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 October 31, 1995
or
Transition Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file Number 0-10593
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) has filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the preceding 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 December 15, 1995 excluding treasury shares): 8,265,995
Transitional small business disclosure format (check one):
YES NO X
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
FOR THE PERIOD ENDED OCTOBER 31, 1995
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at October 31, 1995
and January 31, 1995 3-4
Condensed Consolidated Statements of Operations for the
Three Months Ended October 31, 1995 and 1994 5
Condensed Consolidated Statements of Operations for the
Nine Months Ended October 31, 1995 and 1994 6
Condensed Consolidated Statement of Stockholders Equity
for the Nine Months Ended October 31, 1995 7
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended October 31, 1995 and 1994 8-9
Notes to Condensed Consolidated Financial Statements 10-17
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-20
ART II. OTHER INFORMATION 21
SIGNATURES 21
Page 2
PART I
Item 1.
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
OCTOBER 31, JANUARY 31,
1995 1995
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 207,227 $ --
RESTRICTED CASH -- 100,000
ACCOUNTS RECEIVABLE
net allowances of $254,092 and $45,000
at October 31, 1995 and January 31, 1995 663,908 583,911
INVENTORIES 3,485,826 3,269,158
PREPAID EXPENSES 1,011,685 151,195
OTHER CURRENT ASSETS 136,313 --
TOTAL CURRENT ASSETS 5,504,959 4,104,264
PROPERTY AND EQUIPMENT:
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (Note 3) 138,293 142,960
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 384,408 414,234
TRADEMARK 4,902,170 5,114,282
OTHER 459,776 514,274
TOTAL OTHER ASSETS 5,746,354 6,042,790
TOTAL ASSETS $11,389,606 $10,290,014
Page 3
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
OCTOBER 31, JANUARY 31,
1995 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 3,349,303 $ 1,820,598
PAYABLE FOR INVENTORY IN TRANSIT 705,273 1,105,845
DUE TO FACTOR (Note 4) 410,797 1,162,035
ACCRUED LITIGATION EXPENSE -- 100,000
ACCRUED EXPENSES AND TAXES 1,230,633 1,394,253
ACCRUED U.S. CUSTOMS DUTIES (Note 9) 55,383 63,427
TOTAL CURRENT LIABILITIES 5,751,389 5,646,158
OTHER NONCURRENT LIABILITIES 25,111 206,213
ACCRUED U.S. CUSTOMS DUTIES (Note 9) 2,140 45,746
TOTAL LIABILITIES 5,778,640 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
ISSUED 8,742,034 AT October 31, 1995
AND 8,709,425 AT January 31, 1995 8,742 8,709
ADDITIONAL PAID-IN CAPITAL 9,200,305 9,162,837
DEFICIT, since February 28, 1993,
(deficit eliminated $27,696,007) (3,598,081) (4,779,649)
TOTAL STOCKHOLDERS' EQUITY 5,610,966 4,391,897
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY $11,389,606 $10,290,014
Page 4
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
LANDED SALES $ 9,333,498 $ 4,826,909
COMMISSION AND
LICENSING INCOME 1,268,696 1,126,476
TOTAL REVENUES 10,602,194 5,953,385
COST OF LANDED SALES 7,401,356 4,324,481
TOTAL GROSS PROFIT 3,200,838 1,628,904
OPERATING EXPENSES:
SELLING EXPENSES 1,324,304 1,159,058
GENERAL & ADMINISTRATION EXPENSES 856,205 798,013
REVERSAL OF ACCRUAL NO LONGER
REQUIRED - PENSION PLAN -- (340,000)
TOTAL OPERATING EXPENSES 2,180,509 1,617,071
OPERATING INCOME 1,020,329 11,833
OTHER DEDUCTIONS:
LOSS ON SETTLEMENT OF OBLIGATIONS -- (155,000)
INTEREST - NET (242,176) (228,155)
OTHER EXPENSES -- (131,858)
TOTAL OTHER DEDUCTIONS (242,176) (515,013)
INCOME (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM 778,153 (503,180)
INCOME TAXES (RECOVERY) 72,511 (8,825)
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 705,642 (494,355)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $121,000 -- 2,702,175
