U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 1995
--------------
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Exchange Act
For the transition period from _______________ to ____________________
Commission file Number 0-18234
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CANDIE'S, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2481903
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices)
(914)694-8600
------------------------------------------------
(Issuer's telephone number, including area code)
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
--------- ----------
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of June 14, 1995 (excluding treasury shares): 8,233,386
Transitional small business disclosure format (check one):
YES NO X
--------- ----------
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
FOR THE PERIOD ENDED APRIL 30, 1995
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at April 30, 1995 3-4
and January 31, 1995
Condensed Consolidated Statements of Operations for the 5
Three Months Ended April 30, 1995 and 1994
Condensed Consolidated Statement of Stockholders Equity 6
for the Three Months Ended April 30, 1995
Condensed Consolidated Statements of Cash Flows for 7-8
the Three Months Ended April 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements 9-15
ITEM 2.
Management's Discussion and Analysis of Financial 16-17
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. 17
Exhibits and Reports on Form 8-K
SIGNATURES 18
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
APRIL 30, JANUARY 31,
1995 1995
----------- -----------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 275,364 $ --
RESTRICTED CASH 100,000 100,000
ACCOUNTS RECEIVABLE
net allowances of $135,360 and $45,000
at April 30, 1995 and January 31, 1995
413,397 583,911
INVENTORIES 3,949,483 3,269,158
PREPAID EXPENSES 499,792 151,195
OTHER CURRENT ASSETS 64,510 --
----------- -----------
TOTAL CURRENT ASSETS 5,302,546 4,104,264
PROPERTY AND EQUIPMENT
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (Note 3) 130,808 142,960
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 404,292 414,234
TRADEMARK 5,043,578 5,114,282
OTHER 497,825 514,274
----------- -----------
TOTAL OTHER ASSETS 5,945,695 6,042,790
----------- -----------
TOTAL ASSETS $11,379,049 $10,290,014
=========== ===========
Page 3
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
APRIL 30, JANUARY 31,
1995 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 1,359,882 $ 1,820,598
PAYABLE FOR INVENTORY IN
TRANSIT 1,798,033 1,105,845
NOTES PAYABLE - NEW RETAIL CONCEPTS,INC
(NOTE 9) 600,000 --
DUE TO FACTOR (Note 4) 2,442,872 1,162,035
ACCRUED LITIGATION EXPENSE 100,000 100,000
ACCRUED EXPENSES AND TAXES 1,054,536 1,394,253
ACCRUED U.S. CUSTOMS DUTIES (Note 9) 70,000 63,427
------------ ------------
TOTAL CURRENT LIABILITIES 7,425,323 5,646,158
OTHER NONCURRENT LIABILITIES 153,929 206,213
ACCRUED U.S. CUSTOMS DUTIES (Note 9) 37,619 45,746
------------ ------------
TOTAL LIABILITIES 7,616,871 5,898,117
------------ ------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE - SHARES
AUTHORIZED 5,000,000; NONE ISSUED OR
OUTSTANDING
COMMON STOCK, $.001 PAR VALUE - SHARES
AUTHORIZED: 30,000,000 and 10,000,000;
ISSUED 8,709,465 AT APRIL 30, 1995
AND JANUARY 31, 1995 8,709 8,709
ADDITIONAL PAID-IN CAPITAL 9,162,837 9,162,837
DEFICIT, since February 28, 1993,
(deficit eliminated $27,696,007) (5,409,368) (4,779,649)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,762,178 4,391,897
------------ ------------
TOTAL LIABILITIES AND STOCK-
HOLDER'S EQUITY $ 11,379,049 $ 10,290,014
============ ============
Page 4
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1995 1994
----------- -----------
LANDED SALES $ 5,303,875 $ 3,662,808
COMMISSION AND
LICENSING INCOME 448,728 831,711
----------- -----------
TOTAL REVENUES 5,752,603 4,494,519
COST OF LANDED SALES 4,241,435 3,142,893
----------- -----------
TOTAL GROSS PROFIT 1,511,168 1,351,626
----------- -----------
OPERATING EXPENSES:
SELLING EXPENSE 1,163,203 1,145,585
GEN. & ADMIN. EXP. 802,516 842,571
----------- -----------
TOTAL OPER. EXP. 1,965,719 1,988,156
----------- -----------
OPERATING LOSS (454,551) (636,530)
OTHER INCOME AND (DEDUCTIONS):
GAIN ON SETTLEMENT OF
OBLIGATION -- 126,329
INTEREST & OTHER ITEMS (174,447) (147,810)
----------- -----------
TOTAL OTHER INCOME AND
(DEDUCTIONS) (174,447) (21,481)
----------- -----------
LOSS BEFORE INCOME TAXES (628,998) (658,011)
INCOME TAXES 721 3,651
----------- -----------
NET LOSS $ (629,719) $ (661,662)
