SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 2 to Form 10-QSB)
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1995
or
Transition Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file Number 0-10593
CANDIE'S, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2481903
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices)
(914) 694-8600
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES |X| NO
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of December 15, 1995 excluding treasury shares): 8,265,995
Transitional small business disclosure format (check one):
YES NO |X|
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
FOR THE PERIOD ENDED OCTOBER 31, 1995
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at October 31, 1995
and January 31, 1995 3-4
Condensed Consolidated Statements of Operations for the
Three Months Ended October 31, 1995 and 1994 5
Condensed Consolidated Statements of Operations for the
Nine Months Ended October 31, 1995 and 1994 6
Condensed Consolidated Statement of Stockholders Equity
for the Nine Months Ended October 31, 1995 7
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended October 31, 1995 and 1994 8-9
Notes to Condensed Consolidated Financial Statements 10-18
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-21
PART II. OTHER INFORMATION 22
SIGNATURES 23
Page 2
<PAGE>
PART I
Item 1.
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
RESTATED RESTATED
(Note 6) (Note 6)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 207,227 $ --
RESTRICTED CASH -- 100,000
ACCOUNTS RECEIVABLE
net allowances of $254,092 and $45,000
at October 31, 1995 and January 31, 1995 663,908 583,911
INVENTORIES 3,485,826 3,269,158
PREPAID EXPENSES 1,011,685 151,195
OTHER CURRENT ASSETS 136,313 --
----------- -----------
TOTAL CURRENT ASSETS 5,504,959 4,104,264
PROPERTY AND EQUIPMENT:
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (Note 3) 138,293 142,960
OTHER ASSETS:
NON-COMPETITION AGREEMENTS 384,408 414,234
TRADEMARK 4,902,170 5,114,282
OTHER 459,776 514,274
----------- -----------
TOTAL OTHER ASSETS 5,746,354 6,042,790
----------- -----------
TOTAL ASSETS $11,389,606 $10,290,014
=========== ===========
Page 3
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
OCTOBER 31, JANUARY 31,
1995 1995
------------ ------------
Restated Restated
(Note 6) (Note 6)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 3,349,303 $ 1,820,598
PAYABLE FOR INVENTORY IN TRANSIT 705,273 1,105,845
DUE TO FACTOR (Note 4) 410,797 1,162,035
ACCRUED LITIGATION EXPENSE -- 100,000
ACCRUED EXPENSES AND TAXES 1,230,633 1,394,253
ACCRUED U.S. CUSTOMS DUTIES (Note 10) 55,383 63,427
------------ ------------
TOTAL CURRENT LIABILITIES 5,751,389 5,646,158
OTHER NONCURRENT LIABILITIES 25,111 206,213
ACCRUED U.S. CUSTOMS DUTIES (Note 10) 2,140 45,746
------------ ------------
TOTAL LIABILITIES 5,778,640 5,898,117
------------ ------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE -SHARES
AUTHORIZED 5,000,000; NONE ISSUED OR
OUTSTANDING
COMMON STOCK, $.001 PAR VALUE -SHARES
AUTHORIZED: 30,000,000
ISSUED 8,742,034 AT October 31, 1995
AND 8,709,425 AT January 31, 1995 8,742 8,709
ADDITIONAL PAID-IN CAPITAL (Note 6) 9,940,305 9,902,837
DEFICIT, since February 28, 1993,
(deficit eliminated $27,696,007) (4,338,081) (5,519,649)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,610,966 4,391,897
------------ ------------
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY $ 11,389,606 $ 10,290,014
============ ============
Page 4
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
------------ ------------
Restated
(Note 6)
LANDED SALES $ 9,333,498 $ 4,826,909
COMMISSION AND
LICENSING INCOME 1,268,696 1,126,476
------------ ------------
TOTAL REVENUES 10,602,194 5,953,385
COST OF LANDED SALES 7,401,356 4,324,481
------------ ------------
TOTAL GROSS PROFIT 3,200,838 1,628,904
------------ ------------
OPERATING EXPENSES:
SELLING EXPENSES 1,324,304 1,159,058
GENERAL & ADMINISTRATION EXPENSES 856,205 798,013
REVERSAL OF ACCRUAL NO LONGER
REQUIRED - PENSION PLAN -- (340,000)
------------ ------------
TOTAL OPERATING EXPENSES 2,180,509 1,617,071
------------ ------------
OPERATING INCOME 1,020,329 11,833
OTHER DEDUCTIONS:
LOSS ON SETTLEMENT OF OBLIGATIONS -- (155,000)
INTEREST - NET (242,176) (228,155)
OTHER EXPENSES -- (131,858)
------------ ------------
TOTAL OTHER DEDUCTIONS (242,176) (515,013)
------------ ------------
INCOME (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM 778,153 (503,180)
INCOME TAXES (RECOVERY) 72,511 (8,825)
------------ ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 705,642 (494,355)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $121,000 -- 1,962,175
------------ ------------
NET INCOME $ 705,642 $ 1,467,820
============ ============
EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS)BEFORE
EXTRAORDINARY ITEM $ .07 $ (.07)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $.02 FOR 1994 -- .29
------------ ------------
NET INCOME $ .07 $ .22
============ ============
WEIGHTED AVERAGE
OUTSTANDING SHARES 14,452,746 6,660,846
