-----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, O6K1kENToXEN9FeZrlSM8uElPRHjT7gzEkG89gblNwW+qxD2cJyp6dtHfh9/QUoj JjgNYoqHi4qJ/DObcdlg1Q== 0000891554-96-000625.txt : 19961001 0000891554-96-000625.hdr.sgml : 19961001 ACCESSION NUMBER: 0000891554-96-000625 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940731 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: 96636856 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 July 31, 1994 or Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number 0-10593 CANDIE'S, INC. (Exact name of small business issuer as specified in its charter) Delaware 11-2481903 (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation) 60 West 40th Street, New York, New York 10018 (Address of principal executive offices) (212)869-8725 (Issuer's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the registrant's Common Stock, $.001 par value, outstanding as of September 14, 1994 (excluding treasury shares): 6,238,292 Transitional small business disclosure format (check one): YES _______ NO X CANDIE'S, INC. AND SUBSIDIARIES INDEX TO FORM 10-QSB/A FOR THE PERIOD ENDED JULY 31, 1994 PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at July 31, 1994 3-4 and January 31, 1994 Condensed Consolidated Statements of Operations for the 5 Six Months Ended July 31, 1994 and 1993 Condensed Consolidated Statements of Operations for the 6 Three Months Ended July 31, 1994 and 1993 Condensed Consolidated Statements of Stockholders' Equity 7 (Deficiency) for the Six Months Ended July 31, 1994. Condensed Consolidated Statements of Cash Flows for 8-12 the Six Months Ended July 31, 1994 Notes to Condensed Consolidated Financial Statements 13-24 ITEM 2. Management's Discussion and Analysis of Financial 25-28 Condition and the Results of Operations PART II. OTHER INFORMATION 29 SIGNATURES 30 Page 2 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) JULY 31, JANUARY 31, 1994 1994 ----------- ----------- RESTATED RESTATED (Note 6) (Note 6) ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 106,021 $ 114,153 ACCOUNTS RECEIVABLE less allowances of $793,500 and $965,000 for possible losses 687,247 226,593 INVENTORY 3,399,217 3,572,733 PREPAID EXPENSES 60,828 273,832 REFUNDABLE TAXES -- 219,876 ----------- ----------- TOTAL CURRENT ASSETS 4,253,313 4,407,187 ----------- ----------- PROPERTY AND EQUIPMENT (Note 3) LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 178,938 210,514 ----------- ----------- OTHER ASSETS: NON-COMPETITION AGREEMENTS 462,736 516,952 TRADEMARK 5,255,690 5,397,098 OTHER 494,153 512,929 ----------- ----------- TOTAL OTHER ASSETS 6,212,579 6,426,979 ----------- ----------- TOTAL ASSETS $10,644,830 $11,044,680 =========== =========== Page 3 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) JULY 31, JANUARY 31, 1994 1994 ------------ ------------ RESTATED RESTATED (Note 6) (Note 6) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 2,254,205 $ 1,795,246 PAYABLE FOR INVENTORY IN TRANSIT 843,931 395,918 DUE TO FACTOR (Note 4) 470,569 1,782,413 DUE TO MAJOR LEAGUE FOOTWEAR -- 613,771 ACCRUED LITIGATION EXPENSE 555,000 555,000 ACCRUED EXPENSES AND TAXES 1,256,902 1,678,854 ACCRUED ROYALTY -- 532,031 ACCRUED U.S. CUSTOMS DUTIES 51,883 51,004 CURRENT MATURITIES OF LONG TERM DEBT (Note 5) 678,750 183,750 ------------ ------------ TOTAL CURRENT LIABILITIES 6,111,240 7,587,987 LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 5) 2,699,425 3,209,425 DUE TO EL GRECO, INC -- 325,000 ACCRUED U.S. CUSTOMS DUTIES 79,405 100,449 ACCRUED PENSION LIABILITY 392,000 392,000 ------------ ------------ TOTAL LIABILITIES 3,170,830 11,614,861 ------------ ------------ STOCKHOLDERS' DEFICIENCY: PREFERRED STOCK, $.01 PAR VALUE - SHARES AUTHORIZED 5,000,000; NONE ISSUED OR O/S COMMON STOCK, $.001 PAR VALUE - SHARES AUTHORIZED 10,000,000; ISSUED 6,354,956 AT JULY 31, 1994 AND 5,022,735 AT JANUARY 31, 1994 6,355 5,023 ADDITIONAL PAID-IN CAPITAL 7,638,024 6,042,737 ACCUMULATED DEFICIT (5,210,586) (5,546,908) TREASURY STOCK, AT COST 216,666 SHARES AT JULY 31, 1994 AND JANUARY 31, 1994 (Note 6) (1,071,033) (1,071,033) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIENCY 1,362,760 (570,181) ------------ ------------ TOTAL LIABILITIES AND STOCK- HOLDERS' DEFICIENCY $ 10,644,830 $ 11,044,680 ============ ============ Page 4 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) SIX MONTHS SIX MONTHS ENDED ENDED JULY 31, JULY 31, 1994 1993 ------------ ------------ LANDED SALES $ 9,233,029 $ 4,845,007 COMMISSION AND LICENSING INCOME 2,286,706 1,166,912 ------------ ------------ TOTAL REVENUES 11,519,735 6,011,919 COST OF LANDED SALES 8,058,004 4,083,175 ------------ ------------ TOTAL GROSS PROFIT 3,461,731 1,928,744 ------------ ------------ OPERATING EXPENSES: SELLING EXPENSE 2,106,080 2,899,518 GEN. & ADMIN. EXP 1,583,476 2,391,350 ------------ ------------ TOTAL OPERATING EXPENSES 3,689,556 5,290,868 ------------ ------------ OPERATING LOSS (227,825) (3,362,124) OTHER INCOME AND DEDUCTIONS: GAIN ON SETTLEMENT OF OBLIGATIONS (Note 9) 883,249 -- INTEREST & OTHER ITEMS (306,689) (198,610) ------------ ------------ TOTAL OTHER INCOME AND DEDUCTIONS 576,560 (198,610) ------------ ------------ INCOME (LOSS) FROM OPERATIONS BEFORE TAXES 348,735 (3,560,734) INCOME TAXES (RECOVERY) 12,412 (7,445) ------------ ------------ NET INCOME (LOSS) $ 336,323 $ (3,553,289) ============ ------------ INCOME (LOSS) PER SHARE - PRIMARY AND FULLY DILUTED: WEIGHTED AVERAGE OUTSTANDING SHARES 5,284,258 3,828,894 ============ ============ INCOME (LOSS) PER SHARE $ .06 $ (.93) ============ ============ Page 5 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) THREE MONTHS THREE MONTHS ENDED ENDED JULY 31, JULY 31, 1994 1993 ----------- ----------- LANDED SALES $ 5,570,221 $ 2,178,310 COMMISSION AND LICENSING INCOME 1,454,995 427,074 ----------- ----------- TOTAL REVENUES 7,025,216 2,605,384 COST OF LANDED SALES 4,915,111 1,884,363 ----------- ----------- TOTAL GROSS PROFIT 2,110,105 721,021 ----------- ----------- OPERATING EXPENSES: SELLING EXPENSE 960,495 1,392,555 GEN. & ADMIN. EXP 740,905 1,061,620 ----------- ----------- TOTAL OPER. EXP 1,701,400 2,454,175 ----------- ----------- OPERATING INCOME (LOSS) 408,705 (1,733,154) OTHER INCOME AND DEDUCTIONS: GAIN ON SETTLEMENT OF OBLIGATIONS (Note 9) 756,919 -- INTEREST & OTHER ITEMS (158,879) (132,590) ----------- ----------- TOTAL OTHER INCOME AND DEDUCTIONS 598,040 (132,590) ----------- ----------- INCOME (LOSS) FROM OPERATIONS BEFORE TAXES 1,006,745 (1,865,744) INCOME TAXES 8,761 143 ----------- ----------- NET INCOME (LOSS) $ 997,984 $(1,865,887) =========== =========== INCOME (LOSS) PER SHARE - PRIMARY AND FULLY DILUTED: WEIGHTED AVERAGE OUTSTANDING SHARES 5,747,277 4,680,692 =========== =========== INCOME (LOSS) PER SHARE $ .17 $ (.40) =========== =========== Page 6 CANDIE'S, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE SIX MONTHS ENDED JULY 31, 1994 (unaudited) Restated (Note 6)
