SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 3 TO 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 July 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 September 13, 1995 (excluding treasury shares): 8,265,995
Transitional small business disclosure format (check one):
YES X NO
Page 1
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
FOR THE PERIOD ENDED JULY 31, 1995
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 1995
and January 31, 1995 3-4
Condensed Consolidated Statements of Operations for the
Three Months Ended July 31, 1995 and 1994 5
Condensed Consolidated Statements of Operations for the
Six Months Ended July 31, 1995 and 1994 6
Condensed Consolidated Statement of Stockholders Equity
for the Six Months Ended July 31, 1995 7
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended July 31, 1995 and 1994 8-9
Notes to Condensed Consolidated Financial Statements 10-18
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-22
PART II. OTHER INFORMATION 23
SIGNATURES 24
Page 2
<PAGE>
PART I
Item 1.
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JULY 31, JANUARY 31,
1995 1995
----------- -----------
ASSETS RESTATED RESTATED
(Note 6) (Note 6)
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 397,686 $ --
RESTRICTED CASH 100,000 100,000
ACCOUNTS RECEIVABLE
net allowances of $200,092 and $45,000
at July 31, 1995 and January 31, 1995 3,724,206 583,911
INVENTORIES 3,541,893 3,269,158
PREPAID EXPENSES 930,866 151,195
OTHER CURRENT ASSETS 146,910 --
----------- -----------
TOTAL CURRENT ASSETS 8,841,561 4,104,264
PROPERTY AND EQUIPMENT
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (Note 3) 115,954 142,960
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 394,350 414,234
TRADEMARK 4,972,874 5,114,282
OTHER 468,963 514,274
----------- -----------
TOTAL OTHER ASSETS 5,836,187 6,042,790
----------- -----------
TOTAL ASSETS $14,793,702 $10,290,014
=========== ===========
Page 3
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JULY 31, JANUARY 31,
1995 1995
----------- -----------
RESTATED RESTATED
(Note 6) (Note 6)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 5,871,879 $ 1,820,598
PAYABLE FOR INVENTORY IN TRANSIT 864,017 1,105,845
NOTES PAYABLE - NEW RETAIL CONCEPTS,INC.
(NOTE 10) 600,000 --
DUE TO FACTOR (Note 4) 903,571 1,162,035
ACCRUED LITIGATION EXPENSE 100,000 100,000
ACCRUED EXPENSES AND TAXES 1,331,013 1,394,253
ACCRUED U.S. CUSTOMS DUTIES (Note 10) 70,000 63,427
----------- -----------
TOTAL CURRENT LIABILITIES 9,740,480 5,646,158
OTHER NONCURRENT LIABILITIES 130,972 206,213
ACCRUED U.S. CUSTOMS DUTIES (Note 10) 16,926 45,746
----------- -----------
TOTAL LIABILITIES 9,888,378 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 8,742,074 AT JULY 31, 1995
AND 8,709,465 AT JANUARY 31, 1995 8,742 8,709
ADDITIONAL PAID-IN CAPITAL (Note 6) 9,940,305 9,902,837
DEFICIT, since February 28, 1993,
(deficit eliminated $27,696,007) (5,043,723) (5,519,649)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,905,324 4,391,897
----------- -----------
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY $14,793,702 $10,290,014
=========== ===========
Page 4
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31,
(unaudited)
1995 1994
----------- -----------
LANDED SALES $12,156,062 $ 5,570,221
COMMISSION AND
LICENSING INCOME 1,682,468 1,454,995
----------- -----------
TOTAL REVENUES 13,838,530 7,025,216
COST OF LANDED SALES 10,226,117 4,915,111
----------- -----------
TOTAL GROSS PROFIT 3,612,413 2,110,105
----------- -----------
OPERATING EXPENSES:
SELLING EXPENSE 1,166,349 960,495
GENERAL & ADMINISTRATIVE EXPENSE 956,584 740,905
----------- -----------
