-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FrNTbYXef9viQcjUeqpfTmJYSK98o0jh9Y2JbksA80ZvMyDrFPJairRHzrKCICWL ibNX7BtMpP0wlZjcB5NJlQ== 0000891554-98-001536.txt : 19981207 0000891554-98-001536.hdr.sgml : 19981207 ACCESSION NUMBER: 0000891554-98-001536 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980924 ITEM INFORMATION: FILED AS OF DATE: 19981204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481930 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-10593 FILM NUMBER: 98764499 BUSINESS ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9146948600 MAIL ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 8-K/A 1 FORM 8-K/A 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 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 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 Section A 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 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 MICHAEL CARUSO & CO., INC. dba BONGO BALANCE SHEETS
ASSETS December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ------------ 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 =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 2 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENTS OF INCOME
Year ended Year ended Year ended December 31, 1997 December 31, 1996 December 31, 1995 ----------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- 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% ============ ===== ============ ===== ============ =====
See accompanying independent auditors' report and notes to financial statements. 3 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common stock Total ------------ Retained stockholders' Shares Amount earnings equity ------ ----------- ----------- ------------- 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 ==== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 4 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended Year ended December 31, December 31 December 31, 1997 1996 1995 ----------- ----------- ----------- 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 =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 5 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 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:
December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ----------- 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 =========== =========== ===========
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 MICHAEL CARUSO & CO., INC. dba BONGO NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(4) Other Receivables: A summary is as follows: December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ----------- 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 =========== =========== ===========
See accompanying independent auditors' report. 8 MICHAEL CARUSO & CO., INC. dba BONGO NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(7) Property and Equipment: A summary is as follows: December 31, December 31, December 31, 1997 1996 1995 ---------- ---------- ---------- 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 ========== ========== ==========
(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:
December 31, December 31, December 31, 1997 1996 1995 ----------- ----------- ----------- 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 ========== ========== ==========
See accompanying independent auditors' report. 9 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:
Minimum Royalty Advertising Date Sales Rate Rate ---------------- --------------- ---------- ------------ 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%
See accompanying independent auditors' report. 10 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:
December 31, December 31, December 31, 1997 1996 1995 ---------- ---------- ---------- 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 ========== ========== ==========
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:
Warehouse and Office Showroom Total ---------- ---------- ---------- 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 ========== ========== ==========
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 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 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF NET SALES AND COST OF SALES
Year ended Year ended Year ended December 31, December 31 December 31, 1997 1996 1995 ------------ ------------ ------------ 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 ============ ============ ============
See accompanying independent auditors' report on supplemental information. 13 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF MANUFACTURING OVERHEAD
Year ended Year ended Year ended December 31, December 31 December 31, 1997 1996 1995 ---------- ---------- ---------- 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 ========== ========== ==========
See accompanying independent auditors' report on supplemental information. 14 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF OPERATING EXPENSES
Year ended Year ended Year ended December 31, 1997 December 31, 1996 December 31, 1995 Amount Percent Amount Percent Amount Percent ----------- -------- ----------- -------- ----------- -------- 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 ----------- -------- ----------- -------- ----------- --------
(Continued) See accompanying independent auditors' report on supplemental information. 15 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF OPERATING EXPENSES (CONTINUED)
Year ended Year ended Year ended December 31, 1997 December 31, 1996 December 31, 1995 Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- 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% ============ ========= ============ ========= ============ =========
See accompanying independent auditors' report on supplemental information. 16 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF LICENSE DIVISION
Year ended Year ended Year ended December 31, 1997 December 31, 1996 December 31, 1995 Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Income - footwear: Royalties $519,169 .9% $ -- $ -- Expense - footwear: Advertising due to/from 190,465) (.4) -- -- -------- --- -------- -------- -------- --- $328,704 .5% $ -- $ ======== === ======== ======== ======== ===
See accompanying independent auditors' report on supplemental information. 17 Section B 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 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 MICHAEL CARUSO & CO., INC. dba BONGO BALANCE SHEETS
June 30, June 30, ASSETS 1998 1997 ----------- ----------- 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 =========== ===========
See accompanying accountants' review report and notes to financial statements. 2 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENTS OF INCOME
Six months ended Six months ended June 30, 1998 June 30, 1997 ------------- ------------- Amount Percent Amount Percent ------ ------- ------ ------- 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% ============ ===== ============ =====
See accompanying accountants' review report and notes to financial statements. 3 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Common stock Total ------------ Retained stockholders' Shares Amount earnings equity ------ ------ -------- ------ 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 =========== =========== =========== ===========
See accompanying accountants' review report and notes to financial statements. 4 MICHAEL CARUSO & CO., INC. dba BONGO STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months ended Six months ended June 30, 1998 June 30, 1997 ---------------- ---------------- Cash flows provided by (used for) operating activities: 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 =========== ===========
See accompanying accountants' review report and notes to financial statements. 5 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 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 MICHAEL CARUSO & CO., INC. dba BONGO NOTES TO FINANCIAL STATEMENTS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(4) Other Receivables: A summary is as follows: June 30, June 30, 1998 1997 ----------- ----------- 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 =========== ===========
See accompanying accountants' review report. 8 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 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:
Minimum Royalty Advertising Date Sales Rate Rate ---- ------- ------- ----------- 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%
(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 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 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 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 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 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF OPERATING EXPENSES
Six months ended Six months ended June 30, 1998 June 30, 1997 ---------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- 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 ---------- --- ---------- ---
(Continued) See accompanying accountants' review report on supplemental information. 15 MICHAEL CARUSO & CO., INC. dba BONGO SCHEDULES OF OPERATING EXPENSES (CONTINUED)
Six months ended Six months ended June 30, 1998 June 30, 1997 ---------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- 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% =========== ========= =========== =========
See accompanying accountants' review report on supplemental information. 16 Section C 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 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)
Candie's, Inc. Michael Caruso Pro Forma Consolidated & Co., Inc. Adjustments Pro Forma ---------------- ----------------- ----------------- ---------------- January 31, 1998 December 31, 1997 January 31, 1998 ---------------- ----------------- ---------------- 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 ======== ========
C-2 See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information Candie's, Inc. and Subsidiaries Unaudited Pro Forma Condensed Combined Balance Sheet as of July 31, 1998 and June 30, 1998 (in thousands)
Candie's, Inc. Michael Caruso Pro Forma Consolidated & Co., Inc. Adjustments Pro Forma ------------- ------------- ------------- ------------ July 31, 1998 June 30, 1998 July 31, 1998 ------------- ------------- ------------ 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 ======== ======== ======== ========
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information C-3 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)
(Candie's, Inc.) (Caruso) Pro Forma Candies & Six Months Ended Six Months Ended Adjustments Caruso July 31, 1998 June 30, 1998 Pro Forma ------------- ------------- ------------- --------- 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 ======== ========
C-4 See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information 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 EX-23 2 LETTER FROM CERTIFIED PUBLIC ACCOUNTANTS 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 -----END PRIVACY-ENHANCED MESSAGE-----