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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 1998
OR
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________to ______________.
Commission File Number 0-10593
CANDIE'S, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 694-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 ____
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based upon the closing sale price of $7.94 on April 21, 1998)
was approximately $95,260,000.
As of April 21, 1998, 14,170,364 shares of Common Stock, par value $.001
per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
CANDIE'S, INC.-FORM 10-K
TABLE OF CONTENTS
Page
----
PART I................................................................................................. 1
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 6
Item 3. Legal Proceedings.................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................................. 6
PART II................................................................................................ 6
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 6
Item 6. Selected Financial Data.............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 12
Item 8. Financial Statements and Supplementary Data.......................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................... 12
PART III............................................................................................... 12
Item 10. Directors and Executive Officers of the Registrant....................................... 12
Item 11. Executive Compensation................................................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 18
Item 13. Certain Relationships and Related Transactions........................................... 19
PART IV................................................................................................ 20
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 20
Signatures............................................................................................. 21
Consolidated Financial Statements..................................................................... F-1
Financial Statements Schedule..........................................................................S-1
Index to Exhibits...................................................................................... 22
-ii-
PART I
Item 1. Business
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements which are not historical facts contained in this Annual
Report on Form 10-K are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors include, but are not
limited to, uncertainty regarding continued market acceptance of current
products and the ability to successfully develop and market new products
particularly in light of rapidly changing fashion trends, the impact of supply
and manufacturing constraints or difficulties particularly in light of the
Company's dependence on foreign manufacturers, uncertainties relating to
customer plans and commitments, competition, uncertainties relating to economic
conditions in the markets in which the Company operates, the ability to hire and
retain key personnel, the ability to obtain additional capital if required, the
risks of uncertainty of trademark protection and other risks detailed below and
in the Company's Securities and Exchange Commission filings.
Introduction
Candie's, Inc., which was incorporated in Delaware in 1978, and its
subsidiaries (together the "Company") are currently engaged primarily in the
design, marketing and importation of a variety of moderately-priced women's and
girls' casual and fashion footwear and handbags under the CANDIE'S(R) and
BONGO(R) trademarks for distribution to better department and specialty stores
worldwide. The Company also markets and distributes, under the CANDIE'S(R) and
BONGO(R) trademarks, children's footwear designed by it, and also arranges for
the manufacture of footwear products, similar to those produced under the
CANDIE'S(R) trademark, for mass market and discount retailers, under one of the
Company's other trademarks or under the private label brand of the retailer.
Moreover, the Company distributes a variety of men's workboots, hiking boots,
winter boots and outdoor casual shoes designed and marketed by the Company's
wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star"), under
private labels and a brand name licensed by the Company from third parties
(ASPEN(R)).
The Company began to license the use of the CANDIE'S(R) trademark from New
Retail Concepts, Inc. ("NRC") in June 1991 and in March 1993 purchased ownership
of the CANDIE'S(R) trademark from NRC together with certain pre-existing
licenses of such third party. NRC is a publicly traded company engaged primarily
in the licensing and sublicensing of fashion trademarks and a significant
shareholder of the Company. NRC's principal shareholder is also the Company's
President and Chief Executive Officer.
The Proposed Merger
The Company and NRC have executed a Merger Agreement dated April 6, 1998,
(the "Merger Agreement") which provides that NRC will be merged with and into
the Company (the "Merger"), and the Company will be the surviving corporation.
At the effective date of the Merger (the "Effective Date"), each issued and
outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"),
and each issued and outstanding option to purchase shares of NRC Common Stock
immediately prior to the Effective Date will be converted, respectively, into
0.405 shares of common stock, $.001 par value, and options of the Company (the
"Common Stock").
The completion of the Merger is subject to a number of conditions,
including among other things, the approval of the stockholders of both the
Company and NRC and the registration of the Common Stock to be issued to the
holders of NRC pursuant to the Merger under the Securities Act of 1933, as
amended. No assurance can be given that the Company and NRC will be able to
successfully obtain the requisite stockholder approval or that the Company will
otherwise be able to consummate the Merger.
At April 6, 1998, there were 5,693,639 shares of NRC Common Stock issued
and outstanding and options to purchase 1,635,000 shares of NRC Common Stock
outstanding. NRC currently owns 1,227,696 shares of Common Stock and has options
and warrants to purchase an additional 800,000 shares of Common Stock, all of
which will be extinguished upon consummation of the Merger.
Products
CANDIE'S(R) Footwear Products. CANDIE'S(R) brand fashion and casual
footwear is designed primarily for girls and women, aged 8 to 40, featuring a
variety of styles for a variety of uses. The retail prices of CANDIE'S(R)
footwear generally range from $30 to $60. Four times per year, as part of its
Spring and Fall collections, the Company generally designs and markets 30 to 40
different styles of shoes among its footwear categories. Approximately one-third
of such styles are "updates" of the Company's most popular styles from prior
periods and the Company considers such footwear to be "core" products.
The Company designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S(R) image and price
point. Fashion trend information is compiled by the Company's designers through
various methods, including travel to Europe and throughout the world to identify
and confirm seasonal trends, utilization of outside fashion forecasting services
and attendance at trade shows and seminars. Each season, subsequent to the final
determination of that season's line by the design team and management (including
colors, trim, fabrics, constructions and decorations), the design team travels
to the Company's manufacturers to oversee the production of the initial sample
lines.
CANDIE'S(R) Handbag Products. The Company recently began to market and
distribute under the CANDIE'S(R) trademark a line of women's and girls' handbags
to the same retail outlets it markets its footwear products. The retail price
range for CANDIE'S(R) handbags will generally range from $30 to $100.
BONGO(R) Footwear and Handbag Products. The Company designs fashion and
casual footwear and handbags for girls and women, aged 14 to 40, and markets and
distributes such footwear and handbags under the BONGO(R) trademark pursuant to
a license agreement with the owner of such trademark. The retail price range for
such footwear is between $30 to $50 and for such handbags is $15 to $30. The
Company distributes such footwear and handbags to department and specialty
retail stores, including Burdines, Wet Seal/Contempo Casuals, Mervyns and Edison
Brothers.
Children's Footwear. In the Spring of 1997, the Company began to market and
distribute under the CANDIE'S(R) and BONGO(R) trademarks a line of children's
footwear, primarily to the same retail outlets to which it markets its women's
brand, as well as to selected children's specialty stores. Approximately
three-quarters of the children's styles are smaller versions of the best selling
women's styles and one-quarter of the children's products are designed
specifically for the children's division. The Company's lines of children's
footwear have received favorable retailer and consumer response from across the
country.
Private Label Products. In addition to sales under the CANDIE'S(R) and
BONGO(R) trademarks, the Company arranges for the manufacture of women's
footwear, acting as agent for mass market and discount retailers, primarily
under the retailer's private label brand. Under its agency arrangements, the
Company receives a commission based upon the purchase price of the products
purchased from the manufacturer for providing design expertise, arranging for
the manufacturing of the footwear, oversight of production, inspection of the
finished goods and arranging for the sale of the finished goods by the
manufacturer to the retailer. All of the private label footwear is presold
against firm purchase orders and is backed by letters of credit opened by such
retailers.
Bright Star Footwear. Bright Star, acting principally as agent for its
customers, designs, markets and distributes a wide variety of men's workboots,
hiking boots, winter boots and leisure footwear, which
2
is either unbranded, or marketed under the private label brand names of Bright
Star's customers, or under the Company's licensed brand, ASPEN(R). Bright Star's
customer base consists of a broad group of retailers, including discounters,
specialty retailer and better grade accounts. Bright Star's products are
directed toward the moderately-priced market. The retail prices of Bright Star's
footwear generally ranges from $25 to $75. The majority of Bright Star's
products are sold on a commission agency basis.
Manufacturing and Suppliers
The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Spain, Italy, and
Taiwan. The Company believes that such diversification permits it to respond to
customer needs and minimizes risks associated with foreign manufacturing. The
Company has developed, and seeks to develop, long-term relationships with
manufacturers that can produce a high volume of quality products at competitive
prices.
The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract with other
manufacturers. Bright Star is responsible for identifying suppliers, planning
production schedules, supervising manufacture, inspecting samples and finished
products and arranging for the shipment of goods directly to customers in the
United States. Finished goods are purchased primarily on an open account basis,
generally payable within 7 to 45 days after shipment.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber), are available from various alternative sources, there can be no
assurance that any such materials will continue to be available on a timely or
cost-effective basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately three months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and
shipment to the customer each take approximately one month. If the shoes are
produced in the United States or shipped via air freight, rather than ocean
freight, the shipment time is reduced.
For the fiscal year ended January 31, 1998 ("Fiscal 1998"), and the fiscal
year ended January 31, 1997 ("Fiscal 1997"), Redwood Shoe Corp. ("Redwood") a
buying agent for the Company, initiated the manufacture of approximately 60% and
80%, respectively, of the Company's total footwear purchases. At April 29, 1998,
the Company had approximately $23,000,000 of open purchase commitments with
Redwood.
There can be no assurance that, in the future, the capacity or availability
of manufacturers or suppliers will be adequate to meet the Company's product
needs.
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule (a
fixed duty structure in effect since January 1, 1989), the Company pays import
duties on its footwear products manufactured outside of the United States
ranging from approximately 3.2% to 48%, depending on whether the principal
component of the product is leather or some other material. Inasmuch as the
Company's products have differing compositions, the import duties vary with each
shipment of footwear products. Since 1981, there have not been any quotas or
restrictions, other than the duties mentioned hereinabove, imposed on footwear
imported by the Company into the United States.
3
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company. In addition, other restrictions on the
importation of footwear and apparel are periodically considered by the United
States Congress and no assurance can be given that tariffs or duties on the
Company's goods may not be raised, resulting in higher costs to the Company, or
that import quotas respecting such goods may not be lowered which could restrict
or delay shipment of products from the Company's existing foreign suppliers.
Backlog
At April 29, 1998 the Company had an estimated backlog of orders of its
products of approximately $75,000,000, as compared to a backlog of approximately
$49,000,000 at April 23, 1997. The backlog at any particular time is affected by
a number of factors, including seasonality, the buying policies of retailers,
scheduling, the manufacture and shipment of products. Accordingly, a comparison
of backlog from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments.
Seasonality
In previous years, demand for the Company's footwear peaked during the
months of June through August (the fall/back-to-school selling season). As a
result, shipment of the Company's products in previous years were heavily
concentrated in its second and third fiscal quarters. Accordingly, historically,
operating results have fluctuated significantly from quarter to quarter.
Although there can be no assurance that the Company will be able to achieve
consistent quarterly operating results in future years, the Company believes
that fluctuations in its quarterly operating results will be reduced over the
next year.
