SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1 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 October 31, 1994
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 identification No.)
incorporation)
2975 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices)
(914)694-8600
(Issuer's telephone number, including area code)
60 West 40th Street, New York, New York 10018
(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, 1994 (excluding treasury shares): 8,176,203
Transitional small business disclosure format (check one):
YES _______ NO [X]
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
FOR THE PERIOD ENDED OCTOBER 31, 1994
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at October 31, 1994 3-4
and January 31, 1994
Condensed Consolidated Statements of Operations for the 5-6
Three Months Ended October 31, 1994 and 1993
Condensed Consolidated Statements of Operations for the 7-8
Nine Months Ended October 31, 1994 and 1993
Condensed Consolidated Statement of Stockholders' Equity 9
(Deficiency) for the Nine Months Ended October 31, 1994
Condensed Consolidated Statements of Cash Flows for 10-11
the Nine Months Ended October 31, 1994 and 1993
Notes to Condensed Consolidated Financial Statements 12-21
ITEM 2.
Management's Discussion and Analysis of Financial 22-26
Condition and the Results of Operations
PART II. OTHER INFORMATION 27
SIGNATURES 28
Page 2
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
OCTOBER 31, JANUARY 31,
1994 1994
---------- ----------
Restated Restated
(Note 6) (Note 6)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 209,792 $ 114,153
ACCOUNTS RECEIVABLE
less allowances of $793,500
and $773,000 1,359,644 226,593
INVENTORY 3,518,472 3,572,733
PREPAID EXPENSES 328,581 273,832
REFUNDABLE TAXES -- 219,876
----------- -----------
TOTAL CURRENT ASSETS 5,416,489 4,407,187
----------- -----------
PROPERTY AND EQUIPMENT (Note 3)
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 167,668 210,514
----------- -----------
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 435,628 516,952
TRADEMARK 5,184,986 5,397,098
OTHER 527,701 512,929
----------- -----------
TOTAL OTHER ASSETS 6,148,315 6,426,979
----------- -----------
TOTAL ASSETS $11,732,472 $11,044,680
=========== ===========
Page 3
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
OCTOBER 31, JANUARY 31,
1994 1994
---------- ----------
Restated Restated
(Note 6) (Note 6)
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 2,292,327 $ 1,795,246
INVENTORY IN-TRANSIT PAYABLE 1,500,000 395,918
DUE TO FACTOR (Note 4) 366,620 1,782,413
DUE TO MAJOR LEAGUE FOOTWEAR -- 613,771
ACCRUED LITIGATION EXPENSE 515,000 555,000
ACCRUED EXPENSES AND TAXES 1,510,653 1,678,854
ACCRUED ROYALTY -- 532,031
ACCRUED U.S. CUSTOMS DUTIES 51,883 51,004
CURRENT MATURITIES OF LONG
TERM DEBT (Note 5) -- 183,750
ACCRUED PENSION LIABILITY 52,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 6,288,483 7,587,987
LONG-TERM DEBT, LESS CURRENT
MATURITIES (Note 5) -- 3,209,425
DUE TO EL GRECO, INC. -- 325,000
ACCRUED U.S. CUSTOMS DUTIES 67,208 100,449
ACCRUED PENSION LIABILITY -- 392,000
----------- -----------
TOTAL LIABILITIES 6,355,691 11,614,861
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
PREFERRED STOCK, $.01 PAR VALUE - SHARES
AUTHORIZED 5,000,000; 10,286 ISSUED
AND OUTSTANDING 103 --
COMMON STOCK, $.001 PAR VALUE - SHARES
AUTHORIZED 10,000,000; ISSUED 7,411,481
AT OCTOBER 31, 1994 AND 5,022,735 AT
JANUARY 31, 1994 7,412 5,023
ADDITIONAL PAID-IN CAPITAL 10,183,064 6,042,737
ACCUMULATED DEFICIT (3,742,765) (5,546,908)
TREASURY STOCK, AT COST
216,666 SHARES AT OCTOBER 31, 1994 AND
JANUARY 31, 1994 (NOTE 6) (1,071,033) (1,071,033)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 5,376,781 (570,181)
----------- -----------
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFICIENCY) $11,732,472 $11,044,680
============ ===========
Page 4
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS HREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
------------ ------------
Restated
(Note 6)
LANDED SALES $ 4,826,909 3,318,753
COMMISSION AND
LICENSING INCOME 1,126,476 1,705,183
-------------- ----------
TOTAL REVENUES 5,953,385 5,023,936
COST OF LANDED SALES 4,324,481 2,788,060
-------------- ----------
TOTAL GROSS PROFIT 1,628,904 2,235,876
-------------- ----------
OPERATING EXPENSES:
SELLING EXPENSE 1,159,058 1,009,502
GEN. & ADMIN. EXP. 798,013 682,723
REVERSAL OF ACCRUAL NO
LONGER REQUIRED -
PENSION PLAN (NOTE 11) (340,000) --
-------------- ----------
TOTAL OPERATING EXPENSES 1,617,071 1,692,225
-------------- ----------
OPERATING INCOME 11,833 543,651
OTHER INCOME (EXPENSE):
LOSS ON SETTLEMENT OF
OBLIGATIONS (Note 9) (155,000) --
INTEREST EXPENSE (228,155) (131,102)
OTHER EXPENSE (131,858) --
-------------- ----------
TOTAL OTHER EXPENSES (515,013) (131,102)
-------------- -----------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (503,180) 412,549
PROVISION (RECOVERY)
OF INCOME TAXES ( 8,825) 1,452
-------------- ----------
NET LOSS INCOME BEFORE
EXTRAORDINARY ITEM (494,355) 411,097
EXTRAORDINARY ITEM - GAIN
ON EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES OF
$121,000 (NOTE 9) 1,962,175 --
------------- ----------
NET INCOME $ 1,467,820 $ 411,097
============= ===========
Page 5
<PAGE>
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
------------ -------------
Restated
