SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1 to Form 10-QSB)
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 1994
or
Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file Number 0-10593
CANDIE'S, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation)
60 West 40th Street, New York, New York 10018
(Address of principal executive offices)
(212)869-8725
(Issuer's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
---------
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of September 14, 1994 (excluding treasury shares): 6,238,292
Transitional small business disclosure format (check one):
YES _______ NO X
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
FOR THE PERIOD ENDED JULY 31, 1994
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 1994 3-4
and January 31, 1994
Condensed Consolidated Statements of Operations for the 5
Six Months Ended July 31, 1994 and 1993
Condensed Consolidated Statements of Operations for the 6
Three Months Ended July 31, 1994 and 1993
Condensed Consolidated Statements of Stockholders' Equity 7
(Deficiency) for the Six Months Ended July 31, 1994.
Condensed Consolidated Statements of Cash Flows for 8-12
the Six Months Ended July 31, 1994
Notes to Condensed Consolidated Financial Statements 13-24
ITEM 2.
Management's Discussion and Analysis of Financial 25-28
Condition and the Results of Operations
PART II. OTHER INFORMATION 29
SIGNATURES 30
Page 2
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JULY 31, JANUARY 31,
1994 1994
----------- -----------
RESTATED RESTATED
(Note 6) (Note 6)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 106,021 $ 114,153
ACCOUNTS RECEIVABLE
less allowances of $793,500
and $965,000 for possible losses 687,247 226,593
INVENTORY 3,399,217 3,572,733
PREPAID EXPENSES 60,828 273,832
REFUNDABLE TAXES -- 219,876
----------- -----------
TOTAL CURRENT ASSETS 4,253,313 4,407,187
----------- -----------
PROPERTY AND EQUIPMENT (Note 3)
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 178,938 210,514
----------- -----------
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 462,736 516,952
TRADEMARK 5,255,690 5,397,098
OTHER 494,153 512,929
----------- -----------
TOTAL OTHER ASSETS 6,212,579 6,426,979
----------- -----------
TOTAL ASSETS $10,644,830 $11,044,680
=========== ===========
Page 3
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JULY 31, JANUARY 31,
1994 1994
------------ ------------
RESTATED RESTATED
(Note 6) (Note 6)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 2,254,205 $ 1,795,246
PAYABLE FOR INVENTORY IN
TRANSIT 843,931 395,918
DUE TO FACTOR (Note 4) 470,569 1,782,413
DUE TO MAJOR LEAGUE FOOTWEAR -- 613,771
ACCRUED LITIGATION EXPENSE 555,000 555,000
ACCRUED EXPENSES AND TAXES 1,256,902 1,678,854
ACCRUED ROYALTY -- 532,031
ACCRUED U.S. CUSTOMS DUTIES 51,883 51,004
CURRENT MATURITIES OF LONG
TERM DEBT (Note 5) 678,750 183,750
------------ ------------
TOTAL CURRENT LIABILITIES 6,111,240 7,587,987
LONG-TERM DEBT, LESS CURRENT
MATURITIES (Note 5) 2,699,425 3,209,425
DUE TO EL GRECO, INC -- 325,000
ACCRUED U.S. CUSTOMS DUTIES 79,405 100,449
ACCRUED PENSION LIABILITY 392,000 392,000
------------ ------------
TOTAL LIABILITIES 3,170,830 11,614,861
------------ ------------
STOCKHOLDERS' DEFICIENCY:
PREFERRED STOCK, $.01 PAR VALUE - SHARES
AUTHORIZED 5,000,000; NONE ISSUED OR O/S
COMMON STOCK, $.001 PAR VALUE - SHARES
AUTHORIZED 10,000,000; ISSUED 6,354,956
AT JULY 31, 1994 AND 5,022,735 AT
JANUARY 31, 1994 6,355 5,023
ADDITIONAL PAID-IN CAPITAL 7,638,024 6,042,737
ACCUMULATED DEFICIT (5,210,586) (5,546,908)
TREASURY STOCK, AT COST
216,666 SHARES AT JULY 31, 1994 AND
JANUARY 31, 1994 (Note 6) (1,071,033) (1,071,033)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY 1,362,760 (570,181)
------------ ------------
TOTAL LIABILITIES AND STOCK-
HOLDERS' DEFICIENCY $ 10,644,830 $ 11,044,680
============ ============
Page 4
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 31, JULY 31,
1994 1993
------------ ------------
LANDED SALES $ 9,233,029 $ 4,845,007
COMMISSION AND
LICENSING INCOME 2,286,706 1,166,912
------------ ------------
TOTAL REVENUES 11,519,735 6,011,919
COST OF LANDED SALES 8,058,004 4,083,175
------------ ------------
TOTAL GROSS PROFIT 3,461,731 1,928,744
------------ ------------
OPERATING EXPENSES:
SELLING EXPENSE 2,106,080 2,899,518
GEN. & ADMIN. EXP 1,583,476 2,391,350
------------ ------------
TOTAL OPERATING EXPENSES 3,689,556 5,290,868
------------ ------------
OPERATING LOSS (227,825) (3,362,124)
OTHER INCOME AND DEDUCTIONS:
GAIN ON SETTLEMENT OF
OBLIGATIONS (Note 9) 883,249 --
INTEREST & OTHER ITEMS (306,689) (198,610)
------------ ------------
TOTAL OTHER INCOME AND
DEDUCTIONS 576,560 (198,610)
------------ ------------
INCOME (LOSS) FROM OPERATIONS
BEFORE TAXES 348,735 (3,560,734)
INCOME TAXES (RECOVERY) 12,412 (7,445)
------------ ------------
NET INCOME (LOSS) $ 336,323 $ (3,553,289)
============ ------------
INCOME (LOSS) PER SHARE -
PRIMARY AND FULLY DILUTED:
WEIGHTED AVERAGE
OUTSTANDING SHARES 5,284,258 3,828,894
============ ============
INCOME (LOSS) PER SHARE $ .06 $ (.93)
============ ============
Page 5
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 31, JULY 31,
1994 1993
----------- -----------
LANDED SALES $ 5,570,221 $ 2,178,310
COMMISSION AND
LICENSING INCOME 1,454,995 427,074
----------- -----------
TOTAL REVENUES 7,025,216 2,605,384
COST OF LANDED SALES 4,915,111 1,884,363
----------- -----------
TOTAL GROSS PROFIT 2,110,105 721,021
----------- -----------
OPERATING EXPENSES:
SELLING EXPENSE 960,495 1,392,555
GEN. & ADMIN. EXP 740,905 1,061,620
----------- -----------
TOTAL OPER. EXP 1,701,400 2,454,175
----------- -----------
OPERATING INCOME (LOSS) 408,705 (1,733,154)
OTHER INCOME AND DEDUCTIONS:
GAIN ON SETTLEMENT OF
OBLIGATIONS (Note 9) 756,919 --
INTEREST & OTHER ITEMS (158,879) (132,590)
----------- -----------