Customers and Sales
During Fiscal 1998, the Company sold its footwear products to more than 750
retail accounts consisting of department stores, including Federated Stores
(which includes Macy's and Bloomingdale's), Nordstrom's and May Company, mass
merchandisers, shoe stores and other outlets in the United States. No individual
customer accounted for more than 10% of the Company's revenues during Fiscal
1998; although the Company has five customers that each accounted for between
approximately 5.7% and 8.8% of the Company's net revenues in Fiscal 1998, and
between 7.1% and 8.6% in Fiscal 1997.
The Company has also entered into various long-term distribution agreements
with United Authentics, GmbH in Germany, Bata Shoe Pte. Ltd. of Singapore and
Malaysia and Cravo E. Canala of Brazil. Pursuant to the terms of such
distribution agreements, the Company's products will be distributed and marketed
in specialty stores throughout Germany, Singapore, Malaysia and Brazil. There
can be no assurance that such customers will continue to purchase products from
the Company or utilize its services in the future in the United States or
abroad.
The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.
The Company currently utilizes the services of 27 full-time sales persons
(including 20 employees and 7 independent contractors), who are compensated on a
commission basis. The Company emphasizes customer service in the conduct of its
operations and maintains a customer service department. The Company customer
service department processes customer purchase orders and supports the sales
representatives by coordinating orders and shipments with customers.
4
Licensing of the CANDIE'S(R) Trademark
During Fiscal 1997, the Company licensed the CANDIE'S(R) trademark for use
in connection with the manufacture and distribution of women's intimate apparel
and children's footwear. The Company terminated these licenses during Fiscal
1998 because, the Company has commenced to distribute its own line of children's
footwear under the CANDIE'S(R) trademark and, as to women's intimate apparel,
the Company perceived a conflict between the licensee's level of retail
distribution and the current retail market for the Company's footwear.
The Company currently intends to offer new license agreements for women's
apparel, accessories and related categories. The Company does not intend to
aggressively market such licenses but intends to evaluate prospective licensees
based on their experience, financial stability, reputation, marketing and
distribution ability, the marketability of the proposed product line and
compatibility of such proposed product line with the product lines of then
existing CANDIE'S(R) licensees. There can be no assurance that the Company will
be able to successfully license the CANDIE'S(R) trademark in the future.
Trademarks
The Company believes that its federally registered trademark, CANDIE'S(R)
which expires on June 9, 2001, is of material importance in marketing the
Company's products and, accordingly, has significant value. The Company also
owns other registered trademarks which it does not consider to be material to
its current operations. There can be no assurance that the CANDIE'S(R) trademark
or any other trademark which the Company owns, does not, and will not, violate
the proprietary rights of others, that any such trademark would be upheld if
challenged, or that the Company would, in such an event, not be prevented from
using such trademarks, any of which events could have a material adverse effect
on the Company. In addition, there can be no assurance that the Company will
have the financial or other resources necessary to enforce or defend an
infringement action.
The Company sells footwear and handbags under the BONGO(R) trademark and
footwear under the ASPEN(R) trademark, each of which the Company licenses from
third parties. The BONGO(R) license agreement grants the Company the exclusive
right to market and distribute footwear and handbags under the BONGO(R)
trademark in North America and certain foreign countries for a term expiring on
January 31, 2002, subject to the Company's right to extend the license through
January 31, 2006 under certain circumstances. The ASPEN(R) license agreement
grants Bright Star the exclusive right to market and distribute certain
categories of footwear under the ASPEN(R) trademark in the United States, its
territories and Puerto Rico for a term expiring on September 30, 1998. Although
the Company will seek to renew the ASPEN(R) license, there can be no assurance
that the Company can successfully negotiate a renewal of such license on terms
acceptable to it. The BONGO(R) and ASPEN(R) licenses require the Company to pay
royalties based on percentages of sales exceeding certain minimum royalties.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from
Skechers, Nine & Co. and Esprit. In general, competitive factors include
quality, price, style, name recognition and service. Although the Company
believes that it competes favorably in these areas, there can be no assurance
that it will be able to do so in the future. In addition, the presence in the
marketplace of various fashion trends and the limited availability of shelf
space can affect competition. Many of the Company's competitors have
substantially greater financial, distribution, marketing and other resources
than the Company and have achieved significant name recognition for their brand
names. There can be no assurance that the Company will be able to successfully
compete with the companies marketing these products.
5
Employees
At April 21, 1998, the Company employed 93 persons, of whom 4 are
executives and 89 are management, sales, marketing, product development,
administrative, customer service representatives and retail store personnel.
None of the Company's employees are represented by a labor union. The Company
also utilizes the services of 7 independent contractors who are engaged in
sales. The Company considers its relations with its employees to be good.
Item 2. Properties
The Company currently occupies 19,653 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease which
expires on April 1, 2000. The monthly rental expense pursuant to the lease is
$32,755 per month through the expiration date of the lease. The Company also
occupies (i) approximately 1,265 square feet of retail space in The Galleria
shopping mall in White Plains, New York pursuant to a lease which expires on
September 30, 2006, (ii) approximately 1,265 square feet of retail space in the
Roosevelt Field shopping mall in Garden City, New York pursuant to a lease which
expires on October 22, 2004, and (iii) approximately 2,919 square feet of retail
space in the Tanger Outlet shopping mall in Riverhead, New York pursuant to a
lease which expires on October 31, 2002. The lease at The Galleria shopping mall
provides for a minimum monthly rental of approximately $3,000 through September
30, 1998, increasing to approximately $5,000 for the 12 months ending September
30, 2006, plus additional rent as described below. The lease at the Roosevelt
Field shopping mall provides for a minimum monthly rental of approximately
$10,000 through October 31, 1999, and increasing to approximately $12,000 for
the twelve months ended October 31, 2004, plus additional rent as described
below. The lease at the Tanger Outlet shopping mall provides for a minimum
monthly rental of approximately $6,300 through October 31, 2002, plus additional
rent as described below. Additional rent at all three shopping mall locations is
based on percentages of annual gross sales of the retail store exceeding certain
amounts and proportionate amounts of monthly real estate taxes, utilities and
other expenses relating to the shopping mall.
Item 3. Legal Proceedings
The Company is a party to certain litigation incurred in the normal course
of business. While any litigation has an element of uncertainty, the Company
believes that the final outcome of any of these matters will not have a material
effect on the Company's financial position or future liquidity. Furthermore, the
Company knows of no material legal proceedings, pending or threatened, or
judgments entered, against any director or officer of the Company in his
capacity as such.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since January 22, 1990 (under the symbol "CAND" since February
23, 1993 and, prior to such time, under the symbol "SHOE"). The Common Stock is
currently traded on the NASDAQ National Market. The following table sets forth,
for the indicated periods, the high and low sales prices for the Common Stock as
reported by NASDAQ:
6
High Low
---- ---
Fiscal Year Ended January 31, 1998
Fourth Quarter .............................. $7.25 $4.63
Third Quarter ............................... 7.88 4.13
Second Quarter .............................. 5.69 3.63
First Quarter ............................... 6.88 4.25
Fiscal Year Ended January 31, 1997
Fourth Quarter .............................. $5.69 $1.75
Third Quarter ............................... 2.75 1.72
Second Quarter .............................. 3.06 1.59
First Quarter ............................... 2.75 1.69
As of April 21, 1998, there were approximately 150 holders of record of the
Company's Common Stock. The Company believes that, in addition, there are in
excess of 1,000 beneficial owners of its Common Stock, which shares are held in
"street name."
The Company has not paid cash dividends on its Common Stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future.
During the fiscal quarter ended January 31, 1998, the Company issued
five-year options to its employees to purchase an aggregate of 464,500 shares of
its common stock at exercise prices of (i) $5.00 for 400,000 shares, (ii) $6.81
for 30,000 shares; (iii) $5.06 for 30,000 shares; and (iv) $6.88 for 4,500
shares. The foregoing options were acquired by the holders for investment in
private transactions exempt from registration by virtue of either Sections 2(3)
or 4(2) of the Act.
Item 6. Selected Financial Data
Selected Historical Financial Data
(in thousands, except earnings per share amounts)
The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
Year Ended January 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Operating Data:
Net revenues ................... $ 92,976 $ 45,005 $ 37,914 $ 24,192 $ 13,164
Operating income (loss) ........ 6,961 966 2,057 (1,391) (5,009)
Net income (loss) .............. 4,536 1,145 1,054 27 (6,321)
7
Earnings (loss) per share:
Basic ...................... .40 .13 .12 .00 (1.32)
Diluted .................... .33 .11 .11 .00 (1.32)
Weighted average number of common
shares outstanding:
Basic ...................... 11,375 9,143 8,726 6,398 4,790
Diluted .................... 13,788 10,152 9,427 6,461 4,790
Year Ended January 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Balance Sheet Data:
Current assets ................. $ 23,408 $ 9,039 $ 5,969 $ 4,104 $ 4,407
Total assets ................... 30,881 14,709 11,746 10,290 11,045
Long-term debt ................. -- -- -- -- 4,027
Total stockholders' equity ..... 24,681 8,608 5,586 4,392 (570)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. See "Safe
Harbor Statement" in Item 1 of this report which statement is incorporated
herein by reference.
Results of Operations
Fiscal 1998 Compared with Fiscal 1997
Revenues. Net revenues increased by $47,971,000, or 106.6% to $92,976,000,
primarily due to increased brand awareness and consumer acceptance due to the
Company's increased sales and marketing efforts coupled with increased sales in
all product categories, the successful introduction of children's footwear
products and increased selling prices.
Gross Profit. Gross Profit margins increased to 26.0% from 21.9% in the
prior year. The increase is primarily attributable to changes in product mix and
the ability to source product at lower prices coupled with increases in units
sold and selling prices.
Operating Expenses. Selling, general and administrative expenses increased
by approximately $8,327,000 to $17,217,000 for Fiscal 1998 compared to
$8,890,000 for the prior year. The increase is primarily due to increased
selling, shipping and administrative expenses which are directly associated with
the increase in net revenues and an increase in marketing and advertising
expenses. As a percentage of net revenues, selling, general and administrative
expenses decreased 1.3% to 18.5% for Fiscal 1998 from 19.8% for the prior year.
8
Operating Income. As a result of the foregoing, operating income increased
approximately sevenfold to $6,960,000, or 7.5% of net revenues for Fiscal 1998,
compared to $966,000, or 2.1% of net revenues for the prior year.
Interest Expense. Interest expense increased by $374,000, or 49.5%,
primarily as a result of increased levels of borrowings under the Company's
revolving credit facility with its factor for seasonal working capital
requirements to fund the Company's growth.
Income Tax Expense. The relationship of the income tax provision in Fiscal
1998 and the benefit in Fiscal 1997, respectively, to income before income taxes
was significantly affected by the recognition of deferred tax assets in the
amount of $1,347,000 and $1,100,000, respectively, in each year. See Note 10 to
the Consolidated Financial Statements and Net Operating Loss Carryforward
discussion included later in this management's discussion.
