U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
AMENDMENT NO. 1 to FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended January 31, 1995
[ ] Transition Report Under 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.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number, including area code: (914) 694-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value and Common Stock Purchase Warrants
(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended January 31, 1995 were:
$24,192,133.
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based upon the closing sale price) on May 9, 1995 was
approximately $8,844,000.
As of May 9, 1995, 8,233,386 shares of Common Stock, par value $.001 per
share were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes____ No X
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business.......................................... 1
Item 2. Description of Properties........................................ 9
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security-Holders.............. 11
PART II
Item 5. Market for Common Equity and Related Stock
Holder Matters................................................... 12
Item 6. Management's Discussion and Analysis or Plan of Operation........ 13
Item 7. Financial Statements ............................................ 21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 21
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a)
of the Exchange Act ............................................. 22
Item 10. Executive Compensation........................................... 24
Item 11. Security Ownership of Certain Beneficial Owners
and Management................................................... 28
Item 12. Certain Relationships and Related Transactions................... 29
Item 13. Exhibits, List and Reports on Form 8-K........................... 32
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PART I
Item 1. Business
Introduction
Candies, Inc. and its subsidiaries (together the "Company") are engaged
primarily in the design, marketing and importation of a variety of
moderately-priced women's and girls' casual, outdoor and fashion footwear under
the CANDIE'S(R) trademark for distribution to better department and specialty
stores nationwide. The Company also licenses its CANDIE'S trademark to third
parties for the sale of other products under such licenses generally pursuant to
exclusion agreements and require the licensees to pay royalties, including
minimum royalties, to the Company. Such licenses include licenses for the sale
of children's footwear and ladies intimate apparel under the CANDIE'S trademark.
The Company also arranges for the manufacture of footwear products, similar to
those produced under the CANDIE'S trademark, for mass market and discount
retailers, under one of the Company's other trademarks or under the private
label brand of the retailer. In addition, the Company sells a variety of men's
workboots, hiking boots, winter boots and outdoor casual shoes designed and
marketed by the Company's wholly-owned subsidiary, Bright Star Footwear, Inc.
("Bright Star") under its private label and a brand name licensed by the Company
from third parties specifically for use by Bright Star (ASPEN(R)). In February
1995, the Company entered into an agreement in principle with the owner of the
BONGO(R) trademark to act as exclusive licensee to manufacture and market
women's footwear in North America under the BONGO trademark for an initial
period expiring July 31, 1998, which may be extended by the Company under
certain circumstances, to July 31, 2001. The Company also owns the trademarks
SUGAR BABIES(R), FULLMOON(R) and ACTION CLUB(R), which are not frequently used
in the Company's operations.
During its fiscal year ended January 31, 1994 ("Fiscal 1994"), the Company
completed a restructuring plan (the "Restructuring Plan") which substantially
reduced its liabilities, restructured the terms of continuing obligations,
reduced operating costs and acquired new sources of revenue and capital funds by
effecting (i) the acquisition (the "El Greco Transactions") of the CANDIE'S and
certain other trademarks (the "Trademarks") and the related trademark licensing
business from El Greco, Inc. ("El Greco"), a former subsidiary of New Retail
Concepts, Inc. ("NRC") that was merged into NRC in 1993, by granting additional
licenses for the distribution of products bearing the CANDIE'S trademark and
entering into license agreements to obtain additional brand name licenses for
its Bright Star division; (ii) the conversion to equity of an outstanding $3.5
million debenture ("Debt Conversion") and certain other liabilities of the
Company; (iii) the restructuring of the Company's institutional debt (the "Debt
Restructuring") and establishment of new credit facilities; (iv) a 1-for-4.5
reverse stock split (the "Reverse Split"); (v) sales of its securities; (vi) the
settlement of outstanding U.S. Customs Service ("Customs") claims; and (vii) a
quasi-reorganization of the Company's accounts (the "Quasi-Reorganization"). In
addition, in March 1993, Neil Cole, President, Chief Executive Officer, a
director and a principal stockholder of NRC, joined the Company as its new
Chairman of the Board, President and Chief Executive Officer. See Item 6-
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"Management's Discussion and Analysis or Plan of Operation -- Restructuring
Plan" and Item 12- "Certain Relationships and Related Transactions".
Although the Restructuring Plan helped improve the Company's financial
condition, the Company determined that it would have to take further steps
during the fiscal year ending January 31, 1995 ("Fiscal 1995") to further
improve its financial condition. During Fiscal 1995, the Company completed a
further series of transactions as part of a comprehensive plan (the "Financial
Program") intended to significantly improve the Company's financial condition
and help to ensure the Company's financial viability by substantially reducing
operating and other expenses and liabilities while improving cash flow. Among
other things, as part of the Financial Program, the Company reduced its rental
expense by relocating its executive offices and showroom to Westchester, New
York, eliminated certain trade payables through the issuance of shares of its
common stock, settled certain litigation and eliminated approximately $3.4
million of institutional indebtedness. See Item 6 - "Management's Discussion and
Analysis or Plan of Operations."
CANDIE'S Footwear Products
CANDIE'S footwear is designed primarily for women and girls, aged 14 to 40,
and features a variety of styles for a variety of uses. The Company currently
markets, sells and distributes fashion, casual and outdoor footwear. Twice a
year, as part of its Spring and Fall collections, the Company generally produces
20 to 30 different styles of shoes among its footwear categories.
The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S image and price point.
Trend information is compiled by the designers through various methods,
including travel to Europe to identify and confirm seasonal trends, the
utilization of several outside fashion forecasting services and attendance at
trade shows and seminars. Each season, subsequent to the final determination of
that season's line by the design team and management (including colors, trim,
fabrics, constructions and decorations), the design team travels to the
factories to oversee the manufacturing of the initial sample lines. Several
seasonal trend presentations are also made by the Company's design and
merchandising teams to the licensees of the CANDIE'S trademark, at which
presentations the seasons' trends are translated and adapted for each CANDIE'S
product category in an attempt to keep the designs and styles of all CANDIE'S
products coordinated with and complementary to that of CANDIE'S footwear
products. The Company's licensees may then purchase the same fabrics and
decorations from the same or similar source, further ensuring a cohesive retail
presentation for the full range of products bearing the CANDIE'S brand name.
Licensing of CANDIE'S Trademark for Apparel and Related Products
As of March 3, 1993, the Company acquired from El Greco the CANDIE'S
trademark and El Greco's rights as a licensor under license agreements with
manufacturers of apparel and accessory products for use of the CANDIE'S
trademark. Such license agreements (in connection with which the Company is
entitled to royalties from the licensees) included licenses for CANDIE'S
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sleepwear, women's intimate apparel, jeanswear, handbags and totes, socks,
belts, headwear and hair accessories. All of these license arrangements, except
for the license with Wundies, Inc. ("Wundie's") relating to women's intimate
apparel, have expired or were terminated.
In December 1993, the Company entered into a license agreement with Kid
Nation, Inc. ("Kid"), a wholly-owned subsidiary of Brown Group, Inc. (a
corporation with worldwide footwear operations under brands such as BUSTER
BROWN(R), DR. SCHOLL'S(R) and DISNEY(R)), granting Kid the exclusive license to
manufacture and distribute children's footwear bearing the CANDIE'S trademark in
the United States and Canada. The CANDIE'S children's line retails between $20
and $40 per pair and is distributed to department and specialty stores
throughout the United States.
As of April 25, 1995, the Company had two outstanding CANDIE'S license
agreements (the license agreements with Kid and Wundies). These license
agreements currently expire on various dates in December 1998, and December
1996, respectively. The license agreement with Kid allows for contract renewal
prior to expiration at the option of the licensee, for an additional term of
three years if minimum net sales requirements specified in the license agreement
are met and requires the licensee to pay royalties based on a specified
percentage of the licensee's net sales against a minimum royalty that usually
increases over the term of the license agreement. In addition, the agreement
with Kid requires the licensee to pay the Company an advertising fee. The
license agreement with Wundies is cancellable by either party on six months
notice.
The Company intends to seek new license agreements in apparel, accessories
and related categories. In evaluating a prospective licensee, the Company will
consider its experience, financial stability, performance and reputation,
distribution and marketing ability. The Company will also evaluate the
marketability of the proposed product categories and their compatibility with
the product lines of the Company's existing CANDIE'S licenses.
First Cost Unbranded Operations
Capitalizing on its retail relationships, sourcing associations and buying
power, the Company arranges for the manufacture of footwear products for mass
market and discount retailers. Footwear similar to CANDIE'S is produced and
carries the private label brand of the retailer or one of the Company's
trademarks, such as TAKE A HIKE(R), or under ASPEN, a trademark licensed by the
Company.
In its "first cost" operations, the Company generally receives a commission
of from 6% to 12% for acting as an agent for its customers and supervising the
production and importation of footwear. These operations allow the Company to
expand its distribution base to include leading national retailers such as
Sears, Wal-Mart and K-Mart. The Company believes that an opportunity exists for
expanding these operations and is currently developing several new trademarks
that will be offered to retailers during the fiscal year ending January 31, 1996
("Fiscal 1996").
All of the footwear sold by the Company on a first cost basis is presold
against firm purchase orders. As compensation for its services, the Company
charges customers a commission which is based upon a percentage of the
customer's purchase price of the footwear products. Inasmuch as the Company acts
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solely as an agent, the risk of loss or damage to the footwear products remains
with the customer.
Bright Star Footwear
Bright Star, principally as agent for customers who place orders with it,
is engaged in the business of designing, marketing and distributing a wide
variety of workboots, hiking boots, winter boots, and mens' leisure footwear
under the brand names of Bright Star's customers, unbranded footwear and the
Company's licensed brand ASPEN. When acting as an agent for its customers,
Bright Star does not take title to any products distributed by it. Bright Star's
customer base consists of a broad group of retailers, including wholesalers,
discounters, "box" stores and better grade accounts, which provides Bright Star
a distribution base for its footwear. Bright Star's products are directed toward
a low to moderately-priced market. The retail prices of Bright Star's footwear
generally range from $12 to $60. Substantially all of Bright Star's products are
sold on a "first cost" agency basis. See "Business - First Cost Unbranded
Operations."
Product Design and Manufacturing
The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the image of its footwear and
applicable price points. Trend information is compiled by the designers through
various methods, including travel to Europe to identify and confirm seasonal
trends, the utilization of several outside fashion forecasting services and
attendance at trade shows and seminars. Each season, subsequent to the final
determination of that season's line by the design team and management (including
colors, trim, fabrics, constructions and decorations), the design team travels
to the factories to oversee the manufacturing of the initial sample lines.
The Company does not own or operate any manufacturing facilities. All of
the Company's footwear products are manufactured to its specifications by a
number of independent suppliers located in Korea, China, Italy, the United
States, Taiwan, Indonesia and Thailand. None of these suppliers account for more
than 10% of the Company's footwear products except for Synco Footwear Company,
Inc. who indirectly supplies the Company with footwear products that the Company
orders through an independent buying agent. The Company believes that such
diversification permits it to respond to customer needs and minimizes risks
associated with foreign manufacturing. The Company has developed, and seeks to
develop, long-term relationships with manufacturers that can produce a high
volume of quality products at competitive pricing.
The Company negotiates the price of finished products with its suppliers,
who manufacture the products themselves or subcontract with other manufacturers.
Bright Star utilizes unaffiliated agents who are responsible for identifying
suppliers, planning production schedules, supervising manufacture, inspecting
samples and finished products and arranging the shipment of goods directly to
customers in the United States.
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While the Company seeks to enter into long-term contracts with certain of
its footwear product suppliers, it does not intend to enter into long-term
contracts with all of them. Moreover, there can be no assurance that it will be
able to enter into long-term contracts with any of its suppliers on terms
favorable to the Company, or at all. To date the Company has no such long-term
contractual relationships although it is seeking to enter into a long term
arrangement with an entity which would act as the Company's buying agent with
respect to purchases by the Company of certain goods on an open account basis.
There can be no assurance that the Company will be able to enter into any such
arrangement. Consequently, any or all of its suppliers could terminate their
relationship with the Company at any time. In addition, suppliers of the
Company's products have limited production capacity and may not, in all
instances, have the capability to satisfy the Company's manufacturing
requirements. However, the Company believes that alternative sources of supply
could be located should manufacturing capacity in excess of that of its current
suppliers be required. Nevertheless, there can be no assurance that, in the
future, the capacity of such suppliers will be sufficient or that alternative
sources of supply will be available on a cost effective basis, either of which
events could have an adverse effect on the Company's ability to deliver its
products on a timely and competitive basis and could have an adverse effect on
the Company's operations.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers from vendors located in the country of
manufacture. Goods are purchased by the Company from its suppliers either by the
delivery of letters of credit which are opened prior to shipment of the goods
and or, on open account generally payable within 90 days after shipment of the
goods. Although the Company believes that the raw materials required, which
include leather, nylon, canvas, polyurethane and rubber, are available from
various alternative sources, there can be no assurance that any such materials
will be available on a timely or cost-effective basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately two months, the shoe is offered
for sale to wholesale purchasers. Once orders are received by the Company, the
acquisition of raw materials, the manufacture of the shoes and shipment to the
customer each take approximately one month. In the event the shoes are produced
in the United States or shipped via air freight rather than ocean freight, the
shipment time is reduced.
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule, a
fixed duty structure in effect since January 1, 1989, the Company pays import
duties on its footwear products ranging from approximately 2.5% to 48%,
depending on whether the principal component of the product is leather or some
other material. Inasmuch as the Company's products have differing compositions,
the import duties vary with each shipment of footwear products. Since 1981,
there have not been any quotas or restrictions imposed on footwear imported by
the Company into the United States.
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The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company. In addition, other restrictions on the
importation of footwear and apparel are periodically considered by the United
States Congress and no assurances can be given that tariffs or duties on the
Company's goods may not be raised, resulting in higher costs to the Company, or
that import quotas respecting such goods may not be lowered which could restrict
or delay shipment of products from the Company's existing foreign suppliers.
Between October 1991 and March 1993, the Company paid Customs approximately
$1,814,000 for certain underpayments of customs duties that it had
miscalculated. The Company also agreed to settle claims for customs duties and
penalties allegedly owed for the period from October 1, 1991 through December
31, 1991 by the payment of $180,000, plus interest, at the rate of $5,000 per
month for 36 months, which payments commenced on July 31, 1993. In addition,
although the Company does not believe (nor does Customs allege) that any amounts
are due for the period January 1, 1992 through March 31, 1992, the settlement
agreement provides that if duties for such period are determined to be owed, the
Company may pay such duties over the three-year period that commenced on July
31, 1993. The Company has since revised its customs reporting and payment
procedures with respect to current importations. In June 1991, the Company's
former President, Barry Feldstein, indemnified the Company for all duties,
interest and penalties owed for the period 1986 through July 1, 1991, as a
result of the Company's voluntary disclosure and any additional duties
ultimately payable as a result of the U.S. Customs audit. In October 1994, in
connection with the Company's agreement with its institutional lender (the
"Institutional Lender"), the Company released Mr. Feldstein from his
indemnification obligations in consideration for Mr. Feldstein providing certain
collateral to the Institutional Lender. See Item 6 - "Management's Discussion
and Analysis or Plan of Operation - Financial Program" and Note 10(b) to the
Consolidated Financial Statements.
