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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): September 24, 1998
CANDIE'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-10593 11-2481903
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 694-8600
Former name or former address, if changed since last report
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Section
-------
(a) Index to Financial Statements of Business Acquired
MICHAEL CARUSO & CO., INC.
- Financial Statements for the Years Ended A
December 31, 1997, 1996 and 1995
- Financial Statements for the Six Months Ended B
June 30, 1998 and 1997
(b) Index to Pro-Forma Financial Information
CANDIE'S, INC. - ACQUISITION OF MICHAEL CARUSO & CO., INC.
- Pro-Forma Consolidated Financial Information C
For the Year Ended January 31, 1998 and
For the Six Month Period Ended July 31, 1998
(c) Exhibits
- CONSENT OF STONEFIELD JOSEPHSON, INC. 23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDIE'S, INC.
By: /s/ David Golden
-----------------------
David Golden
Senior Vice President,
Chief Financial Officer
Date: December 4, 1998
<PAGE>
Section A
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995
CONTENTS
Page
-----
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Income 3
Statement of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-11
Independent Auditors' Report on Supplemental Information 12
Supplemental Information:
Schedules of Net Sales and Cost of Sales 13
Schedules of Manufacturing Overhead 14
Schedules of Operating Expenses 15-16
Schedules of License Division 17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Michael Caruso & Co., Inc.
dba Bongo
Vernon, California
We have audited the accompanying balance sheets of Michael Caruso & Co., Inc.
dba Bongo as of December 31, 1997, 1996 and 1995, and the related statements of
income, stockholders' equity and cash flows for the years then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Michael Caruso & Co., Inc. dba
Bongo as of December 31, 1997, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 10, 1998
1
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, December 31, December 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Current assets:
Cash $ 6,672 $ 90,218 $ 8,573
Receivable from factor, net of
unapplied customer credits 6,500,389 12,479,105 17,691,722
Other receivables 858,878 375,609 169,340
Inventory 5,249,342 5,548,739 6,287,589
Prepaid expenses 212,721 325,102 617,292
----------- ----------- -----------
Total current assets 12,828,002 18,818,773 $24,774,516
Property and equipment, net of
accumulated depreciation and amortization 814,460 556,671 669,357
Other assets 26,473 29,392 29,247
----------- ----------- -----------
$13,668,935 $19,404,836 $25,473,120
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,852,858 $ 1,636,342 $ 3,716,367
Accrued expenses 3,022,919 7,449,007 9,638,174
Accrued officer salaries -- 400,000 300,000
Note payable, officer-stockholder -- -- 2,000,000
----------- ----------- -----------
Total current liabilities 4,875,777 9,485,349 15,654,541
----------- ----------- -----------
Stockholders' equity:
Common stock; 1,000 shares authorized,
400 shares issued and outstanding 11,000 11,000 11,000
Retained earnings 8,782,158 9,908,487 9,807,579
----------- ----------- -----------
Total stockholders' equity 8,793,158 9,919,487 9,818,579
----------- ----------- -----------
$13,668,935 $19,404,836 $25,473,120
=========== =========== ===========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
2
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 56,810,875 100.0% $ 91,502,186 100.0% $102,585,230 100.0%
Cost of sales 42,853,299 75.4 68,460,725 74.8 75,069,271 73.2
------------ ----- ------------ ----- ------------ -----
Gross profit 13,957,576 24.6 23,041,461 25.2 27,515,959 26.8
Operating expenses 10,277,752 18.1 11,607,514 12.7 12,784,211 12.5
------------ ----- ------------ ----- ------------ -----
Income from operations before officer salaries
and license division 3,679,824 6.5 11,433,947 12.5 14,731,748 14.3
Officer salaries 3,764,541 6.6 10,063,631 11.0 13,462,341 13.1
------------ ----- ------------ ----- ------------ -----
Income (loss) before license division (84,717) (.1) 1,370,316 1.5 1,269,407 1.2
License division 328,704 .5 -- --
------------ ----- ------------ ----- ------------ -----
Net income $ 243,987 .4% $ 1,370,316 1.5% $ 1,269,407 1.2%
============ ===== ============ ===== ============ =====
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
3
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common stock Total
------------ Retained stockholders'
Shares Amount earnings equity
------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 400 $ 11,000 $ 8,895,658 $ 8,906,658
Dividends paid (357,486) (357,486)
Net income for the year
ended December 31, 1995 1,269,407 1,269,407
---- ----------- ----------- -----------
Balance at December 31, 1995 400 11,000 9,807,579 9,818,579
Dividends paid (1,269,408) (1,269,408)
Net income for the year
ended December 31, 1996 1,370,316 1,370,316
---- ----------- ----------- -----------
Balance at December 31, 1996 400 11,000 9,908,487 9,919,487
Dividends paid (1,370,316) (1,370,316)
Net income for the year
ended December 31, 1997 243,987 243,987
---- ----------- ----------- -----------
Balance at December 31, 1997 400 $ 11,000 $ 8,782,158 $ 8,793,158
==== =========== =========== ===========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
4
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31 December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net income $ 243,987 $ 1,370,316 $ 1,269,407
----------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by (used for)
operating activities:
Depreciation and amortization 156,934 $ 187,025 $ 179,383
Bad debt recovery -- (34,008) (496)
Changes in assets and liabilities:
(Increase) decrease in assets:
Receivable from factor 5,978,716 5,246,625 1,636,485
Other receivables (483,269) (206,269) 23,316
Inventory 299,397 738,850 (611,119)
Prepaid expenses 112,381 292,190 (229,586)
Other assets 2,919 -- --
Deposits -- -- (5,000)
Increase (decrease) in liabilities:
Accounts payable 216,516 (2,080,025) 987,063
Accrued expenses (4,426,088) (2,189,167) (1,703,907)
Accrued officer salaries (400,000) 100,000 50,000
Income taxes payable -- -- (5,792)
----------- ----------- -----------
Total adjustments 1,457,506 2,055,221 320,347
----------- ----------- -----------
Net cash provided by operating activities 1,701,493 3,425,537 1,589,754
----------- ----------- -----------
Cash flows used for investing activities -
payments to acquire property and equipment (414,723) (74,484) (324,076)
----------- ----------- -----------
Cash flows used for financing activities -
Dividends paid (1,370,316) (1,269,408) (357,486)
Payments on note payable, officer-stockholder -- (2,000,000) (1,000,000)
----------- ----------- -----------
Net cash used for financing activities (1,370,316) (3,269,408) (1,357,486)
----------- ----------- -----------
Net increase (decrease) in cash (83,546) 81,645 (91,808)
Cash, beginning of year 90,218 8,573 100,381
----------- ----------- -----------
Cash, end of year $ 6,672 $ 90,218 $ 8,573
=========== =========== ===========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
5
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) Summary of Significant Accounting Policies:
Business Activity:
The Company manufactures women's apparel for sale to retailers in the
United States and other countries.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents:
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturities of three
months or less which are not securing any corporate obligations.