(Note 6)
EARNINGS (LOSS) PER SHARE:
NET (LOSS) INCOME BEFORE
EXTRAORDINARY ITEM $ (.07) $ .09
EXTRAORDINARY ITEM - GAIN ON
EXTINGUISHMENT OF DEBT, NET
OF INCOME TAXES OF $.02 .29 --
------------- ------------
NET INCOME $ .22 $ .09
============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING $ 6,660,846 $ 4,823,344
============= ============
Page 6
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
----------- -----------
Restated
(Note 6)
LANDED SALES $ 14,059,938 $ 8,163,760
COMMISSION AND
LICENSING INCOME 3,413,182 2,872,095
------------- ------------
TOTAL REVENUES 17,473,120 11,035,855
COST OF LANDED SALES 12,382,485 6,871,235
------------- ------------
TOTAL GROSS PROFIT 5,090,635 4,164,620
------------- ------------
OPERATING EXPENSES:
SELLING EXPENSE 3,265,138 3,909,020
GEN. & ADMIN. EXP. 2,381,490 3,074,073
REVERSAL OF ACCRUAL NO
LONGER REQUIRED - PENSION
PLAN (NOTE 11) (340,000) --
------------- ------------
TOTAL OPERATING EXPENSES 5,306,628 6,983,093
------------- ------------
OPERATING LOSS (215,993) (2,818,473)
OTHER INCOME (EXPENSE):
GAINS ON SETTLEMENT OF
OBLIGATIONS (NOTE 9) 728,249 --
INTEREST EXPENSE (534,844) (329,712)
OTHER EXPENSE (131,858) --
------------- ------------
TOTAL OTHER INCOME (EXPENSE) 61,547 (329,712)
------------- ------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (154,446) (3,148,185)
PROVISION (RECOVERY) OF INCOME
TAXES 3,586 (5,993)
-------- ------------
NET LOSS BEFORE EXTRAORDINARY
ITEM (158,032) (3,142,192)
EXTRAORDINARY ITEM - GAIN ON
EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES OF
$121,000 (NOTE 9) 1,962,175 --
------------- ------------
Page 7
<PAGE>
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
----------- -----------
Restated
(Note 6)
NET INCOME (LOSS) 1,804,143 (3,142,192)
============= ===========
EARNINGS (LOSS) PER SHARE:
NET LOSS BEFORE EXTRAORDINARY
ITEM $(0.03) $(0.69)
EXTRAORDINARY ITEM - GAIN ON
EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES OF $.02 $.34 --
------------- ------------
NET INCOME (LOSS) $.31 $(0.69)
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING $ 5,752,943 $ 4,570,986
============= =============
Page 8
<PAGE>
<TABLE>
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1994
(unaudited)
Restated (Note 6)
<CAPTION>
PREFERRED
COMMON STOCK STOCK ADDITIONAL TREASURY STOCK
------------------ -------------- PAID-IN ACCUMULATED -------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------ ------ ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31,
1994, AS PREVIOUSLY
REPORTED 5,022,735 $ 5,023 $ 7,670,081 $(5,546,908) (254,633) $(2,698,377) $ (570,181)
CORRECTION OF
PREVIOUSLY RECORDED
TREASURY STOCK
TRANSACTION PURSUANT
TO AN INDEMNIFICA-
TION AGREEMENT (1,627,344) 37,967 1,627,344
--------- ---------- ------ ----- ----------- ---------- -------- ----------- ----------
RESTATED BALANCE,
JANUARY 31, 1994 5,022,735 5,023 6,042,737 (5,546,908) (216,666) (1,071,033) (570,181)
ISSUANCE OF 810,000
SHARES OF COMMON
STOCK IN CONJUNCTION
WITH SETTLEMENTS OF
OBLIGATIONS 810,000 810 952,690 953,500
EL GRECO DEBT TO
EQUITY CONVERSION 240,740 241 324,759 325,000
ISSUANCE OF SHARES
OF COMMON STOCK IN
CONJUNCTION WITH
PRIVATE PLACEMENTS
IN MAY 1994, NET OF
$13,381 IN FEES 281,481 281 317,838 318,119
ISSUANCE OF COMMON
AND PREFERRED STOCK
IN CONJUNCTION WITH
PRIVATE PLACEMENTS
IN OCTOBER 1994 NET
OF $232,287 IN FEES 956,525 957 10,286 $ 103 1,690,140 1,691,200
CAPITAL CONTRIBUTION 740,000 740,000
FIELDCREST ESCROW
SHARES - COMMON 100,000 $ 100 114,900 115,000
NET INCOME FOR THE
NINE MONTHS ENDED
OCTOBER 31, 1994 1,804,143 1,804,143
--------- ---------- ------ ----- ----------- ---------- -------- ----------- ----------
BALANCE, OCTOBER 31,
1994, AS RESTATED 7,411,481 $ 7,412 10,286 $ 103 $10,183,064 $3,742,765 (216,666) $(1,071,033) $5,376,781
========= ========== ====== ===== =========== ========== ======== =========== ==========
</TABLE>
9
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
----------- -----------
Restated
(Note 6)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ 1,804,143 $(3,142,192)
Items In Net Income (Loss)
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 20,500 5,000
Depreciation and Amort. 372,174 471,807
Deferred Offering Costs -- 972,892
Provision For Pension Costs (340,000) (325)
(Gain) Loss on Settlement
of Obligations (728,249) 51,214
Loss on Disposal of
Fixed Assets 60,755 26,133
Extraordinary Gain on
Extinguishment of Debt (2,083,175)
Increase (Decrease) In Cash
Flows From Changes In
Assets and Liabilities (380,739) (3,908,873)
------------ -----------
Net Cash Used In
Operating Activities (1,274,591) (5,524,344)
----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital Expenditure (69,089) (97,868)
Payment in connection
with CANDIE'S Trademark -- (195,000)
----------- -----------
Net Cash Used In
Investing Activities (69,089) (292,868)
----------- -----------
Page 10
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (CONT'D.)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net payments under revolving credit
agreement (570,000) (1,595,065)
Proceeds from secondary public offering,
net of related exp. of $1,577,298 -- 5,797,702
Proceeds from private placements
net of expenses 2,009,319 1,885,206
Additional expenses related
to secondary public offering -- (462,800)
------------- ------------
Net Cash Provided By