============ ============
Page 5
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
------------ ------------
Restated
(Note 6)
LANDED SALES $ 26,793,435 $ 14,059,938
COMMISSION AND
LICENSING INCOME 3,399,892 3,413,182
------------ ------------
TOTAL REVENUES 30,193,327 17,473,120
COST OF LANDED SALES 21,868,908 12,382,485
------------ ------------
TOTAL GROSS PROFIT 8,324,419 5,090,635
------------ ------------
OPERATING EXPENSES:
SELLING EXPENSES 3,653,856 3,265,138
GENERAL & ADMINISTRATIVE EXPENSES 2,615,305 2,381,490
REVERSAL OF ACCRUAL NO LONGER
REQUIRED - PENSION PLAN -- (340,000)
------------ ------------
TOTAL OPERATING EXPENSES 6,269,161 5,306,628
------------ ------------
OPERATING INCOME (LOSS) 2,055,258 (215,993)
OTHER (DEDUCTIONS) AND INCOME:
(LOSS) GAIN ON SETTLEMENT OF
OBLIGATIONS (113,000) 728,249
INTEREST - NET (628,079) (534,844)
OTHER EXPENSES -- (131,858)
------------ ------------
TOTAL OTHER (DEDUCTIONS) AND INCOME (741,079) 61,547
------------ ------------
INCOME (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM 1,314,179 (154,446)
INCOME TAXES 132,611 3,586
------------ ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 1,181,568 (158,032)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $121,000 -- 1,962,175
------------ ------------
NET INCOME $ 1,181,568 $ 1,804,143
============ ============
EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS BEFORE EXTRAORDINARY
ITEM $ .14 $ (.03)
EXTRAORDINARY ITEM--GAIN ON
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $.02 FOR 1994 -- .34
------------ ------------
NET INCOME $ .14 $ .31
============ ============
WEIGHTED AVERAGE
OUTSTANDING SHARES 8,542,944 5,752,943
============ ============
Page 6
<PAGE>
CANDIE'S, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 31, 1995
(unaudited)
Restated (Note 6)
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- ------ ---------- ----------- ----------
Balance,
January, 1995
as previously
reported 8,709,465 $8,709 $9,162,837 $(4,779,649) $4,391,897
Capital
Transaction 740,000 (740,000)
---------- ------ ---------- ----------- ----------
Balance,
January 31, 1995 8,709,465 8,709 9,902,837 (5,519,649) 4,391,897
Issuance of common
stock due to
warrant exercise. 32,609 33 37,468 37,501
Net income 1,181,568 1,181,568
Balance,
October 31, 1995 8,742,034 $8,742 $9,940,305 $(4,338,081) $5,610,966
========= ====== ========== =========== ==========
Page 7
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited)
1995 1994
----------- -----------
Restated
(Note 6)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 1,181,568 $ 2,544,143
Items In Net Income
Not Affecting Cash:
Provision For Losses On
Accounts Receivable 3,124 20,500
Depreciation and Amortization 316,811 372,174
Provision For Pension Costs -- (340,000)
Gains on Settlement of
Obligations -- (3,551,424)
Loss on Disposal of Fixed Assets -- 60,755
Increase (Decrease) In Cash
Flows From Changes In Operations:
Assets and Liabilities (1,273,965) (380,739)
----------- -----------
Net Cash Provided By (Used In)
Operating Activities $ 227,538 $(1,274,591)
----------- -----------
Page 8
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31,
(unaudited) (CONT'D.)
1995 1994
----------- -----------
Restated
CASH FLOWS FROM (Note 6)
INVESTING ACTIVITIES:
Capital Expenditures $ (57,812) $ (69,089)
----------- -----------
Net Cash Used in
Investing Activities (57,812) (69,089)
----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Notes Payable -New Retail
Concepts, Inc. 600,000 --
Repayments of Notes Payable - New Retail
Concepts, Inc. (600,000) --
Net Payments under Revolving Credit
Agreement -- (570,000)
Proceeds from private placements
net of expenses -- 2,009,319
Proceeds from exercise of warrants 37,501 --
----------- -----------
Net Cash Provided By
Financing Activities 37,501 1,439,319
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 207,227 95,639
CASH AND CASH EQUIVALENTS,
beginning of period -- 114,153
----------- -----------
CASH AND CASH EQUIVALENTS,
end of the period $ 207,227 $ 209,792
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 567,532 $ 813,525
=========== ===========
Income Taxes $ 53,757 $ 49,310
=========== ===========
Issuance of 1,050,740 shares
of common stock in connection
with settlement of obligation
to creditors:
Issuance of common stock $ -- $ 1,278,500
Increase in prepaid expenses -- (66,350)
Reduction of security deposit -- 74,531
Reduction of accounts payable -- (1,421,666)
Reduction of accrued royalty -- (382,031)
Reduction of inventory -- 139,460
Reduction of note payable -- (325,000)
Reduction of accrued expenses -- (280,693)
----------- -----------
Total $ -- $ (983,249)
=========== ===========
Capital Contribution $ -- $ 740,000
=========== ===========
Issuance of 100,000 shares of stock $ -- $ 115,000
=========== ===========
Page 9
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
1. Continuing Operations
Business, Secondary Offering and Other Transactions
Candie's, Inc., the Registrant, together with its subsidiaries is sometimes
referred to herein as Candie's or the "Company."