=========== ===========
LOSS PER SHARE -
PRIMARY AND FULLY DILUTED:
WEIGHTED AVERAGE
OUTSTANDING SHARES 8,531,205 4,806,071
=========== ===========
NET LOSS PER SHARE $ (.07) $ (.14)
=========== ===========
Page 5
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<TABLE>
<CAPTION>
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 30, 1995
(unaudited)
Common Stock Paid-In Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount Total
------ ------ ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 31, 1995 8,709,465 $ 8,709 $ 9,162,837 $(4,779,649) 0 $ 0 $ 4,391,897
Net loss for the
three months ended
April 30, 1995 0 0 0 (629,719) 0 0 (629,719)
Balance, -----------------------------------------------------------------------------------------------------
April 30, 1995 8,709,465 $ 8,709 $ 9,162,837 $(5,409,368) 0 $ 0 $ 3,762,178
=====================================================================================================
</TABLE>
Page 6
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1995 1994
------------ -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Loss $ (629,719) $ (661,662)
Items In Net Loss
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 90,360 (33,900)
Depreciation and Amort. 104,795 123,680
(Gain) Loss on Settlement of
Obligation -- (126,329)
Increase (Decrease) In Cash
Flows From Changes In Oper.
Assets and Liabilities:
Accounts Receivable 80,154 (45,967)
Inventories (680,325) 751,919
Prepaid Expenses (348,597) 222,471
Other Assets (57,247) (74,127)
Accounts Payable (460,717) 102,250
Due to Factor 1,280,837 (191,658)
Accrued Expenses (339,717) (461,366)
Payable For Inventory
In Transit 692,189 385,728
Accrued U.S. Customs
Duties (1,554) (8,306)
Other Non-current Liabilities (51,047) --
----------- -----------
Net Cash Provided By (Used In)
Operating Activities (320,588) (17,267)
----------- -----------
Page 7
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (CONT'D.)
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1995 1994
------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital Expenditures $ (2,811) $ (1,116)
--------- ---------
Net Cash Used In
Investing Activities (2,811) (1,116)
--------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Notes Payable - New Retail
Concepts, Inc 600,000 --
Net borrowings (payments) on loans (1,237) --
--------- ---------
Net Cash Provided By (Used in)
Financing Activities 598,763 --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 275,364 (18,383)
--------- ---------
CASH AND CASH EQUIVALENTS,
beginning of period -- 114,153
--------- ---------
CASH AND CASH EQUIVALENTS,
end of first quarter $ 275,364 $ 95,770
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 160,273 $ 208,930
========= =========
Income Taxes $ 41,421 $ 3,651
========= =========
Page 8
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
1. Continuing Operations
Business, Secondary Offering and Other Transactions
Candie's, Inc. the Registrant together with its subsidiary is referred to herein
as Candie's or the "Company."
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which are in the opinion of management, necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included under generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures in
such financial statements are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the Company's Financial Statement and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 1995.
Candie's, Inc. and its subsidiaries (the "Company") design, market, and import a
variety of moderately-priced casual, outdoor and fashion footwear for women and
girls under the trademark CANDIE'S. The Company's product line also includes,
among others, a wide variety of men's workboots, winter boots, hiking boots and
outdoor casual shoes designed and marketed by the Company's wholly-owned
subsidiary, Bright Star Footwear, Inc. ("Bright Star").
The Company is engaged in a joint venture arrangement for the development of a
specialized footwear sole (the "Joint Venture") with Urethane Technologies, Inc.
("UTI").
(i) Secondary Offering
The Company completed an offering of its common stock (the "Secondary Offering")
during the quarter ended April 30, 1993. Upon the effectiveness of the Secondary
Offering, the Company's stockholders approved the following: (1) a change in the
company's name from Millfeld Trading Co., Inc., to Candie's, Inc., (2) a 1 for
4.5 reverse stock split of its common stock for which retroactive effect has
been given in the financial statements, and (3) a quasi-reorganization.