Financing Activities 1,439,319 5,625,043
------------- ------------
NET INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS 95,639 (192,169)
------------- --------------
CASH AND CASH EQUIVALENTS,
beginning of period 114,153 286,577
------------- --------------
CASH AND CASH EQUIVALENTS,
end of period $ 209,792 $ 94,408
============= =============
Page 11
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (Cont'd.)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
-------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 813,525 $ 324,064
============== ==============
Income Taxes $ 49,310 $ 3,856
============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Issuance of 900,000
shares of common stock
in connection with
acquisition of CANDIE'S
trademark -- 1,080,000
============== ==============
Issuance of note payable
in connection with
acquisition of CANDIE'S
trademark -- 325,000
============== ==============
Issuance of 777,777
shares of common stock
and write-off of deferred
professional fees and
accrued interest in connection
with conversion of debenture -- 2,490,261
============== ==============
Issuance of 57,609
shares of common stock
in connection with
acquisition of under-
writer's IPO Warrants -- 58
============== ==============
Issuance of 32,500 shares
of common stock in lieu
of compensation to two
officers -- 130,000
============== ==============
Issuance of 65,000 shares
of common stock in con-
nection with settlement
of accrued royalties
owed to Chaus -- 306,000
============== ==============
Page 12
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (Cont'd.)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER, 31, OCTOBER 31,
1994 1993
-------------- -------------
Issuance of 50,000 shares
of common stock in connection
with settlement of legal fees
relating to the offering -- 50
=============== ==============
Forgiveness of debt by
the Company's Insti-
tutional Lender -- 5,940,019
=============== ==============
Acquisition of Treasury stock
through capital contribution by the
Company's former debenture holder
of 127,777 shares of common stock -- 415,033
=============== ==============
Quasi-Reorganization
resulting in changes
to the following asset and
liability accounts:
CANDIE'S trademark -- 2,249,013
Non-competition
agreements -- (1,717,927)
Investment in Sole
Associates -- (737,724)
Other Assets -- (184,433)
Accrued Pension
Liability -- 391,071
---------------- --------------
Total -- 0
================ ==============
Page 13
<PAGE>
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1994 1993
----------- -----------
Issuance of 1,050,740 shares
of common stock in connection
with settlements of obligations
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) --
=========== =============
Capital contribution $ 740,000 --
=========== =============
Issuance of 100,000
shares in escrow in connection
with indemnifiable loss of
former landlord $ 115,000 --
=========== =============
Page 14
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Candie's, Inc. the Registrant together with its subsidiary is referred to
herein as Candie's or the "Company."
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which are in the opinion of management, necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included under generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures in
such financial statements are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the Company's Financial Statement and the notes thereto
included in the Company's Annual Form 10-K for the fiscal year ended January 31,
1994.
(a) Business
Candie's, Inc. and its subsidiaries (the "Company") design, market, import and
distribute a variety of moderately-priced athletic, leisure and fashion footwear
for women and girls under the trademark CANDIE'S. 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"). The Company's 60% owned subsidiary,
Intercontinental Trading Group ("ITG") is inactive. The Company is engaged in a
joint venture arrangement for the development of a specialized footwear sole
(the "Joint Venture") with Urethane Technologies, Inc. ("UTI").
(i) Secondary Offering
The Company completed an offering of its common stock (the "Secondary Offering")
on March 3, 1993. Upon the effectiveness of the Secondary Offering, the
Company's stockholders approved a change in the company's name from Millfeld
Trading Co., Inc., to Candie's, Inc., a 1 for 4.5 reverse stock split of its
common stock for which retroactive effect has been given in the financial
statements, and a quasi-reorganization.
The following transactions occurred contemporaneously upon effectiveness or on
the 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
Page 15
<PAGE>
of his 777,777 post-split shares of common stock to the Company and cancelled a
warrant to purchase additional shares of common stock previously issued to him
in connection with the Debenture.
(iii) The El Greco Transactions
Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an
affiliated company, consummated the following transactions (the "El Greco
Transactions"): (i) El Greco received 900,000 shares of the Company's common
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. Upon the
closing of the El Greco Transactions, the Company ceased to be a licensee and
acquired actual ownership of the Candie's trademark and therefore no longer
makes royalty payments.
