-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVQo7TDOsG0Dbdo+Af8jPjfGc8mRzRvE3UZg4CrrukdKdFW+FQRNVzLTJdLL8EMD sN2BsqelyqdHMP3xA3jGbw== 0000891554-96-000626.txt : 19961001 0000891554-96-000626.hdr.sgml : 19961001 ACCESSION NUMBER: 0000891554-96-000626 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941031 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481930 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10593 FILM NUMBER: 96636863 BUSINESS ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9146948600 MAIL ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10QSB/A 1 QUARTERLY REPORT 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, 1994 or Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number: 0-10593 CANDIE'S, INC. (Exact name of small business issuer as specified in its charter) Delaware 11-2481903 (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation) 2975 Westchester Avenue, Purchase, New York 10577 (Address of principal executive offices) (914)694-8600 (Issuer's telephone number, including area code) 60 West 40th Street, New York, New York 10018 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO_____ APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the registrant's Common Stock, $.001 par value, outstanding as of December 15, 1994 (excluding treasury shares): 8,176,203 Transitional small business disclosure format (check one): YES _______ NO [X] CANDIE'S, INC. AND SUBSIDIARIES INDEX TO FORM 10-QSB/A FOR THE PERIOD ENDED OCTOBER 31, 1994 PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at October 31, 1994 3-4 and January 31, 1994 Condensed Consolidated Statements of Operations for the 5-6 Three Months Ended October 31, 1994 and 1993 Condensed Consolidated Statements of Operations for the 7-8 Nine Months Ended October 31, 1994 and 1993 Condensed Consolidated Statement of Stockholders' Equity 9 (Deficiency) for the Nine Months Ended October 31, 1994 Condensed Consolidated Statements of Cash Flows for 10-11 the Nine Months Ended October 31, 1994 and 1993 Notes to Condensed Consolidated Financial Statements 12-24 ITEM 2. Management's Discussion and Analysis of Financial 25-29 Condition and the Results of Operations PART II. OTHER INFORMATION 30 SIGNATURES 31 Page 2 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) OCTOBER 31, JANUARY 31, 1994 1994 ---------- ---------- Restated Restated (Note 6) (Note 6) ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 209,792 $ 114,153 ACCOUNTS RECEIVABLE less allowances of $793,500 and $773,000 1,359,644 226,593 INVENTORY 3,518,472 3,572,733 PREPAID EXPENSES 328,581 273,832 REFUNDABLE TAXES -- 219,876 ----------- ----------- TOTAL CURRENT ASSETS 5,416,489 4,407,187 ----------- ----------- PROPERTY AND EQUIPMENT (Note 3) LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 167,668 210,514 ----------- ----------- OTHER ASSETS: NON-COMPETITION AGREEMENTS 435,628 516,952 TRADEMARK 5,184,986 5,397,098 OTHER 527,701 512,929 ----------- ----------- TOTAL OTHER ASSETS 6,148,315 6,426,979 ----------- ----------- TOTAL ASSETS $11,732,472 $11,044,680 =========== =========== Page 3 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) OCTOBER 31, JANUARY 31, 1994 1994 ---------- ---------- Restated Restated (Note 6) (Note 6) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 2,292,327 $ 1,795,246 INVENTORY IN-TRANSIT PAYABLE 1,500,000 395,918 DUE TO FACTOR (Note 4) 366,620 1,782,413 DUE TO MAJOR LEAGUE FOOTWEAR -- 613,771 ACCRUED LITIGATION EXPENSE 515,000 555,000 ACCRUED EXPENSES AND TAXES 1,510,653 1,678,854 ACCRUED ROYALTY -- 532,031 ACCRUED U.S. CUSTOMS DUTIES 51,883 51,004 CURRENT MATURITIES OF LONG TERM DEBT (Note 5) -- 183,750 ACCRUED PENSION LIABILITY 52,000 -- ----------- ----------- TOTAL CURRENT LIABILITIES 6,288,483 7,587,987 LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 5) -- 3,209,425 DUE TO EL GRECO, INC. -- 325,000 ACCRUED U.S. CUSTOMS DUTIES 67,208 100,449 ACCRUED PENSION LIABILITY -- 392,000 ----------- ----------- TOTAL LIABILITIES 6,355,691 11,614,861 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIENCY): PREFERRED STOCK, $.01 PAR VALUE - SHARES AUTHORIZED 5,000,000; 10,286 ISSUED AND OUTSTANDING 103 -- COMMON STOCK, $.001 PAR VALUE - SHARES AUTHORIZED 10,000,000; ISSUED 7,411,481 AT OCTOBER 31, 1994 AND 5,022,735 AT JANUARY 31, 1994 7,412 5,023 ADDITIONAL PAID-IN CAPITAL 10,183,064 6,042,737 ACCUMULATED DEFICIT (3,742,765) (5,546,908) TREASURY STOCK, AT COST 216,666 SHARES AT OCTOBER 31, 1994 AND JANUARY 31, 1994 (NOTE 6) (1,071,033) (1,071,033) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 5,376,781 (570,181) ----------- ----------- TOTAL LIABILITIES AND STOCK- HOLDERS' EQUITY (DEFICIENCY) $11,732,472 $11,044,680 ============ =========== Page 4 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS HREE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ------------ ------------ Restated (Note 6) LANDED SALES $ 4,826,909 3,318,753 COMMISSION AND LICENSING INCOME 1,126,476 1,705,183 -------------- ---------- TOTAL REVENUES 5,953,385 5,023,936 COST OF LANDED SALES 4,324,481 2,788,060 -------------- ---------- TOTAL GROSS PROFIT 1,628,904 2,235,876 -------------- ---------- OPERATING EXPENSES: SELLING EXPENSE 1,159,058 1,009,502 GEN. & ADMIN. EXP. 798,013 682,723 REVERSAL OF ACCRUAL NO LONGER REQUIRED - PENSION PLAN (NOTE 11) (340,000) -- -------------- ---------- TOTAL OPERATING EXPENSES 1,617,071 1,692,225 -------------- ---------- OPERATING INCOME 11,833 543,651 OTHER INCOME (EXPENSE): LOSS ON SETTLEMENT OF OBLIGATIONS (Note 9) (155,000) -- INTEREST EXPENSE (228,155) (131,102) OTHER EXPENSE (131,858) -- -------------- ---------- TOTAL OTHER EXPENSES (515,013) (131,102) -------------- ----------- (LOSS) INCOME BEFORE EXTRAORDINARY ITEM (503,180) 412,549 PROVISION (RECOVERY) OF INCOME TAXES ( 8,825) 1,452 -------------- ---------- NET LOSS INCOME BEFORE EXTRAORDINARY ITEM (494,355) 411,097 EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES OF $121,000 (NOTE 9) 1,962,175 -- ------------- ---------- NET INCOME $ 1,467,820 $ 411,097 ============= =========== Page 5 THREE MONTHS THREE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ------------ ------------- Restated (Note 6) EARNINGS (LOSS) PER SHARE: NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM $ (.07) $ .09 EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES OF $.02 .29 -- ------------- ------------ NET INCOME $ .22 $ .09 ============= ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING $ 6,660,846 $ 4,823,344 ============= ============ Page 6 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ----------- ----------- Restated (Note 6) LANDED SALES $ 14,059,938 $ 8,163,760 COMMISSION AND LICENSING INCOME 3,413,182 2,872,095 ------------- ------------ TOTAL REVENUES 17,473,120 11,035,855 COST OF LANDED SALES 12,382,485 6,871,235 ------------- ------------ TOTAL GROSS PROFIT 5,090,635 4,164,620 ------------- ------------ OPERATING EXPENSES: SELLING EXPENSE 3,265,138 3,909,020 GEN. & ADMIN. EXP. 2,381,490 3,074,073 REVERSAL OF ACCRUAL NO LONGER REQUIRED - PENSION PLAN (NOTE 11) (340,000) -- ------------- ------------ TOTAL OPERATING EXPENSES 5,306,628 6,983,093 ------------- ------------ OPERATING LOSS (215,993) (2,818,473) OTHER INCOME (EXPENSE): GAINS ON SETTLEMENT OF OBLIGATIONS (NOTE 9) 728,249 -- INTEREST EXPENSE (534,844) (329,712) OTHER EXPENSE (131,858) -- ------------- ------------ TOTAL OTHER INCOME (EXPENSE) 61,547 (329,712) ------------- ------------ LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (154,446) (3,148,185) PROVISION (RECOVERY) OF INCOME TAXES 3,586 (5,993) -------- ------------ NET LOSS BEFORE EXTRAORDINARY ITEM (158,032) (3,142,192) EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES OF $121,000 (NOTE 9) 1,962,175 -- ------------- ------------ Page 7 NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ----------- ----------- Restated (Note 6) NET INCOME (LOSS) 1,804,143 (3,142,192) ============= =========== EARNINGS (LOSS) PER SHARE: NET LOSS BEFORE EXTRAORDINARY ITEM $(0.03) $(0.69) EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES OF $.02 $.34 -- ------------- ------------ NET INCOME (LOSS) $.31 $(0.69) ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING $ 5,752,943 $ 4,570,986 ============= ============= Page 8 CANDIE'S, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE NINE MONTHS ENDED OCTOBER 31, 1994 (unaudited) Restated (Note 6)
PREFERRED COMMON STOCK STOCK ADDITIONAL TREASURY STOCK ------------------ -------------- PAID-IN ACCUMULATED ------------------- SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL ------ ------ ------ ------ ------- ------- ------ ------ ----- BALANCE, JANUARY 31, 1994, AS PREVIOUSLY REPORTED 5,022,735 $5,023 $ 7,670,081 $(5,546,908) (254,633) $(2,698,377) $ (570,181) CORRECTION OF PREVIOUSLY RECORDED TREASURY STOCK TRANSACTION PURSUANT TO AN INDEMNIFICA- TION AGREEMENT (1,627,344) 37,967 1,627,344 --------- ---------- ------ ----- ----------- ----------- -------- ----------- ---------- RESTATED BALANCE, JANUARY 31, 1994 5,022,735 5,023 6,042,737 (5,546,908) (216,666) (1,071,033) (570,181) ISSUANCE OF 810,000 SHARES OF COMMON STOCK IN CONJUNCTION WITH SETTLEMENTS OF OBLIGATIONS 810,000 810 952,690 953,500 EL GRECO DEBT TO EQUITY CONVERSION 240,740 241 324,759 325,000 ISSUANCE OF SHARES OF COMMON STOCK IN CONJUNCTION WITH PRIVATE PLACEMENTS IN MAY 1994, NET OF $13,381 IN FEES 281,481 281 317,838 318,119 ISSUANCE OF COMMON AND PREFERRED STOCK IN CONJUNCTION WITH PRIVATE PLACEMENTS IN OCTOBER 1994 NET OF $232,287 IN FEES 956,525 957 10,286 $ 103 1,690,140 1,691,200 CAPITAL CONTRIBUTION 740,000 740,000 FIELDCREST ESCROW SHARES - COMMON 100,000 100 114,900 115,000 NET INCOME FOR THE NINE MONTHS ENDED OCTOBER 31, 1994 1,804,143 1,804,143 --------- ---------- ------ ----- ----------- ----------- -------- ----------- ---------- BALANCE, OCTOBER 31, 1994, AS RESTATED 7,411,481 $7,412 10,286 $ 103 $10,183,064 ($3,742,765) (216,666) $(1,071,033) $5,376,781 ========= ========== ====== ===== =========== =========== ======== =========== ==========
9 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ----------- ----------- Restated (Note 6) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 1,804,143 $(3,142,192) Items In Net Income (Loss) Not Affecting Cash: Provision For Losses On Accounts Receivable 20,500 5,000 Depreciation and Amort. 372,174 471,807 Deferred Offering Costs -- 972,892 Provision For Pension Costs (340,000) (325) (Gain) Loss on Settlement of Obligations (728,249) 51,214 Loss on Disposal of Fixed Assets 60,755 26,133 Extraordinary Gain on Extinguishment of Debt (2,083,175) Increase (Decrease) In Cash Flows From Changes In Assets and Liabilities (380,739) (3,908,873) ------------ ----------- Net Cash Used In Operating Activities (1,274,591) (5,524,344) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditure (69,089) (97,868) Payment in connection with CANDIE'S Trademark -- (195,000) ----------- ----------- Net Cash Used In Investing Activities (69,089) (292,868) ----------- ----------- Page 10 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONT'D.) NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under revolving credit agreement (570,000) (1,595,065) Proceeds from secondary public offering, net of related exp. of $1,577,298 -- 5,797,702 Proceeds from private placements net of expenses 2,009,319 1,885,206 Additional expenses related to secondary public offering -- (462,800) ------------- ------------ Net Cash Provided By Financing Activities 1,439,319 5,625,043 ------------- ------------ NET INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS 95,639 (192,169) ------------- -------------- CASH AND CASH EQUIVALENTS, beginning of period 114,153 286,577 ------------- -------------- CASH AND CASH EQUIVALENTS, end of period $ 209,792 $ 94,408 ============= ============= Page 11 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (Cont'd.) NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 -------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 813,525 $ 324,064 ============== ============== Income Taxes $ 49,310 $ 3,856 ============== ============== Supplemental disclosure of non-cash investing and financing activities: Issuance of 900,000 shares of common stock in connection with acquisition of CANDIE'S trademark -- 1,080,000 ============== ============== Issuance of note payable in connection with acquisition of CANDIE'S trademark -- 325,000 ============== ============== Issuance of 777,777 shares of common stock and write-off of deferred professional fees and accrued interest in connection with conversion of debenture -- 2,490,261 ============== ============== Issuance of 57,609 shares of common stock in connection with acquisition of under- writer's IPO Warrants -- 58 ============== ============== Issuance of 32,500 shares of common stock in lieu of compensation to two officers -- 130,000 ============== ============== Issuance of 65,000 shares of common stock in con- nection with settlement of accrued royalties owed to Chaus -- 306,000 ============== ============== Page 12 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (Cont'd.) NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER, 31, OCTOBER 31, 1994 1993 -------------- ------------- Issuance of 50,000 shares of common stock in connection with settlement of legal fees relating to the offering -- 50 =============== ============== Forgiveness of debt by the Company's Insti- tutional Lender -- 5,940,019 =============== ============== Acquisition of Treasury stock through capital contribution by the Company's former debenture holder of 127,777 shares of common stock -- 415,033 =============== ============== Quasi-Reorganization resulting in changes to the following asset and liability accounts: CANDIE'S trademark -- 2,249,013 Non-competition agreements -- (1,717,927) Investment in Sole Associates -- (737,724) Other Assets -- (184,433) Accrued Pension Liability -- 391,071 ---------------- -------------- Total -- 0 ================ ============== Page 13 NINE MONTHS NINE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1994 1993 ----------- ----------- Issuance of 1,050,740 shares of common stock in connection with settlements of obligations to creditors: Issuance of common stock 1,278,500 -- Increase in prepaid expenses (66,350) -- Reduction of security deposit 74,531 -- Reduction of accounts payable (1,421,666) -- Reduction of accrued royalty (382,031) -- Reduction of inventory 139,460 -- Reduction of note