Net Income. As a result of the foregoing, net income increased fourfold to
$4,536,000 or 4.9% of net revenues for Fiscal 1998, compared to $1,145,000 or
2.5% of net revenues for the prior year.
Fiscal 1997 Compared with Fiscal 1996
Revenues and Gross Profit. Net revenues increased by $7,091,000, or 18.7%,
primarily due to the Company's sales and marketing efforts, including the
Company's decision to emphasize sales of casual, outdoor and fashion footwear
and sales of footwear under the CANDIE'S brand and the Company's licensed brand,
BONGO. These efforts resulted in both an increase in the amount of footwear sold
and lower profit margins due to decreased selling prices for certain of the
Company's core products, in an effort to maintain retail market share.
Accordingly, the Company's gross profit percentage decreased to 21.9% from 27.7%
for the fiscal year ended January 31, 1996 ("Fiscal 1996").
Operating Expenses. Selling expenses increased by $494,000, or 9.8%,
primarily due to increases in the amount of salesmen's commissions on increases
in footwear sales and increases in advertising expenditures. General and
administrative expenses decreased by approximately $34,000, or 1.0%, principally
due to the Company's cost containment efforts. Total operating expenses
increased by 5.5% or approximately $461,000. This increase is principally due to
the increases in sales commissions and advertising expense discussed above.
Accordingly, operating income decreased by $1,092,000, or 53.1%, to $966,000 for
Fiscal 1997, from operating income of $2,057,000 in Fiscal 1996.
Interest Expense. Interest expense increased by $28,000, or 3.9%, primarily
as a result of increased borrowings under the Company's revolving credit
facility with its factor.
Income Tax Expense. In Fiscal 1997, income tax expense was credited by a
$1.1 million reduction in the valuation allowance previously provided against
the Company's net deferred tax assets. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" net deferred tax
assets are not recognized when a company has cumulative losses in recent years.
However, as a result of its continued profitability, the Company believes it is
more likely than not that the Company will generate sufficient taxable income to
realize the benefits of these deferred tax assets (see Note 10 of Notes to
Consolidated Financial Statements appearing elsewhere herein). This reduction in
the valuation allowance of the deferred tax assets resulted in a net income tax
benefit for Fiscal 1997 of $1,010,000, as compared to an income tax provision of
$163,000 for Fiscal 1996.
Net Income. As a result of the foregoing, the Company achieved net income
of $1,145,000 for Fiscal 1997, compared to net income of $1,054,000 in Fiscal
1996.
9
Liquidity and Capital Resources
The Company has relied in the past primarily upon revenues generated from
operations, borrowings from its factor and sales of securities to finance its
liquidity and capital needs. Net cash used in operating activities totaled
$8,830,000 in Fiscal 1998, as compared to net cash provided by operating
activities of approximately $663,000 for Fiscal 1997. Net income of $4,536,000
and the effects of non-cash charges for depreciation and amortization of
$604,000 and deferred income taxes of $993,000 were more than offset by the
Company's requirement to finance increased inventories in the amount of
$10,928,000, increased accounts receivable and factoring activity in the amount
of $2,888,000 and other changes in operating assets and liabilities, resulting
in the Fiscal 1998 use of cash from operating activities. Net cash provided by
operating activities for Fiscal 1997 resulted principally from net income of
$1,145,000, an increase in accounts payable and accrued expenses of $2,365,000,
partially offset by deferred income taxes of $1,100,000, a decrease in due to
factor of $719,000, non-cash items of depreciation and amortization of $459,000,
an increase in prepaid expenses of $235,000, and an increase in inventories of
$1,251,000.
The ratio of current assets to current liabilities increased to 3.8:1 at
January 31, 1998 from 1.5:1 at January 31, 1997. Working capital increased by
approximately $14,223,000 to $17,268,000 at January 31, 1998 compared to working
capital of $3,046,000 at January 31, 1997.
The Company expects a continuation of the recent trend of increases in
revenues through increased sales of women's footwear and handbags under the
CANDIES(R) and BONGO(R) trademarks, and revenues from children's footwear
products under the CANDIES(R) and BONGO(R) trademarks.
Other than short-term borrowings for working capital requirements, the
Company is virtually debt-free.
The Company sells substantially all of its accounts receivable to a factor
without recourse. In circumstances where a customer's account cannot be factored
without recourse, the Company may take other measures to reduce its credit
exposure which could include credit insurance, requiring the customer to pay in
advance or providing a letter of credit covering the sales price of the
merchandise ordered.
The Company currently has an accounts receivable factoring agreement
whereby it sells receivables generally without recourse. The agreement which
under its original terms was to expire on November 30, 1998 (as amended),
provides the Company with the ability to borrow funds from the factor, limited
to 85% of eligible accounts receivable and 50% of eligible finished goods
inventory (to a maximum of $15,000,000 in inventory) in which the factor has a
security interest. The agreement 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 reserves an amount equal to 43% of the full amount of each
letter of credit to be opened against the Company's available borrowings. The
total credit facility is limited to the lesser of (i) available borrowings as
determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings bear
interest at the rate of three quarters of one percent (3/4%) over the existing
prime rate (8-1/2% at January 31, 1998) established by the CoreStates Bank N.A.
Factoring commissions on accounts receivable assigned to the factor are at a
rate of .60%. The Company's assets are pledged as collateral. The unused portion
of the credit lines at April 16, 1998 was approximately $11,500,000.
The Company is currently negotiating a new revolving credit and factoring
arrangement with prospective lenders. The Company anticipates that the
replacement credit facility will be in place shortly with terms and conditions
that will be more favorable than its current financial arrangement with its
factor. Accordingly, the Company has notified its factor of its intention to
terminate its
10
factoring agreement and is currently operating on a month to month basis. The
Company has reserved its right to terminate the agreement at will, if necessary,
without any penalties or fee upon termination.
Subsequent to year-end through February 23, 1998, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of $7,157,000 from the exercise of such
Warrants. The proceeds were used to repay short- term borrowings. Each Warrant
entitled the holder thereof to purchase one share of Common Stock at an exercise
price of $5.00 on that date, at which time the right to exercise such Warrant
terminated. In addition, subsequent to January 31, 1998, the Company received
proceeds of $1,042,000, in connection with the issuance of common stock relating
to the exercise of outstanding stock options and certain underwriters' warrants.
The Company believes that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, including requirements for its
expansion, primarily with cash flow from operations, supplemented by borrowings
under its existing replacement credit facility.
The Company intends to retain its earnings to finance the development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the financial condition of the Company and
general business conditions.
Seasonality
The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volumes of products sold during the second and fourth
quarters.
Effects of Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the past few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.
Year 2000 Issues.
The Company has assessed the issues associated with its existing computer
system with respect to a two digit year value as the year 2000 approaches and is
in the process of implementing a new computer system which it believes addresses
such issues. The Company also believes that implementation of this system is not
a material event or uncertainty that would cause expected financial information
not to be indicative of future operating results or financial condition.
Net Operating Loss Carryforwards
At January 31, 1998, the Company had net operating losses of approximately
$5,500,000 for income tax purposes, which expire in the years 2008 through 2010.
Due to the issuance of Common Stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275,000 per year. Approximately $4,600,000 of
the operating loss carryforwards are subject to this restriction and
accordingly, no accounting recognition has been given to approximately $1.8
million of such losses since present restrictions preclude their utilization.
11
After the date of the pre-quasi reorganization the tax benefits of net
operating loss carryforwards incurred prior to the reorganization, has been
treated for financial statement purposes as direct additions to additional
paid-in capital. For Fiscal 1998 and Fiscal 1997, the Company utilized $149,000
and $158,000, respectively, of pre-quasi reorganization net operating loss
carryforwards. The related tax benefits of $56,000 and $60,000, at January 31,
1998 and 1997 respectively, have been recognized as increases to additional
paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company
reduced its valuation allowance for deferred tax assets by $2,392,000 and
$1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000
and benefiting the income tax provision by $1,347,000 and $1,100,000,
respectively. The Company believes it is more likely than not that the
operations will generate future taxable income to realize such tax assets.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
and No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information," respectively, both of which are required
to be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130
will require the Company to report in its financial statements all non-owner
related changes in equity for the periods being reported. SFAS No. 131 will
require the Company to disclose revenues, earnings and other financial
information pertaining to the business segments by which the Company is managed,
as well as what factors management used to determine these segments. The Company
is currently evaluating the effects SFAS No. 130 and No. 131 will have on its
financial statements and related disclosures.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of option, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods presented have been
restated in accordance with the SFAS No. 128 requirements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is a list of the directors, executive officers and key
employees of the Company and their respective ages and positions are as follows:
12
Name Age Position
---- --- --------
Neil Cole 40 Chairman of the Board, President and Chief Executive
Officer
Lawrence O'Shaughnessy 48 Executive Vice President, Chief Operating Officer and
Director
David Golden 44 Senior Vice President, Chief Financial Officer
Gary Klein 43 Vice President of Finance
Barry Emanuel 56 Director
Mark Tucker 50 Director
Neil Cole has been Chairman of the Board, President and Chief Executive
Officer of the Company since February 23, 1993. From February through April
1992, Mr. Cole served as director and as acting President of the Company. Mr.
Cole has also served as Chairman of the Board, President, Treasurer and a
director of NRC since its inception in April 1985.
Lawrence O'Shaughnessy has been a director and Chief Operating Officer of
the Company since March 1993 and Executive Vice President of the Company since
April 1995. He also served as a director of the Company from April to June 1992.
Mr. O'Shaughnessy has served as President of O'Shaughnessy & Company, a
management consulting firm, since March 1991.
David Golden has been the Senior Vice President and Chief Financial Officer
of the Company since March 1, 1998. From April 1994 to February 1998, Mr. Golden
was a principal at DMG Consulting Services, a management consulting firm. From
September 1991 to March 1994, Mr. Golden was Executive Vice President and Chief
Financial and Administrative Officer of Hugo Boss USA, Inc.
Gary Klein has served as Vice President of Finance of the Company since
October 1994 and has also served in that position from February to December
1993. He also has served as Principal Accounting Officer from December 1993 to
October 1994. Mr. Klein has also served as Chief Financial Officer of NRC since
May 1990.
Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York.
Mark Tucker has been a director of the Company since May 1996. From August
1993 to the present, Mr. Tucker has been a principal of Mark Tucker, Inc., a
family owned business engaged in the design and import of shoes. Mr. Tucker has
also been a principal of Redwood, a manufacturer and distributor of footwear
since June 1993. From December 1992 to August 1993, he was an independent
consultant to the shoe industry. From July 1992 to December 1992, Mr. Tucker was
employed as Director of Far East Shoe Wholesale Operations for United States
Shoe Far East Limited, a subsidiary of U.S. Shoe Corp. For more than five years
prior to July 1992, Mr. Tucker was a principal of Mocambo Ltd., a family owned
shoe design and import company.