Backlog
As of April 25, 1995, the Company had an estimated backlog resulting from
first cost orders as follows: for Bright Star products, approximately $25.8
million (which is expected to produce approximately $1.9 million in net
commission income); for ASPEN and unbranded products, approximately $3.3 million
(which is expected to produce approximately $300,000 of net commission income).
At the same date, the Company had an estimated backlog of approximately $17.5
million resulting from sales of CANDIE'S products. Furthermore, on that date the
Company had an estimated backlog of approximately $2.5 million for BONGO
products. The Company anticipates that all of the products constituting backlog
as of April 25, 1995 will be filled by the end of Fiscal 1996.
Seasonality
Demand for the Company's footwear has historically peaked during the months
of June through August (the Fall/back-to-school selling season) with a result
that shipment of the Company's products are heavily concentrated in the second
and third fiscal quarters. Therefore, the Company's results of operations
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typically fluctuate significantly from quarter to quarter. The Company will seek
to market additional footwear categories during other selling seasons to reduce
the fluctuations in its operating results. There can be no assurance that the
Company will be able to market any such additional products or that, if the
Company markets any such additional products, its operating results will not
continue to fluctuate.
Customers and Sales
During Fiscal 1995, the Company sold its footwear products to more than 500
retail accounts consisting of department stores, mass merchandisers, shoe stores
and other outlets, including Federated, Nordstrom's, Mercantile and Strawbridge
& Clothier. During Fiscal 1995, no individual customer accounted for more than
10% of the Company's revenues. There can be no assurance that such customers
will continue to purchase products from the Company or utilize its services in
the future.
The Company generally requires payment for goods by its customers within 10
to 60 days after receipt of the goods. In certain instances, the Company offers
its customers a discount from the purchase price in lieu of returned goods;
otherwise, goods may be returned solely for defects in quality, in which event
the Company returns the goods to the manufacturer for a credit to the Company's
account.
The Company currently utilizes the services of seven full-time sales
personnel, including employees and independent contractors, who are compensated
on a commission basis. The Company emphasizes customer service in the conduct of
its operations and maintains a customer service department. The customer service
department processes customer purchase orders and supports the sales
representatives to coordinate orders and shipments with customers.
A portion of the Company's women's and children's footwear products, and a
substantial portion of Bright Star's sales, are sold on a "first cost" basis, in
which case the customer finances the manufacturing costs and a commission is
charged for services. A large portion of the Company's sales of women's and
children's footwear products, are made on a "landed" basis, which means that the
Company is responsible for all expenses of manufacture and earns a mark-up on
the sale. In the case of landed sales, the Company bears the risk of loss,
damage or destruction until the footwear products are delivered to the customer.
Where the sale is made on a first cost basis, the manufacturer and customer bear
such risks during the manufacturing and shipping process, respectively. For the
fiscal year ended January 31, 1995 "landed" and "first cost" sales represented
approximately 82% and 16%, respectively of the Company's total revenues.
Commission income on first cost sales generally represents between 6%-12% of the
cost of the products sold. Gross margins on "landed sales" generally ranges from
25%-35% before giving effect to product returns, allowances and markdowns, which
differ from period to period.
Trademarks and Trade Names
The Company owns federal trademark registrations for the following
trademarks: CANDIE'S(R) and TAKE A HIKE(R), and believes that such trademarks,
especially the CANDIE'S trademark, have significant value and are, or will be,
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important to the marketing of the Company's products and those of its licensees.
The Company also owns the trademarks Action Club, Full Moon and Sugar Babies
which are not considered to be material to the Company's current operations.
There can be no assurance that the Company's trademarks do not or will not
violate the proprietary rights of others, that they would be upheld if
challenged or that the Company would, in such an event, not be prevented from
using the trademarks, any of which could have an adverse effect on the Company.
In addition, there can be no assurance that the Company will have the financial
resources necessary to enforce or defend its trademarks.
The Company also sells footwear under the BONGO and ASPEN trademarks, which
the Company licenses from third parties. The BONGO license expires on July 31,
1998 subject to the Company's right to extend the license through July 31, 2000.
The ASPEN license expires on September 30, 1996 subject to the Company's right
to extend the license through September 30, 1997. The inability of the Company
to utilize these trademarks, for whatever reason, could have an adverse effect
on its business.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines. In general,
competitive factors include quality, price, style, name recognition and service.
Although the Company believes that it can compete favorably in these areas,
there can be no assurance that it will be able to do so. In addition, the
presence in the marketplace of various fads and the limited availability of
shelf space can affect competition. Many of the Company's competitors have
substantially greater financial, distribution, marketing and other resources
than the Company and have achieved significant name recognition for their brand
names such as Esprit(R), Bass(R) and White Mountain(R). There can be no
assurance that the Company will be able to successfully compete with the
companies marketing these products.
The market for women's and girls' casual apparel and accessories is also
highly competitive. Some of the Company's competitors in the footwear industry,
including Keds, Esprit and Vans, also have licensed lines of apparel and
accessory products. In addition, the Company competes with moderately-priced
branded and private label programs. It is likely that the success of the
Company's licensed product lines will be closely related to the success of the
Company's footwear program.
Employees
As of April 25, 1995, the Company employed 31 persons, of whom three act in
executive capacities, two are full-time sales and marketing personnel, five are
customer service representatives, three are product development personnel and 18
are administrative personnel. None of the Company's employees is represented by
a union. The Company also utilizes the services of several independent
contractors who are engaged in sales. The Company considers its relations with
its employees to be good.
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Item 2. Description of Properties
The Company currently occupies 14,430 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease which
commenced on October 1, 1994 and expires on April 1, 2000. The monthly rental
expense pursuant to the lease is $9,620 for the first twelve months of the
rental term, $19,240 for months thirteen through thirty, $21,645 for months
thirty-one through forty-two and $24,050 for months forty-three through the
expiration date of lease.
Item 3. Legal Proceedings
Except as set forth below, no material proceedings to which the Company is
a party, or to which any of its properties are subject, are pending or are known
to be contemplated, and the Company knows of no material legal proceedings,
pending or threatened, or judgments entered against any director or officer of
the Company in his capacity as such.
In April 1991, an action was commenced in the Supreme Court of the State of
New York, County of Nassau by Stuart Belloff, derivatively on behalf of the
Company, against Barry Feldstein, Glenn Feldstein, Michael Callahan and Dale
Whitney, former officers and directors of the Company; Michael Epstein, Steven
Gold and Ronald Nigro, former directors of the Company; and the Company, as a
nominal defendant. The complaint alleges that the Company's actions in
connection with a public offer to exchange warrants of the Company and the
reacquisition of International Trading Group, Inc., a subsidiary of the Company
("ITG"), were detrimental to the Company's financial condition. Plaintiff seeks
an accounting by the Company and payment by the individual defendants of an
unspecified amount of damages. In September 1991, 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 defend the
action vigorously. Inasmuch as the Company is only a nominal defendant in the
action, the Company does not believe that the outcome of the action, if decided
in favor of the plaintiff, will materially adversely affect its operations.
In July 1994, the Company settled the action commenced against it in May
1992 by Starter Corporation ("Starter"), in the Superior Court of the State of
Connecticut. Pursuant to the settlement agreement the Company makes monthly
payments to Starter of $10,000 over a period of 15 months (expiring in September
1995) and issued 100,000 shares of its Common Stock to Starter.
In December 1994, the Company settled the June 1992 action that was
instituted in the United States District Court for the Southern District of New
York, against the Company and Barry Feldstein, its former president, by Pentland
USA, Inc. ("Pentland") and its parent company. Pursuant to the settlement, the
Company agreed to pay Pentland $445,000, of which $175,000 was paid upon the
execution of the settlement agreement and the remaining $270,000 of which is
being paid over a 22 month period expiring in October 1996.
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In July 1992, an action was instituted in the United States District Court
for the Southern District of New York 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. Plaintiff
alleges that the Company made false representations or failed to disclose
material information in certain of its documents filed with the Securities and
Exchange Commission (the "Commission") regarding underpayments to Customs.
Plaintiff seeks to recover an unspecified amount of damages. The Company has
answered the complaint and asserted crossclaims against Barry Feldstein, a
co-defendant in this action. The Company reached an agreement with the plaintiff
to settle this action, which agreement was subject to court approval. Court
approval of the settlement was obtained in December 1995. The settlement
requires the Company to make a $100,000 cash payment to the plaintiffs and to
issue to the plaintiffs that number of shares of its Common Stock (up to a
maximum of 600,000 shares) which would allow the plaintiffs to realize an
additional $550,000 upon their sale over a two-year period. If the plaintiffs do
not realize $550,000 from the sale of such shares, the Company will be required
to pay to the plaintiffs the amount of the shortfall.
The March 1994 action, which was instituted by American Sporting Goods
("ASG") in the United States District Court for the Southern District of
California against Bright Star, was settled in July 1994 with Bright Star's
agreement to pay the plaintiff $100,000 over a ten month period. The $100,000
payment has been made pursuant to the settlement agreement.
In October 1994, an action was commenced against NRC and the Company in the
United States District Court for the Southern District of New York by a former
officer of NRC whose employment with NRC was terminated in October 1994. The
plaintiff alleges that pursuant to the Company's Services Allocation Agreement
with NRC, the Company undertook to perform NRC's obligations under its
employment agreement with the plaintiff. Plaintiff is seeking to recover
payments of approximately $500,000, which he alleges constitutes unpaid
compensation owed to him under the terms of an employment agreement with NRC as
well as interest thereon. The Company intends to vigorously defend this matter.
In the event that the Court does not approve the settlement with Food and
Allied Service Trades Department and the Company is not successful in the
defense of the actions brought against it and NRC by the former NRC officer and
a substantial monetary judgment is obtained against the Company, and the Company
is unable to resolve such judgment on terms favorable to it, the Company's
financial condition could be adversely affected.
The Company has been advised by the Staff of the Commission that the Staff
intends to recommend to the Commission that it authorize the Staff to commence
an administrative proceeding against the Company with respect to alleged
violations of Section 5 of the Securities Act of 1993 in connection with the
Company's 1993 Regulation S offering (the "Offering") of shares of Common Stock
in the aggregate amount of $2,000,000. The Company believes that it justifiably
relied upon the opinion of its then corporate counsel in connection with the
Offering and, therefore, is considering making a submission to the Commission
requesting that the Commission not authorize the Staff to proceed against the
Company in connection with this matter. Even if the Company is unsuccessful, it
believes that the outcome of any proceeding that the Commission may bring
10
<PAGE>
against it in connection with the Offering will not have a material adverse
affect on the Company's operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
On November 29, 1994, at a special meeting, the stockholders of the Company
approved an Amendment to the Company's Certificate of Incorporation increasing
its authorized common stock from 10,000,000 to 30,000,000 Shares. The
stockholder vote on such matters was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
Common Stock 5,120,402 243,603 32,326
Preferred Stock 6,768* -0- -0-
- ----------
* Equivalent to a vote of 588,545 shares of Common Stock.
11
<PAGE>
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since January 22, 1990 (under the symbol "CAND" since February
23, 1993 and, prior to such time, under the symbol "SHOE"); the Common Stock is
currently traded on the NASDAQ National Market System. The following table sets
forth, for the indicated periods, the high and low sales for the Common Stock as
reported by NASDAQ.
High Low
---- ---
Fiscal Year Ended January 31, 1994
First Quarter............................ $ 4.50 $ 2.25
Second Quarter........................... 4.50 3.50
Third Quarter............................ 3.88 1.88
Fourth Quarter........................... 3.00 2.25
Fiscal Year Ended January 31, 1995
First Quarter............................ $ 2.75 $ 1.75
Second Quarter........................... 2.63 1.50
Third Quarter............................ 2.63 1.63
Fourth Quarter........................... 2.00 .98
As of May 9, 1995, there were 146 holders of record of the Company's Common
Stock. The Company believes that, in addition, there are in excess of 300
beneficial owners of its Common Stock, which shares are held in "street name."
The Company has not paid cash dividends on its Common Stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that cash or stock dividends will be paid.
12
<PAGE>
Item 6. Management's Discussion and Analysis
or Plan of Operations
General
During the two years ended January 31, 1995, the Company's financial
condition has been adversely affected by continuous operating losses. As part of
its ongoing efforts to improve its financial condition, during Fiscal 1994, the
Company effected the Restructuring Plan and during Fiscal 1995 the Company
effected the Financial Program.
Restructuring Plan
The Restructuring Plan was designed to substantially reduce liabilities,
restructure the terms of continuing obligations, reduce operating costs and
acquire new sources of revenues and capital funds by effecting the El Greco
Transactions, the Debenture Conversion, the Debt Restructuring, the
Quasi-Reorganization and sales of its securities. The following discussion
describes the manner in which the Restructuring Plan was effected and certain
related transactions:
On February 23, 1993, the Company's stockholders approved (i) the change of
the Company's name to Candie's, Inc.; (ii) the Reverse Split; and (iii) the
Quasi-Reorganization. The 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 corporate reorganization proceeding. The Company's assets and
liabilities and its capital accounts were adjusted to eliminate the
stockholders' deficiency.
On March 3, 1993, in exchange for 900,000 shares of the Company's Common
Stock, $75,000 in cash and a subordinated note of the Company in the principal
amount of $325,000, the Company acquired from El Greco (i) the Trademarks, (ii)
all of El Greco's business operations associated with the Trademarks, and (iii)
the assignment to the Company of El Greco's existing license agreements with
licensees of the Trademarks. By acquiring the CANDIE'S trademark, the Company
terminated its obligation to make future royalty payments to El Greco, including
remaining minimum royalty payments of $2,300,000 and minimum advertising
payments of $1,066,000.
Immediately prior to the Reverse Split (on February 23, 1993), Mr. Terren
Peizer, the holder of a $3.5 million convertible subordinated debenture issued
by the Company (the "Debenture") converted the Debenture into 3.5 million shares
of Common Stock in accordance with the terms of the Debenture (777,777 shares,
after giving effect to the Reverse Split). After the Reverse Split was effected,
the holder of such shares made a capital contribution of 127,777 of post-
Reverse Split shares to the Company and surrendered to the Company for
cancellation a Common Stock purchase warrant issued to such holder in connection
with his purchase of the Debenture. The transaction reduced the Company's
interest expense payments by approximately $315,000 and non-cash interest
expense by approximately $117,000, annually.