PREFERRED COMMON STOCK STOCK ADDITIONAL ---------------------------------------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ------------------------------------------------------------------------------------ BALANCE, JANUARY 31, 1994, AS PREVIOUSLY REPORTED 5,022,735 $ 5,023 $ 7,670,081 $(5,446,908) CORRECTION OF PREVIOUSLY RECORDED TREASURY STOCK TRANSACTION PURSUANT TO AN INDEMNIFICATION AGREEMENT (1,627,344) --------- ----------- ----------- ----------- ----------- ----------- BALANCE JANUARY 31, 1994, AS RESTATED 5,022,735 5,023 6,042,737 (5,546,908) ISSUANCE OF 810,000 SHARES OF COMMON STOCK IN CONJUNCTION WITH SETTLEMENTS OF OBLIGATIONS 810,000 810 952,690 EL GRECO DEBT TO EQUITY CONVERSION 240,740 241 324,759 ISSUANCE OF SHARES OF COMMON STOCK IN CONJUNCTION WITH PRIVATE PLACEMENTS IN MAY 1994, NET OF $13,381 IN FEES 281,481 281 317,838 NET INCOME FOR THE SIX MONTHS ENDED JULY 31, 1994 336,322 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, JULY 31, 1994, AS RESTATED 6,354,956 $ 6,355 -- -- $ 7,638,024 $(5,210,586) =========== =========== =========== =========== =========== ===========
TREASURY STOCK ------------------------------- SHARES AMOUNT TOTAL ----------------------------------------------- BALANCE, JANUARY 31, 1994, AS PREVIOUSLY REPORTED (254,633) $(2,698,377) $ (570,181) CORRECTION OF PREVIOUSLY RECORDED TREASURY STOCK TRANSACTION PURSUANT TO AN INDEMNIFICATION AGREEMENT 37,967 1,627,344 ----------- ----------- ----------- BALANCE JANUARY 31, 1994, AS RESTATED (216,666) (1,071,033) (570,181) ISSUANCE OF 810,000 SHARES OF COMMON STOCK IN CONJUNCTION WITH SETTLEMENTS OF OBLIGATIONS 953,500 EL GRECO DEBT TO EQUITY CONVERSION 325,000 ISSUANCE OF SHARES OF COMMON STOCK IN CONJUNCTION WITH PRIVATE PLACEMENTS IN MAY 1994, NET OF $13,381 IN FEES 318,119 NET INCOME FOR THE SIX MONTHS ENDED JULY 31, 1994 336,322 ----------- ----------- ----------- BALANCE, JULY 31, 1994, AS RESTATED (216,666) ($1,071,033) $ 1,362,760 =========== =========== =========== Page 7 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) SIX MONTHS SIX MONTHS ENDED ENDED JULY 31, JULY 31, 1994 1993 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 336,323 $(3,553,289) Items In Net Income (Loss) Not Affecting Cash: Provision For Losses On Accounts Receivable 20,500 (116,000) Depreciation and Amort 246,688 349,304 Deferred Offering Costs -- 972,892 Provision For Pension Costs -- (325) (Gain) Loss on Settlement of Obligation (983,249) 74,979 Loss on Disposal of Fixed Assets -- 26,133 Increase (Decrease) In Cash Flows From Changes In Assets and Liabilities: Accounts Receivable (481,155) 368,211 Inventories 34,056 (1,509,339) Prepaid Expenses 314,235 (34,864) Refundable Income Taxes 219,876 (29,346) Other Assets (109,008) 23,721 Accounts Payable 1,266,854 (1,148,467) Due to Factor (1,311,844) 178,087 Accrued Expenses (189,315) (58,038) Accrued Royalty (101,944) (100,000) Payable For Inventory In Transit 448,013 (120,561) Accrued U.S. Customs Duties (20,165) (1,004,406) ----------- ----------- Net Cash Used In Operating Activities (310,135) (5,681,308) ----------- ----------- Page 8 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONT'D.) SIX MONTHS SIX MONTHS ENDED ENDED JULY 31, JULY 31, 1994 1993 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures $ (1,116) $ (83,110) Payment in connection with CANDIE'S Trademark -- (75,000) ----------- ----------- Net Cash Used In Investing Activities (1,116) (158,110) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under revolving credit agreement (15,000) (1,441,304) Proceeds from secondary public offering, net of related exp. of $1,577,298 -- 5,797,702 Proceeds from private placements net of expenses 318,119 1,885,206 Additional expenses related to sec. public offering -- (462,800) ----------- ----------- Net Cash Provided By Financing Activities 303,119 5,778,804 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (8,132) (60,614) ----------- ----------- CASH AND CASH EQUIVALENTS, beginning of period 114,153 286,577 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 106,021 $ 225,963 =========== =========== Page 9 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (Cont'd.) SIX MONTHS SIX MONTHS ENDED ENDED JULY 31, JULY 31, 1994 1993 -------------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 439,909 $ -- ============== =========== Income Taxes $ 30,566 $ -- ============== =========== Supplemental disclosure of non-cash investing and financing activities: Issuance of 900,000 shares of common stock in connection with acquisition of CANDIE'S trademark -- 1,080,000 ============== =========== Issuance of note payable in connection with acquisition of CANDIE'S trademark -- 325,000 ============== =========== Issuance of 777,777 shares of common stock and write-off of deferred professional fees and accrued interest in connection with conversion of debenture -- 2,490,261 ============== =========== Issuance of 57,609 shares of common stock in connection with acquisition of under- writer's IPO Warrants -- 58 ============== =========== Issuance of 32,500 shares of common stock in lieu of compensation to two officers -- 130,000 ============== =========== Issuance of 65,000 shares of common stock in con- nection with settlement of accrued royalties owed to Chaus -- 306,000 ============== =========== Page 10 CANDIE'S, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (Cont'd.) SIX MONTHS SIX MONTHS ENDED ENDED JULY, 31, JULY 31, 1994 1993 --------------- ---------- Issuance of 50,000 shares of common stock in connection with settlement of legal fees relating to the offering -- 50 =============== ========== Forgiveness of debt by the Company's Insti- tutional Lender -- 5,940,019 =============== ========== Acquisition of Treasury stock through capital contribution by the Company's former debenture holder of 127,777 shares of common stock -- 415,033 =============== ========== Quasi-Reorganization resulting in changes to the following asset and liability accounts: CANDIE'S trademark -- 2,249,013 Non-competition agreements -- (1,717,927) Investment in Sole Associates -- (737,724) Other Assets -- (184,433) Accrued Pension Liability -- 391,071 ---------------- ---------- Total -- 0 ================ ========== Page 11 SIX MONTHS SIX MONTHS ENDED ENDED JULY, 31, JULY 31, 1994 1993 Issuance of 1,050,740 shares of common stock in connection with settlements of obligations to creditors: Issuance of common stock 1,278,500 -- Increase in prepaid expenses (66,350) -- Reduction of security deposit 74,531 -- Reduction of accounts payable (1,421,666) -- Reduction of accrued royalty (382,031) -- Reduction of inventory 139,460 -- Reduction of note payable (325,000) -- Reduction of accrued expenses (280,693) -- ---------- ------- Total (983,249) -- ========== ======= Page 12 CANDIE'S, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION Candie's, Inc. the Registrant together with its subsidiary is referred to herein as Candie's or the "Company." The Condensed Consolidated Financial Statements included herein are unaudited and include all adjustments which are in the opinion of management, necessary for a fair presentation of the results of operations of the interim period pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included under generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's Financial Statement and the notes thereto included in the Company's Annual Form 10-K for the fiscal year ended January 31, 1994. (a) Business Candie's, Inc. and its subsidiaries (the "Company") design, market, import and distribute a variety of moderately-priced athletic, leisure