TOTAL OPERATING EXPENSE 2,122,933 1,701,400
----------- -----------
OPERATING INCOME 1,489,480 408,705
OTHER INCOME AND (DEDUCTIONS):
(LOSS) GAIN ON SETTLEMENT OF
OBLIGATIONS (113,000) 756,919
INTEREST (211,456) (158,879)
----------- -----------
TOTAL OTHER INCOME AND
(DEDUCTIONS) (324,456) 598,040
----------- -----------
INCOME BEFORE TAXES 1,165,024 1,006,745
INCOME TAXES 59,379 8,761
----------- -----------
NET INCOME $ 1,105,645 $ 997,984
=========== ===========
EARNINGS PER SHARE -
PRIMARY AND FULLY DILUTED:
WEIGHTED AVERAGE
OUTSTANDING SHARES 9,456,112 5,747,277
=========== ===========
NET EARNINGS PER SHARE $ .12 $ .17
=========== ===========
Page 5
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31,
(unaudited)
1995 1994
----------- -----------
LANDED SALES $17,459,937 $ 9,233,029
COMMISSION AND
LICENSING INCOME 2,131,196 2,286,706
----------- -----------
TOTAL REVENUES 19,591,133 11,519,735
COST OF LANDED SALES 14,467,552 8,058,004
----------- -----------
TOTAL GROSS PROFIT 5,123,581 3,461,731
----------- -----------
OPERATING EXPENSES:
SELLING EXPENSE 2,329,552 2,106,080
GENERAL & ADMINISTRATIVE EXPENSE 1,759,100 1,583,476
----------- -----------
TOTAL OPERATING EXPENSE 4,088,652 3,689,556
----------- -----------
OPERATING INCOME 1,034,929 (227,825)
OTHER INCOME AND (DEDUCTIONS):
(LOSS) GAIN ON SETTLEMENT OF
OBLIGATIONS (113,000) 883,249
INTEREST (385,903) (306,689)
----------- -----------
TOTAL OTHER INCOME AND
(DEDUCTIONS) (498,903) 576,560
----------- -----------
INCOME BEFORE TAXES 536,026 348,735
INCOME TAXES 60,100 12,412
----------- -----------
NET INCOME $ 475,926 $ 336,323
=========== ===========
EARNINGS PER SHARE -
PRIMARY AND FULLY DILUTED:
WEIGHTED AVERAGE
OUTSTANDING SHARES 9,370,562 5,284,258
=========== ===========
NET EARNINGS PER SHARE $ 0.05 $ 0.06
=========== ===========
Page 6
<PAGE>
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 1995
(unaudited)
Restated
(Note 6)
<TABLE>
<CAPTION>
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance,
January 31, 1995,
as previously reported 8,709,465 $8,709 $9,162,837 $(4,779,649) $4,391,897
Capital Transaction 740,000 (740,000)
---------- ------- ---------- ----------- ----------
Balance,
January 31, 1995,
as restated 8,709,465 $8,709 $9,902,837 $(5,519,649) $4,391,897
Issuance of common
stock due to warrant
exercise. 32,609 33 37,468 37,501
Net income 475,926 475,926
Balance,
---------- ------- ---------- ----------- ----------
July 31, 1995 8,742,074 $8,742 $9,940,305 $(5,043,723) $4,905,324
========= ====== ========== ============ ==========
</TABLE>
Page 7
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31,
(unaudited)
1995 1994
----------- -------
CASH FLOWS FROM
OPERATING ACTIVITIES: RESTATED
(Note 6)
Net Income $ 475,926 $ 336,323
Items In Net Income
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 73,788 20,500
Depreciation and Amortization 209,481 246,688
(Gain) Loss on Settlement of
Obligations -- (983,249)
Increase (Decrease) In Cash
Flows From Changes In Operations:
Assets and Liabilities:
Accounts Receivable (3,214,083) (481,155)
Inventories (272,735) 173,516
Prepaid Expenses (779,671) 314,235
Other Assets (119,971) (109,008)
Refundable Income Taxes -- 219,876
Accounts Payable 4,051,280 1,127,394
Payable For Inventory In Transit (241,827) 448,013
Due to Factor (258,464) (1,311,844)
Accrued Royalty -- (101,944)
Accrued Expenses and Taxes (63,240) (189,315)
Accrued U.S. Customs Duties (22,247) (20,165)
Other Non-current Liabilities (75,241) --
------------ ----------
Net Cash Used In Operating Activities $ ( 237,004) $ (310,135)
------------ ----------
Page 8
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31,
(unaudited) (CONT'D.)
