U.S. Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended April 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ________ to ________
Commission file number 0-10593
CANDIE'S, INC.
(Exact name of 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, NY 10577
(Address of principal executive offices) (Zip Code)
(914) 694-8600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.001 Par Value -- 17,897,166 shares as of September 7, 1999
<PAGE>
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - April 30, 1999 and January 31, 1999............ 3
Condensed Consolidated Statements of Operations - Three Months
Ended April 30, 1999 and 1998.......................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended
April 30, 1999......................................................................... 5
Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30,
1999 and 1998.......................................................................... 6
Notes to Condensed Consolidated Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ....................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14
Part II. Other Information
Item 1. Legal Proceedings.................................................................. 15
Item 2. Changes in Securities.............................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................................... 15
Signatures ............................................................................... 16
Index to Exhibits........................................................................... 17
</TABLE>
2
<PAGE>
Part I. Financial Information
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
--------- ----------
(Unaudited)
(000's omitted, except par value)
<S> <C> <C>
Assets
Current Assets
Cash ....................................................... $ 741 $ 598
Accounts receivable, net ................................... 3,785 2,774
Due from affiliate ......................................... 861 796
Due from factors and trade receivables ..................... 12,882 15,138
Inventories ................................................ 17,619 19,031
Refundable and prepaid income taxes ........................ 2,536 2,623
Deferred income taxes ...................................... 2,598 2,598
Prepaid advertising and other .............................. 2,253 1,182
Other current assets ....................................... 272 476
-------- --------
Total Current Assets ............................................. 43,547 45,216
Property and equipment, at cost:
Furniture, fixtures and equipment .......................... 4,483 3,860
Less: Accumulated depreciation and amortization ............ 1,453 1,258
-------- --------
3,030 2,602
Other assets:
Intangibles, net ........................................... 25,680 26,179
Deferred income taxes ...................................... 433 --
Investment and equity in joint venture - net ............... -- 51
Other ...................................................... 516 552
-------- --------
26,629 26,782
-------- --------
Total Assets ..................................................... $ 73,206 $ 74,600
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks ............................ $ 13,252 $ 16,874
Accounts payable and accrued expenses ...................... 4,501 4,416
Accounts payable - Redwood Shoe ............................ 4,252 943
Losses in excess of joint venture investment ............... 65 --
Current portion of long-term liabilities
and capital lease obligation ............................ 97 97
-------- --------
Total Current Liabilities ........................................ 22,167 22,330
Long-term liabilities and deferred taxes ......................... 194 421
Stockholders' Equity
Preferred stock, $.01 par value
-- authorized 5,000 shares; none issued and outstanding
Common stock, $.001 par value
-- authorized 30,000 shares; issued 19,129 shares at
April 30, 1999 and 18,525 shares issued
at January 31, 1999 .................................. 19 18
Additional paid-in capital ................................. 58,992 58,819
Retained earnings (deficit) ................................ (1,734) (556)
Treasury stock - at cost - 1,313 shares .................... (6,432) (6,432)
-------- --------
Total Stockholders' Equity ....................................... 50,845 51,849
-------- --------
Total Liabilities and Stockholders' Equity ....................... $ 73,206 $ 74,600
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
April 30, April 30,
1999 1998
-------- --------
(000's omitted, except per share data)
(Restated)
<S> <C> <C>
Net revenues ........................................ $ 21,254 $ 23,358
Cost of goods sold .................................. 15,846 17,109
-------- --------
Gross profit ........................................ 5,408 6,249
Licensing income .................................... 390 --
-------- --------
. ................................................... 5,798 6,249
Selling, general and administrative expenses ........ 7,146 5,338
-------- --------
Operating (loss) income ............................. (1,348) 911
Other expenses:
Interest expense - net ......................... 282 274
Equity loss in joint venture ................... 116 --
-------- --------
398 274
-------- --------
(Loss) income before income taxes ................... (1,746) 637