and fashion footwear for women and girls under the trademark CANDIE'S. The Company's product line also includes a wide variety of workboots, hiking shoes and men's leisure shoes designed, marketed and distributed by the Company's wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star"). The Company's 60% owned subsidiary, Intercontinental Trading Group ("ITG") is inactive. The Company is engaged in a joint venture arrangement for the development of a specialized footwear sole (the "Joint Venture") with Urethane Technologies, Inc. ("UTI"). (i) Secondary Offering The Company completed an offering of its common stock (the "Secondary Offering") on February 23, 1993. Upon the effectiveness of the Secondary Offering, the Company's stockholders approved a change in the company's name from Millfeld Trading Co., Inc., to Candie's, Inc., a 1 for 4.5 reverse stock split of its common stock for which retroactive effect has been given in the financial statements, and a quasi-reorganization. The following transactions occurred contemporaneously upon effectiveness or on the closing of the Secondary Offering: (ii) Debenture Conversion Upon effectiveness of the Secondary Offering and immediately prior to the reverse stock split, the holder of the Company's $3,500,000 subordinated convertible debenture (the "Debenture") converted the Debenture, in accordance with its terms, into 3,500,000 shares of common stock. Upon the completion of Page 13 the reverse split, such former holder made a capital contribution of 127,777 of his 777,777 post-split shares of common stock to the Company and cancelled a warrant to purchase additional shares of common stock previously issued to him in connection with the Debenture. (iii) The El Greco Transactions Upon the closing of the Secondary Offering, the Company and El Greco, Inc., an affiliated company, consummated the following transactions (the "El Greco Transactions"): (i) El Greco received 900,000 shares of the Company's common stock; (ii) El Greco transferred the trademarks "CANDIE'S," "ACTION CLUB," "FULLMOON" and "SUGAR BABIES" (collectively, the "Trademarks"), and all of its business operations associated with the Trademarks, to the Company; (iii) El Greco assigned all of its preexisting agreements with licensees of the Trademarks to the Company; (iv) the Company issued to El Greco a subordinated note in the principal amount of $325,000, plus interest payable quarterly at the "prime interest rate" (as defined) (the "El Greco Note"); and (v) the Company paid El Greco's expenses, including attorney's fees relating to the El Greco Transactions, in the sum of $75,000 from the proceeds of the offering. The El Greco Note is payable by the Company as follows: (a) in the event the Class B or Class C Warrants are exercised, to the extent of such exercise subject to the Company's prior payment of $300,000 to the Institutional Lender; (b) commencing upon the completion of fiscal 1994, in the event, and to the extent (up to the amount outstanding after the effectuation of (a) above), the Company achieves net income to be determined quarterly at the end of each quarter; and (c) for any amount outstanding after the effectuation of both (a) and (b) above, two years from the Closing. In May 1994, the Company entered into an agreement with New Retail Concepts, Inc. ("NRC") (the former parent company of El Greco, which was merged into NRC in 1993) pursuant to which the Company agreed to issue 240,740 shares of its common stock to NRC in full payment of the El Greco Note. Upon the closing of the El Greco Transactions, the Company ceased to be a licensee and acquired actual ownership of the Candie's trademark and therefore no longer makes royalty payments. (iv) Quasi-Reorganization Upon effectiveness of the Secondary Offering and the Debt Restructuring, the Company's stockholders approved a corporate readjustment of the Company's accounts in the form of a quasi-reorganization which was effected upon the completion of the El Greco Transactions and the Debt Restructuring. A quasi-reorganization, often referred to as "Fresh Start Accounting," is an accounting procedure which accomplishes, with respect to the Company's accounts and financial statements, what might have been accomplished in a reorganization by legal proceedings. The Company's assets, liabilities and capital accounts were adjusted to eliminate the stockholders' deficiency. On completion of the readjustments, the Company's accounts and financial statements were substantially similar to those of a new company commencing business. The Company believes the quasi-reorganization was appropriate because on completion of the Debenture Conversion and the Debt Restructuring and installation of a new management team, the Company had substantially reduced its outstanding Page 14 indebtedness, which to a great extent was incurred in connection with the Discontinued Footwear Products had formulated revised operating plans and as a result thereof would be able to devote its resources to its continuing operations and development of the Trademarks. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company's wholly-owned subsidiary, Bright Star, from June 1, 1990, the effective date of the acquisition, and 60% owned subsidiary ITG from February 1, 1988. All material intercompany accounts and transactions are eliminated. (c) Inventories Inventories, which consist entirely of finished goods, are valued at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. (d) Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets (5 - 10 years) using accelerated methods. (e) Candie's Trademark/License The Candie's trademark is stated at cost, net of amortization, as determined by its fair value relative to other assets and liabilities revalued in the aforementioned quasi-reorganization, and is being amortized over twenty years. (f) Investment in Joint Venture The Company's investment in the Joint Venture has been accounted for under the equity method of accounting. Management believes that the Company's recovery of its investment, if any, will be realized over an indeterminate future period; therefore, the investment has been fully reserved. (g) Revenue Recognition The Company's products are sold on either a landed or first cost basis. In the case of landed sales, the Company bears the risk of loss until the products are delivered to the customer. Revenues on landed sales are recognized when the products are delivered to the customers. For goods sold on a first cost basis, the Company acts as agent only, without risk of loss, and charges a commission on the sale. Commission income is recognized upon shipment by the manufacturers. Licensing income is recognized over the term of the license agreements. (h) Taxes on Income The Company has adopted the liability method of accounting for income taxes under Financial Accounting Statement No. 109 "Accounting for Income Taxes" ("FASB 109"). The adoption of FASB 109 did not have a material effect on the financial statements. Page 15 (i) Net Income (Loss) Per Share Net income (loss) per common share is computed on a basis of the weighted average number of common shares outstanding during each year, retroactively adjusted to give effect to all stock splits. All common stock equivalents have been used in the calculation. (j) Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. NOTE 2 - (a) Going Concern The Company's consolidated financial statements have been presented on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The liquidity of the Company and its ability to obtain financing for its operations has been adversely affected by recurring significant losses. Although on February 23, 1993 the Company successfully completed the Secondary Offering and Debt Restructuring which improved its financial condition, sales of the Company's products have been significantly below management's expectations. At July 31, 1994, the Company had a substantial working capital deficit. The unexpectedly high operating losses for the year ended January 31, 1994 and the quarter ended July 31, 1994 resulted in an accelerated use of funds provided by the public offering and adversely affected the Company's liquidity. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The continuation of the Company is dependent upon the continued support of the Company's trade vendors, and institutional lenders, obtaining additional equity and ultimately achieving profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities or any other adjustments that may be necessary should the Company be unable to continue as a going concern. Subsequent to January 31, 1994, the Company has raised additional equity capital, continues to seek additional equity financing, has settled various obligations through the issuance of its common stock, in addition to continuing a cost containment program and attempting to enhance its gross margins while achieving commensurate sales level increases. Page 16 NOTE 3 - PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following: January 31, July 31, 1994 1994 ----------- ----------- Furniture, fixtures and equipment $722,229 $721,113 Transportation equipment 20,750 20,750 Leasehold improvements 53,905 53,905 ----------- ----------- 796,884 795,768 Less accumulated depreciation and amortization 617,946 585,254 ------------ ----------- Net property and equipment $178,938 $217,517 ============ ========= NOTE 4 - DUE TO/FROM FACTOR On April 2, 1993, the Company entered into an accounts receivable factoring agreement. This agreement provides the Company with the ability to borrow funds from the factor, limited to 80% of eligible accounts receivable and 50% of eligible finished goods inventory (to a maximum of $5 million in inventory) in which the factor has a security interest. The agreement also provides for the opening of documentary letters of credit (up to a maximum of $2.5 million) to suppliers, on behalf of the Company. The factor requires a deposit equal to 43% of the amount of the letter of credit to be opened. Borrowings bear interest at the rate of one and one half percent (1 1/2%) over the existing prime rate established by the Philadelphia National Bank. Additionally, the Company was able to borrow $300,000 above its eligible accounts receivable and inventory formulas until July 31, 1994. This additional borrowing capacity is personally guaranteed by the Company's President. At July 31, 1994, the Company had $1,394,331 of outstanding letters of credit. Due to factor at July 31, 1994 is comprised as follows: Accounts Receivable - assigned $4,355,592 Outstanding factor advances 4,826,161 ---------- Due to Factor $ 470,569 ========== Page 17 NOTE 5 - LONG-TERM DEBT At the closing of the Secondary Offering on March 3, 1993, the Company's former Institutional Lender agreed to restructure the Company's indebtedness (the "Debt Restructuring"). The indebtedness before and after the Debt Restructuring is as follows:
Current Working Term Capital Revolving Accrued Loan Loan Loan Interest Total ----------- ----------- ------------ ---------- ------------ Indebtedness before Debt Restructuring $ 2,204,378 $ 500,000 $ 8,200,818 $ 284,823 $ 11,190,019 Debt forgiveness-March 3,1993 (954,378) -- (4,700,818) (284,823) (5,940,019) ----------- ----------- ------------ ---------- ------------ Indebtedness after Debt Restructuring $ 1,250,000 $ 500,000 $ 3,500,000 $ -- $ 5,250,000 =========== =========== =========== ========== =========== The balance of the indebtedness, after the Debt Restructuring was converted to the following facilities: Modified Working First Second Term Capital Term Term Loan Loan Loan Loan Total ---------- ---------- ---------- ---------- ---------- Restructured Indebtedness $1,250,000 $ 500,000 $2,500,000 $1,000,000 $5,250,000 ========== ========== ========== ========== ==========
Long-Term Debt consists of: July 31, 1994 January 31, 1994 ------------- ---------------- (unaudited) (unaudited) First Term Loan $ 858,175 $ 873,175 Second Term Loan 1,000,000 1,000,000 Modified Term Loan 1,220,000 1,220,000 Working Capital Loan 300,000 300,000 ---------- ---------- Total 3,378,175 3,393,175 Less Current Maturities 678,750 183,750 ---------- ---------- Total Long-Term Debt $2,699,425 $3,209,425 ========== ========== The Company's indebtedness bears interest at the lender's prime lending rate plus 2%. The debt is collaterized by substantially all of the assets of the Company, except where the security interest in certain assets are subordinate to the factor, and a continuing second mortgage held by the lender on certain commercial property owned by the Company's former President. Page 18 The Debt Restructuring Agreement, as amended, provides for additional principal payments based on the occurrence of certain events, as defined in addition to minimum principal payments to as follows:
First Second Modified Working Term Term Term Capital Loan Loan Loan Loan TOTAL ---- ---- ---- ---- ----- Year Ended January 31, 1995 $ 105,000 $ 35,000 $ 35,000 $ 8,750 $ 183,750 Year Ended January 31, 1996 400,000 225,000 60,000 105,000 790,000 Year Ended January 31, 1997 353,175 740,000 417,500 186,250 1,696,925 Year Ended January 31, 1998 -- -- 450,000 -- 450,000 Year Ended January 31, 1999 -- -- 257,500 -- 257,500 ---------- ---------- ----------- --------- ----------- Total: $ 858,175 $ 1,000,000 $ 1,220,000 $ 300,000 $ 3,378,175 Less amounts due within one year 420,000 140,000 65,000 53,750 678,750 ----------- ---------- ----------- --------- ----------- Long-Term Debt $ 438,175 $ 860,000 $ 1,155,000 $ 246,250 $ 2,699,425 =========== ========== =========== ========= ==========