NET INCOME $ 705,642 $ 2,207,820
EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS)BEFORE
EXTRAORDINARY ITEM $ .07 $ (.07)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $.02 FOR 1994 -- .40
NET INCOME $ .07 $ .33
WEIGHTED AVERAGE
OUTSTANDING SHARES 14,452,746 6,660,846
Page 5
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
LANDED SALES $26,793,435 $14,059,938
COMMISSION AND
LICENSING INCOME 3,399,892 3,413,182
TOTAL REVENUES 30,193,327 17,473,120
COST OF LANDED SALES 21,868,908 12,382,485
TOTAL GROSS PROFIT 8,324,419 5,090,635
OPERATING EXPENSES:
SELLING EXPENSES 3,653,856 3,265,138
GENERAL & ADMINISTRATIVE EXPENSES 2,615,305 2,381,490
REVERSAL OF ACCRUAL NO LONGER
REQUIRED - PENSION PLAN -- (340,000)
TOTAL OPERATING EXPENSES 6,269,161 5,306,628
OPERATING INCOME (LOSS) 2,055,258 (215,993)
OTHER (DEDUCTIONS) AND INCOME:
(LOSS) GAIN ON SETTLEMENT OF
OBLIGATIONS (113,000) 728,249
INTEREST - NET (628,079) (534,844)
OTHER EXPENSES -- (131,858)
TOTAL OTHER (DEDUCTIONS) AND INCOME (741,079) 61,547
INCOME (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM 1,314,179 (154,446)
INCOME TAXES 132,611 3,586
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 1,181,568 (158,032)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $121,000 -- 2,702,175
NET INCOME $ 1,181,568 $ 2,544,143
EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS BEFORE EXTRAORDINARY
ITEM $ .14 $ (.03)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $.02 FOR 1994 -- .47
NET INCOME $ .14 $ .44
WEIGHTED AVERAGE
OUTSTANDING SHARES 8,542.944 5,752,943
Page 6
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 31, 1995
(unaudited)
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Balance,
January 31, 1995 8,709,425 $8,709 $9,162,837 $(4,779,649) $4,391,897
Issuance of common
stock due to
warrant exercise. 32,609 33 37,468 0 37,501
Net income 0 0 0 1,181,568 1,181,568
Balance,
October 31, 1995 8,742,034 $8,742 $9,200,305 $(3,598,081) $5,610,966
Page 7
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 1,181,568 $2,544,143
Items In Net Income
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 209,092 20,500
Depreciation and Amortization 316,811 372,174
Provision For Pension Costs -- (340,000)
Gains on Settlement of
Obligations -- (3,551,424)
Loss on Disposal of Fixed Assets -- 60,755
Increase (Decrease) In Cash
Flows From Changes In Operations:
Assets and Liabilities (1,479,933) (380,739)
Net Cash Provided By (Used In)
Operating Activities $ 227,538 $(1,274,591)
Page 8
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited) (CONT'D.)
1995 1994
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital Expenditures $(57,812) $ (69,089)
Net Cash Used in
Investing Activities (57,812) (69,089)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Notes Payable - New Retail
Concepts, Inc. 600,000 --
Repayments of Notes Payable - New Retail
Concepts, Inc. (600,000) --
Net Payments under Revolving Credit
Agreement -- (570,000)
Proceeds from private placements
net of expenses -- 2,009,319
Proceeds from exercise of warrants 37,501 --
Net Cash Provided By
Financing Activities 37,501 1,439,319
NET INCREASE IN CASH AND
CASH EQUIVALENTS 207,227 95,639
CASH AND CASH EQUIVALENTS,
beginning of period -- 114,153
CASH AND CASH EQUIVALENTS,
end of the period $207,227 $ 209,792
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $567,532 $ 813,525
Income Taxes $ 53,757 $ 49,310
Page 9
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
1. Continuing Operations
Business, Secondary Offering and Other Transactions
Candie's, Inc., the Registrant, together with its subsidiaries is sometimes
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 U.S. 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
Statements and the notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended January 31, 1995.