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which are in the opinion of management, necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission. Certain information and footnote disclosures normally included under
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures in such financial statements are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the Company's Financial Statements and the
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended January 31, 1995.
The Company designs, markets, imports and distributes a variety of
moderately-priced athletic, leisure and fashion footwear for women and girls
under the trademarks CANDIE'S, ASPEN and BONGO. The Company's product line also
includes a wide variety of workboots, hiking shoes and men's leisure shoes
designed, marketed and distributed by the Company's wholly-owned subsidiary,
Bright Star Footwear, Inc. ("Bright Star").
(i) Secondary Offering
The Company completed an offering of its common stock (the "Secondary Offering")
on February 23, 1993. Upon the effectiveness of the Secondary Offering, the
Company's stockholders approved the following: (1) a change in the company's
name from Millfeld Trading Co., Inc., to Candie's, Inc., (2) a 1 for 4.5 reverse
stock split of its common stock for which retroactive effect has been given in
the financial statements, and (3) a quasi-reorganization.
The following transactions ((ii) through (v)) occurred contemporaneously upon
effectiveness or closing of the Secondary Offering:
(ii) Debenture Conversion
Upon effectiveness of the Secondary Offering and immediately prior to the
reverse stock split, the holder of the Company's $3,500,000 subordinated
convertible debenture (the "Debenture") converted the Debenture, in accordance
with its terms, into 3,500,000 shares of common stock. Upon the completion of
the reverse split, such former holder made a capital contribution of 127,777 of
his 777,777 post-split shares of common stock to the Company and cancelled a
warrant to purchase additional shares of common stock previously issued to him
in connection with the Debenture.
Page 10
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
(iii) The El Greco Transactions
Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an
affiliated company, consummated the following transactions (the "El Greco
Transactions"): (i) El Greco received 900,000 shares of the Company's common
stock; (ii) El Greco transferred the trademarks "CANDIE'S," "ACTION CLUB,"
"FULLMOON" and "SUGAR BABIES" (collectively, the "Trademarks"), and all of its
business operations associated with the Trademarks, to the Company; (iii) El
Greco assigned all of its preexisting agreements with licensees of the
Trademarks to the Company; (iv) the Company issued to El Greco a subordinated
note in the principal amount of $325,000, plus interest payable quarterly at the
"prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company
paid El Greco's expenses, including attorney's fees relating to the El Greco
Transactions, in the sum of $75,000 from the proceeds of the offering. In May
1994, the El Greco Note was satisfied.
Upon the closing of the El Greco Transactions, the Company ceased to be a
licensee and acquired actual ownership of the Candie's trademark.
In conjunction with the closing of the Secondary Offering and the transfer of
the Trademarks from El Greco to the Company, El Greco's operations were merged
into the operations of New Retail Concepts, Inc. ("NRC"), a significant
shareholder of the Company and an entity in which the Company's President is a
principal stockholder.
(iv) Institutional Lender-Forgiveness ("Debt Restructuring")
At the closing of the Secondary Offering, the Company's Institutional Lender
agreed to restructure the Company's indebtedness which aggregated approximately
$11,190,000, including accrued interest at February 28, 1993. Such Debt
Restructuring included the forgiveness of approximately $5,940,000 of such debt
and the restructuring of the payment terms relating to the remaining principal
amount of such loans. As a result of and upon the completion of the Debt
Restructuring, the Company's outstanding indebtedness (excluding letters of
credit) to the Institutional Lender totaled approximately $5,250,000 at February
28, 1993.
(v) Quasi-Reorganization
Upon effectiveness of the Secondary Offering and the Debt Restructuring, the
Company's stockholders approved a corporate readjustment of the Company's
accounts in the form of a quasi-reorganization which was effected upon the
completion of the El Greco Transactions and the Debt Restructuring.
A quasi-reorganization, often referred to as "Fresh Start Accounting," is an
accounting procedure which accomplishes, with respect to the Company's accounts
and financial statements, what might have been accomplished in reorganization by
legal proceedings. The Company's assets, liabilities and capital accounts were
adjusted to eliminate the stockholders' deficiency. On completion of the
readjustments, the Company's accounts and financial statements were
substantially similar to those of a new company commencing business. The Company
believes the quasi-reorganization was appropriate
Page 11
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
because on completion of the Debenture Conversion and the Debt Restructuring and
installation of a new management team, the Company had substantially reduced its
outstanding indebtedness, which to a great extent was incurred in connection
with the Discontinued Footwear Products had formulated revised operating plans
and as a result thereof would be able to devote its resources to its continuing
operations and development of the Trademarks.