The following transactions ((ii) through (v)) occurred contemporaneously upon
effectiveness or closing of the Secondary Offering:
(ii) Debenture Conversion
Upon effectiveness of the Secondary Offering and immediately prior to the
reverse stock split, the holder of the Company's $3,500,000 subordinated
convertible debenture (the "Debenture") converted the Debenture, in accordance
with its terms, into 3,500,000 shares of common stock. Upon the completion of
the reverse split, such former holder made a capital contribution of 127,777 of
his 777,777 post-split shares of common stock to the Company and cancelled a
warrant to purchase additional shares of common stock previously issued to him
in connection with the Debenture.
(iii) The El Greco Transactions
Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an
affiliated company, consummated the following transactions (the "El Greco
Transactions"): (i) El Greco received 900,000 shares of the Company's common
Page 9
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
stock; (ii) El Greco transferred the trademarks "CANDIE'S(R)," "ACTION CLUB(R),"
"FULLMOON(R)" and "SUGAR BABIES(R)" (collectively, the "Trademarks"), and all of
its business operations associated with the Trademarks, to the Company; (iii) El
Greco assigned all of its preexisting agreements with licensees of the
Trademarks to the Company; (iv) the Company issued to El Greco a subordinated
note in the principal amount of $325,000, plus interest payable quarterly at the
"prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company
paid El Greco's expenses, including attorney's fees relating to the El Greco
Transactions, in the sum of $75,000 from the proceeds of the offering. In May
1994, the El Greco Note was satisfied.
Upon the closing of the El Greco Transactions, the Company ceased to be a
licensee and acquired actual ownership of the Candie's trademark.
In conjunction with the closing of the Secondary Offering and the transfer of
the Trademarks from El Greco to the Company, El Greco's operations were merged
into the operations of New Retail Concepts, Inc. ("NRC"), a significant
shareholder of the Company and an entity in whom the Company's President is a
principal shareholder.
(iv) Institutional Lender-Forgiveness ("Debt Restructuring") At the closing of
the Secondary Offering, the Company's Institutional Lender agreed to restructure
the Company's indebtedness which aggregated approximately $11,190,000, including
accrued interest at February 28, 1993. Such Debt Restructuring included the
forgiveness of approximately $5,940,000 of such debt and the restructuring of
the payment terms relating to the remaining principal amount of such loans. As a
result of and upon the completion of the Debt Restructuring, the Company's
outstanding indebtedness (excluding letters of credit) to the Institutional
Lender totaled approximately $5,250,000 at February 28, 1993.
(v) Quasi-Reorganization
Upon effectiveness of the Secondary Offering and the Debt Restructuring, the
Company's stockholders approved a corporate readjustment of the Company's
accounts in the form of a quasi-reorganization which was effected upon the
completion of the El Greco Transactions and the Debt Restructuring.
A quasi-reorganization, often referred to as "Fresh Start Accounting," is an
accounting procedure which accomplishes, with respect to the Company's accounts
and financial statements, what might have been accomplished in reorganization by
legal proceedings. The Company's assets, liabilities and capital accounts were
adjusted to eliminate the stockholders' deficiency. On completion of the
readjustments, the Company's accounts and financial statements were
substantially similar to those of a new company commencing business. The Company
believes the quasi-reorganization was appropriate because on completion of the
Debenture Conversion and the Debt Restructuring and installation of a new
management team, the Company had substantially reduced its outstanding
indebtedness, which to a great extent was incurred in connection with the
Discontinued Footwear Products had formulated revised operating plans and as a
result thereof would be able to devote its resources to its continuing
operations and development of the Trademarks.
2. Summary of Significant Account Policies
Basis of Presentation
Going Concern
The Company's consolidated financial statements have been presented on a going
concern basis which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The liquidity of the Company
and its ability to obtain financing for its operations has been adversely
affected by recurring operating losses.
Page 10
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
Although during the quarter ended April 30, 1993 the Company successfully
completed the Secondary Offering and Debt Restructuring which improved its
financial condition, prior management's unresolved operating issues and vendor
negotiations continued to negatively impact the Company's operations and,
additionally, the Company incurred operating losses for its fiscal years ended
January 31, 1994 and January 31, 1995. At April 30, 1995, the Company had a
substantial working capital deficit. The operating losses have resulted in an
accelerated use of funds provided by the public and private offerings of the
Company's securities and adversely affected the Company's liquidity. These
factors, among others raise doubt about the Company's ability to continue as a
going concern.