Inventory:
Inventory is valued at the lower of cost (first-in, first-out) or
market.
Property and Equipment:
Property and equipment are valued at cost. Depreciation and
amortization are being provided by use of straight-line and
accelerated methods over the estimated useful lives of the assets.
Income Taxes:
S Corporation
The Company and its stockholders have elected income tax status as an
S corporation. Under this election, the stockholders of the
corporation are personally liable for federal and state income taxes.
The Company is liable for and has provided for corporate state taxes
on income.
Payments
Income taxes paid amounted to $25,028, $8,463 and $70,716 for the year
ended December 31, 1997, 1996 and 1995, respectively.
See accompanying independent auditors' report.
6
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) Cash Concentration:
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
(3) Receivable from Factor, Net of Unapplied Customer Credits:
The Company uses a factor for credit administration and cash flow purposes.
Under the factoring agreement, the factor purchases substantially all of
the trade accounts receivable and assumes substantially all credit risks
with respect to such accounts for a factoring charge negotiated as a
percentage of the invoice amount assigned. The Company can draw advances
from the factor based on a pre-determined percentage of accounts receivable
sold. Advances on receivables sold in excess of credit limits established
for each account are subject to recourse in the event of nonpayment by the
customer. At December 31, 1997, 1996 and 1995, items subject to recourse
were not significant. The Company is contingently liable to the factor for
merchandise disputes, customer claims, and the like, on receivables sold to
the factor.
The factor holds a security interest in all receivables, inventory
proceeds, returned merchandise, and general intangibles.
Receivable from factor as presented in the balance sheet is summarized as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding factored receivables $ 3,878,829 $ 4,652,000 $ 9,701,000
Matured funds 1,798,788 6,705,906 1,811,162
Assignments in transit, net of discounts 1,171,787 1,954,931 7,094,362
----------- ----------- -----------
6,849,404 13,312,837 18,606,524
Less unapplied customer credits 349,015 833,732 914,802
----------- ----------- -----------
Net receivable from factor $ 6,500,389 $12,479,105 $17,691,722
=========== =========== ===========
</TABLE>
Included in factor receivables are approximately $1,620,000, $1,892,000 and
$3,866,000 due from three, four and two customers at December 31, 1997,
1996 and 1995, respectively. Total sales to these customers amounted to
approximately $24,531,000, $43,323,000 and $32,360,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Factor interest income amounted to $94,795, $226,044 and $455,647 for the
years ended December 31, 1997, 1996 and 1995, respectively.
See accompanying independent auditors' report.
7
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(4) Other Receivables:
A summary is as follows:
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Royalty receivable (Notes 11 and 14) $ 461,891 $ 147,942 $ --
Accounts receivable 355,637 144,767 87,166
Employee loans 41,350 82,900 51,450
Income tax refunds receivable -- -- 30,724
----------- ----------- -----------
$ 858,878 $ 375,609 $ 169,340
=========== =========== ===========
(5) Inventory:
A summary is as follows:
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- -----------
Piece goods $ 2,162,817 $ 2,181,381 $ 2,880,723
Finished goods 1,683,002 1,952,059 1,446,292
Work in process 904,838 1,017,322 1,455,835
Trim 498,685 397,977 504,739
----------- ----------- -----------
$ 5,249,342 $ 5,548,739 $ 6,287,589
=========== =========== ===========
(6) Prepaid Expenses:
A summary is as follows:
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- -----------
Insurance $ 137,420 $ 113,911 134,388
Advertising 52,750 198,053 399,545
Income taxes 22,551 -- --
Deferred tax -- 9,700 9,700
Subscriptions -- 3,438 --
Trade show -- -- 71,425
Interest -- -- 2,234
----------- ----------- -----------
$ 212,721 $ 325,102 $ 617,292
=========== =========== ===========
</TABLE>
See accompanying independent auditors' report.
8
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(7) Property and Equipment:
A summary is as follows:
December 31, December 31, December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Machinery, equipment and computer $ 977,854 $ 872,722 $ 803,240
Leasehold improvements 636,164 355,752 355,752
Furniture and fixtures 177,188 153,673 153,673
---------- ---------- ----------
1,791,206 1,382,147 1,312,665
Less accumulated depreciation and amortization 976,746 825,476 643,308
---------- ---------- ----------
$ 814,460 $ 556,671 $ 669,357
========== ========== ==========
</TABLE>
(8) Accounts Payable:
Included in accounts payable are approximately $307,000, $570,000 and
$2,300,000 due to one, three and four suppliers at December 31, 1997, 1996
and 1995, respectively. Total purchases from these suppliers amounted to
approximately $6,103,000, $14,386,000 and $19,200,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(9) Accrued Expenses:
A summary is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Payroll taxes - officer $1,744,819 $4,713,112 $6,944,247
Book overdraft 700,000 1,400,000 1,160,000
Month end bills 395,192 1,160,716 993,489
Advertising deferral 151,927 -- --
Salaries 30,981 -- --
Accrued employee bonus -- 150,350 350,000
Accrued salaries -- 21,374 29,050
Income taxes payable -- 3,455 --
Unearned royalty income -- -- 145,000
Insurance contract payable -- -- 16,388
---------- ---------- ----------
$3,022,919 $7,449,007 $9,638,174
========== ========== ==========
</TABLE>
See accompanying independent auditors' report.