The Company designs, markets, imports and distributes a variety of
moderately-priced athletic, leisure and fashion footwear for women and girls
under the trademarks CANDIE'S, ASPEN and BONGO. The Company's product line
also includes a wide variety of workboots, hiking shoes and men's leisure
shoes designed, marketed and distributed by the Company's wholly-owned
subsidiary, Bright Star Footwear, Inc. ("Bright Star").
(i)Secondary Offering
The Company completed an offering of its common stock (the "Secondary
Offering") on February 23, 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.
Page 10
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
(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
stock; (ii) El Greco transferred the trademarks "CANDIE'S," "ACTION CLUB,"
"FULLMOON" and "SUGAR BABIES" (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 which the Company's
President is a principal stockholder.
(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 indebtness
(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
Page 11
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
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 during the fiscal years
ended January 31, 1992, 1993 and 1994.
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 October 31, 1995, the
Company had a working capital deficit of $246,430. The operating losses of
prior years 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. 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 and a 60% subsidiary. All material intercompany
accounts and transactions are eliminated.
Page 12
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
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.
Earnings Per Share
Earnings per common share is computed based on the modified treasury stock
method which considers the weighted average number of common stock and common
stock equivalents outstanding during each year, retroactively adjusted to
give effect to all stock splits. Common stock equivalents include stock
options and warrants reduced by the shares which could be purchased with the
assumed proceeds from such shares. Common stock equivalents that have an
antidilutive effect on earnings per share are not included in the
calculation.
Reclassifications
Certain amounts from the prior years' 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:
Page 13
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
October 31, January 31,
1995 1995
Furniture and equipment $ 807,874 $ 750,063
Transportation 20,750 44,443
828,624 794,506
Less accumulated depreciation
and amortization 690,331 651,546
Net property and equipment $ 138,293 $ 142,960
4. Factor Agreement
In April 1993, the Company entered into an accounts receivable factoring
agreement ("Factor Agreement"). The agreement provides the Company with the
ability to borrow funds from the factor, limited to 85% (increased from 80%
in August 1995) of eligible accounts receivable and up to 50% of eligible
finished goods inventory (to a maximum of $6 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. The Company's
President personally guarantees any and all borrowings with the factor.
Due to Factor is comprised as follows:
October 31, January 31,
1995 1995
Accounts Receivable - assigned $5,972,752 $3,478,771
Outstanding advances 6,383,548 4,640,806
Due to Factor $ 410,797 $1,162,035
5. Related Party Transactions
The Company entered into a Services Allocation Agreement with NRC, pursuant
to which the Company will provide NRC with financial, marketing, sales and
other business services for which NRC will be 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 agreed to issue up to 300,000 shares and
has issued 200,000 shares of its common stock to date to its former landlord.
During August 1994, the Company entered into a new lease agreement and
relocated its corporate headquarters to Purchase, NY.
Page 14
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
Rent expense was approximately $177,095 and $205,229 for the nine months
ended October 31, 1995 and 1994, respectively. As of October 31, 1995,
future net minimum lease payments under noncancellable operating lease
agreements are as follows:
1996 $ 58,000
1997 231,000
1998 255,000
1999 283,000
2000 289,000
Thereafter 48,000
$1,164,000
7. Long-Term Debt
On October 6, 1994, the Company consummated an agreement with its
Institutional Lender to extinguish its outstanding indebtedness of
approximately $3,378,000. As part of the extinguishment, the Company paid
$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 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.