payable (325,000) -- Reduction of accrued expenses (280,693) -- ----------- ------------- Total (983,249) -- =========== ============= Capital contribution $ 740,000 -- =========== ============= Issuance of 100,000 shares in escrow in connection with indemnifiable loss of former landlord $ 115,000 -- =========== ============= Page 14 CANDIE'S, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION Candie's, Inc. the Registrant together with its subsidiary is referred to herein as Candie's or the "Company." The Condensed Consolidated Financial Statements included herein are unaudited and include all adjustments which are in the opinion of management, necessary for a fair presentation of the results of operations of the interim period pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included under generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's Financial Statement and the notes thereto included in the Company's Annual Form 10-K for the fiscal year ended January 31, 1994. (a) Business Candie's, Inc. and its subsidiaries (the "Company") design, market, import and distribute a variety of moderately-priced athletic, leisure and fashion footwear for women and girls under the trademark CANDIE'S. The Company's product line also includes a wide variety of workboots, hiking shoes and men's leisure shoes designed, marketed and distributed by the Company's wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star"). The Company's 60% owned subsidiary, Intercontinental Trading Group ("ITG") is inactive. The Company is engaged in a joint venture arrangement for the development of a specialized footwear sole (the "Joint Venture") with Urethane Technologies, Inc. ("UTI"). (i) Secondary Offering The Company completed an offering of its common stock (the "Secondary Offering") on March 3, 1993. Upon the effectiveness of the Secondary Offering, the Company's stockholders approved a change in the company's name from Millfeld Trading Co., Inc., to Candie's, Inc., a 1 for 4.5 reverse stock split of its common stock for which retroactive effect has been given in the financial statements, and a quasi-reorganization. The following transactions occurred contemporaneously upon effectiveness or on the closing of the Secondary Offering: (ii) Debenture Conversion Upon effectiveness of the Secondary Offering and immediately prior to the reverse stock split, the holder of the Company's $3,500,000 subordinated convertible debenture (the "Debenture") converted the Debenture, in accordance with its terms, into 3,500,000 shares of common stock. Upon the completion of the reverse split, such former holder made a capital contribution of 127,777 Page 15 of his 777,777 post-split shares of common stock to the Company and cancelled a warrant to purchase additional shares of common stock previously issued to him in connection with the Debenture. (iii) The El Greco Transactions Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an affiliated company, consummated the following transactions (the "El Greco Transactions"): (i) El Greco received 900,000 shares of the Company's common stock; (ii) El Greco transferred the trademarks "CANDIE'S," "ACTION CLUB," "FULLMOON" and "SUGAR BABIES" (collectively, the "Trademarks"), and all of its business operations associated with the Trademarks, to the Company; (iii) El Greco assigned all of its preexisting agreements with licensees of the Trademarks to the Company; (iv) the Company issued to El Greco a subordinated note in the principal amount of $325,000, plus interest payable quarterly at the "prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company paid El Greco's expenses, including attorney's fees relating to the El Greco Transactions, in the sum of $75,000 from the proceeds of the offering. Upon the closing of the El Greco Transactions, the Company ceased to be a licensee and acquired actual ownership of the Candie's trademark and therefore no longer makes royalty payments. In May 1994, the Company entered into an agreement with New Retail Concepts, Inc. ("NRC") (the former parent company of El Greco, which was merged into NRC in 1993) pursuant to which the Company agreed to issue 240,740 shares of its common stock to NRC in full payment of the El Greco Note. (iv) Quasi-Reorganization Upon effectiveness of the Secondary Offering and the Debt Restructuring, the Company's stockholders approved a corporate readjustment of the Company's accounts in the form of a quasi-reorganization which was effected upon the completion of the El Greco Transactions and the Debt Restructuring. A quasi-reorganization, often referred to as "Fresh Start Accounting," is an accounting procedure which accomplishes, with respect to the Company's accounts and financial statements, what might have been accomplished in a reorganization by legal proceedings. The Company's assets, liabilities and capital accounts were adjusted to eliminate the stockholders' deficiency. On completion of the readjustments, the Company's accounts and financial statements were substantially similar to those of a new company commencing business. The Company believes the quasi-reorganization was appropriate because on completion of the Debenture Conversion and the Debt Restructuring and installation of a new management team, the Company had substantially reduced its outstanding indebtedness, which to a great extent was incurred in connection with the Discontinued Footwear Products had formulated revised operating plans and as a result thereof would be able to devote its resources to its continuing operations and development of the Trademarks. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company's wholly-owned subsidiary, Bright Star, from June 1, 1990, the effective date Page 16 of the acquisition, and 60% owned subsidiary ITG from February 1, 1988. All material intercompany accounts and transactions are eliminated. (c) Inventories Inventories, which consist entirely of finished goods, are valued at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. (d) Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets (5 - 10 years) using accelerated methods. (e) Candie's Trademark/License The Candie's trademark is stated at cost, net of amortization, as determined by its fair value relative to other assets and liabilities revalued in the aforementioned quasi-reorganization, and is being amortized over twenty years. (f) Investment in Joint Venture The Company's investment in the Joint Venture has been accounted for under the equity method of accounting. Management believes that the Company's recovery of its investment, if any, will be realized over an indeterminate future period; therefore, the investment has been fully reserved. (g) Revenue Recognition The Company's products are sold on either a landed or first cost basis. In the case of landed sales, the Company bears the risk of loss until the products are delivered to the customer. Revenues on landed sales are recognized when the products are delivered to the customers. For goods sold on a first cost basis, the Company acts as agent only, without risk of loss, and charges a commission on the sale. Commission income is recognized upon shipment by the manufacturers. Licensing income is recognized over the term of the license agreements. (h) Taxes