9
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) Line of Credit, Bank:
The Company has a $8,000,000 revolving credit line agreement with a bank
which is unsecured and expires on June 3, 1998 and June 3, 1997. Interest
is payable on the outstanding principal balance monthly using various
pricing options. The Company is required to maintain tangible net worth of
at least $9,000,000. At December 31, 1997 and 1996, there were no
obligations outstanding under this financing agreement.
On September 11, 1998, the line of credit, which was renewed on June 3,
1998 for $6,000,000, was closed due to the acquisition of the Company (see
Note 14).
Interest paid on all corporate obligations amounted to $21,765, $152,577
and $260,714 during the years ended December 31, 1997, 1996 and 1995,
respectively.
(11) Licensing Agreement:
On February 1, 1995, the Company, as licensor, entered into a 42-month
licensing agreement with a three-year option (at the licensee's
discretion). The option was renewed on May 30, 1997, and the Company
entered into a 48-month licensing agreement commencing on February 1, 1998
with a four-year option (at the licensee's discretion). This agreement
replaced a former agreement with the licensee which would have terminated
on January 31, 1998. The agreement allows the licensee the exclusive right
to design, manufacture, market and sell footwear and handbags using the
tradename "Bongo" and "B Bongo" (see Notes 4 and 14).
In addition, the licensee has agreed to pay an advertising royalty.
The advertising and licensing royalties will be a percentage on the greater
of the minimum net sales pursuant to the agreement or the actual net sales.
The minimum net guarantees are as follows:
<TABLE>
<CAPTION>
Minimum Royalty Advertising
Date Sales Rate Rate
---------------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
Year ending July 31, 1997 $ 5,000,000 3% 3%
July 31, 1998 7,000,000 6% 3%
January 31, 1999 9,000,000 5% 2%
January 31, 2000 13,000,000 5% 2%
January 31, 2001 15,000,000 5% 2%
January 31, 2002 17,000,000 5% 2%
</TABLE>
See accompanying independent auditors' report.
10
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(12) Retained Earnings:
Retained earnings, as presented in the balance sheet, consist of the
following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pre-S corporation earnings $ 538,170 $ 538,170 $ 538,170
S corporation income, net of dividends 8,243,988 9,370,317 9,269,409
---------- ---------- ----------
$8,782,158 $9,908,487 $9,807,579
========== ========== ==========
</TABLE>
The stockholders can declare and receive dividends up to the amount of the
S corporation earnings without incurring any additional personal taxes.
(13) Commitments:
The following is a schedule by years of future minimum rental payments
required under operating leases that have noncancellable lease terms in
excess of one year as of December 31, 1995:
<TABLE>
<CAPTION>
Warehouse
and Office Showroom Total
---------- ---------- ----------
<S> <C> <C> <C>
Year ending December 31,
1996 $ 299,124 $ 62,412 $ 361,536
1997 273,720 65,436 339,156
1998 273,720 43,624 317,344
1999 273,720 -- 273,720
---------- ---------- ----------
$1,120,284 $ 171,472 $1,291,756
========== ========== ==========
</TABLE>
Rent expense amounted to $511,237, $502,954 and $490,812 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(14) Subsequent Event:
On September 24, 1998, the stockholders exchanged 100% of the Company's
stock for stock of the licensee (see Notes 4 and 11) and the Company ceased
operations. Management does not believe any significant losses will arise
from the disposition of its assets or satisfaction of its obligations.
See accompanying independent auditors' report.
11
<PAGE>
Board of Directors
Michael Caruso & Co., Inc.
dba Bongo
Vernon, California
Our report on our audit of the basic financial statements of Michael Caruso &
Co., Inc. dba Bongo for the years ended December 31, 1997, 1996 and 1995 appears
on page 1. The audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 10, 1998
12
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF NET SALES AND COST OF SALES
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31 December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 58,624,094 $ 94,580,794 $106,550,216
Returns and allowances 815,992 1,442,928 1,803,933
Discounts 997,227 1,635,680 2,161,053
------------ ------------ ------------
$ 56,810,875 $ 91,502,186 $102,585,230
============ ============ ============
Cost of sales:
Beginning inventory $ 5,548,739 $ 6,287,590 $ 5,676,470
Purchases:
Piece goods 14,423,568 22,151,026 26,442,901
Trim 1,767,371 2,960,316 3,390,560
Freight-in 173,833 335,292 534,580
Contract labor:
Cutting 1,419,530 2,426,115 2,595,561
Sewing 17,282,168 28,153,425 30,852,910
Laundry and dyeing 6,059,680 9,829,731 10,033,208
Printing and artwork 201,724 484,587 533,522
Manufacturing overhead 1,226,028 1,381,382 1,297,148
------------ ------------ ------------
48,102,641 74,009,464 81,356,860
Ending inventory 5,249,342 5,548,739 6,287,589
------------ ------------ ------------
$ 42,853,299 $ 68,460,725 $ 75,069,271
============ ============ ============
</TABLE>
See accompanying independent auditors' report on supplemental information.
13
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF MANUFACTURING OVERHEAD
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31 December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Salaries - warehouse $ 201,028 $ 239,241 $ 241,375
Payroll taxes 18,609 22,900 22,358
Depreciation 128,724 163,200 150,516
Equipment rental 11,245 12,519 5,800
Factory expense 85,985 139,907 137,975
Insurance:
General 239,261 259,853 245,076
Workers' compensation 76,538 76,451 96,118
Repairs and maintenance 30,112 19,220 18,963
Security 62,354 76,747 15,179
Warehouse rent 372,172 371,344 363,788
---------- ---------- ----------
$1,226,028 $1,381,382 $1,297,148
========== ========== ==========
</TABLE>
See accompanying independent auditors' report on supplemental information.
