10-Q 1 c33299_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended (Commission File Number): 1-4814 June 30, 2004 ------ ARIS INDUSTRIES, INC. --------------------- (Exact name of registrant as specified in its charter) New York 22-1715274 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 525 Seventh Avenue, New York, New York 10018 --------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 354-4600 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- --- Number of shares of Common Stock outstanding 108,819,527 As of August 13, 2004 ARIS INDUSTRIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements a. Consolidated Condensed Balance Sheets as of June 30, 2004 and December 31, 2003 3 b. Consolidated Condensed Statements of Operations for the Six-Months Ended June 30, 2004 and June 30, 2003 4 c. Consolidated Condensed Statements of Operations for the Three-Months Ended June 30, 2004 and June 30, 2003 5 d. Consolidated Condensed Statements of Cash Flows for the Six-Months Ended June 30, 2004 and June 30, 2003 6 e. Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 ARIS INDUSTRIES, INC. AND SUBDIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated condensed financial statements - 3 - ARIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated condensed financial statements - 4 - ARIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated condensed financial statements - 5 - ARIS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated condensed financial statements - 6 - ARIS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed financial statements as of June 30, 2004 and for the six and three-month periods ended June 30, 2004 and 2003 are unaudited and reflect all adjustments consisting of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of financial position, operating results and cash flows for the periods. The consolidated condensed balance sheet as of December 31, 2003, as restated, was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying consolidated condensed financial statements have been prepared in accordance with accounting standards appropriate for interim financial statements and should be read in conjunction with the financial statements and notes thereto included in Aris Industries, Inc. (the "Company", the "Registrant" or "Aris") Annual Report on Form 10-K/A for the year ended December 31, 2003. The operating results for the six and three-month periods ended June 30, 2004 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2004. 2. LIQUIDITY RISKS These consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has continued to incur losses from operations and had a working capital deficit of $9,675,000 at June 30, 2004 as compared to a working capital deficit of $6,068,000 at December 31, 2003. As a result of the sale of the Company's XOXO(R) trademark and certain related assets, the Company has satisfied all obligations that were previously outstanding under its credit facility and certain other debt instruments. 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 $1,586,000. The Company collected the remaining balance of this escrow account in April 2004. The second escrow account, which does not expire until July, 2006, has been reduced to $922,000 as the result of the continuing default of an XOXO licensee. - 7 - 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 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. The Buyer also issued a promissory note payable to BP in the principal amount of $2,500,000 which, after additional offsets of approximately $500,000, was due and payable on the six-month anniversary of the closing. In addition, BP was to receive $2,500,000 in post-closing payments at a rate of 1% of net sales each month commencing on July 18, 2004 and ending on June 18, 2005, or sooner if fully paid. BP has reserved approximately $2,242,000 against the post-closing payments and the related gain on sale to cover a contractual obligation due a former officer and director of the Company, who is also an affiliate of the Buyer, which can be offset against these payments (See Note 8). 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 began receiving installment payments against the $2,000,000 note on May 13, 2004 which will continue through August 30, 2004. 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. The Company believes that its financing plan will be sufficient, at least through December 31, 2004, to sustain its operations. There can be no assurance that the timing of cash receipts 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. - 8 - 3. 