================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NO.: 1-4814 ARIS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NEW YORK 22-1715274 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 525 SEVENTH AVENUE, NEW YORK, NY 10018 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-354-4600 ------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during then preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10- K. Yes X No --- Indicate by check mark whether the Registrant is an accelerated filer (as defined Rule 12b-2 of the Act) Yes No X --- As of March 15, 2004, 108,819,527 shares of the Registrant's Common Stock were outstanding. The aggregate market value of the 24,379,414 shares of voting stock of the Registrant held by non-affiliates of the Registrant at March 15, 2004 was $1,218,971. Documents incorporated by reference: None. ================================================================================ ARIS INDUSTRIES, INC. TABLE OF CONTENTS

~~Page~~PAGE ~~----~~ PART I ..........................................................................................................~~..1~~ Item 1. Business...............................................................................~~.........~~1 Item 2. Properties.............................................................................~~.........4~~3 Item 3. Legal Proceedings......................................................................~~.........~~4 Item 4. Submission of Matters to a Vote of Security Holders....................................~~.........6~~7 PART II ...........................................................................................................6 Item 5. Market for Registrant's Common Equity and Related Security Holder Matters......................6..............................7 Item 6. Selected Financial Data................................................................~~.........7~~8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................~~........~~8 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...........................~~.........13~~17 Item 8. Financial Statements and Supplementary Data...........................................~~.........14~~17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........14.......................................................18 Item 9A. Controls and Procedures ..............................................................18 Part III .........................................................................................................15. Item 10. Directors and Executive Officers of the Registrant....................................~~.........15~~18 Item 11. Executive Compensation................................................................~~.........17~~20 Item 12. Security Ownership of Certain Beneficial Owners and Management........................23 Item 13. Certain Relationships and Related Transactions........21................................24 Item 1314. ~~Certain~~Principal ~~Relationships~~Accountant Fees and ~~Related~~Services ~~Transactions~~...............................................~~..23~~27 PART IV ..........................................................................................................26 Item 1415. Exhibits, Financial ~~Statements~~Statement ~~Schedules~~Schedule and Reports on Form 8-K........................~~.......26~~28 SIGNATURES.......................................................................................................3033

-i- PART I ITEM 1. BUSINESS. INTRODUCTION AND CURRENT BUSINESS Aris Industries Inc. ("the Company"), is a New York corporation organized in 1947. Aris currently has a license agreement for its Members Only(R)trademark and is seeking to obtain new licenses in niche markets to continue its licensing and brand management operations. 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"), a related party, 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. 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. As the result of a default by an XOXO licensee and claims arising from a transition agreement, the $2 million dollar escrow account was reduced by approximately $1,498,000. These amounts have been offset against the gain recorded on the sale. 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"), (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, (v) satisfy liens placed against the Company's XOXO(R) by CIT and (vi) reduce trade obligations. 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 July 2003. On December 22, 2003, pursuant to an Asset Purchase Agreement dated December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly owned subsidiary of the Company, and Adamson sold to a newly created limited liability company, BP Clothing LLC ("BPLLC"), an unaffiliated Company, substantially all of the operating assets, including licensed trademark rights and other intangibles, inventory, machinery and equipment, rights under customer sales orders and open -1- vendor purchase orders of BP and Adamson relating to the manufacture, distribution and sale of the Baby Phat(R) line of clothing and related accessories pursuant to a License Agreement by and between Phat Fashions LLC and BP dated as of July 1, 1999 (the "License Agreement"). In connection with the transaction, Phat Fashions LLC terminated the License Agreement with BP and entered into a new license agreement with Buyer (the "New License"). Adamson had been operating the business pursuant to a sublicense with BP. The terms of the transaction, including the purchase price, were the results of negotiations between representatives of BP and Adamson, and Buyer, including Steven Feiner, a member of Buyer, who was, until closing, an Officer and Director of the Company. Under the terms of the agreement, the Company is to receive $7,500,000, less certain offsets. The terms of the transaction were approved by the Board of Directors of the Company including all of the independent directors of the Company. In accordance with the purchase agreement, BP was to receive an initial payment of $2,500,000 in cash at closing. This amount was reduced by approximately $1,200,000 of offsets. In addition, Buyer issued a promissory note payable to BP in the principal amount of $4,500,000, after additional offsets of approximately $500,000, and has agreed to pay $2,000,000 to the Company in June 2004 and $2,500,000 at a rate of 1% of net sales each month commencing on July 18, 2004 and ending on the maturity date, June 30, 2005, or sooner if fully paid. The Adamson Agreement provided for royalties of 9% on sales under the Company's XOXO(R) and Members Only(R) brands and 3.5% on sales of Baby Phat(R) branded products. The Adamson Agreement expired on December 31, 2003. The Company was incorporated in the State of New York in 1947. Reference to the Company includes its subsidiaries, where applicable. The Company's principal executive offices are located at 525 Seventh Avenue, New York, NY. Its phone number at such offices is 212-354- 4600. TRADEMARKS AND LICENSING The Company has registered the trademark Members Only(R) in the United States and 47 other countries, principally for use in connection with apparel and other men's clothing. The Company was the registered owner of the XOXO(R) and Fragile(R) trademarks in the United States. It was also the registered owner of XOXO(R) in 24 other countries in various classifications. The Company sold all rights, domestic and foreign, to XOXO(R) and Fragile(R) trademark as part of the sales to Global. The Company considers its Trademark to be of material importance to its business. XOXO(R) LICENSING In addition to the Adamson agreement, the Company had granted domestic licenses to use XOXO(R) and, in some cases, Fragile(R) for the manufacture and sale of the following product categories: activewear essentials, outerwear, footwear, swimwear, handbags, leather and suede sportswear, girls sportswear, girls swimwear and girls outerwear. In addition, the Company had granted master licenses for use of the XOXO(R) trademark in Mexico, Canada, Central America, portions of South America, Japan and the Middle East. All of these domestic and foreign licenses were assigned to Global as part of the trademark assets sale. -2- MEMBERS ONLY(R) LICENSING In January 2004, the Company entered into a license agreement for its Members Only(R) trademark. Minimum royalties due the Company start at $250,000 in 2004 and increase to $360,000 for 2007. The Company is also entitled to receive additional percentage royalties should sales exceed minimums. LICENSE AGREEMENTS FOR TRADEMARKS OWNED BY OTHERS BABY PHAT. The Company was party to a license agreement with Phat Fashions LLC to manufacture and sell casual apparel for women in all fabrics, excluding swimwear and accessories, under the Baby Phat(R) trademark for a term which commenced on July 1, 1999 and expires on December 31, 2004. The Company had assigned the Baby Phat(R) license to Adamson. The Company no longer is a party to the license which was terminated in connection with the Asset Purchase Agreement between the Company and BPLLC. CUSTOMERS, MARKETING AND DISTRIBUTION The Company's licensed products are sold primarily to department and specialty stores and national retail chains. Currently, substantially all of the Company's revenues are derived from royalties. COMPETITION The Company's licensees sell products in markets which place a premium on identifiable brand names. The Company's licensees compete with other apparel manufacturers based on style, quality, value and brand recognition. The apparel products sold by the Company's licensees , which are sold on the main selling floors of its retail store customers, are facing increasing competition from the expanded dedication of retail floor space to "designer collections". THE APPAREL INDUSTRY The apparel industry is volatile and unpredictable due to changes in consumer buying patterns, weather conditions and other factors. EMPLOYEES As of December 31, 2003, the Company and its subsidiaries had approximately 8 full time employees on its payroll. This is a reduction from the 25 full and part-time employees as of December 31, 2002 due the Company's closing of the Company's remaining retail store in July 2003 and further overhead reductions. ITEM 2. PROPERTIES. The Company currently has approximately 5,000 square feet of leased space for its executive and sales offices at 525 Seventh Avenue in New York City. The Company is still party to a lease of approximately 5,925 square feet of office and showroom space at 1466 Broadway in New York City, which formerly housed its XOXO and Baby Phat showrooms. The Company also leases approximately 212,939 square feet in Commerce, California that were formerly used for office, showroom, manufacturing and distribution use in connection with the its XOXO and Baby Phat businesses. BPLLC currently pays 100% of the rental expense for the space in Commerce, and will continue to pay the rent for as long as it occupies the premises. BPLLC is under no obligation to remain there and has not assumed any lease obligations at 1466 Broadway. The Company had outlet stores in the following locations at December 31, 2002: Virginia, Florida, -3- California, New Jersey, New York, Nevada, Illinois and Pennsylvania of approximately 37,921 square feet, as well a full-price retail store in New York of approximately 4,596 square feet. Adamson was operating the outlet stores through July of 2003. The Company has negotiated settlements with all of the outlet landlords and has been released from all obligations under those leases. The Company closed its remaining full priced retail store in July 2003 and has reached a settlement with the landlord and is no longer liable under the lease. In January 2002, the Company decided to scale back its retail operations, and has closed three of its four full-price retail stores. The Company recorded restructuring and impairment charges in fiscal 2002 aggregating $2,510,000 to cover the exit costs from the three locations. During 2003, the Company recorded additional charges of approximately $1,032,000 to cover future rental costs for the two retail locations still under litigation. ITEM 3. LEGAL PROCEEDINGS. The Company, in the ordinary course of its business, is party to various legal actions the outcome of which the Company believes may have a material adverse effect on its consolidated financial position and results of operations at December 31, 2003. 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 of which was paid on signing and $20,000 is payable 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. Ms. Wilson recently filed a motion for summary judgement. The Company also intends to file a motion for summary judgement to dismiss a portion of her claims. JENNY'S GARMENTS INC. V. ARIS INDUSTRIES ET AL: Jenny's Garments Inc.("Jenny") filed a compliant against Aris and certain of its subsidiaries and current and former officers, as well as other defendants, in the Supreme Court of New York State, New York County, on or about December 23, 2003. The suit seeks recovery from Aris and other defendants in the total amount of $843,947 for goods that were sold and delivered by Jenny to defendants unrelated to Aris. The suit asserts claims for breach of contract, quasi-contract and fraud and seeks compensatory and punitive damages. Aris answered the -4- complaint on or about February 17, 2004 denying liability and asserting various affirmative defenses. The Company believes that there is a substantial likelihood of defeating all claims asserted as neither Aris nor its subsidiaries were the contracting parties for the goods. 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 and also committed trademark infringement. The Company settled Campers World's claim by agreeing to pay $100,000 over a twenty month period. The Company is defending PEI's claim on the basis of a release PEI issued to the Company and its affiliates in June 2001. MELVILLE REALTY COMPANY, INC. V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS SUCCESSORS TO LOLA INC. Melville instituted an action in the Supreme Court of the State of New York, County of NewYork 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 Europe Craft Imports, Inc., which is subsidiary of the Company, pertaining to an alleged 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 alleged 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 pleaded 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. 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. -5- GREEN 1466 BROADWAY LLC VS. XOXO CLOTHING COMPANY, INC. D/B/A XOXO F/K/A LOLA, INC. D/B/A XOXO, INC. Green 1466 Broadway LLC instituted a summary proceeding in the Civil Court of the City of New York, County of New York, regarding office space at 1466 Broadway, New York, New York. This action was discontinued by a Stipulation of Settlement. No money was paid by XOXO Clothing Company, Inc. for the discontinuance. 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. BRISTOL INDUSTRIAL I, LLC commenced an action against Sheila Clothing Company, Inc. (formerly known as XOXO Clothing Company, Inc.) for breach of a lease for an industrial warehouse space in the City of Commerce, California. The landlord previously filed an action for unlawful detainer when Sheila defaulted on its payment of rent in June 2003, and at that time Sheila agreed to give up possession of the premises and the landlord agreed to dismiss its unlawful detainer action. However, the landlord later commenced this action for breach of lease, alleging lost rent because of its alleged inability to re-let the premises through the end of the lease term, which expired December 31, 2003. The landlord is suing Sheila as lessor and Aris as guarantor of the lease. 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 ("Cofaco") had 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. On March 29, 2004, the Company and Cofaco agreed to compromise and settle the claims raised in the suit. Aris agreed to pay Cofaco $100,000 in $5,000 installments beginning in March 2004 with the final payment due in October 2005. MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a substantial amount of sewing. Martinez & Sons went bankrupt, and therefore failed to pay employees. In December of 2000, XOXO settled with the DOL on behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other employees sued, and XOXO settled that case in the amount of $62,000. Some of the claimants of the DOL settlement, as well as two other employees, filed a complaint with the DLSE for unpaid wages totaling $22,318.62. They asserted that they had not been paid any wages and claimed that they were owed more money than paid in settlement with the DOL. The Company is in the process of investigating these matters. The Company received a demand letter from a law firm claiming to represent some of the same individuals involved in the Martinez & Sons DOL settlement and the DLSE investigation. The attorney representing these 16 former employees have demanded $660,000 from XOXO. The attorney for these individuals has stated that he may file a claim under Business and Professions Code 17200 ET SEQ. This statute allows individuals to sue for unfair business practices, and penalties include treble damages. It is too premature at this time to assess liability in this matter. -6- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS. The Company's Common Stock is traded in the over-the-counter (OTC) market under the symbol AISI. Set forth below are the high and low bid prices for a share of the Common Stock for each fiscal quarter during the prior two fiscal years, as reported in published financial sources. Pursuant to the terms of the Company's loan agreements, the Company has agreed not to declare or pay any dividends (other than stock dividends) on the Common Stock without the prior written consent of its lenders. The Company has not paid any dividends during the last two fiscal years and does not intend to pay any cash dividends in the foreseeable future. The price quotations set forth below reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions. HIGH LOW 2002 First Quarter $0.4500 $0.2200 Second Quarter 0.4500 0.1200 Third Quarter 0.2200 0.1200 Fourth Quarter 0.2000 0.0700 2003 First Quarter $0.1100 $0.0900 Second Quarter 0.1600 0.0500 Third Quarter 0.0900 0.0400 Fourth Quarter 0.1200 0.0300 There were approximately 3,333 shareholders of record as of March 15, 2004. RECENT SALES OF UNREGISTERED SECURITIES In March 2001, in settlement of a disputed claim with Tarrant Apparel Group, Inc., the Company issued 1,500,000 shares of its common stock to Tarrant, with a value of $1,050,000. The Company agreed that, in the event the market value of such shares as of December 31, 2001 was less than $3,300,000, the Company would (x) pay to Tarrant in cash an amount, or (y) issue to Tarrant additional shares of common stock having a share value, equal to the difference between $3,300,000 and the greater of the share value as of December 31, 2001 and $1,050,000. In February, 2002, the Company issued 6,617,647 shares of its common stock in full satisfaction of its obligation under 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- ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE DATA)

~~(In thousands except for per share data) ======================================================================================================================~~ Year Ended Year Ended Year Ended Year Ended 11Year ~~Months~~ Ended ------------------------------------------------------------------------------------------------------------------------- 12/31/0003 12/31/~~99(4)~~02 12/31/9801 12/31/~~97(3)~~00 12/31/96 99(1) ------------------------------------------------------------------------------------------------------------------------- ~~Net~~Royalty ~~sales~~income $~~199~~6,~~439~~144 $~~175~~9,~~359~~557 $~~127~~11,~~680~~389 $942,~~539~~737 $~~130~~2,~~155~~571 ------------------------------------------------------------------------------------------------------------------------- Income (~~Loss~~loss) ~~income~~- ~~before~~continuing ~~extraordinary~~operations ~~items (36~~6,~~480)~~135 (108,~~583~~365) (413,~~250~~601) 2,~~333~~692 2,~~104~~522 ------------------------------------------------------------------------------------------------------------------------- ~~Net~~Income (loss) ~~income~~- discontinued (361,~~480~~296) (105,~~583~~349) (~~3,728~~2) 28,~~333~~169 12(39,~~966~~172) (213,105) operations ------------------------------------------------------------------------------------------------------------------------- Net income (loss) ~~earnings~~4,839 ~~per~~(13,714) ~~share before extraordinary items - basic~~ (~~.46~~3,434) (~~.19~~36,480) (~~.29~~10,583) ~~.18 .18~~ ------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) ~~earnings~~ per share ~~before~~- ~~extraordinary~~basic ~~items~~and diluted: ------------------------------------------------------------------------------------------------------------------------- ~~diluted~~Net earnings (~~.46~~loss) per share - .05 (.1909) (.2917) .1603 .1705 continuing operations ------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) ~~earnings~~ per share - ~~basic~~ (.4601) (.1906) .11 (.2549) (.1824) ~~1.09~~discontinued operations ------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) ~~earnings~~ per share -.04 ~~diluted~~ (.4615) (.1904) (.2546) (.1619) ~~1.07~~ ------------------------------------------------------------------------------------------------------------------------- Total assets ~~100~~10,~~209~~359 ~~106~~38,~~117~~336 7748,~~332~~696 73100,~~837~~209 44106,~~855~~117 ------------------------------------------------------------------------------------------------------------------------- Long-term ~~obligations~~debt ~~5,242~~-0- 147,~~342~~500 167,~~438~~500 165,~~930~~242 1614,~~702~~342 ------------------------------------------------------------------------------------------------------------------------- Working capital/(deficit) (336,~~283~~068) 7(35,~~419~~243) 9(28,~~551~~334) 11(33,~~738~~283) 127,~~370~~419 ------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 3(deficiency) (2,~~486~~954) 39(7,~~251~~800) 141,~~092~~177 173,~~814~~486 1439,~~755~~251 ~~======================================================================================================================~~-------------------------------------------------------------------------------------------------------------------------