13
<PAGE>
On March 3, 1993, the Company and Shanghai Commercial Bank Ltd. (the
"Institutional Lender") effected the Debt Restructuring pursuant to which
approximately $11.2 million of indebtedness, including accrued interest, was
reduced to approximately $5.25 million (excluding letters of credit). The Debt
Restructuring involved the forgiveness of approximately $5.95 million of debt
and the restructuring of the payment terms relating to the remaining principal
amount of such debt. In connection with the Financial Program, the approximately
$3.4 million balance of the restructured indebtedness was eliminated in Fiscal
1995.
In March 1993, the Company sold, pursuant to a public offering, 1.475
million units, each unit consisting of one share of Common Stock, a redeemable
Class B warrant to purchase one share of Common Stock at a price of $4.00 and a
redeemable Class C warrant to purchase one share of Common Stock at a price of
$5.00, each warrant expiring on February 23, 1998. The net proceeds of such
sale, after deduction of underwriting discounts and commissions and other
expenses, was approximately $5.3 million. Such net proceeds were primarily used
to pay advertising and promotion costs, certain expenses in connection with the
acquisition of the Trademarks, duties and penalties claimed by Customs,
retirement of certain obligations, purchase of inventory and indebtedness due to
the Institutional Lender in connection with the Debt Restructuring described
above, salaries of certain of the Company's officers and the balance for working
capital and general corporate purposes.
In April 1993, the Company entered into an accounts receivable factoring
agreement with Congress Talcott Corp. ("Congress"), a factor, which permits the
Company to borrow funds from the factor limited to 80% of the value of eligible
accounts receivable and 50% of the value of eligible finished goods inventory
(to a maximum of $5 million of inventory value) in which Congress has a security
interest. Congress has also agreed to arrange for the opening, for the Company's
account, of documentary letters of credit (up to a maximum of $2.5 million) for
the benefit of suppliers of the Company. The Company must deposit with Congress
an amount equal to 43% of the amount of each letter of credit to be opened.
Borrowings bear interest at an annual rate equal to the prime rate of
Philadelphia National Bank in effect from time to time plus 1.5% (currently
10.5% per annum) and factoring commissions on accounts receivable assigned to
Congress are at the rate of .75%.
In May 1993, the Company sold, pursuant to a private offering, 727,272
shares of Common Stock for an aggregate of $200,000 in cash and $1.8 million of
promissory notes issued to the Company by investors. Such notes were paid in
July 1993. The Company used the proceeds of such sale to pay indebtedness due to
the Institutional Lender, for the payment of certain professional fees and
expenses, and the balance for working and general corporate purposes.
Financial Program
The following discussion describes certain transactions effected by the
Company in connection with the Financial Program:
14
<PAGE>
o The Company terminated a sublease agreement for its executive offices and
showroom in New York City and relocated to a site in Westchester County, New
York in October 1994, at a substantially reduced rent. In connection with the
lease termination, the Company issued 200,000 shares of Common Stock and has
agreed to release an additional 100,000 shares currently held in escrow to its
former landlord in settlement of its obligations thereunder. The issuance of
these shares in exchange for the cancellation of past rent due increased the
Company's net tangible assets during Fiscal 1995.
o In May 1994, the Company and Major League Footwear, Inc. ("MLF"), a
company owned by Mr. Lawrence O'Shaughnessy, the Company's Executive Vice
President, which ceased operations in October 1994, entered into an agreement
pursuant to which the Company issued 260,000 shares of Common Stock as payment
of the amounts due to MLF. The amount due to MLF was included on the Company's
balance sheet as a liability of $613,771 at January 31, 1994.
o In May 1994, the Company received proceeds of approximately $318,000 in
connection with the sales of Common Stock to a limited number of investors.
o In May 1994, the Company entered into a settlement relating to a note
payable by the Company to El Greco in the amount of $325,000. Pursuant to the
settlement, the Company issued 240,740 shares of Common Stock to NRC, the former
parent of El Greco, in cancellation of the note.
o In July 1994, the Company's credit facility pursuant to its accounts
receivable factoring agreement with Congress was increased from $6,000,000 to
$7,500,000. Mr. Neil Cole, the Company's President, has personally guaranteed
any and all borrowings under the Company's credit facility with Congress.
o In July 1994, the Company and Starter entered into an agreement in
settlement of a lawsuit filed by Starter against the Company for non-payment of
certain royalties. At January 31, 1994, the Company had accrued $532,000 of
unpaid royalties to Starter. Pursuant to the agreement, the Company issued
Starter 100,000 shares of Common Stock and agreed to pay Starter $150,000 (over
a fifteen month period with the last payment due September 1995) in settlement
of the unpaid royalties.
o In July 1994, the Company and Saintday International Co., Ltd.
("Saintday") entered into an agreement to settle the Company's accounts payable
of $860,000 due Saintday. The Company paid Saintday $100,000 and issued 250,000
shares of Common Stock in full satisfaction of the amount due Saintday.
o In October 1994, the Company and Barry Feldstein, the former President
and Chief Executive Officer of the Company, consummated an agreement with the
Institutional Lender to extinguish all of the Company's outstanding indebtedness
(approximately $3,400,000) owed to the Institutional Lender and guaranteed by
Mr. Feldstein. Pursuant to the agreement, the Institutional Lender received a
payment of approximately $695,000 from the Company, Mr. Feldstein transferred to
the Institutional Lender the proceeds from the sale of his 322,222 shares of
15
<PAGE>
Common Stock of the Company (which shares had been pledged to the Institutional
Lender as collateral for such indebtedness) and certain real property owned by
him. Consummation of the transaction resulted in the elimination of the
approximately $3,400,000 liability from the Company's balance sheet.
In October 1994, the Company consummated an offering of shares of its
common stock, for gross proceeds of approximately $1,100,000. The Company used
approximately $695,000 of the net proceeds of this offering in connection with
the settlement with the Institutional Lender.
In October 1994, the Company sold shares of its 8% Series A Convertible
Preferred Stock, par value $.01 per share (the "Preferred Stock"), for gross
proceeds of approximately $1,028,000. The shares of Preferred Stock
automatically converted into 894,431 shares of the Company's common stock in
November 1994.
In February 1995, the Company entered into an agreement with NRC, pursuant
to which NRC loaned the Company the sum of $400,000 (the "Loan"). The Loan is
evidenced by a senior subordinated secured note (the "Note") in the sum of
$400,000 bearing interest at the prime rate as established by Corestate National
Bank of Philadelphia, Pennsylvania ("Corestate"), from time to time, and is due
on June 30, 1995, subject to extension of the maturity date by the Company to
September 30, 1995 (the "Loan Extension"). The Company used the proceeds of the
Loan to provide cash collateral to Congress, a portion of which had previously
been advanced to Congress by Mr. Cole for the benefit of the Company. At the
same time, NRC also loaned the Company the sum of $200,000 (the "Trademark
Loan"), the proceeds of which were used by the Company as an advance for the
license of a fashion trademark (the " BONGO Trademark") with an unaffiliated
third party. The Trademark Loan is evidenced by a senior subordinated secured
note. See Item 12 "Certain Relationships and Related Transactions".
Liquidity and Capital Resources
After the Restructuring Plan was effectuated, management believed that it
had provided the Company with adequate resources to implement its new business
strategies. However, the Company continued to experience recurring operating
losses. Such losses were greater than expected due to a weak retail market in
Fiscal 1994 and the delay, until March 1993, in securing the factoring agreement
with Congress, which affected the Company's ability to purchase goods. The
unanticipated high operating losses resulted in an accelerated use of funds
provided by the Company's 1993 public offering and adversely affected the
Company's liquidity. At January 31, 1995, the Company had a working capital
deficit of approximately $1,541,894 compared to a working capital deficit of
$3,180,800 at January 31, 1994 and the Company had indebtedness to Congress of
$1,162,035. In addition to its continuing obligations under various settlement
agreements with certain vendors entered into in Fiscal 1995, the Company will
also be required to pay approximately $471,000 in settlement of certain federal
and state tax liabilities for prior periods, of which approximately $389,000
will be paid in Fiscal 1996. The Company's allowance for doubtful accounts
declined from $773,000 at January 31, 1994 to $45,000 at January 31, 1995.
Receivables are typically factored and therefore, the risk of non-collection
passes from the Company to the factor. The substantial writedown in receivables
at January 31, 1994 related to old receivables incurred by prior management that
16
<PAGE>
were not factored and other customer deductions, both of which were written off
at January 31, 1995 when a determination was made that they were not
collectible.
The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements stating certain factors
raise a substantial doubt about the Company's ability to continue as a going
concern.
In response to its recent losses, the Company has completed the Financial
Program set forth above, which was designed to increase revenue and cash flow
while reducing expenses. The Financial Program involved the reduction of
expenses through the cancellation of the sublease for the Company's former
facility in New York City and relocation of its offices to Westchester County,
New York (which resulted in reduced facility costs), elimination or reduction of
certain operating costs and elimination of all indebtedness due to the
Institutional Lender. In addition, in Fiscal 1995, the Company terminated
certain personnel not deemed necessary to the continued operations of the
business and obtained additional funds for working capital and general corporate
purposes from the sale of its securities. In addition, the Company issued shares
of Common Stock to creditors in satisfaction of existing claims against the
Company and in consideration for the cancellation of certain indebtedness.
The Company expects a continuation of the recent trend of increases in
revenues through increased sales of footwear as the licensee of the BONGO
trademark, increased royalty income from licensing of the CANDIE'S trademark and
continued aggressive marketing of CANDIE'S footwear. The Company plans to
increase its line of credit through Congress by providing, if necessary,
additional collateral through short-term and long-term borrowings. The Company
anticipates that future revenues of its Bright Star division will decrease
during the fiscal year ending January 31, 1996 as retailers choose to purchase
footwear directly from factories. However, the Company anticipates that it will
be able to compensate for any such decreases through sales of footwear under the
CANDIE'S and BONGO trademarks.
The Company has relied in the past primarily upon revenues generated from
operations, borrowings and sales of securities to finance its liquidity and
capital needs. Net cash used in operating activities totaled approximately
$1,600,000 in Fiscal 1995 compared to cash used in operating activities of
approximately $5,600,000 in Fiscal 1994. Net cash used in operating activities
for Fiscal 1995 resulted principally from net income from operations of
$767,000, an increase in payable of inventory in transit of $709,000, a decrease
of inventory of $304,000 and non-cash items of depreciation and amortization of
$496,000, offset by a decrease in amounts due to factor of $620,000, increase in
restricted cash of $100,000, a decrease in the allowance for doubtful accounts
of $728,000, provisions for anticipated costs of terminating the Company's
pension plan of $340,000, a reduction in amounts due to vendors of $510,000 and
a gain on extinguishment of debt of $2,823,000. The net cash used in operating
activities in Fiscal 1994 is primarily attributable to several factors,
including, but not limited to, the net loss of approximately $6,400,000,
increase in inventories of approximately $2,900,000, as well as decreases of
$800,000 in accounts payable and $750,000 of accrued expenses. Cash flows from
operating activities benefited in Fiscal 1994 from financing provided by
Congress.
17
<PAGE>
Net cash used in investing activities of $67,000 for Fiscal 1995 resulted
from certain capital expenditures.
Net cash provided by financing activities of approximately $1,567,000 in
Fiscal 1995 resulted primarily from the net proceeds from private placements of
securities of $2,137,000, which was offset by the Company's use of $570,000
during Fiscal 1995 to repay long-term debt.
Commencing in February 1995 the Company has been selling footwear under the
BONGO trademark pursuant to an agreement in principle it reached with the owner
of the BONGO trademark (the "licensor") with respect to the licensing of the
trademark. The Company paid the licensor $200,000 upon entering into the
agreement in principle which also provides for the Company to pay the licensor
minimum royalties of $820,000 over the initial term of the arrangement. The
agreement in principle also provides for the Company to pay the licensor
additional royalties based upon a percentage of sales exceeding certain
specified amounts. The agreement in principle contemplates that the foregoing
arrangements will expire on July 31, 1998, subject to renewal, under certain
circumstances, at the option of the Company, to July 31, 2001.
Management is continuing to seek means of reducing costs while increasing
revenues. The Company expects to incur a loss for the three months ending April
30, 1995, primarily as a result of the seasonal nature of its business.
Notwithstanding the increased cash flow required to fund the anticipated loss,
management believes that its completed cost containment program, on-going cost
containing efforts plus the support of its trade vendors and institutional
lenders, will provide the Company with sufficient working capital for the 12
months ending January 31, 1996. However, there can be no assurance that the
Company will be able to generate sufficient funds to meet future operating
expenses and the Company may therefore be required to seek to obtain additional
financing from, among other sources, institutional lenders and the sale of its
securities. There can be no assurance that if required, the Company will be able
to obtain any such financing. However, the Company has requested that Congress
increase its credit line to not less than $10,000,000 and allow the Company to
borrow funds up to 85% (rather than 80%) of eligible accounts receivables. A
decision on this request is expected by the end of May 1995. At January 31, 1995
and 1994, the Company had $1,782,708 and $1,067,051, respectively, of
outstanding letters of credit and approximately $540,000 and $65,000,
respectively, of available letters of credit under its factoring arrangement
with Congress. The Company is also seeking to enter into an arrangement with an
entity that would act as the Company's buying agent with respect to purchases by
the Company of goods on an open account basis. If the Company is able to enter
into such arrangement it will allow the Company to purchase certain goods
without the need to obtain letters of credit. As part of its plan to curtail
future cash requirements management currently intends to increase its first cost
orders as a percentage of total sales.
Inflation
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's revenues or
profitability.
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Net Operating Loss Carryforwards
For Federal income tax purposes, the Company files a consolidated tax
return including its wholly-owned subsidiaries. At January 31, 1995, the Company
and its subsidiaries have net operating loss carryforwards of approximately
$8,500,000 for income tax purposes, which expire in the years 2008 and 2009. Due
to the issuance by the Company of shares of its common stock on February 23,
1993 in connection with a public offering, an "ownership change," as defined in
Section 382 of the Internal Revenue Code, occurred. Section 382 restricts the
use of net operating loss carryforwards incurred prior to the ownership change
to $275,000 per year. Approximately $5,700,000 of the operating loss
carryforwards are subject to this restriction and, as a result, the Company may
not be able to fully utilize these restricted operating loss carryforwards. This
restriction may be reduced by the occurrence of certain events.
19
<PAGE>
Results of Operations
The following table reflects the results of operations for the periods
indicated.