At July 31, 1994, the Company was not in compliance with certain financial covenants under the Debt Restructuring Agreement as amended. Compliance with such covenants is determined based upon the quarterly financial statements of the Company. Subsequent to July 31, 1994, the Company has reached an agreement in principal with its former institutional lender, Shanghai Commercial Bank ("Shanghai"), to extinguish all of its outstanding indebtedness to Shanghai, currently $3,378,175 plus accrued interest, through a combination of cash and certain assets pledged as collateral to Shanghai as part of a personal guaranty by the former president and chief executive officer of the Company, Barry Feldstein. The agreement contemplates that Shanghai will receive $500,000 plus accrued interest on the indebtedness, and Barry Feldstein will transfer his 322,222 shares of Candie's common stock and certain real property owned by him. It is contemplated that the $500,000 payment will be paid from the funds raised through the private placements of securities contemplated by the Company as discussed in Note 10(a) of the Notes to Condensed Consolidated Financial Statements. NOTE 6 - RESTATEMENT In September 1991, in connection with an Indemnification Agreement with the Company's former president, former management and the Company recorded a capital contribution and treasury stock acquisition approximating $1,627,000 in recognition of the fair market value of 37,967 shares to reimburse the Company for U.S. Customs duties assessments. During fiscal 1995 the Company discovered that the shares were not received and therefore the prior accounting treatment was incorrect. The restatement has no effect on total stockholders' equity, results of operations or per share results previously recorded. See Condensed Consolidated Statement of Stockholders' 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 Shares Amount Capital --------- ------------ ----------- Balance at July 31, 1994, as previously reported (254,633) ($2,698,377) $ 9,265,368 Correction of previously recorded treasury stock transaction 37,967 1,627,344 (1,627,344) -------- ----------- ----------- Balance at July 31, 1994, as restated (216,666) ($1,071,033) $ 7,638,024 ======== =========== =========== Page 19 NOTE 7 - RELATED PARTY TRANSACTIONS The Company has entered into a Services Allocation Agreement with NRC pursuant to which the Company will provide NRC with financial, marketing, sales and other business services for which NRC will be charged an allocation of the Company's expenses, including employees' salaries associated with such services. NOTE 8 - LEASES In connection with the its sublease agreement, the Company has entered into an agreement with the sublandlord to terminate the sublease agreement and to issue 200,000 shares of its common stock (the "Shares") to the sublandlord and to deposit into escrow, with an escrow agent, an additional 100,000 shares of common stock (the "Escrow Shares"). The termination agreement provides that the Company will vacate and surrender its current premises no later than June 30, 1994. The agreement also provides that until such date, the Company shall have no additional liability or obligation to make any cash payment for use and occupation of the premises to the sublandlord, except to reimburse the sublandlord for the reasonable costs necessary to repair any damage to the premises caused by the Company. The Company has also agreed to indemnify the sublandlord for any loss, as defined, suffered by the sublandlord from the period July 1994 through April 27, 1997. Such loss shall be determined and paid solely as follows: (i) The amount of indemnifiable loss determined above shall be paid as follows: (a) the Shares shall be valued as of July 1, 1994, as defined, and (b) to the extent that the value of the Shares (as so computed) exceeds $270,000, then the amount of such excess shall be applied against the amount of indemnifiable loss. (ii) After full amount of such excess, if any, has been applied to the indemnifiable loss, the Company's liability for indemnifiable loss shall be limited to 50% of any shortfall in the amount of indemnifiable loss on a monthly basis (a "Loss Shortfall"), which liability shall be satisfied solely through releases from escrow of a certain amount of Escrow Shares, as defined. The maximum number of shares of common stock which the sublandlord is entitled to is a total of 300,000 shares of common stock. The amount of additional rent expense, if any, is not presently determinable. The Shares and the Escrow Shares, if any, when issued, will be "restricted securities" (as such term is defined in Rule 144 under the Securities Act of 1933) and may not be sold or otherwise disposed of unless the same have been registered under such Act or an exemption from registration is available. The Company has granted the sublandlord certain registration rights with respect to the Shares. Page 20 NOTE 9 - CERTAIN TRANSACTIONS AND GAINS AND LOSSES ON SETTLEMENTS WITH CREDITORS (a) Offering of Shares In May 1994, the Company issued 281,481 shares of its common stock and received aggregate net proceeds of approximately $350,000. (b) Conversion of Debt In May 1994, the Company entered into an agreement with NRC pursuant to which the Company agreed to issue 240,740 shares of its common stock to NRC in full payment of the El Greco Note. (c) Settlement with Overseas Agent In May 1994, the Company agreed to issue 250,000 shares of common stock, valued by the Company at $1.00 per share, in satisfaction of an outstanding payable of $759,888. The Company realized a net gain of $509,888 from this transaction during the second quarter of the fiscal year ending January 31, 1995. (d) Settlement with Major League Footwear In May 1994, in connection with a settlement with Major League Footwear, Inc. ("MLF") a company under common management, the Company agreed to issue 110,000 shares of common stock to be registered, and valued by the Company at $1.35 per share, and 150,000 shares of common stock, valued by the Company at $1.00 per share, in satisfaction of an outstanding liability to MLF in the amount of $537,961. This transaction relates to inventory received by the Company in the fiscal year ended January 31, 1994. The Company realized a net gain of $100,000 from this settlement during the second quarter of the fiscal year ending January 31, 1995. (e) Settlement of Litigation with Starter Corporation In July 1994, in connection with a settlement with Starter Corporation ("Starter") regarding $532,031 in royalties due Starter under a former license agreement, the Company agreed to issue 100,000 shares of common stock to be registered, and valued by the Company at $1.35 per share, and pay $150,000 over a fifteen month period beginning in July 1994. The Company realized a net gain of $247,031 from this settlement during the second quarter of the fiscal year ended January 31, 1995. (f) Settlement of Litigation with American Sporting Goods In July 1994, in connection with a settlement with American Sporting Goods ("ASG"), the Company's subsidiary, Bright Star Footwear, has agreed to pay ASG $100,000 over a ten month period commencing in July 1994. Such amount has been recorded as a net loss during the second quarter of the fiscal year ended January 31, 1995. Page 21 NOTE 10 - COMMITMENTS AND CONTINGENCIES (a) On August 31, 1989, the Company entered into a three-year distribution agreement with Starter, under which the Company was granted the right to distribute footwear bearing the colors and logos of certain collegiate and professional sports teams in accordance with licenses held by Starter. In December 1991, the Company discontinued all sales of such footwear products. Royalties to Starter were $-0-, $110,000, and $1,351,000 on sales of $-0-, $1,017,000, and $12,700,000 for the years ended January 31, 1994, 1993 and 1992, respectively. In March 1992, the Company was advised by Starter that it had terminated its license agreement with the Company on March 15, 1992 and in May 1992, Starter instituted a legal action against the Company for $515,000 of unpaid royalties. This action was settled in July 1994, whereby the company has