1. Includes results of operations and assets and liabilities of XOXO from its acquisition on August 10, 1999. 2. Includes loss of $1,272,000 related to the Company's retail store operations. The Company closed three of its four retail store locations in the first quarter of 2002. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements, including the notes thereto, and the "Selected Financial Data" included on this page, and pages F-1 through F- 25, respectively, of this Annual Report. FORWARD LOOKING STATEMENTS This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including the ability of the Company to satisfy the conditions and requirements of the credit facilities of the Company, the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within prevailing retail environment, customer acceptance of both new designs and newly- -8- introduced product lines, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition," are forward-looking statements. Although the Company believes that expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. SUMMARY OF CRITICAL ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures relating to contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. The most significant estimates relate to the recoverability of long-lived assets, valuation allowances on deferred tax assets, collectability of receivables and estimates of future lease obligations. Actual results could differ from those estimates. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates the carrying value of its long-lived assets in relation to the operating performance and future undiscounted cash flows of the underlying assets when indications of impairment are present. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. The Company moved to a significantly smaller office location in the fourth quarter of 2003. In connection with this move in 2003 the Company recorded an impairment charge of $345,000 on write-downs of property and equipment no longer in use. The Company also recorded an impairment charge of $220,000 in 2001 which represented the net book value of various computer and other equipment that has become idle as a result of the transition of the Company into a licensing and brand management business. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. SFAS No. 146 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. Since the Company has elected to continue to use the provisions of APB 25 in accounting for stock options granted to employees, it is required by Statement of Financial Accounting -9- Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", to present additional pro forma information showing effects on its historical results of operations of the use of a method that estimates the fair value of the options at the grant date and then amortizes the fair value to expense over the options' vesting period. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as shown in the accompanying consolidated financial statements, the Company has incurred losses from operations for the three year period ended December 31, 2003. As of December 31, 2003, the Company had a working capital deficit of $6,068,000. As a result of the trademark assets sale and the sale of the BP license, the Company has repaid a substantial portion of its existing indebtedness. The Company intends to finance its remaining operations through (i) royalties which the Company is due from the license of its Members Only trademark, (ii) payments of escrow funds due from the trademark assets sale and collection of the balance of proceeds from the sale of licensed trademark rights, (iii) continued reduction of the Company's overhead and, (iv) continued negotiated settlements with its trade creditors. The Company believes that its financing plan will be sufficient at least through December 31, 2004, to sustain its operations. However, there can be no assurance that the timing of cash receipts to be realized from working capital and operations will be sufficient to meet obligations as they become due. These factors raise substantial doubt about the entity's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2003, the Company had a working capital deficit of approximately $6,068,000 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 received from the sale of its major operating assets as explained below. The Company's working capital was negatively impacted by its loss from operations. During the year ended December 31, 2003, the Company financed its working capital requirements principally through licensing revenue from Adamson and the Company's other licensees along with proceeds received from the trademark assets sale and the Asset Purchase Agreement and a loan 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 -10- 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. The royalty due from Adamson is based on a percentage of net sales. 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 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. As the result of a default by an XOXO licensee and claims arising from a transition agreement, the $2 million dollar escrow account was reduced by approximately $1,498,000. These amounts have been offset against the gain recorded on the sale. 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 guarantee expired upon re- payment of the Company's obligations to CIT. On December 22, 2003, pursuant to an Asset Purchase Agreement dated December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly owned subsidiary of the Company, and Adamson sold to a newly created limited liability company, BP Clothing LLC ("BPLLC"), an unaffiliated company, substantially all of the operating assets, including licensed trademark rights and other intangibles, inventory, machinery and equipment, rights under customer sales orders and open vendor purchase orders of BP and Adamson relating to the manufacture, distribution and sale of the Baby Phat(R) line of clothing and related accessories pursuant to a License Agreement by and between Phat Fashions LLC and BP dated as of July 1, 1999 (the "License Agreement"). In connection with the transaction, Phat Fashions LLC terminated the License Agreement with BP and entered into a new license agreement with Buyer (the "New License"). Adamson had been operating the business pursuant to a sublicense with BP. The terms of the transaction, including the purchase price, were the results of negotiations between representatives of BP and Adamson, and Buyer, including Steven Feiner, a member of Buyer, who was, until closing, an Officer and Director of the Company. Under the terms of the agreement, the Company is to receive $7,500,000, less certain offsets. The terms of the transaction were approved by the Board of Directors of the Company including all of the independent directors of the Company. In accordance with the purchase agreement, BP was to receive an initial payment of $2,500,000 in cash at closing. This amount was reduced by approximately $1,200,000 of offsets. In addition, Buyer issued a promissory note payable to BP in the principal amount of $4,500,000, after additional offsets of approximately $500,000, and has agreed to pay $2,000,000 to the Company in June 2004 and $2,500,000 at a rate of 1% of net sales each month commencing on July 18, 2004 and ending on the maturity date, June 30, 2005, or sooner if fully paid. As a result of the trademark assets sale and the sale of the BP license, the Company has repaid a substantial portion of its existing indebtedness. The Company intends to finance its -11- remaining operations through (i) royalties which the Company is due from the license of its Members Only trademark is $250,000 in 2004 and increases to $360,000 for 2007, (ii) payments of escrow funds due from the trademark assets sale and collection of the balance of proceeds from the sale of licensed trademark rights, (iii) continued reduction of the Company's overhead and, (iv) continued negotiated settlements with its other creditors. The Company believes that this financing plan will be sufficient, at least through December 31, 2004, to sustain its operations as a licensing and brand management business. 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 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. -12- CAPITAL EXPENDITURES. By virtue of the change in the nature of the Company's operations, the Company's capital expenditures for 2003 were nil. RESULTS OF OPERATIONS: 2003 COMPARED TO 2002 The Company reported net income of $4,839,000 for the year ended December 31, 2003, which consisted of $6,135,000 of income from continuing operations and a loss of $1,296,000 from discontinued operations. This is compared to a net loss of $13,714,000 for the year ended December 31, 2002, which consist of a loss of $8,365,000 from continuing operations and a loss of $5,349,000 from discontinued operations. The Company's income from continuing operations for the twelve-months ended December 31, 2003 was primarily attributable to gains realized by the Company on the sale of its XOXO(R) trademark and the sale of its Baby Phat sub-license. These gains was offset by impairment charges recorded relating to goodwill associated with the Company's Members Only(R) trademark and capitalized assets no longer in use. The Company's loss from discontinued operations consist primarily of rent accruals related to its closed retail stores and goodwill and asset impairment charges relating to its former retail and outlet store operations. The Company's loss from continuing operations for the twelve-months ended December 31, 2002 was partly attributable to the default by Grupo of its license agreement. 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. The Company was also required to record non-cash charges in the amount of $2,400,000 relating to the issuance of 20,000,000 shares of the Company's common stock to two unrelated third parties as consideration for their making an investment in Adamson. The Company's loss from discontinued operations consist primarily of rent accruals for its closed retail stores, goodwill and asset impairment charges related to its former retail stores along with losses incurred by those stores before closing in the first quarter of 2002. REVENUES-CONTINUING OPERATIONS The Company's royalty income decreased from $9,557,000 during the twelve-months ended December 31, 2002 to $6,144,000 for the twelve-months ended December 31, 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 from Adamson's sales of XOXO branded products for the year ended December 31, 2002 as compared to $2,818,000 for the yaer ended December 31, 2003. The Company also received royalty revenues of $3,177,000 directly from its XOXO licensees for the year ended December 31, 2002 as compared to $2,002,000 for the year ended December 31, 2003. These revenues will no longer be available to the Company as a result of the trademark assets sale. As a result of the Asset -13- Purchase Agreement dated December 22, 2003, the Company will also no longer receive any royalty income from Adamson in regards to its Baby Phat sub-license. SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS Selling and Administrative expenses were $11,716,000 or 190.7% of revenue for the twelve months ended December 31, 2003 as compared to $15,832,000 or165.7% of revenue for the twelve months ended December 31, 2002. Selling and Administrative expenses as a percentage of revenues for the twelve months ended December 31, 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. In addition, the Company reserved $2,000,000 as an allowance against receivables from Adamson. Selling and Administrative expenses for the twelve-months ended December 31, 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 $1,023,000 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 in 2002. The total charge to the Company for these items was approximately $3,023,000 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 non-cash charges in the amount of $2,400,000 relating to the issuance of 20,000,000 shares of the Company's common stock to two unrelated third parties as consideration for their investment in Adamson. DISCONTINUED OPERATIONS Discontinued operations for the years ended December 31, 2003 and 2002 include all sales, commissions, cost of goods sold and selling and administrative expenses recorded in connection with the Company's former retail and outlet store operations, import and wholesale operations and all sales to licensee. Additionally, certain restructuring charges, goodwill and long-lived assets impairment charges have also been reclassified as discontinued operations. For the year ended December 31, 2003 the Company included in discontinued operations a goodwill impairment charge of $368,000, long-lived assets impairment charges of $483,000 and a restructuring charge of $1,032,000. Goodwill and long-lived assets relating to the XOXO retail store and the XOXO outlet stores, which were being operated by the Company's former licensee Adamson, were determined to be impaired after the closing of the trademark sale to Global. The $1,032,000 restructuring charge represents an additional years rent accrual for two of the Company's four former XOXO retail stores which were closed in 2002 and are still the subject of litigation with the landlord. 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 by the end of 2004. The Company could incur significantly higher rent charges should a future review warrant an additional accrual. The Company reached a settlement agreement with the remaining retail store closed in 2002 and settled with the landlord and was released from its lease on the remaining store closed in July 2003. The Company also included a $500,000 gain on the forgiveness of indebtedness realized on the settlement of accounts payable. For the year ended December 31, 2002 the Company has reclassified into discontinued operations a goodwill impairment charge of $412,000, long-lived assets impairment charges of $441,000 and a restructuring charge of $2,507,000. Goodwill and long-lived assets relating to the -14- four XOXO retail stores, three of which were closed in the first quarter of 2002, were determined to be impaired. The $2,507,000 restructuring charge represents an accrual of rental charges for 2002 and 2003 for its three closed retail stores. INTEREST EXPENSE Interest expense for the twelve months ended December 31, 2003 was $987,000 as compared to $2,086,000 for the twelve months ended December 31, 2002. This decrease was primarily attributable to the satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments. AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS The Company had approximately $94,000,000 of net operating loss carryforwards ("NOL") at December 31, 2003. The NOL's expire in varying amounts between 2005 and 2022. As a result of the change in control of the Company in 1999, the utilization of approximately $57,000,000 of these NOL's are limited by Section 382 of the Internal Revenue Code to approximately $1,500,000 annually for five years. Accordingly, the Company expects that a significant portion of these NOL's will expire. The remaining NOL's were incurred subsequent to the Simon Purchase Transaction and are not subject to the limitation. 2002 COMPARED TO 2001 The Company reported a net loss of $13,714,000 for the twelve months ended December 31, 2002, which consisted of a loss of $8,365,000 from continuing operations and a loss of $5,349,000 from discontinued operations. This is compared to a net loss of $3,434,000 for the twelve months ended December 31, 2001, which consist of a loss of $13,601,000 from continuing operations, income of $8,685,000 from discontinued operations and extraordinary gain of $1,482,000. The Company's loss from continuing operations for the twelve-months ended December 31, 2002 was partly attributable to the default by Grupo of its license agreement. 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. The Company was also required to record non-cash charges in the amount of $2,400,000 relating to the issuance of 20,000,000 shares of the Company's common stock to two unrelated third parties as consideration for their making an investment in Adamson. The Company's loss from discontinued operations consist primarily of rent accruals for its closed retail stores, goodwill and asset impairment charges related to its former retail stores along with losses incurred by those stores before closing in the first quarter of 2002. The Company's loss from continuing operations for the twelve-months ended December 31, 2001 was partly attributable to phase-out costs associated with the consolidation of its facilities, reductions of its workforce and legal expenses incurred as the Company continued its negotiated settlements with vendors. The Company's income from discontinued operations consist primarily of reversals aggregating approximately $5,600,000 of restructuring and inventory reserves related to previously reserved inventory that was subsequently sold to Grupo at original cost. -15- REVENUES-CONTINUING OPERATIONS The Company's royalty income decreased from $11,389,000 during the twelve months ended December 31, 2001, to $9,557,000 for the twelve months ended December 31, 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. Additionally, this decrease was partly attributable to softness in the retail environment which has impacted royalties earned under the new Adamson license. The Company also wrote off royalty receivable as the result of a default by one of its XOXO licensees. SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS Selling and Administrative expenses were $15,832,000 or 165.7% of revenue for the twelve months ended December 31, 2002 as compared to $21,297,000 or187.0% of revenue for the twelve months ended December 31, 2001. Selling and Administrative expenses as a percentage of revenues for the twelve months ended December 31, 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 $1,023,000 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 in 2002. The total charge to the Company for these items was approximately $3,023,000 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 non-cash charges in the amount of $2,400,000 relating to the issuance of 20,000,000 shares of the Company's common stock to two unrelated third parties as consideration for their investment in Adamson. Selling and administrative expenses as a percentage of revenue for the twelve months ended December 31, 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. DISCONTINUED OPERATIONS Discontinued operations for the years ended December 31, 2002 and 2001 include all sales, commissions, cost of goods sold and selling and administrative expenses recorded in connection with the Company's former retail and outlet store operations, import and wholesale operations and all sales to licensee. Additionally, certain restructuring charges, goodwill and long-lived assets impairment charges have also been reclassified as discontinued operations. For the year ended December 31, 2002 the Company has reclassified into discontinued operations a goodwill impairment charge of $412,000, long-lived assets impairment charges of $441,000 and a restructuring charge of $2,507,000. Goodwill and long-lived assets relating to the four XOXO retail stores, three of which were closed in the first quarter of 2002, were determined to be impaired. The $2,507,000 restructuring charge represents an accrual of rental charges for 2002 and 2003 for its three closed retail stores. -16- For the year ended December 31, 2001 the Company has reclassified into discontinued operations a long-lived assets impairment charge of $242,000 and a restructuring recovery of $1,679,000. The asset impairment charge related to assets at the Company's former office location which were abandoned. In 2000, the Company had reserved $4,187,000 in connection with a restructuring of its operations. In 2001, the Company reversed $1,679,000 in accrued rental costs resulting from the settlement of the Company's lease obligation on its New Bedford, Massachusetts, warehouse. INTEREST EXPENSE Interest expense for the twelve months ended December 31, 2002 was $2,086,000 as compared to $3,404,000 for the twelve months ended December 31, 2001. This decrease was primarily attributable to reductions of the Company's indebtedness under its credit facility. EFFECT OF INFLATION The Company does not believe that inflation has had any material impact on its operating results for any of the fiscal periods discussed in the management's discussion and analysis. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. QUARTERLY FINANCIAL DATA. (UNAUDITED)(IN THOUSANDS EXCEPT PER SHARE DATA) Per Share --------- Quarter Royalty Net Income/(Loss) Basic Revenues 2003 First $2,116 $(1,279) $(0.01) Second 2,602 (647) (0.01) Third 1,025 6,510 0.06 Fourth 401 255 0.00 --- --- $6,144 $4,839 ====== ====== 2002 First $2,088 $(5,658) $(0.07) Second 2,482 (2,690) (0.03) Third 2,376 (1,190) (0.01) Fourth 2,611 (4,176) (0.04) ----- ------ $9,557 $(13,714) ====== ======== -17- The financial statements listed in the accompanying Index at Part IV, Item 15(a)1 are filed as a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2003, we carried out an evaluation under the supervision and with the participation of our the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in our periodic reports to the Securities and Exchange Commission. During the fourth quarter of 2003, there were no changes in our internal control over financial reporting that have materially affected, or reasonably likely to materially affect, our internal controls over financial reporting. There have been no significant changes in our internal control or in other factors which could significantly affect our internal control over financial reporting subsequent to such evaluation. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below are the names, ages and principal occupations of the current members of the Board of Directors and the executive officers of the Company, their positions with the Company, their business experience during the last five years and the year each was first elected a director of the Company. Directors hold office until the next Annual Meeting of Shareholders and until their respective successors are elected and qualify, provided that vacancies occurring in the Board of Directors may be filled by vote of the Directors. Officers of the Company serve at the pleasure of the Board of Directors of the Company.