on Income The Company has adopted the liability method of accounting for income taxes under Financial Accounting Statement No. 109 "Accounting for Income Taxes" ("FASB 109"). The adoption of FASB 109 did not have a material effect on the financial statements. (i) Net Income (Loss) Per Share Net income (loss) per common share is computed on a basis of the weighted average number of common shares outstanding during each year, retroactively adjusted to give effect to all stock splits. All common stock equivalents have been used in the calculation. Page 17 (j) Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. NOTE 2 - Going Concern The Company's consolidated financial statements have been presented on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The liquidity of the Company and its ability to obtain financing for its operations has been adversely affected by incurring significant losses. Although on February 23, 1993 the Company successfully completed the Secondary Offering and Debt Restructuring which improved its financial condition, sales of the Company's products have been significantly below management's expectations. At October 31, 1994, the Company had a substantial working capital deficit. The unexpectedly high operating losses for the year ended January 31, 1994 and the operating loss for the nine months ended October 31, 1994 resulted in an accelerated use of funds provided by the public offering and adversely affected the Company's liquidity. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Subsequent to January 31, 1994, the Company raised additional net equity capital in the amount of approximately $2,009,000, settled various obligations through the issuance of its common stock which resulted in the reduction of liabilities in the amount of $5,148,105 for the nine months ended October 31, 1994, in addition to continuing a cost containment program and attempting to enhance its gross margins while achieving commensurate sales level increases. However, the continuation of the Company is dependent upon the continued support of the Company's trade vendors, and institutional lenders, obtaining additional equity and ultimately achieving profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities or any other adjustments that may be necessary should the Company be unable to continue as a going concern. Page 18 NOTE 3 - PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following: October 31, January 31, 1994 1994 ---------- ---------- Furniture, fixtures and equipment $ 752,111 $ 721,113 Transportation equipment 44,443 20,750 Leasehold improvements -- 53,905 ---------- ---------- 796,554 795,768 Less accumulated depreciation and amortization 628,886 585,254 ---------- ---------- Net property and equipment $ 167,668 $ 210,514 ========== ========== NOTE 4 - DUE TO/FROM FACTOR On April 2, 1993, the Company entered into an accounts receivable factoring agreement. This agreement provides the Company with the ability to borrow funds from the factor, limited to 80% of eligible accounts receivable and 50% of eligible finished goods inventory (to a maximum of $5 million in inventory) in which the factor has a security interest. The agreement also provides for the opening of documentary letters of credit (up to a maximum of $2.5 million) to suppliers, on behalf of the Company. The factor requires a deposit equal to 43% of the amount of the letter of credit to be opened. Borrowings bear interest at the rate of one and one half percent (1 1/2%) over the existing prime rate established by the Philadelphia National Bank. Additionally, the Company is able to borrow $300,000 above its eligible accounts receivable and inventory formulas. This additional borrowing capacity is personally guaranteed by the Company's President. At October 31, 1994, the Company had $1,966,871 of outstanding letters of credit. Due to factor at October 31, 1994 is comprised as follows: Accounts Receivable - assigned $3,098,237 Outstanding factor advances 3,464,857 ---------- Due to Factor $ 366,620 ========== NOTE 5 - LONG-TERM DEBT EXTINGUISHMENT On October 6, 1994, the Company consummated an agreement with its Institutional Lender to extinguish its outstanding indebtedness of approximately $3,378,000. As part of the extinguishment, the Company paid $555,000 of principal and approximately $140,000 of accrued interest. The Institutional Lender also received the proceeds (approximately $370,000) from the sale of 322,222 shares of the Company's previously issued common stock and certain real property, subject to an existing mortgage of approximately $260,000, from the Company's former President, both previously pledged as collateral. The Company has been informed by the Institutional Lender that the fair value of the real property Page 19 is based on a contract of sale to a third party for $630,000. The total fair value of this collateral ($740,000) has been treated as a reduction of the extraordinary gain on the extinguishment and a corresponding capital contribution. The principal and interest payments were made from funds raised through private placements of the Company's stock completed in October 1994. The extinguishment resulted in an extraordinary gain of approximately $1,962,000, net of income taxes. See Notes 8 and 10(b). NOTE 6 - RESTATEMENT The Company has restated the 1995 Statement 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. For the Three Months Ended October 31,1994 Previously As Reported Adjusted Restated ---------- --------- ---------- Net income (loss): $2,207,820 ($740,000) $1,467,820 ========== ========= ========== Earnings (loss) per share: $0.33 ($0.11) $0.22 ========== ========= ========== For the Nine Months Ended October 31,1994 Previously As Reported Adjusted Restated ---------- --------- ---------- Net income (loss): $2,544,143 ($740,000) $1,804,143 ========== ========= ========== Earnings (loss) per share: $0.44 ($0.13) $0.31 ========== ========= ========== The Company has also restated the Statement of Stockholder's Equity (from January 31, 1993) to correct the accounting for the receipt of 37,967 shares of the Company's common stock, which were subject to an Indemnity Agreement, whereby the Company's former president was to reimburse the Company for approximately $1,800,000, exclusive of interest and penalties, for all duties, interest and penalties in connection with a U.S. Customers Service audit for the period 1986 to 1991. In September 1991, the Company exercised its option to acquire such shares and the Company and former management recorded this as a capital contribution and treasury stock acquisition. The Company discovered, during fiscal 1995, that the shares were never received and therefore the prior accounting was incorrect. This adjustment which reduced additional paid-in capital and treasury stock, had no effect on total stockholders' equity, results of operations or per share results, previously reported. See Condensed Consolidated Statement of Stockholder's Equity for restated balances. Treasury Stock Additional ------------------------ Paid-In Shares Amount Capital --------- ------------ ----------- Balance at January 31, 1994, as previously reported (254,633) ($2,698,377) $ 7,670,081 Correction of previously recorded treasury stock transaction 37,967 1,627,344 (1,627,344) -------- ----------- ----------- Balance at January 31, 1994, as restated (216,666) ($1,071,033) $ 6,042,737 ======== =========== ===========