Year Ended January 31
---------------------
1995 1994
---- ----
(In Thousands)
Landed sales ............................ $ 19,953 $ 9,799
Cost of landed sales .................... 17,827 9,389
-------- --------
Gross profit on landed sales .......... 2,126 410
Commission income ....................... 3,957 3,246
License income .......................... 282 119
-------- --------
Gross profit .......................... 6,365 3,775
-------- --------
Selling expense ......................... 4,575 4,936
General and administrative
expense ............................... 3,520 3,848
Income on defined benefit plan
curtailment ........................... (340) --
-------- --------
Operating loss .......................... (1,390) (5,008)
Loss on settlement of
obligations ........................... (77) --
Insurance claim proceeds ................ 275 --
Provision for litigation settlements
and writedown of investment ........... (--) 817
Interest expense, net ................... (647) (473)
Loss on abandonment of
fixed assets .......................... (61) (28)
-------- --------
Loss before income taxes
and extraordinary item ................ (1,901) (6,327)
Provision (recovery) of
income taxes .......................... 34 (6)
-------- --------
Net income (loss)
before extraordinary item ............. (1,935) (6,321)
Extraordinary item ...................... 2,702 --
-------- --------
Net income (loss) ....................... $ 767 $ (6,321)
======== ========
Fiscal 1995 Compared with Fiscal 1994
Landed sales increased by $10,154,450 (103.6%) primarily due to the
Company's sales and marketing efforts, including the Company's decision to
emphasize sales of casual, outdoor and fashion footwear. These efforts resulted
in both an increase in the amount of footwear sold as well as higher profit
20
<PAGE>
margins. Commission income increased by $711,002 (21.9%) primarily due to the
Company's decision to emphasize sale of footwear on a first cost rather than a
landed sales basis which, in addition to increasing commission income, reduces
the Company's need to finance inventory. License income increased by $162,982
(137%) due to increased sales of ladies intimate apparel pursuant to the
licensing arrangement with Wundies and increases in sales of Candie's children's
footwear by Kid. Selling expenses decreased by $360,891, a 7.3% decrease,
primarily as a result of management's efforts to control costs by reducing
advertising, travel and entertainment expenses and a reduction in sales
commissions. General and administrative expenses decreased by $327,519 (8.5%),
as a result of management's efforts to reduce overhead costs through, among
others, a significant reduction in rental expense and insurance costs.
Professional fees also declined as a result of the settlement of certain
litigation. Total operating expenses decreased by 11.7% or $1,028,410. The
operating loss decreased by $3,618,434, a 72.2% improvement. Interest expense
increased by $174,869 (37%) primarily as a result of increased borrowings under
the Company's arrangements with Congress and an increased interest rate paid on
outstanding indebtedness, including the indebtedness with the Institutional
Lender that was extinguished in October 1994. During Fiscal 1995, the Company
recognized extraordinary income of $2,702,175, representing a gain on the
extinguishment of debt due to the Institutional Lender. There was no comparable
item in Fiscal 1994. As a result of the foregoing, the Company achieved a net
income of $767,259 for Fiscal 1995 compared to a loss of $6,321,092 in Fiscal
1994.
Income Taxes
At January 31, 1995, the Company had net operating losses of approximately
$8,500,000 for income tax purposes, which expire in the years 2008 and 2009. The
Company cannot utilize these losses unless it is profitable. If the Company
achieves taxable income in the future, it will be able to utilize these net
operating loss carryforwards to satisfy its tax liabilities to the extent such
carryforwards are available. Under certain provisions of the Internal Revenue
Code, the use of approximately $5,700,000 of these operating loss carryforwards
will be restricted to $275,000 per year. As a result, the Company may not be
able to fully utilize these restricted operating loss carryforwards. This
restriction may be reduced by the occurrence of certain events.
Item 7. Financial Statements
The response to this Item is submitted as a separate section of this report
commencing on page S-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
21
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Neil Cole 38 Chairman of the Board, President
and Chief Executive Officer
Gary Klein 40 Vice President-Finance
Lawrence O'Shaughnessy 46 Chief Operating Officer, Executive
Vice President and Director
Barry Emanuel 56 Director
Neil Cole became Chairman of the Board, President and Chief Executive
Officer of the Company on February 23, 1993. During February through April 1992,
Mr. Cole served as a director and as acting President of the Company. Mr. Cole
has also served as Chairman of the Board, President, Treasurer and a director of
New Retail Concepts, Inc. ("NRC"), a public company, since its inception in
April 1985, and as President of El Greco from 1984 to 1985.
Gary Klein has been Vice President-Finance of the Company from February 23,
1993 until December 1993 and from October 1994 to present and was Chief
Financial Officer from December 1993 to October 1994. From May 1989 to May 1990,
Mr. Klein was Chief Financial Officer of NRC. From May 1990 to the present, Mr.
Klein has served as Vice President-Finance of NRC. He is a graduate of George
Washington University, with a BBA degree in accounting, and a licensed certified
public accountant in the State of New York.
Lawrence O'Shaughnessy has been a director and Chief Operating Officer of
the Company since March 1993 and has been Executive Vice President of the
Company since April 1, 1995. He also served as a director of the Company from
April to June 1992. Mr. O'Shaughnessy has been President of O'Shaughnessy &
Company, a management consulting firm, since March 1991. From April 1992 to the
present, 1995, Mr. O'Shaughnessy has also been the President, a director and a
principal stockholder of Major League Footwear, Inc. ("MLF"), a company that
engaged in the importation and distribution of footwear bearing the names and
logos of major league baseball teams. MLF ceased active operations in October
1994. From March 1985 through February 1991, Mr. O'Shaughnessy was President of
Breeze-Eastern, a division of TransTechnology Corporation, designer and
manufacturer of airborne hoisting, winching and cargo handling systems.
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<PAGE>
Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York. Mr.
Emanuel received his B.A. degree from the University of Rhode Island.
Directors are elected annually by the stockholders. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The Company has agreed, for a period of five years through March 3, 1998,
if so requested by Whale Securities Co., L.P., the underwriter of the Company's
public offering in February 1993 (the "Underwriter"), to nominate and use its
best efforts to cause the election of a designee of the Underwriter as a
director of the Company, or, at the Underwriter's option, as a non-voting
advisor to the Company's Board of Directors. The Company's officers and
directors and holders of 5% or more of the outstanding shares of the Company's
Common Stock have agreed to vote their shares of Common Stock in favor of such
designee. The Underwriter has not yet exercised its right to designate such
person.
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Commission. Officers, directors and
greater than 10 percent owners are required by certain Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during the year ended January 31, 1995, except
as set forth below, filing requirements applicable to its officers, directors
and 10% stockholders of Common Stock were complied with: Mr. Cole failed to
timely file a Form 4 with respect to grants of options to him in August and
December 1994 and the purchase of 86,956 shares by NRC upon conversion of a
convertible note in January 1995; Mr. Klein failed to timely file Form 4's with
respect to his purchase of 5,000 shares of Common Stock and the grant to him of
stock options in December 1994; and Mr. O'Shaughnessy failed to timely file a
Form 4 with respect to the receipt of a contract right to acquire 260,000 shares
in May 1994, the disposition of certain shares of stock in August 1994 and a
grant of options to him in December 1994. Barry Emanuel failed to timely file a
Form 4 to report certain grants to him of stock options in September 1994.
23
<PAGE>
Item 10. Executive Compensation
The following table discloses for the fiscal years ended January 31, 1995,
1994 and 1993, compensation for the person that served as Chief Executive
Officer during the fiscal year ended January 31, 1995 and for the those persons
that served as executive officers of Candie's, Inc. during such fiscal year
whose salaries exceeded $100,000 (collectively, the "Named Executives").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
-------------------------- -------------------------------
Securities
Name and Principal Underlying All Other
Position Year Salary($) Bonus($) Options(#) Compensation($)(1)
-------- ---- --------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Neil Cole 1995 225,000 $46,100(2) 410,000 -0-
President and Chief 1994 232,198(3) 600,000 -0-
Executive Officer 1993 -0- -0- 200,012
Gary Klein 1995 106,667 15,000 -0-
Chief Financial Officer 1994 103,969 20,000 -0-
and Vice President- 1993 12,271 -0- -0-
Finance
Lawrence O'Shaughnessy 1995 186,000 10,000 -0-
Chief Operating 1994 149,083 75,000 -0-
Officer 1993 -0- -0- -0-
</TABLE>
- ----------
(1) The amount reported for Mr. Cole for the 1993 fiscal year represents
consulting fees paid by the Company to Mr. Cole in that year.
(2) Represents bonus accrued in Fiscal 1995 under Mr. Cole's employment
agreement.
(3) The amount reported in this column for 1994 fiscal year for Mr. Cole
includes $69,062 which represents the fair market value as of February 23,
1993 of 16,250 shares of the Company's Stock awarded to Mr. Cole on that
date in lieu of $65,000 of salary accrued but not paid by the Company to
Mr. Cole during its 1993 and 1994 fiscal years, of which approximately
$43,300 of such amount was accrued in fiscal 1993 and the balance in fiscal
1994, which accrued salary was converted into shares of Common Stock at the
rate of $4.00 per share. The fair market value of the shares of Common
24
<PAGE>
Stock issued to Mr. Cole is based on the per share closing sale price
of the Common Stock on February 23, 1993 ($4.25) as reported by NASDAQ.
The following table provides information with the respect to individual stock
options granted during Fiscal 1995 to each of the Named Executive officers:
Option Grants in Last Fiscal Year
---------------------------------
(Individual Grants)
<TABLE>
<CAPTION>
% of
Total
Options
Shares Granted to
Underlying Employees Exercise
Options in Fiscal Price Expiration
Name Granted(#) Year ($/sh) Date
- ---- ---------- ---- ------ ----
<S> <C> <C> <C> <C>
Neil Cole 10,000(1) 0.9 1.25 12/20/99
400,000(1) 37.2 1.50 8/01/99
Gary Klein 10,000(2) 0.9 1.75 9/30/04
5,000(1) 0.5 1.25 12/20/99
Lawrence
O'Shaughnessy 10,000(1) 0.9 1.25 12/20/99
</TABLE>
- ----------
(1) Non-qualified non-plan stock options; each option became exercisable on its
date of grant and expires five years from that date. The options for
410,000 shares granted to Mr. Cole and the option for 10,000 shares granted
to Mr. O'Shaughnessy are subject to termination prior to their stated
expiration dates upon occurrence of certain events related to termination
of employment or death.
(2) Incentive stock option granted under the Company's 1989 Stock Plan; the
option granted to Mr. Klein became exercisable on the date of grant. Each
such option expires on the earlier of 10 years from its date of grant or
termination of the Plan, subject to earlier termination upon the occurrence
of certain events related to termination of employment or death.
25
<PAGE>
The following table sets forth information at January 31, 1995 respecting
exercised and unexercised stock options held by the Named Executives. None of
the Named Executives exercised any stock options during Fiscal 1995.
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
-----------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at January 31, 1995 at January 31, 1995*
------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Neil Cole 1,010,000 -0- $ -0- $-0-
Gary Klein 23,000 12,000 -0- -0-
Lawrence O'Shaughnessy 85,000 -0- -0- -0-
</TABLE>
- ----------------
* Options are "in-the-money" if the fair market value of the Common Stock
exceeds the exercise price. At January 31, 1995, the closing sale price per
share of the Common Stock as reported by NASDAQ was $1.13.
Pension Plan
As of December 31, 1994, the Company suspended benefit accruals for future
services for participants under the Company's defined benefit pension plan which
was terminated on February 10, 1995. Participants in the plan will receive a
lump sum distribution of amounts held in their respective accounts under the
plan.
Compensation of Directors
Directors receive no cash compensation for serving on the Board. However,
non-employee directors of the Company are eligible to be granted non-qualified
stock options and limited stock appreciation rights under the Company's 1989
Stock Option Plan (the "1989 Plan"). No stock appreciation rights have been
granted under the 1989 Plan. Non-qualified stock options may be granted under
the 1989 Plan for up to 10 years from the date of grant at such exercise prices
as the Board of Directors may determine. No non-qualified stock options were
granted to non-employee directors under the 1989 Plan during Fiscal 1995.
However, in September 1994, Mr. Barry Emanuel was granted five-year non-plan
non-qualified stock options to purchase an aggregate of 25,000 shares of Common
Stock at $1.9375 per share.
Employment Contracts and Termination and Change-in-Control Arrangements
The Company has entered into an employment agreement with Neil Cole, which
as amended, expires on February 28, 1997, at an annual base salary of $300,000
for the year ending February 28, 1996 and $350,000 thereafter, subject to annual
increases at the discretion of the Company's Board of Directors. Pursuant to the
employment agreement, Mr. Cole will serve as President and Chief Executive
Officer of the Company, devoting a majority of his business time to the Company
and the remainder of his business time to other business activities, including
those of NRC. Pursuant to the agreement, Mr. Cole (i) is entitled to receive a
26
<PAGE>
portion of an annual bonus pool equal to five percent of the Company's annual
pre-tax profits, if any, divided among the Company's executive officers, as
determined by the Board of Directors; (ii) was granted an immediately
exercisable non-qualified five-year option to purchase 400,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share; and (iii) is
entitled to customary benefits, including participation in management incentive
and benefit plans, reimbursement for automobile, reasonable travel and
entertainment expenses and a life insurance policy in the amount of $1,000,000.
Mr. Cole is also entitled to receive any additional bonuses as the Board of
Directors may determine. In March 1995, Mr. Cole was also granted an immediately
exercisable five-year option to purchase 400,000 shares of Common Stock at $1.16
per share for his agreement to extend his employment agreement to the current
expiration date. If Mr. Cole terminates his employment with the Company for
"good reason" (as defined in the employment agreement) or the Company terminates
Mr. Cole's employment without "cause" (as defined in the employment agreement),
including by reason of a "change-in-control" of the Company (as defined in the
employment agreement), the Company is obligated to pay Mr. Cole his full salary
(at the annual base salary rate then in effect) through the date of termination
plus full base salary for one year or the balance of the term of the agreement,
whichever is greater.
The Company has reached an agreement in principle to enter into an
employment agreement with Mr. O'Shaughnessy with respect to his continued
employment as an officer of the Company. The agreement contemplates that Mr.
O'Shaugnessy will be employed at an annual base salary of $225,000 for the year
ending March 31, 1996 and $250,000 thereafter, subject to annual increases at
the discretion of the Company's Board of Directors. Pursuant to the agreement,
Mr. O'Shaughnessy will serve as Executive Vice-President and Chief Operating
Officer of the Company, devoting a majority of his business time to the Company
and the remainder of his business time to other business activities. Pursuant to
the agreement, Mr. O'Shaughnessy (i) will be entitled to receive an annual bonus
equal to 1.5% of the Company's annual pre-tax profits, if any; (ii) was granted
an immediately exercisable non-qualified five-year option to purchase 200,000
shares of the Company's Common Stock at an exercise price of $1.16 per share;
and (iii) will be entitled to customary benefits, including participation in
management incentive and benefit plans, reimbursement for automobile, reasonable
travel and entertainment expenses and a life insurance policy in an amount equal
to his annual base salary.
The Company has entered into an employment agreement with Gary Klein which
provides for his employment as the Vice-President of Finance of the Company for
a two year period expiring November 15, 1996 at an annual salary of $100,000. In
addition, the Company will provide Mr. Klein with term life insurance in the
amount of $110,000.
Effective as of December 16, 1993, the Company entered into an agreement
with MLF (the "Inventory Purchase Agreement") to purchase finished goods
inventory items from MLF. In May 1994, the Company agreed to issue an aggregate
of 260,000 shares of Common Stock to MLF in satisfaction of the Company's
obligation to make payments of approximately $614,000 to MLF in connection with
the Company's purchase of shoes from MLF under the Inventory Purchase Agreement.