~~Per~~----------------------------------------------------------------------------------------------------------- ~~Share~~NAME AGE POSITION ----------------------------------------------------------------------------------------------------------- ~~Quarter~~Arnold ~~Net~~H. ~~Sales~~Simon ~~Gross~~58 ~~Profit~~Director, ~~Net~~Chairman, ~~Income/(Loss)~~Chief ~~Basic~~Executive ~~Diluted~~Officer and President of the Company. ----------------------------------------------------------------------------------------------------------- ~~2000~~Debra ~~First~~Simon $47 ~~42,886~~Director. ~~$15,152~~(Resigned $August (71,~~094)~~ ~~$(0.09~~2003) ~~$(0~~----------------------------------------------------------------------------------------------------------- Howard Schneider 76 Director.~~09)~~ ~~Second~~----------------------------------------------------------------------------------------------------------- ~~44,200~~Mark ~~15,166~~Weiner ~~(5,528)~~49 (0Director.~~07)~~ ~~(0.07)~~----------------------------------------------------------------------------------------------------------- ~~Third~~Paul ~~58,262~~Spector ~~16,513~~61 ~~(3,362)~~Senior ~~(0.04)~~Vice ~~(0.04)~~President, ~~Fourth~~Chief ~~54,091~~Financial 8Officer,~~369~~ ~~(20,496)~~Treasurer ~~(0.26)~~and (0Secretary.~~26)~~ -------- ------- -------------------------------------------------------------------------------------------- ~~$199,439~~Gregg ~~$55,200~~Fiene ~~$(36,480)~~52 ~~========~~Vice ~~=======~~Chairman ~~========~~and ~~1999~~Director ~~First~~of ~~$28,133~~the ~~$6,660~~Company ~~$(7,324)~~and ~~$(0.28)~~Chief ~~$(0.28)~~Executive ~~Second~~Officer ~~25,324~~of ~~6,908~~XOXO ~~(3,083)~~Clothing ~~(0.07)~~Company (~~0.07)~~Resigned ~~Third~~September 6219,~~869~~ ~~18,318~~2003) ~~3,275~~----------------------------------------------------------------------------------------------------------- ~~0.05~~Steven ~~0.05~~Feiner ~~Fourth~~36 ~~59,033~~Director ~~18,648~~and ~~(3,451)~~President (0of XOXO.~~04)~~ (~~0.04~~Resigned December 22, 2003) -------- ------- -------- ~~$175,359 $50,534 $(10,583) ======== ======= ========~~------------------------------------------------------------------------------------

ARNOLD H. SIMON became Chairman of the Board of Directors and Chief Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999. From 1985 until -18- December 1997, Mr. Simon was president of Rio Sportswear, Inc., and from 1994 until December 1997, he was President, Chief Executive Officer and a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an aggregate of 31 years of experience in the apparel industry. Mr. Simon is the Managing Member of The Simon Group and has sole voting and investment power with respect to the shares of the Company owned by The Simon Group. Mr. Simon currently owns a majority of the membership interests in the Simon Group. Mr. Simon is married to Debra Simon. DEBRA SIMON became a Director of the Company on March 18, 1999. Ms. Simon was Executive Vice-President and a Director of Designer Holdings Ltd. from March 1994 until December 1997, and was Vice-President of Rio Sportswear, Inc. from 1985 until 1997. Ms. Simon is the wife of Arnold H. Simon. Ms. Simon resigned from the board on August 1, 2003. HOWARD SCHNEIDER became a Director of the Company on March 18, 1999. Mr. Schneider has been engaged as a Certified Public Accountant with the firm Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York, for the past 30 years. Mr. Schneider performs accounting services for The Simon Group and Mr. and Ms. Simon personally. MARK S. WEINER became a Director of the Company on June 17, 2000. He is currently, and for more than the past five years has been, president of Financial Innovations, Inc., a private marketing and merchandising company. Mr. Weiner was deputy treasurer of the Democratic National Committee from 1989 to 1993 and currently serves as treasurer of the Democratic National Governors Association. PAUL SPECTOR has been Senior Vice President and Chief Financial Officer of the Company since May 1992 and Treasurer and Secretary of the Company since August 1991. From 1986 until May 1992, Mr. Spector was Vice President of the Company and from 1983 until August 1991 Mr. Spector was Controller of the Company. GREGG FIENE has been vice chairman of the Company's board of directors and chief executive officer of the Company's XOXO subsidiary since August 10, 1999. For more than five years prior to its acquisition by the Company, Mr. Fiene was the chairman and chief executive officer and a principal shareholder of the predecessor to XOXO. Mr. Fiene resigned as an officer and director of the Company on September 19, 2003. STEVEN FEINER was appointed to the Board on March 23, 2000 to fill the vacancy created by the death of David Fidlon. Mr. Feiner was appointed president of XOXO in June 2000. Prior thereto, Mr. Feiner had been for more than the prior five years, the owner and operator of various privately held apparel concerns. Mr. Feiner resigned as an officer and director of the Company on December 22, 2003. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company's equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by Commission regulations to furnish the Company with copies of all Section 16(a) forms they filed. -19- To the Company's knowledge, based solely on the Company's review of Forms 3 (Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in Beneficial Ownership) furnished to the Company with respect to the fiscal year ended December 31, 2003, no persons failed to file any such form in a timely manner. ITEM 11. EXECUTIVE COMPENSATION. The following table presents the compensation paid to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as of December 31, 2003 who received compensation in excess of $100,000.

~~==================================================================================================================== NAME AGE POSITION~~ -------------------------------------------------------------------------------------------------------------------- ~~Arnold H. Simon 55 Director, Chairman, Chief Executive Officer and President of the Company.~~ ---------------- Long-Term Annual Compensation Compensation --------------------------------------------------------------------------------------------------- ~~Robert A. Katz 34 Director.~~ --------------------------------- Other Securities Name and Fiscal Annual Underlying All Other Principal Position Year Salary ($) Bonus ($) Compensation Stock Compensation($) ($) Options(#) ----------------------------------------------------------------------------------- ~~Debra Simon 44 Director.~~ ------------------------------------------------- Arnold H. Simon, 2003 750,000 -- 79,668(2) -- -- Chairman, Chief 2002 750,000 -- 79,668(2) -- --~~-------------------------------------------------------~~ ~~Howard~~Executive ~~Schneider~~Officer 73of ~~Director.~~the 2001 750,000 -- 107,983(1) -- -- Company and President -------------------------------------------------------------------------------------------------------------- ~~Mark Weiner 46 Director.~~ ----------------------~~----------------------------------------------------------------------------------------------~~ ~~Maurice~~Steven ~~Dickson~~Feiner, 562003 ~~Executive~~250,000(6) ~~Vice~~-- President, ~~Chief~~of ~~Operating~~XOXO ~~Officer.~~2002 250,000(4)(5) -- 2001 355,771(3) -- ---------------------------------------------------------------------------------------------------------------- ~~Paul Spector 59 Senior Vice President, Chief Financial Officer, Treasurer and Secretary.~~ --------------------~~------------------------------------------------------------------------------------------------~~ Gregg Fiene, 492003 --(6) -- Vice Chairman, ~~and~~Chief ~~Director~~2002 of8,654(4)(5) ~~the~~-- ~~Company~~-- ~~and Chief~~ Executive Officer of ~~XOXO~~2001 ~~Clothing~~230,768(3) ~~Company~~ -- -- XOXO ---------------------------------------------------------------------------------------------------------------- ~~Steven Feiner 33 Director and President of XOXO.~~ -------------------- Paul Spector, 2003 200,000 --~~----------------------------------------------------------------------------------------------~~ ~~Joseph~~Chief ~~Purritano~~Financial 42Officer ~~Vice~~2002 ~~President~~200,000 -- ~~Sales.~~2001 176,250 100,000 -------------------------------------------------------------------------------------------------------------------- ~~Tom Nastos 42 Vice President~~ - ~~Production.~~ ---------------~~-----------------------------------------------------------------------------------------------------~~

(1) Includes $43,950 in tax and accounting services and $64,033 in automobile expenses paid on behalf of Mr. Simon pursuant to his employment agreement. (2) Includes $79,668 in automobile expenses paid on behalf of Mr. Simon pursuant to his employment agreement. (3) Mr. Feiner and Mr. Fiene received $394,229 and $519,232, respectively, in salary from Grupo in connection with Grupo's assumption of XOXO's operations (4) Mr. Feiner and Mr. Fiene received $134,617 and $201,922, respectively, in salary from Grupo in connection with Grupo's assumption of XOXO's operations (5) Mr. Feiner and Mr. Fiene received $340,389 and $510,574, respectively, in salary from Adamson in connection with Adamson's assumption of XOXO's operations (6) Mr. Feiner and Mr. Fiene received 500,000 and $750,000, respectively, in salary from Adamson in connection with Adamson's assumption of XOXO's operations -20- OPTION GRANTS The following table sets forth information regarding grants of stock options to the Named Executive Officers during the last fiscal year. No SARs were granted during the last fiscal year.

~~-----------------------------------------------------------------------------------------------------------------------------~~POTENTIAL ~~Long-Term~~REALIZABLE ~~Annual~~VALUE ~~Compensation~~AT ~~Compensation~~ASSUMED ~~-----------------------------------------------------------------------------------------------------------------------------~~ANNUAL ~~Other~~RATES ~~Securities~~% ~~Name~~OF ~~and~~OPTIONS/ ~~Fiscal~~WEIGHTED ~~Annual~~OF ~~Underlying~~STOCK ~~Stock~~APPRECIATION ~~All~~SARS ~~Other~~GRANTED ~~Principal~~AVERAGE ~~Position~~FOR ~~Year~~OPTION ~~Salary~~TERM ($) ~~Bonus~~OPTIONS/SARS ~~($)~~TO ~~Compensation($)~~EMPLOYEES ~~Options~~EXERCISE ~~(#)~~EXPIRATION ~~Compensation($)~~ -------------------~~----------------------------------------------------------------------------------------------------------~~ ~~Arnold~~NAME H.GRANTED ~~Simon,~~DURING ~~Chairman,~~FISCAL ~~2000~~YEAR ~~734,615~~PRICE/SHARE --DATE ~~177,611(7) 1,250,000 52,275(6) Chief Executive Officer of 1999 634,615(1) 181,000 189,800(~~5)% ~~1,000,000~~per ~~26,137(6)~~year ~~the~~10% ~~Company~~per ~~and~~year ~~President~~ ---- ------- ------------------ ----------- ---- ----------- ------------~~----------------------------------------------------------~~ ~~Maurice~~Arnold ~~Dickson,~~H. ~~Executive~~Simon ~~2000~~- ~~235,817(8)~~- - - ~~1,000,000~~- ~~Vice President and Chief Operating Officer~~ -~~----------------------------------------------------------------------------------------------------------------------------~~ ~~Tom~~Paul ~~Nastos,~~Spector ~~Vice President 2000 404,000~~ -- -- - ~~Manufacturing 1999 382,666~~ -- ~~750,000(4) 1998 330,000~~ -- ~~250,000(4)~~ -~~----------------------------------------------------------------------------------------------------------------------------~~ Gregg Fiene, ~~2000~~- ~~749,996~~- - - ~~500,000 Vice Chairman, Chief 1999 281,250(2)~~ -- ~~1,150,000 Executive Officer of XOXO Clothing Company~~ -~~----------------------------------------------------------------------------------------------------------------------------~~ ~~Joseph~~Steven ~~Purritano,~~Feiner ~~2000 529,230~~ -- -- -- ~~Vice President~~ - ~~Sales 1999 288,462(3) 250,000(3)~~ -- ~~750,000~~ -~~----------------------------------------------------------------------------------------------------------------------------~~

EXERCISED/UNEXERCISED STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES The following table sets forth, with respect to the named Executive Officers of the Company, the fiscal year-end value as at December 31, 2003 of unexercised options, as well as options exercised by such executive officers during the 2002 Fiscal Year. All options referred to below were granted under the 1993 Stock Incentive Plan. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES -----------------------------------------------

~~POTENTIAL~~Shares ~~REALIZABLE~~Acquired ~~VALUE~~Number %of OFSecurities ~~OPTIONS/~~Underlying ATValue ~~ASSUMED~~of ~~ANNUAL~~Unexercised ~~RATES~~on ~~SARS~~Exercise ~~GRANTED~~Value ~~WEIGHTED~~Realized OFUnexercised ~~STOCK~~Options ~~APPRECIATION~~at TOFY-End ~~EMPLOYEES~~(#) ~~AVERAGE~~In-the-Money ~~FOR~~Options ~~OPTION~~at ~~TERM~~FY-End ($) ~~OPTIONS/SARS~~NAME ~~DURING~~(#) ~~FISCAL~~($) ~~EXERCISE~~Exercisable/Unexercisable ~~EXPIRATION~~Exercisable/Unexercisable(1) ----- ----------- ------------- ~~NAME GRANTED YEAR PRICE/SHARE DATE 5% per year 10% per year~~ -~~---~~ ------------- ------------- -------~~----~~ ---------- ------------- ------------- Arnold H. Simon 1-0- -0- 2,250,000/-0- ~~21.9%~~ $-0~~.51 11~~-/~~30/2010~~ $~~401,000 $1,016,000 Maurice Dickson 1,000,000 17.5% $~~-0~~.57~~- ~~11/30/2010~~Paul ~~359,000~~Spector ~~909,000 Tom Nastos~~ -0- -0- 290,000/-0- $-0- /$-0- -- Gregg Fiene ~~500,000~~-0- ~~8.8% $~~-0~~.30~~- ~~11/30/2010 94~~1,~~000 239~~650,000 ~~Joseph Purritano~~ /-0- $-0-/$-0- Steven Feiner -0- -0- 1,800,000/-0- $-0-/$-0-

