UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended March 31, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the transition period from _____ to _____
Commission file number 0-17805
NEW RETAIL CONCEPTS, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3275369
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2975 Westchester Avenue, Purchase, NY 10577
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code : (914) 694-8888
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year: $385,266
The approximate aggregate market value of the registrant's common stock
held by non-affiliates, computed by reference to the price at which the stock
was sold, or the average closing prices of such stock, as of June 24, 1998 was
$9,727,347. The number of shares outstanding of the registrant's common stock on
June 24, 1998, was 5,743,639 shares.
<PAGE>
PART I
Item 1. Description of Business.
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Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995. The statements which are not historical facts contained in this
Annual Report are forward looking statements that involve risks and
uncertainties, including, but not limited to, the inability to maintain
license or sublicense agreements, failure to consummate a proposed
transaction with Candie's, Inc., lack of adequate financing, increased
competition and unfavorable general economic conditions. The Company's
actual results may differ materially from the results discussed in any
forward looking statement.
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Current Business
The Company was incorporated in Delaware in 1986. The Company's principal
executive offices are located at 2975 Westchester Avenue, Purchase, New York
10577, and the telephone number at that address is (914) 694-8888.
The Company has historically been involved in the manufacture,
distribution and sale of various fashion items and, more recently, in the
licensing and sublicensing of fashion trademarks.
The Company currently maintains license agreements with WalMart Stores,
Inc. ("WalMart") with respect to the NO EXCUSES(R) trademark for footwear, and
with Montgomery Ward & Co., Incorporated ("Montgomery Ward") with respect to the
use of the CRAYONS(R) trademark for footwear. A license agreement with Mamiye
Sales, Inc. ("Mamiye") was assigned to No Excuses Sportswear, Ltd. ("NES")
effective August 1, 1997. The WalMart license agreement expires on July 31,
2002. Pursuant to its agreement with NES, the Company is obligated to pay NES
20% of the royalties received from WalMart, subject to a $40,000 per annum
minimum. To date, the Company has received approximately $25,000 in royalties
pursuant to the Montgomery Ward license.
In addition, as a result of a number of transactions with Candie's, Inc.
("Candie's"), the Company owns 1,227,696 shares of the common stock of Candie's
and holds warrants to purchase 700,000 additional shares of such common stock at
an initial price of $1.2375 per share and an option to purchase 100,000
additional shares of such common stock for $1.15 per share.
Recent Developments
On April 6, 1998, the Company and Candie's entered into an Agreement and
Plan of Merger, amended on May 14, 1998 and June 2, 1998 (the "Merger
Agreement"). If the Merger Agreement is approved and the merger becomes
effective, the Company will merge with and into Candie's, and Candie's will be
the surviving corporation (the "Merger"). Subject to the terms and conditions of
the Merger Agreement, at the effective time, each share of the Company's common
stock, par value $.01 per share (the "Common Stock") will be converted into
0.405 shares of Candie's common stock. In addition, each outstanding stock
option of the Company which currently entitles the holder to purchase one share
of Common Stock as of the effective time of the Merger will be converted into a
stock option to purchase 0.405 shares of Candie's common stock. Based on the
outstanding equity capitalization of Candie's and the Company, respectively, as
of April 21, 1998, the Company's stockholders will own approximately 15% of the
outstanding common shares of Candie's common stock at the effective time. The
value of the consideration to be received by the Company's stockholders based on
the closing price of Candie's common stock (as reported on the Nasdaq National
Market) on April 6, 1998, the last business day preceding public announcement of
the Merger Agreement was approximately $17,726,791 and on June 26, 1998, was
$17,155,532. Mr. Cole, President and a principal shareholder of the Company,
also is President and a principal shareholder of Candie's.
<PAGE>
Background
Prior to the fiscal year ended March 31, 1994 ("Fiscal 1994"), the Company
was primarily engaged in manufacturing, importing and selling women's and
children's jeans under the NO EXCUSES trademark. Beginning in the fiscal year
ended March 31, 1992 ("Fiscal 1992"), and continuing through the fiscal year
ended March 31, 1993 ("Fiscal 1993"), the Company underwent significant changes
which resulted in a movement toward the fashion licensing business.
In Fiscal 1992, the Company determined to wind down its manufacturing and
importing operations and increase its licensing activities. Accordingly, during
Fiscal 1992, the Company acquired El Greco, Inc., a Delaware corporation ("El
Greco"), which owned the Candie's(R) and CRAYONS(R) trademarks, and through El
Greco, licensed those trademarks. In January 1993 the Company sold its NO
EXCUSES(R) trademark to NES (as described below) but retained certain royalty
and sublicensing rights with respect to the NO EXCUSES(R) trademark (the "NO
EXCUSES(R) Transaction"). In March 1993, El Greco transferred various
trademarks, including the Candie's(R) Trademark to Candie's (the "Candie's(R)
Transaction"). As part of the consideration for the NO EXCUSES(R) Transaction
and the Candie's(R) Transaction the Company (directly or through El Greco)
received minority equity interests in both acquiring companies. During fiscal
1995 the Company increased its equity investment in Candie's and sold all of its
NES capital stock back to NES.
As a result of the transactions which took place during Fiscal 1992 and
Fiscal 1993, the Company completely ceased its manufacturing and importing
activities and became exclusively engaged in the business of licensing and
marketing the NO EXCUSES(R), CRAYONS(R) and Candie's(R) trademarks until the
Candie's Transaction. During Fiscal 1995, the licensing arrangement regarding
the CRAYONS(R) trademark was terminated and the Company agreed to terminate
three of its six licenses covering the NO EXCUSES(R) trademark.
During Fiscal 1993, the Company entered into an exclusive license with
WalMart (the "WalMart License"), whereby WalMart was granted the exclusive
right, which has been renewed through July 31, 2002, to import, manufacture,
distribute and sell, throughout North America, men's, women's and children's
footwear bearing the NO EXCUSES(R) trademark. The Company earns a royalty based
on a percentage of all NO EXCUSES(R) footwear purchased for WalMart's stores.
Prior to the consummation of the NO EXCUSES(R) Transaction and the
CANDIE'S(R) Transaction, the Company licensed several unrelated companies to
manufacture, distribute and sell various products under the NO EXCUSES(R),
CANDIE'S(R) and CRAYONS(R) labels. During Fiscal 1994 and Fiscal 1995, the
Company was primarily engaged in the marketing and licensing of its apparel and
footwear brands. During Fiscal 1995, the sole license of the Company with
respect to its CRAYONS(R) brand was terminated.