Treasury Stock Additional ------------------------ Paid-In Accumulated Shares Amount Capital Deficit --------- ------------ ----------- ----------- Balance at October 31, 1994, as previously reported (254,633) ($2,698,377) $11,070,408 ($3,002,765) Capital contribution 740,000 (740,000) Correction of previously recorded treasury stock transaction 37,967 1,627,344 (1,627,344) 0 -------- ----------- ----------- ----------- Balance at October 31, 1994, as restated (216,666) ($1,071,033) $10,183,064 ($3,742,765) ======== =========== =========== ===========
NOTE 7 - RELATED PARTY TRANSACTIONS The Company has entered into a Services Allocation Agreement with NRC pursuant to which the Company will provide NRC with financial, marketing, sales and other business services for which NRC will be charged an allocation of the Company's expenses, including employees' salaries associated with such services. NOTE 8 - LEASES In connection with the sublease of its former headquarters, the Company entered into an agreement in April, 1994 with its former sublandlord to terminate the sublease agreement and to issue 200,000 shares of its common stock (the "Shares") to the sublandlord and to deposit into escrow, with an escrow agent, an additional 100,000 shares of common stock (the "Escrow Shares"). The termination agreement provided that the Company would vacate and surrender its former premises no later than June 30, 1994. The Company continued to occupy such premises until September 16, 1994 and during August 1994, the Company entered into a new lease agreement for the relocation of its corporate headquarters to Purchase, NY, with such lease commencing as of October 1, 1994. The Company believes that any rent due for the period from June 30, 1994 until September 16, 1994 will be covered by the Company's indemnification to its sublandlord as described below. The Company has also agreed to indemnify the sublandlord for any loss, as defined, suffered by the sublandlord from the period July 1994 through April 27, 1997. Such loss shall be determined and paid solely as follows: Page 20 (i) The amount of indemnifiable loss determined above shall be paid as follows: (a) the Shares shall be valued as of July 1, 1994, as defined, and (b) to the extent that the value of the Shares (as so computed) exceeds $270,000, then the amount of such excess shall be applied against the amount of indemnifiable loss. (ii) After full amount of such excess, if any, has been applied to the indemnifiable loss, the Company's liability for indemnifiable loss shall be limited to 50% of any shortfall in the amount of indemnifiable loss on a monthly basis (a "Loss Shortfall"), which liability shall be satisfied solely through releases from escrow of a certain amount of Escrow Shares, as defined. The maximum number of shares of common stock which the sublandlord is entitled to is a total of 300,000 shares of common stock. The amount of additional rent expense, if any, is not presently determinable. The Shares and the Escrow Shares, if any, when issued, will be "restricted securities" (as such term is defined in Rule 144 under the Securities Act of 1933) and may not be sold or otherwise disposed of unless the same have been registered under such Act or an exemption from registration is available. The Company has granted the sublandlord certain registration rights with respect to the Shares. NOTE 9 - CERTAIN TRANSACTIONS AND GAINS AND LOSSES ON SETTLEMENTS WITH CREDITORS (a) Offering of Shares In May 1994, the Company issued 281,481 shares of its common stock and received aggregate net proceeds of approximately $320,000. In October 1994, the Company issued 956,525 shares of its common stock and 10,286 shares of its 8% Series A Convertible Preferred Stock for aggregate net proceeds of approximately $1,691,000. The Company used a portion of those funds to repay principal and accrued interest on its institutional indebtedness as discussed in Note 5. (b) Conversion of Debt In May 1994, the Company entered into an agreement with NRC pursuant to which the Company agreed to issue 240,740 shares of its common stock, at $1.35 per share, to NRC in full payment of the El Greco Note. (c) Settlement with Overseas Agent In May 1994, the Company agreed to issue 250,000 shares of common stock, at $1.00 per share, in satisfaction of an outstanding payable of $759,888. The Company realized a net gain of $509,888 from this transaction during the second quarter of the fiscal year ending January 31, 1995. Page 21 (d) Settlement with Major League Footwear In May 1994, in connection with a settlement with Major League Footwear, Inc. ("MLF") a company under common management, the Company agreed to issue 110,000 shares of common stock to be registered, at $1.35 per share, and 150,000 shares of common stock, at $1.00 per share, in satisfaction of an outstanding liability to MLF in the amount of $398,500 at April 30, 1994. The Company realized a net gain of $100,000 from this settlement during the second quarter of the fiscal year ending January 31, 1995. This transaction relates to inventory received by the Company in the fiscal year ended January 31, 1994. (e) Settlement of Litigation with Starter Corporation In July 1994, in connection with a settlement with Starter Corporation ("Starter") regarding $532,031 in royalties due Starter under a former license agreement, the Company agreed to issue 100,000 shares of common stock to be registered, at $1.35 per share, and pay $150,000 over a fifteen month period beginning in July 1994. The Company realized a net gain of $247,031 from this settlement during the second quarter (see Note 10a). (f) Settlement of Litigation with American Sporting Goods In July 1994, in connection with a settlement with American Sporting Goods ("ASG"), the Company's subsidiary, Bright Star Footwear, has agreed to pay ASG $100,000 over a ten month period commencing in July 1994. Such amount has been recorded as a net loss during the second quarter (see Note 10e). NOTE 10 - COMMITMENTS AND CONTINGENCIES (a) On August 31, 1989, the Company entered into a three-year distribution agreement with Starter, under which the Company was granted the right to distribute footwear bearing the colors and logos of certain collegiate and professional sports teams in accordance with licenses held by Starter. In December 1991, the Company discontinued all sales of such footwear products. Royalties to Starter were $-0-, $110,000, and $1,351,000 on sales of $-0-, $1,017,000, and $12,700,000 for the years ended January 31, 1994, 1993 and 1992, respectively. In March 1992, the Company was advised by Starter that it had terminated its license agreement with the Company on March 15, 1992 and in May 1992, Starter instituted a legal action against the Company for $515,000 of unpaid royalties. This action was settled in July 1994, whereby the company has agreed to issue Starter 100,000 shares of the Company's common stock and pay Starter $150,000 over a fifteen month period commencing in July 1994. Settlement of this action resulted in a net gain