In May 1994, the Company entered into an agreement with New Retail Concepts,
Inc. ("NRC") (the former parent company of El Greco, which was merged into NRC
in 1993) pursuant to which the Company agreed to issue 240,740 shares of its
common stock to NRC in full payment of the El Greco Note.
(iv) 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 a reorganization
by legal proceedings. The Company's assets, liabilities and capital accounts
were adjusted to eliminate the stockholders' deficiency. On completion of the
readjustments, the Company's accounts and financial statements were
substantially similar to those of a new company commencing business. The Company
believes the quasi-reorganization was appropriate because on completion of the
Debenture Conversion and the Debt Restructuring and installation of a new
management team, the Company had substantially reduced its outstanding
indebtedness, which to a great extent was incurred in connection with the
Discontinued Footwear Products had formulated revised operating plans and as a
result thereof would be able to devote its resources to its continuing
operations and development of the Trademarks.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiary, Bright Star, from June 1, 1990, the effective date
Page 16
<PAGE>
of the acquisition, and 60% owned subsidiary ITG from February 1, 1988. All
material intercompany accounts and transactions are eliminated.
(c) 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.
(d) 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.
(e) Candie's Trademark/License
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.
(f) Investment in Joint Venture
The Company's investment in the Joint Venture has been accounted for under the
equity method of accounting. Management believes that the Company's recovery of
its investment, if any, will be realized over an indeterminate future period;
therefore, the investment has been fully reserved.
(g) 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.
Licensing income is recognized over the term of the license agreements.
(h) Taxes on Income
The Company has adopted the liability method of accounting for income taxes
under Financial Accounting Statement No. 109 "Accounting for Income Taxes"
("FASB 109"). The adoption of FASB 109 did not have a material effect on the
financial statements.
(i) Net Income (Loss) Per Share
Net income (loss) per common share is computed on a basis of the weighted
average number of common shares outstanding during each year, retroactively
adjusted to give effect to all stock splits. All common stock equivalents have
been used in the calculation.
Page 17
<PAGE>
(j) Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.
NOTE 2 - 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 incurring significant losses.
Although on February 23, 1993 the Company successfully completed the Secondary
Offering and Debt Restructuring which improved its financial condition, sales of
the Company's products have been significantly below management's expectations.
At October 31, 1994, the Company had a substantial working capital deficit. The
unexpectedly high operating losses for the year ended January 31, 1994 and the
operating loss for the nine months ended October 31, 1994 resulted in an
accelerated use of funds provided by the public offering and adversely affected
the Company's liquidity. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. Subsequent to
January 31, 1994, the Company raised additional net equity capital in the amount
of approximately $2,009,000, settled various obligations through the issuance of
its common stock which resulted in the reduction of liabilities in the amount of
$5,148,105 for the nine months ended October 31, 1994, in addition to continuing
a cost containment program and attempting to enhance its gross margins while
achieving commensurate sales level increases.
However, the continuation of the Company is dependent upon the continued support
of the Company's trade vendors, and institutional lenders, obtaining additional
equity and ultimately 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.
Page 18
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
October 31, January 31,
1994 1994
---------- ----------
Furniture, fixtures and equipment $ 752,111 $ 721,113
Transportation equipment 44,443 20,750
Leasehold improvements -- 53,905
---------- ----------
796,554 795,768
Less accumulated depreciation
and amortization 628,886 585,254
---------- ----------
Net property and equipment $ 167,668 $ 210,514
========== ==========
NOTE 4 - DUE TO/FROM FACTOR
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement. This agreement provides the Company with the ability to borrow funds
from the factor, limited to 80% of eligible accounts receivable and 50% of
eligible finished goods inventory (to a maximum of $5 million in inventory) in
which the factor has a security interest. The agreement also provides for the
opening of documentary letters of credit (up to a maximum of $2.5 million) to
suppliers, on behalf of the Company. The factor requires a deposit equal to 43%
of the amount of the letter of credit to be opened. Borrowings bear interest at
the rate of one and one half percent (1 1/2%) over the existing prime rate
established by the Philadelphia National Bank.
Additionally, the Company is able to borrow $300,000 above its eligible accounts
receivable and inventory formulas. This additional borrowing capacity is
personally guaranteed by the Company's President. At October 31, 1994, the
Company had $1,966,871 of outstanding letters of credit.
Due to factor at October 31, 1994 is comprised as follows:
Accounts Receivable - assigned $3,098,237
Outstanding factor advances 3,464,857
----------
Due to Factor $ 366,620
==========
NOTE 5 - LONG-TERM DEBT EXTINGUISHMENT
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 (approximately $370,000) from the sale of 322,222 shares
of the Company's previously issued common stock and certain real property,
subject to an existing mortgage of approximately $260,000, from the Company's
former President, both previously pledged as collateral. The Company has been
informed by the Institutional Lender that the fair value of the real property
Page 19
<PAGE>
is based on a contract of sale to a third party for $630,000. The total fair
value of this collateral ($740,000) has been treated as a reduction of the
extraordinary gain on the extinguishment and a corresponding capital
contribution. The principal and interest payments were made from funds raised
through private placements of the Company's stock completed in October 1994. The
extinguishment resulted in an extraordinary gain of approximately $1,962,000,
net of income taxes. See Notes 8 and 10(b).
NOTE 6 - RESTATEMENT - TREASURY STOCK TRANSACTION
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.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has 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.