Provision (benefit) for income taxes ................ (568) 255
-------- --------
Net (loss) income ................................... $ (1,178) $ 382
======== ========
(Loss) earnings per common share:
Basic .................................... $ (.07) $ .03
======== ========
Diluted .................................. $ (.07) $ .02
======== ========
Weighted average number of common shares outstanding:
Basic .................................... 17,430 13,656
======== ========
Diluted .................................. 17,430 16,015
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Three Months Ended April 30, 1999
(000's omitted)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1999 .................................. $ 18,525 $ 18 $ 58,819 $ (556) $ (6,432) $ 51,849
Exercise of stock options ................................ 19 -- 31 -- -- 31
Issuance of common stock to retirement plan .............. 37 -- 129 -- -- 129
Additional contingent shares issued for the
Acquisition of Michael Caruso & Co., Inc. .......... 548 1 (1) -- -- 0
Tax benefit from exercise of stock options ............... -- -- 14 -- -- 14
Net loss ................................................. -- -- -- (1,178) -- (1,178)
-------- -------- -------- -------- -------- --------
Balance at April 30, 1999 .................................... $ 19,129 $ 19 $ 58,992 $ (1,734) $ (6,432) $ 50,845
======== ======== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
------------------
April 30, April 30,
1999 1998
------------------
(000's omitted)
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities ...... $ 4,397 $(8,435)
------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ................. (623) (190)
------------------
Net cash used in investing activities .................... (623) (190)
------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 31 8,277
Capital lease reduction ............................. (40) --
Revolving notes payable - bank ...................... (3,622) --
------------------
Net cash (used in) provided by financing activities ...... (3,631) 8,277
------------------
INCREASE (DECREASE) IN CASH .............................. 143 (348)
Cash at beginning of period .............................. 598 367
------------------
Cash at end of period .................................... $ 741 $ 19
==================
See notes to condensed consolidated financial statements.
6
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars are in thousands)
April 30, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended April 30, 1999
are not necessarily indicative of the results that may be expected for a full
fiscal year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended January 31, 1999.
NOTE B -- FINANCING AGREEMENTS
At April 30 and January 31, 1999, the Company had $280 and $1,174, respectively,
of outstanding letters of credit. The Company's letters of credit availability
are formula based which takes into account borrowings under the Facility, as
described below.
On May 27, 1998, the Company entered into a three year $35 million revolving
credit facility (the "Facility"). Under certain conditions, including the
addition of a second lender, the Facility may increase to a maximum of $50
million. On August 4, 1998, BankBoston, N.A. entered into a co-lending
arrangement and became a participant in the Facility with Bank of America
Commercial Corporation.
Prior to January 31, 1999, borrowings under the Facility, which totaled $16,874
at January 31, 1999, bore interest at 1.50% below the prime rate (7.75% at
January 31, 1999) and the Company also had the option to borrow at either LIBOR
plus 1.25% or the banker's acceptance rate plus 1%. These rates were fixed and
subject to an increase or decrease based on certain conditions beginning in
November 1998. Effective January 31, 1999 the Facility was amended and
borrowings under the Facility bear interest at .25% below the prime rate (7.75%
at January 31, 1999). The Company pays a commitment fee of 1/4% on the unused
portion of the Facility.
Borrowings under the Facility are formula based and available up to the maximum
amount of the Facility. The Facility also contains certain financial covenants
including, minimum tangible net worth, certain specified ratios and other
limitations, as defined therein.
The Company has granted the lenders a security interest in substantially all of
its assets.
The Company is in default of certain covenants of its Facility and the lenders
have indicated their desire to terminate the Facility arrangement. The lenders
have been extending the due date of the Facility by issuing periodic forbearance
agreements to the Company. The current forbearance agreement is through October
30, 1999. The Company received a commitment from a new institution to refinance
the Facility and expects to consummate the new financing shortly.
7
<PAGE>
NOTE C -- EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing net
(loss) income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
April 30,
----------------
1999 1998
----------------
(000's omitted)
Basic......................................................... 17,430 13,656
Effect of assumed conversions of employee stock options....... -- 2,359
----------------
Denominator for diluted earnings per share.................... 17,430 16,015
================
NOTE D -- SEGMENT INFORMATION
Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position.