After giving effect to the termination of three NO EXCUSES(R) license
agreements, the Company maintained, in addition to the WalMart License, two
other license agreements for the NO EXCUSES(R) trademark for certain jeanswear,
sportswear, activewear, sweaters, swimwear and intimate apparel. The other NO
EXCUSES(R) licensees were with (i) Mamiye for certain infant's, toddler's boy's
and girl's jeanswear, sportswear, activewear, sweaters and swimwear and (ii)
Inner Secrets Inc. for women's and girl's intimate apparel. Both agreements were
subsequently assigned or terminated and are no longer in effect.
Pursuant to a Settlement Agreement dated as of November 3, 1995 (the
"Settlement Agreement") between the Company and NES, the parties settled certain
claims and rights under the Purchase and Sale Agreement and the Master License
Agreement each dated as of December 31, 1992 (the "Sale Agreements") between the
Company and NES. The Sale Agreements provided for the sale in January 1993 of
the No Excuses(R) trademark by the Company to NES and the retention by the
Company of certain license and royalty rights. Under the Sale Agreements, the
Company had (i) the right to receive in perpetuity 50% of the income received by
NES in connection with certain uses of the NO
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<PAGE>
EXCUSES(R) Trademark and (ii) the obligation to pay NES 50% of the royalties
received with respect to sales outside the United States plus certain additional
fees under the Company's existing license agreements with, among others, WalMart
and Mamiye.
The rights to the royalty income from these licenses were preserved by the
Company subsequent to the sale of the NO EXCUSES(R) trademark to NES pursuant to
a Master License Agreement (the "Master License Agreement"). Under the terms of
the Master License Agreement, the Company retained sublicensing rights to any
category in which the licensee at the time immediately preceding the trademark
sale remained under agreement to license the NO EXCUSES(R) trademark. Should one
of these licenses be terminated or expire without being renewed, the sublicense
rights with respect to such product category could revert to NES, but the
Company could receive certain royalties, in perpetuity, if any future NES
licenses are covered uses.
Under the Settlement Agreement, (i) the Company sold to NES for $200,000
down plus $1,000,000 payable over five years (without interest) the Company's
right to share in future royalty income received by NES, (ii) the Company paid
NES $200,000 in settlement of all amounts due with respect to royalties received
for the 1994 calendar year under the Company's license agreements and (iii) the
rights under the Company's existing license agreements with respect to periods
after January 1, 1995 were revised to provide for (A) the payment by the Company
of 20% of royalties, with a $40,000 minimum per annum under the license
agreement with WalMart with respect to sales after July 31, 1997 if the license
agreement then expiring were renewed by WalMart and (B) the payment by the
Company of 20% of royalties under the license agreement with Mamiye for the
period ending July 31, 1997 and the assignment of such license agreement to NES
on August 1, 1997.
Employees
The Company has no full-time employees and two part-time employees.
Item 2. Description of Property.
None.
Item 3. Legal Proceedings.
On April 26, 1994, a First Amended Complaint was filed in the United
States District Court for the Central District of California, Los Angeles
Division, in Los Angeles, California, by Eric Y. Knipe ("Knipe"), against
Washington Square Capital ("WSC"), Jack Hart, New Retail Concepts, Inc., and
Neil Cole (the Company's President), claiming that the defendants engaged in
activities in violation of the Racketeer Influenced and Corrupt Organization Act
("RICO"), and related claims of breach of contract, bad faith denial of
contract, fraud, conversion and conspiracy. The Company is named as a defendant
only in the RICO, conversion and conspiracy causes of action, with respect to
the Company's activities as a buyer of jeans manufactured at Ready Industries of
Puerto Rico, Inc., of which Knipe was a stockholder. Knipe is seeking
compensatory damages in excess of $3,000,000, punitive damages, trebling of all
damages, attorneys' fees, and injunctive relief. On January 16, 1996, the Court
dismissed the action against all defendants for failure to state a cause of
action with respect to the RICO claims and for failure of diversity jurisdiction
with respect to all other claims. In 1996, Knipe and EYK International Inc.
("EYK") filed suit in Los Angeles Superior Court against the same defendants
with substantially the same claims. In 1997, the presiding judge dismissed EYK
as a party to this action. In 1998, the judge dismissed WSC, Northwestern
National Life and Mr. Hart as defendants. Knipe's appeal was denied by the court
of appeals and is now pending in the California Supreme Court. Knipe's
deposition and mandatory settlement conferences are schedule for late summer
1998. The Company continues to vigorously defend this action.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
The Company's Common Stock has been traded on the over-the-counter
market and quoted in the "pink sheets" or the "Electronic Bulletin Board" of the
National Association of Securities Dealers, Inc. (the "NASD"). The following
table sets forth the high and low bid prices for shares of common stock for the
periods indicated, based on information received from the "Electronic Bulletin
Board" of the NASD. These quotations reflect interdealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Bid Prices
Fiscal Year Ended March 31, 1998 High Low
Fourth Quarter $2.9375 $1.2500
Third Quarter 2.0000 1.2500
Second Quarter 2.3750 .6875
First Quarter 1.5940 1.1250
Fiscal Year Ended March 31, 1997
Fourth Quarter $1.0312 $ .1875
Third Quarter .2500 .1250
Second Quarter .2813 .1250
First Quarter .2813 .2813
Fiscal Year Ended March 31, 1996
Fourth Quarter $ .4062 $ .2812
Third Quarter .6250 .3750
Second Quarter .6250 .1875
First Quarter .6250 .2000
As of June 24, 1998, there were approximately 850 holders of record of the
Company's Common Stock. On June 26, 1998 the closing sale price per share was
$2.843.
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<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. See "Safe
Harbor Statement" in Item 1 of this report which statement is incorporated
herein by reference.
Fiscal 1998 compared to Fiscal 1997
Results of Operations
Revenues. Total revenues for the fiscal year ended March 31, 1998 were
$385,266 compared to $677,842 for fiscal 1997. This decrease is primarily
attributable to the decrease in the royalty percentage on the renewal of the
Walmart License agreement on August 1, 1997 and the assignment of the Mamiye
license agreement to NES at that same date.
Selling, general and administrative expenses. Selling, general and
administrative expenses for fiscal 1998 increased to $1,386,063 from $645,166
for the same period a year ago. This increase was principally attributable to
the compensation expense recorded during the fourth quarter of fiscal 1998
pursuant to the proposed merger with Candie's, Inc. which provided for accrued
bonuses of approximately $600,000 and stock based compensation of approximately
$84,000.
Interest expense. There was no interest expense recorded for the year
ended March 31, 1998 as compared to interest expense of $16,856 for the prior
year. The decrease was due to the forgiveness of accrued interest on a note
payable.
Net loss. As a result of the foregoing, the Company incurred a net loss
for fiscal 1998 of $513,007 as compared to net income of $333,780 for fiscal
1997. The net loss is primarily attributable to the decrease in net revenues and
increases in selling, general and administrative expenses.