agreed to issue Starter 100,000 shares of the Company's common stock and pay Starter $150,000 over a fifteen month period commencing in July 1994. Settlement of this action resulted in a net gain of $247,031 during the three months ended July 31, 1994. (b) In April 1991, an action was commenced derivatively on behalf of Candie's, Inc. against certain of the Company's former directors and the Company as a nominal defendant (the "Defendants"). The complaint alleges that the Company's actions in connection with a public offering to exchange warrants for the Company and the reacquisition of ITG were detrimental to the Company's financial condition. The plaintiff seeks an accounting by the Company and payment by the Board of Directors of an unspecified amount of damages. In September 1991, the defendants moved to dismiss the complaint for failure to state a cause of action. The motion was granted in October 1991 based upon the court's mistaken belief that the plaintiff had defaulted with respect to the motion. The parties agreed to reinstate the motion in June 1992 and the motion has again been submitted to the Court for its determination. The Company and the individual defendants intend to vigorously defend the action. (c) In July 1992, an action was instituted against the Company and its former directors by the Food and Allied Service Trades Department, AFL-CIO, and on behalf of the class of all other similarly situated stockholders. The plaintiff alleges that the Company made false representations or failed to disclose material facts in certain of its documents filed with the Securities and Exchange Commission regarding alleged underpayment to U.S. Customs. In connection with this action, the plaintiff seeks to have this case certified as a class action on behalf of all stockholders and seeks unspecified damages. The Company and certain individual defendants denied any knowledge of such alleged underpayment to U.S. Customs and are vigorously defending against all such claims. The Company and certain individual defendants moved to dismiss the complaint in September 1992 for failure to state a claim. This motion was consolidated with the motion to dismiss the action against the Company and the individual defendants; however, the court allowed plaintiffs the right to replead their claims (which they did on February 1, 1993), subject to the defendants' right to renew its motion to dismiss the amended pleading. The Company has moved to dismiss the amended complaint, however, such motion was denied. The Company has denied the plaintiffs' allegation of wrongdoing and asserted cross claims against the Company's former owner. The Company is currently negotiating a settlement of this action. Page 22 (d) In June 1992, an action was instituted against the Company and its former president, by Pentland and its parent company, alleging, among other things, violations of section 10(b) of the Securities Exchange Act of 1934, common law fraud, negligent misrepresentation and breach of contract, arising out of Pentland's acquisition of 19,900 shares of the Company's common stock in June 1991. The complaint alleges that the Company's former president, and, consequently, the Company, were aware of, but failed to disclose at the time Pentland acquired its shares, certain alleged underpayment to U.S. Customs. Pentland sough compensatory damages of $865,000. The Company denied any knowledge of underpayment at the time of Pentland's acquisition of shares and moved to dismiss the complaint in August 1992, for failure to state a claim. In December 1992, the court granted the Company's motion and dismissed the complaint; the court allowed plaintiffs the right to replead their claims (which they did on February 1, 1993), subject to the Company's right to renew its motion to dismiss the amended pleading. The Company has moved to dismiss the amended complaint, however, such motion was denied. The Company has denied the plaintiff's allegation of wrongdoing, and asserted cross claims against the Company's former president. (e) In March 1994, an action was instituted by ASG in the United States District Court for the Southern District of California against Bright Star concerning Bright Star's activities as a buying agent in connection with suppliers outside the United States who were allegedly marking up the factory price of goods ordered by Bright Star for the benefit of ASG. ASG was seeking to recover compensatory damages of approximately $531,000 and an unspecified amount of punitive damages. In July 1994, Bright Star and ASG settled this action whereby Bright Star has agreed to pay ASG $100,000 over a ten month period commencing in July 1994. This amount has been recorded as a net loss during the three months ended July 31, 1994. In the event that the Company is not successful in defense of the actions set forth above in (b), (c), and (d) or any settlement reached requires a substantial monetary judgment in excess of $555,000 provided for in the accompanying financial statements, the Company's financial condition could be adversely affected thereby. (f) As of July 31, 1994, the Company is obligated under an employment agreement with an executive and a termination agreement with a former executive to provide aggregate minimum compensation of $100,000 remaining during the fiscal year ended January 31, 1995, $200,000 during the fiscal year ended January 31, 1996 and $16,667 during the fiscal year ended January 31, 1997. NOTE 11 - SUBSEQUENT EVENTS Subsequent to the end of the first quarter, the Company has entered into the following transactions: (a) Private Placements The Company has recently entered into a letter of intent with an investment banking firm which provides that the investment banking firm will act as placement agent for the Company with respect to private offerings of securities Page 23 including convertible preferred stock and common stock. The Company intends to raise approximately $2.5 million in this equity financing. (b) Extinguishment of Debt to Former Lender The Company has reached an agreement in principal with its former lender, Shanghai Commercial Bank ("Shanghai"), to extinguish all of its outstanding indebtedness to Shanghai, currently $3,378,175 plus accrued interest, through a combination of cash and certain assets pledged as collateral to Shanghai as part of a personal guaranty by the former president and chief executive officer of the Company, Barry Feldstein. The agreement contemplates that Shanghai will receive $500,000 plus accrued interest on the indebtedness, and Barry Feldstein will transfer his 322,222 shares of Candie's common stock and certain real property owned by him. It is contemplated that the $500,000 payment will be paid from the private offering funds raised per Note 10(a) above. Page 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Six Months Ended July 31, 1994 Landed sales increased by $4,388,022 (91%) for the six months ended July 31, 1994 over the six month period ended July 31, 1993 primarily because of increased market acceptance of CANDIE'S branded footwear products. Total gross profit on landed sales increased by $413,193 (54%) for the six months ended July 31, 1994 over the three month period ended July 31, 1993 as a result of increased sales of CANDIE'S