-------------- (1) The value of unexercised in-the-money options was calculated by determining the difference between the closing price of the Company's common stock on December 31, 2001 and the exercise price of the options. COMPENSATION OF DIRECTORS In April 2000, the Company suspended cash fees to outside directors (i.e., those directors not employed by the Company or any of its subsidiaries). Each of these directors was also entitled to receive reimbursement for expenses incurred in attending meetings of the Board or committees thereof on which they serve. In addition, each outside director was entitled to receive $500 per meeting of the Committees of the Board to which they are assigned. No executive officer received additional -21- compensation for service as a Director. During 2000, each outside director was granted options to purchase 100,000 shares of the Company's common stock. EMPLOYMENT AGREEMENTS The Company has an employment agreement effective as of March 1, 1999 with Mr. Simon, pursuant to which Mr. Simon is to serve as chairman and chief executive officer of the Company and its subsidiaries. The term of the agreement was for three years, and was to expire on February 28, 2002. Mr. Simon's agreement has been extended through February 28, 2005. Pursuant to the agreement, Mr. Simon's base salary is $750,000 per annum, subject to annual review for increase (but not decrease) at the discretion of the Board. In addition, the agreement provides for annual bonuses equal to 2% of adjusted EBITDA if adjusted EBITDA is between $5 million and $10 million, and 3% of adjusted EBITDA if adjusted EBITDA is in excess of $10 million. The agreement entitles Mr. Simon to terminate the agreement for a "good reason", which includes any diminution of his duties under the agreement, the Company's failure to perform its obligations under the agreement, if the Company's principal office or Mr. Simon's own office is relocated to a location not within Manhattan, or if there are certain changes of control. In the event of termination of Mr. Simon for good reason or if he is terminated without cause, Mr. Simon is entitled to a lump sum payment in an amount equal to his highest annual base salary during the term of the agreement multiplied by 2.99 and a lump sum payment in an amount equal to the average bonus paid or payable to Mr. Simon with respect to the then-immediately-preceding three fiscal years multiplied by 2.99. In connection with the acquisition of XOXO, the Company entered into an employment agreement dated as of August 10, 1999 with Gregg Fiene pursuant to which Mr. Fiene is to serve as Vice Chairman of the Board of Directors of the Company, Chief Executive Officer of the Company's XOXO subsidiary and all divisions of the Company (present and future) engaged in the female apparel industry and related ancillary industries, and as chief executive officer, president, or in such other senior executive position with respect to any of the Company's current or future subsidiaries as he and the Chairman of the Board of Directors of the Company shall mutually determine. Pursuant to the agreement, Mr. Fiene's base salary is $750,000 per annum, and he is entitled to an annual bonus if the Company meets certain EBITDA targets. The term of Mr. Fiene's agreement is for five years, ending on August 9, 2004. Effective September 19, 2003, the Company and Mr Fiene agreed to terminate his employment agreement. As a result Mr. Fiene resigned as an officer and director of the Company. In June, 2000, the Company entered into an employment agreement expiring February 28, 2003 with Steven Feiner to serve as Executive Vice President of the Company at an annual base salary of $150,000, subject to annual review, and an annual bonus equal to 1% of adjusted EBITDA if adjusted EBITDA is between $5 million and $10 million, and 1.5% of adjusted EBITDA if adjusted EBITDA is in excess of $10 million. The Company has raised Mr. Feiner's salary to $750,000. The agreement was extended through February 28, 2005. The agreement entitles Mr. Feiner to terminate the agreement for a "good reason", which includes any diminution of his duties under the agreement, the Company's failure to perform its obligations under the agreement, or if there are certain changes of control. In connection with the Asset Purchase Agreement between the Company and BPLLC, Mr. Feiner resigned as an officer and director of the Company on December 22, 2003. Mr. Paul Spector, the Company's Senior Vice President and Chief Financial Officer, is contractually entitled to a severance payment if he is terminated by the Company for reasons other than cause. The severance payment will equal one-half of Mr. Spector's annual salary at the time of termination. -22- 401(K) PLAN The Company has no pension plan but affords its executive officers the opportunity to participate in a 401(k) Plan established for all of the Company's employees, for which the Company may make a discretionary matching contribution of up to 25% of a maximum of four percent (4%) of salary (up to $150,000) contributed by the employee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation and Stock Option Committee (the "Committee") as of December 31, 2002 were Messrs. Simon, Schneider and Weiner. Other than Mr. Simon, neither Committee member was (i) during the twelve months ended December 31, 2002, an officer or employee of the Company or any of its subsidiaries or (ii) formerly an officer of the Company or any of its subsidiaries. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The table below sets forth the beneficial ownership of the Common Stock as of March 15, 2003 by persons who are either (i) beneficial owners of 5% or more of the Common Stock, (ii) named executive officers or directors of the Company, and (iii) and all executive officers and directors as a group. -------------------------------------------------------------------------------- Name and Address Percent of Beneficial Owner(1) Shares of Common Stock of Class -------------------------------------------------------------------------------- Arnold Simon 44,745,045(2)(3) 39.1% 463 Seventh Avenue New York, New York 10018 -------------------------------------------------------------------------------- Apollo Aris Partners, L.P. 16,818,806(3) 14.7% AIF, L.P. c/o Apollo Advisors, L.P. Two Manhattanville Road Purchase, New York 10577 -------------------------------------------------------------------------------- John S. Scaduto 10,000,000 8.7% 1700 Beacon Lane Point Pleasent, N.J. 08742 -------------------------------------------------------------------------------- National Retail Systems Inc. 10,000,000 8.7% 2820 16th Street North Bergen, N.J. 07047 -------------------------------------------------------------------------------- Paul Spector 290,000(5) * 463 Seventh Avenue New York, New York 10018 -------------------------------------------------------------------------------- Gregg Fiene 4,510,000(5) 3.9% 6000 Sheila Street Commerce, CA 90040 -------------------------------------------------------------------------------- Howard Schneider 100,000(5) * Schneider Schechter & Yoss 1979 Marcus Avenue, Suite 232 Lake Success, NY 11042 -------------------------------------------------------------------------------- -23- -------------------------------------------------------------------------------- Name and Address Percent of Beneficial Owner(1) Shares of Common Stock of Class -------------------------------------------------------------------------------- Mark Weiner 100,000(5) * Weingeroff Enterprises 1 Weingeroff Boulevard Cranson, RI 02910 -------------------------------------------------------------------------------- Tarrant Apparel Group 8,117,647 7.1% 3151 East Washington Blvd. Los Angeles, Ca. 90023 -------------------------------------------------------------------------------- All persons who are executive 45,235,045(5) 45.0% officers or directors of the Company, as a group (7 persons) -------------------------------------------------------------------------------- * Less than 1% (1) Except as noted in these footnotes or as otherwise stated above, each person has sole voting and investment power. (2) Includes 9,170,204 shares of Common Stock which were sold to two unaffiliated third parties by The Simon Group LLC, but over which Mr. Simon has voting and certain dispositive power. Includes 35,574,841 shares owned by The Simon Group. Arnold Simon, the Managing Member of The Simon Group, has sole voting and investment power with respect to the shares of the Company held of record by The Simon Group. (3) These shares are subject to the 1999 Shareholders Agreement and 1999 Equity Registration Rights Agreement described in Item 13 below, containing certain voting and other arrangements as to shares covered thereby. (4) Excludes shares owned by The Simon Group, in which such person holds a membership interest. Such person has no power or authority to vote or dispose of any shares held by The Simon Group, LLC, and disclaims beneficial ownership of such shares. (5) Includes options to purchase the following numbers of shares of Common Stock of the Company under the 1993 Stock Incentive Plan which are exercisable or will become exercisable within 60 days: Paul Spector (223,334), Howard Schneider (100,000) and Mark Weiner (100,000). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by the Company's chief executive officer, entered into an agreement (the "Letter of Credit Agreement") with the Company's principal commercial lender to facilitate the opening of up to $17,500,000 in letters of credit for the purchase of inventory. Pursuant to the Letter of Credit Agreement, AHS purchased inventory which was 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. All amounts owed AHS were repaid during the year. -24- The Company has utilized the services of Schneider, Schecter & Yoss, an accounting firm, of which Howard Schneider, a director of the Company, is a partner. During 2002 and 2001, total fees paid were $43,950 and $43,950, respectively. During fiscal 2001 the Company had sales of approximately $828,000 to Humane Incorporated ("Humane") of which Steven Feiner, a director of the Company, is the owner. As of December 31, 2002, the Company had receivables from Humane of approximately $375,000. Steven Feiner resigned as a director of the Company in December 2003. During January 2001, the Company's chief executive officer loaned the Company $2,000,000. In 2002 the Company's chief executive officer made additional loans to the Company totaling $1,500,000. All of the loans are payable on demand and bears interest at prime plus 1/4%. These loans were repaid in 2003. In the fourth quarter of 2003, the Company's chief executive officer loaned the Company $660,000. This loan is payable on demand and bears interest at prime plus 1/4%. This loan was outstanding as of December 31, 2003. In addition, as of December 31, 2003, the Company had trade payables of $15,287 to its chief executive officer, $99,862 to Humane and $75,400 to Schneider, Schecter and Yoss 1999 SHAREHOLDERS AGREEMENT At the Closing of the Simon Purchase Transaction, the Company, The Simon Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the "1999 Shareholders Agreement") pursuant to which, among other things, the parties agreed to certain limitations on sales of their shares of Common Stock and Series A Preferred Stock in the manner set forth therein and to vote their shares of the Company for the designees nominated by The Simon Group, provided that such nominations must include one individual nominated by Apollo (so long as Apollo beneficially owns at least 50% of the shares of Common Stock beneficially owned by it on such closing date). The 1999 Shareholders Agreement provides that Apollo and Ramat and their permitted transferees ("Non-Simon Subject Shareholders") are required to give The Simon Group a right of first offer to match the proposed sale price on any transfers of shares of Common Stock owned by such Non-Simon Subject Shareholders, other than transfer of shares issued or issuable pursuant to an employee stock option or employee purchase plan; transfers to family group members (as defined in the 1999 Shareholders Agreement) or other affiliates of such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject Shareholder's estate; transfers pursuant to offerings registered under the Securities Act; transfers in compliance with Rule 144 of the Securities Act; and transfers not exceeding an annual aggregate of 10% of the shares of Common Stock owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase Transaction. The 1999 Shareholders Agreement provides that, subject to certain limitations, the Non- Simon Subject Shareholders have the right to "tag along" proportionately in accordance with their beneficial ownership of shares of Common Stock with certain non-public transfers by The Simon Group of its shares of Common Stock, at the same consideration per share of Common Stock to be received by The Simon Group in such transfers. Such tag-along rights will also apply to certain -25- transfers by Arnold Simon or his affiliates of their beneficial ownership in The Simon Group after six months from the closing of the Simon Purchase Transaction. The 1999 Shareholders Agreement also grants The Simon Group the right to "bring along" the Non-Simon Subject Shareholders which are parties thereto in a non-public transfer by The Simon Group of 100% of its ownership of Common Stock, at the same consideration per share of Common Stock to be received by The Simon Group in such transfer, provided that such consideration is entirely in cash or in "Marketable Securities" (of issuers listed on the New York Stock Exchange, American Stock Exchange or NASDAQ National Market with a market capitalization for such marketable securities of more than $500,000,000), or a combination thereof. 1999 EQUITY REGISTRATION RIGHTS AGREEMENT At the Closing of the Simon Purchase Transaction, the Company entered into an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which the Company granted registration rights with respect to the Common Stock held by The Simon Group, Apollo, Charles Ramat and their respective permitted transferees (the "1999 Equity Registration Rights Agreement"). Each of such shareholders will have unlimited "piggyback" registration rights with respect to their shares of Common Stock, and The Simon Group and Apollo will each have the right, on three occasions, to demand that the Company register their Common Stock for sale under the Securities Act of 1933, as amended (the "Securities Act"). This Agreement supercedes the demand registration rights afforded Apollo pursuant to the 1993 Registration Rights Agreement, but does not eliminate the "piggyback registration rights" of the other parties thereto who are no longer affiliates of the Company. THE XOXO SHAREHOLDERS AGREEMENT In connection with the XOXO Transaction, the Company, The Simon Group, LLC, and each of the former shareholders of Lola, Inc. entered into a shareholders agreement which provides that each Lola shareholder will vote his or her shares for the election of directors nominated by Arnold Simon. The Agreement also provides that during its term, Simon shall nominate and vote all of its shares of common stock for the election of Gregg Fiene as a director of the Company provided that at such time Mr. Fiene is employed as an executive officer of the Company. The Agreement contains certain restrictions on the sale by Gregg Fiene and one other former Lola shareholder of the Aris shares received in the XOXO Transaction and provides for certain "tag- along" and "drag-along" rights in connection with such shares. The Agreement also provides that in the event the Company registers any shares of its Common Stock under the Securities Act of 1933, as amended, each former Lola shareholder has the right to include a certain amount of his or her shares in such registration statement. The term of the shareholders' agreement is for ten years unless sooner terminated in accordance with its terms. During 2001 and 2000, the Company reimbursed Mr. Simon for accounting and tax services provided to Mr. Simon by Mr. Schneider's accounting firm in the amount of $43,950 and $147,775, respectively. In addition, Mr. Schneider's firm provided services to the Company amounting to approximately $45,050 in 2000. -26- ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES FEES BILLED TO THE COMPANY BY ITS INDEPENDENT AUDITORS The following is a summary of the fees billed to us by J.H. Cohn LLP for professional services rendered for the fiscal years ended December 31, 2003 and 2002. -------------------------------------------------------------------------------- Fee Category 2003 2002 -------------------------------------------------------------------------------- Audit $ 95,861 $165,513 -------------------------------------------------------------------------------- Audit-related (1) 3,125 - 0 - -------------------------------------------------------------------------------- Other Tax services (2) 300 - 0 - -------------------------------------------------------------------------------- Total Fees $ 99,286 $165,513 -------------------------------------------------------------------------------- (1) Audit Fees consist principally of assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements but not reported under the caption "Audit Fees". These fees include review of registration statements and participation at board of director and audit committee meetings. (2) Tax Services - consist of fees for tax compliance, tax advice and planning. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS At present, our audit committee approves each engagement for audit or non-audit services before we engage our independent auditor to provide those services. Our audit committee has not established any pre-approval policies or procedures that would allow our management to engage our independent auditor to provide any specified services with only an obligation to notify the audit committee of the engagement for those services. None of the services provided by our independent auditors for fiscal 2003 was obtained in reliance on the waiver of the pre-approval requirement afforded in SEC Regulations. -27- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements and Report of Independent Public Accountants. PAGE Report of Independent Public Accountants ......................................................F-1 Financial Statements: Consolidated Balance Sheets as of December 31, 2003 and 2002.....................................................................F-2 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001...............................................................F-3 Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31, 2003, 2002 and 2001.........................................................F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001...............................................................F-5 Notes to Consolidated Financial Statements.....................................................F-7 2. Financial Statement Schedule The following financial statement schedule should be read in conjunction with the consolidated financial statements in Item 8 of this Annual Report on Form 10-K: Schedule II- Valuation and Qualifying Accounts.....................................................................S-1

All other schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K Form 8K filed December 22, 2003 - Acquisition and Disposition of Assets -28- (c) INDEX TO EXHIBITS

~~AGGREGATED~~Filed ~~OPTION~~as ~~EXERCISES~~Indicated INExhibit ~~LAST~~to ~~FISCAL~~Document ~~YEAR~~Exhibit ~~AND~~No. ~~FY-END~~Description ~~OPTION~~Referenced ~~VALUES~~in ----------- ----------- Footnote No. ------------ 3.3 Restated Certificate of Incorporation filed on June (3) 30, 1993 3.4 Amended and Restated By-~~-------------------------------------------------------------------~~Laws ~~Shares~~effective ~~Acquired~~June ~~Number~~30, (3) 1993 3.5 Amendment to the Restated Certificate of ~~Securities~~(20) ~~Underlying~~Incorporation ~~Value~~filed with the Secretary of ~~Unexercised~~State on ~~Exercise~~July ~~Value~~29, ~~Realized~~1999 ~~Unexercised~~3.6 ~~Options~~Amendment atto ~~FY-End~~the Restated Certificate of (#21) ~~In-~~Incorporation filed with the~~-Money~~ ~~Options~~Secretary atof ~~FY-End~~State in January 2001 10.67 Series A Junior Secured Note Agreement dated as ($3) ~~Name~~of June 30, 1993 between Registrant and BNY Financial Corporation. 10.68 Series A Junior Secured Note dated as of June 30, (#3) 1993 issued by Registrant to BNY Financial Corporation. 10.72 Secondary Pledge Agreement dated as of June 30, ($3) ~~Exercisable/Unexercisable~~1993 ~~Exercisable/Unexercisable~~between Registrant, BNY Financial Corporation and AIF II, L.P. 10.81 Form of Indemnification Agreement dated as of (13) ~~----~~June ~~-----------~~30, ~~--------------~~1993 ~~---------------------------------~~between ~~----------------------------------~~Registrant ~~Arnold~~and Heach member of Registrant's Board of Directors. ~~Simon~~10.99 ~~-0-~~Warrant ~~-0-~~dated ~~833~~September 30,~~333/1~~ 1996 issued by Aris (10) Industries,~~416~~ Inc. to Heller Financial,~~667~~ ~~$-0-/$277~~Inc. 10.111 Securities Purchase Agreement,~~500~~ ~~Maurice~~dated ~~Dickson~~as ~~-0-~~of ~~-0-~~(17) ~~250~~February 26,~~000/750~~ 1999,~~000~~ ~~$-0-/$185~~between Aris Industries,~~000~~ ~~Tom~~Inc., ~~Nastos~~Apollo ~~-0-~~Aris ~~-0-~~Partners, ~~500~~L.P.,~~000/500~~ AIF,~~000~~ ~~$-0-/$-0-~~L.P., ~~Gregg~~The ~~Fiene~~Simon ~~-0-~~Group, ~~-0-~~L.L.C. 1and Arnold Simon. 10.112 Shareholders Agreement,~~150~~ dated as of February 26,~~000/500~~ (17) 1999,~~000~~ ~~$-0-/$185~~between Aris Industries,~~000~~ ~~Joseph~~Inc., ~~Purritano~~Apollo ~~-0-~~Aris ~~-0-~~Partners, ~~250~~L.P.,~~000/500~~ AIF,~~000~~ $L.P., The Simon Group, L.L.C. and Charles S. Ramat. 10.113 Equity Registration Rights Agreement, dated as of (17) February 26, 1999, between Aris Industries, Inc., Apollo Aris Partners, L.P., AIF, L.P., The Simon Group, L.L.C. and Charles S. Ramat. -029-~~/$-0-~~

Filed as Indicated Exhibit to Document Exhibit No. Description Referenced in ----------- ----------- Footnote No. ------------~~----------------------------------------------------------------------------------~~ ~~Name~~10.115 ~~and~~Financing ~~Address~~Agreement ~~Percent~~dated ofFebruary ~~Beneficial~~26, ~~Owner~~1999 by (118) ~~Shares~~and ofamong ~~Common~~the ~~Stock~~Company ofand ~~Class~~its ~~--------------------------------------------------------------------------------------------------------------------~~Subsidiaries ~~Arnold~~and ~~Simon~~CIT 44Commercial Group,~~745~~ Inc. and the other Financial Industries named therein. 10.116 Agreement and Plan of Merger dated July 19,~~045~~ 1999 (219) by and among Aris Industries, Inc., XOXO Acquisition Corp. and Lola, Inc. and its shareholders (3"Agreement and Plan of Merger"). 56The exhibits and schedules to the Agreement and Plan of Merger are listed on the last page of such Agreement.3% ~~463~~Such ~~Seventh~~exhibits ~~Avenue~~and ~~New~~schedules ~~York~~have not been filed by the Registrant, ~~New~~who ~~York~~hereby ~~10018~~undertakes ~~--------------------------------------------------------------------------------------------------------------------~~to ~~Robert~~file ~~Katz~~such ~~16,818,806~~exhibits and schedules upon request of the Commission. 10.117 Amendment No. 1 to Agreement and Plan of (319) Merger. 10.118 Employment Agreement by and among the (519) ~~21.2%~~Registrant, ~~Apollo~~Europe ~~Aris~~Craft ~~Partners~~Imports, LInc.P., ~~AIF~~ECI Sportswear, LInc.P., ~~c/o~~XOXO ~~Apollo~~and ~~Advisors~~Gregg Fiene, Ldated August 10, 1999.P 10.119 ~~Two~~Employment ~~Manhattanville~~Agreement ~~Road~~by ~~Purchase~~and among the (19) Registrant, ~~New~~ECI, ~~York~~ECI ~~10577~~Sportswear, ~~--------------------------------------------------------------------------------------------------------------------~~Inc., ~~Maurice~~XOXO ~~Dickson~~and ~~416~~Gregg Fiene,~~447~~ dated August 10, 1999. 10.120 Shareholders' Agreement by and among the (619) *Registrant, ~~463~~The ~~Seventh~~Simon ~~Avenue~~Group, ~~New~~LLC, ~~York~~Gregg Fiene, ~~New~~Michele ~~York~~Bohbot ~~10018~~and ~~--------------------------------------------------------------------------------------------------------------------~~Lynne ~~Paul~~Hanson, ~~Spector~~dated ~~106~~August 10,~~666~~ 1999. 10.121 Amendment No. 2 to Financing Agreement by and (619) *among ~~463~~Aris ~~Seventh~~Industries, ~~Avenue~~Inc., ~~New~~Europe ~~York~~Craft Imports, ~~New~~Inc., ~~York~~ECI ~~10018~~Sportswear, ~~--------------------------------------------------------------------------------------------------------------------~~Inc., ~~Gregg~~Stetson ~~Fiene~~Clothing 4Company,~~176~~ Inc.,~~667~~ ~~(6)~~XOXO; ~~5.0%~~the ~~6000~~Financial ~~Sheila~~Institutions ~~Street~~from ~~Commerce,~~time CAto ~~90040~~time ~~--------------------------------------------------------------------------------------------------------------------~~party ~~Joseph~~to ~~Purritano~~the ~~250~~Financing Agreement,~~000~~ ~~(4)(6)~~as *Lenders; ~~463~~and ~~Seventh~~The ~~Avenue~~CIT ~~New~~Group/Commercial ~~York~~Services, NYInc. ~~10018~~as ~~--------------------------------------------------------------------------------------------------------------------~~Agent, ~~Debra~~dated ~~Simon~~August 3310,~~333~~ 1999. 10.122** Amended and Restated 1993 Stock Option Plan (616) 10.123** ~~463~~Employment ~~Seventh~~Agreement ~~Avenue~~with ~~New~~Steven ~~York,~~Feiner NY(21) ~~10018~~10.125 ~~--------------------------------------------------------------------------------------------------------------------~~Agreement between the Company and certain of its (21) subsidiaries and Grupo Xtra dated January, 2001