1995 1994
----------- -----------
CASH FLOWS FROM RESTATED
INVESTING ACTIVITIES: (Note 6)
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 --
Repayments on Borrowings -- (15,000)
Proceeds from private placements
net of expenses -- 318,119
Proceeds from exercise of warrants 37,501 --
----------- -----------
Net Cash Provided By
Financing Activities 637,501 303,119
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 397,686 (8,132)
CASH AND CASH EQUIVALENTS,
beginning of period -- 114,153
----------- -----------
CASH AND CASH EQUIVALENTS,
end of second quarter $ 397,686 $ 106,021
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 353,365 $ 439,909
=========== ===========
Income Taxes $ 41,421 $ 30,566
=========== ===========
Issuance of 1,050,740 shares
of common stock in connection
with settlement of obligation
to creditors:
Issuance of common stock $ -- $ 1,278,500
Increase in prepaid expenses -- (66,350)
Reduction of security deposit -- 74,531
Reduction of accounts payable -- (1,421,666)
Reduction of accrued royalty -- (382,031)
Reduction of inventory -- 139,460
Reduction of note payable -- (325,000)
Reduction of accrued expenses -- (280,693)
----------- -----------
Total $ -- $ (983,249)
=========== ===========
Page 9
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
1. Continuing Operations
Business, Secondary Offering and Other Transactions
Candie's, Inc. the Registrant together with its subsidiaries is sometimes
referred to hereinafter 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.
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
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 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
Page 11
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
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
discontinuance of certain 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 July 31, 1995, the Company had a
substantial working capital deficit. 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. 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
Page 12
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
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 Per Share
Net income per common share is computed on a basis of 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.
Reclassifications
Certain amounts from the January 31, 1995 financial statements have been
reclassified to conform to the current year's presentation.
Page 13
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
3. Property and Equipment
Major classes of property and equipment consist of the following:
July 31, January 31,
1995 1995
--------- ---------
Furniture and equipment $ 752,874 $ 750,063
Transportation 44,443 44,443
--------- ---------
797,317 794,506
Less accumulated depreciation
and amortization 681,363 651,546
--------- ---------
Net property and equipment $ 115,954 $ 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 $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.
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:
July 31, January 31,
1995 1995
---------- ----------
Accounts Receivable - assigned $6,783,647 $3,478,771
Outstanding advances 7,687,218 4,640,806
---------- ----------
Due to Factor $ 903,571 $1,162,035
========== ==========
5. Related Party Transactions
Page 14
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
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. Restatement
In September 1991, in connection with an Indemnification Agreement with the
Company's former president, former management and the Company recorded a capital
contribution and treasury stock acquisition approximating $1,627,000 in
recognition of the fair market value of 37,967 shares to reimburse the Company
for U.S. Customs duties assessments. During fiscal 1995 the Company discovered
that the shares were not received and therefore the prior accounting treatment
was incorrect. The restatement has no effect on total stockholders' equity,
results of operations or per share results previously recorded. The Company has
restated the fiscal year 1995 Statements of Operations and Stockholders' Equity
to give effect to certain property received by the Company's Institutional
Lender from the Company's former President in connection with a personal
guaranty and pledge of collateral, as a reduction of the extraordinary gain
recognized ($740,000, or $.12 per share) in connection with the Company's
restructuring and extinguishment of debt. Such amount was credited to additional
paid-in capital to recognize this transaction. See Condensed Consolidated
Statement of Stockholders' Equity for restated balances.
Additional Accumulated
Paid-In Capital Deficit
--------------- -----------
Balance at January 31, 1995 as
previously reported $9,162,837 ($4,779,649)
Capital contribution 740,000 (740,000)
---------- -----------
Balance at January 31, 1995 as
restated $9,902,837 ($5,519,649)
========== ===========
Additional Accumulated
Paid-In Capital Deficit
--------------- -----------
Balance at July 31, 1995 as
previously reported $9,200,305 ($4,303,723)
Capital contribution 740,000 (740,000)
---------- -----------
Balance at July 31, 1995 as
restated $9,940,305 ($5,043,723)
========== ===========
7. 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.
Rent expense was approximately $118,032 and $199,050 for the six months ended
July 31, 1995 and 1994, respectively. As of July 31, 1995, future net minimum
lease payments under noncancellable operating lease agreements are as follows:
1996 $ 97,000
1997 231,000
1998 255,000
1999 283,000
2000 289,000
Thereafter 48,000
----------
$1,203,000
==========
8. 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 9). The extinguishment
resulted in an extraordinary gain of approximately $1,962,175, net of income
taxes.
Page 15
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
9. 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 8). 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.
10. 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.
Page 16
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
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. 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
($113,000) is included in the financial statements. The Company and NRC are
jointly and severally liable for the $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. Of the remaining amounts outstanding at July 31, 1995, $209,000 will
be paid during the next twelve months and $62,400 will be paid thereafter.
(e) As of July 31, 1995, the Company is obligated under employment agreements
with four executives to provide aggregate minimum compensation of approximately
$596,500, $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 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.
(g) 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
Page 17
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
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.
(h) 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) to NRC in the principal amounts of $400,000 (due 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 $200,000 note has been repaid. 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.