branded footwear products. The gross profit percentage on landed sales decreased from 15.7% for the six months ended July 31, 1993 to 11.8% for the six months ended July 31, 1994 primarily due to closeout sales of inventory during the six month period ended July 31, 1994 and additional markdowns on inventory. Commission income results from arranging for the production and quality control of products. Commission and licensing income for the six months ended July 31, 1994 increased to $2,286,706 from $1,166,912 an increase of $1,119,794 (96%) over the same period last year primarily because of increased orders on a commission basis of Candie's and Bright Star footwear and the licensing agreements under the Candie's label. Selling expenses decreased by $793,438 (27%) for the six months ended July 31, 1994 as compared to the six months ended July 31, 1993 primarily as a result of the acquisition of the Candie's trademark which eliminated license fees that existed last year, however, this decrease was offset by increases in salaries of sales personnel. General and Administrative expenses decreased by $807,874 (34%) for the six months ended July 31, 1994 as compared to the same period last year, primarily due to staff reductions, decreases in professional fees and a decrease in amortization due to reductions in trademark and non-competition agreements as a result of the quasi-reorganization. Interest expense increased by $108,079 (54%) for the six months ended July 31, 1994 as compared to the same period last year. The increase was primarily due to increased advances that the Company received under its Factor Agreement (see Note 4) and increases in the prime lending rate. During the six months ended July 31, 1994, the Company recorded net gains of $883,249 on settlements of certain existing obligations and litigation matters. As a result of the foregoing, the Company's net income for the six months ended July 31, 1994 increased to $336,323 from a loss of $(3,553,289) for the corresponding period ended July 31, 1993. Page 25 Three Months Ended July 31, 1994 Landed sales increased by $3,391,911 (156%) for the three months ended July 31, 1994 over the three month period ended July 31, 1993 primarily because of increased market acceptance of CANDIE'S branded footwear products. Total gross profit on landed sales increased by $361,163 (123%) for the three months ended July 31, 1994 over the three month period ended July 31, 1993 as a result of increased sales of CANDIE'S branded footwear products. The gross profit percentage on landed sales decreased from 13.5% for the three months ended July 31, 1993 to 11.8% for the quarter ended July 31, 1994 primarily due to closeout sales of inventory during the three month period ended July 31, 1994 and additional markdowns on inventory. Commission income results from arranging for the production and quality control of products. Commission and licensing income for the three months ended July 31, 1994 increased to $1,454,995 from $427,074 an increase of $1,027,921 (241%) over the same period last year primarily because of increased orders on a commission basis of Candie's and Bright Star footwear and the licensing agreements under the Candie's label. Selling expenses decreased by $432,068 (31%) for the three months ended July 31, 1994 as compared to the three months ended July 31, 1993 primarily as a result of the acquisition of the Candie's trademark which eliminated license fees that existed last year, however, this decrease was offset by increases in salaries of sales personnel. General and Administrative expenses decreased by $320,715 (30%) for the three months ended July 31, 1994 as compared to the same period last year, primarily due to staff reductions, decreases in professional fees and a decrease in amortization due to reductions in trademark and non-competition agreements as a result of the quasi-reorganization. Interest expense increased by $26,289 (20%) for the three months ended July 31, 1994 as compared to the same period last year. The increase was primarily due to increased advances that the Company received under its Factor Agreement (see Note 4) and increases in the prime lending rate. During the three months ended July 31, 1994, the Company recorded net gains of $756,919 on settlements of certain existing obligations and litigation matters. As a result of the foregoing, the Company's net income for the three months ended July 31, 1994 increased to $997,984 from a loss of $(1,865,887) for the corresponding period ended July 31, 1993. Liquidity and Capital Resources In the report on the Company's annual financial statements at January 31, 1994, the Company's independent certified public accountants have included an explanatory paragraph in their report on the Company's financial statements stating certain factors which raise a substantial doubt about the Company's ability to continue as a going concern. At July 31, 1994, the Company had a working capital deficiency of $1,857,927 versus a working capital deficiency of $3,180,800 at January 31, 1994. This Page 26 decrease in the working capital deficiency is primarily attributable to net income for the six months ended July 31, 1994 and the various settlements of obligations of the Company through the issuance of common stock offset by an increase in the current portion of long-term. The ratio of current assets to current liabilities was .70 to 1.0 at July 31, 1994 compared to .58 to 1.0 at January 31, 1994. The Company's cash flow from operating activities increased for the six month period ended July 31, 1994 compared to the same period of the prior year. Net cash used in operating activities totaled $310,135 for the six months ended July 31, 1994 compared to net cash used in operating activities of $5,681,308 for the six months ended July 31, 1993. The decrease in net cash used resulted primarily from net income for the six months ended July 31, 1994 as compared to a net loss and the reduction in the prior year of old, outstanding liabilities that were settled with the proceeds of the secondary offering, including $1,000,000 owed to the U.S. Customs Service. Cash provided by financing activities decreased by $5,475,685 to $303,119 for the six months ended July 31, 1994 compared to the same period last year. This reduction was primarily caused by the fact that the Company completed a secondary offering in the amount of $5,334,902 in the six month period ended July 31, 1993. Upon completion of the Company's restructuring and equity financing plan in March 1993 (see Note 1 of the Notes to Condensed Consolidated Financial Statements), management believed that it would provide the Company with adequate resources to implement their new business strategies; however, the Company has experienced operating losses in the fourteen month period ended July 31, 1994 which were greater than expected due to a weak retail market, and the resulting delays in the Company's ability to purchase goods. As a result of the foregoing, the Company has undertaken a program set forth below which is designed to increase revenue and cash flow while reducing expenses. The Company believes that if its program is successful, of which there can be no assurance, it will have adequate capital to support the Company's operations