-30-

~~--------------------------------------------------------------------------------------------------------------------~~Filed ~~Name~~as ~~and~~Indicated ~~Address~~Exhibit ~~Percent~~to ofDocument ~~Beneficial~~Exhibit ~~Owner~~No. ~~(1)~~Description ~~Shares~~Referenced ofin ~~Common Stock of Class~~ ----------- ----------- Footnote No. ------------~~----------------------------------------------------------------------------------~~ ~~Howard~~10.126 ~~Schneider~~Form ~~33,333~~Securities ~~(6)~~Purchase *Agreement ~~Schneider~~Dated ~~Schechter~~as &of ~~Yoss~~(21) ~~1979~~February, ~~Marcus~~2001 ~~Avenue,~~between ~~Suite~~the ~~232~~Company ~~Lake~~and ~~Success~~KC Aris Fund I, NYL.P. ~~11042~~10.127 ~~--------------------------------------------------------------------------------------------------------------------~~Trademark ~~Mark~~License ~~Weiner~~Agreement 33Adamson Apparel,~~333~~ (622) *Inc. ~~Weingeroff~~10.128 ~~Enterprises~~Trademark 1Purchase ~~Weingeroff~~Agreement ~~Boulevard~~(23) ~~Cranson,~~10.129 RIAsset ~~02910~~Purchase ~~--------------------------------------------------------------------------------------------------------------------~~Agreement ~~Tom~~(24) ~~Nastos~~21. ~~500,000~~List of Subsidiaries (620) *23. ~~463~~Consent ~~Seventh~~of ~~Avenue~~J.H ~~New~~Cohn ~~York,~~LLP NY(25) ~~10018~~31.1 ~~--------------------------------------------------------------------------------------------------------------------~~Certification ~~Steven~~of ~~Feiner~~Chief ~~750,000~~Executive Officer pursuant to (625) ~~6000~~Section ~~Sheila~~302 ~~Street~~of ~~Commerce,~~the CASarbanes/Oxley ~~90040~~Act ~~--------------------------------------------------------------------------------------------------------------------~~of ~~All~~2002 ~~persons~~31.2 ~~who~~Certification ~~are~~of ~~executive~~Chief ~~officers~~Financial orOfficer ~~directors~~pursuant to (25) Section 302 of the ~~49,070,045~~Sarbanes/Oxley ~~(6)~~Act ~~60.1%~~of ~~Company,~~2002 as32 aCertification ~~group~~under (4Section ~~persons~~906 of the (25) ~~--------------------------------------------------------------------------------------------------------------------~~Sarbanes/Oxley Act

---------------- (1) Filed as the indicated Exhibit to the Annual Report of the Company on Form 10-K for the fiscal year ended February 2, 1991 and incorporated herein by reference. (2) Omitted. (3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30, 1993 and incorporated herein by reference. (4) - (9) Omitted. (10) Filed as the indicated Exhibit to the Report on Form 8-K dated September 30, 1996 and incorporated herein by reference. (11) Omitted. (13) Omitted (14) Omitted (15) Omitted (16) Filed as Annex A to the Company's Proxy Statement filed with the Commission on May 27, 1999, and incorporated herein by reference. -31- (17) Filed as the indicated Exhibit to the Report on Form 8-K dated February 26, 1999 and incorporated herein by reference. (18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with the Commission on or about April 13, 1999 and incorporated herein by reference. (19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999. (20) Omitted. (21) Filed as the indicated Exhibit to the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference. (22) Filed as an exhibit to Form 10Q for the Quarter Ended September 30, 2002 (23) Filed as an Exhibit to Form 8K filed May 8, 2003 (24) Filed as an Exhibit to Form 8K filed December 22, 2003 (25) Filed herewith --------------------- * The Schedules and Exhibits to such Agreements have not been filed by the Company, who hereby undertakes to file such schedules and exhibits upon request of the Commission. ** Management contract or compensatory plan or arrangement. -32- SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIS INDUSTRIES, INC. By: /S/ Arnold H. Simon -------------------------- Arnold H. Simon Chairman and Chief Executive Officer By: /S/Paul Spector -------------------------- Paul Spector Senior Vice President Chief Financial Officer By: /S/Vincent F. Caputo -------------------------- Vincent F. Caputo Principal Accounting Officer Date: April 9, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /S/Arnold Simon April 9, 2004 --------------------------- Arnold Simon, Chairman of the Board and Chief Executive Officer; Director /S/Howard Schneider April 9, 2003 --------------------------- Howard Schneider, Director /S/Mark Weiner April 9, 2003 --------------------------- Mark Weiner, Director -33- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Aris Industries, Inc. We have audited the accompanying consolidated financial statements and financial statement schedule of Aris Industries. Inc. and Subsidiaries listed in the index appearing under Item 15a of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aris Industries, Inc. and Subsidiaries as of December 31, 2003 and 2002, and their results of operations and cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's operations have generated recurring operating losses and the Company has a working capital deficiency as of December 31, 2003. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ J.H. Cohn LLP Roseland, New Jersey March 4, 2004, except for the second to last paragraph of Note 10 which is as of March 29, 2004 ARIS INDUSTRIES, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-2 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------------------------------

~~Filed~~2003 as2002 ~~Indicated~~ASSETS ~~Exhibit~~Current toassets: ~~Document~~Cash ~~Referenced~~and incash ~~Exhibit~~equivalents ~~No.~~$ ~~Description~~953 ~~Footnote~~$ ~~No.~~-- Receivables, net -- 626 Receivable from related party, net of allowance for doubtful accounts of $2,000 and $453 1,761 375 Current portion of note receivable 2,000 -- Inventories -- 183 Prepaid expenses and other current assets 361 3 -------- -------- TOTAL CURRENT ASSETS 5,075 1,187 Property and equipment, net 679 2,909 Goodwill, net -- 33,930 Note receivable 2,500 -- Other assets 2,105 310 -------- -------- ~~3.3~~TOTAL ~~Restated~~ASSETS ~~Certificate~~$ of10,359 ~~Incorporation~~$ ~~filed~~38,336 on======== ~~June~~======== ~~30,~~LIABILITIES ~~1993~~AND ~~(3)~~STOCKHOLDERS' ~~3.4~~DEFICIENCY ~~Amended~~Current ~~and~~liabilities: ~~Restated~~Borrowings ~~By-Laws~~under ~~effective~~revolving ~~June~~credit ~~30,~~facility ~~1993~~$ ~~(3)~~-- ~~3.5~~$ ~~Amendment~~456 toLoans ~~the~~payable ~~Restated~~to ~~Certificate~~related ofparties, ~~Incorporation~~including ~~filed~~accrued ~~(20)~~interest ~~with~~668 ~~the~~13,026 ~~Secretary~~Current portion of ~~State~~long-term ondebt ~~July~~-- 299,642 ~~1999~~Current ~~3.6~~portion ~~Amendment~~of tocapitalized ~~the~~lease ~~Restated~~obligations ~~Certificate~~400 of415 ~~Incorporation~~Accounts ~~filed~~payable ~~(21)~~4,631 ~~with~~3,620 ~~the~~Accounts ~~Secretary~~payable ofto ~~State~~related inparties ~~January~~191 ~~2001~~1,096 ~~10.67~~Accrued ~~Series~~expenses Aand ~~Junior~~other ~~Secured~~current ~~Note~~liabilities ~~Agreement~~5,253 ~~dated~~8,175 as-------- of-------- ~~June~~TOTAL 30CURRENT LIABILITIES 11,143 ~~(3)~~36,430 ~~1993~~Long-term ~~between~~debt ~~Registrant~~-- ~~and~~7,500 ~~BNY~~Capitalized ~~Financial~~lease ~~Corporation.~~obligations ~~10.68~~424 ~~Series~~569 AOther ~~Junior~~liabilities ~~Secured~~1,746 ~~Note~~1,637 ~~dated~~-------- as-------- ofTOTAL ~~June~~LIABILITIES 3013,313 ~~1993~~46,136 ~~issued~~-------- ~~(3)~~-------- byCommitments ~~Registrant~~and tocontingencies ~~BNY~~Stockholders' ~~Financial~~deficiency: ~~Corporation~~Preferred stock, par value $.01, 10~~.72~~,000 ~~Secondary~~shares ~~Pledge~~authorized, ~~Agreement~~none ~~dated~~issued asCommon ofstock, ~~June~~par 30value $.01, ~~1993~~200,000 ~~between~~shares ~~(3)~~authorized, ~~Registrant~~108,783 ~~BNY~~shares ~~Financial~~issued ~~Corporation~~ and ~~AIF~~outstanding II1,088 ~~L.P.~~1,088 ~~10.81~~Additional ~~Form~~paid-in ofcapital ~~Indemnification~~86,146 ~~Agreement~~86,146 ~~dated~~Accumulated asdeficit ~~of June 30~~(90,188) ~~1993~~ (395,027) ~~between~~Unearned ~~Registrant~~compensation ~~and~~-- ~~each~~(7) ~~member~~-------- of-------- ~~Registrant~~TOTAL STOCKHOLDERS's ~~Board~~DEFICIENCY of(2,954) ~~Directors.~~(7,800) ~~10.99~~-------- ~~Warrant~~-------- ~~dated~~TOTAL ~~September~~LIABILITIES ~~30,~~AND ~~1996~~STOCKHOLDERS' ~~issued~~DEFICIENCY by$ ~~Aris Industries~~10,359 ~~(10)~~$ ~~Inc. to Heller Financial~~38,336 ~~Inc.~~======== ========

See notes to consolidated financial statements. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------------------------------

~~Filed~~2003 as2002 ~~Indicated~~2001 ~~Exhibit to Document Referenced in Exhibit No. Description Footnote No.~~ --------~~---~~ --------~~---~~ -------- REVENUE -~~---~~ ~~10.111~~ROYALTY ~~Securities~~INCOME ~~Purchase~~$ ~~Agreement~~6,144 ~~dated~~$ as9,557 of$ ~~February 26~~11,389 ~~1999,~~OPERATING ~~(17)~~EXPENSES ~~between~~: ~~Aris~~Selling ~~Industries,~~and ~~Inc.,~~administrative ~~Apollo~~expenses ~~Aris Partners~~(11,716) ~~L.P.~~(15,832) ~~AIF~~(21,297) ~~L.P.,~~Impairment ~~The~~of ~~Simon~~goodwill ~~Group~~(14,273) ~~L.L.C.~~-- ~~and~~-- ~~Arnold~~Impairment ~~Simon. 10.112 Shareholders Agreement, dated as~~ of ~~February~~long ~~26,~~lived ~~1999,~~assets (17345) ~~between~~-- ~~Aris~~(220) ~~Industries,~~-------- ~~Inc.,~~-------- ~~Apollo~~-------- ~~Aris~~Loss ~~Partners,~~from ~~L.P.,~~operations ~~AIF~~(20,190) ~~L.P.~~(6,275) ~~The Simon Group, L.L.C. and Charles S. Ramat.~~ (10~~.113 Equity Registration Rights Agreement~~,128) ~~dated~~Interest asexpense ~~of February~~ (17987) 26(2,086) ~~1999~~(3,404) ~~between~~Gain ~~Aris~~on ~~Industries,~~sale ~~Inc.,~~of ~~Apollo~~trademark ~~Aris~~and ~~Partners,~~license ~~L.P.~~27,323 ~~AIF,~~-- ~~L.P.,~~-- ~~The~~-------- ~~Simon~~-------- ~~Group,~~-------- ~~L.L.C.~~Income ~~and~~(loss) ~~Charles~~from S.continuing ~~Ramat.~~operations ~~10.115~~before ~~Financing~~income ~~Agreement~~taxes ~~dated February 26~~6,146 ~~1999 by and among the~~ (188,361) ~~Company and its Subsidiaries and CIT Commercial Group~~(13,532) ~~Inc.~~Income ~~and~~tax ~~the~~provision ~~other~~(11) ~~Financial~~(4) ~~Industries~~(69) ~~named~~-------- ~~therein.~~-------- ~~10.116~~-------- ~~Agreement~~Income ~~and~~(loss) ~~Plan~~from ofcontinuing ~~Merger~~operations ~~dated~~6,135 ~~July~~(8,365) 19(13,601) ~~1999~~DISCONTINUED byOPERATIONS ~~and~~: ~~among~~Income (19loss) ~~Aris~~from ~~Industries~~discontinued operations (1,296) ~~Inc.~~(5,349) ~~XOXO Acquisition Corp. and Lola~~8,169 ~~Inc.~~-------- ~~and~~-------- ~~its~~-------- ~~shareholders~~Income (~~"Agreement and Plan of Merger"~~loss). ~~The~~before ~~exhibits~~extraordinary ~~and~~item ~~schedules~~4,839 to(13,714) ~~the~~(5,432) ~~Agreement~~EXTRAORDINARY ~~and~~ITEM: ~~Plan~~Gain ~~of Merger are listed~~ on ~~the~~extinguishment ~~last page~~ of ~~such~~debt, ~~Agreement.~~net ~~Such~~-- ~~exhibits~~-- ~~and~~1,998 ~~schedules~~-------- ~~have~~-------- ~~not~~-------- ~~been~~NET ~~filed~~INCOME by(LOSS) ~~the~~$ ~~Registrant~~4,839 ~~who~~$(13,714) ~~hereby~~$ ~~undertakes~~(3,434) to======== ~~file~~======== ~~such~~======== ~~exhibits~~BASIC ~~and~~AND ~~schedules~~DILUTED ~~upon~~NET ~~request~~INCOME of(LOSS) ~~the~~PER ~~Commission.~~SHARE: ~~10.117~~Income ~~Amendment~~(loss) ~~No.~~from 1continuing tooperations ~~Agreement~~$ ~~and~~0.05 ~~Plan~~$ ~~of Merger~~(0.09) $ (190.17) ~~10.118~~Income ~~Employment~~(loss) ~~Agreement~~from bydiscontinued ~~and~~operations ~~among the Registrant, Europe~~ (19.01) ~~Craft Imports, Inc~~(.,06) ~~ECI Sportswear, Inc~~.,11 ~~XOXO~~Extraordinary ~~and~~item ~~Gregg~~-- ~~Fiene,~~-- ~~dated~~.02 ~~August~~-------- ~~10,~~-------- ~~1999.~~-------- ~~10.119~~Net ~~Employment~~income ~~Agreement~~(loss) byper ~~and~~basic ~~among~~share ~~the~~$ ~~Registrant,~~0.04 ~~ECI,~~$ ~~ECI~~ (190.15) ~~Sportswear,~~$ ~~Inc~~(0.,04) ~~XOXO~~======== ~~and~~======== ~~Gregg~~======== ~~Fiene,~~PER ~~dated~~SHARE ~~August~~DATA: ~~10,~~Weighted ~~1999.~~average ~~10.120~~shares ~~Shareholders'~~outstanding ~~Agreement~~- bybasic ~~and among the Registrant~~108,783 ~~The (19) Simon Group~~92,092 ~~LLC~~81,919 ~~Gregg~~Weighted ~~Fiene,~~average ~~Michele~~shares ~~Bohbot~~outstanding ~~and~~- ~~Lynne~~diluted ~~Hanson~~109,306 ~~dated August 10~~92,092 ~~1999.~~81,919

See notes to consolidated financial statements. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS) --------------------------------------------------------------------------------