11. Settlement Agreements
As a result of settlements of litigations and certain other obligations, the
Company is obligated at July 31, 1995 to pay an aggregate total of $329,700 of
which $72,800 is included in other non-current liabilities.
Page 18
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended July 31, 1995
Landed sales (sales of products which are acquired by the Company) of Candie's
branded footwear increased by $6,585,841 (118%) for the three months ended July
31, 1995 over the three month period ended July 31, 1994 primarily because of
increased market acceptance of Candie's and BONGO footwear products and the
introduction of BONGO footwear products. Landed sales generated through Ponca,
Ltd., one of the Company's wholly-owned subsidiaries, increased to $4,470,269
during the three months ended July 31, 1995 from $950,422 during the comparable
1994 period. Ponca commenced operations in the fiscal quarter ended July 31,
1994.
The gross profit on landed sales increased by $1,274,835 from $655,110 to
$1,929,945 for the three months ended July 31, 1995 over the three month period
ended July 31, 1994 as a result of increased sales of Candie's footwear
products. The gross profit percentage on landed sales increased from 11.8% for
the three months ended July 31, 1994 to 15.9% for the quarter ended July 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 July 31, 1995
increased by $227,473 (16%) 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 ranging from 6%-12%.
Selling expenses increased by $205,854 (21%) for the three months ended July 31,
1995 as compared to the three months ended July 31, 1994 primarily as a result
of the increase in sales volume of the Candie's footwear line.
General and Administrative expenses increased by $215,679 for the three months
ended July 31, 1995 as compared to the same period in 1994. Those costs
increased primarily due to increases in bonus and bad debt expenses.
Operating income increased from $408,705 for the three months ended July 31,
1994 to $1,489,480 for the three months ended July 31, 1995. The $1,080,775
increase was due to a significant increase in sales coupled with an increase in
the Company's gross profit percentage on those sales.
Other income decreased by $869,919 for the three months ended July 31, 1995
compared to the compatible period in 1994. The primary reasons for the decrease
in "other income" were: (i) At July 31, 1994 the Company completed various
settlements of obligations that created a gain of $756,919 for the three month
Page 19
<PAGE>
period and (ii) at July 31, 1995, the Company settled a lawsuit with a former
employee. This settlement required the Company to take a charge of $113,000.
Interest expense increased by $52,577 for the three months ended July 31, 1995
as compared to the same period last year. The increase was primarily due to two
factors. The Company's sales growth required an increase in borrowings under the
Factor Agreement (see Note 4 of Notes to Consolidated Financial Statements) and
an increase in the prime rate of between 1.5%-2.0% over the corresponding period
last year.
As a result of the foregoing, the Company's net income for the three months
ended July 31, 1995 increased to $1,105,645 from $997,984 for the corresponding
period ended July 31, 1994.
Six Months Ended July 31, 1995
Landed sales of Candie's branded footwear increased by 8,226,908 (89%) for the
six months ended July 31, 1995 over the six month period ended July 31, 1994
primarily because of increased market acceptance of Candie's and BONGO footwear
products. One of the Company's subsidiaries, Ponca, Ltd., accounted for
$3,641,631 of the increase as Ponca's landed sales increased to $4,592,053
during the six-months ended July 31, 1995 from $950,422 during the comparable
1994 period. Ponca commenced operations in the fiscal quarter ended July 31,
1994.
The gross profit on landed sales increased by $1,817,360 from $1,175,025 to
$2,992,385 for the six months ended July 31, 1995 over the six month period
ended July 31, 1994 as a result of increased sales of Candie's footwear
products. The gross profit percentage on landed sales increased from 12.7% for
the six months ended July 31, 1994 to 17.1% for the six months ended July 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 six months ended July 31, 1995 increased
by $155,510 (7%) 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 ranging from 6%-12%.
Selling expenses increased by $223,472 (11%) for the six months ended July 31,
1995 as compared to the six months ended July 31, 1994 primarily as a result of
the increase in sales volume of the Candie's footwear line.
General and Administrative expenses increased by $175,624 for the six months
ended July 31, 1995 as compared to the same period in 1994. Those costs
increased primarily due to increases in bonus and bad debt expenses.
Page 20
<PAGE>
Operating income increased from a loss of $227,825 for the six months ended July
31, 1994 to income of $1,034,929 for the six months ended July 31, 1995. The
increase was primarily due to an 89% increase in landed sales along with a
corresponding 4.4% increase in the gross profit percentage on those sales.
Interest expense increased by $79,214 for the six months ended July 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), and a corresponding increase of 1.5%-2.0% in
the prime rate for the period ending July 31, 1995 as compared to July 31, 1994.