for the next twelve months. The Company's program involves (a) cost containment through (i) termination of the sublease for its current facility and relocation to a site in Westchester County, New York (which the Company believes will reduce its facility costs), (ii) termination of personnel not deemed necessary to its continuing operations, (iii) elimination or reduction of certain operating expenses, and (iv) conversion of certain existing claims to equity through issuance of common stock in settlement of such claims; (b) increasing revenues by (i) increasing sales of footwear by the Company's subsidiary, Bright Star Footwear, Inc., under the Company's newly licensed trademarks, BIG SMITH and ASPEN and (ii) increasing royalty income from the licensing by the Company of the CANDIE'S trademark and aggressive marketing of CANDIE'S footwear; (c) seeking to obtain additional debt and equity financing by (i) borrowing additional funds on a long-term basis and (ii) sales of equities securities; and (d) maintaining or enhancing the existing debt structure with its institutional lender by obtaining, when necessary, waivers or restructuring of applicable financial covenants and principal payments and maintaining or enhancing its existing line of credit from a factor by providing, if necessary, additional collateral. Page 27 While the Company believes that its program of cost containment will result in an aggregate decrease in operating expenses of in excess of $1 million, on an annualized basis (of which only a portion would be realized in the 1995 fiscal year), there can be no assurance that the Company will be able to achieve a significant reduction in operating costs, or significantly increase its revenues, or obtain additional financing on acceptable terms. Finally, there can be no assurance that implementation of such program will generate sufficient working capital to meet its operating expenses for the 1995 fiscal year. To implement its plan of operations, the Company has taken the following steps: In May 1994, the Company received net proceeds of approximately $350,000 from sales of common stock which it has used to pay outstanding indebtedness due to its institutional lender and for working capital and general corporate purposes. In addition, the Company anticipates that it will issue additional shares of common stock pursuant to certain settlements, either completed or being negotiated with various creditors, in satisfaction of existing claims against the Company. As part of its strategy of reducing costs, the Company recently terminated its inhouse marketing staff. The Company will use outside marketing consultants on an "as needed" basis to support its marketing activities. In an effort to enhance market penetration, the Company has instituted a pricing plan to further encourage retailers to carry the CANDIE'S line of footwear. Management believes the program will allow its retail customers to offer a nationally known branded product at competitive prices while maintaining significant retail markups. Page 28 CANDIE'S, INC. PART II - Other Information Item 1. Legal Proceedings In July 1994, the Company reached an agreement with Starter Corporation ("Starter") settling the action instituted by Starter against the Company in May 1992 in the Superior Court of the State of Connecticut regarding approximately $515,000 in royalties that Starter alleged were due it under a former licensing agreement. In connection with such settlement the Company agreed to issue to Starter 100,000 shares of the Company's common stock and to make monthly payments of $10,000 to Starter over a fifteen month period commencing in July 1994. In July 1994, the Company's subsidiary, Bright Star Footwear ("Bright Star"), reached an agreement with American Sporting Goods ("ASG") to settle an action commenced in March 1994 by ASG in the United States District Court for the Southern District of California against Bright Star concerning Bright Star's activities as a buying agent. In connection with such settlement Bright Star has agreed to pay ASG $100,000 over a ten month period commencing in July 1994. Item 3. Defaults Upon Senior Securities. At July 31, 1994, the Company was not in compliance with certain financial covenants under the Debt Restructuring Agreement, as amended, with Shanghai and the Company has failed to make certain principal and interest payments due under the Debt Restructuring Agreement. The Company has received a waiver with respect to the financial covenants and Shanghai has agreed that on or prior to September 20, 1994 it will not deem the Company to be in default with respect to the past due principal and interest payments. Item 6. a) Exhibits: 10.1 Settlement Agreement and Release and Waiver of Claims between the Company and Saintday International Co., Ltd. (1) 10.2 Agreement between the Company and Major League Footwear, Inc. 10.3 Settlement Agreement and Release and Waiver of Claims between the Company and Starter Corporation. (1) 10.4 Agreement between the Company and New Retail Concepts, Inc. dated May 16, 1994. (1) 10.5 Personal Guaranty of Neil Cole in favor of Congress Talcott Corporation dated June 28, 1994. (1) 11. Computation of Earnings Per Share 27. Financial Data Schedule. (2) b) Reports on Form 8-K - ---------- (1) Previously filed. (2) Filed herewith. Page 29 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 ------------------------------------------ NEIL COLE President and Chief Executive Officer (Principal Executive and Accounting Officer) Page 30 EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER SHARE Exhibit 11 Page 1 CANDIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE For the Three Months Ended July 31, --------------------------- 1994 1993 ----------- ----------- Net income (loss) $ 997,984 ($1,865,887) =========== =========== Weighted average shares outstanding 5,740,417 4,680,692 Common stock equivalents based on the treasury stock method using average market price 6,860 0 ----------- ----------- Total shares outstanding 5,747,277 4,680,692 =========== =========== Net income (loss) per share primary and fully diluted $0.17 ($0.40) =========== =========== Exhibit 11 Page 2 CANDIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE For the Six Months Ended July 31, --------------------------- 1994 1993 ----------- ----------- Net income (loss) $ 336,323 ($3,553,289) =========== =========== Weighted average shares outstanding 5,276,540 3,828,894 Common stock equivalents based on the treasury stock method using average market price 7,718 0 ----------- ----------- Total shares outstanding 5,284,258 3,828,894 =========== =========== Net income (loss) per share primary and fully diluted $0.06 ($0.93) =========== =========== EX-27 3 ART. 5 FDS FOR 2ND QUARTER 10-QSB/A
5 This schedule contains summary financial information extracted from Form 10-QSB at July 31, 1994 and is qualified in its entirety by reference to such financial statements. 6-MOS JAN-31-1995 JUL-31-1994 106,021 0 1,480,747 793,500 3,399,217 4,253,313 796,884 617,946 10,644,830 6,111,240 0 0 0 6,355 1,356,405 10,644,830 9,233,029 11,519,735 8,058,004 8,058,004 3,689,556 (883,249) 306,689 348,735 12,412 336,323 0 0 0 336,323 0.06 0.06
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