did not pay for. The Company intends to defend the action on the basis that it has no evidence of having received the goods in question. 22 Europe Craft Imports, Inc. vs. Corporate Realty Income Fund I, LP and 475 Fifth Avenue Limited Partnership --------------------------------------------------------------------------- Europe Craft Imports commenced legal action during July 2003 against the defendant in the Supreme Court of the State of New York, County of New York, in which Europe Craft Imports seeks declaratory relief claiming all or a portion of a New York City commercial lease has been rescinded or terminated by the acts or omissions by defendants action. Europe Craft Imports also seeks monetary damages. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Form 8K filed July 15, 2003 - Acquisition and Disposition of Assets 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIS INDUSTRIES, INC. (Registrant) Date: November 13, 2003 By /s/ Paul Spector ----------------------------------- Paul Spector Chief Financial Officer / Treasurer 24 (c) INDEX TO EXHIBITS

------------ (1) Omitted (2) Omitted. (3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30, 1993 and incorporated herein by reference. (4)-(9) Omitted. (10) Filed as the indicated Exhibit to the Report on Form 8-K dated September 30, 1996 and incorporated herein by reference. (11) Omitted. (13) Omitted (14) Omitted (15) Omitted (16) Filed as Annex A to the Company's Proxy Statement filed with the Commission on May 27, 1999, and incorporated herein by reference. (17) Filed as the indicated Exhibit to the Report on Form 8-K dated February 26, 1999 and incorporated herein by reference. (18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with the Commission on or about April 13, 1999 and incorporated herein by reference. (19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999. (20) Omitted. (21) Filed as Exhibit to Annual Report on Form 10-K filed with the Commission on April 15, 2002. (22) Filed as an Exhibit to Form 10Q for the Quarter Ended September 30, 2002 (23) Filed as an Exhibit to Form 8K filed May 8, 2003 27 (24) Filed herewith ----------------------------- * The Schedules and Exhibits to such Agreements have not been filed by the Company, who hereby undertakes to file such schedules and exhibits upon request of the Commission. 28

ARIS INDUSTRIES INC 10-Q