As a result of the foregoing, the Company's net income for the six months ended
July 31, 1995 increased to $475,926 from $336,323 for the corresponding period
ended July 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.
At July 31, 1995, the Company had a working capital deficiency of $898,919
compared to a working capital deficiency of $1,541,894 at January 31, 1995. This
decrease in working capital deficiency primarily results from the Company's net
income for the six month period ended July 31, 1995. Accordingly, the ratio of
current assets to current liabilities was .91 to 1.0 at July 31, 1995 compared
to .73 to 1.0 at January 31, 1995.
The Company's cash flow from operating activities increased for the six month
period ended July 31, 1995 compared to the same period of the prior year. Net
cash used in operating activities totaled $237,004 for the six months ended July
31, 1995 compared to net cash used in operating activities of $310,135 for the
six months ended July 31, 1994. The decrease resulted primarily from the
Company's operating income for the 1995 period. Cash provided by financing
activities increased by $334,382 for the six months ended July 31, 1995 compared
to the six months ended July 31, 1994. The increase resulted primarily from
notes payable to a related company (see Note 9(h) of Notes to the Consolidated
Financial Statements).
The Company's cash position increased by $291,665 to $397,686 at July 31, 1995
compared to the six months ended July 31, 1994. This increase resulted from an
increase in net income for the period and an increase in notes payable to a
related company.
The Company currently intends to repay the approximately $400,000 balance due
New Retail Concepts, Inc. ("NRC") pursuant to the Company's financing
arrangements with NRC, when such amount becomes due on September 30, 1995. If
proceeds are not available for such repayment the Company will seek to obtain an
extension of the due date.
Page 21
<PAGE>
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.
The Company is also seeking ways to offset any decrease in revenues from
existing product lines, such as that experienced by Bright Star as a result of a
recent trend toward direct placement of shoes to overseas factories through
customers' subsidiaries which has resulted in a decline in commission revenue.
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 also agreed to lend up to $6,000,000 against eligible
inventory (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
containing 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 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.
Page 22
<PAGE>
CANDIE'S, INC.
PART II - Other Information
Item 1. Legal Proceedings
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 claimed 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
($113,000) is included in the Company's financial statements. The Company and
NRC are jointly and severally liable for the $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.
Items 2-5.
None.
Item 6.
Exhibits:
11. Computation of Earnings Per Share
27. Financial Data Schedule
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July 31, 1995.
However, 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.
Page 23
<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: September 3, 1996 By: \s\ NEIL COLE
-----------------------------
NEIL COLE
President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
Page 24
Exhibit 11
For the Three Months
Ended July 31,
----------------------------
1995 1994
---------- ----------
Net Income $1,105,645 $ 997,984
========== ==========
Weighted average shares outstanding 8,533,813 5,740,417
Common stock equivalents based on the
treasury stock method at
average market price 922,299 6,860
---------- ----------
Total shares outstanding 9,456,112 5,747,277
========== ==========
Net income per share primary and
fully diluted $ 0.12 $ 0.17
========== ==========
For the Six Months
Ended July 31,
----------------------------
1995 1994
---------- ----------
Net Income $ 475,926 $ 336,323
========== ==========
Weighted average shares outstanding 8,533,688 5,276,540
Common stock equivalents based on the
treasury stock method at
average market price 836,874 7,718
---------- ----------
Total shares outstanding 9,370,562 5,284,258
========== ==========
Net income per share primary and
fully diluted $ 0.05 $ 0.06
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-QSB AT
JULY 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-31-1995
<CASH> 497,686
<SECURITIES> 0
<RECEIVABLES> 3,924,298
<ALLOWANCES> 200,092
<INVENTORY> 3,541,893
<CURRENT-ASSETS> 8,841,561
<PP&E> 797,317
<DEPRECIATION> 681,363
<TOTAL-ASSETS> 14,793,702
<CURRENT-LIABILITIES> 9,740,480
<BONDS> 0
0
0
<COMMON> 8,742
<OTHER-SE> 4,896,582
<TOTAL-LIABILITY-AND-EQUITY> 14,793,702
<SALES> 17,459,937
<TOTAL-REVENUES> 19,591,133
<CGS> 14,467,552
<TOTAL-COSTS> 14,467,552
<OTHER-EXPENSES> 4,008,652
<LOSS-PROVISION> 113,000
<INTEREST-EXPENSE> 385,903
<INCOME-PRETAX> 536,026
<INCOME-TAX> 60,100
<INCOME-CONTINUING> 475,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 475,926
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