2. Summary of Significant Account Policies
Basis of Presentation
Going Concern
The Company's consolidated financial statements have been presented on a going
concern basis which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The liquidity of the Company and
its ability to obtain financing for its operations has been adversely affected
by recurring operating losses during the fiscal years ended January 31, 1992,
1993 and 1994.
Although during the quarter ended April 30, 1993 the Company successfully
completed the Secondary Offering and Debt Restructuring which improved its
financial condition, prior management's unresolved operating issues and vendor
negotiations continued to negatively impact the Company's operations and,
additionally, the Company incurred operating losses for its fiscal years ended
January 31, 1994 and January 31, 1995. At October 31, 1995, the Company had a
working capital deficit of $246,430. The operating losses of prior years have
resulted in an accelerated use of funds provided by the public and private
offerings of the Company's securities and adversely affected the Company's
liquidity. These factors, among others raise doubt about the Company's ability
to continue as a going concern.
The continuation of the Company is dependent upon the continued support of the
Company's trade vendors, and institutional lenders and ultimately upon the
Company achieving profitable operations. The consolidated financial statements
do not include any adjustments relating to the recoverability of assets and
classification of liabilities or any other adjustments that may be necessary
should the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries and a 60% subsidiary. All material intercompany
accounts and transactions are eliminated.
Page 12
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
Inventories
Inventories, which consist entirely of finished goods, are valued at the lower
of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets (5-10 years) using accelerated methods.
Candie's Trademark
The Candie's trademark is stated at cost, net of amortization, as determined by
its fair value relative to other assets and liabilities revalued in the
aforementioned quasi-reorganization, and is being amortized over twenty years.
The Company believes that the trademark has continuing value, as evidenced by
increasing sales and expected profitability of Candie's products, which will be
realized over the course of its useful life.
Revenue Recognition
The Company's products are sold on either a landed or first cost basis. In the
case of landed sales, the Company bears the risk of loss until the products are
delivered to the customer. Revenues on landed sales are recognized when the
products are delivered to the customers. For goods sold on a first cost basis,
the Company acts as agent only, without risk of loss, and charges a commission
on the sale. Commission income is recognized upon shipment by the manufacturers.
Earnings Per Share
Earnings per common share is computed based on the modified treasury stock
method which considers the weighted average number of common stock and common
stock equivalents outstanding during each year, retroactively adjusted to give
effect to all stock splits. Common stock equivalents include stock options and
warrants reduced by the shares which could be purchased with the assumed
proceeds from such shares. Common stock equivalents that have an antidilutive
effect on earnings per share are not included in the calculation.
Reclassifications
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year's presentation.
3. Property and Equipment
Major classes of property and equipment consist of the following:
Page 13
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
October 31, January 31,
1995 1995
--------- ---------
Furniture and equipment $ 807,874 $ 750,063
Transportation 20,750 44,443
--------- ---------
828,624 794,506
Less accumulated depreciation
and amortization 690,331 651,546
--------- ---------
Net property and equipment $ 138,293 $ 142,960
========= =========
4. Factor Agreement
In April 1993, the Company entered into an accounts receivable factoring
agreement ("Factor Agreement"). The agreement provides the Company with the
ability to borrow funds from the factor, limited to 85% (increased from 80% in
August 1995) of eligible accounts receivable and up to 50% of eligible finished
goods inventory (to a maximum of $6 million in inventory) in which the factor
has a security interest. The agreement also provides for the opening of
documentary letters of credit (up to a maximum of $2.5 million) to suppliers, on
behalf of the Company. The factor requires a deposit equal to 43% of the amount
of the letter of credit to be opened. Borrowings bear interest at the rate of
one and one half percent (1-1/2%) over the existing prime rate established by
the Philadelphia National Bank. The Company's President personally guarantees
any and all borrowings with the factor.
Due to Factor is comprised as follows:
October 31, January 31,
1995 1995
---------- ---------
Accounts Receivable - assigned $5,972,752 $3,478,771
Outstanding advances 6,383,548 4,640,806
---------- ---------
Due to Factor $ 410,797 $1,162,035
========== ==========
5. Related Party Transactions
The Company entered into a Services Allocation Agreement with NRC, pursuant to
which the Company will provide NRC with financial, marketing, sales and other
business services for which NRC will be charged an allocation of the Company's
expenses, including employees' salaries associated with such services.
6. Restatement
In September 1991, in connection with an Indemnification Agreement with the
Company's former president, former management and the Company recorded a capital
contribution and treasury stock acquisition approximating $1,627,000 in
recognition of the fair market value of 37,967 shares to reimburse the Company
for U.S. Customs duties assessments. During fiscal 1995 the Company discovered
that the shares were not received and therefore the prior
Page 14
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
accounting treatment was incorrect. The Company has restated the fiscal year
1995 Statements of Operations and Stockholders' Equity to give effect to certain
property received by the Company's Institutional Lender from the Company's
former President in connection with a personal guaranty and pledge of
collateral, as a reduction of the extraordinary gain recognized ($740,000) in
connection with the Company's restructuring and extinguishment of debt. Such
amount was credited to additional paid-in capital to recognize this transaction.