TOTAL OTHER INCOME AND
DEDUCTIONS 598,040 (132,590)
----------- -----------
INCOME (LOSS) FROM OPERATIONS
BEFORE TAXES 1,006,745 (1,865,744)
INCOME TAXES 8,761 143
----------- -----------
NET INCOME (LOSS) $ 997,984 $(1,865,887)
=========== ===========
INCOME (LOSS) PER SHARE -
PRIMARY AND FULLY DILUTED:
WEIGHTED AVERAGE
OUTSTANDING SHARES 5,747,277 4,680,692
=========== ===========
INCOME (LOSS) PER SHARE $ .17 $ (.40)
=========== ===========
Page 6
<PAGE>
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JULY 31, 1994
(unaudited)
Restated (Note 6)
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK ADDITIONAL
---------------------------------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY
31, 1994, AS
PREVIOUSLY
REPORTED 5,022,735 $ 5,023 $ 7,670,081 $(5,446,908)
CORRECTION OF
PREVIOUSLY
RECORDED TREASURY
STOCK TRANSACTION
PURSUANT TO AN
INDEMNIFICATION
AGREEMENT (1,627,344)
--------- ----------- ----------- ----------- ----------- -----------
BALANCE JANUARY
31, 1994, AS
RESTATED 5,022,735 5,023 6,042,737 (5,546,908)
ISSUANCE OF
810,000 SHARES OF
COMMON STOCK IN
CONJUNCTION WITH
SETTLEMENTS OF
OBLIGATIONS 810,000 810 952,690
EL GRECO DEBT TO
EQUITY CONVERSION 240,740 241 324,759
ISSUANCE OF
SHARES OF COMMON
STOCK IN
CONJUNCTION WITH
PRIVATE
PLACEMENTS IN MAY
1994, NET OF
$13,381 IN FEES 281,481 281 317,838
NET INCOME FOR
THE SIX MONTHS
ENDED JULY 31,
1994 336,322
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31,
1994, AS RESTATED 6,354,956 $ 6,355 -- -- $ 7,638,024 $(5,210,586)
=========== =========== =========== =========== =========== ===========
</TABLE>
TREASURY STOCK
-------------------------------
SHARES AMOUNT TOTAL
-----------------------------------------------
BALANCE, JANUARY
31, 1994, AS
PREVIOUSLY
REPORTED (254,633) $(2,698,377) $ (570,181)
CORRECTION OF
PREVIOUSLY
RECORDED TREASURY
STOCK TRANSACTION
PURSUANT TO AN
INDEMNIFICATION
AGREEMENT 37,967 1,627,344
----------- ----------- -----------
BALANCE JANUARY
31, 1994, AS
RESTATED (216,666) (1,071,033) (570,181)
ISSUANCE OF
810,000 SHARES OF
COMMON STOCK IN
CONJUNCTION WITH
SETTLEMENTS OF
OBLIGATIONS 953,500
EL GRECO DEBT TO
EQUITY CONVERSION 325,000
ISSUANCE OF
SHARES OF COMMON
STOCK IN
CONJUNCTION WITH
PRIVATE
PLACEMENTS IN MAY
1994, NET OF
$13,381 IN FEES 318,119
NET INCOME FOR
THE SIX MONTHS
ENDED JULY 31,
1994 336,322
----------- ----------- -----------
BALANCE, JULY 31,
1994, AS RESTATED (216,666) ($1,071,033) $ 1,362,760
=========== =========== ===========
Page 7
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 31, JULY 31,
1994 1993
----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ 336,323 $(3,553,289)
Items In Net Income (Loss)
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 20,500 (116,000)
Depreciation and Amort 246,688 349,304
Deferred Offering Costs -- 972,892
Provision For Pension Costs -- (325)
(Gain) Loss on Settlement of
Obligation (983,249) 74,979
Loss on Disposal of
Fixed Assets -- 26,133
Increase (Decrease) In Cash
Flows From Changes In
Assets and Liabilities:
Accounts Receivable (481,155) 368,211
Inventories 34,056 (1,509,339)
Prepaid Expenses 314,235 (34,864)
Refundable Income Taxes 219,876 (29,346)
Other Assets (109,008) 23,721
Accounts Payable 1,266,854 (1,148,467)
Due to Factor (1,311,844) 178,087
Accrued Expenses (189,315) (58,038)
Accrued Royalty (101,944) (100,000)
Payable For Inventory
In Transit 448,013 (120,561)
Accrued U.S. Customs
Duties (20,165) (1,004,406)
----------- -----------
Net Cash Used In
Operating Activities (310,135) (5,681,308)
----------- -----------
Page 8
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (CONT'D.)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 31, JULY 31,
1994 1993
----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital Expenditures $ (1,116) $ (83,110)
Payment in connection
with CANDIE'S Trademark -- (75,000)
----------- -----------
Net Cash Used In
Investing Activities (1,116) (158,110)
----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings (payments)
under revolving credit
agreement (15,000) (1,441,304)
Proceeds from secondary
public offering, net of
related exp. of $1,577,298 -- 5,797,702
Proceeds from private placements
net of expenses 318,119 1,885,206
Additional expenses related
to sec. public offering -- (462,800)
----------- -----------
Net Cash Provided By
Financing Activities 303,119 5,778,804
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (8,132) (60,614)
----------- -----------
CASH AND CASH EQUIVALENTS,
beginning of period 114,153 286,577
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 106,021 $ 225,963
=========== ===========
Page 9
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (Cont'd.)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 31, JULY 31,
1994 1993
-------------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 439,909 $ --
============== ===========
Income Taxes $ 30,566 $ --
============== ===========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of 900,000
shares of common stock
in connection with
acquisition of CANDIE'S
trademark -- 1,080,000
============== ===========
Issuance of note payable
in connection with
acquisition of CANDIE'S
trademark -- 325,000
============== ===========
Issuance of 777,777
shares of common stock
and write-off of
deferred professional
fees and accrued
interest in connection
with conversion of
debenture -- 2,490,261
============== ===========
Issuance of 57,609
shares of common stock
in connection with
acquisition of under-
writer's IPO Warrants -- 58
============== ===========
Issuance of 32,500 shares
of common stock in lieu
of compensation to two
officers -- 130,000
============== ===========
Issuance of 65,000 shares
of common stock in con-
nection with settlement
of accrued royalties
owed to Chaus -- 306,000
============== ===========
Page 10
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (Cont'd.)