of $247,031 during the nine months ended October 31, 1994 (see Note 9e). (b) In April 1991, an action was commenced derivatively on behalf of Candie's, Inc. against certain of the Company's former directors and the Company as a nominal defendant (the "Defendants"). The complaint alleges that the Company's actions in connection with a public offering to exchange warrants for the Company and the reacquisition of ITG were detrimental to the Company's financial condition. The plaintiff seeks an accounting by the Company and payment by the Board of Directors of an unspecified amount of damages. In September 1991, Page 22 the defendants moved to dismiss the complaint for failure to state a cause of action. The motion was granted in October 1991 based upon the court's mistaken belief that the plaintiff had defaulted with respect to the motion. The parties agreed to reinstate the motion in June 1992 and the motion has again been submitted to the Court for its determination. The Company and the individual defendants intend to vigorously defend the action. (c) In July 1992, an action was instituted against the Company and its former directors by the Food and Allied Service Trades Department, AFL-CIO, and on behalf of the class of all other similarly situated stockholders. The plaintiff alleges that the Company made false representations or failed to disclose material facts in certain of its documents filed with the Securities and Exchange Commission regarding alleged underpayment to U.S. Customs. In connection with this action, the plaintiff seeks to have this case certified as a class action on behalf of all stockholders and seeks unspecified damages. The Company and certain individual defendants denied any knowledge of such alleged underpayment to U.S. Customs and are vigorously defending against all such claims. The Company and certain individual defendants moved to dismiss the complaint in September 1992 for failure to state a claim. This motion was consolidated with the motion to dismiss the action against the Company and the individual defendants; however, the court allowed plaintiffs the right to replead their claims (which they did on February 1, 1993), subject to the defendants' right to renew its motion to dismiss the amended pleading. The Company has moved to dismiss the amended complaint, however, such motion was denied. The Company has denied the plaintiffs' allegation of wrongdoing and asserted cross claims against the Company's former owner. The Company is currently negotiating a settlement of this action. (d) In June 1992, an action was instituted against the Company and its former president, by Pentland and its parent company, alleging, among other things, violations of section 10(b) of the Securities Exchange Act of 1934, common law fraud, negligent misrepresentation and breach of contract, arising out of Pentland's acquisition of 19,900 shares of the Company's common stock in June 1991. The complaint alleges that the Company's former president, and, consequently, the Company, were aware of, but failed to disclose at the time Pentland acquired its shares, certain alleged underpayment to U.S. Customs. Pentland sough compensatory damages of $865,000. The Company denied any knowledge of underpayment at the time of Pentland's acquisition of shares and moved to dismiss the complaint in August 1992, for failure to state a claim. In December 1992, the court granted the Company's motion and dismissed the complaint; the court allowed plaintiffs the right to replead their claims (which they did on February 1, 1993), subject to the Company's right to renew its motion to dismiss the amended pleading. The Company has moved to dismiss the amended complaint, however, such motion was denied. The Company has denied the plaintiff's allegation of wrongdoing, and asserted cross claims against the Company's former president. (e) In March 1994, an action was instituted by ASG in the United States District Court for the Southern District of California against Bright Star concerning Bright Star's activities as a buying agent in connection with suppliers outside the United States who were allegedly marking up the factory price of goods Page 23 ordered by Bright Star for the benefit of ASG. ASG was seeking to recover compensatory damages of approximately $531,000 and an unspecified amount of punitive damages. In July 1994, Bright Star and ASG settled this action whereby Bright Star has agreed to pay ASG $100,000 over a ten month period commencing in July 1994. This amount has been recorded as a net loss during the three months ended July 31, 1994 (see Note 9f). In the event that the Company is not successful in defense of the actions set forth above in (b), (c), and (d) or any settlement reached requires a substantial monetary judgment in excess of $555,000 provided for in the accompanying financial statements, the Company's financial condition could be adversely affected thereby. (f) As of October 31, 1994, the Company is obligated under an employment agreement with an executive and a termination agreement with a former executive to provide aggregate minimum compensation of $50,000 remaining during the fiscal year ended January 31, 1995, $200,000 during the fiscal year ended January 31, 1996 and $16,667 during the fiscal year ended January 31, 1997. NOTE 11 - PENSION PLAN The Company has decided to terminate its defined benefit pension plan as of February 10, 1995. Calculations by its actuary have determined that the Company's liability, based upon current funding status and interest rates, will be approximately $52,000. As a result, the Company reduced its accrued liability and pension expense accounts by $340,000 as of October 31, 1994. NOTE 12 - SUBSEQUENT EVENTS The Company held a Special Meeting of Stockholders on November 29, 1994. At this meeting, the stockholders approved the proposal to amend the Company's Certificate of Incorporation to increase the authorized common stock from 10,000,000 to 30,000,000 shares. Concurrently with the amendment, the holders of the Company's outstanding 8% Series A Convertible Preferred Stock (10,286 shares) converted such shares into 894,431 shares of common stock. During November 1994, NRC purchased shares of the Company's common stock for $100,000. The proceeds of this sale will be used for working capital purposes. Page 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended October 31, 1994 Landed sales increased by $1,508,156 (45%) for the three months ended October 31, 1994 over the three month period ended October 31, 1993 primarily because of increased market acceptance of CANDIE'S branded footwear products. Total gross profit on landed sales decreased by $28,265 (27%) for the three months ended October 31, 1994 over the three month period ended October 31, 1993 as a result of increased returns and allowances of CANDIE'S branded footwear products. The gross profit percentage on landed sales decreased from 16.0% for the three months ended October 31, 1993 to 10.4% for the quarter ended October 31, 1994 primarily due to closeout sales of inventory during the three month period ended October 31, 1994 and additional markdowns on inventory. Commission and licensing income for the three months ended October 31, 1994 decreased