Directors are elected by the Company's stockholders. Officers are elected
by the Company's Board of Directors and serve at the discretion of the Company's
Board of Directors.
13
In April 1996, the Company entered into an agreement (the "Redwood
Agreement") with Redwood under which, in consideration for the satisfaction in
full of certain accounts payable to Redwood aggregating $1,680,000, the Company
(i) issued to Redwood 1,050,000 shares of the Company's Common Stock and an
option to purchase 75,000 shares of the Company's Common Stock; (ii) paid
$50,000 to Redwood; and (iii) agreed, for the three year period ending April 3,
1999, to cause Mark Tucker (or if he is not available, another partner of
Redwood designated by it) to be elected as director of the Company; and (iv)
agreed to register the shares and the option shares for sale under the
Securities Act. Pursuant to the Redwood Agreement, in May 1996, Mr. Tucker was
elected as a director of the Company and in October 1996, a registration
statement covering the shares and the option shares was declared effective under
the Act. The Company has also agreed, if so requested by Redwood to use
reasonable efforts to cause the election of Mr. Mark Tucker as a director and
continue Mr. Tucker as such until April 3, 1999. If Mr. Tucker is not available
to serve, Redwood has the right to designate one of its other partners as a
nominee for election as a director. Each of Messrs. Cole and O'Shaughnessy and
NRC have agreed to vote their shares of the Company's Common Stock to elect and
continue Redwood's nominee in office for such three year period.
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of Securities Exchange Act of 1934 requires the Company
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10 percent owners are required
by certain SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during Fiscal 1998, filing requirements
applicable to its officers, directors and 10% stockholders of the Common Stock
were complied with, except Mr. Cole and Mr. O'Shaughnessy failed to timely file
Form 4 reports with respect to the cancellation of options to purchase 400,000
and 41,700 shares of the Common Stock in January 1998 and September 1997,
respectively, and the simultaneous grant of options to purchase 400,000 and
100,000 shares of the Common Stock in January 1998 and September 1997,
respectively.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth all compensation paid or accrued by the
Company for the Fiscal 1998, 1997 and 1996, to or for the Chief Executive
Officer and for the other persons that served as executive officers of the
Company during Fiscal 1998 whose salaries exceeded $100,000 (collectively, the
"Named Executives"):
14
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Awards
--------------------------------------------------------------------
Securities
Name and Principal Fiscal Other Annual Underlying
Position Year Salary Bonus(1) Compensation(2) Options
------------------ ---- ------ -------- --------------- -------
Neil Cole, 1998 $395,833 $308,909 $5,000 400,000
Chairman, President and 1997 346,000 6,800 2,500 10,000
Chief Executive Officer 1996 300,000 66,500 410,000
Lawrence O'Shaughnessy, 1998 291,667 92,672 5,000 100,000
Executive Vice President 1997 246,000 2,000 2,500 10,000
and Chief Operating 1996 221,500 19,966 210,000
Officer
Gary Klein, 1998 110,000 -0- -0-
Vice President of Finance 1997 102,000 -0- 60,000
1996 100,000 -0- 18,000
- ----------
(1) Represents bonuses accrued under employment agreements.
(2) Represents amounts earned as director's fees.
The following table provides information with respect to individual stock
options granted during Fiscal 1998 to each of the Named Executives:
Option Grants in Fiscal 1998 Year
Individual Grants
----------------------------------------------
Shares % of Total Potential Realizable Value
Underlying Options Granted Exercise of Assumed Annual Rates
Options To Employees in Price Expiration At Stock Price Appreciation
Name Granted(#)* Fiscal Year (per share) Date or Option Term
---- ----------- ----------- ----------- ---------- ---------------------------
Neil Cole 400,000 39.9% $ 5.00 1/15/03 $552,563 $1,221,020
Lawrence 100,000 10.0 5.50 9/4/02 151,955 335,781
O'Shaughnessy
Gary Klein -- -- -- -- -- --
- ----------
* Stock options granted under the Company's 1997 plan; each option became
exercisable on its date of grant and expires five years from that date. The
exercisability of certain options granted to Messrs.
15
Cole and O'Shaughnessy is restricted upon the occurrence of certain events
related to termination of employment or death of the optionee. In addition,
certain options granted to Mr. Cole are subject to termination prior to
their expiration upon termination of employment for cause.
The following table sets forth information as of January 31, 1998 with
respect to exercised and unexercised stock options held by the Named Executives.
No options were exercised by any of the Named Executives during Fiscal 1998.
Aggregated Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at January 31, 1998 at January 31, 1998*
--------------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Neil Cole 1,430,000 -0- 3,454,750 $ -0-
Lawrence 363,300 -0- 973,769 -0-
O'Shaughnessy
Gary Klein 113,000 -0- 335,213 -0-
- ----------
* An option is "in-the-money" if the year-end market value of the Company's
Common Stock exceeds the exercise price of such option. As of January 31, 1998,
the closing price per share of the Company's Common Stock as reported by NASDAQ
was $4.9375.
Employment Contracts and Termination and Change-in-Control Arrangements
The Company has entered into an employment agreement with Neil Cole for a
term expiring on February 28, 2000 at an annual base salary of $400,000 for the
12 months ended February 28, 1998, $450,000 for the 12 months ending February
28, 1999 and $500,000 for the 12 months ending February 28, 2000, subject to
annual increases at the discretion of the Company's Board of Directors. Pursuant
to the amended employment agreement, Mr. Cole serves as President and Chief
Executive Officer of the Company devoting a majority of his business time to the
Company and the remainder of his business time to other business activities,
including those of NRC which is expected to be merged with and into the Company.
Under the agreement, Mr. Cole (i) is entitled to receive a portion of an annual
bonus pool equal to 5% of the Company's annual pre-tax profits, if any, as
determined by the Company's Board of Directors; and (ii) is entitled to
customary benefits, including participation in management incentive and benefit
plans, reimbursement for automobile expenses, reasonable travel and
entertainment expenses and a life insurance policy in the amount of $1,000,000.
Mr. Cole is also entitled to receive any additional bonuses as the Board of
Directors may determine. If Mr. Cole terminates his employment with the Company
for "good reason" (as defined in the amended agreement) or the Company
terminates Mr. Cole's employment without "cause" (as defined in the amended
agreement), including by reason of a "change-in-control" of the Company (as
defined in the employment agreement), the Company is obligated to pay Mr. Cole
his full salary (at the annual base salary rate then in effect) through the date
of termination plus full base salary for one year or the balance of the term of
the agreement, whichever is greater.
The Company has entered into an amended employment agreement with Mr.
O'Shaughnessy for a term expiring on March 31, 2000 at an annual base salary of
$300,000 for the 12 months ended March 31, 1998 and $350,000 thereafter, subject
to annual increases at the discretion of the Company's Board of Directors.
Pursuant to the agreement, Mr. O'Shaughnessy serves as Executive Vice-President
of the Company,
16
devoting a majority of his business time to the Company and the remainder of his
business time to other business activities. Under the amended agreement, Mr.
O'Shaughnessy (i) is entitled to receive an annual bonus equal to 1.5% of the
Company's annual pre-tax profits, if any; and (ii) is entitled to customary
benefits, including participation in management incentive and benefit plans,
reimbursement for automobile expenses, reasonable travel and entertainment
expenses and a life insurance policy in an amount equal to his annual base
salary.
The Company has entered into an employment agreement, effective March 1,
1998 with David Golden which provides for his employment as Senior Vice
President-Chief Financial Officer at an annual salary of $225,000 for the twelve
months ending March 1, 1999 and $250,000 for the twelve months ending March 1,
2000. Under the agreement, Mr. Golden is entitled to receive an annual bonus
equal to 0.5% of the Company's annual pre-tax profits, if any, and is entitled
to customary benefits including participation in management incentive and
benefit plans, and reimbursement for automobile expenses, and reasonable travel
and entertainment expenses. In addition, Mr. Golden was granted options to
purchase an aggregate of 125,000 shares of the Company's Common Stock at $5.00,
which options vested with respect to one-fifth of the aggregate number on the
date of grant and thereafter will vest with respect to an additional two fifths
of the aggregate number on the first anniversary of the date of grant and an
additional one fifth of the aggregate number upon each anniversary of the date
of grant until March 1, 2001. If Mr. Golden terminates his employment with the
Company for "good reason" (as defined in the agreement) or the Company
terminates Mr. Golden's employment without "cause" (as defined in the agreement)
the Company is obligated to pay Mr. Golden (i) his full salary (at the annual
base salary rate then in effect) through the date of termination and the share
of his bonus for such year pro rated for that year through the date of
termination; (ii) any accrued vacation amounts through the date of termination
and (iii) a severance payment (based upon the annual base salary rate then in
effect) for the unexpired portion of the two year term, but in no event less
than six months, and all unvested options shall be accelerated and shall vest
upon the date of termination. In the event that Mr. Golden terminates his
employment with the Company by reason of a change of control of the Company, Mr.
Golden shall be entitled to receive the payments specified in items (i) and (ii)
in the preceding sentence and an amount equal to twelve months of Mr. Golden's
base salary (at the annual base salary rate in effect) and all unvested options
shall be accelerated and shall vest upon the date of termination.
The Company has entered into an employment agreement with Gary Klein which
provides for his employment as the Vice-President of Finance of the Company at
an annual salary of $110,000 for a two year period expiring November 15, 1998,
subject to automatic renewal for successive two year periods, unless earlier
terminated by reason of Mr. Klein's death or by the Company for "cause" (as
defined in the employment agreement). In addition, the Company provides Mr.
Klein with term life insurance in the amount of $110,000.
Compensation of Directors
Each director received cash compensation of $5,000 for serving on the
Company's Board of Directors during Fiscal 1998. Under the Company 1989 Stock
Option Plan (the "1989 Plan"), non-employee directors (other than non-employee
directors who are members of any Stock Option Committee that may be appointed by
the Company's Board of Directors to administer the 1989 Plan) are eligible to be
granted non-qualified stock options and limited stock appreciation rights. No
stock appreciation rights have been granted under the 1989 Plan. Under the
Company's 1997 Stock Option Plan (the "1997 Plan"), non-employee directors are
eligible to be granted non-qualified stock options.
The Company's Board of Directors or the Stock Option Committee of the 1989
Plan or the 1997 Plan, if one is appointed, had discretion to determine the
number of shares subject to each nonqualified option (subject to the number of
shares available for grant under the 1989 Plan or the 1997 Plan, as applicable),
the exercise price thereof (provided such price is not less than the par value
of the underlying shares of the Company's Common Stock), the term thereof (but
not in excess of 10 years from the date of grant, subject to earlier termination
in certain circumstances), and the manner in which the option becomes
exercisable (amounts,
17
intervals and other conditions). No non-qualified options were granted to
non-employee directors under the 1989 Plan and 1997 Plan during Fiscal 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 21, 1998,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Named
Executives; (iii) each of the Company's directors; and (iv) all executive
officers and directors as a group:
Amount and Nature Percentage
Name and Address of of Beneficial of Beneficial
Beneficial Owner (1) Ownership (2) Ownership
- -------------------- --------------- ---------
Neil Cole 3,497,346(3)(4)(5) 21.3%
New Retail Concepts, Inc. 2,027,696(5) 13.5
2975 Westchester Avenue
Purchase, New York 10577
Redwood Shoe Corp. 825,000(6) 5.8
8F, 137 Hua Mei West Street
SEC.1, Taichung, Taiwan, R.O.C.