Liquidity and Capital Resources
At March 31, 1998 the Company had a working capital deficit of $311,263 as
compared to working capital of $335,760 at March 31, 1997. This deficit in
working capital arose principally as a result of the Company's operating loss
for the year ended March 31, 1998.
The Company's equity interest in Candie's (consisting of 1,227,696 shares
of Candie's common stock, warrants to purchase 700,000 additional shares of such
common stock at an initial price of $1.2375 per share and an option to purchase
100,000 additional shares of such common stock for $1.15 per share) had an
aggregate value on June 26, 1998, based on the closing price of $7.375 per share
on the Nasdaq National Market, of approximately $14,000,000.
The Company anticipates that its current cash and the cash flow from the
sale of its licensing rights and from licensing royalties will be sufficient to
meet operating expenses for the next twelve months.
The Company acquired 67,500 shares of the Company's common stock for
$77,974 during fiscal 1998 in open market transactions.
Impact of Inflation and Changing Prices. The Company does not believe that
inflation will have a material adverse effect on the Company.
Year 2000 Issues. The Company has assessed the issues associated with its
existing computer system with respect to a two digit year value as the year 2000
approaches and is properly addressing this issue. The Company also believes that
the implementation of any new system will not have a material adverse effect on
the Company or on future operating results or financial condition.
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<PAGE>
Item 7. Financial Statements.
The Financial Statements are filed as a part of this Annual Report as
pages F-1 through F-20 following Part IV.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The names, ages and principal occupations of the Directors and Executive
Officers of the Company are as follows:
Name Age Position
- ---- --- --------
Neil Cole 40 Chairman of the Board, President and Chief
Executive Officer and Treasurer
Gary Klein 43 Chief Financial Officer
Barry Emanuel 56 Director
Steven Mendelow 54 Director
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
Neil Cole has been Chairman of the Board, President and Chief
Executive Officer of the Company since the inception of the Company in 1986. Mr.
Cole also serves as Chairman of the Board, President and Chief Executive Officer
of Candie's.
Gary Klein, was Chief Financial Officer of NRC from May 1989 to May
1990 and was reappointed Chief Financial Officer in November 1994. Mr. Klein was
Vice President-Finance of the Company since October 1994 and has also served in
that position from May 1990 through November 1994. Mr. Klein also serves as Vice
President-Finance of Candie's.
Barry Emanuel has been a director of the Company since April 1992.
Mr. Emanuel also serves as a director of Candie's. For more than the past five
years, Mr. Emanuel has served as President of Copen Associates, Inc., a textile
manufacturer located in New York, New York. See "Directors and Officers of
Candie's".
Steven Mendelow has been a director of the Company since April 1,
1992. For more than the past five years, Mr. Mendelow has been a principal with
the accounting firm of Konigsberg Wolf & Co. located in New York, New York. In
1994, Mr. Mendelow reached a settlement with the SEC pursuant to which he,
without admitting or denying the allegations, agreed to be enjoined from
violating Section 7 of the Investment Company Act of 1940 and
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<PAGE>
Section 5 of the Securities Act of 1933 and to pay a fine of $50,000.
Directors are elected by the Company's Stockholders. Officers are elected
by the Company's Board of Directors and serve at the discretion of the Board.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely on a review of the reports and representations furnished to
the Company during the last Company fiscal year, the Company believes that each
of the persons required to file reports under Section 16(a) of the Exchange Act
is in compliance with all applicable filing requirements except Mr. Cole and Mr.
Emanuel failed to timely file certain Form 4 reports with respect to a gift of
100,000 shares in December 1996 and a sale of 8,000 shares in October 1997,
respectively.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth all compensation earned for the years ended
March 31, 1998, March 31, 1997 and March 31, 1996, of the Company by the Chief
Executive Officer of the Company who was the only executive officer who received
aggregate compensation during the year ending March 31, 1998 equal to or greater
than $100,000 (collectively, the "Named Executive Officers"):
Summary Compensation Table
Long Term
Annual Compensation(1) Compensation
Securities
Under All Other
Name and Principal Fiscal Options Compensation
Position Year Salary Bonus Granted(#) ($)
- ------------------ ---- ------ ----- ---------- ------------
Neil Cole 1998 $150,000 $650,000(2) 651,543(3) -0-
President and 1997 150,000 143,385 -- -0-
Chief Executive 1996 150,000 184,129 425,000(4) -0-
Officer
(1) The aggregate amounts of all perquisites and other personal benefits
securities and property not included in the summary compensation table or
described below do not exceed the lesser of $50,000 or 10% of the annual
compensation.
(2) In consideration of foregoing certain future bonus opportunities from the
Company as a result of Mr. Cole's agreement to devote his full-time to
Candie's upon consummation of the Merger, the Company approved the payment
to Mr. Cole of a cash bonus in the amount of $525,000. Mr. Cole also
received a $125,000 cash bonus
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<PAGE>
in the 1998 fiscal year.
(3) In March 1998, Mr. Cole was granted options to purchase 626,543 shares of
Common Stock at $1.75 per share which were to vest upon consummation of
the Merger; however, on June 2, 1998, the terms of the options were
modified such that these options instead vested on such date and became
one-third exercisable in March 1999, March 2000 and March 2001 so long as
Mr. Cole is employed with the Company or any successor thereto at such
time. During the Company's 1998 fiscal year, Mr. Cole also received
options to purchase 25,000 shares of Common Stock at $.94 per share as a
director's fee.
(4) During the Company's 1996 fiscal year, Mr. Cole was granted an option to
purchase 400,000 shares of Common Stock as an inducement to enter into a
two-year extension to his employment agreement with the Company. During
the Company's 1996 fiscal year, each of the three directors, including Mr.
Cole, was granted an option to purchase 25,000 shares of Common Stock.
During the NRC fiscal year ended March 31, 1997, there were no stock
option grants to the executive officers named above.
The following table sets forth information as to the unexercised options
held by the executive officers named above as of March 31, 1998:
Number of
Shares Value of
Shares Underlying Unexercised
Acquired on Unexercised In-the-Money
Name Exercise Value Received Options Options(1)
- ---- -------- -------------- ------- ----------
Neil Cole -- -- 1,101,543(2) $1,896,549(3)
(1) Based on $2.875 per share, the closing on March 31, 1998, reported by the
OTC Bulletin Board of The Nasdaq Stock Market, Inc.
(2) Includes 626,543 shares of Common Stock at $1.75 per share, which are
one-third exercisable in March 1999, March 2000 and March 2001 so long as
Mr. Cole is employed with the Company or any successor thereto at such
time.
(3) Includes $704,861 of Value of Unexercised In-the-Money Options with
respect to the options described in footnote (2) above.