The continuation of the Company is dependent upon the continued support of the
Company's trade vendors, and institutional lenders, and ultimately upon the
Company achieving profitable operations. In addition, the Company may seek to
raise additional capital through the sale of its equity securities. The
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities or any other
adjustments that may be necessary should the Company be unable to continue as a
going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries, Bright Star, from June 1, 1990, the effective date of
the acquisition, and Ponca, Ltd. from March 15, 1994, its inception, and the
Company's 60% owned subsidiary Intercontinental Trading Group, Inc. ("ITG") from
February 1, 1988. All material intercompany accounts and transactions are
eliminated.
Inventories
Inventories, which consist entirely of finished goods, are valued at the lower
of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets (5-10 years) using accelerated methods.
Candie's Trademark
The Candie's trademark is stated at cost, net of amortization, as determined by
its fair value relative to other assets and liabilities revalued in the
aforementioned quasi-reorganization, and is being amortized over twenty years.
The Company believes that the trademark has continuing value, as evidenced by
increasing sales and expected profitability of Candie's products, which will be
realized over the course of its useful life.
Revenue Recognition
The Company's products are sold on either a landed or first cost basis. In the
case of landed sales, the Company bears the risk of loss until the products are
delivered to the customer. Revenues on landed sales are recognized when the
products are delivered to the customers. For goods sold on a first cost basis,
the Company acts as agent only, without risk of loss, and charges a commission
on the sale. Commission income is recognized upon shipment by the manufacturers.
Net Income (Loss) Per Share
Net income (loss) per common share is computed on a basis of the weighted
average number of common stock and common stock equivalents outstanding during
Page 11
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CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
each year, retroactively adjusted to give effect to all stock splits. Common
stock equivalents include stock options and warrants.
Reclassifications
Certain amounts from the April 30, 1994 financial statements have been
reclassified to conform to the current year's presentation.
3. Property and Equipment
Major classes of property and equipment consist of the following:
April 30, January 31,
1995 1995
------- -------
Furniture, fixtures and equipment $752,874 $750,063
Transportation equipment 44,443 44,443
-------- --------
797,317 794,506
Less accumulated depreciation
and amortization 666,509 651,546
-------- --------
Net property and equipment $130,808 $142,960
======== ========
4. Factor Agreement
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement. The agreement provides the Company with the ability to borrow funds
from the factor, limited to 80% of eligible accounts receivable and 50% of
eligible finished goods inventory (to a maximum of $5 million in inventory) in
which the factor has a security interest. The agreement also provides for the
opening of documentary letters of credit (up to a maximum of $2.5 million) to
suppliers, on behalf of the Company. The factor requires a deposit equal to 43%
of the amount of the letter of credit to be opened. Borrowings bear interest at
the rate of one and one half percent (1-1/2%) over the existing prime rate
established by the Philadelphia National Bank.
Additionally, the Company is currently able to borrow $800,000 above its
eligible accounts receivable and inventory formulas. This additional borrowing
capacity is personally guaranteed by the Company's President. Subsequent to July
31, 1994, the Company's President personally guaranteed any and all borrowings
with the factor.
Due to factor is comprised as follows:
April 30, January 31,
1995 1995
---------- ----------
Accounts Receivable - assigned $3,730,577 $3,478,771
Outstanding advances 6,173,449 4,640,806
---------- ----------
Due to Factor $2,442,872 $1,162,035
========== ==========
5. Related Party Transactions
The Company has entered into a Services Allocation Agreement with NRC, pursuant
to which the Company provides NRC with financial, marketing, sales and other
business services for which NRC is charged an allocation of the Company's
expenses, including employees' salaries associated with such services.
6. Leases
In April of 1994, the Company entered into a termination agreement for its
former premises whereby the Company issued 300,000 shares of its common stock to
Page 12
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
its former landlord. During August 1994, the Company entered into a new lease
agreement and relocated its corporate headquarters to Purchase, NY.