27
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of May 9, 1995, based
on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock; (ii) each person named in the Summary Compensation
Table; (iii) each of the Company's directors; and (iv) all executive officers
and directors as a group:
<TABLE>
<CAPTION>
Percentage
Name and Address of Amount and Nature of of Beneficial
Beneficial Owner(1) Beneficial Ownership(2) Ownership
------------------- ----------------------- ---------
<S> <C> <C>
Neil Cole....................................................... 3,298,946(3)(4)(5) 32.1%
New Retail Concepts, Inc........................................ 1,827,696(3)(5) 20.7%
Terren Peizer................................................... 650,000 7.9%
c/o Beechwood Financial Company, Inc............................
Suite 2000
11100 Santa Monica Boulevard
Los Angeles, California 90025
Saint Day International Co., Ltd................................ 460,000(6) 5.6%
Lawrence O'Shaughnessy.......................................... 345,000(7) 4.1%
Gary Klein...................................................... 28,000(8) *
Barry Emanuel................................................... 12,500(9) *
All executive officers and directors
as a group (four persons) ................................ 3,684,446(3)(4)
................................................................ (5)(7)(8)(9) 34.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the persons listed below
is 2975 Westchester Avenue, Purchase, New York 10577.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Consequently, each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such
person (but not those held by any other person) and which are exercisable
within 60 days from May 9, 1995 have been exercised. Unless otherwise
noted, the Company believes that all of the persons named in the above
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(3) Neil Cole, the President and Chief Executive Officer of NRC, owns,
beneficially and of record, approximately 30% of NRC's outstanding common
stock. In addition, as President of NRC, Mr. Cole has or will have the
right to vote the 1,827,696 shares of the Company's Common Stock
beneficially owned by NRC. Mr. Cole disclaims beneficial ownership of these
shares.
28
<PAGE>
(4) Includes 1,440,000 shares of Common Stock issuable upon exercise of
immediately exercisable warrants and options owned by Neil Cole. Also
includes 10,000 shares held by a charitable foundation of which Mr. Cole
and his wife are co-trustees. Mr. Cole disclaims beneficial ownership of
the shares held by the charitable foundation.
(5) Includes 600,000 shares of Common Stock issuable upon exercise of
immediately exercisable options and warrants.
(6) Includes 10,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(7) Includes 285,000 shares of Common Stock issuable upon exercise of
immediately exercisable options and 60,000 shares of Common Stock issued to
MLF. Mr. O'Shaughnessy, Chief Operating Officer and a director of the
Company, owns, beneficially and of record, all of the outstanding common
stock of MLF. In addition, as President of MLF, Mr. O'Shaughnessy will have
the right to vote the 60,000 shares of Common Stock issued to MLF.
Consequently, Mr. O'Shaughnessy may be deemed the beneficial owner of such
60,000 shares of Common Stock.
(8) Includes 23,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(9) Represents shares of Common Stock issuable upon exercise of immediately
exercisable options.
Item 12. Certain Relationships and Related Transactions
In March 1993, El Greco, a subsidiary of NRC (a principal stockholder of
the Company) that was later merged with NRC, assigned to the Company certain
trademarks (collectively, the "Trademarks"), including the CANDIE'S trademark,
all of El Greco's business operations associated with the Trademarks and all of
its existing licensing agreements with respect to the Trademarks (including the
existing license agreement between El Greco and the Company relating to the
CANDIE'S trademark). In connection therewith, El Greco received from the Company
in March 1993 (the "Closing Date"), 900,000 shares of Common Stock, a
subordinated note of the Company in the principal amount of $325,000 maturing
two years from the Closing Date (the "El Greco Note") and $75,000 as
reimbursement for its expenses, including attorney's fees, relating to the
foregoing transactions. The term of this transaction was determined by
negotiations between the parties. In July 1994, the Company issued 240,740
shares of Common Stock to NRC in full payment of the El Greco Note.
29
<PAGE>
In March 1993, the Company entered into a Services Allocation Agreement
with NRC pursuant to which the Company provides NRC with certain business
services for which NRC pays the Company an amount equal to an allocable portion
of the Company's expenses, including employees' salaries, associated with such
services. Pursuant to such agreement, NRC paid the Company an aggregate of
approximately $73,860 and $159,758 during the fiscal years ended January 31,
1994 and 1995, respectively.
Effective as of December 16, 1993, the Company entered into an agreement
with MLF (the "Inventory Purchase Agreement") to purchase certain finished goods
inventory items from MLF. Mr. O'Shaughnessy, the Chief Operating Officer of the
Company, is the President of MLF. In July 1994, pursuant to the Inventory
Purchase Agreement, the Company issued an aggregate of 260,000 shares of Common
Stock to MLF in satisfaction of te Company's obligation to make payments in an
amount equal to the purchase price of approximately $614,000, by the Company.
In November 1993, the Company granted to Mr. Cole an immediately
exercisable stock option to purchase 200,000 shares of Common Stock at an
exercise price of $2.56 per share in consideration for the issuance by Mr. Cole
to Congress of his limited guaranty of certain indebtedness of the Company to
Congress. Such option expires five years from its date of grant. In August 1994,
Mr. Cole was granted a five-year option to purchase 400,000 shares of the
Company's Common Stock at $1.50 per share and his annual salary was increased to
$250,000 per annum in consideration of granting his unlimited guaranty of
certain indebtedness of the Company to Congress.
In January 1995, the Company and NRC entered into an Amended and Restated
Affiliation Transaction Agreement which generally provides that, except for
certain specified exceptions, the Company will not enter into any transactions
with NRC or any subsidiary of NRC, except where the transaction is approved by
either a majority of the Company's disinterested directors (as defined in the
agreement) or its stockholders.
On February 1, 1995 (the "Closing Date"), the Company and NRC entered into
a securities purchase agreement (the "Securities Purchase Agreement"), pursuant
to which NRC loaned to the Company the sum of $400,000 (the "Loan"). The Loan is
evidenced by a senior subordinated secured note (the "Note") in the sum of
$400,000 bearing interest at the prime rate as established by Corestate National
Bank of Philadelphia, Pennsylvania ("Corestate"), from time to time, and is due
on June 30, 1995, subject to extension of the maturity date by the Company to
September 30, 1995 (the "Loan Extension"). The Company's has advised the Company
that the proceeds of the Loan are to be utilized to replace cash collateral in
favor of Congress a senior lender to the Company's, which was previously
advanced by Mr. Cole for the benefit of the Company.
30
<PAGE>
On the Closing Date, NRC also loaned the Company the sum of $200,000 (the
"Trademark Loan"), the proceeds of which were used by the Company as an advance
for the license of the Bongo Trademark with an unaffiliated third party. The
Loan is evidenced by the Trademark Note in the sum of $200,000 bearing interest
at the prime rate as established by Corestate, from time to time, and is due on
February 1, 1996. Candie's has agreed to prepay the Trademark Note to the extent
of 50% of gross profits received by the Company from the use of the Trademark
with third parties on an agency or commission basis.
In addition, on the Closing Date, NRC agreed to make available to the
Company during the period which commenced on the Closing Date and expiring on
June 30, 1995, an additional $200,000 if, but only if the Company is required to
advance additional cash collateral to Congress (the "Congress Line of Credit").
Any advances on the Congress Line of Credit will be evidenced by a senior
subordinated secured note (the "Congress Advance Note") bearing interest at the
prime rate as established by Corestate.
On the Closing Date, the Company issued to NRC warrants ("Warrants") to
purchase up to 700,000 shares of Common Stock, of which 500,000 shares vested on
the Closing Date and 200,000 shares will vest upon the occurrence of a Loan
Extension, exercisable at an initial price of $1.2375 per share of Common stock,
which price equals 110% of the closing bid price of the Common Stock on the
NASDAQ National Market System on January 31, 1995. The shares of Common Stock
underlying the Warrants have been granted certain "piggy-back" registration
rights by the Company.
To secure the obligations of the Note, the Trademark Note and, if issued,
the Congress Advance Note (collectively the "Notes"), the Company granted to NRC
a security interest in all of the assets of the Company's, Bright Star Footwear,
Inc., a wholly-owned subsidiary of the Company, and Intercontinental Trading
Group, Inc., a majority-owned subsidiary of the Company, subject to a first lien
on such assets in favor of Congress and/or one or more commercial or
institutional lenders other than Congress, to be identified after the Closing
Date, who may provide the Company with up to an aggregate of $7,500,000
principal amount of secured senior financing. In furtherance thereof, on the
Closing Date, NRC entered into an intercreditor and subordination agreement with
Congress and issued a corporate limited recourse guarantee and waiver in favor
of Congress in the amount of $400,000 (the "Guarantee"), whereby the sole and
exclusive recourse of the Guarantee is the $400,000 Loan. As additional security
for the Notes, Mr. Cole issued a personal guarantee in favor of NRC.
The Company has no reason to believe that the terms of the transactions
described hereunder were on terms that were less favorable to the Company than
those that could have been obtained from non-affiliated parties.
31
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) (1) and (2)
(a) Exhibits numbered in accordance with Item 601 of Regulation S-B.
Exhibit
Numbers Description
3.1(1) Certificate of Incorporation, as amended through October 1994 (1)
3.2 Amendment to Certificate of Incorporation filed November 1994
3(b) By-Laws (1)
4.1 Form of Warrants to Purchase Common Stock issued to Whale Securities
Co., L.P. (2)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (4)
10.2 Millfeld Trading Co., Inc. 1989 Stock Option Plan (1)
10.3 Discount Factoring Agreement and Supplements between Congress Talcott
Corporation and the Company (5)
10.4 General Security Agreement between Congress Talcott Corporation and
Intercontinental Trading Group, Inc. (5)
10.5 Personal Guaranty and Waiver of Neil Cole in favor of Congress Talcott
Corporation (5)
10.6 Employment Agreement between Neil Cole and the Company (5)
10.7 Amendment to Employment Agreement between Neil Cole and the Company
10.8 Services Allocation Agreement between the Company and New Retail
Concepts Inc. (5)
32
<PAGE>
10.9 Joint Venture Agreement between Carousel Group, Inc. and the Company
(4)
10.10 Sublease Termination Agreement between the Company and Fieldcrest
Cannon, Inc. (5)
10.11 Indemnity Agreement of Barnet Feldstein (5)
10.12 Amended and Restated Affiliates Transaction Agreement between the
Company and New Retail Concepts Inc. dated January 30, 1995
10.13 Securities Purchase Agreement between New Retail Concepts, Inc. and the
Company dated February 1, 1995
10.14 Security Agreement among New Retail Concepts, Inc., the Company, Bright
Star Footwear, Inc. and Intercontinental Trading Group, Inc., dated
February 1, 1995
10.15 Guarantee of Neil Cole in favor of New Retail Concepts, Inc. dated
February 1, 1995
10.16 Lease with respect to the Company's executive offices
10.17 Employment Agreement between Gary Klein and the Company
10.18 License Agreement between El Greco, Inc. and Wundie's, Inc.
10.19 Settlement Agreement dated October 6, 1994 by and among the Company,
Intercontinental Trade Group, Inc., Bright Star Footwear, Inc. and
Shanghai Council Bank, Ltd.
10.20 Agreement dated May 16, 1994 between the Company and New Retail
Concepts, Inc.
10.21 Agreement dated May 16, 1994 between the Company and Major League
Footwear, Inc.
10.22 Settlement Agreement dated July 22, 1994 between the Company and
Starter Corporation.
10.23 Settlement Agreement dated July 13, 1994 between the Company and
Saintday International Co. Ltd.
21 Subsidiaries of the Company
33
<PAGE>
- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277- NY) and incorporated by reference herein.
(2) Filed with the Registrant's Current Report on Form 8-K dated June 6, 1991
and incorporated by reference herein.
(3) Filed with the Registrant's Annual Report on Form 10-K for the year ended
January 31, 1992.
(4) Filed with the Registrant's Registration Statement on Form S-1 (File
33-53878) and incorporated by reference herein.
(5) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1994 and incorporated referred herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the last quarter of the
period covered by this report.
34
<PAGE>
Consolidated Financial Statements
Form 10-KSB Item 7
Candie's, Inc. and Subsidiaries
Years ended January 31, 1995 and 1994
<PAGE>
Candie's, Inc. and Subsidiaries
Form 10-KSB Item 7
Index to Consolidated Financial Statements
Report of Independent Auditors........................................... S-3
Consolidated Balance Sheets - January 31, 1995 and 1994.................. S-4
Consolidated Statements of Operations for the Years ended
January 31, 1995 and 1994............................................. S-6
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years ended January 31, 1995 and 1994......................... S-7
Consolidated Statements of Cash Flows for the Years ended
January 31, 1995 and 1994............................................. S-9
Notes to Consolidated Financial Statements............................... S-11
S-2
<PAGE>
Report of Independent Auditors
The Stockholders of
Candie's, Inc.