Compensation of Directors
Directors of the Company receive no cash compensation in their capacity as
directors and received no other compensation during the 1998 fiscal year, other
than 25,000 options to each director.
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<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of June 24, 1998,
except as noted, regarding the beneficial ownership of the common stock by (i)
each person or group known to NRC to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company and (iv) all directors and executive officers
of the Company as a group. Except as otherwise specified, the named beneficial
owner has sole voting and investment power over the shares listed.
Amount and Nature of
Name and Address Beneficial Percent of
of Beneficial Owner (1) Ownership (2) Class (3)
----------------------- ------------- ---------
Neil Cole ................. 2,340,214(4) 37.6%
Steven Mendelow ........... 338,000(5) 5.8%
Barry Emanuel ............. 192,000 3.3%
Gary Klein ................ 200,000 3.4%
All directors and executive 3,070,214(4) 47.6%
officers as a group ....... (5)
(1) The address of each beneficial owner is c/o New Retail Concepts, Inc.,
2975 Westchester Avenue, Purchase, New York 10577.
(2) The number of shares set forth includes the following number of shares
with respect to which each individual has the right, exercisable within
60days, to acquire beneficial ownership upon exercise of options granted
by NRC:
Number of Shares
Mr. Cole ................................................ 475,000
Mr. Mendelow ............................................ 75,000
Mr. Emanuel ............................................. 25,000
Mr. Klein ............................................... 135,000
All directors and executive officers
as a group ........................................... 710,000
(3) Based on 5,743,639 shares of Common Stock outstanding on June 24, 1998.
(4) Includes 255,500 shares owned by The Sweet Foundation, Inc., a charitable
foundation controlled by Mr. Cole.
(5) Includes 63,000 shares owned by Westlake Foundation, a charitable
foundation with respect to which shares Mr. Mendelow shares voting and
dispositive power, and 150,000 shares owned by C&P Associates, a limited
partnership controlled by Mr. Mendelow.
Item 12. Certain Relationships and Related Transactions.
Neil Cole, the President, Chief Executive Officer and Chairman of the
Board, and the beneficial owner of 2,340,214 shares of the Common Stock, is also
the President, Chief Executive Officer, and Chairman of the Board and the
beneficial owner of 21.3% of Candie's common stock. As more fully disclosed in
Item 1 of this Annual
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<PAGE>
Report on Form 10-KSB, the Company has executed a Merger Agreement on April 6,
1998, as amended, with Candie's pursuant to which the Company would be merged
with and into Candie's. See Item 1 - "Recent Developments".
In March 1998, each of Mr. Cole, Mr. Larry O'Shaughnessy, a consultant to
the Company, and Mr. Gary Klein, Chief Financial Officer of the Company, were
granted options to purchase 626,543, 74,074 and 49,383 shares respectively, of
Common Stock at $1.75 per share, which were to vest upon consummation of the
Merger; however, on June 2, 1998, the terms of the options were modified such
that these options instead vested on such date and became one-third exercisable
in March 1999, March 2000 and March 2001 so long as Messrs. Cole and Klein are
employed by, and Mr. O'Shaughnessy is a consultant to, the Company or any
successor thereto at such time. In addition, in consideration of foregoing
certain bonus opportunities as a result of their termination of employment
(consultancy with respect to Mr. O'Shaughnessy) with the Company upon
consummation of the Merger, the Company approved the grant to Mr. Cole, Mr.
O'Shaughnessy and Mr. Klein of cash bonuses in the amount of $525,000, $30,000
and $25,000 respectively.
The Company and Candie's have in effect a Services Allocation Agreement
pursuant to which Candie's provides the Company with certain business services
and the Company pays Candie's an allocable portion of the expenses, including
employees' salaries, associated with such services. Pursuant to such agreement,
the Company paid Candie's approximately $50,000 and $50,000, respectively, for
the two Company fiscal years ended March 31, 1998 and 1997. The Company and
Candie's also have in effect an Amended and Restated Affiliated Transactions
Agreement pursuant to which they have agreed that they will not enter into
certain transactions without the approval of either a majority of the
disinterested members of the Board of Directors of Candie's or a majority of the
stockholders of Candie's who are not affiliates of Candie's. This agreement will
terminate upon the consummation of the Merger.
During the Company's 1996 and 1997 fiscal years, the Company extended
various loans to Mr. Cole all of which have been repaid. There were no
outstanding loans as of March 31, 1998.
On February 1, 1995, the Company entered into a Securities Purchase
Agreement with Candie's pursuant to which the Company loaned Candie's an
aggregate of $600,000, extended Candie's a $200,000 line of credit and received
in partial consideration therefor a warrant to purchase 700,000 shares of the
Candie's common stock for $1.2375 per share. During the Company 1996 fiscal
year, the $600,000 loan was repaid in full, together with approximately $33,500
in interest, and the $200,000 line of credit expired in accordance with its
terms.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Candie's, Inc. and the Company, dated
April 6, 1998 (1)
3.1 Certificate of Incorporation of the Company (2)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company (3)
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3.3 By-Laws of the Company (2)
10.1 Services Allocation Agreement dated as of March 3, 1993 between the
Company and Candie's, Inc. (4)
10.2 Agreement dated as of April 1, 1992, between the Company and Wal-Mart
Stores, Inc. (5)
10.3 Registration Rights Agreement between the Company and Candie's, Inc.,
dated as of May 16, 1994 (6)
10.4 Amended and Restated Affiliate Transactions Agreement between the Company
and Candie's, Inc. dated January 30, 1995 (7)
10.5 Securities Purchase Agreement between the Company and Candie's, Inc. dated
February 1, 1995 (7)
10.6 Employment Agreement between the Company and Gary Klein dated November 15,
1994 (6)
10.7 Option Certificate issued by Candie's, Inc. in favor of the Company dated
as of October 6, 1994 (6)
10.8 Settlement Agreement dated as of November 3, 1995 between the Company and
No Excuses Sportswear, Ltd. (8)
10.9 License Agreement dated as of April 1, 1997 between the Company and
Montgomery Ward & Co., Incorporated (9)
23.1* Consent of Independent Auditors
27.* Financial Data Schedule.
- ----------
* Filed herewith
(1) Incorporated by reference to the Company's and Candie's, Inc. Registration
Statement on Form S-4 (File No. 333-52729 filed with the Securities and
Exchange Commission) on May 14, 1998
(2) Incorporated by reference to the Company's Registration Statement on Form
S-18 (File No. 33-7373-NY) filed with the Securities and Exchange
Commission on September 18, 1986
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1990
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1993
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1992
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995
(7) Incorporated by reference to the Company's Current Report of the Company
on Form 8-K dated January 30, 1995
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1997
(b) Reports on Form 8-K
During the last quarter ending March 31, 1998, the Company did not file
any Reports on Form 8-K.
