SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported): August 18, 1998
CANDIE'S, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-10593 11-2481903
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
2975 Westchester Avenue, Purchase, New York 10577
(Address of principal executive officer) (zip code)
Registrant's telephone number,
including area code (914) 694-8600
(Former name or former address, if changed since the last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On August 18, 1998 (the "Effective Time"), the Registrant completed the
acquisition of New Retail Concepts, Inc. ("NRC") pursuant to the provisions of
the previously reported Agreement and Plan of Merger dated as of April 6, 1998,
as amended (the "Merger Agreement") between the Registrant and NRC. In
accordance with the terms of the merger (the "Merger") pursuant to which NRC
merged with and into the Registrant, the holders of the common stock, $.01 par
value (the "NRC Common Stock"), of NRC became entitled to receive 0.405 shares
of the common stock, $.001 par value (the "Candie's Common Stock"), of the
Registrant for each share of NRC Common Stock owned immediately prior to the
Merger and the holders of options to purchase shares of NRC Common Stock became
entitled to receive options to purchase 0.405 shares of Candie's Common Stock
for each option to purchase one (1) share of NRC Common Stock owned immediately
prior to the Merger.
The description of the Merger Agreement is qualified in its entirety by
reference to the copy of the Merger Agreement which is incorporated as an
exhibit to this current Report on Form 8-K and which is incorporated herein by
reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial statements of business acquired.
The financial statements of NRC filed as part of this Current Report on
Form 8-K are listed in the attached Index to Financial Statements.
(b) Pro forma financial information.
The pro forma financial information filed as part of this Current Report on
Form 8-K are listed in the attached Index to Exhibits.
(c) Exhibits.
The exhibits filed as part of this Current Report on Form 8-K are listed in
the attached Index to Exhibits.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CANDIE'S, INC.
By /s/ David Golden
--------------------------------
David Golden
Senior Vice President, Chief
Financial Officer
Dated: as of August 18, 1998
-3-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements of NRC:
Report of Independent Certified Public Accountants (Incorporated by reference to
page F-24 of the Joint Proxy Statement/Prospectus dated July 2, 1998
constituting a part of Registrant's Registration Statement on Form S-4 No.
333-52729).
Balance Sheet as of March 31, 1998 (Incorporated by reference to pages F-25 and
F-26 of the Joint Proxy Statement/Prospectus dated July 2, 1998 constituting a
part of Registrant's Registration Statement on Form S-4 No. 333-52729).
Statement of Operations for the years ended March 31, 1998 and 1997
(Incorporated by reference to page F-27 of the Joint Proxy Statement/Prospectus
dated July 2, 1998 constituting a part of Registrant's Registration Statement on
Form S-4 No. 333-52729).
Statements of Stockholders' Equity for the years ended March 31, 1998 and 1997
(Incorporated by reference to page F-28 of the Joint Proxy Statement/Prospectus
dated July 2, 1998 constituting a part of Registrant's Registration Statement on
Form S-4 No. 333-52729).
Statements of Cash Flows for the years ended March 31, 1998 and 1997
(Incorporated by reference to page F-29 of the Joint Proxy Statement/Prospectus
dated July 2, 1998 constituting a part of Registrant's Registration Statement on
Form S-4 No. 333-52729).
Notes to Financial Statements (Incorporated by reference to pages F-30 through
F-42 of the Joint Proxy Statement/Prospectus dated July 2, 1998 constituting a
part of Registrant's Registration Statement on Form S-4 No. 333-52729).
Unaudited Pro Forma Combined Condensed Financial Information:
Introductory material following the caption "Unaudited Pro Forma Condensed
Combined Financial Information" (Incorporated by reference to page 93 of the
Joint Proxy Statement/Prospectus dated July 2, 1998 constituting a part of
Registrant's Registration Statement on Form S-4 No. 333-52729).
Unaudited Pro Forma Condensed Combined Balance Sheet as of April 30, 1998 and
March 31, 1998 (Incorporated by reference to page 94 of the Joint Proxy
Statement/Prospectus dated July 2, 1998 constituting a part of Registrant's
Registration Statement on Form S-4 No. 333-52729).
Unaudited Pro Forma Condensed Combined Statement of Income for the years ended
January 31, 1998 and March 31, 1998 (Incorporated by reference to page 95 of the
Joint Proxy Statement/Prospectus
-4-
<PAGE>
dated July 2, 1998 constituting a part of Registrant's Registration Statement on
Form S-4 No. 333-52729).
Unaudited Pro Forma Condensed Combined Statement of Income for the three months
ended April 30, 1998 and March 31, 1998 (incorporated by reference to page 96 of
the Joint Proxy Statement/Prospectus dated July 2, 1998 constituting a part of
Registrant's Registration Statement on Form S-4 No. 333-52729).