The Company has one reportable segment that is engaged in the manufacture and
marketing of branded footwear, including casual shoes and boots to the retail
sector. Revenues of this segment are derived from the sale of branded footwear
products to external customers and the Company's retail division as well as
royalty income from the licensing of the Company's trademarks and brand names to
licensees. The business units comprising the branded footwear segment
manufacture or source, market and distribute products in a similar manner.
Branded footwear is distributed through wholesale channels and under licensing
and distributor arrangements.
The Company measures segment profits as earnings before income taxes. The
accounting policies used to determine profitability and total assets of the
branded footwear segment are the same as disclosed in the summary of significant
accounting policies (see Note 1, Summary of Significant Accounting Policies).
8
<PAGE>
NOTE E -- RESTATEMENT
During the course of the audit of the Company's financial statements for the
year ended January 31, 1999, and the re-audit of the financial statements for
the year ended January 31, 1998, the Company became aware of certain required
adjustments primarily in inventory and accounts receivable/due from factor
balances as of April 30, 1998. The financial statements for the quarter ended
April 30, 1998 have been restated to reflect these adjustments, as summarized
below:
Net income, as previously reported . $ 1,056
-------
Adjustments - Increase (Decrease):
Inventory valuation ........... 550
Revenues (gross profit effect) (21)
Receivable reserves ........... (1,678)
Other ......................... 30
Tax effect on these adjustments 445
-------
(674)
-------
Net income, as adjusted ............ $ 382
=======
Per share amounts:
Basic:
As previously reported ........ $ .08
Adjustments ................... (.05)
-------
As adjusted ................... $ .03
=======
Diluted:
As previously reported ........ $ .07
Adjustments ................... (.05)
-------
As adjusted ................... $ .02
=======
NOTE F -- COMMITMENTS AND CONTINGENCIES
Several lawsuits have recently been filed against the Company and certain of its
current and former officers and directors in the United States District Court
for the Southern District of New York. There can be no assurance that the
Company will successfully defend these lawsuits.
On May 17, 1999, a purported stockholder class action complaint was filed in the
United States District Court for the Southern District of New York, against the
Company and certain of its current and former officers and directors which
together with certain other complaints subsequently filed in the same court
alleging similar violations were consolidated in one lawsuit, Willow Creek
Capital Partners L.P., v. Candie's, Inc. A consolidated complaint was served on
the Company on or about August 24, 1999. The consolidated complaint includes
claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The
consolidated complaint is brought on behalf of all persons who acquired
securities of the Company between May 28, 1997 and May 12, 1999, and alleges
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for Fiscal 1998 and the
first three quarters of Fiscal 1999, which caused the Company's securities to
trade at artificially inflated prices. An unfavorable resolution of this action
could have a material adverse effect on the business, results of operations,
financial condition or cash flows of the Company.
9
<PAGE>
On August 4, 1999, the staff of the Securities and Exchange Commission advised
the Company that it had commenced a formal investigation into the Company's
actions in connection with certain accounting issues and transactions.
The Company is also 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 routine matters will not have a
material effect on the Company's financial position or future liquidity.
NOTE G -- SUBSEQUENT EVENT
In May 1999, the Company entered into a $3.5 million master lease agreement with
a financial organization. The agreement requires the Company to collateralize
property and equipment of $2.4 million, of which $1.4 million had been
collateralized as of May 1999, with the remaining agreement balance considered
to be an unsecured loan. The agreement's term is for a period of four years.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors, all of which are
difficult or impossible to predict and many of which are beyond the control of
the Company, 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 relating to 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 capital if required, the risk of litigation, the risks of uncertainty of
trademark protection, year 2000 compliance, the uncertainty of marketing and
licensing the trademarks acquired during Fiscal 1999 and other risks detailed
below and in the Company's Securities and Exchange Commission filings.
The words "believe", "expect", "anticipate", and "seek" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
Results of Operations
Revenues. Net revenues decreased by $2.1 million or 10% to $21.3 million in
the three months ended April 30, 1999, from $23.4 million in the comparable
restated period of the prior year. The decrease was primarily due to decreased
wholesale volume with department stores.
Gross Profit. Gross profit margins decreased to 25.4% in the three months
ended April 30, 1999 from 26.7% in the comparable period of the prior year. The
decrease was primarily attributable to lower wholesale revenue and higher
private label business at lower margins.