-11-
<PAGE>
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.
NEW RETAIL CONCEPTS, INC.
By /s/ Neil Cole
------------------------
Neil Cole, President
Dated: June 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report had been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dated indicated.
/s/ Neil Cole Chairman of the Board of Directors, June 25, 1998
- ------------------ President and Treasurer (Principal
Neil Cole Executive and Accounting Officer)
/s/ Gary Klein Chief Financial Officer June 25, 1998
- ------------------
Gary Klein
/s/ Steve Mendelow Director June 25, 1998
- ------------------
Steve Mendelow
/s/ Barry Emanuel Director June 25, 1998
- ------------------
Barry Emanuel
-12-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheet F-3
Statements of Operations F-5
Statement of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-20
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
New Retail Concepts, Inc.
We have audited the accompanying balance sheet of New Retail Concepts, Inc. as
of March 31, 1998 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of CANDIE'S, Inc. for
the year ended January 31, 1998, in which the Company has an investment which is
accounted for under the equity method of accounting. The investment in CANDIE'S,
Inc. represents 72% of the total assets of the Company as of March 31, 1998, and
the equity in its earnings represents 43% and 15% of total revenues in 1998 and
1997, respectively. These statements were audited by other auditors whose report
thereon has been furnished to us and our opinion expressed herein, insofar as it
relates to such amounts included for CANDIE'S, Inc., is based solely upon the
report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of New Retail Concepts, Inc. as of March 31, 1998 and the
results of its operations and its cash flows for each of the two years in the
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
May 22, 1998 (except for Notes A
and G, as to which the date is
June 2, 1998)
F-2
<PAGE>
New Retail Concepts, Inc.
BALANCE SHEET
March 31, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 187,827
Accounts receivable 44,755
Note receivable - NES 174,336
Other current assets 13,277
-----------
Total current assets 420,195
FIXED ASSETS - AT COST
Furniture and equipment 101,657
Less accumulated depreciation (101,657)
-----------
--
INVESTMENT IN CANDIE'S, INC 1,977,691
NOTES RECEIVABLE - NES 330,456
-----------
2,308,147
-----------
$ 2,728,342
===========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
New Retail Concepts, Inc.
BALANCE SHEET
March 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 10,000
Accrued bonuses 600,000
Accrued professional fees 100,000
Accrued expenses and other current liabilities 21,458
-----------
Total current liabilities 731,458
DEFERRED INCOME TAXES 100,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01; authorized,
1,000,000 shares, no shares issued
Common stock - par value $.01, authorized,
25,000,000 shares; issued 6,423,498 shares 64,235
Additional paid-in capital 3,603,766
Accumulated deficit (1,349,145)
-----------
2,318,856
Less
Common stock in treasury at cost;
729,854 shares 421,972
-----------
1,896,884
-----------
$ 2,728,342
===========
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
New Retail Concepts, Inc.
STATEMENTS OF OPERATIONS
Year ended March 31,
1998 1997
----------- ----------
License and marketing fees $ 385,266 $ 677,842
----------- ----------
Costs and expenses
Selling, general and administrative 1,386,063 645,166
Interest expense 16,856
----------- ----------
1,386,063 662,022
----------- ----------
Operating (loss) income (1,000,797) 15,820
----------- ----------
Other income
Equity in earnings of affiliate 380,609 146,008
Interest income 42,180 60,849
Gain on sale of securities 18,366 40,410
Other, net 52,064 75,795
----------- ----------
493,219 323,062
----------- ----------
(Loss) income before provision for
income taxes (507,578) 338,882
Provision for income taxes 5,429 5,102
----------- ----------
NET (LOSS) INCOME $ (513,007) $ 333,780
=========== ==========
Net (loss) income per share of common stock
Basic $ (.09) $ .06
=========== ==========
Diluted $ (.09) $ .05
=========== ==========
Weighted average number of shares outstanding
Basic 5,686,235 5,768,860
=========== ==========
Diluted 5,686,235 6,183,489
=========== ==========
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
New Retail Concepts, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Common stock Additional Treasury stock
------------ paid-in Accumulated --------------
Shares Amount capital deficit Shares Amount Total
------ ------ ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 6,603,498 $ 66,035 $ 3,561,734 $(1,169,918) 736,454 $(354,509) $ 2,103,342
Purchase of treasury stock 205,900 (99,489) (99,489)
Cancellation of treasury stock (280,000) (2,800) (107,200) (280,000) 110,000
Net income 333,780 333,780
--------- -------- ----------- ----------- ------- --------- -----------
Balance at March 31, 1997 6,323,498 63,235 3,454,534 (836,138) 662,354 (343,998) 2,337,633
Purchase of treasury stock 67,500 (77,974) (77,974)
Exercise of stock options 100,000 1,000 14,000 15,000
Stock-based compensation 84,491 84,491
Stock options issued to
consultants 50,741 50,741
Net loss (513,007) (513,007)
--------- -------- ----------- ----------- ------- --------- -----------
Balance at March 31, 1998 6,423,498 $ 64,235 $ 3,603,766 $(1,349,145) 729,854 $(421,972) $ 1,896,884
========= ======== =========== =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
New Retail Concepts, Inc.
STATEMENTS OF CASH FLOWS
March 31,
1998 1997
---- ----
Cash flows from operating activities
Net (loss) income $ (513,007) $ 333,780
----------- ----------
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities
Stock-based compensation 84,491
Stock options issued to consultants 50,741
Equity in income of affiliate (380,609) (146,008)
Changes in operating assets and liabilities
(Increase) decrease
Accounts receivable 67,271 (28,133)
Other current assets (3,919) 31,795
Other assets 3,000
Increase (decrease)
Accounts payable 508 (75,508)
Accrued expenses and other current
liabilities 608,842 27,977
Income taxes payable 815 5,117
----------- ----------
428,140 (181,760)
----------- ----------
Net cash (used in) provided by operating
activities (84,867) 152,020
----------- ----------
Cash flows from investing activities
Decrease in loan receivable - officer 10,102 107,607
Payments received on note receivable 164,532 155,280
----------- ----------
Net cash provided by investing activities 174,634 262,887
----------- ----------
Cash flows from financing activities
Repayment of note payable (300,000) (100,000)
Purchase of treasury stock (77,974) (99,489)
Exercise of stock options 15,000
----------- ----------
Net cash used in financing activities (362,974) (199,489)
----------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (273,207) 215,418
Cash and cash equivalents at beginning of year 461,034 245,616
----------- ----------
Cash and cash equivalents at end of year $ 187,827 $ 461,034
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Income taxes $ 11,000 $ 2,220
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
NOTE A - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
New Retail Concepts, Inc. ("NRC" or the "Company") has historically been
involved in the manufacture, distribution and sale of various fashion
items and, more recently, in licensing and sublicensing of fashion
trademarks. License and marketing fees relate to two license agreements
calling for the payment of royalties to the Company for use of the No
Excuses trademark.