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 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. The summary of the operating results of the discontinued operations is as follows (000 omitted): Three-Months Ended Six-Months Ended June 30, 2003 June 30, 2003 -------------------------------------------------------------------------------- Revenues $1,433 $2,527 -------------------------------------------------------------------------------- Cost of goods sold (431) (974) -------------------------------------------------------------------------------- Gross profit 1,002 1,553 -------------------------------------------------------------------------------- Selling and administrative expenses (888) (1,524) -------------------------------------------------------------------------------- Income from discontinued operations $114 $ 29 -------------------------------------------------------------------------------- 4. PER SHARE DATA Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Options and warrants to purchase 6,478,345 and 10,136,345 shares of common stock were outstanding as of June 30, 2004 and 2003, respectively, but were not included in the computation of diluted loss per share because the effect of their assumed exercise would be anti-dilutive. - 9 - 5. STOCK INCENTIVE PLAN The Company has a stock incentive plan which is described more fully in Note 7 of the Company's Annual Report on Form 10K/A for 2003, as restated. The Company accounts for this plan using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related interpretations. No stock-based employee compensation cost is reflected in net loss for the six and three-month periods ended June 30, 2004 and 2003, as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation and amortized the cost over the vesting period. (in thousands, except per share data)

- 10 - 6. RELATED PARTY TRANSACTIONS 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 June 30, 2004. In the second quarter of 2004, the Company's chief executive officer loaned the Company an additional $200,000. This loan is also payable on demand and bears interest at prime plus 1/4%. This loan was outstanding as of June 30, 2004. Adamson is majority owned by the Company's chairman and chief executive officer and principal stockholder. As of June 30, 2003, Adamson was indebted to the Company in the amount of $3,197,000, which is payable on demand and bears no interest. All of this amount has been reserved at June 30, 2004, including $1,197,000 which was reserved in the six-months ended June 30, 2004. 7. CONTINGENCIES The Company, in the ordinary course of its business, is the subject of, or a party to, various pending or threatened legal actions. While it is not possible at this time to predict the outcome of any litigation, the Company may not be able to satisfy an adverse judgement in certain of these actions, which may have a material adverse effect on its financial position, results of operations and cash flows. 8. RESTATEMENT OF 2003 FINANCIAL STATEMENTS In July 2004, the Company discovered that an error had been made in calculating the amount of the gain recognized on the sale of its XOXO trademark in 2003. Based on a further review of the Asset Purchase Agreement dated December 22, 2003, between BP Clothing Company, Inc. ("BP") an indirect wholly owned subsidiary of the Company, and BP Clothing LLC ("BPLLC") an unaffiliated company, it was discovered that $2,500,000 in post-closing payments that the Company was to begin receiving in July 2004, were subject to an offset of $2,242,000 relating to a contractual obligation due a former officer and director of the Company, who is an affiliate of BPLLC. Accordingly, the Company's 2003 consolidated financial statements have been restated. The effects of the restatement have been reflected herein where applicable. ARIS INDUSTRIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following analysis of the financial condition and results of operations of Aris Industries, Inc. (the "Company") - 11 - for the six and three-month periods ended June 30, 2004 and 2003 should be read in conjunction with the consolidated condensed financial statements, including the notes thereto, included on pages 3 through 11 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 June 30, 2004, the Company had a working capital deficit of approximately $9,675,000 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 six-months ended June 30, 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 its Phat Farm license in December 2003 (see Note 2) along with a loan from its chief executive officer. - 12 - 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 $1,586,000. The Company collected the remaining balance of this escrow account in April 2004. The second escrow account, which does not expire until July, 2006, has been reduced to $922,000 as the result of the continuing default of an XOXO licensee. 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 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. The Buyer also issued a promissory note payable to BP in the principal amount of $2,500,000 which, after additional offsets of approximately $500,000, was due and payable on the six-month anniversary of the closing. In addition, BP was to receive $2,500,000 in post-closing payments at a rate of 1% of net sales each month commencing on July 18, 2004 and ending on June 18, 2005, or sooner if fully paid. BP has reserved approximately $2,242,000 against the post-closing payments and the related gain on sale to cover a contractual obligation due a former officer and director of the Company, who is also an affiliate of the Buyer, which can be offset against these payments (See Note 8). 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 began receiving installment payments against the $2,000,000 note on May 13, 2004 which will continue through August 30, 2004. 