NOTE 8 - LEASES
In connection with the sublease of its former headquarters, the Company entered
into an agreement in April, 1994 with its former sublandlord to terminate the
sublease agreement and to issue 200,000 shares of its common stock (the
"Shares") to the sublandlord and to deposit into escrow, with an escrow agent,
an additional 100,000 shares of common stock (the "Escrow Shares").
The termination agreement provided that the Company would vacate and surrender
its former premises no later than June 30, 1994. The Company continued to occupy
such premises until September 16, 1994 and during August 1994, the Company
entered into a new lease agreement for the relocation of its corporate
headquarters to Purchase, NY, with such lease commencing as of October 1, 1994.
The Company believes that any rent due for the period from June 30, 1994 until
September 16, 1994 will be covered by the Company's indemnification to its
sublandlord as described below.
The Company has also agreed to indemnify the sublandlord for any loss, as
defined, suffered by the sublandlord from the period July 1994 through April 27,
1997. Such loss shall be determined and paid solely as follows:
Page 20
<PAGE>
(i) The amount of indemnifiable loss determined above shall be paid as follows:
(a) the Shares shall be valued as of July 1, 1994, as defined, and (b) to the
extent that the value of the Shares (as so computed) exceeds $270,000, then the
amount of such excess shall be applied against the amount of indemnifiable loss.
(ii) After full amount of such excess, if any, has been applied to the
indemnifiable loss, the Company's liability for indemnifiable loss shall be
limited to 50% of any shortfall in the amount of indemnifiable loss on a monthly
basis (a "Loss Shortfall"), which liability shall be satisfied solely through
releases from escrow of a certain amount of Escrow Shares, as defined. The
maximum number of shares of common stock which the sublandlord is entitled to is
a total of 300,000 shares of common stock. The amount of additional rent
expense, if any, is not presently determinable.
The Shares and the Escrow Shares, if any, when issued, will be "restricted
securities" (as such term is defined in Rule 144 under the Securities Act of
1933) and may not be sold or otherwise disposed of unless the same have been
registered under such Act or an exemption from registration is available. The
Company has granted the sublandlord certain registration rights with respect to
the Shares.
NOTE 9 - CERTAIN TRANSACTIONS AND GAINS AND LOSSES ON SETTLEMENTS WITH
CREDITORS
(a) Offering of Shares
In May 1994, the Company issued 281,481 shares of its common stock and received
aggregate net proceeds of approximately $320,000.
In October 1994, the Company issued 956,525 shares of its common stock and
10,286 shares of its 8% Series A Convertible Preferred Stock for aggregate net
proceeds of approximately $1,691,000. The Company used a portion of those funds
to repay principal and accrued interest on its institutional indebtedness as
discussed in Note 5.
(b) Conversion of Debt
In May 1994, the Company entered into an agreement with NRC pursuant to which
the Company agreed to issue 240,740 shares of its common stock, at $1.35 per
share, to NRC in full payment of the El Greco Note.
(c) Settlement with Overseas Agent
In May 1994, the Company agreed to issue 250,000 shares of common stock, at
$1.00 per share, in satisfaction of an outstanding payable of $759,888. The
Company realized a net gain of $509,888 from this transaction during the second
quarter of the fiscal year ending January 31, 1995.
Page 21
<PAGE>
(d) Settlement with Major League Footwear
In May 1994, in connection with a settlement with Major League Footwear, Inc.
("MLF") a company under common management, the Company agreed to issue 110,000
shares of common stock to be registered, at $1.35 per share, and 150,000 shares
of common stock, at $1.00 per share, in satisfaction of an outstanding liability
to MLF in the amount of $398,500 at April 30, 1994. The Company realized a net
gain of $100,000 from this settlement during the second quarter of the fiscal
year ending January 31, 1995. This transaction relates to inventory received by
the Company in the fiscal year ended January 31, 1994.
(e) Settlement of Litigation with Starter Corporation
In July 1994, in connection with a settlement with Starter Corporation
("Starter") regarding $532,031 in royalties due Starter under a former license
agreement, the Company agreed to issue 100,000 shares of common stock to be
registered, at $1.35 per share, and pay $150,000 over a fifteen month period
beginning in July 1994. The Company realized a net gain of $247,031 from this
settlement during the second quarter (see Note 10a).
(f) Settlement of Litigation with American Sporting Goods
In July 1994, in connection with a settlement with American Sporting Goods
("ASG"), the Company's subsidiary, Bright Star Footwear, has agreed to pay ASG
$100,000 over a ten month period commencing in July 1994. Such amount has been
recorded as a net loss during the second quarter (see Note 10e).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) On August 31, 1989, the Company entered into a three-year distribution
agreement with Starter, under which the Company was granted the right to
distribute footwear bearing the colors and logos of certain collegiate and
professional sports teams in accordance with licenses held by Starter. In
December 1991, the Company discontinued all sales of such footwear products.
Royalties to Starter were $-0-, $110,000, and $1,351,000 on sales of $-0-,
$1,017,000, and $12,700,000 for the years ended January 31, 1994, 1993 and 1992,
respectively. In March 1992, the Company was advised by Starter that it had
terminated its license agreement with the Company on March 15, 1992 and in May
1992, Starter instituted a legal action against the Company for $515,000 of
unpaid royalties. This action was settled in July 1994, whereby the company has
agreed to issue Starter 100,000 shares of the Company's common stock and pay
Starter $150,000 over a fifteen month period commencing in July 1994. Settlement
of this action resulted in a net gain of $247,031 during the nine months ended
October 31, 1994 (see Note 9e).