14
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF OPERATING EXPENSES
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
Amount Percent Amount Percent Amount Percent
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Design and production:
Salaries:
Design $ 308,798 .5% $ 332,415 .4% $ 286,220 .3%
Patternmaking 418,883 .7 466,947 .5 406,210 .4
Production 522,419 1.0 656,561 .7 702,486 .7
Payroll taxes 94,038 .2 110,642 .1 103,917 .1
Design expense 89,668 .2 116,859 .1 81,243 .1
Patterns and grading 54,490 .1 105,840 .1 134,889 .1
Samplemaking 191,560 .3 182,089 .2 108,722 .1
Sample piece goods 76,423 .1 64,146 .1 44,856
----------- -------- ----------- -------- ----------- --------
1,756,279 3.1 2,035,499 2.2 1,868,543 1.8
----------- -------- ----------- -------- ----------- --------
Shipping:
Salaries 928,781 1.6 1,271,339 1.4 1,283,863 1.3
Payroll taxes 79,634 .1 109,216 .1 107,446 .1
Freight out 460,765 .8 522,316 .6 544,750 .5
Shipping expense 190,904 .4 353,940 .4 421,642 .4
----------- -------- ----------- -------- ----------- --------
1,660,084 2.9 2,256,811 2.5 2,357,701 2.3
----------- -------- ----------- -------- ----------- --------
Selling:
Salaries 544,471 1.0 559,459 .6 624,020 .6
Payroll taxes 35,625 .1 31,550 34,994
Advertising 2,459,909 4.3 3,067,253 3.5 4,096,123 4.0
Automobile 32,504 .1 32,116 30,307 .1
Commissions -- -- 30,000
Depreciation and amortization 17,057 12,091 15,657
Promotion and entertainment 97,495 .2 93,627 .1 214,899 .2
Royalty income -- (85,780) (.1) --
Showroom expense 70,870 .1 70,019 .1 55,852 .1
Showroom rent 139,065 .2 131,610 .1 127,024 .2
Trade shows 30,677 .1 88,179 .1 102,012 .1
Travel 302,162 .5 204,288 .2 226,687 .2
----------- -------- ----------- -------- ----------- --------
3,729,835 6.6 4,204,412 4.6 5,557,575 5.5
----------- -------- ----------- -------- ----------- --------
</TABLE>
(Continued)
See accompanying independent auditors' report on supplemental information.
15
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
General and administrative:
Salaries - office $ 921,056 1.6% $ 1,068,456 1.2% $ 1,109,067 1.1%
Payroll taxes 95,977 .2 244,406 .3 280,873 .3
Bad debt recoveries -- (34,008) (496)
Bank charges and interest, net 21,765 152,577 .2 260,714 .2
Contributions 85,476 .2 40,333 50,484
Depreciation and amortization 11,153 11,734 13,210
Factor:
Commissions 307,171 .5 541,266 .6 555,347 .5
Interest income (94,795) (.2) (226,044) (.2) (455,647) (.4)
Insurance - health 272,069 .5 257,460 .3 242,418 .2
Office supplies and expense 149,871 .3 189,106 .2 217,181 .2
Professional fees 1,109,564 2.0 633,807 .7 455,906 .5
Provision for income taxes 56,653 .1 27,000 35,000
Taxes and licenses 14,620 34,282 87,522 .1
Telephone 142,829 .3 129,692 .1 128,174 .1
Utilities 38,145 40,727 37,517 .1
Miscellaneous income -- -- (16,878)
------------ --------- ------------ --------- ------------ ---------
3,131,554 5.5 3,110,792 3.4 3,000,392 2.9
------------ --------- ------------ --------- ------------ ---------
$ 10,277,752 18.1% $ 11,607,514 12.7% $ 12,784,211 12.5%
============ ========= ============ ========= ============ =========
</TABLE>
See accompanying independent auditors' report on supplemental information.
16
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF LICENSE DIVISION
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Income - footwear:
<S> <C> <C> <C> <C>
Royalties $519,169 .9% $ -- $ --
Expense - footwear:
Advertising due to/from 190,465) (.4) -- --
-------- --- -------- -------- -------- ---
$328,704 .5% $ -- $
======== === ======== ======== ======== ===
</TABLE>
See accompanying independent auditors' report on supplemental information.
17
<PAGE>
Section B
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
WITH ACCOUNTANTS' REVIEW REPORT
CONTENTS
Page
----
Accountants' Review Report 1
Financial Statements:
Balance Sheets 2
Statements of Income 3
Statement of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-11
Accountants' Review Report on Supplemental Information 12
Supplemental Information:
Schedules of Net Sales and Cost of Sales 13
Schedules of Manufacturing Overhead 14
Schedules of Operating Expenses 5-16
<PAGE>
Board of Directors
Michael Caruso & Co., Inc.
dba Bongo
Vernon, California
We have reviewed the accompanying balance sheets of Michael Caruso & Co., Inc.
dba Bongo as of June 30, 1998 and 1997, and the related statements of income,
stockholders' equity and cash flows for the six months then ended, in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the Board of Directors and
management of Michael Caruso & Co., Inc. dba Bongo.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 10, 1998
1
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 1,000 $ 1,000
Receivable from factor, net of
unapplied customer credits 4,931,492 9,349,625
Other receivables 348,989 329,827
Receivable from licensee - footwear 136,245 304,200
Inventory - estimated 6,118,313 5,521,374
Prepaid expenses 169,230 367,362
----------- -----------
Total current assets 11,705,269 15,873,388
Property and equipment, net of
accumulated depreciation and amortization 726,091 637,440
Other assets 23,623 29,527
----------- -----------
$12,454,983 $16,540,355
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,498,719 $ 2,570,211
Accrued expenses 1,393,483 1,384,856
----------- -----------
Total current liabilities 3,892,202 3,955,067
----------- -----------
Stockholders' equity:
Common stock; 1,000 shares authorized,
400 shares issued and outstanding 11,000 11,000
Retained earnings 8,551,781 12,574,288
----------- -----------
Total stockholders' equity 8,562,781 12,585,288
----------- -----------
$12,454,983 $16,540,355
=========== ===========
</TABLE>
See accompanying accountants' review report and notes to financial statements.