Page 15
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
(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 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 on February 23, 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. On June
21, 1995, this suit was settled for (i) $226,000, payable in 36 equal
semimonthly installments over eighteen months, which was allocated equally to
the Company and NRC and (ii) NRC agreed to acquire 495,000 shares of NRC's
common stock held by the plaintiff for $105,000. Provision for the Company's
pro rata share of the settlement of $113,000 is included in the financial
statements. The Company and NRC are jointly and severally liable for the
Page 16
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
$226,000 settlement. If the Company is sold or merged, substantially
liquidated or disposed of or files bankruptcy, the entire amount due under
the settlement agreement becomes immediately due and payable. Further, if
any of the above conditions happen to NRC, one-half of the amount due becomes
immediately due and payable.
(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. As of October 31, 1995 all such tax liabilities have
been repaid.
(e) The Company has been advised by the Staff of the Securities and Exchange
Commission (the "Commission") that the Commission has authorized 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 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.
(f) As of February 1, 1995, the Company is operating under an exclusive
licensing arrangement which enables the Company to sell footwear in North
America bearing the BONGO trademark. 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 provides for the Company to
pay additional royalties, based on percentages of sales, exceeding minimum
amounts, as defined.
(g) On February 1, 1995, the Company entered into a financing agreement with
NRC, an affiliated entity. Pursuant to the financing agreement, the Company
borrowed $600,000 from NRC and issued promissory notes with interest payable
at the prime rate 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). As of October 31, 1995, the $600,000 promissory notes have been
repaid.
10. Settlement Agreements
As a result of settlements of litigations and certain other obligations, the
Company is obligated at October 31, 1995 to pay an aggregate total of
$303,522 of which $14,694 is included in other non-current liabilities.
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended October 31, 1995
Landed sales (sales of products which are acquired by the Company) of
branded footwear increased to $9,333,498 for the three months ended October
31, 1995 as compared with $4,826,909 for the three month period ended
October 31, 1994. The $4,506,589 (93%) increase was primarily due to
increased market acceptance of Candie's footwear products and the
introduction of footwear products bearing the BONGO trademark.
The gross profit on landed sales increased by $1,429,712 from $502,428 to
$1,932,142 for the three months ended October 31, 1995 over the three month
period ended October 31, 1994 as a result of increased sales of Candie's
footwear products. The gross profit percentage on landed sales increased
from 10.4% for the three months ended October 31, 1994 to 20.7% for the
quarter ended October 31, 1995. The factors which contributed to the
increase in gross profit included, among others, the Company's ability to
obtain from certain suppliers volume discounts on purchased merchandise, a
decrease in inventory markdowns due to wider brand acceptance, and tighter
internal controls which resulted in a reduction in the rate of customers'
chargebacks and deductions.
Commission and licensing income for the three months ended October 31, 1995
increased by $142,220 (12.6%) over the same period last year primarily
because of increased sales of footwear on a "first cost basis." When
products are sold on a first cost basis, the Company acts as agent for its
customers in supervising the design and production of products. In return,
the Company generally receives a commission based on a percentage of the
sales price.
Selling expenses as a percentage of sales decreased for the three months
ended October 31, 1995 as compared to the three months ended October 31,
1994.
General and Administrative expenses as a percentage of sales decreased for
the three months ended October 31, 1995 as compared to the same period in
1994.
Operating income increased from $11,833 for the three months ended October
31, 1994 to $1,020,329 for the three months ended October 31, 1995. The
$1,008,496 increase was due to a significant increase in sales coupled with
an increase in the Company's gross profit percentage on those sales.
Interest expense increased by $14,021 for the three months ended October 31,
1995 as compared to the same period last year. The increase was primarily
due to the Company's sales growth which required an increase in borrowings
under the Factor Agreement (see Note 4 of Notes to Condensed Consolidated
Financial Statements).
Page 18
As a result of the foregoing, the Company's net income before extraordinary
items for the three months ended October 31, 1995 increased to $705,642 from
a net loss of $494,355 for the corresponding period ended October 31, 1994.
Nine Months Ended October 31, 1995
Landed sales of branded footwear increased to $26,793,435 for the nine
months ended October 31, 1995 as compared with $14,059,938 for the nine
month period ended October 31, 1994. The $12,733,497 (91%) increase was
primarily due to increased market acceptance of Candie's footwear products.