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 - 13 - 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 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 losses of $2,786,000 and $4,726,000 for the three and six-month periods ended June 30, 2004 compared to a net losses of $647,000 and $1,926,000 for the three and six-month periods ended June 30, 2003. During the three-months ended June 30, 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 continued to incur significant legal fees in connection with ongoing litigation and recorded charges of approximately $945,000 relating to the settlement of litigation with a former employee and with former vendors. During the three-months ended June 30, 2003, the Company's loss was primarily attributable to continuing soft retail environment which affected sales at Adamson and negatively impacted the Company's royalty revenue along with legal expenses incurred in connection with ongoing legal proceedings to which the Company is a party. During the six-months ended June 30, 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 continued to incur significant legal fees in connection with ongoing litigation and recorded charges of approximately $945,000 relating to the settlement of litigation with a former employee and with former vendors. The Company also reserved $1,197,000 as an allowance against receivables from Adamson. During the six-months ended June 30, 2003, the Company's loss was attributable to legal expenses incurred in connection with ongoing legal proceedings to which the Company is a party, 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 $2,602,000 and $4,718,000 during the three and six-months ended June 30, 2003 to $62,000 and $125,000 for the three and six-months ended June 30, 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). - 14 - SELLING AND ADMINISTRATIVE EXPENSES - CONTINUING OPERATIONS Selling and Administrative expenses were $2,834,000 for the three-months ended June 30, 2004 as compared to $2,952,000 for the three-months ended June 30, 2003. Selling and Administrative expenses for the three-months ended June 30, 2004 were adversely affected as the Company continued to incur significant legal expenses in connection with ongoing litigation. In addition, the Company reserved approximately $945,000 in connection with the settlement of litigation with a former employee and former vendors. Selling and Administrative expenses for the three-months ended June 30, 2003 continued to be negatively impacted by legal expenses incurred in the Company's defense of various lawsuits and the ongoing negotiations with its creditors to settle outstanding amounts due them. Selling and Administrative expenses were $4,824,000 for the six-months ended June 30, 2004 as compared to $5,798,000 for the six-months ended June 30, 2003. Selling and Administrative expenses for the six-months ended June 30, 2004 were adversely affected as the Company continued to incur significant legal expenses in connection with ongoing litigation and reserved approximately $945,000 in connection with the settlement of litigation with a former employee and former vendors. In addition, the Company reserved $1,197,000 as an allowance against receivables from Adamson. Selling and Administrative expenses for the six-months ended June 30, 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. DISCONTINUED OPERATIONS Discontinued operations for the three and six-months ended June 30, 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 June 30, 2004 was $14,000 as compared to $408,000 for the three-months ended June 30, 2003. This decrease was attributable to the satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments in 2003. Interest expense for the six-months ended June 30, 2004 was $27,000 as compared to $869,000 for the six-months ended June 30, 2003. This decrease was attributable to the satisfaction of the Company's indebtedness under its credit facility and other interest bearing instruments in 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable - 15 - ITEM 4. CONTROLS AND PROCEDURES At June 30 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective. During the second quarter of 2004, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, in the ordinary course of its business, is party to various legal actions the outcome of which the Company believes may have a material adverse effect on its consolidated financial position and results of operations. Several of these actions stem from Grupo incurring expenses in the Company's name. Although the Company did not authorize these expenses, the Company mat be subject to liability for them. Because of Grupo's bankruptcy filing, it is unlikely that the Company will be able to recover any of these amount from Grupo. In addition, the following updates information regarding certain litigation to which the Company is subject: FASHION WORLD-SANTA V. LOLA, INC.: On February 11, 2002, Fashion World-Santa filed an unlawful detainer action against Lola, Inc. ("Lola") in the Los Angeles Superior Court. That action sought to evict Lola, on grounds of non-payment of rent, from an XOXO retail