2
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales $ 20,549,659 100.0% $ 33,348,908 100.0%
Cost of sales 16,193,131 78.8 24,324,306 72.9
------------ ----- ------------ -----
Gross profit 4,356,528 21.2 9,024,602 27.1
Operating expenses 4,507,540 21.9 4,596,464 13.8
------------ ----- ------------ -----
Income (loss) from operations before
officer salaries and license division (151,012) (.7) 4,428,138 13.3
Officer salaries 243,597 1.2 471,363 1.4
------------ ----- ------------ -----
Income (loss) before license division (394,609) (1.9) 3,956,775 11.9
License division 408,219 2.0 79,342 .2
------------ ----- ------------ -----
Net income $ 13,610 .1% $ 4,036,117 12.1%
============ ===== ============ =====
</TABLE>
See accompanying accountants' review report and notes to financial statements.
3
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Common stock Total
------------ Retained stockholders'
Shares Amount earnings equity
------ ------ -------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 400 $ 11,000 $ 9,908,487 $ 9,919,487
Dividends paid (1,370,316) (1,370,316)
Net income for the six months
ended June 30, 1997 4,036,117 4,036,117
----------- ----------- ----------- -----------
Balance at June 30, 1997 400 11,000 12,574,288 12,585,288
Net loss for the six months
ended December 31, 1997 (3,792,130) (3,792,130)
----------- ----------- ----------- -----------
Balance at January 1, 1998 400 11,000 8,782,158 8,793,158
Dividends paid (243,987) (243,987)
Net income for the six months
ended June 30, 1998 13,610 13,610
----------- ----------- ----------- -----------
Balance at June 30, 1998 400 $ 11,000 $ 8,551,781 $ 8,562,781
=========== =========== =========== ===========
</TABLE>
See accompanying accountants' review report and notes to financial statements.
4
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Cash flows provided by (used for) operating activities:
<S> <C> <C>
Net income $ 13,610 $ 4,036,117
----------- -----------
Adjustments to reconcile net income to net
cash provided by (used for)
operating activities:
Depreciation and amortization 105,784 71,354
Provision for doubtful accounts 41,300 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Receivable from factor 1,568,897 3,129,480
Other receivables 6,698 (102,160)
Receivable from licensee - footwear 325,646 (156,258)
Inventory - estimated (868,971) 27,365
Prepaid expenses 43,491 (42,260)
Other assets 2,850 (135)
Increase (decrease) in liabilities:
Accounts payable 645,861 1,122,888
Accrued expenses (1,629,436) (6,253,170)
Accrued officer salaries -- (400,000)
----------- -----------
Total adjustments 242,120 (2,602,896)
----------- -----------
Net cash provided by operating activities 255,730 1,433,221
Cash flows used for investing activities -
payments to acquire property and equipment (17,415) (152,123)
Cash flows used for financing activities -
dividends paid (243,987) (1,370,316)
----------- -----------
Net decrease in cash (5,672) (89,218)
Cash, beginning of period 6,672 90,218
----------- -----------
Cash, end of period $ 1,000 $ 1,000
=========== ===========
</TABLE>
See accompanying accountants' review report and notes to financial statements.
5
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(1) Summary of Significant Accounting Policies:
Business Activity:
The Company manufactures women's apparel for sale to retailers in the
United States and other countries.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents:
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturities of three
months or less which are not securing any corporate obligations.
Inventory - Estimated:
Ending inventory has been estimated under the assumption that sales
for the six months ended June 30, 1998 and 1997 produced a gross
profit of approximately 21% and 27%, respectively. Beginning inventory
as of January 1, 1998 and 1997 was based on a physical inventory and
was valued at the lower of cost (first-in, first-out) or market.
Property and Equipment:
Property and equipment are valued at cost. Depreciation and
amortization are being provided by use of straight-line and
accelerated methods over the estimated useful lives of the assets.
Income Taxes:
S Corporation
The Company and its stockholders have elected income tax status as an
S corporation. Under this election, the stockholders of the
corporation are personally liable for federal and state income taxes.
The Company is liable for and has provided for corporate state taxes
on income.
Payments
Income taxes paid amounted to $8,852 and $17,628 during the six months
ended June 30, 1998 and 1997, respectively.
See accompanying accountants' review report.
6
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(2) Cash Concentration:
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
(3) Receivable from Factor, Net of Unapplied Customer Credits:
The Company uses a factor for credit administration and cash flow purposes.
Under the factoring agreement, the factor purchases substantially all of
the trade accounts receivable and assumes substantially all credit risks
with respect to such accounts for a factoring charge negotiated as a
percentage of the invoice amount assigned. The Company can draw advances
from the factor based on a pre-determined percentage of accounts receivable
sold. Advances on receivables sold in excess of credit limits established
for each account are subject to recourse in the event of nonpayment by the
customer. At June 30, 1998 and 1997, items subject to recourse were not
significant. The Company is contingently liable to the factor for
merchandise disputes, customer claims, and the like, on receivables sold to
the factor.
The factor holds a security interest in all receivables, inventory
proceeds, returned merchandise, and general intangibles.
Receivable from factor as presented in the balance sheet is summarized as
follows:
June 30, June 30,
1998 1997
----------- -----------
Outstanding factored receivables $ 4,053,815 $ 6,730,812
Assignments in transit, net of discounts 1,835,413 3,606,779
----------- -----------
5,889,228 10,337,591
----------- -----------
Less:
Advances 559,940 382,057
Unapplied customer credits 397,796 605,909
----------- -----------
957,736 987,966
----------- -----------
Net receivable from factor $ 4,931,492 $ 9,349,625
=========== ===========
Included in factored receivables at June 30, 1998 and 1997 is approximately
$1,788,000 and $2,526,000 due from three and two customers, respectively.
Total sales to these customers amounted to approximately $9,001,000 and
$11,186,000 for the six months ended June 30, 1998 and 1997, respectively.
