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 July 31, 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 30, 1999
<PAGE>
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
Page No.
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - July 31, 1999 and January 31, 1999......................... 3
Condensed Consolidated Statements of Operations - Three and Six Months
Ended July 31, 1999 and 1998....................................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended
July 31, 1999...................................................................................... 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended July 31,
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 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>
July 31, January 31,
1999 1999
---------- ----------
(Unaudited)
(000's omitted)
<S> <C> <C>
Assets
Current Assets
Cash ....................................................... $ 352 $ 598
Accounts receivable, net ................................... 4,757 2,774
Due from affiliate ......................................... 1,243 796
Due from factors and trade receivables ..................... 16,128 15,138
Inventories ................................................ 18,155 19,031
Refundable and prepaid income taxes ........................ 274 2,623
Deferred income taxes ...................................... 2,831 2,598
Prepaid advertising and other .............................. 2,150 1,182
Other current assets ....................................... 434 476
---------- ----------
Total Current Assets ............................................. 46,324 45,216
Property and equipment, at cost:
Furniture, fixtures and equipment .......................... 5,297 3,860
Less: Accumulated depreciation and amortization ............ 1,652 1,258
---------- ----------
3,645 2,602
Other assets:
Intangibles, net ........................................... 25,177 26,179
Deferred income taxes ...................................... 1,655 --
Investment and equity in joint venture - net ............... -- 51
Other ...................................................... 437 552
---------- ----------
27,269 26,782
---------- ----------
Total Assets ..................................................... $ 77,238 $ 74,600
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks ............................ $ 17,149 $ 16,874
Accounts payable and accrued expenses ...................... 5,562 4,416
Accounts payable - Redwood Shoe ............................ 2,991 943
Losses in excess of joint venture investment ............... 286 --
Current portion of long-term liabilities
and capital lease obligation ............................ 893 97
---------- ----------
Total Current Liabilities ........................................ 26,881 22,330
Long-term liabilities and deferred taxes ......................... 2,536 421
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 19,210 shares at
July 31, 1999 and 18,525 shares issued
at January 31, 1999 .................................. 19 18
Additional paid-in capital ................................. 59,059 58,819
Retained earnings (deficit) ................................ (4,825) (556)
Treasury stock - at cost - 1,313 shares ................... (6,432) (6,432)
---------- ----------
Total Stockholders' Equity ....................................... 47,821 51,849
---------- ----------
Total Liabilities and Stockholders' Equity ....................... $ 77,238 $ 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 Six Months Ended
July 31, July 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Restated) (Restated)
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net revenues ........................................ $ 33,054 $ 38,350 $ 54,308 $ 61,708
Cost of goods sold .................................. 26,794 28,603 42,640 45,712
-------- -------- -------- --------
Gross profit ........................................ 6,260 9,747 11,668 15,996
Licensing income .................................... 468 -- 858 --
-------- -------- -------- --------
6,728 9,747 12,526 15,996
Operating expenses:
Special charges ..................................... 1,166 -- 1,166 --
Selling, general and administrative expenses ........ 8,932 7,182 16,078 12,520
-------- -------- -------- --------
10,098 7,182 17,244 12,520
Operating (loss) income ............................. (3,370) 2,565 (4,718) 3,476
Other expenses:
Interest expense - net .............................. 368 223 650 497
Equity loss in joint venture ........................ 221 -- 337 --
-------- -------- -------- --------
589 223 987 497
-------- -------- -------- --------
(Loss) income before income taxes ................... (3,959) 2,342 (5,705) 2,979
(Benefit) provision for income taxes ............... (868) 913 (1,436) 1,168
-------- -------- -------- --------
Net (loss) income ................................... $ (3,091) $ 1,429 $ (4,269) $ 1,811
======== ======== ======== ========
(Loss) earnings per common share:
Basic ...................................... $ (.17) $ 0.10 $ (.24) $ 0.13
======== ======== ======== ========
Diluted .................................... $ (.17) $ 0.09 $ (.24) $ 0.11
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic ...................................... 17,891 14,174 17,664 13,920
======== ======== ======== ========
Diluted .................................... 17,891 16,363 17,664 16,191
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Six Months Ended July 31, 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>
Balances at January 31, 1999 ...................... 18,525 $ 18 $ 58,819 $ (556) $ (6,432) $ 51,849
-------- -------- -------- -------- -------- --------
Exercise of stock options ..................... 99 -- 98 -- -- 98
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)..................................... -- -- -- (4,269) -- (4,269)
-------- -------- -------- -------- -------- --------
Balances at July 31, 1999 ......................... 19,209 $ 19 $ 59,059 $ (4,825) $ (6,432) $ 47,821
======== ======== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 31, July 31,
1999 1998
-------- --------
(Restated)
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities ................... $ (2,295) $(30,037)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ................ (1,437) (349)
-------- --------
Net cash used in investing activities ................... (1,437) (349)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 98 8,287
Capital lease and unsecured loan ................... 3,471 --
Capital lease reduction ............................ (358) --
Bankers acceptance - net ........................... -- 4,876
Revolving notes payable - bank .................. 275 17,216
-------- --------
Net cash provided by financing activities ............... 3,486 30,379
-------- --------
DECREASE IN CASH ........................................ (246) (7)
Cash at beginning of period ............................. 598 367
-------- --------
Cash at end of period ................................... $ 352 $ 360
-------- --------
</TABLE>
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)
July 31, 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 six month period ended July 31, 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
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 July 31, 1999, with the remaining agreement balance
considered to be an unsecured loan. The agreement's term is for a period of four
years.