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY, 31, JULY 31,
1994 1993
--------------- ----------
Issuance of 50,000 shares
of common stock in connection with
settlement of legal fees relating
to the offering -- 50
=============== ==========
Forgiveness of debt by
the Company's Insti-
tutional Lender -- 5,940,019
=============== ==========
Acquisition of Treasury
stock through capital
contribution by the
Company's former
debenture holder of
127,777 shares of
common stock -- 415,033
=============== ==========
Quasi-Reorganization
resulting in changes
to the following asset and
liability accounts:
CANDIE'S trademark -- 2,249,013
Non-competition
agreements -- (1,717,927)
Investment in Sole
Associates -- (737,724)
Other Assets -- (184,433)
Accrued Pension
Liability -- 391,071
---------------- ----------
Total -- 0
================ ==========
Page 11
<PAGE>
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY, 31, JULY 31,
1994 1993
Issuance of 1,050,740 shares
of common stock in connection
with settlements of obligations
to creditors:
Issuance of common stock 1,278,500 --
Increase in prepaid expenses (66,350) --
Reduction of security deposit 74,531 --
Reduction of accounts payable (1,421,666) --
Reduction of accrued royalty (382,031) --
Reduction of inventory 139,460 --
Reduction of note payable (325,000) --
Reduction of accrued expenses (280,693) --
---------- -------
Total (983,249) --
========== =======
Page 12
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Candie's, Inc. the Registrant together with its subsidiary is referred to herein
as Candie's or the "Company."
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which are in the opinion of management, necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included under generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures in
such financial statements are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the Company's Financial Statement and the notes thereto
included in the Company's Annual Form 10-K for the fiscal year ended January 31,
1994.
(a) Business
Candie's, Inc. and its subsidiaries (the "Company") design, market, import and
distribute a variety of moderately-priced athletic, leisure and fashion footwear
for women and girls under the trademark CANDIE'S. The Company's product line
also includes a wide variety of workboots, hiking shoes and men's leisure shoes
designed, marketed and distributed by the Company's wholly-owned subsidiary,
Bright Star Footwear, Inc. ("Bright Star"). The Company's 60% owned subsidiary,
Intercontinental Trading Group ("ITG") is inactive. The Company is engaged in a
joint venture arrangement for the development of a specialized footwear sole
(the "Joint Venture") with Urethane Technologies, Inc. ("UTI").
(i) Secondary Offering
The Company completed an offering of its common stock (the "Secondary Offering")
on February 23, 1993. Upon the effectiveness of the Secondary Offering, the
Company's stockholders approved a change in the company's name from Millfeld
Trading Co., Inc., to Candie's, Inc., a 1 for 4.5 reverse stock split of its
common stock for which retroactive effect has been given in the financial
statements, and a quasi-reorganization.
The following transactions occurred contemporaneously upon effectiveness or on
the closing of the Secondary Offering:
(ii) Debenture Conversion
Upon effectiveness of the Secondary Offering and immediately prior to the
reverse stock split, the holder of the Company's $3,500,000 subordinated
convertible debenture (the "Debenture") converted the Debenture, in accordance
with its terms, into 3,500,000 shares of common stock. Upon the completion of
Page 13
<PAGE>
the reverse split, such former holder made a capital contribution of 127,777 of
his 777,777 post-split shares of common stock to the Company and cancelled a
warrant to purchase additional shares of common stock previously issued to him
in connection with the Debenture.
(iii) The El Greco Transactions
Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an
affiliated company, consummated the following transactions (the "El Greco
Transactions"): (i) El Greco received 900,000 shares of the Company's common
stock; (ii) El Greco transferred the trademarks "CANDIE'S," "ACTION CLUB,"
"FULLMOON" and "SUGAR BABIES" (collectively, the "Trademarks"), and all of its
business operations associated with the Trademarks, to the Company; (iii) El
Greco assigned all of its preexisting agreements with licensees of the
Trademarks to the Company; (iv) the Company issued to El Greco a subordinated
note in the principal amount of $325,000, plus interest payable quarterly at the
"prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company
paid El Greco's expenses, including attorney's fees relating to the El Greco
Transactions, in the sum of $75,000 from the proceeds of the offering. The El
Greco Note is payable by the Company as follows: (a) in the event the Class B or
Class C Warrants are exercised, to the extent of such exercise subject to the
Company's prior payment of $300,000 to the Institutional Lender; (b) commencing
upon the completion of fiscal 1994, in the event, and to the extent (up to the
amount outstanding after the effectuation of (a) above), the Company achieves
net income to be determined quarterly at the end of each quarter; and (c) for
any amount outstanding after the effectuation of both (a) and (b) above, two
years from the Closing.
In May 1994, the Company entered into an agreement with New Retail Concepts,
Inc. ("NRC") (the former parent company of El Greco, which was merged into NRC
in 1993) pursuant to which the Company agreed to issue 240,740 shares of its
common stock to NRC in full payment of the El Greco Note.
Upon the closing of the El Greco Transactions, the Company ceased to be a
licensee and acquired actual ownership of the Candie's trademark and therefore
no longer makes royalty payments.
(iv) Quasi-Reorganization
Upon effectiveness of the Secondary Offering and the Debt Restructuring, the
Company's stockholders approved a corporate readjustment of the Company's
accounts in the form of a quasi-reorganization which was effected upon the
completion of the El Greco Transactions and the Debt Restructuring. A
quasi-reorganization, often referred to as "Fresh Start Accounting," is an
accounting procedure which accomplishes, with respect to the Company's accounts
and financial statements, what might have been accomplished in a reorganization
by legal proceedings. The Company's assets, liabilities and capital accounts
were adjusted to eliminate the stockholders' deficiency. On completion of the
readjustments, the Company's accounts and financial statements were
substantially similar to those of a new company commencing business. The Company
believes the quasi-reorganization was appropriate because on completion of the
Debenture Conversion and the Debt Restructuring and installation of a new
management team, the Company had substantially reduced its outstanding
Page 14
<PAGE>
indebtedness, which to a great extent was incurred in connection with the
Discontinued Footwear Products had formulated revised operating plans and as a
result thereof would be able to devote its resources to its continuing
operations and development of the Trademarks.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiary, Bright Star, from June 1, 1990, the effective date of
the acquisition, and 60% owned subsidiary ITG from February 1, 1988. All
material intercompany accounts and transactions are eliminated.