We have audited the accompanying consolidated balance sheets of Candie's Inc.
and subsidiaries as of January 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Candie's, Inc. and
subsidiaries at January 31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2(a) the Company
has suffered recurring losses, and at January 31, 1995, continues to have a
working capital deficit. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon continued support of trade vendors
and institutional lenders, obtaining additional equity and, achieving profitable
operations. Management's plans in regard to these matters are also discussed in
Note 2(a). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
New York, New York
April 26, 1995
S-3
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31
1995 1994
-------------------------
<S> <C> <C>
Assets (Notes 6 and 7)
Current assets:
Cash and cash equivalents $ -- $ 114,153
Restricted cash (Note 10) 100,000 --
Accounts receivable, net of allowances of $45,000
and $773,000 at January 31, 1995 and 1994 583,911 226,593
Inventories 3,269,158 3,572,733
Prepaid expenses 151,195 273,832
Refundable taxes -- 219,876
-------------------------
Total current assets 4,104,264 4,407,187
-------------------------
Property and equipment, less accumulated
depreciation and amortization (Note 4) 142,960 210,514
-------------------------
Other assets:
Noncompetition agreements (Note 3) 414,234 516,952
Trademark 5,114,282 5,397,098
Other 514,274 512,929
-------------------------
Total other assets 6,042,790 6,426,979
Total assets
-------------------------
$10,290,014 $11,044,680
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
S-4
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
January 31
1995 1994
----------------------------
<S> <C> <C>
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 1,820,598 $ 1,795,246
Payable for inventory in transit 1,105,845 395,918
Due to factor (Note 6) 1,162,035 1,782,413
Due to Major League Footwear (Note 9) -- 613,771
Accrued litigation expense (Note 9) 100,000 555,000
Accrued expenses, allowances and taxes 1,394,253 1,678,854
Accrued royalty (Note 9) -- 532,031
Accrued U.S. Customs duty (Note 10) 63,427 51,004
Current maturities of long-term debt (Notes 1 and 7) -- 183,750
----------------------------
Total current liabilities 5,646,158 7,587,987
Long-term debt (Notes 1 and 7) -- 3,209,425
Due to El Greco, Inc. (Note 1) -- 325,000
Other noncurrent liabilities (Note 9) 206,213 --
Accrued U.S. Customs duty (Note 10) 45,746 100,449
Accrued pension liability (Note 14) -- 392,000
----------------------------
Total liabilities 5,898,117 11,614,861
Commitments, contingencies and other matters (Notes 2,
5, 6, 7, 8, 9, 10, and 13)
Stockholders' equity (deficiency) (Note 8):
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 at January 31, 1995 and
1994, respectively; shares issued: 8,709,465 and
5,022,735 at January 31, 1995 and 1994, respectively 8,709 5,023
Additional paid-in capital 9,162,837 7,670,081
Deficit, since February 28, 1993, (deficit eliminated
$27,696,007) (4,779,649) (5,546,908)
Treasury stock, at cost, 254,633 shares at January 31, 1994 -- (2,698,377)
----------------------------
Total stockholders' equity (deficiency) 4,391,897 (570,181)
----------------------------
Total liabilities and stockholders' equity $ 10,290,014 $ 11,044,680
============================
</TABLE>
S-5
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended January 31
1995 1994
----------------------------
<S> <C> <C>
Landed sales $ 19,953,482 $ 9,799,032
Cost of landed sales 17,827,038 9,388,628
----------------------------
Gross profit on landed sales 2,126,444 410,404
Other income:
Commission income 3,956,722 3,245,720
License income 281,929 118,947
----------------------------
Gross profit 6,365,095 3,775,071
----------------------------
Operating expenses:
Selling expenses 4,574,655 4,935,546
General and administrative expenses 3,520,964 3,848,483
Income on defined benefit plan curtailment (Note 14) (340,000) --
----------------------------
Total operating expenses 7,755,619 8,784,029
Operating loss (1,390,524) (5,008,958)
Other income (deductions):
(Loss) on settlements of litigation and other
obligations (Note 9) (77,697) --
Insurance claim proceeds (Note 9) 275,000 --
Provision for litigation and other settlements
and writedown of investment in Joint Venture
(Notes 5 and 9) -- (817,276)
Interest expense, net (647,440) (472,570)
Loss on abandonment of fixed assets (60,755) (28,282)
----------------------------
Loss before income taxes and extraordinary item (1,901,416) (6,327,086)
Provision (recovery) of income taxes 33,500 (5,994)
----------------------------
Net (loss) before extraordinary item (1,934,916) (6,321,092)
Extraordinary item--gain on extinguishment of debt,
net of income taxes of $121,000 (Note 7) 2,702,175 --
----------------------------
Net income (loss) $ 767,259 $ (6,321,092)
============================
Earnings (loss) per share:
Net loss before extraordinary item $ (.30) $ (1.32)
Extraordinary item--gain on extinguishment of debt,
net of income taxes of $.02 .42 --
----------------------------
Net income (loss) $ .12 $ (1.32)
============================
Weighted average number of common shares outstanding 6,398,488 4,789,667
============================
</TABLE>
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
---------------------------------------- Paid-In Retained
Shares Amount Shares Amount Capital Deficit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1993 912,577 $912 - - $17,737,564 $(26,921,823)
Issuance of common stock at $5.00
per share pursuant to a secondary
public offering on March 3, 1993,
net of related expenses of $1,577,298 1,475,000 1,475 - - 5,796,227 -
Issuance of common stock in connection
with the acquisition of Candie's trademark 900,000 900 - - 1,079,100 -
Issuance of common stock and write-off of
deferred professional fees and accrued
interest in connection with conversion
of debenture 777,777 778 - - 2,489,483 -
Acquisition of treasury stock through
capital contribution by the former
debenture holder - - - 415,033 -
Forgiveness of debt by the Company's
institutional lender - - - - 5,940,019 -
Issuance of common stock in connection with
acquisition of underwriter's IPO warrants 57,609 58 - - (58) -
Issuance of common stock in lieu of
compensation to two executives 32,500 33 - - 129,967 -
Issuance of common stock in connection with
settlements of accrued royalties owed to
Chaus and legal fees related to the
offering on March 3, 1993 115,000 115 - - 305,885 -
Net loss for the month ended
February 28, 1993 - - - - - (774,184)
Reclass stockholders' deficiency pursuant
to quasi-reorganization - - - - (27,696,007) 27,696,007
------------------------------------------------------------------------
Balance at February 28, 1993 4,270,463 4,271 - - 6,197,213 -
Additional secondary offering costs and
settlements of prior year liabilities - -
Issuance of common stock at $2.75 per
share pursuant to a private placement
on May 18, 1993, net of related expenses
of $114,794; and 25,000 shares of common
stock in connection with private
placement finder's fee 752,272 752 - - 1,884,454 -
Net loss for eleven months ended
January 31, 1994 - - - - - (5,546,908)
----------------------------------------------------------------------
Balance at January 31, 1994 5,022,735 5,023 - - 7,670,081 (5,546,908)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Shares Amount Total
--------------------------------------
<S> <C> <C> <C>
Balance at January 31, 1993 (126,856) $(2,283,344) $(11,466,691)
Issuance of common stock at $5.00
per share pursuant to a secondary
public offering on March 3, 1993,
net of related expenses of $1,577,298 - - 5,797,702
Issuance of common stock in connection
with the acquisition of Candie's trademark - - 1,080,000
Issuance of common stock and write-off of
deferred professional fees and accrued
interest in connection with conversion
of debenture - - 2,490,261
Acquisition of treasury stock through
capital contribution by the former
debenture holder (127,777) (415,033) -
Forgiveness of debt by the Company's
institutional lender - - 5,940,019
Issuance of common stock in connection with
acquisition of underwriter's IPO warrants - - -
Issuance of common stock in lieu of
compensation to two executives - - 130,000
Issuance of common stock in connection with
settlements of accrued royalties owed to
Chaus and legal fees related to the
offering on March 3, 1993 - - 306,000
Net loss for the month ended
February 28, 1993 - - (774,184)
Reclass stockholders' deficiency pursuant
to quasi-reorganization - - -
---------------------------------------
Balance at February 28, 1993 (254,633) (2,698,377) 3,503,107
Additional secondary offering costs and
settlements of prior year liabilities - - (411,586)
Issuance of common stock at $2.75 per
share pursuant to a private placement
on May 18, 1993, net of related expenses
of $114,794; and 25,000 shares of common
stock in connection with private
placement finder's fee - - 1,885,206
Net loss for eleven months ended
January 31, 1994 - - (5,546,908)
---------------------------------------
Balance at January 31, 1994 (254,633) (2,698,377) (570,181)
</TABLE>
S-7
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficiency) (continued)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
---------------------------------------- Paid-In Retained
Shares Amount Shares Amount Capital Deficit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994 (carryforward) 5,022,735 $ 5,023 - $ - $ 7,670,081 $ (5,546,908)
Issuance of common stock in conjunction
with settlementsof litigation and other
obligations 910,000 910 - - 1,067,590 -
Issuance of common stock in full
satisfaction of the El Greco Note 240,740 241 - - 324,759 -
Issuance of common stock pursuant to
private placements in May 1994, net of
related expenses of $66,881 281,481 281 - - 317,838 -
Issuance of common stock and 8% Series A
Convertible Preferred Stock pursuant
to private placements in October 1994,
net of related expenses of $398,400;
and 55,000 shares of common stock in
lieu of payment of professional fees 1,011,525 1,012 10,286 103 1,729,085 -
Issuance of treasury shares pursuant to
extinguishment of debt in October 1994 - - - - (1,627,344) -
Conversion of 8% Series A Convertible
Preferred Stock into common stock 894,432 894 (10,286) (103) (791) -
Issuance of common stock to NRC 86,957 87 - - 99,913 -
Retirement of treasury shares (216,666) (217) - - (1,070,816) -
Shares reserved in connection with
settlement of litigation 478,261 478 549,522 -
Tax effect of utilization of pre-quasi
reorganization operating loss
carryforwards - - - - 103,000 -
Net income for the year ended
January 31, 1995 - - - - - 767,259
------------------------------------------------------------------------
Balance at January 31, 1995 8,709,465 $ 8,709 - $ - $ 9,162,837 $(4,779,649)
========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Shares Amount Total
---------------------------------------
<S> <C> <C> <C>
Balance at January 31, 1994 (carryforward) (254,633) $(2,698,377) $ (570,181)
Issuance of common stock in conjunction
with settlementsof litigation and other
obligations - - 1,068,500
Issuance of common stock in full
satisfaction of the El Greco Note - - 325,000
Issuance of common stock pursuant to
private placements in May 1994, net of
related expenses of $66,881 - - 318,119
Issuance of common stock and 8% Series A
Convertible Preferred Stock pursuant
to private placements in October 1994,
net of related expenses of $398,400;
and 55,000 shares of common stock in
lieu of payment of professional fees - - 1,730,200
Issuance of treasury shares pursuant to
extinguishment of debt in October 1994 37,967 1,627,344 -
Conversion of 8% Series A Convertible
Preferred Stock into common stock - - -
Issuance of common stock to NRC - - 100,000
Retirement of treasury shares 216,666 1,071,033 -
Shares reserved in connection with
settlement of litigation - - 550,000
Tax effect of utilization of pre-quasi
reorganization operating loss
carryforwards - - 103,000
Net income for the year ended
January 31, 1995 - - 767,259
------------------------------------------
Balance at January 31, 1995 - $ - $ 4,391,897
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
S-8
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended January 31
1995 1994
------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 767,259 $(6,321,092)
Items in net income (loss) not affecting cash:
Depreciation and amortization 496,119 590,868
Provision for writedown of investment in Joint Venture -- 262,276
Provision for litigation settlement -- 555,000
Gain on extinguishment of debt (2,823,175) --
Loss on settlements of litigation and other obligation 77,697 --
Provision for allowances on accounts receivable (728,000) (192,000)
Income on defined benefit plan curtailment (340,000) (39,000)
Gain on settlement of lease obligation 178,081 --
Gain on settlement of vendor liability (509,888) --
Loss on abandonment of property and equipment 60,755 28,282
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Restricted cash (100,000) --
Accounts receivable 370,682 632,604
Inventories 303,575 (2,860,113)
Prepaid expenses 122,637 (215,364)
Refundable income taxes 219,876 84,147
Other assets (38,089) 98,312
Accounts payable 12,818 18,658
Due to factor (620,378) 1,782,413
Due to Major League Footwear -- 613,771
Accrued expenses and taxes 61,489 548,752
Accrued royalty -- (100,000)
Payable for inventory in transit 709,927 (83,511)
Accrued U.S. Customs duties (42,280) (1, 028,547)
Other noncurrent liabilities 206,213 --
------------------------
Net cash used in operating activities (1,614,682) (5,624,544)
------------------------
</TABLE>
S-9
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended January 31
1995 1994
--------------------------
Cash flows used in investing activities
Payments in connection with Candie's license $ -- $ (75,000)
Capital expenditures (67,041) (97,140)
--------------------------
Net cash used in investing activities (67,041) (172,140)
==========================
Cash flows from financing activities
Net borrowings under revolving credit agreement -- 260,977
Repayments of long-term debt (570,000) (1,856,825)
Proceeds from secondary public offering, net of
related expenses of $2,040,048 -- 5,334,902
Proceeds from private placements, net of
expenses and finders' fees of $476,030
(1995) and $482,108 (1994) 2,037,570 1,885,206
Proceeds from sale of stock to affiliated entity 100,000 --
--------------------------
Net cash provided by financing activities 1,567,570 5,624,260
--------------------------
Net decrease in cash and cash equivalents (114,153) (172,424)
Cash and cash equivalents, beginning of year 114,153 286,577
--------------------------
Cash and cash equivalents, end of year $ -- $ 114,153
==========================
Supplemental cash flow information
Cash paid during the period for interest $ 1,117,468 $ 406,567
==========================
Cash paid during the period for income taxes $ 62,682 $ 3,856
==========================
See accompanying notes to consolidated financial statements.
S-10
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1995
1. Continuing Operations
Business, Secondary Offering and Other Transactions
Candie's, Inc. and its subsidiaries (the "Company") design, market, import and
distribute a variety of moderately-priced, 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 is engaged in a joint venture arrangement for the development of a
specialized footwear sole (the "Joint Venture") with Urethane Technologies, Inc.
("UTI") (see Note 5).
(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 canceled a
warrant to purchase additional shares of common stock previously issued to him
in connection with the Debenture.
S-11
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Continuing Operations (continued)
(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(R)," "ACTION CLUB(R),"
"FULLMOON(R)" and "SUGAR BABIES(R)" (collectively, the "Trademarks"), and all of
its business operations associated with the Trademarks, to the Company; (iii) El
Greco assigned all of its preexisting agreements with licensees of the
Trademarks to the Company; (iv) the Company issued to El Greco a subordinated
note in the principal amount of $325,000, plus interest payable quarterly at the
"prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company
paid El Greco's expenses, including attorney's fees relating to the El Greco
Transactions, in the sum of $75,000 from the proceeds of the offering. In May
1994, the El Greco Note was satisfied. (See Note 9).
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 whose principal shareholder is the
Company's President.
(iv)Institutional Leader--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.
S-12
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Continuing Operations (continued)
The indebtedness before and after the restructuring was as follows:
<TABLE>
<CAPTION>
Current Working Revolving Accrued
Term Loan Capital Loan Loan Interest Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Indebtedness before Debt Restructuring $2,204,378 $500,000 $8,200,818 $ 284,823 $11,190,019
Debt forgiveness at March 3, 1993
(954,378) - (4,700,818) (284,823) (5,940,019)
----------------------------------------------------------------------------------------
Indebtedness after Debt Restructuring $1,250,000 $500,000 $3,500,000 $ - $ 5,250,000
========================================================================================
</TABLE>
The balance of the indebtedness, after the Debt Restructuring was converted
to the following facilities (see Note 7):
<TABLE>
<CAPTION>
Modified Working First Second
Term Loan Capital Loan Term Loan Term Loan Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructured Indebtedness $1,250,000 $500,000 $2,500,000 $1,000,000 $5,250,000
====================================================================================
</TABLE>
(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 (see Note
(iv), above).
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, the Debt Restructuring and the installation of a new
management team, the Company had substantially reduced its outstanding
indebtedness which, to a great extent, was incurred in connection with its
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.
S-13
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Continuing Operations (continued)
In connection with the quasi-reorganization, the following adjustments were made
to the Company's accounts:
CANDIE'S trademark $ 2,640,084
Noncompetition agreements (1,717,927)
Investment in Joint Venture (737,724)
Other assets (184,433)
------------
Total $ --
============
2. Summary of Significant Accounting 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.
Although on February 23, 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, sales of the
Company's products have been below management's expectations. At January 31,
1995, the Company had a substantial working capital deficit. The unexpected
operating losses have resulted in an accelerated use of funds provided by the
public and private offerings of the Company's securities and adversely affected
the Company's liquidity. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern.