On April 6, 1998, the Company and CANDIE'S, Inc. ("CANDIE'S") entered into
an Agreement and Plan of Merger, which was amended on May 14, 1998 and
June 2, 1998 (the "Merger Agreement"). If the Merger Agreement is approved
and the merger becomes effective, the Company will merge with and into
CANDIE'S, and CANDIE'S will be the surviving corporation (the "Merger").
Subject to the terms and conditions of the Merger Agreement, at the
effective time, each share of the Company's common stock, par value $.01
per share (the "Common Stock") will be converted into 0.405 shares of
CANDIE'S common stock. In addition, each outstanding stock option of the
Company which currently entitles the holder to purchase one share of
Common Stock, as of the effective time of the Merger will be converted
into a stock option to purchase 0.405 shares of CANDIE'S common stock.
The Company has no full-time employees and two part-time employees who are
the Chairman of the Board and President, and the Chief Financial Officer
of the Company. (See Note E-2.)
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Fixed Assets
Furniture and equipment are recorded at cost. Depreciation for
furniture and equipment is provided by the straight-line method over
the estimated useful lives of the assets.
F-8
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE A (continued)
2. Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. Revenue Recognition
The Company recognizes revenue over the terms of its licensing
agreements.
4. Earnings Per Share
Earnings per share is based on the weighted average number of shares
outstanding during the period adjusted for the dilutive effect of
common stock equivalents when applicable.
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share." Basic earnings per share exclude dilution and are
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted
earnings per share reflect the weighted-average common shares
outstanding plus the potential dilutive effect of securities or
contracts which are convertible to common shares, such as options,
warrants, and convertible preferred stock. See Note G, for stock
options outstanding that were not included in the computation of
diluted earnings per share because they had an antidilutive effect
during the year ended March 31, 1998. SFAS No. 128 requires
restatement of all prior periods' earnings per share data presented.
The Company's financial statements reflect this adoption.
The following is an analysis of the difference between basic and
diluted weighted average number of shares outstanding:
Year ended March 31,
--------------------
1998 1997
---- ----
Basic shares 5,686,235 5,768,860
Effect of dilutive securities 414,629
--------- ---------
Diluted shares 5,686,235 6,183,489
========= =========
F-9
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE A (continued)
5. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
6. Reclassifications
Certain amounts in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
7. Fair Value of Financial Instruments and Concentrations
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable - trade and accrued expenses and other
current liabilities approximate fair value, principally because of
the short maturity of these items.
The carrying amount of note receivable - NES approximates fair value
as this note was discounted to its net present value. Although NES
has made all scheduled payments on the note, it is reasonably
possible that the Company may incur a loss on the NES note in the
future. The carrying amount of notes payable approximates fair value
due to the interest rate on the borrowings.
Financial instruments that are exposed to concentration of risk
primarily consist of the note receivable -NES and the Company's
investment in CANDIE'S.
8. Future Effect of Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the Company's fiscal year ending
March 31, 1999. The statement addresses the reporting and displaying
of comprehensive income and its components. Earnings per share will
only be reported for net income and not for comprehensive income.
Adoption of SFAS No. 130 is not expected to have a material effect
on the Company's financial statement disclosures.
F-10
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE A (continued)
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is
effective for the Company's fiscal year ending March 31, 1999. The
statement changes the way public companies report information about
segments of their business in their annual financial statements and
requires them to report selected segment information in their
quarterly reports. Adoption of SFAS No. 131 is not expected to have
a material effect on the Company's financial statement disclosures.
NOTE B - INVESTMENT IN CANDIE'S, INC.
At March 31, 1998, the Company owns 1,227,696 shares of restricted common
stock of CANDIE'S, Inc. ("CANDIE'S"), a publicly-traded corporation,
carried at $1,977,691, which is recorded on the equity method of
accounting. Included in the carrying amount is approximately $516,000 of
goodwill (net of amortization) which is being amortized over ten years.
The quoted market value of 1,227,696 shares of CANDIE'S unrestricted
common stock was $9,975,030 at March 31, 1998.
In addition, the Company holds warrants to purchase 700,000 additional
shares of such common stock at an initial price of $1.2375 per share and
an option to purchase 100,000 additional shares at $1.15 per share. The
options are exercisable at any time, in whole or in part, through October
6, 1999. The warrants, which vested in 1995, were issued in conjunction
with a loan agreement, pursuant to which the Company loaned CANDIE'S
$600,000 and extended a $200,000 line of credit. During fiscal 1996, the
$600,000 loan was repaid in full, together with approximately $33,500 in
interest, and the $200,000 line of credit expired.
On March 3, 1993, the Company's then wholly-owned subsidiary transferred
various trademarks, including CANDIE'S(R), and its right, title and
interest in certain identified license agreements with respect to the
trademarks to CANDIE'S, Inc. In consideration for the transfer, CANDIE'S
issued to the Company 900,000 shares of restricted common stock valued at
$2,250,000 by the Company based on a valuation prepared by an investment
banker. The issuer of the restricted common stock, CANDIE'S, Inc., valued
the 900,000 shares at $1,080,000 based on a valuation prepared by a
different investment banker. If the Company would have valued the
restricted common stock using the amount assigned to the shares by the
issuer, the valuation would have been reduced by $1,170,000 and the
Company's net income for the years ended March 31, 1998 and 1997 would
have been increased by $117,000 per year and the net assets and
stockholders' equity as of March 31, 1998 and 1997 would have been reduced
by approximately $1,080,000 and $1,003,000, respectively.
F-11
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE B (continued)
The Company and CANDIE'S entered into a Services Allocation Agreement with
CANDIE'S, pursuant to which CANDIE'S provides NRC with financial,
marketing, sales and other business services for which NRC is charged an
allocated portion of CANDIE'S expenses, including employees' salaries
associated with such services. The service allocation was $50,000 in
fiscal 1998 and 1997.
The Chairman of the Board and President of the Company is also the
President, Chief Executive Officer and a director of CANDIE'S. An
agreement, as amended on January 30, 1995, was entered into among the
Company and CANDIE'S, and the Chairman of the Board and President of the
Company, pursuant to which CANDIE'S will not, directly or indirectly,
other than pursuant to the terms of the Services Allocation Agreement,
conduct any business or enter into any transaction or series of related
transactions, with or for the benefit of the Company or any subsidiary of
it, having a total value per transaction or series of related transactions
in excess of $50,000, other than in the ordinary course of business,
without the approval of either a majority of the disinterested members of
CANDIE'S Board of Directors or a majority of the CANDIE'S stockholders who
are not affiliates of CANDIE'S.
