ARIS INDUSTRIES INC
Filed on May 20 2004
Item 2. Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of the financial condition and results of operations of Aris Industries, Inc. (the "Company") for the three-month periods ended March 31, 2004 and 2003 should be read in conjunction with the consolidated condensed financial statements, including the notes thereto, included on pages 3 through 10 of this report.
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including the ability of the Company to satisfy the conditions and requirements of the credit facilities of the Company, the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition," are forward-looking statements. Although the Company believes that expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146
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. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the consolidated financial statements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
These consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
As of March 31, 2004, the Company had a working capital deficit of approximately $8,009,000 compared to a working capital deficit of approximately $6,068,000 at December 31, 2003. The increase in the working capital deficit was primarily due to the Company's loss from operations. During the three-months ended March 31, 2004, the Company financed its working capital requirements principally through licensing revenue from its Members Only license along with the proceeds from the Asset Purchase Agreement relating to the sale of it's Phat Farm license in December 2003 (see Note 2).
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. 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. The Company collected the remaining balance of this escrow account in April 2004. The remaining escrow account does not expire until the third anniversary of the transaction date.
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 Apparel, Inc. ("Adamson"), a related party, sold to a newly created limited liability company, BP Clothing LLC (the "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 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 sub-license with BP.
In accordance with the Asset 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.
In May 2004 the Company and Buyer restructured the $2,000,000 payment due in June 2004. As a result of this restructuring the Company will receive the $2,000,000 in weekly installments which vary from $100,000 to $200,000 and commence on May 13, 2004 and continue through August 15, 2004. The payment structure of the final $2,500,000 is unchanged.
In 2004, the Company began licensing its Members Only(R) trademark, which is its only remaining trademark.
As a result of the trademark assets sale and the sale of the BP license, the Company has repaid a substantial portion of its 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 other creditors.
There can be no assurance that the timing of cash receipts to be realized from working capital and operations will be sufficient to meet obligations as they become due. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
RESULTS OF OPERATIONS
The Company reported a net loss of $1,940,000 for the three-month period ended March 31, 2004 compared to a net loss of $1,279,000 for the three-month period ended March 31, 2004.
During the three-months ended March 31, 2004, the Company's loss was attributable to a significant reduction in revenues as the result of the sale, in 2003, of the Company's XOXO trademark and licensing operations and its Baby Phat sub-license (see Note 2). In addition, the Company reserved $1,190,000 as an allowance against receivables from Adamson.
During the three-months ended March 31, 2003, the Company's loss was attributable to an increase in legal expenses, the write-off of previously recognized XOXO license royalties and a soft retail environment which affected sales at Adamson and negatively impacted the Company's royalty revenue.
ROYALTY INCOME - CONTINUING OPERATIONS
The Company's royalty income decreased from $2,116,000 during the three-months ended March 31, 2003 to $63,000 for the three-months ended March 31, 2004. This decrease was attributable to the sale, in 2003, of the Company's XOXO trademark and licensing operations and its Baby Phat sub-license (see Note 2).
SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS
Selling and Administrative expenses were $1,990,000 for the three-months ended March 31, 2004 as compared to $2,846,000 for the three-months ended March 31, 2003. Selling and Administrative expenses for the three-months ended March 31, 2004 were adversely affected by the sale, in 2003, of the Company's XOXO trademark and licensing operations and its Baby Phat sub- license (see Note 2). The Company's royalty revenue for the current quarter was derived only from its Members Only license. In addition, the Company reserved $1,190,000 as an allowance against receivables from Adamson. Selling and Administrative expenses for the three-months ended March 31, 2003 continued to be negatively impacted by legal expenses incurred in the Company's defense of various lawsuits, the abandonment in 2002 of three retail locations and the ongoing negotiations with its creditors to settle outstanding amounts due them. This was partially offset as the Company continued to benefit from Adamson's assumption of Grupo's responsibility for most of the Company's operating overhead.
DISCONTINUED OPERATIONS
Discontinued operations for the three-months ended March 31, 2003 include all sales, commissions, cost of goods sold and selling and administrative expenses recorded in connection with the Company's former retail operations.
INTEREST EXPENSE
Interest expense for the three-months ended March 31, 2004 was $13,000 as compared to $461,000 for the three-months ended March 31, 2003. This decrease was attributable to the
satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments in 2003.
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