The continuation of the Company is dependent upon the continuing support of the
Company's trade vendors and 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.
S-14
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries, Bright Star, from June 1, 1990, the effective date of
the acquisition (see Note 3) and Ponca, Ltd. from March 15, 1994, its inception,
and the Company's 60% owned subsidiary, 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 sales 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 customer. 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.
S-15
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Taxes on Income
The Company uses the liability method of accounting for income taxes under
Financial Accounting Statement No. 109 "Accounting for Income Taxes" ("FASB
109").
Net Income (Loss) Per Share
Net income (loss) per common share is computed on the basis of the weighted
average number of shares 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 and the
computation of net income (loss) per common share includes the dilutive effect
of stock options and warrants, as appropriate, adjusted for treasury shares
assumed to be purchased from the proceeds using the modified treasury stock
method. Fully diluted net income (loss) per common share is not materially
different from primary net income (loss) per common share.
Reclassifications
Certain amounts from the January 31, 1994 financial statements have been
reclassified to conform to the current year's presentation.
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.
3. Acquisition of Bright Star Footwear, Inc.
Effective June 1, 1990, the Company acquired all of the common stock of Bright
Star in exchange for 47,402 common shares of the Company's common stock,
recorded at $16.90 per share ($801,088). The acquisition was accounted for as a
purchase. The $551,093 excess of the purchase price over the fair value of
Bright Star's net assets was allocated to goodwill which is being amortized over
15 years and is included in other assets on the accompanying consolidated
balance sheet. Accumulated amortization at January 31, 1995 and 1994 was
approximately $171,500 and $135,000, respectively.
S-16
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Acquisition of Bright Star Footwear, Inc. (continued)
Additionally, in connection with the acquisition, the Company entered into
noncompete agreements with Bright Star's former Chairman and President whereby
the Company paid $1,225,000 and issued $2,275,000 of notes to such individuals.
At February 23, 1993, in connection with the Quasi-reorganization, the Company
wrote down this asset by $1,718,000. The agreements are being amortized over
their respective terms. Accumulated amortization related to these agreements was
$1,368,000 and $1,265,000 at January 31, 1995 and 1994, respectively.
4. Property and Equipment
Major classes of property and equipment consist of the following:
1995 1994
---------------------------------------
Furniture, fixtures and equipment $750,063 $721,113
Transportation equipment 44,443 20,750
Leasehold improvements - 53,905
---------------------------------------
795,768
Less accumulated depreciation
and amortization 651,546 585,254
---------------------------------------
Net property and equipment $142,960 $210,514
=======================================
5. Investment in Joint Venture
In September 1991, the Company entered into a joint venture agreement (the
"Agreement") with Carousel Group, Inc. ("Carousel") an affiliate of Terren
Peizer, a then 13.5% shareholder, primarily to exploit certain technology
relating to the production of footwear soles. The Company invested $1,000,000 as
its capital contribution for a 50% interest in the venture and under the terms
of the Agreement, additional capital calls may be made to the joint venture
partners. If a joint venture partner fails to make such additional contributions
within thirty days, it may be contributed by the other joint venture partners
whose share of income and distributions will be adjusted based on their share of
capital. The Company is not required to make additional capital contributions
and does not intend to make any additional contributions. The venture terminates
on December 31, 2025, or earlier based on the occurrence of certain events, as
defined.
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.
S-17
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Factor Agreement
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement. The agreement provides the Company with the ability to borrow funds
from the factor, limited to 80% of eligible accounts receivable and 50% of
eligible finished goods inventory (to a maximum of $5 million in inventory) in
which the factor has a security interest. The agreement also provides for the
opening of documentary letters of credit (up to a maximum of $2.5 million) to
suppliers, on behalf of the Company. The factor requires a deposit equal to 43%
of the amount of the letter of credit to be opened. Borrowings bear interest at
the rate of one and one-half percent (1-1/2%) over the existing prime rate
established by the Philadelphia National Bank.
Additionally, the Company was permitted to borrow up to $300,000 above its
eligible accounts receivable and inventory formulas through July 31, 1994. This
additional borrowing capacity was 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.
At January 31, 1995 and 1994, the Company had $1,782,708 and $1,067,051,
respectively, of outstanding letters of credit and approximately $540,000 and
$65,000, respectively, of available letters of credit.
Due to factor is comprised as follows:
1995 1994
----------------------------------------
Accounts receivable assigned $3,478,771 $1,682,491
Outstanding advances 4,640,806 3,464,904
----------------------------------------
$1,162,035 $1,782,413
========================================
S-18
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt
At January 31, 1994, the outstanding indebtedness to the Company's Institutional
Lender, in the form of the Modified Term Loan, the Working Capital Loan, the
First Term Loan and the Second Term Loan (See Note 1), was approximately
$3,393,000, of which approximately $3,209,000 was classified long-term at such
date.
On October 6, 1994, the Company consummated an agreement with its Institutional
Lender to extinguish its outstanding indebtedness of approximately $3,378,000.
As part of the extinguishment, the Company paid $555,000 of principal and
approximately $140,000 of accrued interest. The Institutional Lender also
received the proceeds from the sale of 322,222 shares of the Company's
previously issued common stock and certain real property from the Company's
former President, both previously pledged as collateral. The principal and
interest payments were made from funds raised through private placements of the
Company's stock completed in October 1994 (see Note 8). The extinguishment
resulted in an extraordinary gain of approximately $2,702,000, net of income
taxes.
S-19
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholder's Equity
(a) Warrants
The following schedule represents the outstanding warrants at January 3, 1995:
<TABLE>
<CAPTION>
Underwriter's
Stockholders Underwriter's Class (A) Debenture Debenture Class (B) Class (C)
Warrants Warrants (1) Warrants (2) Warrants Holder Warrants (3) Warrants (3)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Warrants outstanding
January 31, 1993 207,603 212,906 54,397 17,144 248,541 - -
Cancellation of debenture
warrants upon debenture
conversion - - - - (248,541) - -
Cancellation of under-
writer's warrants at
Secondary Offering,
February 23, 1993 - (212,906) - (17,144) - - -
Issuance of underwriter's
warrants at Secondary
Offering - 442,500 - - - 1,475,000 1,475,000
Expiration of IPO warrants
at January 31, 1994 (207,603) - - - - - -
--------------------------------------------------------------------------------------------------------
Warrants outstanding
January 31, 1994 - 442,500 54,397 - - 1,475,000 1,475,000
Adjustment of underwriter's
warrants due to anti-
dilution provisions - 211,146(4)
--------------------------------------------------------------------------------------------------------
Warrants outstanding
January 31, 1995 - 653,646 54,397 - - 1,475,000 1,475,000
========================================================================================================
</TABLE>
(1)--At January 31, 1995, underwriter's warrants consist of 217,882 units at an
exercise price of $3.38 per unit entitling the holder to one share of common
stock, one Class B warrant and one Class C warrant. The shares reserved
represent the amount of shares issuable upon the exercise of the underwriter
warrants and the attached Class B and C warrants.
(2)--From July 1, through December 31, 1990, the Company entered into an IPO
warrant exercise solicitation whereby holders of 54,397 of the Company's IPO
warrants who exercised their IPO warrants received a new warrant (the "Class A
Warrants"). These warrants are currently exercisable at a price of $22.50 and
expire July 1997.
(3)--In connection with the Secondary Offering, the Company issued 1,475,000
shares of common stock, 1,475,000 class (B) redeemable warrants and 1,475,000
class (C) redeemable warrants to each registered holder. Each warrant entitles
the holder to purchase one share of common stock at a price of $4.00 and $5.00,
respectively. These warrants expire on February 23, 1998.
(4)--Pursuant to the Warrant Agreement, as a result of the issuance of shares
and their dilutive effect, the Company's underwriters are entitled to exercise
additional units, as described in (1) above. The adjustment represents the
additional shares reserved for issuance in connection with these additional
units. The exercise prices of the existing underwriter warrants have been
adjusted, as defined.
S-20
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
(b) Common Stock
Private Placement Offerings
(i) In May 1994, the Company consummated two private placements of its common
stock as follows:
(a) 33,333 shares at $1.50 per share, resulting in aggregate proceeds of
$50,000.
(b) 248,148 shares at $1.35 per share, resulting in aggregate proceeds of
$335,000.
In connection with these private placements of its common stock, the Company
incurred fees and expenses of approximately $66,900.
(ii) In October 1994, the Company issued 956,522 shares of its common stock at
$1.15 per share and 10,286 shares of its 8% Series A Convertible Preferred
Stock at $100 per share for aggregate proceeds of approximately $1,730,200,
net of related expenses of approximately $398,400. The Company used a
portion of those funds to repay principal and accrued interest on its
institutional indebtedness (see Note 7). In conjunction with these
offerings, the Company issued 55,000 shares of its common stock in lieu of
payment of professional fees incurred.
(iii) In November 1994, the Company sold 86,957 shares of common stock to NRC
for $100,000.
(iv) In May 1993, the Company sold 727,272 shares of common stock at a price of
$2.75 per share to certain investors in a private placement. The investors
paid $200,000 in cash and issued promissory notes to the Company in the
aggregate amount of $1,800,000, which became due during July 1993 and were
collected in full. The Company used the proceeds of the private placement
as follows: $612,000 for the repayment of debt to the Institutional Lender;
$250,000 for the payment of certain professional fees and other expenses
and the remainder for working capital purposes.
S-21
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Increase in Common Stock Authorized
In November 1994, the Stockholders held a Special Meeting to approve 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 converted such shares into 894,431 shares of common stock.
Treasury Stock
In conjunction with the extinguishment of the Company's debt, the Institutional
Lender received 322,222 shares of the Company's common stock from the Company's
former President. Of these shares, 37,967 shares had previously been included in
the Company's treasury stock.
The Company retired its treasury stock, resulting in a reduction of additional
paid in capital of approximately $1,071,000.
Settlements of Obligations
In connection with the settlements of litigation and other obligations, the
Company issued shares of its common stock (see Note 9).
Stock Options
In 1989, the Company's Board of Directors adopted and its stockholders approved
the Company's 1989 Stock Option Plan (the "Plan"). The Plan, as amended in 1990,
provides for the granting of incentive stock options ("ISOs"), nonqualified
stock options ("NQSOs") and limited stock appreciation rights ("Limited
Rights"), covering up to 222,222 shares of common stock. The Plan terminates on
August 1, 1999.
Under the Plan, ISO's are to be granted at not less than the market price of the
Company's common stock on the date of the grant. Stock options not covered by
the Plan ("Non-Plan Options") may be granted at prices determined by the Board
of Directors. Under the Plan as of January 31, 1995 and 1994, ISO's covering
156,300 and 166,500 shares of common stock, respectively, were outstanding.
There were no NQSOs outstanding at either date.
S-22
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Additionally, at January 31, 1995 and 1994, Non-Plan Options covering 1,971,367
and 1,096,167 shares of common stock, respectively, were outstanding. The
options granted under the Plan expire between five and ten years from the date
of grant or at the termination of the Plan, whichever comes first.
Changes in options outstanding are summarized as follows:
Option Price
Options Per Share
----------------------------------
January 31, 1993 66,556 $ 4.50 -$45.00
Grant (exercisable 1994-2000) 1,216,667 $ 1.00 -$ 5.00
Terminated (20,556) $11.25 -$45.00
---------
January 31, 1994 1,262,667 $ 1.00 -$45.00
Grant (exercisable 1995-2001) 1,075,000 $ 1.15 -$ 2.13
Terminated (210,000) $ 1.94 -$ 2.63
----------
January 31, 1995 2,127,667 $ 1.00 -$45.00
=========
Additionally, upon the closing of the Secondary Offering, the Company also
granted Non- Plan Options to purchase 450,000 shares of common stock at $5.00
per share to two executives.
On November 10, 1993, the Company granted 200,000 Non-Plan Options, at an
exercise price of $2.56 per share, to its President in connection with his
personal guarantee relating to certain amounts due to the Company's factor (see
Note 6).
On August 1, 1994, the Company granted 400,000 Non-Plan Options at an exercise
price of $1.50 per share to its President, in connection with his personal
guarantee of any and all borrowings above the Company's eligible receivable and
inventory formulas with its factor (see Note 6).
At January 31, 1995 and 1994, 1,623,167 and 103,723 options, respectively, were
exercisable at prices ranging from $1.00 to $45.00.
S-23
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
At January 31, 1995, common shares reserved for issuance on exercise of stock
options and warrants consisted of:
Stock Options 2,127,667
Underwriters' Warrants 1,023,837
Class A Warrants 54,397
Class B Warrants 1,475,000
Class C Warrants 1,475,000
Other Warrants 25,000
----------
6,180,901
9. Settlement Agreements
Settlements of Litigation and Other Obligations
In connection with the Company's settlements of litigation and other
obligations, the Company, in addition to certain cash payments, has issued
shares of its common stock. The settlements are summarized as follows:
<TABLE>
<CAPTION>
Dollar Cash
Value of Requirements Gain (Loss)
Description Shares for on
Shares Issued Issued Settlement Settlement*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Settlements of Litigation
Starter Corporation (a) 100,000 $135,000 $150,000 $ 247,031
American Sporting Goods (b) - - 100,000 (100,000)
Pentland USA Inc. (c) - - 445,000 (220,000)
AFL-CIO (d) 478,261 550,000 100,000 (320,000)
------- ------- -------- ---------
Total Litigation Settlements 578,261 $685,000 $795,000 $(392,969)
--------
Settlements of Obligations
Major League Footwear Inc. (e) 260,000 $298,500 $ - $ 315,272
El Greco Note (f) 240,740 325,000 -
----------------------------------------------------------------------------
Total Obligation Settlements 500,740 $623,500 $ - $ 315,272
----------------------------------------------------------------------------
Total Loss on Settlements of Litigation $ (77,697)
and Other Obligations
=====================
* Gain (loss) represents additional (provisions) credits from amounts accrued in
prior year.
</TABLE>
S-24
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Settlement Agreements (continued)
(a) Settlement with Starter Corporation
In May 1992, Starter Corporation instituted a legal action against the Company
for approximately $532,000 of unpaid royalties and interest which was accrued by
the Company during the year ended January 31, 1994. In July 1994, the Company
issued 100,000 shares of common stock to be registered for resale and agreed to
pay $150,000 over a fifteen-month period beginning in July 1994. The Company,
based on a value of $1.35 per share for the shares issued and the payment of
$150,000, recognized income of $247,031 from this settlement.
(b) Settlement with American Sporting Goods
In July 1994, in connection with a settlement with American Sporting Goods
("ASG"), Bright Star agreed to pay ASG $100,000 over a ten-month period.
(c) Settlement with Pentland USA Inc.