The gross profit on landed sales increased by $3,247,074 from $1,677,453 to
$4,924,527 for the nine months ended October 31, 1995 over the nine month
period ended October 31, 1994 as a result of increased sales of Candie's
footwear products. The gross profit percentage on landed sales increased
from 11.9% for the nine months ended October 31, 1994 to 18.4% for the nine
months ended October 31, 1995. The factors which contributed to the
increase in gross profit included, among others, the Company's ability to
obtain from certain suppliers volume discounts on purchased merchandise, a
decrease in inventory markdowns due to wider brand acceptance, and tighter
internal controls which resulted in a reduction in the rate of customers'
chargebacks and deductions.
Selling expenses as a percentage of sales decreased for the nine months
ended October 31, 1995 as compared to the nine months ended October 31,
1994.
General and Administrative expenses as a percentage of sales decreased for
the nine months ended October 31, 1995 as compared to the nine months ended
Ocotber 31, 1994.
Operating income increased from a loss of $215,993 for the nine months ended
October 31, 1994 to income of $2,055,258 for the nine months ended October
31, 1995. The increase was primarily due to a 91% increase in landed sales
along with a corresponding 6.5% increase in the gross profit percentage on
those sales.
Interest expense increased by $93,235 for the nine months ended October 31,
1995 as compared to the same period last year. The increase was primarily
due to an increase in financing under the Factor Agreement (see Note 4 of
Notes to Consolidated Financial Statements).
As a result of the foregoing, the Company's net income before extraordinary
items for the nine months ended October 31, 1995 increased to $1,181,568
from a loss of $158,032 for the corresponding period ended October 31, 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.
Page 19
At October 31, 1995, the Company had a working capital deficiency of
$246,430 compared to a working capital deficiency of $1,541,894 at January
31, 1995. This increase in working capital primarily results from the
Company's net income for the nine month period ended October 31, 1995.
Accordingly, the ratio of current assets to current liabilities was .96 to
1.0 at October 31, 1995 compared to .73 to 1.0 at January 31, 1995.
The Company's cash flow from operating activities increased for the nine
month period ended October 31, 1995 compared to the same period of the prior
year. Net cash provided by operating activities totaled $227,538 for the
nine months ended October 31, 1995 compared to net cash used in operating
activities of $1,274,591 for the nine months ended October 31, 1994. The
increase in cash frow from operating activities for the 1995 period resulted
primarily from the Company's income before extraordinary item.
The Company had $207,227 in cash and cash equivalents at October 31, 1995
compared to $209,792 at October 31, 1994. The restricted cash of $100,000
held at October 31, 1994 was released in connection with the settlement of a
legal action against the Company.
Management continues to seek additional means of reducing and maintaining
costs while increasing revenues. Among other actions designed to increase
revenues, management is exploring ways to expand markets for existing
products while considering the ability to generate revenues from new
products or product lines. Management is also concentrating on ways to
increase the Company's liquidity. As part of the aforementioned strategies,
management has obtained from Congress Talcott, its factor, an increase in
its credit line from $7,500,000 to $10,000,000. Congress has also agreed to
lend up to 50% of eligible inventory of $6,000,000 (increased from
$5,000,000). The Company has also been able to negotiate 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. 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 on-going cost
containment efforts, plus the support of its trade vendors and institutional
lenders, will provide the Company with sufficient working capital for the
next twelve months. 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 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.
Page 20
PART II - Other Information
Item 1. Legal Proceedings
In December 1995 the United States District Court for the Southern
District of New York approved the settlement of an action instituted in July
1992 against the Company and its former directors by the Food and Allied
Service Trades Department, AFL-CIO, and on behalf of the class of all other
similarly situated stockholders. The settlement requires the Company to
make a $100,000 cash payment to the plaintiffs and to issue to the
plaintiffs that number of shares of its Common Stock (up to a maximum of
600,000 shares) which would allow the plaintiffs to realize an additional
$550,000 upon their sale over a two-year period. If the plaintiffs do not
realize $550,000 from the sale of such shares, the Company will be required
to pay to the plaintiffs the amount of the shortfall.