(c) Inventories
Inventories, which consist entirely of finished goods, are valued at the lower
of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
(d) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets (5 - 10 years) using accelerated methods.
(e) Candie's Trademark/License
The Candie's trademark is stated at cost, net of amortization, as determined by
its fair value relative to other assets and liabilities revalued in the
aforementioned quasi-reorganization, and is being amortized over twenty years.
(f) Investment in Joint Venture
The Company's investment in the Joint Venture has been accounted for under the
equity method of accounting. Management believes that the Company's recovery of
its investment, if any, will be realized over an indeterminate future period;
therefore, the investment has been fully reserved.
(g) Revenue Recognition
The Company's products are sold on either a landed or first cost basis. In the
case of landed sales, the Company bears the risk of loss until the products are
delivered to the customer. Revenues on landed sales are recognized when the
products are delivered to the customers. For goods sold on a first cost basis,
the Company acts as agent only, without risk of loss, and charges a commission
on the sale. Commission income is recognized upon shipment by the manufacturers.
Licensing income is recognized over the term of the license agreements.
(h) Taxes on Income
The Company has adopted the liability method of accounting for income taxes
under Financial Accounting Statement No. 109 "Accounting for Income Taxes"
("FASB 109"). The adoption of FASB 109 did not have a material effect on the
financial statements.
Page 15
<PAGE>
(i) Net Income (Loss) Per Share
Net income (loss) per common share is computed on a basis of the weighted
average number of common shares outstanding during each year, retroactively
adjusted to give effect to all stock splits. All common stock equivalents have
been used in the calculation.
(j) Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.
NOTE 2 -
(a) 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 significant losses.
Although on February 23, 1993 the Company successfully completed the Secondary
Offering and Debt Restructuring which improved its financial condition, sales of
the Company's products have been significantly below management's expectations.
At July 31, 1994, the Company had a substantial working capital deficit. The
unexpectedly high operating losses for the year ended January 31, 1994 and the
quarter ended July 31, 1994 resulted in an accelerated use of funds provided by
the public offering and adversely affected the Company's liquidity. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
The continuation of the Company is dependent upon the continued support of the
Company's trade vendors, and institutional lenders, obtaining additional equity
and ultimately achieving profitable operations. The consolidated financial
statements do not include any adjustments relating to the recoverability of
assets and classification of liabilities or any other adjustments that may be
necessary should the Company be unable to continue as a going concern.
Subsequent to January 31, 1994, the Company has raised additional equity
capital, continues to seek additional equity financing, has settled various
obligations through the issuance of its common stock, in addition to continuing
a cost containment program and attempting to enhance its gross margins while
achieving commensurate sales level increases.
Page 16
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
January 31, July 31,
1994 1994
----------- -----------
Furniture, fixtures and equipment $722,229 $721,113
Transportation equipment 20,750 20,750
Leasehold improvements 53,905 53,905
----------- -----------
796,884 795,768
Less accumulated depreciation
and amortization 617,946 585,254
------------ -----------
Net property and equipment $178,938 $217,517
============ =========
NOTE 4 - DUE TO/FROM FACTOR
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement. This agreement provides the Company with the ability to borrow funds
from the factor, limited to 80% of eligible accounts receivable and 50% of
eligible finished goods inventory (to a maximum of $5 million in inventory) in
which the factor has a security interest. The agreement also provides for the
opening of documentary letters of credit (up to a maximum of $2.5 million) to
suppliers, on behalf of the Company. The factor requires a deposit equal to 43%
of the amount of the letter of credit to be opened. Borrowings bear interest at
the rate of one and one half percent (1 1/2%) over the existing prime rate
established by the Philadelphia National Bank.
Additionally, the Company was able to borrow $300,000 above its eligible
accounts receivable and inventory formulas until July 31, 1994. This additional
borrowing capacity is personally guaranteed by the Company's President. At July
31, 1994, the Company had $1,394,331 of outstanding letters of credit.
Due to factor at July 31, 1994 is comprised as follows:
Accounts Receivable - assigned $4,355,592
Outstanding factor advances 4,826,161
----------
Due to Factor $ 470,569
==========
Page 17
<PAGE>
NOTE 5 - LONG-TERM DEBT
At the closing of the Secondary Offering on March 3, 1993, the Company's former
Institutional Lender agreed to restructure the Company's indebtedness (the "Debt
Restructuring"). The indebtedness before and after the Debt Restructuring is as
follows:
<TABLE>
<CAPTION>
Current Working
Term Capital Revolving Accrued
Loan 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-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
=========== =========== =========== ========== ===========
The balance of the indebtedness, after the Debt Restructuring was converted to
the following facilities:
<CAPTION>
Modified Working First Second
Term Capital Term Term
Loan Loan Loan 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>
Long-Term Debt consists of:
July 31, 1994 January 31, 1994
------------- ----------------
(unaudited) (unaudited)
First Term Loan $ 858,175 $ 873,175
Second Term Loan 1,000,000 1,000,000
Modified Term Loan 1,220,000 1,220,000
Working Capital Loan 300,000 300,000
---------- ----------
Total 3,378,175 3,393,175
Less Current Maturities 678,750 183,750
---------- ----------
Total Long-Term Debt $2,699,425 $3,209,425
========== ==========
The Company's indebtedness bears interest at the lender's prime lending rate
plus 2%. The debt is collaterized by substantially all of the assets of the
Company, except where the security interest in certain assets are subordinate to
the factor, and a continuing second mortgage held by the lender on certain
commercial property owned by the Company's former President.