~~Filed~~COMMON asSTOCK ~~Indicated~~ADDITIONAL ~~Exhibit~~--------------------- toPAID-IN ~~Document~~ACCUMULATED ~~Referenced~~UNEARNED inSHARES ~~Exhibit~~AMOUNT ~~No.~~CAPITAL ~~Description~~DEFICIT ~~Footnote~~COMPENSATION ~~No.~~TOTAL -------- -------- -------- ----------- ------------ ~~10.121~~-------- ~~Amendment~~BALANCE ~~No.~~AT 2DECEMBER to31, ~~Financing~~2000 ~~Agreement~~80,665 by$ ~~and~~807 ~~among~~$ ~~Aris~~80,753 $(1977,879) ~~Industries,~~$ ~~Inc.~~(195) $ 3,486 ~~Europe~~Common ~~Craft~~stock ~~Imports,~~issued ~~Inc.,~~in ~~ECI~~connection ~~Sportswear,~~with ~~Inc.,~~settlement ~~Stetson~~of ~~Clothing~~Tarrant ~~Company~~obligation 1,500 ~~Inc.~~15 1,035 ~~XOXO;~~1,050 ~~the~~Cancellation ~~Financial~~of ~~Institutions~~compensatory ~~from~~stock ~~time~~options issued to ~~time~~employees ~~party~~(28) to28 ~~the~~-- ~~Financing~~Amortization ~~Agreement,~~of asunearned ~~Lenders;~~compensation ~~and~~on ~~The~~stock ~~CIT~~options ~~Group/Commercial~~-- ~~Services,~~-- ~~Inc.~~-- as-- ~~Agent,~~75 ~~dated~~75 ~~August~~Net 10loss -- -- -- (3,434) ~~1999.~~-- ~~10.122~~(3,434) ~~Amended~~-------- ~~and~~-------- ~~Restated~~-------- ~~1993~~-------- ~~Stock~~-------- ~~Option~~-------- ~~Plan~~BALANCE, ~~(16)~~DECEMBER ~~10.123~~31, ~~Employment~~2001 ~~Agreement~~82,165 ~~with~~822 ~~Steven~~81,760 ~~Feiner~~(81,313) (2192) ~~10.124~~1,177 ~~Employment~~Common ~~Agreement~~stock issued in connection with ~~Maurice~~settlement ~~Dickson~~of ~~(21)~~Tarrant ~~10.125~~obligation ~~Agreement~~6,618 ~~between~~66 ~~the~~2,186 ~~Company~~2,252 ~~and~~Common ~~certain~~stock ofissued ~~its~~in ~~subsidiaries~~connection ~~(21)~~with ~~and~~Adamson ~~Grupo~~capitalization ~~Xtra~~20,000 ~~dated~~200 ~~January~~2,200 ~~2001~~-- ~~10.126~~2,400 ~~Form~~Amortization ~~Securities~~of ~~Purchase~~unearned ~~Agreement~~compensation ~~Dated~~on asstock ofoptions ~~February~~-- -- -- -- 85 85 Net loss -- -- -- (13,714) ~~2001~~-- (2113,714) ~~between~~-------- ~~the~~-------- ~~Company~~-------- ~~and~~-------- KC-------- ~~Aris~~-------- ~~Fund~~BALANCE, IDECEMBER 31, ~~L.P.~~2002 ~~21.~~108,783 ~~List~~1,088 of86,146 ~~Subsidiaries~~(95,027) (217) ~~23.~~(7,800) ~~Consent~~Amortization of ~~PricewaterhouseCoopers~~unearned ~~LLP~~compensation ~~(21)~~on ~~23.~~stock options -- -- -- -- 7 7 Net income -- -- -- 4,839 -- 4,839 -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 2003 108,783 $ 1,088 ~~Consent~~$ of86,146 ~~Deloitte~~$(90,188) &$ ~~Touche~~-- ~~LLP~~$ (212,954) ======== ======== ======== ======== ======== ========

See notes to consolidated financial statements. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS) --------------------------------------------------------------------------------

~~2000~~2003 ~~1999~~2002 ~~1998~~2001 ~~---------~~Cash ~~---------~~flows ~~---------~~from operating activities: Net ~~sales~~income (loss) from continuing operations $ ~~199~~6,~~439~~135 $ ~~175~~(8,~~359~~365) $ ~~127~~(13,~~680~~601) ~~Cost~~Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Gain on sale of ~~sales~~trademark ~~144,239~~and ~~124,825~~license 98(27,~~140~~323) -- --~~-----~~ W rite off of receivables from licensee --~~-------~~ 1,959 --~~-------~~ ~~Gross~~Depreciation ~~profit~~and ~~55,200~~amortization ~~50,534~~of ~~29,540~~property ~~Commission~~ and ~~licensing~~equipment ~~income 2~~1,~~737~~094 21,~~571~~994 13,~~570~~419 Amortization of goodwill -- -- 1,809 Impairment of goodwill 14,273 -- --- Impairment of property and equipment 345 -- 220 Provision for doubtful accounts - related party 2,000 -- -- Non--cash stock transaction charged to expense -- 2,400 -- Non-cash stock based compensation 7 85 75 Changes in assets and liabilities: Decrease in receivables 606 526 32,736 Increase in receivables from related party (3,761) -- -- ~~Income~~Decrease ~~before~~(increase) ~~operating~~in ~~expenses,~~due ~~interest~~from ~~expense~~licensee -- 2,994 ~~income~~(4,953) ~~tax~~Decrease ~~provision~~in prepaid expenses and ~~extraordinary~~other ~~item~~current ~~57,937~~assets ~~53,105~~3 ~~31,110~~172 ~~Operating~~490 ~~expenses:~~(Increase) ~~Selling~~decrease ~~and~~in ~~administrative~~other ~~expenses~~assets 78(1,~~703~~831) ~~48,057~~166 ~~29,950~~64 ~~Start-up~~Increase ~~costs~~(decrease) in accounts payable 1,~~862~~011 2(147) (11,~~235~~585) --(Decrease) ~~Restructuring~~increase in accounts payable to related parties (905) 211 885 (Decrease) increase in accrued expenses and other ~~charges~~current 7liabilities (3,~~040~~822) 83,~~961~~196 --(2,128) Decrease (increase) in other liabilities 225 (702) (578) --------- --------- --------- ~~(Loss)~~Net ~~income~~cash ~~before~~(used ~~interest~~in) ~~expense,~~provided ~~income~~by ~~tax~~operating ~~provision~~activities ~~and extraordinary item~~ (2911,~~668~~943) (64,~~148)~~489 ~~1,160 Interest expense, net~~ 6,~~779~~853 ~~4,185 5,220~~ --------- --------- --------- ~~Loss~~Cash ~~before~~flows ~~income~~from ~~tax~~investing ~~provision~~activities: ~~and~~Capital ~~extraordinary~~expenditures ~~item~~-- (~~36,447~~8) (~~10,333~~491) ~~(4,060)~~Proceeds ~~Income~~from ~~tax~~sale ~~provision~~of 33trademark ~~250~~and ~~190~~license 42,360 -- -- ----- --- ------ -- -------- ~~Loss~~Net ~~before~~cash ~~extraordinary~~provided ~~item~~by (~~36,480)~~used ~~(10,583~~in) ~~(4,250)~~investing ~~Extraordinary~~activities ~~item: Gain on early extinguishment of debt~~42,360 ~~net~~(8) --(491) -- ~~522~~ ------~~---~~ --------- -------- Cash flows from financing activities: Proceeds from long-term ~~NET~~debt ~~LOSS~~-- $-- ~~(36~~7,~~480~~500 (Repayments to) $advances from related parties (1012,~~583~~358) ~~$ (~~3,~~728)~~966 ~~=========~~9,060 ~~=========~~Payments ~~=========~~of ~~BASIC~~long-term ~~NET~~debt ~~LOSS~~and ~~PER~~capitalized ~~SHARE:~~leases ~~Loss~~(17,302) ~~before~~(2,856) ~~extraordinary~~(4,088) ~~item~~Decrease $in borrowings under revolving credit facility (~~0.46~~456) $ (~~0.19~~4,029) $ (~~0.29~~34,194) ~~Extraordinary~~-------- ~~item~~ -------- -------- ~~.04~~Net cash used in financing activities (30,116) (2,919) (21,722) --------- --------- --------- Net ~~loss~~cash $provided by (~~0.46~~used in) $continuing ~~(0.19)~~operations $301 1,562 (~~0.25~~15,360) ~~=========~~Net ~~=========~~cash ~~=========~~provided ~~DILUTED~~by ~~NET~~(used ~~LOSS~~in) ~~PER~~discontinued ~~SHARE:~~operations ~~Loss~~652 ~~before~~(2,019) ~~extraordinary~~13,428 ~~item~~-------- $-------- -------- Net increase (~~0.46~~decrease) $in cash 953 (~~0.19~~457) $ (~~0.29~~1,932) ~~Extraordinary~~Cash ~~item~~and --cash equivalents, beginning of year -- ~~.04~~457 2,389 --------- --------- --------- ~~Net~~Cash ~~loss~~and cash equivalents, end of year $ ~~(0.46)~~953 $ ~~(0.19)~~-- $ ~~(0.25)~~457 ========= ========= ========~~= Per share data: Weighted average shares outstanding - basic 79,777 55,374 14,912 Weighted average shares outstanding - diluted 79,777 55,374 14,912~~

See notes to consolidated financial statements. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS) --------------------------------------------------------------------------------

~~COMMON~~2003 ~~STOCK~~2002 ~~ADDITIONAL~~2001 ~~--------------------~~Supplemental ~~PAID-IN~~disclosures ~~ACCUMULATED~~of ~~UNEARNED~~cash ~~SHARES~~flow ~~AMOUNT~~information: ~~CAPITAL~~Cash ~~DEFICIT~~paid ~~COMPENSATION~~during ~~TOTAL~~the ~~--------~~year ~~--------~~for: ~~--------~~Interest ~~-------- ------------ -------- Balance at December 31, 1997 14,905~~ $ ~~150~~979 $ 441,~~752~~984 $~~(27~~2,~~088)~~606 $====== ~~17,814~~====== ~~Stock~~====== ~~options~~Income ~~exercised~~taxes 51$ 111 5$ 64 Net loss -- -- -- (3,728) (3,728) -------- -------- -------- -------- -------- -------- Balance, December 31, 1998 14,956 151 44,757 (30,816) 14,092 Common stock issued in connection with Simon Transaction, net of transaction costs of $~~1,468~~ ~~57,009~~69 ~~570~~====== ~~24,107~~====== --====== ~~24,677~~Supplemental ~~Stock~~schedule ~~options exercised 969 9 429 -- 438 Common stock issued in connection with Lola, Inc. acquisition 6,500 65 9,685 -- 9,750 Issuance~~ of ~~stock options in connection with Lola, Inc. acquisition~~ non--cash --investing ~~805~~and --financing ~~805~~activities: Issuance of ~~stock~~common ~~options to employees/consultants -- -- 540 -- $ (540) -- Amortization of unearned compensation on~~ stock options -- -- -- -- 72 72 Net loss -- -- -- (10,583) -- (10,583) -------- -------- -------- -------- -------- -------- Balance, December 31, 1999 79,434 795 80,323 (41,399) (468) 39,251 Stock options exercised 231 2 114 -- -- 116 Common stock issued in ~~connection with~~ settlement of ~~FUBU~~accounts ~~royalty~~payable ~~obligations~~$ ~~1,000 10 290~~ -- -- 300 Issuance of stock options to consultants -- -- 300 -- (300) -- Cancellation of compensatory stock options issued to employees -- -- (274) -- 274 -- Amortization of unearned compensation on stock options -- -- -- -- 299 299 Net loss -- -- -- (36,480) -- (36,480) -------- -------- -------- -------- -------- -------- Balance, December 31, 2000 80,665 $ ~~807 $ 80~~2,~~753~~250 $~~(77~~1,~~879)~~050 ~~$ (195) $ 3,486~~ ======== ======== ======== Note receivable on sale of license $4,500 $ -- $ -- ======== ======== ========

See notes to consolidated financial statements. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS In 2001 and prior, Aris Industries, Inc. and Subsidiaries (collectively, the "Company" or "Aris") was primarily a licensor or sub-licensor of a broad line of high quality junior's sportswear including jeans, shirts, skirts and sweaters as well as men's outerwear. During 2002, the Company completed its first full year as a licensor or sub-licensor of its owned or licensed trademarks. The Company licensed its trademark portfolio domestically and internationally for apparel and other products that it did not sell. These products were distributed and marketed by the Company's licensees in the United States, primarily in department stores, specialty stores and national retail chains as well as Company-owned retail stores. In addition, the Company had granted licenses to use Company-owned trademarks for the manufacture and sale of various products. 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 trademarks 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"), an affiliate of Arnold H. Simon, Chief Executive Officer of the Company, 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. 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. As a result of a default by an XOXO licensee and claims arising from a transition agreement, the $2 million escrow account and the gain on sale were reduced by approximately $1,498,000. On December 22, 2003, pursuant to an Asset Purchase Agreement dated December 22, 2003, BP Clothing Company, Inc. ("BP"), an indirect wholly owned subsidiary of the Company, and Adamson, sold to a newly created limited liability company, BP Clothing LLC ("Buyer"), an unaffiliated company, substantially all of the operating assets, including licensed trademark rights and other intangibles, inventory, machinery and equipment, rights under customer sales orders and open vendor purchase orders of BP and Adamson relating to the manufacture, distribution and sale of the Baby Phate line of clothing and related accessories pursuant to a License Agreement by and between Phat Fashions LLC and BP dated as of July 1, 1999 (the "License Agreement"). In connection with the transaction, Phat Fashions LLC terminated the License Agreement with BP and entered into a new license agreement with Buyer (the "New License"). Adamson had been operating the business pursuant to a sublicense with BP. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The terms of the transaction, including the purchase price, were the results of negotiations between representatives of BP, Adamson and the Buyer, including Steven Feiner, a member of Buyer, who was, until closing, an Officer and Director of the Company. In accordance with the purchase agreement, BP was to receive an initial payment of $2,500,000 in cash at closing. This amount was reduced by approximately $1,200,000 of offsets. In addition, Buyer issued a promissory note payable to BP in the principal amount of $4,500,000, after additional offsets of approximately $500,000, and has agreed to pay $2,000,000 to the Company in June 2004 and $2,500,000 at a rate of 1% of net sales each month commencing on July 18, 2004 and ending on the maturity date, June 30, 2005, or sooner if fully paid. The terms of the transaction were approved by the Board of Directors of the Company including all of the independent directors of the Company. In 2004 the Company began licensing its Members Only(R) trademark, which is its only remaining trademark, and is actively seeking new licenses. In addition, the Company closed its remaining XOXO(R) retail store in July 2003 in connection with the trademark assets sale to Global. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as shown in the accompanying consolidated financial statements, the Company has incurred losses from operations in each of the three years ended December 31, 2003, 2002 and 2001. As of December 31, 2003, the Company had a working capital deficit of $6,068,000. As a result of the trademark assets sale and the sale of the BP license, the Company has repaid a substantial portion of its existing indebtedness. The Company intends to finance its remaining operations through (i) royalties which the Company is due from the license of its Members Only trademark, (ii) payments of escrow funds due from the trademark assets sale and collection of the balance of proceeds from the sale of licensed trademark rights, (iii) continued reduction of the Company's overhead and, (iv) continued negotiated settlements with its trade creditors. The Company believes that its financing plan will be sufficient at least through December 31, 2004, to sustain its operations. However, there can be no assurance that the timing of cash receipts to be realized from working capital and operations will be sufficient to meet obligations as they become due. These factors raise substantial doubt about the entity's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Aris Industries, Inc. and its wholly-owned subsidiaries after elimination of all significant inter-company transactions and balances. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- the reported amounts of assets and liabilities and disclosures relating to contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses for the reporting periods. The most significant estimates relate to the recoverability of long-lived assets, valuation allowances on deferred tax assets, collectability of receivables and estimates of future rent obligations. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. INVENTORIES Inventories were stated at the lower of cost (weighted average basis) or market and consisted solely of finished goods. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the term of the lease or the improvement. Expenditures for maintenance, repairs and minor renewals are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss realized on disposition is reflected in operations. GOODWILL Goodwill represents the excess of purchase price over the fair values of identifiable net assets of businesses acquired, which includes intangible assets related to certain trade names and licensing arrangements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changed the accounting for goodwill from an amortization method to an impairment only approach. Under the non-amortization approach, goodwill and indefinite-lived intangibles are not amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the period or periods in which their recorded values are determined to be more than their fair value. The Company has adopted the provisions of SFAS No.142 effective January 1, 2002. In accordance with SFAS No. 142, in 2003, the Company determined that the carrying value of goodwill associated with its Members Only(R) trademark was impaired. As a result of this impairment the Company recorded a goodwill impairment charge of $14,273,000 during the year ended December 31, 2003. Additionally, $19,289,000 of goodwill related to the Company's XOXO acquisition was written off against the proceeds of the sale of the XOXO trade name and service mark to Global. In 2002, the Company recorded an impairment charge of $412,000 on goodwill, which charge is included in discontinued operations (see Note 4). Had SFAS No. 142 been effective for the year ended December 31 2001, the application of the non-amortization provisions of the statement would have reduced the Company's net loss by $1,809,000. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The following table shows the changes to goodwill for the years ended December 31, 2003, 2002 and 2001 (in thousands): GOODWILL -------- BALANCE AT JANUARY 1, 2001 $ 36,151 Amortization of goodwill (1,809) -------- BALANCE, DECEMBER 31, 2001 34,342 Impairment of goodwill included in discontinued operations (Note 4) (412) -------- BALANCE, DECEMBER 31, 2002 33,930 Impairment of goodwill included in: continuing operations (14,273) discontinued operations (Note 4) (368) Sale of XOXO trademark (19,289) -------- BALANCE, DECEMBER 31, 2003 $ -- ======== LONG-LIVED ASSETS The Company reviews long-lived assets, other than goodwill, 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. The Company moved to a significantly smaller office location in the fourth quarter of 2003. In connection with this move, the Company recorded an impairment charge of $345,000 on write-downs of property and equipment no longer in use. The Company also recorded an impairment charge in 2001 of $220,000, which represented the net book value of various computer and other equipment that had become idle as a result of the transition of the Company into a licensing and brand management business. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses, approximate fair value due to the short maturity of these assets and liabilities. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- CONCENTRATION OF CREDIT RISK The Company carries its accounts receivable at cost, less an allowance for doubtful accounts. On a periodic basis the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections. REVENUE RECOGNITION Royalty and licensing income is based upon a percentage of the licensee's net sales, as defined in the underlying agreements, and is recognized as earned, provided that collectability is reasonably assured. ADVERTISING COSTS Advertising costs are charged to expense as incurred. Advertising costs amounted to $302,000 in 2003, $777,000 in 2002 and $1,847,000 in 2001. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock method. Potentially dilutive securities have been excluded from the computation in 2002 and 2001 as their effect is anti-dilutive. If the Company had reported net income in 2002 and 2001, diluted earnings per share would have included the shares used in the computation of basic net loss per share plus common equivalent shares. In 2002 and 2001, convertible debentures, options and warrants to purchase 26,349,024 and 24,971,701 shares of common stock, respectively, were anti-dilutive and were excluded from the calculation of diluted weighted average shares outstanding. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. RECLASSIFICATIONS Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation. STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plans under the intrinsic value method per Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees", whereby compensation cost is recorded for the excess, if any, of the quoted market price of the common shares over the exercise price at the date of grant for all employee stock options issued. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Since the Company has elected to continue to use the provisions of APB 25 in accounting for stock options granted to employees, it is required by Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation and SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", to present additional pro forma information showing effects on its historical results of operations of the use of a method that estimates the fair value of the options at the grant date and then amortizes the fair value to expense over the options' vesting period. Had the Company elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans, net income (loss) and net income (loss) per share would have been decreased or increased to the pro forma amounts shown in the table below (in thousands, except per share data):