(b) 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,
Page 22
<PAGE>
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.
(c) In July 1992, an action was instituted 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 plaintiff
alleges that the Company made false representations or failed to disclose
material facts in certain of its documents filed with the Securities and
Exchange Commission regarding alleged underpayment to U.S. Customs. In
connection with this action, the plaintiff seeks to have this case certified as
a class action on behalf of all stockholders and seeks unspecified damages. The
Company and certain individual defendants denied any knowledge of such alleged
underpayment to U.S. Customs and are vigorously defending against all such
claims. The Company and certain individual defendants moved to dismiss the
complaint in September 1992 for failure to state a claim. This motion was
consolidated with the motion to dismiss the action against the Company and the
individual defendants; however, the court allowed plaintiffs the right to
replead their claims (which they did on February 1, 1993), subject to the
defendants' right to renew its motion to dismiss the amended pleading. The
Company has moved to dismiss the amended complaint, however, such motion was
denied. The Company has denied the plaintiffs' allegation of wrongdoing and
asserted cross claims against the Company's former owner. The Company is
currently negotiating a settlement of this action.
(d) In June 1992, an action was instituted against the Company and its former
president, by Pentland and its parent company, alleging, among other things,
violations of section 10(b) of the Securities Exchange Act of 1934, common law
fraud, negligent misrepresentation and breach of contract, arising out of
Pentland's acquisition of 19,900 shares of the Company's common stock in June
1991. The complaint alleges that the Company's former president, and,
consequently, the Company, were aware of, but failed to disclose at the time
Pentland acquired its shares, certain alleged underpayment to U.S. Customs.
Pentland sough compensatory damages of $865,000. The Company denied any
knowledge of underpayment at the time of Pentland's acquisition of shares and
moved to dismiss the complaint in August 1992, for failure to state a claim. In
December 1992, the court granted the Company's motion and dismissed the
complaint; the court allowed plaintiffs the right to replead their claims (which
they did on February 1, 1993), subject to the Company's right to renew its
motion to dismiss the amended pleading. The Company has moved to dismiss the
amended complaint, however, such motion was denied. The Company has denied the
plaintiff's allegation of wrongdoing, and asserted cross claims against the
Company's former president.
(e) In March 1994, an action was instituted by ASG in the United States District
Court for the Southern District of California against Bright Star concerning
Bright Star's activities as a buying agent in connection with suppliers outside
the United States who were allegedly marking up the factory price of goods
Page 23
<PAGE>
ordered by Bright Star for the benefit of ASG. ASG was seeking to recover
compensatory damages of approximately $531,000 and an unspecified amount of
punitive damages. In July 1994, Bright Star and ASG settled this action whereby
Bright Star has agreed to pay ASG $100,000 over a ten month period commencing in
July 1994. This amount has been recorded as a net loss during the three months
ended July 31, 1994 (see Note 9f).
In the event that the Company is not successful in defense of the actions set
forth above in (b), (c), and (d) or any settlement reached requires a
substantial monetary judgment in excess of $555,000 provided for in the
accompanying financial statements, the Company's financial condition could be
adversely affected thereby.
(f) As of October 31, 1994, the Company is obligated under an employment
agreement with an executive and a termination agreement with a former executive
to provide aggregate minimum compensation of $50,000 remaining during the fiscal
year ended January 31, 1995, $200,000 during the fiscal year ended January 31,
1996 and $16,667 during the fiscal year ended January 31, 1997.
NOTE 11 - PENSION PLAN
The Company has decided to terminate its defined benefit pension plan as of
February 10, 1995. Calculations by its actuary have determined that the
Company's liability, based upon current funding status and interest rates, will
be approximately $52,000. As a result, the Company reduced its accrued liability
and pension expense accounts by $340,000 as of October 31, 1994.
NOTE 12 - SUBSEQUENT EVENTS
The Company held a Special Meeting of Stockholders on November 29, 1994. At this
meeting, the stockholders approved the proposal to amend the Company's
Certificate of Incorporation to increase the authorized common stock from
10,000,000 to 30,000,000 shares.
Concurrently with the amendment, the holders of the Company's outstanding 8%
Series A Convertible Preferred Stock (10,286 shares) converted such shares into
894,431 shares of common stock.
During November 1994, NRC purchased shares of the Company's common stock for
$100,000. The proceeds of this sale will be used for working capital purposes.
Page 24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended October 31, 1994
Landed sales increased by $1,508,156 (45%) for the three months ended October
31, 1994 over the three month period ended October 31, 1993 primarily because of
increased market acceptance of CANDIE'S branded footwear products. Total gross
profit on landed sales decreased by $28,265 (27%) for the three months ended
October 31, 1994 over the three month period ended October 31, 1993 as a result
of increased returns and allowances of CANDIE'S branded footwear products. The
gross profit percentage on landed sales decreased from 16.0% for the three
months ended October 31, 1993 to 10.4% for the quarter ended October 31, 1994
primarily due to closeout sales of inventory during the three month period ended
October 31, 1994 and additional markdowns on inventory.
Commission and licensing income for the three months ended October 31, 1994
decreased to $1,126,476 from $1,705,183 a decrease of $578,707 (34%) over the
same period last year, primarily because of decreased orders on a commission
basis of Bright Star footwear in the period. Commission income results from
arranging for the production and quality control of products.