Page 18
<PAGE>
The Debt Restructuring Agreement, as amended, provides for additional principal
payments based on the occurrence of certain events, as defined in addition to
minimum principal payments to as follows:
<TABLE>
<CAPTION>
First Second Modified Working
Term Term Term Capital
Loan Loan Loan Loan TOTAL
---- ---- ---- ---- -----
Year Ended
<S> <C> <C> <C> <C> <C>
January 31, 1995 $ 105,000 $ 35,000 $ 35,000 $ 8,750 $ 183,750
Year Ended
January 31, 1996 400,000 225,000 60,000 105,000 790,000
Year Ended
January 31, 1997 353,175 740,000 417,500 186,250 1,696,925
Year Ended
January 31, 1998 -- -- 450,000 -- 450,000
Year Ended
January 31, 1999 -- -- 257,500 -- 257,500
---------- ---------- ----------- --------- -----------
Total: $ 858,175 $ 1,000,000 $ 1,220,000 $ 300,000 $ 3,378,175
Less amounts due
within one year 420,000 140,000 65,000 53,750 678,750
----------- ---------- ----------- --------- -----------
Long-Term Debt $ 438,175 $ 860,000 $ 1,155,000 $ 246,250 $ 2,699,425
=========== ========== =========== ========= ==========
</TABLE>
At July 31, 1994, the Company was not in compliance with certain financial
covenants under the Debt Restructuring Agreement as amended. Compliance with
such covenants is determined based upon the quarterly financial statements of
the Company. Subsequent to July 31, 1994, the Company has reached an agreement
in principal with its former institutional lender, Shanghai Commercial Bank
("Shanghai"), to extinguish all of its outstanding indebtedness to Shanghai,
currently $3,378,175 plus accrued interest, through a combination of cash and
certain assets pledged as collateral to Shanghai as part of a personal guaranty
by the former president and chief executive officer of the Company, Barry
Feldstein. The agreement contemplates that Shanghai will receive $500,000 plus
accrued interest on the indebtedness, and Barry Feldstein will transfer his
322,222 shares of Candie's common stock and certain real property owned by him.
It is contemplated that the $500,000 payment will be paid from the funds raised
through the private placements of securities contemplated by the Company as
discussed in Note 10(a) of the Notes to Condensed Consolidated Financial
Statements.
NOTE 6 - RESTATEMENT - TREASURY STOCK TRANSACTION
In September 1991, in connection with an Indemnification Agreement with the
Company's former president, former management and the Company recorded a capital
contribution and treasury stock acquisition approximating $1,627,000 in
recognition of the fair market value of 37,967 shares to reimburse the Company
for U.S. Customs duties assessments. During fiscal 1995 the Company discovered
that the shares were not received and therefore the prior accounting treatment
was incorrect. The restatement has no effect on total stockholders' equity,
results of operations or per share results previously recorded.
Page 19
<PAGE>
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has entered into a Services Allocation Agreement with NRC pursuant
to which the Company will provide NRC with financial, marketing, sales and other
business services for which NRC will be charged an allocation of the Company's
expenses, including employees' salaries associated with such services.
NOTE 8 - LEASES
In connection with the its sublease agreement, the Company has entered into an
agreement with the sublandlord to terminate the sublease agreement and to issue
200,000 shares of its common stock (the "Shares") to the sublandlord and to
deposit into escrow, with an escrow agent, an additional 100,000 shares of
common stock (the "Escrow Shares").
The termination agreement provides that the Company will vacate and surrender
its current premises no later than June 30, 1994. The agreement also provides
that until such date, the Company shall have no additional liability or
obligation to make any cash payment for use and occupation of the premises to
the sublandlord, except to reimburse the sublandlord for the reasonable costs
necessary to repair any damage to the premises caused by the Company.
The Company has also agreed to indemnify the sublandlord for any loss, as
defined, suffered by the sublandlord from the period July 1994 through April 27,
1997. Such loss shall be determined and paid solely as follows:
(i) The amount of indemnifiable loss determined above shall be paid as follows:
(a) the Shares shall be valued as of July 1, 1994, as defined, and (b) to the
extent that the value of the Shares (as so computed) exceeds $270,000, then the
amount of such excess shall be applied against the amount of indemnifiable loss.
(ii) After full amount of such excess, if any, has been applied to the
indemnifiable loss, the Company's liability for indemnifiable loss shall be
limited to 50% of any shortfall in the amount of indemnifiable loss on a monthly
basis (a "Loss Shortfall"), which liability shall be satisfied solely through
releases from escrow of a certain amount of Escrow Shares, as defined. The
maximum number of shares of common stock which the sublandlord is entitled to is
a total of 300,000 shares of common stock. The amount of additional rent
expense, if any, is not presently determinable.
The Shares and the Escrow Shares, if any, when issued, will be "restricted
securities" (as such term is defined in Rule 144 under the Securities Act of
1933) and may not be sold or otherwise disposed of unless the same have been
registered under such Act or an exemption from registration is available. The
Company has granted the sublandlord certain registration rights with respect to
the Shares.
Page 20
<PAGE>
NOTE 9 - CERTAIN TRANSACTIONS AND GAINS AND LOSSES ON SETTLEMENTS WITH
CREDITORS
(a) Offering of Shares
In May 1994, the Company issued 281,481 shares of its common stock and received
aggregate net proceeds of approximately $350,000.
(b) Conversion of Debt
In May 1994, the Company entered into an agreement with NRC pursuant to which
the Company agreed to issue 240,740 shares of its common stock to NRC in full
payment of the El Greco Note.
(c) Settlement with Overseas Agent
In May 1994, the Company agreed to issue 250,000 shares of common stock, valued
by the Company at $1.00 per share, in satisfaction of an outstanding payable of
$759,888. The Company realized a net gain of $509,888 from this transaction
during the second quarter of the fiscal year ending January 31, 1995.
(d) Settlement with Major League Footwear
In May 1994, in connection with a settlement with Major League Footwear, Inc.
("MLF") a company under common management, the Company agreed to issue 110,000
shares of common stock to be registered, and valued by the Company at $1.35 per
share, and 150,000 shares of common stock, valued by the Company at $1.00 per
share, in satisfaction of an outstanding liability to MLF in the amount of
$537,961. This transaction relates to inventory received by the Company in the
fiscal year ended January 31, 1994. The Company realized a net gain of $100,000
from this settlement during the second quarter of the fiscal year ending January
31, 1995.