See Condensed Consolidated Statement of Stockholders' Equity for restated
balances.
For the Three Months Ended October 31, 1994
-------------------------------------------
Previously As
Reported Adjusted Restated
---------- --------- ----------
Net income: $2,207,820 ($740,000) $1,467,820
========== ========= ==========
Earnings per share: $0.33 ($0.11) $0.22
========== ========= ==========
For the Nine Months Ended October 31, 1994
------------------------------------------
Previously As
Reported Adjusted Restated
---------- --------- ----------
Net income: $2,544,143 ($740,000) $1,804,143
========== ========= ==========
Earnings per share: $0.44 ($0.13) $0.31
========== ========= ==========
Additional Accumulated
Paid-In-Capital Deficit
--------------- -----------
Balance at January 31, 1995 as
previously reported $9,162,837 ($4,779,649)
Capital contribution 740,000 (740,000)
---------- -----------
Balance at January 31, 1995 as
restated $9,902,837 ($5,519,649)
========== ===========
Additional Accumulated
Paid-In-Capital Deficit
--------------- -----------
Balance at October 31, 1995 as
previously reported $9,200,305 ($3,598,081)
Capital contribution 740,000 (740,000)
---------- -----------
Balance at October 31, 1995 as
restated $9,940,305 ($4,338,081)
========== ===========
7. Leases
In April of 1994, the Company entered into a termination agreement for its
former premises whereby the Company agreed to issue up to 300,000 shares and has
issued 200,000 shares of its common stock to date to its former landlord. During
August 1994, the Company entered into a new lease agreement and relocated its
corporate headquarters to Purchase, NY.
Rent expense was approximately $177,095 and $205,229 for the nine months ended
October 31, 1995 and 1994, respectively. As of October 31, 1995, future net
minimum lease payments under noncancellable operating lease agreements are as
follows:
1996 $ 58,000
1997 231,000
1998 255,000
1999 283,000
2000 289,000
Thereafter 48,000
---------
$1,164,000
8. Long-Term Debt
On October 6, 1994, the Company consummated an agreement with its Institutional
Lender to extinguish its outstanding indebtedness of approximately $3,378,000.
As part of the extinguishment, the Company paid $555,000 of principal and
approximately $140,000 of accrued interest. The Institutional Lender also
received the proceeds (approximately $370,000) from the sale of 322,222 shares
of the Company's previously issued common stock and certain real property,
subject to an existing mortgage of approximately $260,000, from the Company's
former President, both previously pledged as collateral. The Company has been
informed by the Institutional Lender that the fair value of the real property is
based on a contract of sale to a third party for $630,000. The total fair value
of this collateral ($740,000) has been treated as a reduction of the
extraordinary gain on the extinguishment and a corresponding capital
contribution. The principal and interest payments were made from funds raised
through private placements of the Company's stock completed in October 1994. The
extinguishment resulted in an extraordinary gain of approximately $1,962,000,
net of income taxes. See Notes 8 and 10(b).
Page 15
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
9. Private Placement Offerings
(i) In May 1994, the Company consummated two private placements of its common
stock as follows:
(a) 33,333 shares at $1.50 per share, resulting in aggregate proceeds of
$50,000.
(b) 248,148 shares at $1.35 per share, resulting in aggregate proceeds of
$335,000.
In connection with these private placements of its common stock, the Company
incurred fees and expenses of approximately $66,900.
(ii) In October 1994, the Company issued 956,522 shares of its common stock at
$1.15 per share and 10,286 shares of its 8% Series A Convertible Preferred Stock
at $100 per share for aggregate proceeds of approximately $1,730,200, net of
related expenses of approximately $398,400. The Company used a portion of those
funds to repay principal and accrued interest on its institutional indebtedness
(see Note 8). In conjunction with these offerings, the Company issued 55,000
shares of its common stock in lieu of payment of professional fees incurred.
(iii) In November 1994, the Company sold 86,957 shares of common stock to NRC
for $100,000.
10. Commitments, Contingencies and Other Matters
(a) In April 1991, an action was commenced derivatively on behalf of Candie's,
Inc. against certain of the Company's former directors and the Company as a
nominal defendant (the "Defendants"). The complaint alleges that the Company's
actions in connection with a public offering to exchange warrants for the
Company and the reacquisition of ITG were detrimental to the Company's financial
condition. The plaintiff seeks an accounting by the Company and payment by the
Board of Directors of an unspecified amount of damages. In September 1991, the
defendants moved to dismiss the complaint for failure to state a cause of
action. The motion was granted in October 1991 based upon the court's mistaken
belief that the plaintiff had defaulted with respect to the motion. The parties
agreed to reinstate the motion in June 1992 and the motion has again been
submitted to the Court for its determination. The Company and the individual
defendants intend to vigorously defend the action.
(b) In June 1991, the Company and prior management received a notice from the
U.S. Customs Service ("U.S. Customs"), that it intended to audit the Company's
payments of customs duties for the period 1986 to June 1991. After a pre-audit
review, the Company voluntarily reported to U.S. Customs in September 1991 that
it had miscalculated certain customs duties owed, resulting in underpayment of
$1,627,344 which was included in operations for the year ended January 31, 1992.