Rent expense was approximately $59,032 and $99,525 for the three months ended
April 30, 1995 and 1994, respectively. As of April 30, 1995, future net minimum
lease payments under noncancellable operating lease agreements are as follows:
1996 $ 125,000
1997 231,000
1998 255,000
1999 283,000
2000 289,000
Thereafter 48,000
----------
$1,260,000
==========
7. Long-Term Debt
On October 6, 1994, the Company consummated an agreement with its primary bank
lending institution (the "Institutional Lender") to extinguish its outstanding
indebtedness of approximately $3,378,000. As part of the extinguishment, the
Company paid the Institutional Lender $555,000 of principal and approximately
$140,000 of accrued interest. The Institutional Lender also received the
proceeds from the sale of 322,222 shares of the Company's previously issued
common stock and certain real property from the Company's former President, both
previously pledged as collateral. The principal and interest payments were made
from funds raised through private placements of the Company's stock completed in
October 1994 (see Note 8). The extinguishment resulted in an extraordinary gain
to the Company of approximately $2,702,000, net of income taxes.
8. Private Placement Offerings
(i) In May 1994, the Company consummated two private placements of its common
stock as follows:
(a) 33,333 shares at $1.50 per share, resulting in aggregate proceeds of
$50,000.
(b) 248,148 shares at $1.35 per share, resulting in aggregate proceeds of
$335,000.
In connection with these private placements of its common stock, the Company
incurred fees and expenses of approximately $66,900.
(ii) In October 1994, the Company issued 956,522 shares of its common stock at
$1.15 per share and 10,286 shares of its 8% Series A Convertible Preferred Stock
at $100 per share for aggregate proceeds of approximately $1,730,200, net of
related expenses of approximately $398,400. The Company used a portion of those
funds to repay principal and accrued interest on its institutional indebtedness
(see Note 7). In conjunction with these offerings, the Company issued 55,000
shares of its common stock in lieu of payment of professional fees incurred.
(iii) In November 1994, the Company sold 86,957 shares of common stock to NRC
for $100,000.
9. Commitments, Contingencies and Other Matters
(a) In April 1991, an action was commenced derivatively on behalf of Candie's,
Inc. against certain of the Company's former directors and the Company as a
nominal defendant (the "Defendants"). The complaint alleges that the Company's
actions in connection with a public offering to exchange warrants for the
Page 13
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
Company and the reacquisition of ITG were detrimental to the Company's financial
condition. The plaintiff seeks an accounting by the Company and payment by the
Board of Directors of an unspecified amount of damages. In September 1991, the
defendants moved to dismiss the complaint for failure to state a cause of
action. The motion was granted in October 1991 based upon the court's mistaken
belief that the plaintiff had defaulted with respect to the motion. The parties
agreed to reinstate the motion in June 1992 and the motion has again been
submitted to the Court for its determination. The Company and the individual
defendants intend to vigorously defend the action.
(b) In June 1991, the Company and prior management received a notice from the
U.S. Customs Service ("U.S. Customs"), that it intended to audit the Company's
payments of customs duties for the period 1986 to June 1991. After a preaudit
review, the Company voluntarily reported to U.S. Customs in September 1991 that
it had miscalculated certain customs duties owed, resulting in underpayment of
$1,627,344 which was included in operations for the year ended January 31, 1992.
The Company paid $813,672 to U.S. Customs in October 1991. In August 1992, the
Company and U.S. Customs reached an agreement whereby the Company was to pay an
additional $1,000,000 to relieve the Company of all liabilities for Customs'
duties, penalties and interest owed from 1986 through September 30, 1991. Such
$1,000,000 was paid from the proceeds of the Secondary Offering consummated
during the first quarter of 1993. The Company also agreed to settle all claims
for Customs' duties and penalties allegedly owed for the period October 1, 1991
to December 31, 1991, by the payment of $180,000 plus interest, commencing July
1, 1993, at the rate of $5,000 per month for 40 months.
(c) In October of 1994, a former employee of the Company and NRC commenced an
action in the United States District Court for the Southern District of New York
against the Company and NRC, alleging the existence and breach of employment
agreements with NRC and assumption of the agreements by the Company. The former
employee is claiming damages for unpaid compensation, bonuses and unreimbursed
expenses aggregating in excess of $500,000. Discovery and depositions have
commenced; however, as the Company denies any liability and intends to
vigorously defend the action, no amounts have been provided for in the
accompanying financial statements.
(d) During fiscal year ended January 31, 1995, the Company settled amounts due
for federal and state tax liabilities in the aggregate amount of approximately
$526,000. Of the remaining amounts outstanding at April 30, 1995, $284,000 will
be paid during the next twelve months and $70,000 will be paid thereafter.