(e) Settlement of Litigation with Starter Corporation
In July 1994, in connection with a settlement with Starter Corporation
("Starter") regarding $532,031 in royalties due Starter under a former license
agreement, the Company agreed to issue 100,000 shares of common stock to be
registered, and valued by the Company at $1.35 per share, and pay $150,000 over
a fifteen month period beginning in July 1994. The Company realized a net gain
of $247,031 from this settlement during the second quarter of the fiscal year
ended January 31, 1995.
(f) Settlement of Litigation with American Sporting Goods
In July 1994, in connection with a settlement with American Sporting Goods
("ASG"), the Company's subsidiary, Bright Star Footwear, has agreed to pay ASG
$100,000 over a ten month period commencing in July 1994. Such amount has been
recorded as a net loss during the second quarter of the fiscal year ended
January 31, 1995.
Page 21
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) On August 31, 1989, the Company entered into a three-year distribution
agreement with Starter, under which the Company was granted the right to
distribute footwear bearing the colors and logos of certain collegiate and
professional sports teams in accordance with licenses held by Starter. In
December 1991, the Company discontinued all sales of such footwear products.
Royalties to Starter were $-0-, $110,000, and $1,351,000 on sales of $-0-,
$1,017,000, and $12,700,000 for the years ended January 31, 1994, 1993 and 1992,
respectively. In March 1992, the Company was advised by Starter that it had
terminated its license agreement with the Company on March 15, 1992 and in May
1992, Starter instituted a legal action against the Company for $515,000 of
unpaid royalties. This action was settled in July 1994, whereby the company has
agreed to issue Starter 100,000 shares of the Company's common stock and pay
Starter $150,000 over a fifteen month period commencing in July 1994. Settlement
of this action resulted in a net gain of $247,031 during the three months ended
July 31, 1994.
(b) In April 1991, an action was commenced derivatively on behalf of Candie's,
Inc. against certain of the Company's former directors and the Company as a
nominal defendant (the "Defendants"). The complaint alleges that the Company's
actions in connection with a public offering to exchange warrants for the
Company and the reacquisition of ITG were detrimental to the Company's financial
condition. The plaintiff seeks an accounting by the Company and payment by the
Board of Directors of an unspecified amount of damages. In September 1991, the
defendants moved to dismiss the complaint for failure to state a cause of
action. The motion was granted in October 1991 based upon the court's mistaken
belief that the plaintiff had defaulted with respect to the motion. The parties
agreed to reinstate the motion in June 1992 and the motion has again been
submitted to the Court for its determination. The Company and the individual
defendants intend to vigorously defend the action.
(c) In July 1992, an action was instituted against the Company and its former
directors by the Food and Allied Service Trades Department, AFL-CIO, and on
behalf of the class of all other similarly situated stockholders. The plaintiff
alleges that the Company made false representations or failed to disclose
material facts in certain of its documents filed with the Securities and
Exchange Commission regarding alleged underpayment to U.S. Customs. In
connection with this action, the plaintiff seeks to have this case certified as
a class action on behalf of all stockholders and seeks unspecified damages. The
Company and certain individual defendants denied any knowledge of such alleged
underpayment to U.S. Customs and are vigorously defending against all such
claims. The Company and certain individual defendants moved to dismiss the
complaint in September 1992 for failure to state a claim. This motion was
consolidated with the motion to dismiss the action against the Company and the
individual defendants; however, the court allowed plaintiffs the right to
replead their claims (which they did on February 1, 1993), subject to the
defendants' right to renew its motion to dismiss the amended pleading. The
Company has moved to dismiss the amended complaint, however, such motion was
denied. The Company has denied the plaintiffs' allegation of wrongdoing and
asserted cross claims against the Company's former owner. The Company is
currently negotiating a settlement of this action.
Page 22
<PAGE>
(d) In June 1992, an action was instituted against the Company and its former
president, by Pentland and its parent company, alleging, among other things,
violations of section 10(b) of the Securities Exchange Act of 1934, common law
fraud, negligent misrepresentation and breach of contract, arising out of
Pentland's acquisition of 19,900 shares of the Company's common stock in June
1991. The complaint alleges that the Company's former president, and,
consequently, the Company, were aware of, but failed to disclose at the time
Pentland acquired its shares, certain alleged underpayment to U.S. Customs.
Pentland sough compensatory damages of $865,000. The Company denied any
knowledge of underpayment at the time of Pentland's acquisition of shares and
moved to dismiss the complaint in August 1992, for failure to state a claim. In
December 1992, the court granted the Company's motion and dismissed the
complaint; the court allowed plaintiffs the right to replead their claims (which
they did on February 1, 1993), subject to the Company's right to renew its
motion to dismiss the amended pleading. The Company has moved to dismiss the
amended complaint, however, such motion was denied. The Company has denied the
plaintiff's allegation of wrongdoing, and asserted cross claims against the
Company's former president.
(e) In March 1994, an action was instituted by ASG in the United States District
Court for the Southern District of California against Bright Star concerning
Bright Star's activities as a buying agent in connection with suppliers outside
the United States who were allegedly marking up the factory price of goods
ordered by Bright Star for the benefit of ASG. ASG was seeking to recover
compensatory damages of approximately $531,000 and an unspecified amount of
punitive damages. In July 1994, Bright Star and ASG settled this action whereby
Bright Star has agreed to pay ASG $100,000 over a ten month period commencing in
July 1994. This amount has been recorded as a net loss during the three months
ended July 31, 1994.
In the event that the Company is not successful in defense of the actions set
forth above in (b), (c), and (d) or any settlement reached requires a
substantial monetary judgment in excess of $555,000 provided for in the
accompanying financial statements, the Company's financial condition could be
adversely affected thereby.
(f) As of July 31, 1994, the Company is obligated under an employment agreement
with an executive and a termination agreement with a former executive to provide
aggregate minimum compensation of $100,000 remaining during the fiscal year
ended January 31, 1995, $200,000 during the fiscal year ended January 31, 1996
and $16,667 during the fiscal year ended January 31, 1997.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to the end of the first quarter, the Company has entered into the
following transactions:
(a) Private Placements
The Company has recently entered into a letter of intent with an investment
banking firm which provides that the investment banking firm will act as
placement agent for the Company with respect to private offerings of securities
Page 23
<PAGE>
including convertible preferred stock and common stock. The Company intends to
raise approximately $2.5 million in this equity financing.