Selling expenses increased by $149,556 (15%) for the three months ended October
31, 1994 as compared to the three months ended October 31, 1993, primarily due
to an increase in sales commissions and shipping expenses which directly relate
to the increase in landed sales.
General and Administrative expenses increased by $115,290 (17%) for the three
months ended October 31, 1994 as compared to the same period last year,
primarily due to increases in bad debts and financing fees. Both factors are
directly related to the Company's increase in landed sales for the three month
period.
The Company reduced pension expense for the quarter ended October 31, 1994 by
$340,000, in accordance with the determination to discontinue the defined
benefit pension plan.
Interest expense increased by $97,053 (74%) for the three months ended October
31, 1994 as compared to the same period last year. The increase was primarily
due to increased advances that the Company received under its Factor Agreement
and increases in the prime lending rate.
During the three months ended October 31, 1994, the Company recorded a net
extraordinary gain of approximately $1,962,175 on forgiveness of indebtedness by
one of the Company's former institutional lenders.
As a result of the foregoing, the Company's net income for the three months
ended October 31, 1994 increased to $1,467,820 from $411,097 for the
corresponding period ended October 31, 1993.
Page 25
<PAGE>
Nine Months Ended October 31, 1994
Landed sales increased by $5,896,178 (72%) for the nine months ended October 31,
1994 over the nine month period ended October 31, 1993, primarily because of
increased market acceptance of CANDIE'S branded footwear products. Total gross
profit on landed sales increased by $926,015 (22%) for the nine months ended
October 31, 1994 over the nine month period ended October 31, 1993 as a result
of increased sales of CANDIE'S branded footwear products. The gross profit
percentage on landed sales decreased from 16.0% for the nine months ended
October 31, 1993 to 11.9% for the nine months ended October 31, 1994 primarily
due to closeout sales of inventory during the nine month period ended October
31, 1994 and additional markdowns on inventory.
Commission and licensing income for the nine months ended October 31, 1994
increased to $3,413,182 from $2,872,095 an increase of $541,087 (19%) over the
same period last year, primarily because of increased orders on a commission
basis of Candie's and Bright Star footwear and the licensing agreements under
the Candie's label. Commission income results from arranging for the production
and quality control of products.
Selling expenses decreased by $643,882 (16%) for the nine months ended October
31, 1994 as compared to the nine months ended October 31, 1993 primarily as a
result of the elimination of the in-house marketing department, however, this
decrease was offset by increases in salaries of sales personnel.
General and Administrative expenses decreased by $692,583 (23%) for the nine
months ended October 31, 1994 as compared to the same period last year,
primarily due to staff reductions, decreases in professional fees and the
relocation of the corporate offices from New York City to Purchase,NY. The
Company also experienced a reduction of $340,000 in pension expense as a result
of the Company's decision to terminate its defined benefit plan effective as of
February 1, 1995.
Interest expense increased by $205,132 (62%) for the nine months ended October
31, 1994 as compared to the same period last year. The increase was primarily
due to increased advances that the Company received under its Factor Agreement
and increases in the prime lending rate.
During the nine months ended October 31, 1994, the Company recorded net gains of
$728,249 on settlements of certain existing obligations and litigation matters
and an extraordinary gain of approximately $1,962,175 on forgiveness of
indebtedness.
As a result of the foregoing, the Company's net income for the nine months ended
October 31, 1994 increased to $1,804,143 from a net loss of $3,142,192 for the
corresponding period ended October 31, 1993.
Liquidity and Capital Resources
In their report on the Company's annual financial statements at January 31,
1994, the Company's independent certified public accountants have included an
explanatory paragraph in their report on the Company's financial statements
Page 26
<PAGE>
stating certain factors which raise a substantial doubt about the Company's
ability to continue as a going concern.
At October 31, 1994, the Company had a working capital deficiency of $871,994 as
compared to a working capital deficiency of $3,180,800 at January 31, 1994. This
decrease in the working capital deficiency is primarily attributable to net
income for the nine months ended October 31, 1994 and the various settlements of
obligations of the Company through the issuance of common stock. The ratio of
current assets to current liabilities was .86 to 1.0 at October 31, 1994
compared to .58 to 1.0 at January 31, 1994.
The Company's cash flow from operating activities increased for the nine month
period ended October 31, 1994 compared to the same period of the prior year. Net
cash used in operating activities totaled $1,274,591 for the nine months ended
October 31, 1994 compared to net cash used in operating activities of $5,524,344
for the nine months ended October 31, 1993. The decrease in net cash used
resulted primarily from net income for the nine months ended October 31, 1994 as
compared to a net loss and the reduction in the prior year of old, outstanding
liabilities that were settled with the proceeds of the secondary offering,
including $1,000,000 owed to the U.S.
Customs Service.
Cash provided by financing activities decreased by $4,185,724 to $1,439,319 for
the nine months ended October 31, 1994 compared to the same period last year.
This reduction was primarily caused by the fact that the Company completed a
secondary offering in the amount of $5,334,902 in the nine month period ended
October 31, 1993.
Upon completion of the Company's restructuring and equity financing plan in
March 1993 (see Note 1 of the Notes to Condensed Consolidated Financial
Statements), management believed that it would provide the Company with adequate
resources to implement their new business strategies; however, the Company has
experienced significant operating losses since the restructuring in March 1993
which were greater than expected due to a weak retail market, and the resulting
delays in the Company's ability to purchase goods. As a result of the foregoing,
the Company has undertaken a program set forth below which is designed to
increase revenue and cash flow while reducing expenses. The Company believes
that if its program is successful, of which there can be no assurance, it will
have adequate capital to support the Company's operations for the next twelve
months.