Page 16
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
The Company paid $813,672 to U.S. Customs in October 1991. In August 1992, the
Company and U.S. Customs reached an agreement whereby the Company was to pay an
additional $1,000,000 to relieve the Company of all liabilities for Customs'
duties, penalties and interest owed from 1986 through September 30, 1991. Such
$1,000,000 was paid from the proceeds of the Secondary Offering consummated on
February 23, 1993. The Company also agreed to settle all claims for Customs'
duties and penalties allegedly owed for the period October 1, 1991 to December
31, 1991, by the payment of $180,000 plus interest, commencing July 1, 1993, at
the rate of $5,000 per month for 40 months.
(c) In October of 1994, a former employee of the Company and NRC commenced an
action in the United States District Court for the Southern District of New York
against the Company and NRC, alleging the existence and breach of employment
agreements with NRC and assumption of the agreements by the Company. The former
employee is claiming damages for unpaid compensation, bonuses and unreimbursed
expenses aggregating in excess of $500,000. On June 21, 1995, this suit was
settled for (i) $226,000, payable in 36 equal semimonthly installments over
eighteen months, which was allocated equally to the Company and NRC and (ii) NRC
agreed to acquire 495,000 shares of NRC's common stock held by the plaintiff for
$105,000. Provision for the Company's pro rata share of the settlement of
$113,000 is included in the financial statements. The Company and NRC are
jointly and severally liable for the $226,000 settlement. If the Company is sold
or merged, substantially liquidated or disposed of or files bankruptcy, the
entire amount due under the settlement agreement becomes immediately due and
payable. Further, if any of the above conditions happen to NRC, one-half of the
amount due becomes immediately due and payable.
(d) During fiscal year ended January 31, 1995, the Company settled amounts due
for federal and state tax liabilities in the aggregate amount of approximately
$526,000. As of October 31, 1995 all such tax liabilities have been repaid.
(e) The Company has been advised by the Staff of the Securities and Exchange
Commission (the "Commission") that the Commission has authorized the Staff to
commence an administrative proceeding against the Company with respect to
alleged violations of Section 5 of the Securities Act of 1993 in connection with
the Company's 1993 Regulation S Offering (the "Offering") of shares of common
stock in the aggregate amount of $2,000,000. The Company believes that the
outcome of any proceeding which the Commission may bring against it in
connection with the Offering will not have a material adverse affect on the
Company or its financial condition.
(f) As of February 1, 1995, the Company is operating under an exclusive
licensing arrangement which enables the Company to sell footwear in North
America bearing the BONGO trademark. The Company paid a $200,000 minimum fee,
and is required to pay additional minimum amounts totaling $820,000 over a three
and one-half year period. The agreement provides for the Company to pay
additional royalties, based on percentages of sales, exceeding minimum amounts,
as defined.
Page 17
<PAGE>
CANDIE'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1995
(g) On February 1, 1995, the Company entered into a financing agreement with
NRC, an affiliated entity. Pursuant to the financing agreement, the Company
borrowed $600,000 from NRC and issued promissory notes with interest payable at
the prime rate and issued to NRC warrants to purchase 700,000 shares of the
Company's common stock (exercisable at an initial price of $1.2375 per share).
As of October 31, 1995, the $600,000 promissory notes have been repaid.
11. Settlement Agreements
As a result of settlements of litigations and certain other obligations, the
Company is obligated at October 31, 1995 to pay an aggregate total of $303,522
of which $14,694 is included in other non-current liabilities.
Page 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended October 31, 1995
Landed sales (sales of products which are acquired by the Company) of branded
footwear increased to $9,333,498 for the three months ended October 31, 1995 as
compared with $4,826,909 for the three month period ended October 31, 1994. The
$4,506,589 (93%) increase was primarily due to increased market acceptance of
Candie's footwear products and the introduction of footwear products bearing the
BONGO trademark.
The gross profit on landed sales increased by $1,429,712 from $502,428 to
$1,932,142 for the three months ended October 31, 1995 over the three month
period ended October 31, 1994 as a result of increased sales of Candie's
footwear products. The gross profit percentage on landed sales increased from
10.4% for the three months ended October 31, 1994 to 20.7% for the quarter ended
October 31, 1995. The factors which contributed to the increase in gross profit
included, among others, the Company's ability to obtain from certain suppliers
volume discounts on purchased merchandise, a decrease in inventory markdowns due
to wider brand acceptance, and tighter internal controls which resulted in a
reduction in the rate of customers' chargebacks and deductions.
Commission and licensing income for the three months ended October 31, 1995
increased by $142,220 (12.6%) over the same period last year primarily because
of increased sales of footwear on a "first cost basis." When products are sold
on a first cost basis, the Company acts as agent for its customers in
supervising the design and production of products. In return, the Company
generally receives a commission based on a percentage of the sales price.
Selling expenses as a percentage of sales decreased for the three months ended
October 31, 1995 as compared to the three months ended October 31, 1994.