Factor interest income amounted to $704 and $31,558 for the six months
ended June 30, 1998 and 1997, respectively.
See accompanying accountants' review report.
7
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
(4) Other Receivables:
A summary is as follows:
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable $ 274,589 $ 289,427
Legal settlement receivable 50,000 --
Employee loans 24,400 40,400
----------- -----------
$ 348,989 $ 329,827
=========== ===========
(5) Prepaid Expenses:
A summary is as follows:
June 30, June 30,
1998 1997
----------- -----------
Insurance $ 130,910 $ 222,990
Advertising 38,320 134,672
Deferred income taxes -- 9,700
----------- -----------
$ 169,230 $ 367,362
=========== ===========
(6) Property and Equipment:
A summary is as follows:
June 30, June 30,
1998 1997
----------- -----------
Machinery, equipment and computer $ 992,419 $ 905,079
Leasehold improvements 636,164 469,312
Furniture and fixtures 177,188 158,013
----------- -----------
1,805,771 1,532,404
Less accumulated depreciation and amortization 1,079,680 894,964
----------- -----------
$ 726,091 $ 637,440
=========== ===========
</TABLE>
See accompanying accountants' review report.
8
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(7) Accounts Payable:
Included in accounts payable is approximately $955,000 and $643,000 due to
four and three suppliers at June 30, 1998 and 1997, respectively. Total
purchases from these suppliers amounted to approximately $4,709,000 and
$5,611,000 for the six months ended June 30, 1998 and 1997, respectively.
(8) Accrued Expenses:
A summary is as follows:
June 30, June 30,
1998 1997
----------- -----------
Book overdraft $ 374,826 $ 1,118,494
Advertising deferral 325,545 --
Month end bills 312,809 69,310
Deferred royalties revenue 237,500 --
Salaries 136,284 29,992
Payroll taxes 12,871 89,717
Income taxes (6,352) 77,343
----------- -----------
$ 1,393,483 $ 1,384,856
=========== ===========
(9) Line of Credit, Bank:
The Company has a $6,000,000 revolving credit line agreement with a bank
which is unsecured and expires on June 15, 1999. Interest is payable on the
outstanding principal balance monthly using various pricing options. The
Company is required to maintain tangible net worth of at least $8,752,000.
At June 30, 1998 and 1997, there were no obligations outstanding under this
financing agreement.
Interest paid on all corporate obligations amounted to $9,026 and $21,194
during the six months ended June 30, 1998 and 1997, respectively.
On September 11, 1998, the line of credit was closed due to the acquisition
of the Company (see Note 13).
See accompanying accountants' review report.
9
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(10) Licensing Agreement:
On February 1, 1995, the Company, as licensor, entered into a 42-month
licensing agreement with a three-year option (at the licensee's
discretion). The option was renewed on May 30, 1997, and the Company
entered into a 48-month licensing agreement commencing on February 1, 1998
with a four-year option (at the licensee's discretion). This agreement
replaced a former agreement with the licensee which would have terminated
on January 31, 1998. The agreement allows the licensee the exclusive right
to design, manufacture, market and sell footwear and handbags using the
tradename "Bongo" and "B Bongo."
In addition, the licensee has agreed to pay an advertising royalty.
The advertising and licensing royalties will be a percentage on the greater
of the minimum net sales pursuant to the agreement or the actual net sales.
The minimum net guarantees are as follows:
<TABLE>
<CAPTION>
Minimum Royalty Advertising
Date Sales Rate Rate
---- ------- ------- -----------
<S> <C> <C> <C> <C>
Year ending July 31, 1997 $ 5,000,000 3% 3%
July 31, 1998 7,000,000 6% 3%
January 31, 1999 9,000,000 5% 2%
January 31, 2000 13,000,000 5% 2%
January 31, 2001 15,000,000 5% 2%
January 31, 2002 17,000,000 5% 2%
</TABLE>
(11) Retained Earnings:
The status of retained earnings at June 30, 1998 and 1997 are as follows:
June 30, June 30,
1998 1997
----------- -----------
Pre-S corporation earnings $ 538,170 $ 538,170
S corporation income, net of dividends 8,013,611 12,036,118
----------- -----------
$ 8,551,781 $12,574,288
=========== ===========
The stockholders can declare and receive dividends up to the amount of the
S corporation earnings without incurring any additional personal taxes.
See accompanying accountants' review report.
10
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(12) Commitments:
The following is a schedule by years of future minimum rental payments
required under operating leases that have noncancellable lease terms in
excess of one year as of June 30, 1998:
Warehouse
and Office Showroom Total
---------- -------- --------
Year ending December 31,
1998 $136,860 $ 43,624 $180,484
1999 273,720 -- 273,720
-------- -------- --------
$410,580 $ 43,624 $454,204
======== ======== ========
Rent expense amounted to $265,341 and $271,945 for the six months ended
June 30, 1998 and 1997, respectively.
(13) Subsequent Event:
On September 24, 1998, the stockholders exchanged 100% of the Company's
stock for stock of the licensee (see Note 10) and the Company ceased
operations. Management does not believe any significant losses will arise
from the disposition of its assets or satisfaction of its obligations.
See accompanying accountants' review report.
11
<PAGE>
Board of Directors
Michael Caruso & Co., Inc.
dba Bongo
Vernon, California
The supplemental information for the six months ended June 30, 1998 and 1997,
contained on pages 13 through 16, is presented only for supplementary analysis
purposes and is the representation of the Board of Directors and management of
Michael Caruso & Co., Inc. dba Bongo. Such information has been subjected to the
inquiry and analytical procedures applied in the review of the basic financial
statements, and we are not aware of any material modifications that should be
made to the supplemental information in order for it to be in conformity with
generally accepted accounting principles.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 10, 1998
12
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF NET SALES AND COST OF SALES
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Sales $21,561,582 $34,312,456
Returns and allowances 754,818 438,957
Discounts 257,105 524,591
----------- -----------
$20,549,659 $33,348,908
=========== ===========
Beginning inventory $ 5,249,342 $ 5,548,739
Purchases:
Piece goods 6,340,621 8,289,558
Trim 1,080,445 996,833
Freight-in 210,520 96,754
Contract labor:
Cutting 586,396 868,884
Sewing 6,222,830 9,972,901
Laundry and dyeing 1,917,454 3,330,850
Printing and artwork 119,417 119,257
Customs and brokerage fees 4,688 --
Manufacturing overhead 579,731 621,904
----------- -----------
22,311,444 29,845,680
Ending inventory 6,118,313 5,521,374
----------- -----------
$16,193,131 $24,324,306
=========== ===========
See accompanying accountants' review report on supplemental information.