Mark Tucker 825,000(6) 5.8
Lawrence O'Shaughnessy 427,200(7) 2.9
David Golden 25,000(8) *
Gary Klein 121,025(9) *
Barry Emanuel 30,000(10) *
All executive officers and directors as 4,925,571(3)(4)(5) 29.1
a group (six persons) (6)(7)(8)(9)(10)
- ----------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has an address at 2975
Westchester Avenue, Purchase, New York 10577.
(2) A person is deemed to have beneficial ownership of securities that can be
acquired by such person within 60 days of April 21, 1998 upon exercise of
warrants or options. Consequently, each beneficial owner's percentage
ownership is determined by assuming that warrants or options held by such
person (but not those held by any other person) and which are exercisable
within 60 days from April 21, 1998 have been exercised. Unless otherwise
noted, the Company believes that all persons referred to in the table have
sole voting and investment power with respect to all shares of Common Stock
reflected as beneficially owned by them.
18
(3) Includes 2,027,696 shares of Common Stock beneficially owned by NRC; Neil
Cole, the President and Chief Executive Officer of NRC, owns, beneficially
and of record, approximately 44% of NRC's common stock. In addition, as
President of NRC, Mr. Cole has or will have the right to vote the 2,027,696
shares of Common Stock beneficially owned by NRC. Mr. Cole disclaims
beneficial ownership of these shares.
(4) Includes 1,430,000 shares of Common Stock issuable upon exercise of
immediately exercisable options owned by Neil Cole. Also includes 10,000
shares held by a charitable foundation, of which Mr. Cole and his wife are
co-trustees. Mr. Cole disclaims beneficial ownership of the shares held by
such charitable foundation.
(5) Includes 800,000 shares of Common Stock issuable upon exercise of
immediately exercisable options and warrants issued to NRC.
(6) Represents 825,000 shares of Common Stock, which shares were issued
pursuant to an agreement between the Company and Redwood pertaining to the
settlement of certain indebtedness of the Company to Redwood. Mr. Tucker is
an affiliate of Redwood.
(7) Includes 363,300 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(8) Represents 25,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(9) Includes 113,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(10) Includes 25,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
Item 13. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
In March 1993, the Company entered into a Services Allocation Agreement
with NRC pursuant to which the Company provides NRC with certain services for
which NRC pays the Company an amount equal to the allocable portion of the
Company's expenses, including employees' salaries, associated with such
services. Pursuant to such agreement, NRC paid the Company $50,000 in Fiscal
1998.
As more fully disclosed in Item 1 of this Annual Report on Form 10-K, the
Company has executed a Merger Agreement on April 6, 1998 with NRC pursuant to
which NRC would be merged with and into the Company, and the related party
transaction mentioned above would be terminated. See Item 1 - "The Merger".
For Fiscal 1998, Redwood, as buying agent for the Company, initiated the
manufacture of approximately 60%, of the Company's total footwear purchases. At
April 29, 1998, the Company had placed approximately $23,000,000 of open
purchase commitments with Redwood.
19
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedule
See the accompanying Financial Statements and Financial Statement Schedule
filed herewith submitted as a separate section of this report - See F-1.
(b) Reports on Form 8-K
None
(c) Exhibits
See the accompanying Exhibit Index filed herewith in response to this
portion of Item 14 and submitted as a separate section of this report.
(d) Financial Statement Schedule
The response to this portion of Item 14 is submitted as a separate section
of this report. See F- 1.
20
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANDIE'S, INC.
By: /s/ NEIL COLE
--------------------
Neil Cole
Chief Executive Officer
Dated: May 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature and Name Capacity in Which Signed Date
- ------------------ ------------------------ ----
Chairman of the Board, President and May 1, 1998
/s/ NEIL COLE Chief Executive Officer
- ----------------------------
Neil Cole
Executive Vice President and Chief May 1, 1998
/s/ LAWRENCE O'SHAUGHNESSY Operating Officer and a Director
- ----------------------------
Lawrence O'Shaughnessy
May 1, 1998
/s/ BARRY EMANUEL Director
- ----------------------------
Barry Emanuel
May 1, 1998
/s/ MARK TUCKER Director
- ----------------------------
Mark Tucker
Senior Vice President and Chief May 1, 1998
/s/ DAVID GOLDEN Financial Officer
- ----------------------------
David Golden
Vice President of Finance May 1, 1998
/s/ GARY KLEIN [Principal Accounting Officer]
- ----------------------------
Gary Klein
21
Annual Report on Form 10-K
Item 8, 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Year Ended January 31, 1998
Candie's, Inc. and Subsidiaries
F-1
Candie's, Inc. and Subsidiaries
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors............................................ F-3
Consolidated Balance Sheets - January 31, 1998 and 1997................... F-4
Consolidated Statements of Income for the Years ended
January 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 1998, 1997 and 1996................... F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 1998, 1997 and 1996....................................... F-7
Notes to Consolidated Financial Statements................................ F-8
The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):
Schedule II Valuation and qualifying accounts ............................ S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
Report of Independent Auditors
The Stockholders of
Candie's, Inc.
We have audited the accompanying consolidated balance sheets of Candie's, Inc.
and subsidiaries as of January 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Candie's, Inc. and subsidiaries at January 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
White Plains, New York
April 16, 1998
F-3
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
January 31,
---------------------------
1998 1997
------------ ------------
Assets
Current assets:
Cash ............................................................ $ 367,068 $ 389,517
Accounts receivable, net of allowances of
$27,000 in 1998 and $34,000 in 1997 ........................... 2,804,503 1,328,814
Inventories ..................................................... 16,179,175 5,251,091
Due from factor ................................................. 831,332 --
Deferred income taxes ........................................... 801,400 1,300,000
Prepaid advertising and marketing ............................... 1,820,659 459,120
Other current assets ............................................ 603,523 310,661
------------ ------------
Total current assets .................................................... 23,407,660 9,039,203
------------ ------------
Property and equipment, at cost:
Furniture, fixtures and equipment ............................... 1,809,971 1,104,558
Less: Accumulated depreciation and amortization ..................... 958,716 727,413
------------ ------------
851,255 377,145
------------ ------------
Other assets:
Deferred income taxes ........................................... 1,442,500 --
Intangibles ..................................................... 4,860,469 5,189,481
Other ........................................................... 319,056 103,516
------------ ------------
Total other assets ...................................................... 6,622,025 5,292,997
------------ ------------
Total assets ............................................................ $ 30,880,940 $ 14,709,345
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ............................... $ 5,950,868 $ 3,788,524
Accounts payable-related party ...................................... 188,338 1,624,395
Due to factor ....................................................... -- 580,515
------------ ------------
Total current liabilities ............................................... 6,139,206 5,993,434
Long-term liabilities ................................................... 61,216 108,000
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value
--shares authorized 5,000,000;
none issued or outstanding
Common stock, $.001 par value
--shares authorized 30,000,000;
shares issued and outstanding:
12,425,014 in 1998 and
9,633,786 in 1997 ......................................... 12,425 9,634
Additional paid-in capital .......................................... 23,452,545 11,918,655
Retained earnings (deficit)* ............................................ 1,215,548 (3,320,378)
------------ ------------
Total stockholders' equity .............................................. 24,680,518 8,607,911
------------ ------------
Total liabilities and stockholders' equity .............................. $ 30,880,940 $ 14,709,345
============ ============
* Accumulated since February 28, 1993, deficit eliminated of $27,696,007
See accompanying notes to consolidated financial statements.