The Company's program involves (a) cost containment through (i) termination of
the sublease for its current facility and relocation to a site in Westchester
County, New York (which the Company believes will reduce its facility costs),
(ii) termination of personnel not deemed necessary to its continuing operations,
(iii) elimination or reduction of certain operating expenses, and (iv)
conversion of certain existing claims to equity through issuance of common stock
in settlement of such claims; (b) increasing revenues by (i) increasing sales of
footwear by the Company's subsidiary, Bright Star Footwear, Inc., under the
Company's newly licensed trademarks, BIG SMITH and ASPEN and (ii) increasing
royalty income from the licensing by the Company of the CANDIE'S trademark and
aggressive marketing of CANDIE'S footwear; (c) seeking to obtain additional debt
and equity financing by
Page 27
<PAGE>
(i) borrowing additional funds on a long-term basis and (ii) sales of equities
securities; and (d) maintaining or enhancing the existing debt structure with
its institutional lender by obtaining, when necessary, waivers or restructuring
of applicable financial covenants and principal payments and maintaining or
enhancing its existing line of credit from a factor by providing, if necessary,
additional collateral. While the Company believes that its program of cost
containment will result in an aggregate decrease in operating expenses in excess
of $1 million, on an annualized basis (of which only a portion would be realized
in the 1995 fiscal year), there can be no assurance that the Company will be
able to achieve a significant reduction in operating costs, or significantly
increase its revenues, or obtain additional financing on acceptable terms.
Finally, there can be no assurance that implementation of such program will
generate sufficient working capital to meet its operating expenses for the 1995
fiscal year.
To implement its plan of operations, the Company has taken the following steps:
In May 1994, the Company received net proceeds of approximately $350,000 from
sales of common stock which it has used to pay outstanding indebtedness due to
its institutional lender and for working capital and general corporate purposes.
In addition, the Company anticipates that it will issue additional shares of
common stock pursuant to certain settlements, either completed or being
negotiated with various creditors, in satisfaction of existing claims against
the Company.
In October 1994, the Company received net proceeds of approximately $1,691,000
from sales of its common and preferred stock which it has used to pay
outstanding indebtedness due to its institutional lender and for working capital
and general corporate purposes.
As part of its strategy of reducing costs, the Company recently terminated its
in-house marketing staff. The Company will use outside marketing consultants on
an "as needed" basis to support its marketing activities.
In an effort to enhance market penetration, the Company has instituted a pricing
plan to further encourage retailers to carry the CANDIE'S line of footwear.
Management believes the program will allow its retail customers to offer a
nationally known branded product at competitive prices while maintaining
significant retail markups.
The Company has successfully completed a reduction of liabilities of $2,269,930
through the issuance of the Company's common stock. The Company has entered into
a new lease agreement for the relocation of its corporate headquarters to
Purchase, NY, which will result in an annual cost savings of approximately
$300,000.
In October 1994, the Company consummated an agreement with one of its former
institutional lenders, Shanghai Commercial Bank ("Shanghai"), to extinguish
all of its then outstanding indebtedness to Shanghai, a total of $3,378,175
plus accrued interest of $139,606, through a combination of cash and certain
assets pledged as collateral to Shanghai as part of a personal guaranty by
the former president and chief executive officer of the Company. The Company
Page 28
<PAGE>
realized a gain of approximately $1,962,175 on the extinguishment of its debt
with Shanghai. In return, the Company paid Shanghai $555,000 in principal plus
$139,606 of accrued interest, the proceeds of which were derived from the equity
offering described above. Shanghai also received 322,222 shares of Candie's
common stock and certain real property owned by the former president and chief
executive officer of the Company with a fair market value of $740,000.
Page 29
<PAGE>
CANDIE'S, INC.
PART II - Other Information
Item 1. Legal Proceedings
None.
Items 2-5.
None.
Item 6.
a)Exhibits
27. Financial Data Schedule
b)Reports on Form 8-K
The Company filed a report for the event dated October 6, 1994 under Item 5
of Form 8-K to report private placements and debt extinguishment.
Page 30
<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, thereunto duly
authorized.
CANDIE'S, INC.
--------------
(Registrant)
DATED: April 26, 1996 By:/s/Neil Cole
---------------
President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
Page 31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-QSB AT
OCTOBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> OCT-31-1994
<CASH> 209,792
<SECURITIES> 0
<RECEIVABLES> 2,153,144
<ALLOWANCES> 793,500
<INVENTORY> 3,518,472
<CURRENT-ASSETS> 5,416,489
<PP&E> 796,554
<DEPRECIATION> 628,886
<TOTAL-ASSETS> 11,732,472
<CURRENT-LIABILITIES> 6,288,483
<BONDS> 0
0
103
<COMMON> 7,412
<OTHER-SE> 5,369,266
<TOTAL-LIABILITY-AND-EQUITY> 11,732,472
<SALES> 14,059,938
<TOTAL-REVENUES> 17,473,120
<CGS> 12,382,485
<TOTAL-COSTS> 12,382,485
<OTHER-EXPENSES> 5,306,628
<LOSS-PROVISION> (596,391)
<INTEREST-EXPENSE> 534,844
<INCOME-PRETAX> (154,446)
<INCOME-TAX> 3,586
<INCOME-CONTINUING> (158,032)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,962,175
<CHANGES> 0
<NET-INCOME> 1,804,143
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