to $1,126,476 from $1,705,183 a decrease of $578,707 (34%) over the same period last year, primarily because of decreased orders on a commission basis of Bright Star footwear in the period. Commission income results from arranging for the production and quality control of products. Selling expenses increased by $149,556 (15%) for the three months ended October 31, 1994 as compared to the three months ended October 31, 1993, primarily due to an increase in sales commissions and shipping expenses which directly relate to the increase in landed sales. General and Administrative expenses increased by $115,290 (17%) for the three months ended October 31, 1994 as compared to the same period last year, primarily due to increases in bad debts and financing fees. Both factors are directly related to the Company's increase in landed sales for the three month period. The Company reduced pension expense for the quarter ended October 31, 1994 by $340,000, in accordance with the determination to discontinue the defined benefit pension plan. Interest expense increased by $97,053 (74%) for the three months ended October 31, 1994 as compared to the same period last year. The increase was primarily due to increased advances that the Company received under its Factor Agreement and increases in the prime lending rate. During the three months ended October 31, 1994, the Company recorded a net extraordinary gain of approximately $1,962,175 on forgiveness of indebtedness by one of the Company's former institutional lenders. As a result of the foregoing, the Company's net income for the three months ended October 31, 1994 increased to $1,467,820 from $411,097 for the corresponding period ended October 31, 1993. Page 25 Nine Months Ended October 31, 1994 Landed sales increased by $5,896,178 (72%) for the nine months ended October 31, 1994 over the nine month period ended October 31, 1993, primarily because of increased market acceptance of CANDIE'S branded footwear products. Total gross profit on landed sales increased by $926,015 (22%) for the nine months ended October 31, 1994 over the nine month period ended October 31, 1993 as a result of increased sales of CANDIE'S branded footwear products. The gross profit percentage on landed sales decreased from 16.0% for the nine months ended October 31, 1993 to 11.9% for the nine months ended October 31, 1994 primarily due to closeout sales of inventory during the nine month period ended October 31, 1994 and additional markdowns on inventory. Commission and licensing income for the nine months ended October 31, 1994 increased to $3,413,182 from $2,872,095 an increase of $541,087 (19%) over the same period last year, primarily because of increased orders on a commission basis of Candie's and Bright Star footwear and the licensing agreements under the Candie's label. Commission income results from arranging for the production and quality control of products. Selling expenses decreased by $643,882 (16%) for the nine months ended October 31, 1994 as compared to the nine months ended October 31, 1993 primarily as a result of the elimination of the in-house marketing department, however, this decrease was offset by increases in salaries of sales personnel. General and Administrative expenses decreased by $692,583 (23%) for the nine months ended October 31, 1994 as compared to the same period last year, primarily due to staff reductions, decreases in professional fees and the relocation of the corporate offices from New York City to Purchase,NY. The Company also experienced a reduction of $340,000 in pension expense as a result of the Company's decision to terminate its defined benefit plan effective as of February 1, 1995. Interest expense increased by $205,132 (62%) for the nine months ended October 31, 1994 as compared to the same period last year. The increase was primarily due to increased advances that the Company received under its Factor Agreement and increases in the prime lending rate. During the nine months ended October 31, 1994, the Company recorded net gains of $728,249 on settlements of certain existing obligations and litigation matters and an extraordinary gain of approximately $1,962,175 on forgiveness of indebtedness. As a result of the foregoing, the Company's net income for the nine months ended October 31, 1994 increased to $1,804,143 from a net loss of $3,142,192 for the corresponding period ended October 31, 1993. Liquidity and Capital Resources In their report on the Company's annual financial statements at January 31, 1994, the Company's independent certified public accountants have included an explanatory paragraph in their report on the Company's financial statements Page 26 stating certain factors which raise a substantial doubt about the Company's ability to continue as a going concern. At October 31, 1994, the Company had a working capital deficiency of $871,994 as compared to a working capital deficiency of $3,180,800 at January 31, 1994. This decrease in the working capital deficiency is primarily attributable to net income for the nine months ended October 31, 1994 and the various settlements of obligations of the Company through the issuance of common stock. The ratio of current assets to current liabilities was .86 to 1.0 at October 31, 1994 compared to .58 to 1.0 at January 31, 1994. The Company's cash flow from operating activities increased for the nine month period ended October 31, 1994 compared to the same period of the prior year. Net cash used in operating activities totaled $1,274,591 for the nine months ended October 31, 1994 compared to net cash used in operating activities of $5,524,344 for the nine months ended October 31, 1993. The decrease in net cash used resulted primarily from net income for the nine months ended October 31, 1994 as compared to a net loss and the reduction in the prior year of old, outstanding liabilities that were settled with the proceeds of the secondary offering, including $1,000,000 owed to the U.S. Customs Service. Cash provided by financing activities decreased by $4,185,724 to $1,439,319 for the nine months ended October 31, 1994 compared to the same period last year. This reduction was primarily caused by the fact that the Company completed a secondary offering in the amount of $5,334,902 in the nine month period ended October 31, 1993. Upon completion of the Company's restructuring and equity financing plan in March 1993 (see Note 1 of the Notes to Condensed Consolidated Financial Statements), management believed that it would provide the Company with adequate resources to implement their new business strategies; however, the Company has experienced significant operating losses since the restructuring in March 1993 which were greater than expected due to a weak retail market, and the resulting delays in the Company's ability to purchase goods. As a result of the foregoing, the Company has undertaken a program set forth below which is designed to increase revenue and cash flow while reducing expenses. The Company believes that if its program is successful, of which there can be no assurance, it will have adequate capital to support the Company's operations for the next twelve months. The Company's program involves (a) cost containment through (i) termination of the