General and Administrative expenses as a percentage of sales decreased for the
three months ended October 31, 1995 as compared to the same period in 1994.
Operating income increased from $11,833 for the three months ended October 31,
1994 to $1,020,329 for the three months ended October 31, 1995. The $1,008,496
increase was due to a significant increase in sales coupled with an increase in
the Company's gross profit percentage on those sales.
Interest expense increased by $14,021 for the three months ended October 31,
1995 as compared to the same period last year. The increase was primarily due to
the Company's sales growth which required an increase in borrowings under the
Factor Agreement (see Note 4 of Notes to Condensed Consolidated Financial
Statements).
Page 19
<PAGE>
As a result of the foregoing, the Company's net income before extraordinary
items for the three months ended October 31, 1995 increased to $705,642 from a
net loss of $494,355 for the corresponding period ended October 31, 1994.
Nine Months Ended October 31, 1995
Landed sales of branded footwear increased to $26,793,435 for the nine months
ended October 31, 1995 as compared with $14,059,938 for the nine month period
ended October 31, 1994. The $12,733,497 (91%) increase was primarily due to
increased market acceptance of Candie's footwear products.
The gross profit on landed sales increased by $3,247,074 from $1,677,453 to
$4,924,527 for the nine months ended October 31, 1995 over the nine month period
ended October 31, 1994 as a result of increased sales of Candie's footwear
products. The gross profit percentage on landed sales increased from 11.9% for
the nine months ended October 31, 1994 to 18.4% for the nine months ended
October 31, 1995. The factors which contributed to the increase in gross profit
included, among others, the Company's ability to obtain from certain suppliers
volume discounts on purchased merchandise, a decrease in inventory markdowns due
to wider brand acceptance, and tighter internal controls which resulted in a
reduction in the rate of customers' chargebacks and deductions.
Selling expenses as a percentage of sales decreased for the nine months ended
October 31, 1995 as compared to the nine months ended October 31, 1994.
General and Administrative expenses as a percentage of sales decreased for the
nine months ended October 31, 1995 as compared to the nine months ended October
31, 1994.
Operating income increased from a loss of $215,993 for the nine months ended
October 31, 1994 to income of $2,055,258 for the nine months ended October 31,
1995. The increase was primarily due to a 91% increase in landed sales along
with a corresponding 6.5% increase in the gross profit percentage on those
sales.
Interest expense increased by $93,235 for the nine months ended October 31, 1995
as compared to the same period last year. The increase was primarily due to an
increase in financing under the Factor Agreement (see Note 4 of Notes to
Consolidated Financial Statements).
As a result of the foregoing, the Company's net income before extraordinary
items for the nine months ended October 31, 1995 increased to $1,181,568 from a
loss of $158,032 for the corresponding period ended October 31, 1994.
Liquidity and Capital Resources
In the report on the Company's annual financial statements at January 31, 1995,
the Company's independent certified public accountants have included an
explanatory paragraph in their report on the Company's financial statements
stating certain factors which raise a substantial doubt about the Company's
ability to continue as a going concern.
Page 20
<PAGE>
At October 31, 1995, the Company had a working capital deficiency of $246,430
compared to a working capital deficiency of $1,541,894 at January 31, 1995. This
increase in working capital primarily results from the Company's net income for
the nine month period ended October 31, 1995. Accordingly, the ratio of current
assets to current liabilities was .96 to 1.0 at October 31, 1995 compared to .73
to 1.0 at January 31, 1995.
The Company's cash flow from operating activities increased for the nine month
period ended October 31, 1995 compared to the same period of the prior year. Net
cash provided by operating activities totaled $227,538 for the nine months ended
October 31, 1995 compared to net cash used in operating activities of $1,274,591
for the nine months ended October 31, 1994. The increase in cash flow from
operating activities for the 1995 period resulted primarily from the Company's
income before extraordinary item.
The Company had $207,227 in cash and cash equivalents at October 31, 1995
compared to $209,792 at October 31, 1994. The restricted cash of $100,000 held
at October 31, 1994 was released in connection with the settlement of a legal
action against the Company.
Management continues to seek additional means of reducing and maintaining costs
while increasing revenues. Among other actions designed to increase revenues,
management is exploring ways to expand markets for existing products while
considering the ability to generate revenues from new products or product lines.
Management is also concentrating on ways to increase the Company's liquidity. As
part of the aforementioned strategies, management has obtained from Congress
Talcott, its factor, an increase in its credit line from $7,500,000 to
$10,000,000. Congress has also agreed to lend up to 50% of eligible inventory of
$6,000,000 (increased from $5,000,000). The Company has also been able to
negotiate open account shipments from certain overseas factories on payment
terms of 30-60 days. This will allow the Company to purchase certain goods
without the need to obtain letters of credit. The Company has also entered into
an arrangement with a buying agent to assist in reducing the cost of merchandise
purchased from overseas factories. Management believes that its on-going cost
containment efforts, plus the support of its trade vendors and institutional
lenders, will provide the Company with sufficient working capital for the next
twelve months. However, there can be no assurance that the Company will be able
to generate sufficient funds to meet future operating expenses and the Company
may, therefore, be required to seek additional financing from, among other
sources, institutional lenders and the sale of its securities. There can be no
assurance that if required, the Company will be able to obtain any such
financing.