F-4
Candie's, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended January 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Net revenues ........................................ $ 92,976,416 $ 45,005,416 $ 37,914,127
Cost of goods sold .................................. 68,799,226 35,149,271 27,427,508
------------ ------------ ------------
Gross profit ........................................ 24,177,190 9,856,145 10,486,619
Selling, general and administrative expenses ........ 17,216,712 8,890,173 8,429,143
------------ ------------ ------------
Operating income .................................... 6,960,478 965,972 2,057,476
Other expenses:
Interest expense - net ...................... 1,129,552 755,657 727,210
Other - net ................................. 98,000 75,000 113,000
------------ ------------ ------------
1,227,552 830,657 840,210
------------ ------------ ------------
Income before income taxes .......................... 5,732,926 135,315 1,217,266
Provision (benefit) for income taxes ................ 1,197,000 (1,010,000) 163,310
------------ ------------ ------------
Net income .......................................... $ 4,535,926 $ 1,145,315 $ 1,053,956
============ ============ ============
Earnings per share:
Basic ............................... $ .40 $ .13 $ .12
============ ============ ============
Diluted ............................. $ .33 $ .11 $ .11
============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................... 11,375,374 9,142,598 8,725,888
============ ============ ============
Diluted ............................. 13,788,136 10,151,500 9,426,634
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1995 ........................ 8,709,465 $ 8,709 $ 9,902,837 $ (5,519,649) $ 4,391,897
Exercise of warrants ............................ 36,273 37 37,464 -- 37,501
Tax benefit from pre-quasi reorganization
carryforward losses ........................... -- -- 103,000 -- 103,000
Net income ...................................... -- -- -- 1,053,956 1,053,956
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1996 ........................ 8,745,738 8,746 10,043,301 (4,465,693) 5,586,354
Purchase and retirement of treasury shares ...... (179,900) (180) (310,638) -- (310,818)
Conversion of trade payables to common
stock, net of expenses ........................ 1,050,000 1,050 1,562,950 -- 1,564,000
Exercise of warrants ............................ 174,009 174 199,935 -- 200,109
Issuance of common stock to benefit plan ........ 22,200 22 49,929 -- 49,951
Shares reserved in settlement of
litigation and never issued ................... (178,261) (178) 178 -- --
Tax benefit from pre-quasi reorganization
carryforward losses ........................... -- -- 260,000 -- 260,000
Stock option compensation ....................... -- -- 113,000 -- 113,000
Net income ...................................... -- -- -- 1,145,315 1,145,315
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1997 ........................ 9,633,786 9,634 11,918,655 (3,320,378) 8,607,911
Exercise of stock options ....................... 647,889 648 1,482,246 -- 1,482,894
Exercise of warrants ............................ 2,152,561 2,152 8,028,005 -- 8,030,157
Retirement of escrow shares ..................... (20,000) (20) 20 -- --
Issuance of common stock to benefit plan ........ 10,778 11 55,901 -- 55,912
Tax benefit from pre-quasi
reorganization carryforward losses ........... -- -- 1,101,500 -- 1,101,500
Stock option compensation ....................... -- -- 36,000 -- 36,000
Tax benefit from exercise of stock options ...... -- -- 830,218 -- 830,218
Net income ...................................... -- -- -- 4,535,926 4,535,926
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 ........................ 12,425,014 $ 12,425 $ 23,452,545 $ 1,215,548 $ 24,680,518
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended January 31,
1998 1997 1996
------------ ------------ -------------
Cash flows (used in) provided by operating activities:
Net income ...................................................................... $ 4,535,926 $ 1,145,315 $ 1,053,956
Items in net income not affecting cash:
Depreciation and amortization ............................................. 604,210 458,740 423,868
Stock option compensation ................................................. 36,000 113,000 --
Deferred income taxes ..................................................... 993,000 (1,100,000) --
Changes in operating assets and liabilities:
Restricted cash ................................................... -- -- 100,000
Accounts receivable ............................................... (1,475,689) (100,002) (644,901)
Inventories ....................................................... (10,928,084) (1,251,145) (730,788)
Prepaid advertising and marketing ................................. (1,361,539) (234,872) (383,714)
Other assets ...................................................... (552,297) (496) 27,380
Accounts payable and accrued expenses ............................. 777,017 2,364,992 (1,323,196)
Due to/from factor ................................................ (1,411,847) (718,581) 137,061
Long-term liabilities ............................................. (46,784) (14,436) (114,359)
Accounts payable trade expected to be
refinanced with common stock .................................... -- -- 1,680,000
----------------------------------------------
Net cash (used in) provided by operating activities ............................. (8,830,087) 662,515 225,307
----------------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment ...................................... (705,413) (301,236) (57,812)
----------------------------------------------
Net cash used in investing activities ........................................... (705,413) (301,236) (57,812)
----------------------------------------------
Cash flows provided by (used in) financing activities:
Purchase and retirement of treasury stock ................................ -- (310,818) --
Proceeds from exercise of stock options and warrants ..................... 9,513,051 134,060 37,501
----------------------------------------------
Net cash provided by (used in) financing activities ............................. 9,513,051 (176,758) 37,501
----------------------------------------------
Net (decrease) increase in cash and cash equivalents ............................ (22,449) 184,521 204,996
Cash and cash equivalents, beginning of year ............................. 389,517 204,996 --
==============================================
Cash and cash equivalents, end of year ................................... $ 367,068 $ 389,517 $ 204,996
==============================================
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest ................................................................. $ 1,130,981 $ 755,657 $ 727,210
==============================================
Income taxes ............................................................. $ 89,000 $ 28,000 $ 59,000
==============================================
Supplemental disclosures of noncash investing and financing activities:
Common stock issued to a related party .................................. -- $ 1,680,000 --
==============================================
Tax benefit from pre-quasi reorganization
carryforward losses ................................................. $ 1,101,500 $ 260,000 $ 103,000
==============================================
Issuance of common stock to benefit plan ................................ $ 55,912 $ 49,951 --
==============================================
Tax benefit from exercise of stock options .............................. $ 830,218 -- --
==============================================
See accompanying notes to consolidated financial statements.
F-7
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1998
The Company
Candie's, Inc. and its subsidiaries (the "Company") are engaged primarily in the
design, marketing and importation of a variety of moderately-priced women's and
girls' casual and fashion footwear and handbags under the CANDIE'S(R) and
BONGO(R) trademarks for distribution to better department and specialty stores
worldwide. The Company also markets and distributes, under the CANDIE'S(R) and
BONGO(R) trademarks, children's footwear designed by it and also arranges for
the manufacture of women's and men's footwear products, for mass importation by
market and discount retailers, under one of the Company's trademarks or under a
private label brand for retailers.
1. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Candie's, Inc. and
its wholly owned subsidiaries, Bright Star Footwear, Inc. ("Bright Star"),
Ponca, Ltd. ("Ponca"), Yulong Co., Ltd. ("Yulong"), Candie's Galleria , Inc.
("Candie's Galleria") and the Company's 60% owned subsidiary Intercontinental
Trading Group, Inc. ("ITG"), (collectively, the "Company"). All significant
intercompany transactions and items have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
footnotes. Actual results may differ from those estimates and assumptions.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable-Factored
The Company has a factoring agreement with a financial institution whereby it
may assign certain receivables generally without recourse as to credit risk.
Inventories
Inventories, which consist entirely of finished goods, are stated at the lower
of cost or net realizable value. Cost is determined by the first-in, first-out
("FIFO") method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are
determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets.
F-8
Impairment of Long-Lived Assets
When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value,based
on discounted cash flow, is necessary.
Intangibles
The Candie's trademark is stated at cost in the amount of $5,276,722, net of
accumulated amortization of $980,572 and $697,350 at January 31, 1998 and 1997,
respectively, as determined by its fair value relative to other assets and
liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency. The
trademark is being amortized over twenty years.
Goodwill in the amount of $551,093, represents the excess amount paid over the
fair value of assets acquired related to the acquisition of Bright Star and is
being amortized over fifteen years. Accumulated amortization at January 31, 1998
and 1997 was approximately $282,000 and $245,000, respectively.
In connection with the acquisition of Bright Star in 1991, the Company entered
into noncompete agreements with Bright Star's former Chairman and President
whereby the Company paid $1,225,000 and issued $2,275,000 of notes to such
individuals. At February 23, 1993, in connection with the quasi reorganization,
the Company wrote down this asset by $1,718,000. The agreements are being
amortized over 15 years. Accumulated amortization related to these agreements
was $1,488,000 and $1,448,000 at January 31, 1998 and 1997, respectively.
Amortization expense amounted to $372,907, $363,581 and $359,328 in 1998, 1997
and 1996, respectively.
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to the
customers. The Company's sales are principally derived from its U.S. operations.
Export sales accounted for 23%, 30% and 22% of the Company's revenues for the
years ended January 31, 1998, 1997 and 1996, respectively.
Taxes on Income
The Company uses the liability method of accounting for income taxes under
Statement of Financial Accounting Standards ("SFAS ") No. 109 "Accounting for
Income Taxes".
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted since the exercise price of the option is the same as the market value
of the Company's common stock. As prescribed under SFAS No. 123, "Accounting for
Stock Based Compensation," the Company has disclosed in Note 4 the pro-forma
effects on net income and earnings per share of recording compensation expense
for the fair value of the options granted.
Derivative Financial Instruments
In 1995, the Company adopted SFAS No. 119. "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" which requires
various disclosures about financial instruments and related transactions. The
Company's utilization of derivative financial instruments is substantially
limited to the use of forward exchange contracts to hedge foreign currency
transactions. Unrealized gains and losses are deferred and included in the
measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 1998, 1997 and 1996 were immaterial.
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31, 1998
and 1997.
F-9
Foreign Currency
The Company enters into forward exchange contracts to hedge foreign currency
transactions and not to engage in currency speculation. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on the assets, liabilities or transactions being hedged. The
forward exchange contracts generally require the Company to exchange U.S.
dollars for foreign currencies. If the counterparties to the exchange contracts
do not fulfill their obligations to deliver the contracted currencies, the
Company could be at risk for any currency related fluctuations. The Company
limits exposure to foreign currency fluctuations in most of its purchase
commitments through provisions that require vendor payments in U.S. dollars. As
of January 31, 1998, there were no forward exchange contracts outstanding.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share" which replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods presented have been restated in accordance with
SFAS No. 128 requirements.
Advertising Campaign Costs
The company records national advertising campaign costs as an expense upon the
first showing of the related advertising and other advertising costs when
incurred. Advertising expenses for the years ended January 31, 1998, 1997 and
1996 amounted to $3,461,357, $664,000, and $533,390 respectively.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and
No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively, both of which are required to
be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130 will
require the Company to report in its financial statements all non-owner related
changes in equity for the periods being reported. SFAS No. 131 will require the
Company to disclose revenues, earnings and other financial information
pertaining to the business segments by which the Company is managed, as well as
what factors management used to determine these segments. The Company is
currently evaluating the effects SFAS No. 130 and No. 131 will have on its
financial statements and related disclosures.
2. Investment in Joint Venture
In September 1991, the Company entered into a joint venture agreement (the "
Carousel Agreement") with Carousel Group, Inc. ("Carousel") to exploit certain
technology relating to the production of footwear soles as well as other
opportunities that may arise utilizing polyurethane technology. Carousel's
rights under the Carousel Agreement were subsequently assigned to Urethane
Technologies, Inc. ("Urethane"). The Company invested $1,000,000 as its capital
contribution for a 50% interest to fund equipment acquisition and working
capital requirements, while Carousel contributed its technical knowledge and
capabilities relating to polyurethane products manufacturing processes. The
investment had been accounted for under the equity method of accounting. The
investment was fully reserved prior to Fiscal 1996 since the Company's recovery
of its investment, if any, was indeterminable. The Company sold its share in the
joint venture to Urethane during Fiscal 1997 and recorded a gain of $16,000.
F-10
3. Factoring Agreement
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement to sell receivables generally without recourse. The agreement which
under its original terms was to expire on November 30, 1998 (as amended; See
Note 12), provides the Company with the ability to borrow funds from the factor,
limited to 85% of eligible accounts receivable and 50% of eligible finished
goods inventory (to a maximum of $15 million in inventory) in which the factor
has a security interest. The agreement 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 reserves an amount equal to 43% of the full amount of
each letter of credit to be opened against the Company's available borrowings.
The total credit facility is limited to the lesser of (i) available borrowings
as determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings
bear interest at the rate of three quarters of one percent (3/4%) over the
existing prime rate (8 1/2% at January 31, 1998) established by the CoreStates
Bank N.A. Factoring commissions on accounts receivable assigned to the factor
are at a rate of .60%. The Company's assets are pledged as collateral. The
unused portion of the credit lines at April 16, 1998 was approximately
$11,500,000. See Note 12.
At January 31, 1998 and 1997, the Company had $680,000 and $648,000,
respectively, of outstanding letters of credit, and approximately $1,820,000 and
$1,852,000, respectively, of available letters of credit.
Due from (to) factor is comprised as follows:
January 31,
-----------------------------
1998 1997
-----------------------------
Accounts receivable assigned .............. $17,415,403 $ 8,179,473
Outstanding advances ...................... 16,584,071 8,759,988
-----------------------------
Due from (to) factor ...................... $ 831,332 $ (580,515)
=============================
Concentration of credit risk is limited due to the large number of customers to
which the Company sells its products and the use of a factor to assign invoices
for sales to its customers. See Note 12. The Company's five largest customers
each accounted for between approximately 5.7% and 8.8% of the Company's net
revenues in 1998 and between 7.1% and 8.6% in 1997.