(e) As of April 30, 1995, the Company is obligated under employment agreements
with four executives to provide aggregate minimum compensation of approximately
$637,500, $921,000 and $16,667 during the fiscal years ended January 31, 1996,
1997 and 1998, respectively.
(f) The Company has been advised by the Staff of the Securities and Exchange
Commission (the "Commission") that the Staff intends to recommend to the
Commission that it authorize the Staff to commence an administrative proceeding
against the Company with respect to alleged violations of Section 5 of the
Securities Act of 1993 in connection with the Company's 1993 Regulation S
Offering (the "Offering") of shares of common stock in the aggregate amount of
$2,000,000. The Company believes that it justifiably relied upon the opinion of
its then corporate counsel in connection with the Offering and, has made a
submission to the Commission requesting that the Commission not authorize the
Staff to proceed against the Company in connection with the matter. Even if the
Company is unsuccessful it believes that the outcome of any proceeding which the
Commission may bring against it in connection with the Offering will not have a
material adverse affect on the Company or its financial condition.
(g) Since February 1, 1995 the Company has been operating under an exclusive
licensing arrangement which enables the Company to sell footwear in North
America bearing the BONGO trademark. In connection with this arrangement, the
Company paid a $200,000 minimum fee, and is required to pay additional minimum
amounts totaling $820,000 over a three and one-half year period. The agreement
Page 14
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995
with the licensor provides for the Company to pay additional royalties, based on
percentages of sales, exceeding minimum amounts, as defined.
(h) On February 1, 1995, the Company entered into a financing agreement with
NRC, an affiliated entity. Pursuant to the financing agreement the Company
issued promissory notes to NRC in the principal amounts of $400,000 (due June
30, 1995, unless extended by the Company to September 30, 1995) and $200,000
(due February 1, 1996) and issued to NRC warrants to purchase 700,000 shares of
the Company's common stock (exercisable at an initial price of $1.2375 per
share). The financing agreement also provides for NRC to make available an
additional $200,000 through June 30, 1995, to be utilized for working capital
purposes. As collateral for the Company's obligations under the financing
agreement, the Company granted to NRC a security interest in all of the assets
of the Company and its subsidiaries, subject to a first lien on such assets in
favor of the Company's factor or other lender, as defined.
10. Settlement Agreements
As a result of settlements of litigations and certain other obligations, as of
April 30, 1995 the Company was obligated to pay an aggregate total of $400,000
of which $94,000 is included in other non-current liabilities.
Page 15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Landed sales (sales for which the Company pays a fixed price) of Candie's
branded footwear increased by $1,641,067 (45%) for the three months ended April
30, 1995 over the three month period ended April 30, 1994 primarily because of
increased market acceptance of CANDIE'S footwear products. The gross profit on
landed sales increased by $542,525 for the three months ended April 30, 1995
over the three month period ended April 30, 1994 as a result of increased sales
of CANDIE'S footwear products. The gross profit percentage on landed sales
increased from 14.2% for the three months ended April 30, 1994 to 20.0% for the
quarter ended April 30, 1995 primarily due to increased demand for certain
Candie's footwear products, reduction of air freight expense and lower costs of
certain merchandise purchased from overseas factories. Commission income results
from arranging for the production and quality control of products. Commission
and licensing income for the three months ended April 30, 1995 decreased by
$382,983 (46%) over the same period last year primarily because of decreased
orders on a commission basis of Bright Star footwear.
Bright Star Footwear's commission income decreased by $375,455 for the period
ended April 30, 1995 as compared to April 30, 1994. This decrease resulted from
a weak retail market and direct placement of shoes to overseas factories through
customers' subsidiaries which eliminated the need for Bright Star services.
Selling expenses increased by $17,618 (2%) for the three months ended April 30,
1995 as compared to the three months ended April 30, 1994 primarily as a result
of the increase in sales volume of the Candie's footwear line.
General and Administrative expenses decreased by $40,000 for the three months
ended April 30, 1995 as compared to the same period last year. Those costs
decreased primarily due to staff reductions.
Interest expense increased by $26,637 for the three months ended April 30, 1995
as compared to the same period last year. The increase was primarily due to the
advances the Company received under the Factor Agreement (see Note 4).