13
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF MANUFACTURING OVERHEAD
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Salaries - warehouse $ 82,697 $105,567
Payroll taxes 12,259 10,030
Depreciation 56,012 60,220
Equipment rental 14,867 8,950
Factory expense 34,083 45,274
Insurance:
General 123,979 122,454
Workers' compensation 16,017 39,921
Repairs and maintenance 14,199 11,970
Security 30,764 35,660
Warehouse rent 194,854 181,858
-------- --------
$579,731 $621,904
======== ========
See accompanying accountants' review report on supplemental information.
14
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF OPERATING EXPENSES
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Design and production:
Salaries:
Design $ 168,988 .8% $ 153,495 .5%
Patternmaking 173,543 .8 213,135 .6
Production 257,429 1.3 248,847 .8
Payroll taxes 72,736 .4 50,645 .1
Design expense 48,378 .2 39,416 .1
Patterns and grading 27,004 .1 30,126 .1
Samplemaking 73,348 .4 78,120 .2
Sample piece goods 19,729 .1 39,779 .1
---------- --- ---------- ---
841,155 4.1 853,563 2.5
---------- --- ---------- ---
Shipping:
Salaries 357,126 1.8 496,595 1.5
Payroll taxes 46,476 .2 45,147 .1
Freight out 213,878 1.0 222,541 .8
Shipping expense 104,108 .5 108,683 .3
---------- --- ---------- ---
721,588 3.5 872,966 2.7
---------- --- ---------- ---
Selling:
Salaries 570,868 2.7 214,441 .6
Payroll taxes 35,185 .2 17,368 .1
Advertising 497,648 2.4 814,635 2.5
Automobile 15,885 .1 14,323
Depreciation and amortization 43,240 .2 6,620
Promotion and entertainment 112,717 .5 29,533 .1
Showroom expense 32,508 .2 6,113
Showroom rent 70,487 .3 90,087 .3
Trade shows 219,432 1.1 1,990
Travel 176,399 .9 107,676 .3
---------- --- ---------- ---
1,774,369 8.6 1,302,786 3.9
---------- --- ---------- ---
</TABLE>
(Continued)
See accompanying accountants' review report on supplemental information.
15
<PAGE>
MICHAEL CARUSO & CO., INC.
dba BONGO
SCHEDULES OF OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
General and administrative:
Salaries - office $ 393,524 1.9% $ 468,838 1.4%
Payroll taxes 100,439 .5 59,773 .2
Contributions 11,554 .1 33,119 .1
Depreciation and amortization 6,532 4,514
Factor:
Commissions 104,234 .5 175,099 .5
Interest income (704) (31,558) (.1)
Insurance - health 89,855 .4 137,396 .4
Interest expense 9,026 21,194 .1
Office supplies and expense 66,914 .3 74,111 .2
Professional fees 251,018 1.3 406,516 1.2
Provision for income taxes (1,985) 131,047 .4
Provision for doubtful accounts 41,300 .2 --
Taxes and licenses 1,307 3,524
Telephone 79,789 .4 66,401 .2
Utilities 17,625 .1 17,175 .1
----------- --------- ----------- ---------
1,170,428 5.7 1,567,149 4.7
----------- --------- ----------- ---------
$ 4,507,540 21.9% $ 4,596,464 13.8%
=========== ========= =========== =========
</TABLE>
See accompanying accountants' review report on supplemental information.
16
<PAGE>
Section C
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
presented herein is based on the historical consolidated financial statements of
Candie's, Inc. ("Candie's") and Michael Caruso & Co., Inc. ("Caruso"), 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 July 31, 1998 for the pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined statements of income for the year and
six-month period each include Caruso's, twelve and six month results of
operations for the year ended December 31, 1997 and June 30, 1998, respectively.
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
July 31, 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.