Operating Expenses. Selling and administrative expenses increased by $1.8
million or 33.9% to $7.1 million in the three months ended April 30, 1999 from
$5.3 million in the comparable period of the prior year. As a percentage of net
revenues, selling and administrative expenses increased 10.8% to 33.6% for the
three months ended April 30, 1999 from 22.8% for the comparable period of the
prior year. These increases reflect costs which are directly associated with
implementation of the Company's strategic plan to strengthen its management team
and infrastructure, the expansion outside of its core footwear products to
include, handbags, international distribution channels and the growth of
licensing as well as increased intangible amortization relating to the Company's
Fiscal 1999 acquisitions.
Interest Expense. Interest expense for the three months ended April 30,
1999 was $282,000, compared to $274,000 for the comparable period in the
previous year.
Net (loss) Income. As a result of the foregoing, the Company sustained a
net loss of $1.2 million in the three months ended April 30, 1999, compared to
net income of $382,000 in the corresponding 1998 period.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Results of Operations -Continued
(Loss) Earnings Per Share. The loss per share in the three months ended
April 30, 1999 was $(.07) on a basic and diluted basis, which reflects an
additional 3.8 million weighted average shares outstanding, compared to net
income of $.02 per diluted share in the comparable quarter of the prior year.
The increase in the weighted average shares outstanding for the three month
period ended April 30, 1999 is primarily the result of the shares issued in
connection with the Company's Fiscal 1999 acquisitions
Liquidity and Capital Resources
Working capital decreased approximately $1.5 million to $21.4 million at
April 30, 1999 from $22.9 million at January 31, 1999, primarily due to the net
loss for the period. At April 30, 1999, the current ratio was 2.0 to 1.
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 provided by operating activities totaled
$4.3 million for the three months ended April 30, 1999, compared to cash used of
$8.4 million for the three months ended April 30, 1998. This change primarily
reflects the change in the Company's agreements with its factor in fiscal 1999.
This resulted in the grossing up of advances from the factor and amounts
borrowed under the factoring and financing agreements compared to the prior
period when these amounts were netted.
Capital expenditures were $623,000 for the three months ended April 30,
1999, compared to $190,000 for the three months ended April 30, 1998.
The Company is obligated on or prior to October 31, 1999 to make a $500,000
capital contribution to Unzipped Apparel, LLC ("Unzipped"), the Company's joint
venture with Sweet Sportswear, LLC.
During the three month period ended April 30, 1998, substantially all of
the Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of approximately $7.16 million from the
exercise of such Warrants. The proceeds were used to repay short-term
borrowings. In addition, the Company received proceeds of approximately $1.12
million in connection with the issuance of Common Stock relating to the exercise
of outstanding stock options and certain underwriters' warrants.
On May 27, 1998, the Company entered into a three year $35 million
revolving credit facility (the "Facility"). On August 4, 1998, BankBoston, N.A.
entered into a co-lending arrangement and became a participant in the Facility
with Bank of America Commercial Corporation.
Effective January 31, 1999 the Facility was amended and borrowings under
the Facility bear interest at .25% below the prime rate (7.75% at April 30,
1999).
Borrowings under the Facility are formula based and available up to the
maximum amount of the Facility. The Facility also contains certain financial
covenants including, minimum tangible net worth, certain specified ratios and
other limitations, as defined therein. The Company has granted the lenders a
security interest in substantially all of its assets.
The Company is in default of certain covenants of its Facility and the
lenders have indicated their desire to terminate the Facility arrangement. The
lenders have been extending the due date of the Facility by issuing periodic
forbearance agreements to the Company. The current forbearance agreement is
through October 30, 1999. The Company received a commitment from a new
institution to refinance the
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Liquidity and Capital Resources - Continued
Facility and expects to consummate the new financing shortly.
In May 1999, the Company entered into a $3.5 million master lease agreement with
a financial organization. The agreement requires the Company to collateralize
property and equipment of $2.4 million, of which $1.4 million had been
collateralized as of May 1999, with the remaining agreement balance considered
to be an unsecured loan. The agreement's term is for a period of four years.