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(Incorporated by reference to page 97 of the Joint Proxy Statement/Prospectus
dated July 2, 1998 constituting a part of Registrant's Registration Statement on
Form S-4 No. 333-52729).
-5-
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
2(a) - Agreement and Plan of Merger dated as of
April 6, 1998, as amended, between the
Registrant and New Retail Concepts, Inc.
(Incorporated by reference to Annex A to
the Joint Proxy Statement/Prospectus
dated July 2, 1998 constituting a part
of Registrant's Registration Statement
on Form S-4 No. 333-52729).
23 - Consent of Grant Thornton LLP.
99 - Pages F-24 through F-42 and pages 93
through 97 of the Joint Proxy
Statement/Prospectus dated July 2, 1998
constituting a part of Registrant's
Registration Statement on Form S-4 No.
333-52729.
-6-
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this report on Form 8-K of our
report dated May 22, 1998, (except for Notes A and G, as to which the date is
June 2, 1998), accompanying the financial statements of New Retail Concepts,
Inc. contained in the registration statement on Form S-4, as amended (File No.
333-52729) of Candie's Inc., filed with Securities and Exchange Commission
pursuant to the Securities Act of 1933, which became effective July 2, 1998.
/s/ GRANT THORNTON LLP
New York, New York
August 26, 1998
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-24
<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-25
<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-26
<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-27
<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 50,741 50,741
consultants
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-28
<PAGE>
New Retail Concepts, Inc.
STATEMENTS OF CASH FLOWS
March 31,
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
------------------------------------------------------------
The following unaudited pro forma condensed combined financial information
is based on the historical consolidated financial statements of Candie's, Inc.
("Candie's") and New Retail Concepts, Inc. ("NRC") included elsewhere herein and
has been prepared to illustrate the effects of the acquisition as though it had
occurred as of the beginning of each period presented for the pro forma
condensed combined statement of income and as if it had occurred on April 30,
1998 for the pro forma condensed combined balance sheet. The unaudited pro forma
condensed combined statements of income for the year and the three month period
each include NRC's three months results of operations for the period ended March
31, 1998.
The pro forma adjustments include, in the opinion of management, all
adjustments necessary to give pro forma effect to the acquisition as though such
transactions had occurred as of the beginning of each period presented for the
pro forma condensed combined statement of income and as if they had occurred on
April 30, 1998 for the pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial information is not
necessarily indicative of how Candie's balance sheet and results of operations
would have been presented had this acquisition actually been consummated at the
assumed dates, nor is the presentation necessarily indicative of Candie's
balance sheet and results of operations for any future period. The unaudited pro
forma condensed combined financial information should be read in conjunction
with the historical consolidated financial statements and related notes thereto
included elsewhere herein.
The pro forma adjustments are based upon available information. These
adjustments are directly attributable to the acquisition and are expected to
have a continuing impact on Candie's business, results of operations and
financial position. The acquisition will be accounted for using the purchase
method of accounting, pursuant to which the estimated purchase cost of the
acquisition is allocated to the tangible and intangible assets and liabilities
acquired based upon their estimated fair values. The final allocation of the
purchase price will be based upon the fair values of the acquired assets and the
assumed liabilities.
-93-
<PAGE>
Unaudited Pro Forma Condensed Balance Sheet
as of April 30, 1998 and March 31, 1998
(in thousands)
<TABLE>
<CAPTION>
April 30, 1998 March 31, 1998 Pro Forma Pro Forma
(Candie's) (NRC) Adjustments Candie's and NRC
-------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 19 $ 188 $ 207
Accounts receivable, net 4,998 45 5,043
Note receivable - NES -- 174 174
Inventories 7,595 -- 7,595
Due from factor 13,454 -- 13,454
Deferred income taxes 653 -- 919(A) 1,572
Prepaid advertising and marketing 2,945 -- 2,945
Other current assets 496 13 -- 509
-------- -------- -------- --------
Total current assets 30,160 420 919 31,499
Property and equipment, net 944 -- 944
Other assets:
Investment in Candie's, Inc. -- 1,978 (1,978)(A) --
Note receivable - NES -- 330 330
Deferred income taxes 1,443 -- (545)(A) 898
Intangibles 4,770 1,041 (A) 5,811
Other 722 -- -- 722
-------- -------- -------- --------
Total assets $ 38,039 $ 2,728 $ (563) $ 40,204
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,763 $ 731 $ 570 (D) $ 5,064
-------- -------- -------- --------
Total current liabilities 3,763 731 570 5,064
Long-term liabilities 60 -- 60
Deferred income taxes -- 100 (100)(A) --
Stockholders' equity:
Preferred stock -- -- --
Common stock 14 64 (63)(A) 15
Additional paid-in-capital 31,930 3,604 4,992 (A) 40,526
Retained earnings (deficit) $ 2,272 $ (1,349) $ 1,349 (A) $ 2,272
-------- -------- -------- --------
34,216 2,319 6,278 42,813
Less: treasury stock -- (422) (7,311)(A) (7,733)
-------- -------- -------- --------
Total stockholders' equity 34,216 1,897 (1,033) 35,080
-------- -------- -------- --------
Total liabilities and stockholders' equity $ 38,039 $ 2,728 $ (563) $ 40,204
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Information.