(b) Extinguishment of Debt to Former Lender
The Company has reached an agreement in principal with its former lender,
Shanghai Commercial Bank ("Shanghai"), to extinguish all of its outstanding
indebtedness to Shanghai, currently $3,378,175 plus accrued interest, through a
combination of cash and certain assets pledged as collateral to Shanghai as part
of a personal guaranty by the former president and chief executive officer of
the Company, Barry Feldstein. The agreement contemplates that Shanghai will
receive $500,000 plus accrued interest on the indebtedness, and Barry Feldstein
will transfer his 322,222 shares of Candie's common stock and certain real
property owned by him. It is contemplated that the $500,000 payment will be paid
from the private offering funds raised per Note 10(a) above.
Page 24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Six Months Ended July 31, 1994
Landed sales increased by $4,388,022 (91%) for the six months ended July 31,
1994 over the six month period ended July 31, 1993 primarily because of
increased market acceptance of CANDIE'S branded footwear products. Total gross
profit on landed sales increased by $413,193 (54%) for the six months ended July
31, 1994 over the three month period ended July 31, 1993 as a result of
increased sales of CANDIE'S branded footwear products. The gross profit
percentage on landed sales decreased from 15.7% for the six months ended July
31, 1993 to 11.8% for the six months ended July 31, 1994 primarily due to
closeout sales of inventory during the six month period ended July 31, 1994 and
additional markdowns on inventory. Commission income results from arranging for
the production and quality control of products. Commission and licensing income
for the six months ended July 31, 1994 increased to $2,286,706 from $1,166,912
an increase of $1,119,794 (96%) over the same period last year primarily because
of increased orders on a commission basis of Candie's and Bright Star footwear
and the licensing agreements under the Candie's label.
Selling expenses decreased by $793,438 (27%) for the six months ended July 31,
1994 as compared to the six months ended July 31, 1993 primarily as a result of
the acquisition of the Candie's trademark which eliminated license fees that
existed last year, however, this decrease was offset by increases in salaries of
sales personnel.
General and Administrative expenses decreased by $807,874 (34%) for the six
months ended July 31, 1994 as compared to the same period last year, primarily
due to staff reductions, decreases in professional fees and a decrease in
amortization due to reductions in trademark and non-competition agreements as a
result of the quasi-reorganization.
Interest expense increased by $108,079 (54%) for the six months ended July 31,
1994 as compared to the same period last year. The increase was primarily due to
increased advances that the Company received under its Factor Agreement (see
Note 4) and increases in the prime lending rate.
During the six months ended July 31, 1994, the Company recorded net gains of
$883,249 on settlements of certain existing obligations and litigation matters.
As a result of the foregoing, the Company's net income for the six months ended
July 31, 1994 increased to $336,323 from a loss of $(3,553,289) for the
corresponding period ended July 31, 1993.
Page 25
<PAGE>
Three Months Ended July 31, 1994
Landed sales increased by $3,391,911 (156%) for the three months ended July 31,
1994 over the three month period ended July 31, 1993 primarily because of
increased market acceptance of CANDIE'S branded footwear products. Total gross
profit on landed sales increased by $361,163 (123%) for the three months ended
July 31, 1994 over the three month period ended July 31, 1993 as a result of
increased sales of CANDIE'S branded footwear products. The gross profit
percentage on landed sales decreased from 13.5% for the three months ended July
31, 1993 to 11.8% for the quarter ended July 31, 1994 primarily due to closeout
sales of inventory during the three month period ended July 31, 1994 and
additional markdowns on inventory. Commission income results from arranging for
the production and quality control of products. Commission and licensing income
for the three months ended July 31, 1994 increased to $1,454,995 from $427,074
an increase of $1,027,921 (241%) over the same period last year primarily
because of increased orders on a commission basis of Candie's and Bright Star
footwear and the licensing agreements under the Candie's label.
Selling expenses decreased by $432,068 (31%) for the three months ended July 31,
1994 as compared to the three months ended July 31, 1993 primarily as a result
of the acquisition of the Candie's trademark which eliminated license fees that
existed last year, however, this decrease was offset by increases in salaries of
sales personnel.
General and Administrative expenses decreased by $320,715 (30%) for the three
months ended July 31, 1994 as compared to the same period last year, primarily
due to staff reductions, decreases in professional fees and a decrease in
amortization due to reductions in trademark and non-competition agreements as a
result of the quasi-reorganization.
Interest expense increased by $26,289 (20%) for the three months ended July 31,
1994 as compared to the same period last year. The increase was primarily due to
increased advances that the Company received under its Factor Agreement (see
Note 4) and increases in the prime lending rate.
During the three months ended July 31, 1994, the Company recorded net gains of
$756,919 on settlements of certain existing obligations and litigation matters.
As a result of the foregoing, the Company's net income for the three months
ended July 31, 1994 increased to $997,984 from a loss of $(1,865,887) for the
corresponding period ended July 31, 1993.
Liquidity and Capital Resources
In the report on the Company's annual financial statements at January 31, 1994,
the Company's independent certified public accountants have included an
explanatory paragraph in their report on the Company's financial statements
stating certain factors which raise a substantial doubt about the Company's
ability to continue as a going concern.
At July 31, 1994, the Company had a working capital deficiency of $1,857,927
versus a working capital deficiency of $3,180,800 at January 31, 1994. This
Page 26
<PAGE>
decrease in the working capital deficiency is primarily attributable to net
income for the six months ended July 31, 1994 and the various settlements of
obligations of the Company through the issuance of common stock offset by an
increase in the current portion of long-term. The ratio of current assets to
current liabilities was .70 to 1.0 at July 31, 1994 compared to .58 to 1.0 at
January 31, 1994.
The Company's cash flow from operating activities increased for the six month
period ended July 31, 1994 compared to the same period of the prior year. Net
cash used in operating activities totaled $310,135 for the six months ended July
31, 1994 compared to net cash used in operating activities of $5,681,308 for the
six months ended July 31, 1993. The decrease in net cash used resulted primarily
from net income for the six months ended July 31, 1994 as compared to a net loss
and the reduction in the prior year of old, outstanding liabilities that were
settled with the proceeds of the secondary offering, including $1,000,000 owed
to the U.S. Customs Service.
Cash provided by financing activities decreased by $5,475,685 to $303,119 for
the six months ended July 31, 1994 compared to the same period last year. This
reduction was primarily caused by the fact that the Company completed a
secondary offering in the amount of $5,334,902 in the six month period ended
July 31, 1993.