In December 1994, in connection with a settlement with Pentland USA
Inc.("Pentland"), the Company agreed to pay Pentland $445,000, of which $220,000
was accrued by the Company at January 31, 1994. The Company paid $175,000 upon
the execution of the settlement agreement and will pay the remaining $270,000
over a period of twenty-two months, of which $124,000 is included in other
noncurrent liabilities in the accompanying consolidated balance sheet.
(d) Settlement with Food and Allied Services Trade Department, AFL-CIO
The Company has reached a settlement with the plaintiffs, subject to court
approval. The Company, based upon the advice of counsel, believes that it is
highly probable that the court will approve the settlement terms. The settlement
requires the Company to pay $100,000 in cash and to issue shares of its common
stock, up to a maximum of 600,000 shares, to enable the plaintiffs to realize
$550,000 of proceeds from the sale of such shares. If the proceeds from the sale
of shares is less than $550,000, the Company may be required to make an
additional cash payment for the difference. The sale of such shares will be
restricted so as to occur over a period of approximately twenty-four months. The
Company has escrowed $100,000 for the required cash payment, which is shown as
restricted cash on the accompanying consolidated balance sheet. Additionally,
the Company has provided for the stock portion of the settlement, based upon a
value of $1.15 per share.
S-25
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Settlement Agreements (continued)
(e) Settlement with Major League Footwear Inc.
In May 1994, in connection with a settlement with Major League Footwear, Inc.
("MLF"), a company under common management, the Company issued 110,000 shares of
common stock to be registered for resale, valued at $1.35 per share, and 150,000
shares of common stock, valued at $1.00 per share, in satisfaction of an
outstanding liability to MLF in the amount of $613,771 for inventory purchased
by the Company during the fiscal year ended January 31, 1994. The Company
recognized income of $315,272 from this settlement (see Note 11).
(f) Settlement of the El Greco Note
In May 1994, the Company entered into an agreement with NRC pursuant to which
the Company issued 240,740 shares of its common stock, to be registered for
resale, to NRC in full payment of the El Greco Note (see Note 1). The Company
valued each share at its fair market value of $1.35 at the time of issuance.
Other Settlements
(a) Settlement with Former Landlord
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 in connection therewith, issued 300,000 shares of its
common stock to the sublandlord as consideration for all liabilities incurred.
(b) Settlement with Vendor
In July 1994, the Company paid $100,000 in cash and issued 250,000 shares of
common stock in settlement of an outstanding payable of $859,587. The Company,
based on a fair market value of $1.00 per share, recorded a gain of $509,888
from this settlement as a reduction of cost of goods sold (see Note 16).
(c) Insurance Claim
In connection with the above mentioned legal actions, the Company filed a claim
with its insurance company and received a settlement of $275,000 relating to its
director's and officer's liability insurance.
S-26
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 and current 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
of the Company and the reacquisition of ITG were detrimental to the Company's
financial condition. The plaintiff seeks an accounting by the Company and
payment by the Board of Directors of an unspecified amount of damages. In
September 1991, the defendants moved to dismiss the complaint for failure to
state a cause of action. The motion was granted in October 1991 based upon the
court's mistaken belief that the plaintiff had defaulted with respect to the
motion. The parties agreed to reinstate the motion in June 1992 and the motion
has again been submitted to the Court for its determination. The Company and the
individual defendants intend to vigorously defend the action.
(b) In June 1991, the Company and prior management received a notice from the
U.S. Customs Service ("U.S. Customs"), that it intended to audit the Company's
payments of customs duties for the period 1986 to June 1991. After a preaudit
review, the Company voluntarily reported to U.S. Customs in September 1991 that
it had miscalculated certain customs duties owed, resulting in underpayment of
$1,627,344 which was included in operations for the year ended January 31, 1992.
The Company paid $813,672 to U.S. Customs in October 1991. In August 1992, the
Company and U.S. Customs reached an agreement whereby the Company was to pay an
additional $1,000,000 to relieve the Company of all liabilities for Customs'
duties, penalties and interest owed from 1986 through September 30, 1991. Such
$1,000,000 was paid from the proceeds of the Secondary Offering consummated on
February 23, 1993. The Company also agreed to settle all claims for Customs'
duties and penalties allegedly owed for the period October 1, 1991 to December
31, 1991, by the payment of $180,000 plus interest, commencing July 1, 1993, at
the rate of $5,000 per month for 36 months. Interest expense on amounts due
amounted to approximately $9,000 and $13,000 for 1995 and 1994, respectively.
(c) In October of 1994, a former employee of the Company and NRC commenced an
action in the United States District Court for the Southern District of New York
against the Company and NRC, alleging the existence and breach of employment
agreements with NRC and, assumption of the agreements by the Company. The former
employee is claiming damages for unpaid compensation, bonuses and unreimbursed
expenses aggregating in excess of $500,000. Discovery and depositions have
commenced; however, as the Company denies any liability and intends to
vigorously defend the action, no amounts have been provided for in the
accompanying financial statements.
S-27
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments, Contingencies and Other Matters (continued)
(d) During the year, 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 January 31, 1995, $389,000 will be paid during fiscal
year ended January 31, 1996 and $82,000 will be paid thereafter.
(e) As of January 31, 1995, the Company is obligated under employment agreements
with four executives to provide aggregate minimum compensation of approximately
$809,000, $921,000 and $16,667 during the fiscal years ended January 31, 1996,
1997 and 1998, respectively.
Subsequent to year end, the Company granted stock options to its President and
Chief Operating Officer to purchase 400,000 and 200,000 shares of the Company's
common stock, respectively. The options, granted in connection with the
Company's employment agreements with these executives, are exercisable at a
price of $1.16 per share and expire in 2000.
(f) The Company has been advised by the Staff of the Securities and Exchange
Commission (the "Commission") that the Staff intends to recommend to the
Commission that it authorize the Staff to commence an administrative proceeding
against the Company with respect to alleged violations of Section 5 of the
Securities Act of 1993 in connection with the Company's 1993 Regulation S
Offering (the "Offering") of shares of common stock in the aggregate amount of
$2,000,000 (see Note 8). The Company believes that it justifiably relied upon
the opinion of its then corporate counsel in connection with the Offering and,
therefore, is considering making a submission to the Commission requesting that
the Commission not authorize the Staff to proceed against the Company in
connection with the matter. Even if the Company is unsuccessful, it believes
that the outcome of any proceeding which the Commission may bring against it in
connection with the Offering will not have a material adverse affect on the
Company or its financial condition.
11. Related Party Transactions
Effective December 16, 1993, the Company entered into an agreement with MLF, a
company under common management to purchase finished goods, including shoes and
sneakers. Such merchandise has been included in inventory at the lower of cost
or fair market value (approximately $614,000) at January 31, 1994. The effect of
this transaction on the Company's financial statements might have been
materially different had it been conducted with a vendor at arm's length. In May
of 1994, the Company settled its obligation to MLF (see Note 9).
S-28
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Related Party Transactions (continued)
The Company entered into a Services Allocation Agreement with NRC, an affiliated
entity (see Note 1), 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. Pursuant to such agreement, NRC paid the Company
approximately $74,000 and $160,000 during the years ended January 31, 1994 and
1995, respectively.
12. Major Customers
The Company sells to retailers throughout the United States. Sales of Bright
Star products are primarily on a first cost basis. Sales of Candie's products
are primarily on a landed basis. Although the Company obtains credit insurance
on the majority of its customers purchasing its products on a landed basis, the
Company may incur losses on accounts receivable for landed sales as a result of
customer chargebacks and disputes with respect to the products sold.
No customer accounted for more than 10% of revenues for the years ended January
31, 1995 and 1994.
13. Leases
In April of 1994, the Company entered into a termination agreement for its
former premises whereby the Company issued 300,000 shares of its common stock to
the former landlord (see Note 9). During August 1994, the Company entered into a
new lease agreement and relocated its corporate headquarters to Purchase, NY.
Rent expense was approximately $234,000 and $408,000 for the years ended January
31, 1995 and 1994, respectively. As of January 31, 1995, future net minimum
lease payments under noncancelable operating lease agreements are as follows:
1996 $ 154,000
1997 231,000
1998 255,000
1999 283,000
2000 289,000
Thereafter 48,000
----------
$1,260,000
==========
S-29
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Pension Plan
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation for the three highest consecutive years of service. The Company's
funding policy has been to contribute annually the maximum amount that can be
deducted for Federal income tax purposes. Contributions were not required in
fiscal 1995 or 1994, as the plan assets exceeded the projected benefit
obligation. The Company distributed approximately $284,000 and $45,000 to
terminated employees during fiscal 1995 and 1994, respectively.
As of December 31, 1994, the Company suspended benefit accruals for future
service for participants and elected to terminate the Plan effective February
10, 1995. In connection with this curtailment, the Company's actuary determined
the Company's liability, based upon the funded status, to be approximately
$52,000. As a result, the Company reduced its accrued pension liability by
$340,000. The Company intends to replace its defined benefit plan with a defined
contribution plan.
S-30
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Pension Plan (continued)
The following table sets forth the Plan's funded status as of January 31, 1994:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations--accumulated benefit
obligation, substantially all of which is vested $ 863,000
===========
Projected benefit obligation for service rendered to date $(1,005,000)
Plan assets at fair value, consisting primarily of mortgage
loans receivable, mutual funds and government securities 1,533,000
-----------
Plan assets in excess of projected benefit obligation 528,000
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 281,000
Unrecognized net asset at February 1, 1987 being recognized
over 21 years (599,000)
Unrecognized reduction in projected benefit obligation due to
plan amendment being recognized over 26 years (602,000)
-----------
Accrued pension liability $ (392,000)
===========
Net pension costs included the following components:
Service cost--benefits earned during the period $ 74,000
Interest cost on projected benefit obligation 62,000
Actual return on plan assets (30,000)
Net amortization and deferral (145,000)
-----------
Net periodic pension cost $ (39,000)
===========
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7% for the year ended January 31, 1994. The expected long-range
rates of return on assets was 7%, for the year ended January 31, 1994.
S-31
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Income Taxes
For Federal income tax purposes, Candie's, Inc. files a consolidated tax return
with its wholly-owned subsidiaries. At January 31, 1995, Candie's, Inc. and
subsidiaries have net operating losses of approximately $8,500,000 for income
tax purposes, which expire in the years 2008 and 2009. Due to the issuance of
the common stock on February 23, 1993, an "ownership change," as defined in
Section 382 of the Internal Revenue Code, occurred. Section 382 restricts the
use of net operating loss carryforwards incurred prior to the ownership change
to $275,000 per year. Approximately $5,700,000 of the operating loss
carryforwards are subject to this restriction and, as a result, the Company may
not be able to fully utilize these restricted operating loss carryforwards. This
restriction may be reduced by the occurrence of certain events.
ITG files a separate Federal income tax return. At January 31, 1995, ITG has net
operating loss carryforwards of approximately $8,000,000 which expire in the
years 2006 through 2010. During the year ended January 31, 1994, the net
operating loss carryforwards of ITG were reduced by the cancellation of debt by
the institutional lender.
After the date of the Quasi-reorganization (Note 1), the tax benefits of net
operating loss carryforwards subsequently recognized will be treated for
financial statement purposes as direct additions to additional paid-in capital.
For the year ended January 31, 1995, the Company utilized $275,000 of pre
quasi-reorganization net operating loss carryforwards. The related tax benefit
of $103,000 has been recognized as an increase to additional paid-in capital.
S-32
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Income Taxes (continued)
The significant components of deferred tax assets of the Company consist of the
following:
January 31
1995 1994
----------------------------------
Allowance for doubtful accounts $19,000 $260,000
Inventory valuation 239,000 353,000
Net operating loss carryforwards 3,875,000 5,712,000
Provision for litigation 372,000 --
Other 155,000 --
----------------------------------
Total deferred tax assets 4,660,000 6,325,000
----------------------------------
Valuation allowance (4,660,000) (6,325,000)
----------------------------------
Net deferred assets $ -- $ --
==================================
The provision (benefit) for Federal and state income taxes in the consolidated
statement of operations consist of the following:
January 31
1995 1994
--------------------------------
Current:
Federal $ -- $ 33,751
State 33,500 (39,745)
---------------------------------
Total current 33,500 (5,994)
---------------------------------
Deferred:
Federal -- --
State -- --
Total deferred -- --
---------------------------------
Total provision (benefit) $33,500 $(5,994)
==================================
S-33
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Income Taxes (continued)
The current provision at January 31, 1995 reflects minimum taxes for state and
local purposes. The current benefit at January 31, 1994 reflects minimum taxes
for state and local purposes and an under provision of prior year Federal taxes.
The following summary reconciles taxes (benefit) from continuing operations at
the Federal statutory rate with the actual provision (benefit):
<TABLE>
<CAPTION>
January 31
1995 1994
------------------------------
------------------------------
<S> <C> <C>
Income taxes (benefit) at statutory rate $(646,481) $(2,036,971)
Unrecognized tax benefit of net operating losses (646,481) (2,036,971)
State provision, net of Federal income tax benefit 33,500 --
Other (5,994)
------------------------------
Total provision (benefit) $33,500 $(5,994)
==============================
</TABLE>
16. Fourth Quarter Adjustments
The loss for the fourth quarter of 1995 of approximately $1,777,000 included
material adjustments resulting primarily from changes in estimated losses in the
areas of accounts receivable ($166,000), inventories ($523,000) and an accrual
for the settlement of litigation ($400,000). The fourth quarter also included an
adjustment to decrease cost of sales $294,000, net, relating to settlements of
obligations.
The loss for the fourth quarter of 1994 of approximately $3,179,000 included
material adjustments resulting primarily from change in estimated losses in the
areas of accounts receivable ($156,000), inventories ($317,000), accrual for
potential settlement of litigation ($555,000), write-off of investment in Joint
Venture ($262,000) and understatement of cost of goods sold ($465,000).
S-34
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Subsequent Events
On February 1, 1995, the Company is operating under an exclusive licensing
arrangement which enables the Company to sell footwear in North America bearing
the BONGO trademark. The Company paid a $200,000 minimum fee, and is required to
pay additional minimum amounts totaling $820,000 over a three and one-half year
period. The agreement provides for the Company to pay additional royalties,
based on percentages of sales, exceeding minimum amounts, as defined.
On February 1, 1995, the Company entered into a financing agreement with NRC, an
affiliated entity (see Note 1). The financing agreement provides for the Company
to issue promissory notes to NRC in the principal amounts of $400,000 (due June
30, 1995) and $200,000 (due February 1, 1996) and provide warrants for 700,000
shares of the Company's common stock (exercisable at an initial price of $1.2375
per share). The financing agreement also provides for NRC to make available an
additional $200,000 through June 30, 1995, to be utilized for working capital
purposes. As collateral for the Company's obligations under the financing
agreement, the Company granted to NRC a security interest in all of the assets
of the Company and its subsidiaries, subject to a first lien on such assets in
favor of the Company's factor or other lender, as defined.
S-35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this amendment to this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANDIE'S, INC.
By: /s/ Neil Cole
----------------------
Neil Cole
President and Chief Executive
Officer
Dated: January 2, 1996