~~2000~~2003 ~~1999~~2002 ~~1998~~2001 -------- -------- -------- ~~Cash~~Net ~~flows~~income ~~from~~(loss) ~~operating~~as ~~activities:~~reported ~~Net loss~~ $~~(36~~ 4,~~480)~~839 $(1013,~~583~~714) $ (3,~~728~~434) ~~Adjustments to reconcile net loss to net cash used in operating activities~~Deduct: ~~Extraordinary~~Total ~~gain on early extinguishment of debt~~ stock--based --employee ~~(522)~~compensation ~~Gain~~expense ondetermined ~~settlement~~under offair ~~licensing~~value ~~royalty~~based ~~obligations~~method (1,500) -- -- Loss on disposal of property and equipment 1,538 733 -- Depreciation and amortization of property and equipment 4,115 1,515 601 Amortization of goodwill 1,868 1,037 1,110 Amortization of deferred financing costs 864 79 -- Provision for ~~allowances~~all onawards ~~receivables~~580 1,~~807~~994 ~~2,773 -- Provision for obsolescence on inventory~~ 3,~~912~~738 ~~(453)~~ -- ~~Provision for restructuring charges 4,187~~ -- -- ~~Impairment of goodwill~~ -- ~~3,749~~ -- ~~Issuance of notes in lieu of interest~~ -- ~~108 276 Deferred income taxes~~ -- ~~137 151 Non~~-~~cash stock based compensation 299 72~~ -- Changes in assets and liabilities: Increase in receivables (1,691) (11,393) (52) (Increase) decrease in inventories (1,598) 18,376 (6,873) Decrease (increase) in prepaid expenses and other current assets 1,150 (575) 390 Decrease (increase) in other assets 517 (241) 1,187 Increase (decrease) in accounts payable 12,652 (2,685) (2,626) Increase (decrease) in accrued expenses and other current liabilities 4,563 (4,811) (500) Increase (decrease) in other liabilities 895 510 (748) -------- ~~-------- --------~~ Net ~~cash~~income ~~used in operating activities~~ (~~2,902~~loss) (1,~~652)~~ ~~(11,334)~~pro ~~--------~~forma ~~--------~~$ ~~-------- Cash flows from investing activities: Capital expenditures (~~4,~~608)~~259 $(415,~~289~~708) ~~(233)~~$ ~~Acquisition of businesses, net of cash acquired --~~ (107,~~320~~172) ~~(2,659)~~======== ~~--------~~======== ~~--------~~======== ~~--------~~Basic ~~Net~~and ~~cash~~diluted ~~used~~net inincome ~~investing activities~~ (~~4,608~~loss) ~~(14,609)~~per ~~(2,892) -------- -------- -------- Cash flows from financing activities~~share: ~~Book~~As ~~overdraft~~reported ~~(889)~~$ ~~1,544~~0.04 --$ ~~Proceeds from issuance of common stock -- 20,000 -- Common stock issuance costs paid --~~ (~~1,468~~0.15) --$ ~~Stock options exercised 116 438 6 Proceeds from long-term debt -- 10,000 -- Deferred financing costs paid~~ (~~430~~0.04) ~~(406)~~======== --======== ~~Payments~~======== ofPro ~~long-term~~forma ~~debt~~$ ~~and~~0.04 ~~capitalized~~$ ~~leases~~ (~~3,201~~0.17) ~~(5,435)~~$ (~~1,335~~0.09) ~~Increase~~======== ~~(decrease)~~======== in borrowings under revolving credit facility 13,194 (8,415) 15,295 -------- -------- -------- Net cash provided by financing activities 8,790 16,258 13,966 -------- -------- -------- Increase (decrease) in cash and cash equivalents 1,280 (3) (260) Cash and cash equivalents, beginning of year 1,109 1,112 1,372 -------- -------- -------- Cash and cash equivalents, end of year $ 2,389 $ 1,109 $ 1,112 -------- -------- --------========

4. DISCONTINUED OPERATIONS The Company had been engaged in the business of designing, manufacturing and marketing men's and boy's outerwear and women's sportswear, loungewear and swimwear under a variety of trademarks which were owned or licensed from others. During 2001, the Company substantially completed its transformation from a manufacturer, importer and wholesaler to a licensor or sub-licensor of its owned or licensed trademarks. On May 7, 2003, the Company signed a definitive trademark purchase agreement with Global providing for the sale of the trade name and service mark XOXO(R) and the trademarks XOXO(R), XOXO IN AMERICA AND ABROAD(R), LOLA(R) and FRAGILE(R) along with certain related assets and accompanying goodwill. On December 22, 2003, the Company sold its rights to use the Baby Phat(R) trademark pursuant to a License Agreement by and between Phat Fashions LLC and BP dated as of July 1, 1999. As a result of the transformation into a licensing operation and the sale of the Company's owned and licensed trademarks, operating results relating to manufacturing, wholesaling and retailing have been excluded from the results from continuing operations and are classified as discontinued operations for all periods presented in accordance with the requirements of SFAS144 "Accounting for Impairment or Disposal of Long-Lived Assets". Discontinued operations for the years ended December 31, 2003, 2002 and 2001 include all sales, commissions, cost of goods sold and selling and administrative expenses recorded in connection with ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- the Company's former retail and outlet store operations, import and wholesale operations and all sales to licensee. Additionally, certain restructuring charges, goodwill and long-lived asset impairment charges and portions of extraordinary gains have also been reclassified as discontinued operations. The summary of the operating results of the discontinued operations is as follows: 2003 2002 2001 -------- -------- -------- (in thousands) Revenue: $ 4,830 $ 3,343 $ 47,468 Cost of goods sold 1,760 2,139 34,129 -------- -------- -------- Gross profit 3,070 1,204 13,339 Operating expenses: Selling and administrative expenses 2,483 3,193 6,774 Impairment of goodwill 368 412 -- Impairment of long lived assets 483 441 242 Restructuring and other charges 1,032 2,507 (1,679) -------- -------- -------- Income (loss) from operations (1,296) (5,349) 8,002 Interest expense -- -- (189) -------- -------- -------- Income (loss) before income taxes (1,296) (5,349) 8,191 Income tax provision -- -- 22 -------- -------- -------- Income (loss) $ (1,296) $ (5,349) $ 8,169 ======== ======== ======== For the year ended December 31, 2003, included in discontinued operations is a goodwill impairment charge of $368,000, long-lived assets impairment charges of $483,000 and a restructuring charge of $1,032,000. Goodwill and long-lived assets relating to the XOXO(R) retail store and the XOXO(R) outlet stores, which were being operated by the Company's former licensee, Adamson, were determined to be impaired after the closing of the trademark sale to Global. The $1,032,000 restructuring charge represents an additional year's rent accrual for two of the Company's four former XOXO(R) retail stores, which were closed in 2002 and are still the subject of litigation with the landlord. 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 by the end of 2004. The Company could incur additional rent charges of up to $235,000 should a future review warrant an additional accrual. The Company reached a settlement agreement for the third retail store closed in 2002. The Company settled with the landlord of its fourth retail store that closed in July 2003 and was released from all obligations under the lease. The Company also included a $500,000 gain on the settlement of indebtedness realized on the settlement of accounts payable in 2003. For the year ended December 31, 2002 the Company has reclassified into discontinued operations a goodwill impairment charge of $412,000, long-lived assets impairment charges of $441,000 and a ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- restructuring charge of $2,507,000. Goodwill and long-lived assets relating to the four XOXO(R) retail stores, three of which were closed in the first quarter of 2002, were determined to be impaired. The $2,507,000 restructuring charge represents an accrual of rental charges for 2002 and 2003 for its three closed retail stores. For the year ended December 31, 2001 the Company has reclassified into discontinued operations a long-lived assets impairment charge of $242,000 and a restructuring recovery of $1,679,000. The asset impairment charge related to assets at the Company's former office location which were abandoned. In 2000, the Company had reserved $4,187,000 in connection with a restructuring of its operations. In 2001, the Company reversed $1,679,000 in accrued rental costs resulting from the settlement of the Company's lease obligation on its New Bedford, Massachusetts, warehouse. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): ESTIMATED USEFUL LIVES DECEMBER 31, IN YEARS 2003 2002 Furniture, fixtures and equipment 3 - 7 $ 6,063 $12,476 Leasehold improvements 5 - 10 931 3,403 ------- ------- 6,994 15,879 Less accumulated depreciation and amortization 6,315 12,970 ------- ------- $ 679 $ 2,909 ======= ======= As of December 31, 2003 and 2002, property and equipment include amounts for equipment leased under capital leases with an original cost of $2,554,000. As of December 31, 2003 and 2002, accumulated depreciation and amortization include $2,354,000 and $1,943,000, respectively, associated with these leased assets. 6. FINANCING The following amounts represent borrowings outstanding (in thousands): ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- DECEMBER 31, 2003 2002 Revolving Credit Facility (a) $ -- $ 456 ======= ======= Long-term debt: Term Loan (a) $ -- $ 4,000 Convertible Debentures (b) -- 7,500 Series A Junior Secured Note (c) -- 5,642 ------- ------- -- 17,142 Less current portion -- 9,642 ------- ------- $ -- $ 7,500 ======= ======= a. During February 1999, the Company entered into a Financing Agreement with CIT Commercial Services Group, Inc. ("CIT") and certain other financial institutions, whereby such lenders agreed to provide a revolving credit facility up to $65,000,000 for working capital loans and letters of credit financing. In connection with the acquisition of XOXO, the Company's Financing Agreement was amended to increase the revolving credit facility to $80,000,000, and provide a term loan of $10,000,000. The Company repaid all amounts outstanding under the Financing Agreement out of the proceeds of the trademark assets sale to Global. Accordingly, the Financing Agreement is no longer in effect. The Company's chief executive officer had personally guaranteed $3 million of indebtedness outstanding under the Financing Agreement. This guarantee expired upon re-payment of the Company's obligations to CIT. b. 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. All amounts outstanding under these debentures , including accrued interest, were repaid in full and the debentures were retired. c. On June 30, 1993, the Company entered into a Series A Junior Secured Note Agreement with BNY Financial Corporation ("BNY") pursuant to which BNY received a nine-year, $7,000,000 note. The Company repaid all amounts outstanding under the BNY note out of the proceeds of the trademark assets sale to Global. 7. STOCK INCENTIVE PLAN The 1993 Stock Incentive Plan (the "Plan"), as amended, authorizes the Company's Board of Directors (or a committee thereof), to award to employees and directors of, and consultants to, the Company and its subsidiaries: (i) options to acquire common stock at prices determined when the options are granted, (ii) stock appreciation rights (entitling the holder to a payment equal to the ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- appreciation in market value of a specified number of shares of common stock over a specified period), (iii) restricted shares of common stock whose vesting is subject to terms and conditions specified at the time of grant, and (iv) performance shares of common stock that are granted upon achievement of specified performance goals. Options granted pursuant to the Plan may be either "incentive stock options" within the meaning of Section 422A of the United States Internal Revenue Code of 1986, as amended, or non-qualified options. In April 1999, the Company's Board of Directors approved an amendment to the Plan to allow for the granting of options to purchase an additional 3,500,000 shares under the Plan for a total of 7,000,000 shares. Additionally, in 2000, the Company received approval from its board of directors and shareholders to increase the number of shares for which options may be granted to 10,000,000. The Plan provides that options which are cancelled or expire remain subject to future grant under the Plan. In general, options granted provide for vesting in three equal annual installments from the date of grant and are exercisable for a period of 10 years from the grant date. Transactions in stock options under the Plan are summarized as follows:

~~ESTIMATED~~2003 ~~DECEMBER~~2002 ~~31,~~2001 ~~USEFUL LIVES~~ ------------------------- ~~IN YEARS 2000 1999~~ ------------ ------------- ------------------------- ~~Furniture,~~WEIGHTED ~~fixtures~~WEIGHTED ~~and~~WEIGHTED ~~equipment~~AVERAGE 3AVERAGE -AVERAGE 7NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE Outstanding, January 1 9,552,000 $ 1.15 10,~~256~~762,500 $12 1.15 13,~~381~~225,600 ~~Leasehold~~$ ~~improvements~~1.20 5Granted -- 10-- ~~3,605~~-- 4-- 275,~~615~~000 0.31 Exercised -- -- --- -- -- --- ~~18,861~~Expired/Cancelled 16(3,~~996~~658,000) ~~Less~~1.03 ~~accumulated~~(1,210,500) ~~depreciation~~1.85 ~~and amortization 8~~(2,~~898 6~~738,~~244~~100) 1.32 ---------- ---------- --------- Outstanding, Decem ber 31 5,894,000 $ 1.09 9,~~963~~552,000 $ 1.05 10,~~752~~762,500 $ 1.15 ========== ======== ========== ======== ========== ======== Options Exercisable, December 31 5,894,000 $ 1.09 9,460,333 $ 1.07 8,083,008 $ 1.13 ========== ======== ========== ======== ========== ========

Stock options outstanding and exercisable at December 31, 2003 are as follows: WEIGHTED WEIGHTED AVERAGE RANGE OF SHARES UNDER AVERAGE REMAINING EXERCISE OPTION PRICE CONTRACTUAL PRICES AND EXERCISABLE PER SHARE LIFE IN YEARS ---------------- ----------------- --------- -------------- Outstanding: under $1.00 3,269,000 $ 0.58 5.7 $1.00 - $1.50 765,000 1.00 3.5 $1.51 - $2.00 1,860,000 2.00 5.6 ----------------- 5,894,000 $ 1.09 5.4 ================= ========= ============== The Plan provides for the immediate vesting of outstanding options upon a change of control of the Company. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 8. INCOME TAXES The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consists of state and local income taxes. A reconciliation of the statutory Federal income tax rate to the Company's effective tax rate is summarized as follows: YEAR ENDED DECEMBER 31, 2003 2002 2001 Federal statutory income tax rate (34)% (34)% (34)% State and local income taxes (6) (6) 2 Goodwill amortization/impairment 100 -- 1 Valuation allowance (60) 40 32 Other, individually less than 5% -- -- 1 --- --- --- 0% 0% 2% === === === The components of deferred tax assets and liabilities are as follows (in thousands): YEAR ENDED DECEMBER 31, ----------------- 2003 2002 Deferred tax assets/(liabilities) Current: Restructuring charge $ 1,498 $ 1,107 Allowance for sales returns, discounts, credits and doubtful accounts 800 -- Accruals 129 267 Other -- -- ------- ------- 2,427 1,374 ------- ------- Noncurrent: Net operating loss carryforwards 43,570 48,681 Goodwill -- 1,163 Alternative minimum tax credit carryforward 846 846 Other tax credit carryforwards 37 37 Installment sale (1,800) -- Other 157 605 ------- ------- 42,810 51,332 ------- ------- 45,237 52,706 Valuation allowance (45,237) 52,706) ------- ------- Total deferred tax assets $ -- $ -- ======= ======= ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The Company's valuation allowance decreased to $47,045,000 as of December 31, 2003 from $52,706,000 as of December 31, 2002. For the year ended December 31, 2002, the Company's valuation allowance increased from $48,823,000 as of December 31, 2001 to $52,706,000 as of December 31, 2002. At December 31, 2003, the Company has available net operating loss carryforwards for federal income tax purposes of approximately $94,000,000 which expire during fiscal 2005 through 2022. In addition, the Company has certain state net operating loss carryforwards available, which expire at various times in accordance with governing state tax statutes. As a result of a change in control of the Company in 1999, the utilization of net operating loss carryforwards generated prior to the change are limited by Section 382 of the Internal Revenue Code to approximately $1,500,000 annually through 2019. Accordingly, the Company expects that a significant portion of the net operating loss carryforwards will expire unused. 9. EXTRAORDINARY GAIN During the year ended December 31, 2001, the Company recorded extraordinary gains of approximately $1,998,000 which consisted of the following: (i) settlements with vendors for liabilities totaling approximately $2,345,000, which the Company agreed to pay approximately $1,063,000 in cash, (ii) settlement with Perry Ellis International on royalty payables totaling approximately $1,416,000 which the Company agreed to pay $900,000 in cash and (iii) in connection with the closing of the New Bedford location in 2001 the Company agreed to settle a union obligation of approximately $750,000 by paying $550,000 in cash. 10. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Future minimum rental payments under capital leases and non-cancelable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2003 are as follows (in thousands): ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------