Upon completion of the Company's restructuring and equity financing plan in
March 1993 (see Note 1 of the Notes to Condensed Consolidated Financial
Statements), management believed that it would provide the Company with adequate
resources to implement their new business strategies; however, the Company has
experienced operating losses in the fourteen month period ended July 31, 1994
which were greater than expected due to a weak retail market, and the resulting
delays in the Company's ability to purchase goods. As a result of the foregoing,
the Company has undertaken a program set forth below which is designed to
increase revenue and cash flow while reducing expenses. The Company believes
that if its program is successful, of which there can be no assurance, it will
have adequate capital to support the Company's operations for the next twelve
months.
The Company's program involves (a) cost containment through (i) termination of
the sublease for its current facility and relocation to a site in Westchester
County, New York (which the Company believes will reduce its facility costs),
(ii) termination of personnel not deemed necessary to its continuing operations,
(iii) elimination or reduction of certain operating expenses, and (iv)
conversion of certain existing claims to equity through issuance of common stock
in settlement of such claims; (b) increasing revenues by (i) increasing sales of
footwear by the Company's subsidiary, Bright Star Footwear, Inc., under the
Company's newly licensed trademarks, BIG SMITH and ASPEN and (ii) increasing
royalty income from the licensing by the Company of the CANDIE'S trademark and
aggressive marketing of CANDIE'S footwear; (c) seeking to obtain additional debt
and equity financing by (i) borrowing additional funds on a long-term basis and
(ii) sales of equities securities; and (d) maintaining or enhancing the existing
debt structure with its institutional lender by obtaining, when necessary,
waivers or restructuring of applicable financial covenants and principal
payments and maintaining or enhancing its existing line of credit from a factor
by providing, if necessary, additional collateral.
Page 27
<PAGE>
While the Company believes that its program of cost containment will result in
an aggregate decrease in operating expenses of in excess of $1 million, on an
annualized basis (of which only a portion would be realized in the 1995 fiscal
year), there can be no assurance that the Company will be able to achieve a
significant reduction in operating costs, or significantly increase its
revenues, or obtain additional financing on acceptable terms. Finally, there can
be no assurance that implementation of such program will generate sufficient
working capital to meet its operating expenses for the 1995 fiscal year.
To implement its plan of operations, the Company has taken the following steps:
In May 1994, the Company received net proceeds of approximately $350,000 from
sales of common stock which it has used to pay outstanding indebtedness due to
its institutional lender and for working capital and general corporate purposes.
In addition, the Company anticipates that it will issue additional shares of
common stock pursuant to certain settlements, either completed or being
negotiated with various creditors, in satisfaction of existing claims against
the Company.
As part of its strategy of reducing costs, the Company recently terminated its
inhouse marketing staff. The Company will use outside marketing consultants on
an "as needed" basis to support its marketing activities.
In an effort to enhance market penetration, the Company has instituted a pricing
plan to further encourage retailers to carry the CANDIE'S line of footwear.
Management believes the program will allow its retail customers to offer a
nationally known branded product at competitive prices while maintaining
significant retail markups.
Page 28
<PAGE>
CANDIE'S, INC.
PART II - Other Information
Item 1. Legal Proceedings
In July 1994, the Company reached an agreement with Starter Corporation
("Starter") settling the action instituted by Starter against the Company in May
1992 in the Superior Court of the State of Connecticut regarding approximately
$515,000 in royalties that Starter alleged were due it under a former licensing
agreement. In connection with such settlement the Company agreed to issue to
Starter 100,000 shares of the Company's common stock and to make monthly
payments of $10,000 to Starter over a fifteen month period commencing in July
1994.
In July 1994, the Company's subsidiary, Bright Star Footwear ("Bright Star"),
reached an agreement with American Sporting Goods ("ASG") to settle an action
commenced in March 1994 by ASG in the United States District Court for the
Southern District of California against Bright Star concerning Bright Star's
activities as a buying agent. In connection with such settlement Bright Star has
agreed to pay ASG $100,000 over a ten month period commencing in July 1994.
Item 3. Defaults Upon Senior Securities.
At July 31, 1994, the Company was not in compliance with certain financial
covenants under the Debt Restructuring Agreement, as amended, with Shanghai and
the Company has failed to make certain principal and interest payments due under
the Debt Restructuring Agreement. The Company has received a waiver with respect
to the financial covenants and Shanghai has agreed that on or prior to September
20, 1994 it will not deem the Company to be in default with respect to the past
due principal and interest payments.
Item 6.
a) Exhibits
10.1) Settlement Agreement and Release and Waiver of Claims between
the Company and Saintday International Co., Ltd. (1)
10.2) Agreement between the Company and Major League Footwear, Inc.
10.3) Settlement Agreement and Release and Waiver of Claims between
the Company and Starter Corporation. (1)
10.4) Agreement between the Company and New Retail Concepts, Inc.
dated May 16, 1994. (1)
10.5) Personal Guaranty of Neil Cole in favor of Congress Talcott
Corporation dated June 28, 1994. (1)
27) Financial Data Schedule. (2)
b) Reports on Form 8-K
- ----------
(1) Previously filed.
(2) Filed herewith.
Page 29
<PAGE>
CANDIE'S, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANDIE'S, INC.
(Registrant)
DATED: April 26, 1996 By: /S/ NEIL COLE
------------------------------------------
NEIL COLE
President and Chief Executive Officer
(Principal Executive and Accounting Officer)
Page 30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-QSB at July 31, 1994 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JUL-31-1994
<CASH> 106,021
<SECURITIES> 0
<RECEIVABLES> 1,480,747
<ALLOWANCES> 793,500
<INVENTORY> 3,399,217
<CURRENT-ASSETS> 4,253,313
<PP&E> 796,884
<DEPRECIATION> 617,946
<TOTAL-ASSETS> 10,644,830
<CURRENT-LIABILITIES> 6,111,240
<BONDS> 0
0
0
<COMMON> 6,355
<OTHER-SE> 1,356,405
<TOTAL-LIABILITY-AND-EQUITY> 10,644,830
<SALES> 9,233,029
<TOTAL-REVENUES> 11,519,735
<CGS> 8,058,004
<TOTAL-COSTS> 8,058,004
<OTHER-EXPENSES> 3,689,556
<LOSS-PROVISION> (883,249)
<INTEREST-EXPENSE> 306,689
<INCOME-PRETAX> 348,735
<INCOME-TAX> 12,412
<INCOME-CONTINUING> 336,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,323
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