Cash requirements fluctuate from time to time due to seasonal requirements,
including the timing of receipt of merchandise and various other factors. 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 a new financing
agreement.
Year 2000
In preparation for the Year 2000, the Company has completed an inventory
and assessment of its information systems, including its computer software and
hardware. The Company determined over a year ago that its existing systems would
be adversely affected by the Year 2000 and that its operational needs would be
best served by upgrading its entire system. Accordingly, the Company is
currently in the process of implementing throughout all operating areas of the
Company, JBA's ERP Software Solution (the "JBA Solution"), which has been
certified "Year 2000 Compliant" by the ITAA (Information Technology Association
of America). The implementation has progressed to the testing phase.
The testing and implementation of the JBA Solution includes assessment of
all internal software that will integrate with the JBA Solution and an upgrade
of the IBM AS/400 operating system on which the JBA Solution will run. In
addition, the Local Area Network and networked PC's have been or will be
upgraded. The goal is to complete all testing and achieve full system
implementation during the fourth quarter of Fiscal 2000.
Since the implementation of the JBA Solution will not be complete prior to
December 31, 1999, the Company has contracted with Millennium Solutions 400 Ltd.
to license software and to implement a remedial system, MS4, that will permit
the Company to bring its current system into compliance. The MS4 system uses an
encapsulation process that will make the Company's existing system Year 2000
compliant. The algorithm that will be used by this system will ensure that the
Company's existing system is Year 2000 compliant and will work until the year
2027.
Additionally, the Company has inventoried and analyzed substantially all of
its embedded information systems throughout its operations, including,
telephones, voice mail, alarms and personal computers. The results of this
analysis did not indicate that embedded systems would not present a material
Year 2000 risk to the Company. The Company will continue to test selected
embedded systems and remediate and certify systems that exhibit Year 2000
issues. The Company intends to complete the testing and remediation of these
systems by the fourth quarter of Fiscal 2000.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Year 2000 - Continued
The Company's Year 2000 strategy addresses its relationships with critical
third parties, including suppliers, customers and service providers. The
Company's evaluation of these business partners includes written inquiry of such
third parties' Year 2000 readiness and evaluation of responses. The Company has
or intends to follow up with those third parties that indicate material problems
with continued operations, particularly as the Company's products are sourced
from third parties abroad into the Year 2000. The Company is working jointly
with customers, strategic vendors and business partners to identify and resolve
any Year 2000 issues that may impact the Company. The Company anticipates that
this evaluation will be on-going through the third quarter of Fiscal 2000. An
assessment of the capability of electronic data interface trading partners to
operate with respect to Year 2000 has been completed.
The Company expects its total costs to address the Year 2000 issue to be
approximately $1,000,000 in connection with the implementation of the JBA
Solution and $100,000 for the purchase of the MS4 remedial system. Approximately
$750,000 of these costs have been incurred through August 31, 1999, and the
Company expects to incur the balance of such costs to complete the compliance
plan in Fiscal 2000. The balance of such costs is expected to be funded through
operating cash flows. The Company's cost estimates do not include costs
associated with addressing and resolving issues as a result of the failure of
third parties to become Year 2000 compliant.
The Company does not expect the Year 2000 issue to pose significant
operational or financial problems for the Company. The Company bases this
expectation on the progress it has made in upgrading and remediating its
internal information systems and the assurances it has received so far from its
suppliers. Nevertheless, the Year 2000 issue could have a material impact on the
Company's operations and financial condition in the future in the event that the
Company or its key suppliers, such as off-shore manufacturers of shoes for the
Company or the shipping companies that carry those shoes to the Company, are
unable to resolve Year 2000 issues on a timely manner or if the Company becomes
the subject of litigation or other proceedings regarding any Year 2000-related
events. The amount of potential loss cannot be reasonably estimated at this
time.