~~2000~~YEAR ~~1999~~ENDING ~~1998~~OPERATING SUB-~~------------------------~~RENTS ~~-----------------------~~NET ~~-----------------------~~RENT ~~WEIGHTED~~CAPITAL ~~WEIGHTED~~DECEMBER ~~WEIGHTED~~31, ~~AVERAGE~~LEASES ~~AVERAGE~~LEASES ~~AVERAGE~~2004 ~~NUMBER~~$ ~~EXERCISE~~2,879 ~~NUMBER~~$ ~~EXERCISE~~(623) ~~NUMBER~~$ ~~EXERCISE~~2,256 OF$ ~~OPTIONS~~404 ~~PRICE~~2005 ~~OF OPTIONS PRICE OF OPTIONS PRICE ----------- -------- ---------- -------- ---------- -------- Outstanding~~2,680 ~~January~~(637) ~~1 8~~2,~~621,316~~043 $196 ~~1.70~~2006 1,~~803,000~~968 $(637) ~~0.76~~ 1,~~695,000~~331 $192 ~~0.70~~2007 ~~Granted 5,698,500 0.58 7,888,350~~ 1~~.73 280~~,~~000~~259 ~~0.96 Exercised~~ (~~231,166~~632) ~~0.50~~627 ~~(968,834)~~40 ~~0.45~~2008 ~~(51~~1,~~333)~~198 ~~0.13 Expired/Cancelled~~ (~~863,050~~632) ~~1.97~~566 ~~(101,200)~~- ~~1.61~~Thereafter 200 (~~120,667~~105) ~~0.66~~95 - --------- ------ ---~~------~~ ------ --------- ------- ~~Outstanding,~~Total ~~December~~minimum 31lease ~~13,225,600~~payments $ ~~1.20 8~~10,~~621,316~~184 $ ~~1.70 1~~(3,~~803,000~~266) $ ~~0.76~~6,918 832 ========== ====== ===~~======~~ ====== =~~========~~ ~~======~~Less ~~Options~~amount ~~Exercisable,~~representing ~~December~~interest 318 ~~5,890,532~~-------- $Present ~~1.29~~value ~~2,959,166~~of $minimum ~~1.05~~lease ~~622,666~~payments $ ~~0.45~~824 ========~~== ====== ========= ====== ========= ======~~

The Company had various operating leases in effect for retail and outlet stores, offices and warehouses. During 2003, the Company negotiated settlements with outlet store landlords and has been released from all future obligations under the leases. During 2003, the Company also negotiated settlements with two of its former retail store landlords. Aris has been released from all future obligations under the lease of its former XOXO retail store at Roosevelt Field and is making settlement payments to its former Rodeo Drive landlord. The Company remains in litigation with its remaining two retail landlords. Aris has included in discontinued operations (see Note 4) a rent accrual of $1,032,000 in 2003, to cover 2004 rent for these stores and a rent accrual of $2,507,000 in 2002 to cover 2002 and 2003 rent for these stores. Aris also negotiated a release from approximately $2,000,000 in future rental obligations for its former office location at 463 Seventh Avenue. The remaining office leases expire over the next five years and the warehouse leases expire over the next two years. Total rental expense under all operating leases was approximately $2,445,000, $4,538,000 and $5,485,000 for fiscal 2003, 2002 and 2001, respectively. During 2003 and 2002, Adamson was responsible for approximately $1,715,000 and $1,844,000, respectively, in rental costs associated with the Company's office and warehouse space and its outlet stores. In 2001, the Company received reimbursements from Grupo totaling approximately $2,818,000 covering rent expense for office, warehouse and outlet store rents that were Grupo's responsibility as per the Grupo Agreement. LICENSE AGREEMENTS As of December 31, 2003 the Company is not a party to any license agreements and has no future commitments (see Note 1). The Company's license agreement with Phat Fashions LLC for the use of the Baby Phat(R) was terminated on December 22, 2003 in connection with the Asset Purchase Agreement with BP Clothing LLC (see Note 1). In January 2004, the Company entered into a license agreement for its Members Only(R) trademark. Minimum royalties due the Company start at $250,000 in 2004 and increase to $360,000 for 2007. EMPLOYMENT CONTRACTS The Company has entered into employment contracts with certain senior executives for periods of three to five years, expiring no later than February 2005. Under the agreements, the executives are ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- entitled to a specified salary over the contract period. Bonuses are payable based upon profitability and cash flows of the Company for each period. The estimated future minimum obligation under these contracts as of December 31, 2003 is $750,000 in 2004 and $125,000 in 2005. In addition, upon certain events of termination or change in control of the Company, certain of these agreements contain lump sum payment provisions, as defined within the respective agreements. LITIGATION The Company, in the ordinary course of its business, is the subject of, or a party to, various pending or threatened legal actions involving private interests. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, the dispositions of these matters could have a material adverse effect on the Company's financial statements. As of December 31, 2003 the Company is a party to the following significant legal actions: FASHION WORLD-SANTA V. LOLA, INC.: On February 11, 2002, Fashion World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action sought to evict Lola, on grounds of non-payment of rent, from an XOXO retail store located in Beverly Hills, California. Lola is a party to a five-year lease for that store, and that lease does not expire until April 2006. XOXO Clothing Company, Inc. responded to the complaint as successor in interest to Lola, Inc., denying the material allegations of the complaint, and asserting other affirmative defenses. On 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 of which was paid on signing and $20,000 is payable 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 $900,000 in damages, representing commissions due under the agreement, and an unstated amount of alleged damages regarding a claim of slander. The material allegations of the complaint have been denied and the Company has filed counterclaims for $2,000,000 alleging breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, theft of trade secrets and tortious interference with prospective economic advantage. Discovery in this matter is ongoing. Ms. Wilson recently filed a motion for summary judgement. The Company also intends to file a motion for summary judgement to dismiss a portion of her claims. JENNY'S GARMENTS INC. V. ARIS INDUSTRIES ET AL: Jenny's Garments Inc.("Jenny") filed a compliant against Aris and certain of its subsidiaries and current and former officers, as well as other defendants, in the Supreme Court of New York State, New York County, on or about December 23, 2003. The suit seeks recovery from Aris and other defendants in the total amount of $843,947 for goods that were sold and delivered by Jenny to defendants unrelated to Aris. The suit asserts claims for breach of contract, quasi-contract and fraud and seeks compensatory and punitive damages. Aris answered the complaint on or about February 17, 2004 denying liability and asserting various affirmative defenses. The Company believes that there is a substantial likelihood of defeating all claims asserted as neither Aris nor its subsidiaries were the contracting parties for the goods. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 and also committed trademark infringement. The Company settled Campers World's claim by agreeing to pay $100,000 over a twenty month period. The Company is defending PEI's claim on the basis of a release PEI issued to the Company and its affiliates in June 2001. MELVILLE REALTY COMPANY, INC. V XOXO, EUROPE CRAFT IMPORTS AND ARIS, AS SUCCESSORS TO LOLA INC. Melville instituted an action in the Supreme Court of the State of New York, County of New York claiming that the Company is liable on an alleged guaranty by Lola, Inc. on rent obligations of 8-3 Retailing Inc. ("8-3"), a subsidiary of Europe Craft Imports, Inc. which is a subsidiary of the Company, pertaining to a alleged 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 alleged 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 February 2, 2002, 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. EUROPE CRAFT IMPORTS, INC. VS. CORPORATE REALTY INCOME FUNDS I AND 475 FIFTH AVENUE LIMITED PARTNERSHIP. Europe Craft Imports, Inc. instituted an action in the Supreme Court of the State of New York, claiming that a lease for office space at 475 Fifth Avenue, New York, New York, was terminated in whole or in part by the action of the defendants. Declaratory relief and compensatory damages are being sought by Europe Craft Imports, Inc., a subsidiary of the Company. The defendants have counter claimed for cross-declaratory relief, claiming the lease is valid and was not terminated by the defendants' actions. This litigation is being pursued and the counter claim vigorously defended. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- GREEN 1466 BROADWAY LLC VS. XOXO CLOTHING COMPANY, INC. D/B/A XOXO F/K/A LOLA, INC. D/B/A XOXO, INC. Green 1466 Broadway LLC instituted a summary proceeding in the Civil Court of the City of New York, County of New York, regarding office space at 1466 Broadway, New York, New York. This action was discontinued by a Stipulation of Settlement. No money was paid by XOXO Clothing Company, Inc. for the discontinuance. 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. BRISTOL INDUSTRIAL I, LLC commenced an action against Sheila Clothing Company, Inc. (formerly known as XOXO Clothing Company, Inc.) for breach of a lease for an industrial warehouse space in the City of Commerce, California. The landlord previously filed an action for unlawful detainer when Sheila defaulted on its payment of rent in June 2003, and at that time Sheila agreed to give up possession of the premises and the landlord agreed to dismiss its unlawful detainer action. However, the landlord later commenced this action for breach of lease, alleging lost rent because of its alleged inability to re-let the premises through the end of the lease term, which expired December 31, 2003. The landlord is suing Sheila as lessor and Aris as guarantor of the lease. 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 ("Cofaco") had 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. On March 29, 2004, the Company and Cofaco agreed to compromise and settle the claims raised in the suit. Aris agreed to pay Cofaco $100,000 in $5,000 installments beginning in March 2004 with the final payment due in October 2005. MARTINEZ & SONS: Martinez & Sons was a contractor with whom XOXO did a substantial amount of sewing. Martinez & Sons went bankrupt, and therefore failed to pay employees. In December of 2000, XOXO settled with the DOL on behalf of 23 employees. XOXO paid $17,433.44 to settle these claims. Other employees sued, and XOXO settled that case in the amount of $62,000. Some of the claimants of the DOL settlement, as well as two other employees, filed a complaint with the DLSE for unpaid wages totaling $22,318.62. They asserted that they had not been paid any wages and claimed that they were owed more money than paid in settlement with the DOL. The Company is in the process of investigating these matters. The Company received a demand letter from a law firm claiming to represent some of the same individuals involved in the Martinez & Sons DOL settlement and the DLSE investigation. The attorney representing these 16 former employees have demanded $660,000 from XOXO. The attorney for these individuals has stated that he may file a claim under Business and Professions Code 17200 ET SEQ. This statute allows individuals to sue for unfair business practices, and penalties include treble damages. It is too premature at this time to assess liability in this matter. ARIS INDUSTRIES, INC. AND SUBSIDIARIES F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 11. RETIREMENT PLANS The Company participates in a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code. All employees are eligible to participate. Employer contributions are discretionary. Participants vest immediately in their own contributions and after seven years of service in employer contributions. The Company made no contributions in 2003, 2002 or 2001. 12. RELATED PARTY TRANSACTIONS In June 2000, First A.H.S. Acquisition Corp. ("AHS"), a company owned by the Company's chief executive officer, entered into an agreement (the "Letter of Credit Agreement") with the Company's principal commercial lender to facilitate the opening of up to $17,500,000 in letters of credit for the purchase of inventory. Pursuant to the Letter of Credit Agreement, AHS purchased inventory which was 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. All amounts owed AHS were repaid during 2003. The Company has utilized the services of Schneider, Schecter & Yoss, an accounting firm, of which Howard Schneider, a director of the Company, is a partner. During 2002 and 2001, total fees paid were $43,950 and $43,950, respectively. During fiscal 2001 the Company had sales of approximately $828,000 to Humane Incorporated ("Humane") of which Steven Feiner, a director of the Company, is the owner. As of December 31, 2002, the Company had receivables from Humane of approximately $375,000 which have been repaid. Steven Feiner resigned as a director of the Company in December 2003. During January 2001, the Company's chief executive officer loaned the Company $2,000,000. In 2002 the Company's chief executive officer made additional loans to the Company totaling $1,500,000. All of the loans were payable on demand and bore interest at prime plus 1/4%. These loans were repaid in 2003. In the fourth quarter of 2003, the Company's chief executive officer loaned the Company $660,000. This loan is payable on demand and bears interest at prime plus 1/4%. This loan was outstanding as of December 31, 2003. In addition, as of December 31, 2003, the Company had trade payables of $15,287 to its chief executive officer, $99,862 to Humane and $75,400 to Schneider, Schecter and Yoss. ARIS INDUSTRIES, INC. AND SUBSIDIARIES S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS --------------------------------------------------------------------------------

~~2000~~COLUMN ~~1999~~A ~~1998~~COLUMN B COLUMN C COLUMN D COLUMN E ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND AT END CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ---------- ---------- ~~Net~~---------- ~~loss~~---------- ~~from~~Year ~~continuing~~ended ~~operations~~December As31, ~~reported~~2003: Allowance for sales returns, discounts, credits and doubtful accounts $~~(36~~ 453,~~480)~~000 $~~(10~~2,~~583)~~000,000 $ (4453,~~250~~000(1) ~~Pro~~$2,000,000 ~~forma~~Restructuring ~~(40~~reserves 2,~~857)~~573,000 ~~(14~~1,~~774)~~032,000 (480,~~478~~000(3) ~~Net~~3,525,000 ~~loss~~---------- ~~per~~---------- ~~share~~---------- ~~from~~---------- ~~continuing~~Year ~~operations~~ended -December ~~diluted~~31, As2002: ~~reported~~Allowance for sales returns, discounts, credits and doubtful accounts $1,014,000 ~~(0.46)~~$ -- $ 561,000(~~0.19~~1) $ 453,000 Restructuring reserves 567,000 2,510,000 504,000(~~0.29~~3) ~~Pro~~2,573,000 ~~forma~~---------- ---------- ---------- ---------- Year ended December 31, 2001: Allowance for sales returns, discounts, credits and doubtful accounts $9,141,000 $ -- $8,127,000(~~0.51~~1) $1,014,000 Inventory reserves 6,017,000 -- 6,017,000(~~0.27~~2) -- Restructuring reserves 4,187,000 -- 3,620,000(~~0.30~~3) 567,000 ---------- ---------- ---------- ----------

(1) Write-off of receivables. (2) Write-off of inventory. (3) Cash amounts paid and reserve recovery.

DECEMBER 31, ------------------------- 2000 1999 -------- -------- Deferred tax assets: Current: Restructuring charge $ 1,801 $ 723 Inventories 2,891 89 Allowance for sales returns, discounts, credits and doubtful accounts 3,930 1,318 Accruals 1,304 -- Other 78 416 -------- -------- 10,004 2,546 -------- -------- Noncurrent: Net operating loss carryforwards 37,998 33,365 Goodwill 1,408 1,440 Alternative minimum tax credit carryforward 846 846 Other tax credit carryforwards 37 37 Other 605 460 -------- -------- 40,894 36,148 -------- -------- 50,898 38,694 Valuation allowance (50,322) (38,321) -------- -------- Total deferred tax assets $ 576 $ 373 ======== ========

YEAR ENDING OPERATING CAPITAL DECEMBER 31, LEASES LEASES ----------- --------- ------- 2001 $ 6,154 $ 1,242 2002 4,739 855 2003 4,779 810 2004 3,875 492 2005 2,628 3 Thereafter 1,288 -- -------- ------- Total minimum lease payments $ 23,463 3,402 ======== Less amount representing interest 774 ------- Present value of minimum lease payments (including short-term portion of $1,150) $ 2,628 =======

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ----------------------------------------------------------------------------------------------------------------------- ADDITIONS BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND AT END CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD --------------- -------------- --------------- ------------ Year ended December 31, 2000: Allowance for sales returns, discounts, $ 7,334,000 $ 1,807,000 $ -- $ 9,141,000 credits and doubtful accounts Inventory reserves 2,105,000 3,912,000 -- 6,017,000 ------------ ------------ ----------- ------------ $ 9,439,000 $ 5,719,000 $ -- $ 15,158,000 ============ ============ =========== ============ Year ended December 31, 1999: Allowance for sales returns, discounts, credits and doubtful accounts $ 4,561,000 $ 9,935,000 (1) $ 7,162,000 (2) $ 7,334,000 Inventory reserves 2,558,000 597,000 1,050,000 (3) 2,105,000 ------------ ------------ ----------- ------------ $ 7,119,000 $ 10,532,000 $ 8,212,000 $ 9,439,000 ============ ============ =========== ============ Year ended December 31, 1998: Allowance for sales returns, discounts, credits and doubtful accounts $ 1,832,000 $ 10,440,000 $ 7,711,000 $ 4,561,000 Inventory reserves 268,000 1,240,000 -- 1,508,000 Reserve for price allowances 880,000 1,075,000 905,000 1,050,000 ------------ ------------ ----------- ------------ $ 2,980,000 $ 12,755,000 $ 8,616,000 $ 7,119,000 ============ ============ =========== ============

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