Page 21
<PAGE>
PART II -Other Information
Item 1. Legal Proceedings
In December 1995 the United States District Court for the Southern District
of New York approved the settlement of an action instituted in July 1992 against
the Company and its former directors by the Food and Allied Service Trades
Department, AFL-CIO, and on behalf of the class of all other similarly situated
stockholders. The settlement requires the Company to make a $100,000 cash
payment to the plaintiffs and to issue to the plaintiffs that number of shares
of its Common Stock (up to a maximum of 600,000 shares) which would allow the
plaintiffs to realize an additional $550,000 upon their sale over a two-year
period. If the plaintiffs do not realize $550,000 from the sale of such shares,
the Company will be required to pay to the plaintiffs the amount of the
shortfall.
Items 2-5.
None.
Item 6.
(a) Exhibits
11 - Computation of earnings per common share.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K for the event dated July 31, 1995 was filed in August 1995
under Item 5 of Form 8-K in order to file certain unaudited balance sheet
information which was required by NASDAQ for continued inclusion of the
Company's securities in the NASDAQ system.
Page 22
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, duly
authorized.
CANDIE'S, INC.
-----------------------------
(Registrant)
DATED: September 3, 1996 By: /s/ Neil Cole
-----------------------------
NEIL COLE
President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
Page 23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
11 Computation of Earnings per Share 22
(Three months ended October 31, 1995 and 1994)
Computation of Earnings per Share 23
(Nine months ended October 31, 1995 and 1994)
27 Financial Data Schedule 24
Page 24
Exhibit 11
Page 1
CANDIE'S, INC.
COMPUTATIONS OF EARNINGS PER SHARE
Three Months Ended
--------------------------------------
October 31, 1995 October 31, 1994
---------------- ----------------
Restated
(Note 6)
Income (loss) before
extraordinary item $ 705,642 ($ 494,355)
Extraordinary item
Gain on Debt extinguishment 0 1,962,175
----------- -----------
Net Income 705,642 1,467,820
Earnings Per Share Income
from investment of excess
proceeds on exercise of
common stock equivalents 337,190 0
----------- -----------
TOTAL EPS INCOME $ 1,042,832 $ 1,467,820
=========== ===========
Weighted average shares outstanding 8,563,814 6,498,216
Common stock equivalents based on the
treasury stock method at
average market price 5,888,932 162,630
----------- -----------
Total shares outstanding, primary and
fully diluted 14,452,746 6,660,846
=========== ===========
Earnings (Loss) Per Share
Net Income (Loss) Before
Extraordinary item $ 0.07 ($ 0.07)
Extraordinary item-Gain on
extinguishment of debt, net of
income taxes of $.02 for 1994 $ 0.00 $ 0.29
----------- -----------
NET INCOME PER SHARE $ 0.07 $ 0.22
=========== ===========
Page 25
<PAGE>
Exhibit 11
Page 2
CANDIE'S, INC.
COMPUTATIONS OF EARNINGS PER SHARE
Nine Months Ended
---------------------------------------
October 31, 1995 October 31, 1994
---------------- ----------------
Restated
(Note 6)
Income (loss) before
extraordinary item $1,181,568 ($ 158,032)
Extraordinary item
Gain on Debt extinguishment 0 1,962,175
---------- ---------
Net Income 1,181,568 1,804,143
========== ==========
Weighted average shares outstanding 8,542,944 5,690,870
Common stock equivalents based on
the treasury stock method at
average market price 0 62,073
----------- -----------
Total shares outstanding, primary
and fully diluted 8,542,944 5,752,943
=========== ===========
Earnings (Loss) Per Share
Net Income (Loss) Before
Extraordinary item $0.14 ($0.03)
Extraordinary item-Gain on
extinguishment of debt, net of
income taxes of $.02 for 1994 $0.00 $0.34
-------- --------
NET INCOME PER SHARE $0.14 $0.31
======== ========
Page 26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-QSB at October 31, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> OCT-31-1995
<CASH> 207,227
<SECURITIES> 0
<RECEIVABLES> 918,000
<ALLOWANCES> 254,092
<INVENTORY> 3,485,826
<CURRENT-ASSETS> 5,504,959
<PP&E> 828,624
<DEPRECIATION> 690,331
<TOTAL-ASSETS> 11,389,606
<CURRENT-LIABILITIES> 5,751,389
<BONDS> 0
0
0
<COMMON> 8,742
<OTHER-SE> 5,602,224
<TOTAL-LIABILITY-AND-EQUITY> 11,389,606
<SALES> 26,793,435
<TOTAL-REVENUES> 30,193,327
<CGS> 21,868,908
<TOTAL-COSTS> 21,868,908
<OTHER-EXPENSES> 6,269,161
<LOSS-PROVISION> 113,000
<INTEREST-EXPENSE> 628,079
<INCOME-PRETAX> 1,314,179
<INCOME-TAX> 132,611
<INCOME-CONTINUING> 1,181,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,181,568
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