94
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Income
For the years ended January 31, 1998 and March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year
Ended Year Ended Pro Forma
January March Pro Forma Candie's and
31, 1998 31, 1998 Adjustments NRC
(Candie's) (NRC)
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 92,976 $ 385 $ -- $ 93,361
Cost of goods sold 68,799 -- -- 68,799
-------- -------- -------- --------
Gross profit 24,177 385 -- 24,562
Selling, general and administrative
expenses 17,216 1,386 6 (B)(C) 18,608
-------- -------- -------- (E)(F) --------
Operating income (loss) 6,961 (1,001) (6) 5,954
Other expense (income) 1,228 (493) 381(G) 1,116
-------- -------- -------- --------
Income (loss) before income taxes 5,733 (508) (387) 4,838
Provision for income taxes 1,197 5 -- 1,202
-------- -------- -------- --------
Income (loss) from continuing operations $ 4,536 $ (513) $ (387) $ 3,636
======== ======== ======== ========
Income from continuing operations per common share:
Basic $ 0.40 $ (0.09) $ 0.29
======== ======== ========
Diluted $ 0.33 $ (0.09) $ 0.25
======== ======== ========
Weighted average number of common
shares used in calculating income from
continuing operations per common share:
Basic 11,375 5,686 12,453
======== ======== ========
Diluted 13,788 5,686 14,519
======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Information.
-95-
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Income
For the three months ended April 30, 1998 and March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Three
Months Months Pro Forma
Ended April Ended March Pro Forma Candie's and
30, 1998 31, 1998 Adjustments NRC
(Candie's) (NRC)
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 25,693 $ 70 $ -- $ 25,763
Cost of goods sold 18,295 -- -- 18,295
-------- -------- -------- --------
Gross profit 7,398 70 -- 7,468
Selling, general and administrative
expenses 5,368 950 (46)(H)(I)(J) 6,272
-------- -------- -------- --------
Operating income (loss) 2,030 (880) 46 1,196
Other expense (income) 274 (197) 105 (G) 182
-------- -------- -------- --------
Income (loss) before income taxes 1,756 (683) (59) 1,014
Provision for income taxes 700 2 -- 702
-------- -------- -------- --------
Income (loss) from continuing operations $ 1,056 $ (685) $ (59) $ 312
======== ======== ======== ========
Income from continuing operations per
common share:
Basic $ 0.08 $ (0.12) $ 0.02
======== ======== ========
Diluted $ 0.07 $ (0.12) $ 0.02
======== ======== ========
Weighted average number of common shares
used in calculating income from
continuing operations per common share:
Basic 13,656 5,694 14,734
======== ======== ========
Diluted 16,015 5,694 16,716
======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Condensed Combined Financial Information.
-96-
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(in thousands)
(A) Candie's, Inc. ("Candie's") will acquire all of the issued and outstanding
shares of capital stock of New Retail Concepts, Inc. ("NRC") in exchange
for .405 shares of Candie's common stock, par value, $.001 per share for an
aggregate estimated consideration of approximately $13,200 in securities
and cash. The consideration consists of approximately $12,650 in securities
and $550 in transaction costs. This transaction is to be accounted for
under the purchase method of accounting, and has been allocated as follows:
Operating assets acquired $ 750
Common Stock, options and warrants of Candie's acquired 11,814
("owned by NRC")
Deferred taxes 374
Intangible assets acquired - Licenses and trademarks 1,041
Liabilities assumed (751)
(B) Includes adjustment for the elimination of duplicate accounting, legal and
insurance costs incurred by NRC of $45.
(C) Includes amortization of licenses and trademarks acquired of $136. These
intangibles are amortized on a straight-line basis over 5 and 15 years,
respectively.
(D) Includes accrual of estimated transaction costs of $550 and other assumed
liabilities of NRC.
(E) Includes adjustment for $275 as a result of the elimination of compensation
expense to an executive of NRC under existing employment contract.
(F) Includes compensation expense related to the unvested portion of stock
options granted by NRC of $190.
(G) Represents the elimination of equity earnings of Candie's.
(H) Includes adjustment for the elimination of duplicate accounting, legal and
insurance costs incurred by NRC of $11.
(I) Includes amortization of licenses and trademarks acquired of $34. These
intangibles are amortized on a straight-line basis over 5 and 15 years,
respectively.
(J) Includes adjustment of $69 as a result of the elimination of compensation
expense to an executive of NRC under an existing employment contract.
-97-