A contingency plan in the event of a problem with the MS4 system is being
developed and will be updated and implemented as necessary to address risks
identified. In the event of a worst case scenario in which the JBA Solution is
not fully implemented and the MS4 does not fully remediate the system, the
Company will modify its existing systems so as to permit business operations to
continue pending the implementation of the JBA Solution. No contingency plans
are being developed for the availability of key public services and utilities in
the United States or abroad or to deal with a failure by any of the Company's
key suppliers. A failure to develop a contingency plan in the future could have
a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
14
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Several lawsuits have recently been filed against the Company and
certain of its current and former officers and directors in the United
States District Court for the Southern District of New York. There can
be no assurance that the Company will successfully defend these
lawsuits.
On May 17, 1999, a purported stockholder class action complaint was
filed in the United States District Court for the Southern District of
New York, against the Company and certain of its current and former
officers and directors which together with certain other complaints
subsequently filed in the same court alleging similar violations were
consolidated in one lawsuit, Willow Creek Capital Partners L.P., v.
Candie's, Inc. A consolidated complaint was served on the Company on
or about August 24, 1999. The consolidated complaint includes claims
under sections 11, 12 and 15 of the Securities Act of 1933 and
sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act
of 1934. The consolidated complaint is brought on behalf of all
persons who acquired securities of the Company between May 28, 1997
and May 12, 1999, and alleges that the plaintiffs were damaged by
reason of the Company's having issued materially false and misleading
financial statements for Fiscal 1998 and the first three quarters of
Fiscal 1999, which caused the Company's securities to trade at
artificially inflated prices. An unfavorable resolution of this action
could have a material adverse effect on the business, results of
operations, financial condition or cash flows of the Company.
On August 4, 1999, the staff of the Securities and Exchange Commission
advised the Company that it had commenced a formal investigation into
the actions of the Company and others in connection with, among other
things, certain accounting issues and transactions.
The Company is also 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 routine matters will not have a material effect on the Company's
financial position or future liquidity.
Item 2. Changes in Securities
On March 30, 1999, the Registrant issued 547,722 additional shares of
its common stock in connection with the Fiscal 1999 acquisition of all
the outstanding shares of Michael Caruso & Co., Inc., in a private
transaction exempt from registration by Section 4(2) of the Securities
Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 10.1 - None
B. Exhibit 27 - Financial Data Schedules
C. Reports on Form 8-K - None
15
<PAGE>
Signatures
Pursuant to the requirements 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.
----------------------------
(Registrant)
Date September 21, 1999 By: /s/ Neil Cole
----------------------------
Neil Cole
Chief Executive Officer
(on Behalf of the Registrant)
Date September 21, 1999 By: /s/ Frank Marcinowski
----------------------------
Frank Marcinowski
Vice President and
Chief Financial Officer
16
<PAGE>
Index to Exhibits
Exhibit
Numbers Description
- ------- -----------
10.1 None
27 Financial Data Schedules
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q AT APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 741
<SECURITIES> 0
<RECEIVABLES> 20,412
<ALLOWANCES> 3,745
<INVENTORY> 17,619
<CURRENT-ASSETS> 43,547
<PP&E> 4,483
<DEPRECIATION> 1,453
<TOTAL-ASSETS> 73,206
<CURRENT-LIABILITIES> 22,167
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 50,826
<TOTAL-LIABILITY-AND-EQUITY> 73,206
<SALES> 21,254
<TOTAL-REVENUES> 21,254
<CGS> 15,846
<TOTAL-COSTS> 15,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> (1,746)
<INCOME-TAX> (568)
<INCOME-CONTINUING> (1,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,178)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED ART 5. FDS RESTATED FOR QUARTER ENDED APRIL 30, 1998
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> APR-30-1998
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 15,831
<ALLOWANCES> 2,103
<INVENTORY> 10,266
<CURRENT-ASSETS> 26,912
<PP&E> 2,014
<DEPRECIATION> 1,056
<TOTAL-ASSETS> 36,230
<CURRENT-LIABILITIES> 3,759
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 32,397
<TOTAL-LIABILITY-AND-EQUITY> 36,230
<SALES> 23,358
<TOTAL-REVENUES> 23,358
<CGS> 17,109
<TOTAL-COSTS> 17,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> 637
<INCOME-TAX> 255
<INCOME-CONTINUING> 382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382
<EPS-BASIC> .03
<EPS-DILUTED> .02
</TABLE>