4. Stockholders' Equity
Warrants
The following schedule represents warrants outstanding at January 31, 1998, 1997
and 1996:
Underwriter's Class (A) Class (B) Class (C) NRC Other
Warrants(1) Warrants(2) Warrants(3) Warrants(3) Warrants(5) Warrants(6)
-------------------------------------------------------------------------------
Warrants outstanding at January 31, 1995 ....... 1,023,821 54,397 1,475,000 1,475,000 -- 75,000
Warrants issued ................................. -- -- -- -- 700,000 --
Warrants exercised (1) .......................... (32,609) -- -- -- -- --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1996 ....... 991,212 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (174,009) -- -- -- --
Adjustment of underwriter's warrants (4) ....... 40,329 -- -- -- -- --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1997 ....... 857,532 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (650,461) -- (1,431,100) (21,000) -- (50,000)
Warrants expired or cancelled ................... -- (54,397) (43,900) -- -- (25,000)
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1998 (7) .... 207,071 -- -- 1,454,000 700,000 --
==============================================================================
(1) Underwriter's warrants consist of 231,325 units at an exercise price of
$3.19 per unit entitling the holder to one share of common stock, one Class
B warrant and one Class C warrant. The shares reserved represent the number
of shares issuable upon the exercise of the underwriter warrants and the
attached Class B and C warrants. During the year ended January 31, 1998,
162,301 units (representing a total of 486,904 shares of common stock) were
exercised aggregating $1,975,510. In connection with the October 1994
private placement, the Company issued additional warrants to purchase
370,175 shares at an exercise price of $1.15 per share, of which 163,557,
174,009 and 32,609 were exercised during the years ended January 31, 1998,
1997 and 1996 respectively.
F-11
(2) From July 1, through December 31, 1990, the Company made an IPO warrant
exercise solicitation whereby holders of 54,397 of the Company's IPO
warrants who exercised their IPO warrants received new warrants (the "Class
A Warrants"). The Class A warrants expired during July 1997.
(3) In connection with a secondary offering, the Company issued 1,475,000
shares of common stock, 1,475,000 class B redeemable warrants and 1,475,000
class C redeemable warrants to each registered holder. Each Class B warrant
entitled the holder thereof to purchase one share of common stock at a
price of $4.00 and each Class C warrant entitles the holder thereof to
purchase one share of common stock at a price of $5.00. These warrants
expired on February 23, 1998. The Company redeemed 1,431,000 Class B
warrants and upon their exercise realized $5,686,557 net of expenses during
the fiscal year ended January 31, 1998.The remaining 43,900 warrants were
not exercised and were canceled. During the year ended January 31, 1998,
21,000 Class C Warrants were exercised aggregating $105,000.
(4) Pursuant to the warrant agreement, as a result of the issuance of
additional shares and their dilutive effect, the Company's underwriters are
entitled to exercise additional units. The exercise prices of the existing
underwriter warrants have been adjusted.
(5) On February 1, 1995, in consideration of loans extended to the Company, NRC
was granted warrants to acquire up to 700,000 shares of Company common
stock at an exercise price of $1.24 per share. The warrants expire five
years from their date of grant.
(6) The number of shares of stock purchasable upon the exercise of the warrant
is 75,000 of which 50,000 shares were vested and exercisable to date. The
exercise price was $1.50. The vested warrants were exercised during the
year ended January 31, 1998 and the unvested portion expired on November
28, 1997.
(7) See Note 12.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Effects of applying SFAS 123 for providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years (e.g. the first year reflects expense for
only one year's vesting, while the second year reflects expense for two years'
vesting).
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
January 31,
------------------------------------------
1998 1997 1996
------------------------------------------
Expected Volatility............... .759-.812 .770-.904 .525-.875
Expected Dividend Yield........... 0% 0% 0%
Expected Life (Term).............. 1-3 years 2-5 years 2-3 years
Risk-Free Interest Rate........... 5.25-6.61% 5.70%-6.25% 5.30%-6.85%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-12
For purposes of pro forma disclosures, the estimated fair value of the option is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
January 31,
--------------------------------------
1998 1997 1996
--------------------------------------
Pro forma net income ............... $3,601,763 $ 922,804 $ 698,780
Pro forma earnings per share:
Basic ......................... $ .32 $ .10 $ .08
Diluted ....................... $ .29 $ .10 $ .08
The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 1998, 1997 and 1996 was $2.20, $.64 and $.37,
respectively.
In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminates on August 1, 1999.
Under the 1989 Plan, ISO's are to be granted at not less than the market price
of the Company's common stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") may be granted at prices determined by the Board of Directors.
Under the 1989 Plan 126,800, 149,300 and 179,300 of ISO's as of January 31,
1998, 1997 and 1996, respectively, were outstanding.
On September 4, 1997, the Company's shareholders approved the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of
common stock options to purchase up to 3,500,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.
Under the 1997 Plan, as of January 31, 1998, ISO's covering 165,000 shares of
common stock and NQSO's covering 462,000 shares of common stock, were
outstanding.
Additionally, at January 31, 1998, 1997 and 1996, NQSO's covering 3,298,500,
4,066,311 and 2,866,311 shares of common stock, respectively, were outstanding,
which are not part of either the 1989 or 1997 Plans.
The options granted under the 1989 and 1997 Plans expire between five and ten
years from the date of grant or at the termination of either Plan, whichever
comes first.
On January 15, 1998, the Company granted 400,000 NQSO's at an exercise price of
$5.00 per share, to its Chief Executive Officer and simultaneously cancelled
400,000 NQSO's with an exercise price of $5.00 that were to expire February 23,
1998. On March 15, 1995, the Company granted 400,000 NQSO's at an exercise price
of $1.16 per share, to its Chief Executive Officer, in connection with the
renewal of an employment agreement.
On September 4, 1997, the Company granted its Executive Vice President, Chief
Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and
simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were
to expire April 15, 1998. On April 1, 1995, the Company granted 200,000 NQSO's
at an exercise price of $1.16 per share, to its Executive Vice President, Chief
Operating Officer, in connection with an employment agreement.
A summary of the Company's stock option activity, and related information for
the years ended 1998, 1997 and 1996 follows:
Weighted-Average
Shares Exercise Price
--------------------------
Outstanding January 31, 1995 ................. 1,427,667 $3.34
Granted ...................................... 1,710,000 $1.36
Canceled ..................................... (92,056) $2.69
---------
Outstanding January 31, 1996 ................. 3,045,611 $2.25
Granted ...................................... 1,250,000 $2.17
Canceled ..................................... (80,000) $2.63
---------
Outstanding January 31, 1997 ................. 4,215,611 $2.23
Granted ...................................... 1,002,500 $5.48
Canceled ..................................... (517,922) $4.55
Exercised .................................... (647,889) $2.33
---------
Outstanding January 31, 1998 ................. 4,052,300 $2.72
---------
F-13
At January 31, 1998, 1997 and 1996, exercisable stock options totaled 3,456,967,
3,702,611 and 2,782,611 and had weighted average exercise prices of $2.43, $2.25
and $2.30, respectively.
Options outstanding and exercisable at January 31, 1998 were as follows:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------- ---------------------------
$1.15-1.50................. 1,188,000 2.0 $1.28 1,188,000 $1.28
$1.51-2.50................. 1,535,000 3.3 $2.04 1,260,000 $2.04
$2.51-3.50................. 316,800 2.0 $2.63 316,800 $2.63
$3.51-5.00................. 605,500 4.7 $4.78 531,500 $4.82
$5.01-12.00................ 407,000 4.5 $6.51 160,667 $5.66
- --------------------------------------------------------------------------------- ------------------------
4,052,300 3.2 $2.72 3,456,967 $2.43
================================================================================= =========================
At January 31, 1998, common shares reserved for issuance on exercise of stock
options and warrants consisted of:
Stock Options ........................................... 4,052,300
Underwriters' Warrants .................................. 207,071
Class C Warrants ........................................ 1,454,000
NRC Warrants ............................................ 700,000
--------
6,413,371
========
5. Earnings Per Share
The following is a reconciliation of the numerator and denominators of the basic
and diluted EPS computations and other related disclosures required by SFAS No.
128:
January 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Numerator:
Numerator for basic and diluted earnings per share $ 4,535,926 $ 1,145,315 $ 1,053,956
=======================================
Denominator:
Denominator for basic earnings per share 11,375,374 9,142,598 8,725,888
Effect of dilutive securities 2,412,762 1,008,902 700,746
---------------------------------------
Denominator for diluted earnings per share 13,788,136 10,151,500 9,426,634
=======================================
Basic earnings per share $ .40 $ .13 $ .12
=======================================
Diluted earnings per share $ .33 $ .11 $ .11
=======================================
Outstanding options and warrants to purchase 231,400, 5,080,300, and 4,712,000
shares of common stock for 1998, 1997 and 1996, respectively, at exercise prices
exceeding the average market price of the common stock were not included in the
computation of diluted earnings per share as the effect would have been
anti-dilutive.
F-14
The Company has granted 75,000 stock options to a related party, which vest
based upon the achievement of certain targeted criteria. These shares have not
been included in the computation of diluted earnings per share as the targeted
criteria has not been met and the exercise price exceeded the market price and,
therefore, the effect would have been antidilutive.
6. Commitments and Contingencies
The Company is party to certain litigation incurred in the normal course of
business. While any litigation has an element of uncertainty, the Company
believes that the final outcome of any of these matters will not have a material
adverse effect on the Company's financial position or future liquidity.
Effective June 17, 1997, the Company is operating under an exclusive amended
licensing agreement which enables the Company to sell footwear in North America
and certain foreign territories bearing the BONGO trademark. At January 31,
1998, the Company was obligated to pay minimum royalties of $3,780,000 through
January 2002.
7. Related Party Transactions
The Company has a Service Allocation Agreement (the "Agreement") with New Retail
Concepts, Inc. ("NRC"), a significant shareholder of the Company and whose
principal shareholder is the Company's President. Pursuant to the Agreement the
Company provides NRC with business services for which NRC is charged an
allocation of the Company's expenses, including employees' salaries associated
with such services. Pursuant to such Agreement, NRC paid the Company
approximately $50,000 during each of the years ended January 31, 1998, 1997, and
1996, respectively. This Agreement terminates upon consummation of the Merger
referred to in Note 12.
The Company also granted a total of 700,000 warrants to purchase shares of the
Company's Stock (contractually valued at $6,500), at an exercise price of $1.24
per share, to NRC for loans made to the Company during fiscal 1996. As
collateral for such loans, the Company granted to NRC a security interest in all
of the assets of the Company and its subsidiaries, subject to a first lien on
such assets in favor of the Company's factor, as defined. All loans made to the
Company were fully satisfied during fiscal 1996.
On April 3, 1996, the Company entered into an agreement with Redwood (a
principal buying agent of footwear products) to satisfy in full certain trade
payables (the "Payables") amounting to $1,680,000. Under the terms of the Vendor
Agreement, the Company has; (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50,000. The Company purchased
approximately $48 million, $24 million, and $12 million in 1998, 1997, and 1996,
respectively, of footwear products through Redwood. At January 31, 1998, the
Company had approximately $21 million of open purchase commitments with Redwood.