C-1
<PAGE>
Candie's, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
For the Years Ended January 31, 1998 and December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Candie's, Inc. Michael Caruso Pro Forma Consolidated
& Co., Inc. Adjustments Pro Forma
---------------- ----------------- ----------------- ----------------
January 31, 1998 December 31, 1997 January 31, 1998
---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 92,976 $ 56,811 $(56,811)(B) $ 92,976
Cost of goods sold 68,799 42,853 (44,078)(B)(E) 67,574
-------- -------- -------- --------
Gross profit 24,177 13,958 (12,733) 25,402
Licensing income - net 329 (329)(B) --
Selling, general and administrative expenses 17,314 14,043 (13,265)(B)(F) 18,092
-------- -------- -------- --------
Operating income 6,863 244 203 7,310
Other (income) expenses:
Interest expense - net 1,130 -- -- 1,130
Equity earnings in joint venture -- -- (122)(B) (122)
-------- -------- -------- --------
1,130 -- (122) 1,008
Income before income taxes 5,733 244 325 6,302
Income taxes 1,197 -- 101 1,298
-------- -------- -------- --------
Net income $ 4,536 $ 244 $ 224 $ 5,004
======== ======== ======== ========
Net income per share
Basic $ 0.40 $ 0.38
======== ========
Diluted $ 0.33 $ 0.31
======== ========
Weighted average number of common shares
Basic 11,375 13,343
======== ========
Diluted 13,788 16,303
======== ========
</TABLE>
C-2
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Information
<PAGE>
Candie's, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
as of July 31, 1998 and June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Candie's, Inc. Michael Caruso Pro Forma Consolidated
& Co., Inc. Adjustments Pro Forma
------------- ------------- ------------- ------------
July 31, 1998 June 30, 1998 July 31, 1998
------------- ------------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 360 $ 1 $ 181(A)(C) $ 542
Accounts receivable, net 7,329 4,932 (4,932)(C) 7,329
Other receivables 349 (293)(A)(C) 56
Receivable from licensee 136 (136)(C) --
Inventories 15,530 6,118 (6,118)(C) 15,530
Due from factor 30,411 30,411
Deferred income taxes 670 670
Prepaid advertising and marketing 3,437 169 (169)(C) 3,437
Other current assets 570 570
-------- -------- -------- --------
Total Current Assets 58,307 11,705 (11,467) 58,545
Property and Equipment, Net 996 726 (726)C) 996
Other Assets:
Deferred income taxes 1,443 1,443
Intangibles 4,735 15,312(A) 20,047
Investment in joint venture 500(D) 500
Other 702 24 (24)(C) 702
-------- -------- -------- --------
6,880 24 15,788 22,692
-------- -------- -------- --------
Total Assets $ 66,183 $ 12,455 $ 3,595 $ 82,233
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 6,412 $ 3,892 $ (3,592)(A)(C) $ 6,712
Revolving notes payable - bank 17,216 500(D) 17,716
Bankers' acceptance - net 4,876 4,876
-------- -------- -------- --------
Total Current Liabilities 28,504 3,892 (3,092) 29,304
Long-Term Liabilities 76 76
Stockholders' Equity:
Preferred stock --
Common stock 14 11 (9)(A) 16
Additional paid-in-capital 31,957 -- 15,248(A) 47,205
Retained earnings 5,632 8,552 (8,552) 5,632
-------- -------- -------- --------
Total Stockholders' Equity 37,603 8,563 6,687 52,853
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 66,183 $ 12,455 $ 3,595 $ 82,233
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Information
C-3
<PAGE>
Candie's, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
For the Six Months Ended July 31, 1998 and Six Months Ended June 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
(Candie's, Inc.) (Caruso) Pro Forma Candies &
Six Months Ended Six Months Ended Adjustments Caruso
July 31, 1998 June 30, 1998 Pro Forma
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 67,170 $ 20,550 $(20,550)(B) $ 67,170
Cost of goods sold 47,856 16,193 (16,551)(B)(E) 47,498
-------- -------- -------- --------
Gross profit 19,314 4,357 (3,999) 19,672
Licensing income 408 (408)(B)(E) --
Selling, general and administrative expenses 11,551 4,751 (4,751)(G) 11,551
-------- -------- -------- --------
Operating income 7,763 14 344 8,121
Other (income) expenses:
Interest expense - net 497 497
Equity earnings in joint venture -- -- (7)(B) (7)
-------- -------- -------- --------
497 -- (7) 490
Income before income taxes 7,266 14 351 7,631
Income taxes 2,850 -- 137 2,987
-------- -------- -------- --------
Net income $ 4,416 $ 14 $ 214 $ 4,644
======== ======== ======== ========
Net income per share
Basic $ 0.32 $ 0.29
======== ========
Diluted $ 0.27 $ 0.25
======== ========
Weighted average number of common shares
Basic 13,920 15,888
======== ========
Diluted 16,191 18,706
======== ========
</TABLE>
C-4
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Information
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except share data)
(A) On September 24, 1998 Candie's, Inc. ("Candie's"), through a wholly owned
subsidiary, Licensing Acquisition Corp., acquired all of the outstanding
shares of Michael Caruso & Co., Inc. ("Caruso"). Under the terms of the
agreement, Candie's acquired the BONGO trademark as well as certain other
related trademarks and two license agreements for kids' and large size
jeanswear. Caruso was a licensor of certain trademarks relating to footwear
products sold by Candie's, which license was terminated as of the closing.
The purchase price for the shares acquired was $15,250 and was be paid at
the closing in 1,968 shares of Candie's common stock (each share being
valued at $7.75), plus $100 in cash. The transaction may be subject to
adjustment based on the closing market price of Candie's common stock
during the six month period immediately following the closing.
This transaction was accounted for using the purchase method of accounting.
The total purchase of $15,650, including acquisition expenses of
approximately $300, but excluding the contingency consideration described
above, resulted principally in purchase price allocation to the licenses
acquired of $2,706 and a trademark value of $12,606. If and when the
contingency consideration is issued, there will be no effect on the above
purchase price allocation.
(B) Subsequent to the above noted acquisition, on October 7, 1998, Candie's
entered into a joint venture with Sweet Sportswear LLC ("Sweet") to market
and distribute certain apparel under the Candie's and Bongo labels.
Candie's and Sweet each have a fifty percent (50%) interest in the joint
venture, named Unzipped Apparel, LLC ("Unzipped"). Under the terms of the
joint venture, Candie's licensed each of its Candie's and Bongo trademarks
to Unzipped for their use in the design, manufacture and sale of certain
designated apparel products. Consequently, Candie's recognized each of its
proportionate share of earnings under the equity method of accounting in
the pro forma combined Statement of Income.
(C) Includes adjustment for the elimination of assets not acquired and
liabilities not assumed.
(D) Represents Candie's proportionate interest in the joint venture.
(E) Represents the elimination of license fees paid and received (see note (a)
above).
(F) Includes trademark amortization of $778. These intangibles will be
amortized on a straight line basis over 20 years.
(G) Includes amortization of trademark of $315 and licenses of $71, which are
being amortized over 20 years and 4 years, respectively.
C-5
EXHIBIT 23
Board of Directors
Candies, Inc.
Purchase, New York
As independent certified public accountants, we have audited the financial
statements of Michael Caruso and Co., Inc. for the three years ended December
31, 1997, 1996 and 1995, and hereby consent to the inclusion of our report dated
November 10, 1998, in this Form 8-K/A of Candie's, Inc. and the incorporation of
such report into Candie's, Inc.'s previously filed Registration Statement Nos.
33-62697 and 333-7659 on Form S-3, and No 333-27655 on Form S-8.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 10, 1998
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