The following is a condensed balance sheet of CANDIE'S, Inc. and a
condensed statement of operations for the years ended January 31, 1998 and
1997:
January 31,
-------------------------
1998 1997
---- ----
Current assets $ 23,407,660 $ 9,039,203
CANDIE'S trademark 4,296,150 4,548,650
Other noncurrent assets 3,177,130 1,121,492
------------ ------------
$ 30,880,940 $ 14,709,345
============ ============
Total liabilities $ 6,200,422 $ 6,101,434
============ ============
Total stockholders' equity $ 24,680,518 $ 8,607,911
============ ============
Revenues $ 92,976,416 $ 45,005,416
Costs and expenses (88,440,490) (43,860,101)
------------ ------------
Net income $ 4,535,926 $ 1,145,315
============ ============
F-12
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE C - NO EXCUSES TRADEMARK
On January 7, 1993, the Company sold its No Excuses trademark and certain
identified license agreements with respect to the trademark ("Assets") to
No Excuses Sportswear, Ltd. ("Buyer" or "NES"). As additional
consideration for the sale of the Assets, the Buyer had agreed to pay the
Company fifty percent of all "Net Shared Income" in perpetuity. Net Shared
Income means all income received by Buyer or its affiliates in connection
with "Covered Uses" of the trademark, as defined. On November 3, 1995, the
Company and NES settled certain disputes relating to the aforementioned
agreements via a settlement agreement (the "Settlement Agreement"),
resulting in a gain of $1,062,324. Under the Settlement Agreement, (i) the
Company sold to NES for $200,000 down plus $1,000,000 payable over five
years ($862,000, net of imputed interest) the Company's right to share in
future royalty income received by NES, (ii) the Company paid NES $200,000
in settlement of all amounts due with respect to royalties received for
the 1994 calendar year under the Company's license agreements and (iii)
the rights under the Company's existing license agreements with respect to
periods after January 1, 1995 were revised to provide for (A) the payment
by the Company of 20% of royalties, with a minimum of $40,000 per annum,
under the license agreement with WalMart with respect to sales after July
31, 1997 and (B) the payment by the Company of 20% of royalties under the
license agreement with Mamiye for the period ending July 31, 1997 and the
assignment of such license agreement to NES on August 1, 1997.
NOTE D - NOTE PAYABLE
Note payable represents amounts due the estate of Charles Cole, the
deceased father of the Company's Chairman of the Board and President. In
February 1998, the note was repaid in full and all accrued interest was
forgiven.
NOTE E - COMMITMENTS AND CONTINGENCIES
1. Litigation
On April 26, 1994, a First Amended Complaint was filed in the United
States District Court for the Central District of California, Los
Angeles Division, in Los Angeles, California, by Eric Y. Knipe
("Knipe"), against Washington Square Capital, Jack Hart, New Retail
Concepts, Inc., and Neil Cole (the Company's President), claiming
that the defendants engaged in activities in violation of the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), and
related claims of breach of contract, bad faith denial of contract,
fraud, conversion and conspiracy. The
F-13
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE E (continued)
Company is named as a defendant only in the RICO, conversion, and
conspiracy causes of action, with respect to the Company's
activities as a buyer of jeans manufactured at Ready Industries of
Puerto Rico, Inc., of which Knipe was a stockholder. Knipe is
seeking compensatory damages in excess of $3,000,000, punitive
damages, trebling of all damages, attorney's fees, and injunctive
relief. On January 16, 1996, the Court dismissed the action against
all defendants for failure to state a cause of action with respect
to the RICO claims and for failure of diversity jurisdiction with
respect to all other claims. In 1996, Knipe and EYK International
("EYK") filed suit in Los Angeles Superior Court against the same
defendants (with substantially the same claims). In 1997, the judge
dismissed EYK as a party to this action. In 1998, the judge
dismissed WSC, Northwestern National Life and Jack Hart as
defendants. Knipe's appeal was denied by the Court of Appeals and is
now pending in the California Supreme Court. Knipe's deposition and
mandatory settlement conferences are scheduled for late summer 1998.
The Company continues to vigorously defend this action.
2. Employment Contracts
Upon the consummation of the proposed merger between the Company and
CANDIE'S, the Company will terminate its employment agreements with
its President and Chief Financial Officer. In consideration for the
termination of these agreements, and contingent upon the closing of
the Merger (which is expected to occur in August 1998), the Company
granted the President and Chief Financial Officer options to acquire
up to 626,543 and 49,383 shares, respectively, of the Company's
common stock at an exercise price of $1.75 per share. The Company
recorded compensation expense of approximately $84,000, as it
relates to the granting of such options. These options were
subsequently amended. See Note G. In addition, the President and
Chief Financial Officer were granted cash bonuses of $525,000 and
$25,000, respectively. Prior to the termination of the employment
agreement with the President, the agreement provided that the
President of the Company may spend up to 49% of his time in
furtherance of his duties to the Company and provides for an annual
salary of $150,000. In addition, the agreement provided the
President with an annual incentive bonus, pursuant to which the
Company would pay him an amount equal to 5% of the annual pretax net
income of the Company, up to $2,000,000 and up to 7-1/2% of the
annual pretax net income of the Company, if any, which was in excess
of $2,000,000. The Board of Directors additionally authorized a
bonus in fiscal 1997 of $125,000 which was paid to the President in
monthly installments of $10,417 throughout calendar 1997.
F-14
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE E (continued)
The employment agreement with the Chief Financial Officer provides
for an annual salary of $40,000 and a bonus equal to 1% of the
Company's pretax earnings. In addition, in November 1994, the Chief
Financial Officer was granted a five-year option to acquire 135,000
shares of the Company's common stock at an exercise price of $.10
per share, pursuant to the Company's incentive stock option plan.
NOTE F - INCOME TAXES
Significant components of the Company's deferred taxes at March 31, are as
follows:
1998 1997
---- ----
Deferred tax assets
Net operating loss carryforward $ 6,922,000 $6,789,000
Bonus accrual 228,000 11,000
Alternative minimum tax 103,000 39,000
Other 32,000
----------- ----------
7,285,000 6,839,000
Deferred tax liabilities
Gain in equity of affiliate 752,000 445,000
Installment income 192,000 254,000
----------- ----------
6,341,000 6,140,000
Less valuation allowance 6,441,000 6,240,000
----------- ----------
Net deferred tax liability $ (100,000) $ (100,000)
=========== ==========
F-15
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE F (continued)
SFAS No. 109 requires a valuation allowance against deferred tax assets,
if based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets may not be realized. The
valuation allowance primarily pertains to uncertainties with respect to
future utilization of net operating loss carryforwards.