8. Leases
Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 1998 are as follows:
1999................................... $ 572,000
2000................................... 575,000
2001................................... 322,000
2002................................... 266,000
2003................................... 247,000
Thereafter............................. 452,000
----------
Totals................................. $2,434,000
==========
Rent expense was approximately $337,000, $276,000 and $236,000 for the years
ended January 31, 1998, 1997 and 1996, respectively.
F-15
9. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $80,000 and $62,000 to the Savings Plan for the years ended
January 31, 1998 and 1997, respectively.
The Company has certain incentive compensation arrangements with each of its
Chief Executive Officer and its Chief Operating Officer pursuant to their
employment agreements. The incentive compensation aggregates 6.5% of pre-tax
earnings, as defined.
Included in accounts payable and accrued expenses are trade payables of
$3,097,815 in 1998 and $3,049,067 in 1997, accrued chargebacks of $1,282,000 in
1998 and $350,000 in 1997, and $372,000 of accrued bonuses and $728,000 of
accrued royalties in 1998.
10. Income Taxes
At January 31, 1998, the Company has net operating losses of approximately
$5,500,000 for income tax purposes, which expire in the years 2008 through 2010.
Due to the issuance of common stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275,000 per year. Approximately $4,600,000 of
the operating loss carryforwards are subject to this restriction and,
accordingly, no accounting recognition has been given to approximately $1.8
million of such losses since present restrictions preclude their utilization.
After the date of the pre quasi reorganization the tax benefits of net operating
loss carryforwards incurred prior to the reorganization, have been treated for
financial statement purposes as direct additions to additional paid-in capital.
For the years ended January 31, 1998 and 1997, the Company utilized $149,000 and
$158,000, respectively, of pre-quasi reorganization net operating loss
carryforwards. The related tax benefits of $56,500 and $60,000, at January 31,
1998 and 1997 respectively, have been recognized as increases to additional
paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company
reduced its valuation allowance for deferred tax assets by $2,392,000 and
$1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000
and benefiting the income tax provision by $1,347,000 and $1,100,000,
respectively. The Company believes it is more than likely than not that the
operations will generate sufficient taxable income to realize such assets.
The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of income consists of the following:
January 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Current:
Federal ....................... $ 103,000 $ -- $ 33,000
State ......................... 101,000 30,000 27,310
--------------------------------------------
Total current ................. 204,000 30,000 60,310
--------------------------------------------
Deferred:
Federal ....................... 738,000 (876,000) --
State ......................... 255,000 (164,000) 103,000
--------------------------------------------
Total deferred ................ 993,000 (1,040,000) 103,000
--------------------------------------------
Total provision (benefit) ..... $ 1,197,000 $(1,010,000) $ 163,310
============================================
F-16
The following summary reconciles income tax provision at the Federal statutory
rate with the actual provision (benefit):
January 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Income taxes at statutory rate ..................... $ 1,949,000 $ 46,000 $ 412,000
Non-deductible amortization ........................ 122,000 97,000 --
Utilization of net operating losses ................ -- (60,000) (300,000)
Change in valuation allowance of deferred tax assets (1,347,000) (1,100,000) --
Alternative minimum taxes .......................... -- -- 33,000
State provision, net of federal income tax benefit . 235,000 20,000 18,310
Adjustment for estimate of prior year taxes ........ 216,000
Other .............................................. 22,000 (13,000) --
-----------------------------------------
Total income tax provision (benefit) ............... $ 1,197,000 $(1,010,000) $ 163,310
=========================================
The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Accrued bonus....................................... $ 169,200 $ -- $ --
Compensation expense................................ 56,600 42,900 --
Alternative minimum taxes........................... 102,500 -- --
Inventory valuation................................. 411,900 118,000 226,000
Net operating loss carryforwards.................... 1,409,000 3,437,000 3,100,000
Other-net........................................... 94,700 94,100 149,000
-----------------------------------------
Total net deferred tax assets....................... 2,243,900 3,692,000 3,475,000
Valuation allowance................................. -- (2,392,000) (3,475,000)
-----------------------------------------
Total deferred tax assets........................... $ 2,243,900 $ 1,300,000 $ --
=========================================
11. Quarterly Financial Data (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------
Fiscal 1998:
Net revenues $16,861,264 $29,725,989 $23,780,001 $22,609,162
Gross profit 5,087,136 6,638,038 6,107,371 6,344,645
Operating income 1,671,374 2,373,451 1,618,747 1,296,965
Net income 823,338 2,194,940(b) 808,504 709,144(a)
Diluted earnings per share .06 .17 .06 .05
Weighted average number of common shares
Outstanding - diluted 12,730,331 13,150,181 14,453,665 14,690,992
(a) Includes tax benefit of $447,000 resulting from a change in the
valuation allowance for net deferred tax assets.
(b) Includes tax benefit of $900,000 resulting from a change in the
valuation allowance for net deferred tax assets.
The first three quarters of fiscal 1998 have been restated to comply with the
requirements of SFAS 128.
F-17
12. Subsequent Events
Subsequent to year-end through February 23, 1998, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of $7,157,025 from the exercise of such
warrants. The proceeds were used to repay short-term borrowings. Each Warrant
entitled the holder thereof to purchase one share of Common Stock at an exercise
price of $5.00 on that date, at which time the right to exercise such Warrant
terminated. In addition, subsequent to January 31, 1998, the Company received
proceeds of $1,041,867, in connection with the issuance of common stock relating
to the exercise of outstanding stock options and certain underwriter's warrants.
The Company is currently negotiating a new revolving credit and factoring
arrangement with prospective lenders. The Company anticipates that the
replacement credit facility will be in place shortly with terms and conditions
that will be more favorable than its current financial arrangement with its
factor. Accordingly, the Company has notified its factor of its intention to
terminate its factoring agreement and is currently operating on a month to month
basis. The Company has reserved its right to terminate the agreement at will, if
necessary, without any penalties or fee upon termination.
The Company and NRC have executed a Merger Agreement dated April 6, 1998, (the
"Merger Agreement") which provides that NRC will be merged with and into the
Company (the "Merger"), and the Company will be the surviving corporation. At
the effective date of the Merger (the "Effective Date"), each issued and
outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"),
and each issued and outstanding option to purchase shares of NRC Common Stock
immediately prior to the Effective Date will be converted, respectively, into
0.405 shares of common stock and options of the Company (the "Common Stock").
The completion of the Merger is subject to a number of conditions, including
among other things, the approval of the stockholders of both the Company and NRC
and the registration of the Common Stock to be issued to the holders of NRC
pursuant to the Merger under the Securities Act of 1933, as amended. No
assurance can be given that the Company and NRC will be able to successfully
obtain the requisite stockholder approval or that the Company will otherwise be
able to consummate the Merger.
At April 6, 1998 there were 5,693,639 shares of NRC Common Stock issued and
outstanding and options to purchase 1,635,000 shares of NRC Common Stock. NRC
currently owns 1,227,696 shares of Common Stock and has options and warrants to
purchase an additional 800,000 shares of Common Stock of the Company, all of
which will be extinguished upon consummation of the Merger.
F-18
Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
(a)
Column A Column B Column C Column D Column E
- ----------------------------------------------------- -------------- ---------- ---------- ----------
Additions
----------
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ----------------------------------------------------- ------------ ---------- ---------- ----------
Year ended January 31, 1998:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 34,000 $182,636 $189,636 $ 27,000
======== ======== ======== ========
Year ended January 31, 1997:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 63,400 $ 68,355 $ 97,755 $ 34,000
======== ======== ======== ========
Year ended January 31, 1996:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 45,000 $ 78,498 $ 60,098 $ 63,400
======== ======== ======== ========
(a) Uncollectible receivables charged against the allowance provided.
S-1
Index to Exhibits
Exhibit
Numbers Description
- ------ ---------
2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.
3.1 Certificate of Incorporation, as amended through October 1994 (1)(3)
3.2 Amendment to Certificate of Incorporation filed November 1994 (2)
3.3 By-Laws (1)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)
10.2 1989 Stock Option Plan of the Company (1)
10.3 1997 Stock Option Plan of the Company (7)
10.4 Discount Factoring Agreement and Supplements between Congress Talcott
Corporation and the Company (4)
10.5 General Security Agreement between Congress Talcott Corporation and
Intercontinental Trading Group, Inc. (4)
10.6 Personal Guaranty and Waiver of Neil Cole in favor of Congress Talcott
Corporation (4)
10.7 Employment Agreement between Neil Cole and the Company (4)
10.8 Amendment to Employment Agreement between Neil Cole and the Company (6)
10.9 Services Allocation Agreement between the Company and New Retail
Concepts Inc. (4)
10.10 Indemnity Agreement of Barnet Feldstein (4)
10.11 Amended and Restated Affiliates Transaction Agreement between the
Company and New Retail Concepts Inc. dated January 30, 1995 (2)
10.12 Security Agreement among New Retail Concepts, Inc., the Company, Bright
Star Footwear, Inc. and Intercontinental Trading Group, Inc., dated
February 1, 1995 (2)
10.13 Guarantee of Neil Cole in favor of New Retail Concepts, Inc. dated
February 1, 1995 (2)
10.14 Lease with respect to the Company's executive offices (2)
10.15 Employment Agreement between Gary Klein and the Company (2)
10.16 Agreement dated May 16, 1994 between the Company and New Retail
Concepts, Inc. (2)
10.17 Agreement dated as of April 3, 1996 between the Company and Redwood
Shoe Corp. (5)
10.18 Amendment dated as of September 30, 1996 to agreement dated as of April
3, 1996 between the Company and Redwood Shoe Corp. (6)
10.19 Employment Agreement between Lawrence O' Shaughnessy and the Company.
(5)
10.20 Amendment to Employment Agreement between Lawrence O'Shaughnessy and
the Company. (6)
10.21 Bongo License Agreement
10.22 December 31, 1996 Amendments to the Discount Factoring Agreement
between Congress Talcott Corporation and the Company. (6)
10.23 December 31, 1996 Amendment to the Guarantee of Neil Cole in Favor of
Congress Talcott Corporation. (6)
10.24 Employment Agreement between David Golden and the Company.
21 Subsidiaries of the Company.
23 Consent of Independent Auditors
27 Financial Data Schedules. (for SEC use only)
- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277-NY) and incorporated by reference herein.
22
(2) Filed with the Registrant's Annual Report on Form 10-KSB for the year ended
January 31, 1995, and incorporated by reference herein.
(3) Filed with the Registrant's Registration Statement on Form S-1 (File
33-53878) and incorporated by reference herein.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1994, and incorporated by reference herein.
(5) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1996, and incorporated by reference herein.
(6) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1997, and incorporated by reference herein.
(7) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1997, and incorporated by reference herein.
23