As a result of the foregoing, the Company's net loss for the three months ended
April 30, 1995 decreased to $629,719 from $661,662 for the corresponding period
ended April 30, 1994.
Liquidity and Capital Resources
In the report on the Company's annual financial statements at January 31, 1995,
the Company's independent certified public accountants have included an
explanatory paragraph in their report on the Company's financial statements
stating certain factors which raise a substantial doubt about the Company's
ability to continue as a going concern.
At April 30, 1995, the Company had a working capital deficiency of $2,122,777
versus a working capital deficiency of $1,541,894 at January 31, 1995. The ratio
of current assets to current liabilities was .71 to 1.0 at April 30, 1995
compared to .73 to 1.0 at January 31, 1995. This increase in the working capital
deficiency was primarily due to the net loss for the three months ended April
30, 1995 and, to a lesser extent, increased interest expense from the borrowings
under the Factor Agreement (see Note 4 of the Notes to Condensed Consolidated
Financial Statements), and settlements of obligations (see Note 9)
The Company's cash flow from operating activities decreased for the three month
period ended April 30, 1995 compared to the same period of the prior year. Net
cash used in operating activities totaled $320,588 for the three months ended
April 30, 1995 compared to net cash used in operating activities of $17,267 for
the three months ended April 30, 1994. The decrease in operating cash during the
1995 period resulted primarily from increased inventories, an increase in
prepaid expenses and the Company's operating loss for the quarter, which was
Page 16
<PAGE>
partially offset by increased borrowings from the Company's factor and an
increase in payables for inventories in transit. Cash provided by financing
activities increased by $598,763 for the three months ended April 30, 1995
compared to the three months ended April 30, 1994. The increase resulted
primarily from notes payable to a related company (see Note 9).
Management is continuing to seek means of reducing costs while increasing
revenues. Management is also concentrating on ways to increase the Company's
liquidity. As part of the aforementioned strategies, management has asked the
factor to increase the Company's credit line and the ability to borrow up to 85%
(rather than 80%) of eligible accounts receivable. The Company has also asked
the factor to lend up to $6,000,000 against eligible inventory (rather than the
$5,000,000 currently in effect). The Company has also been able to negotiate
through a buying agent open account shipments from certain overseas factories on
payment terms of 30-60 days. This will allow the Company to purchase certain
goods without the need to obtain letters of credit. In an effort to reduce
costs, management has eliminated seven positions within the organization that
were not deemed necessary to ongoing operations. The Company has also entered
into an arrangement with a buying agent to assist in reducing the cost of
merchandise purchased from overseas factories. Management believes that its
completed cost containment program, on-going cost containing efforts plus the
support of its trade vendors and institutional lenders, will provide the Company
with sufficient working capital for the fiscal year ending January 31, 1996.
However, there can be no assurance that the Company will be able to generate
sufficient funds to meet future operating expenses and the Company may,
therefore, be required to seek to obtain additional financing from, among other
sources, institutional lenders and the sale of its securities. There can be no
assurance that if required, the Company will be able to obtain any such
financing.
PART II - Other Information
Item 6.
a) Exhibits
27. Financial Data Schedule
b) Reports on Form 8-K
None.
Page 17
<PAGE>
CANDIE'S, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, duly
authorized.
CANDIE'S, INC.
----------------------------------
(Registrant)
DATED: June 14, 1995 By: \s\ NEIL COLE
----------------------------------
NEIL COLE
President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-QSB AT
APRIL 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> APR-30-1995
<CASH> 275,364
<SECURITIES> 0
<RECEIVABLES> 548,757
<ALLOWANCES> 135,360
<INVENTORY> 3,949,483
<CURRENT-ASSETS> 5,302,546
<PP&E> 797,317
<DEPRECIATION> 666,509
<TOTAL-ASSETS> 11,379,049
<CURRENT-LIABILITIES> 7,425,323
<BONDS> 0
<COMMON> 8,709
0
0
<OTHER-SE> 3,753,469
<TOTAL-LIABILITY-AND-EQUITY> 11,379,049
<SALES> 5,303,875
<TOTAL-REVENUES> 5,752,603
<CGS> 4,241,435
<TOTAL-COSTS> 4,241,435
<OTHER-EXPENSES> 1,965,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174,447
<INCOME-PRETAX> (628,998)
<INCOME-TAX> 721
<INCOME-CONTINUING> (629,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (629,719)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