store located in Beverly Hills, California. Lola is a party to a five-year lease for that store, and that lease does not expire until April 2006. XOXO Clothing Company, Inc. responded to the complaint as successor in interest to Lola, Inc. On August 21, 2003, the Company and Fashion World-Santa agreed to settle the dispute. The Company has agreed to pay Fashion World-Santa $900,000, $20,000 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 was seeking damages for commissions allegedly due under the agreement, and an unstated amount of alleged damages regarding a claim of slander. In May of 2004, the Company reached a settlement agreement with Ms. Wislon. Under the terms of the settlement, Ms. Wilson received an initial payment of $200,000 and is scheduled to receive $25,000 per month beginning on September 1, 2004 for a total of twelve months. - 16 - 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. 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. The case is trial ready but the trial which was set to commence on August 2, 2004 was adjourned without a reschedule date. The parties are in ongoing settlement negotiations. 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 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. - 17 - 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 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. had commenced an action against the Company in the State Supreme Court for the County of New York, all of which had been consolidated, seeking an aggregate of approximately $250,000 for merchandise allegedly delivered to the Company and for commissions in connection therewith. The Company reached a settlement with Hitch & Trail in July 2004. Under the terms of the settlement, Hitch & Trail will receive eighteen monthly payments of $10,000 beginning on August 15, 2004. 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. A mediation before a court-appointed mediator is scheduled to take place on September 13, 2004. 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 24, 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. - 18 - 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. JIANQSU ANIMAL BY PRODUCTS IMPORT & EXPORT GROUP CORP. V. ADAMSON APPAREL, INC. ET AL., 04-cv-05617 (SOUTHERN DISTRICT OF NEW YORK). This Complaint, alleging breach of contract and damages in the amount of approximately $114,000 was filed on July 2, 2004. Aris' time to answer the complaint has been extended. Investigation of this matter has just begun and it is too early to assess the likely outcome of the litigation. However, it does not appear that Aris Industries was the contracting party. SIEMENS FINANCIAL SERVICES, INC. V. ARIS INDUSTRIES, INC. INDEX NO. 602304/04 (SUPREME COURT, NEW YORK COUNTY). On July 21, 2004, plaintiff filed a Motion for Summary Judgment in lieu of Complaint, alleging breach of certain lease agreements and claiming damages in the amount of $193,824.09. Investigation of this matter has just begun and it is too early to assess the likely outcome of the litigation. COMMITTEE OF UNSECURED CREDITORS OF LUX CORPORATION has commenced action against Adamson Apparel, Inc. and B.P.Clothing Co., Inc., for goods purchased by Adamson in the amount of $293,477.00. The company is in the process of preparing a Motion for Summary Judgment against Lux for the dismissal of the case, since B.P. Clothing Co., Inc., does not believe it has any liability. GENERAL ORIENT has commenced an action against Adamson Apparel, Inc., for failure to pay for goods and associated shipping charges in the amount of $1,600,000. In addition to suing Adamson, the vendor has also sued Aris, B.P. Clothing Company, Inc., certain Directors of the company and Global Brands Holding. The company is defending this action and no trial date has been set for this action. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None - 19 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIS INDUSTRIES, INC. (Registrant) Date: August 16, 2004 By /s/ Paul Spector ------------------------------- Paul Spector Chief Financial Officer / Treasurer - 20 - (c) INDEX TO EXHIBITS

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---------------- (1) Omitted. (2) Omitted. (3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30, 1993 and incorporated herein by reference. (4) - (9) Omitted. (10) Filed as the indicated Exhibit to the Report on Form 8-K dated September 30, 1996 and incorporated herein by reference. (11) Omitted. (13) Omitted. (14) Omitted. (15) Omitted. (16) Filed as Annex A to the Company's Proxy Statement filed with the Commission on May 27, 1999, and incorporated herein by reference. (17) Filed as the indicated Exhibit to the Report on Form 8-K dated February 26, 1999 and incorporated herein by reference. (18) Filed as Exhibit 10.115 to the Annual Report on Form 10-K filed with the Commission on or about April 13, 1999 and incorporated herein by reference. (19) Filed as Exhibit to the Report on Form 8-K dated August 24, 1999. (20) Omitted. (21) Filed as Exhibit to Annual Report on Form 10-K filed with the Commission on April 15, 2002. - 23 - (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. - 24 -

ARIS INDUSTRIES INC 10-Q