The provision for income taxes is comprised of the following:
1998 1997
---- ----
Current
Federal $ 3,860
State and local $ 5,429 1,242
----------- ----------
$ 5,429 $ 5,102
=========== ==========
The following is a reconciliation of the normal expected statutory Federal
income tax rate to the effective rate reported in the financial
statements:
1998 1997
---- ----
Statutory Federal income tax rate (34.0%) 34.0%
State and city taxes - net of
Federal tax benefit 1.0 0.4
Effect of net operating loss carryforwards
and valuation allowances 34.0 (34.0)
Other 1.1
----- -----
Effective income tax rate 1.0% 1.5%
===== =====
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
utilization of net operating loss carryforwards to offset future taxable
income following a corporate "ownership change." The Company's ability to
utilize its net operating loss carryforwards may be limited because of a
change in ownership in excess of 50 percentage points.
F-16
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE G - STOCK OPTION PLAN AND STOCKHOLDERS' EQUITY
On January 13, 1995 and June 25, 1995, the Company granted to each of the
three directors of the Company five-year options to acquire 25,000 (or a
total of 75,000 and 75,000, respectively) shares of common stock of the
Company at an exercise price of $.20 and $.22 per share, respectively. On
May 18, 1995, the Company granted five-year options to acquire 100,000
shares of common stock of the Company at an exercise price of $.15 per
share to a consultant.
In July 1995, the Board of Directors granted the President a five-year
option to acquire 400,000 shares of the Company's common stock at an
exercise price of $.35 per share.
On June 30, 1997, as compensation for services rendered as directors of
the Company, the Company granted to each of the three directors of the
Company five-year options to acquire 25,000 (or a total of 75,000) shares
of common stock of the Company at an exercise price of $.94 per share. On
July 7, 1997, the Company granted five-year options to acquire 100,000
shares of common stock of the Company at an exercise price of $.75 per
share.
In March 1998, the Company granted, pursuant to the merger with CANDIE'S
and the termination of their employment agreements with the Company,
options to purchase 626,543 shares and 49,383 shares, respectively, of the
Company's common stock to the President and Chief Financial Officer. The
options are exercisable at $1.75 per share and expire in ten years, and
are exercisable upon the effective date of the Merger (which is expected
to be in August 1998). The Company recorded compensation expense of
approximately $84,000 at the grant date for such options. In addition, the
Company granted a consultant similar options to purchase 74,074 shares of
common stock at an exercise price of $1.75, contingent upon the closing of
the Merger and the options will become exercisable upon the effective date
of the Merger. The Company used the Black Scholes option valuation model
to determine the fair market value of the options and recorded consulting
expense of approximately $21,000 during the fiscal year ended March 31,
1998.
On June 2, 1998, the Company modified the options granted in March 1998.
The options are no longer contingent upon the closing of the Merger;
instead such options become exercisable with respect to one-third of the
aggregate amount granted to each individual, on the first, second and
third anniversaries of the original date of grant, respectively, so long
as the President and Chief Financial Officer are still employed by the
Company, or any successor and the consultant provide future services to
the Company or any successor.
The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its employee
stock options.
F-17
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE G (continued)
Under APB No. 25, compensation expense is recognized when the market price
of the underlying stock on the date of grant exceeds the exercise price of
the Company's employee stock options. Effects of applying SFAS No. 123 for
providing pro forma disclosures are not likely to be representative of the
effects on reported net income for future years (e.g., the first year
reflects expense for only one year's vesting, while the second year
reflects expense for two years' vesting).
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options (including options granted to
directors and the President (see Note E) under the fair value method of
that Statement. The fair value for options granted during the year ended
March 31, 1998 was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
Expected volatility 70%
Expected life (term) 3.8 years
Risk-free interest rate 6%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro
forma information follows:
F-18
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE G (continued)
March 31,
------------------
1998 1997
---- ----
Pro forma net (loss) income $ (601,930) $ 333,780
=========== ==========
Pro forma net (loss) income per share
Basic $ (.11) $ .06
=========== ==========
Diluted $ (.11) $ .05
=========== ==========
The weighted-average fair value of all options granted (at their grant
date) during the year ended March 31, 1998 was $1.40. No options were
granted during the year ended March 31, 1997.
A summary of the Company's stock option activity for all options granted
for the years ended March 31, 1998 and 1997 follows:
Weighted-
average
exercise
Shares price
------ -----
Outstanding, March 31, 1996 785,000 $ .26
Granted --
Canceled --
---------
Outstanding, March 31, 1997 785,000 .26
Granted 950,000 1.56
Exercised (100,000) .15
---------
Outstanding, March 31, 1998 1,635,000 1.02
=========
F-19
<PAGE>
New Retail Concepts, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 1998 and 1997
NOTE G (continued)
All options outstanding and exercisable at March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted- Weighted- Weighted
Range of Number average remaining Average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .10 - .35 685,000 2.7 years $ .27 685,000 $ .27
.75 - .94 200,000 4.3 years .85 200,000 .85
1.75 750,000 10.0 years 1.75 -- --
--------- -------
1,635,000 6.2 years 1.02 885,000 .40
========= =======
</TABLE>
NOTE H - MAJOR CUSTOMERS
The Company derived a significant portion of its license and marketing
fees from two customers in 1998 and 1997. Net revenues attributable to
each such customer amounted to 82% and 14%, respectively, for the year
ended March 31, 1998 and 80% and 20%, respectively, for the year ended
March 31, 1997.
NOTE I - OTHER INCOME
Included in other income for the year ended March 31, 1998 is the reversal
of an accrual for imputed interest payable on a note payable of $52,000,
which was repaid in full during the year ended March 31, 1998.
F-20
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated May 22, 1998 (except for Notes A and G, as to
which the date is June 2, 1998), accompanying the consolidated financial
statements included in the Annual Report of New Retail Concepts, Inc. on Form
10-KSB for the year ended March 31, 1998. We hereby consent to the incorporation
by reference of said report in the Registration Statement of New Retail
Concepts, Inc. on Form S-8 (Registration No. 333-31959).
GRANT THORNTON LLP
New York, New York
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Financial Statements of New Retail Concepts, Inc. at March 31, 1998 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 187,827
<SECURITIES> 0
<RECEIVABLES> 44,755
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 420,195
<PP&E> 101,657
<DEPRECIATION> 101,657
<TOTAL-ASSETS> 2,728,342
<CURRENT-LIABILITIES> 731,458
<BONDS> 0
0
0
<COMMON> 64,235
<OTHER-SE> 1,832,649
<TOTAL-LIABILITY-AND-EQUITY> 2,728,342
<SALES> 385,266
<TOTAL-REVENUES> 385,266
<CGS> 0
<TOTAL-COSTS> 1,386,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (507,578)
<INCOME-TAX> 5,429
<INCOME-CONTINUING> (513,007)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (513,007)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