Items 2-5.
None.
Item 6.
(a) Exhibits
11 - Computation of earnings per common share.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K for the event dated July 31, 1995 was filed in August
1995 under Item 5 of Form 8-K in order to file certain unaudited balance
sheet information which was required by NASDAQ for continued inclusion of
the Company's securities in the NASDAQ system.
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: December 15, 1995 By: /s/ Neil Cole
NEIL COLE
President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
Page 21
EXHIBIT INDEX
Exhibit No. Description Page
11 Computation of Earnings per Share 23
(Three months ended October 31, 1995 and 1994)
Computation of Earnings per Share 24
(Nine months ended October 31, 1995 and 1994)
27 Financial Data Schedule 25
Page 22
Exhibit 11
Page 1
CANDIE'S, INC.
COMPUTATIONS OF EARNINGS PER SHARE
Three Months Ended
October 31, 1995 October 31, 1994
Income (Loss) before
extraordinary item $ 705,642 ($ 494,355)
Extraordinary item
Gain on Debt extinguishment - 2,702,175
Net Income 705,642 2,207,820
Earnings Per Share Income
from investment of excess
proceeds on exercise of
common stock equivalents 337,190 -
TOTAL EPS INCOME $1,042,832 $2,207,820
Weighted average number
of shares outstanding 14,452,746 6,660,846
Earnings (Loss) Per Share
Net Income (Loss) Before
Extraordinary item $0.07 ($0.07)
Extraordinary item-Gain on
extinguishment of debt, net of
income taxes of $.02 for 1994 - $0.40
NET INCOME PER SHARE $0.07 $0.33
Page 23
Exhibit 11
Page 2
CANDIE'S, INC.
COMPUTATIONS OF EARNINGS PER SHARE
Nine Months Ended
October 31, 1995 October 31, 1994
Income (Loss) before
extraordinary item $1,181,568 ($ 158,032)
Extraordinary item
Gain on Debt extinguishment - 2,702,175
Net Income 1,181,568 2,544,143
Earnings Per Share Income
from investment of excess
proceeds on exercise of
common stock equivalents (1) - -
TOTAL EPS INCOME $1,181,568 $2,544,143
Weighted average number
of shares outstanding 8,542,944 5,752,944
Earnings (Loss) Per Share
Net Income (Loss) Before
Extraordinary item $0.14 ($0.03)
Extraordinary item-Gain on
extinguishment of debt, net of
income taxes of $.02 for 1994 - $0.47
NET INCOME PER SHARE $0.14 $0.44
(1) The Modified Treasury Stock Method was not used since its results were
antidilutive. Accordingly, there was no additional income included in
earnings per share for investment of proceeds upon the exercise of
common stock equivalents.
Page 24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Candie's, Inc. at October 31,
1995 and is qualified in its entirety by reference to such Condensed Financial
Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> OCT-31-1995
<CASH> 207,227
<SECURITIES> 0
<RECEIVABLES> 918,000
<ALLOWANCES> 254,092
<INVENTORY> 3,485,826
<CURRENT-ASSETS> 5,504,959
<PP&E> 828,624
<DEPRECIATION> 690,331
<TOTAL-ASSETS> 11,389,606
<CURRENT-LIABILITIES> 5,751,389
<BONDS> 0
<COMMON> 8,742
0
0
<OTHER-SE> 5,602,224
<TOTAL-LIABILITY-AND-EQUITY> 11,389,606
<SALES> 26,793,435
<TOTAL-REVENUES> 30,193,327
<CGS> 21,868,908
<TOTAL-COSTS> 21,868,908
<OTHER-EXPENSES> 6,269,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 628,079
<INCOME-PRETAX> 1,314,179
<INCOME-TAX> 132,611
<INCOME-CONTINUING> 1,181,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,181,568
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
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