sublease for its current facility and relocation to a site in Westchester County, New York (which the Company believes will reduce its facility costs), (ii) termination of personnel not deemed necessary to its continuing operations, (iii) elimination or reduction of certain operating expenses, and (iv) conversion of certain existing claims to equity through issuance of common stock in settlement of such claims; (b) increasing revenues by (i) increasing sales of footwear by the Company's subsidiary, Bright Star Footwear, Inc., under the Company's newly licensed trademarks, BIG SMITH and ASPEN and (ii) increasing royalty income from the licensing by the Company of the CANDIE'S trademark and aggressive marketing of CANDIE'S footwear; (c) seeking to obtain additional debt and equity financing by Page 27 (i) borrowing additional funds on a long-term basis and (ii) sales of equities securities; and (d) maintaining or enhancing the existing debt structure with its institutional lender by obtaining, when necessary, waivers or restructuring of applicable financial covenants and principal payments and maintaining or enhancing its existing line of credit from a factor by providing, if necessary, additional collateral. While the Company believes that its program of cost containment will result in an aggregate decrease in operating expenses in excess of $1 million, on an annualized basis (of which only a portion would be realized in the 1995 fiscal year), there can be no assurance that the Company will be able to achieve a significant reduction in operating costs, or significantly increase its revenues, or obtain additional financing on acceptable terms. Finally, there can be no assurance that implementation of such program will generate sufficient working capital to meet its operating expenses for the 1995 fiscal year. To implement its plan of operations, the Company has taken the following steps: In May 1994, the Company received net proceeds of approximately $350,000 from sales of common stock which it has used to pay outstanding indebtedness due to its institutional lender and for working capital and general corporate purposes. In addition, the Company anticipates that it will issue additional shares of common stock pursuant to certain settlements, either completed or being negotiated with various creditors, in satisfaction of existing claims against the Company. In October 1994, the Company received net proceeds of approximately $1,691,000 from sales of its common and preferred stock which it has used to pay outstanding indebtedness due to its institutional lender and for working capital and general corporate purposes. As part of its strategy of reducing costs, the Company recently terminated its in-house marketing staff. The Company will use outside marketing consultants on an "as needed" basis to support its marketing activities. In an effort to enhance market penetration, the Company has instituted a pricing plan to further encourage retailers to carry the CANDIE'S line of footwear. Management believes the program will allow its retail customers to offer a nationally known branded product at competitive prices while maintaining significant retail markups. The Company has successfully completed a reduction of liabilities of $2,269,930 through the issuance of the Company's common stock. The Company has entered into a new lease agreement for the relocation of its corporate headquarters to Purchase, NY, which will result in an annual cost savings of approximately $300,000. In October 1994, the Company consummated an agreement with one of its former institutional lenders, Shanghai Commercial Bank ("Shanghai"), to extinguish all of its then outstanding indebtedness to Shanghai, a total of $3,378,175 plus accrued interest of $139,606, through a combination of cash and certain assets pledged as collateral to Shanghai as part of a personal guaranty by the former president and chief executive officer of the Company. The Company Page 28 realized a gain of approximately $1,962,175 on the extinguishment of its debt with Shanghai. In return, the Company paid Shanghai $555,000 in principal plus $139,606 of accrued interest, the proceeds of which were derived from the equity offering described above. Shanghai also received 322,222 shares of Candie's common stock and certain real property owned by the former president and chief executive officer of the Company with a fair market value of $740,000. Page 29 CANDIE'S, INC. PART II - Other Information Item 1. Legal Proceedings None. Items 2-5. None. Item 6. a) Exhibits: 11. Computation of Earnings Per Share 27. Financial Data Schedule b) Reports on Form 8-K The Company filed a report for the event dated October 6, 1994 under Item 5 of Form 8-K to report private placements and debt extinguishment. Page 30 CANDIE'S, INC. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. -------------- (Registrant) DATED: September 3, 1996 By:/s/Neil Cole --------------- President and Chief Executive Officer (Principal Executive and Accounting Officer) Page 31 EX-11 2 COMPUTATIONS OF EARNINGS PER SHARE EXHIBIT 11 Page 1 CANDIE'S, INC. AND SUBSIDIARIES COMPUTATIONS OF EARNINGS (LOSS) PER SHARE For the Three Months Ended October 31, 1994 1993 ------------- ----------- (Loss) income before extraordinary item ($ 494,355) $ 411,097 Extraordinary item -- gain on extinguishment 1,962,175 0 ------------- ----------- Net income 1,467,820 411,097 ============= =========== Weighted average shares outstanding 6,498,216 4,823,344 Common stock equivalents based on the treasury stock method at average market price 162,630 0 ------------- ----------- Total shares outstanding 6,660,846 4,823,344 ============= =========== Earnings (loss) per share: Earnings (loss) per share before extraordinary item ($0.07) $0.09 Extraordinary item 0.29 0.00 ------------- ----------- Net income per share primary and fully diluted $0.22 $0.09 ============= =========== EXHIBIT 11 Page 2 CANDIE'S, INC. AND SUBSIDIARIES COMPUTATIONS OF EARNINGS (LOSS) PER SHARE For the Nine Months Ended October 31, 1994 1993 ------------- ----------- (Loss) before extraordinary item ($ 158,032) ($3,142,192) Extraordinary item -- gain on extinguishment 1,962,175 0 ------------- ----------- Net income (loss) 1,804,143 (3,142,192) ============= =========== Weighted average shares outstanding 5,690,870 4,570,986 Common stock equivalents based on the treasury stock method at average market price 62,073 0 ------------- ----------- Total shares outstanding 5,752,943 4,570,986 ============= =========== Earnings (loss) per share: Loss per share before extraordinary item ($0.03) ($0.69) Extraordinary item 0.34 0.00 ------------- ----------- Net income (loss) per share primary and fully diluted $0.31 ($0.69) ============= =========== EX-27 3 ART. 5 FDS FOR 3RD QUARTER 10-QSB/A
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB AT OCTOBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JAN-31-1995 OCT-31-1994 209,792 0 2,153,144 793,500 3,518,472 5,416,489 796,554 628,886 11,732,472 6,288,483 0 0 103 7,412 5,369,266 11,732,472 14,059,938 17,473,120 12,382,485 12,382,485 5,306,628 (596,391) 534,844 (154,446) 3,586 (158,032) 0 1,962,175 0 1,804,143 0.31 0.31
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