At July 31, 1999 and January 31, 1999, the Company had $270 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 will bear interest at .25% below the prime rate
(8.00% at July 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
7
<PAGE>
periodic forbearance agreements to the Company. The current forbearance
agreement is through October 30, 1999. The Company has received a commitment
letter from a new institution to refinance the Facility and expects to
consummate the new financing shortly.
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:
Three Months Six Months
Ended July 31, Ended July 31,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
(000's omitted)
Basic share ........................ 17,891 14,174 17,664 13,920
Effect of assumed conversion
of employee stock options ...... -- 2,189 -- 2,271
------ ------ ------ ------
Diluted share ...................... 17,891 16,363 17,664 16,191
====== ====== ====== ======
NOTE D SEGMENT INFORMATION
Effective February 1, 1999, 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.
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 valuation, accounts receivable/due from
factor balances as of July 31, 1998. The financial statements for the quarter
ended July 31, 1998 have been restated to reflect these adjustments, as
summarized below:
Three Months Ended Six Months Ended
July 31, 1998 July 31, 1998
Net income, as previously reported ........... $ 3,361 $ 4,416
------- -------
Adjustments - Increase (Decrease):
Inventory valuation ..................... -- 550
Revenues (gross profit effect) .......... (36) (57)
Receivable reserves ..................... (2,758) (4,436)
Other ................................... (375) (345)
Tax effect on these adjustments ......... 1,237 1,683
------- -------
(1,932) (2,605)
------- -------
Net income, as adjusted ...................... $ 1,429 $ 1,811
======= =======
Per share amounts:
Basic:
As previously reported .................. $ .24 $ .32
Adjustments ............................. (.14) (.19)
------- -------
As adjusted ............................. $ .10 $ .13
======= =======
Diluted:
As previously reported .................. $ .21 $ .27
Adjustments ............................. (.12) (.16)
------- -------
As adjusted ............................. $ .09 $ .11
======= =======
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 section 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 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.
NOTE G -- SPECIAL CHARGES
As mentioned in Notes E and F, the Company has restated the fiscal 1998 and the
financial statements for the first three quarters of 1999 and it is also
currently defending a class action lawsuit. The Company has incurred
professional fees including lawyers, accountants and others relating to these
matters. Commencing in the second quarter of fiscal 2000, the Company has
incurred approximately $ 1.2 million in special charges. The Company anticipates
additional charges for the future quarters.
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 $ 5.3 million or 13.8% to $ 33.0
million in the three months ended July 31, 1999, from $ 38.3 million in the
comparable restated period of the prior year. Net revenues decreased by $ 7.4
million or 12.0% to $ 54.3 million in the six months ended July 31, 1999, from
$61.7 million in the comparable restated period of the prior year. The decrease
was primarily due to decreased wholesale sales of women's footwear.
Gross Profit. Gross profit margins decreased to 18.9% in the three months
ended July 31, 1999 from 25.4% in the comparable period of the prior year. Gross
profit margins decreased to 21.5% in the six months ended July 31, 1999 from
25.9% in the comparable period of the prior year. The decrease was primarily
attributable to lower wholesale sales of women's footwear, increased markdowns
taken to clear excess inventory and higher private label business at lower
margins.
Operating Expenses. Selling and administrative expenses increased by $ 1.7
million to $ 8.9 million in the three months ended July 31, 1999 from $ 7.2
million in the comparable period of the prior year. As a percentage of net
revenues, selling and administrative expenses increased 8.3% to 27.0% for the
three months ended July 31, 1999 from 18.7% for the comparable period of the
prior year. Selling and administrative expenses increased by $ 3.6 million to
$16.1 million in the six months ended July 31, 1999 from $ 12.5 million in the
comparable period of the prior year. As a percentage of net revenues, selling
and administrative expenses increased 9.3% to 29.6% for the six months ended
July 31, 1999 from 20.3% 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 advertising expenditures and intangible amortization relating to the
Company's fiscal 1999 acquisitions. The Company has incurred $ 1.2 million in
special charges, for the three and six months ended July 31, 1999, relating to
professional fees for an investigation of certain transactions by a special
committee of the Company's Board of Directors and the class action lawsuit.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Results of Operations -Continued
Interest Expense. Interest expense for the three months ended July 31, 1999
was $ 368,000, compared to $ 223,000 for the comparable period in the previous
year. Interest expense for the six months ended July 31, 1999 was $ 650,000,
compared to $ 497,000 for the comparable period in the previous year. The
increase was caused by higher rates charged for the periods compared to the
prior year.
Net (loss) Income. As a result of the foregoing, the Company sustained a
net loss of $ 3.1 million in the three months ended July 31, 1999, compared to
net income of $1.4 million in the corresponding period a year ago. The net loss
increased to $ 4.3 million for the six months ended July 31, 1999 compared to
net income of $1.8 million for the same period in fiscal 1999.
(Loss) Earnings Per Share. The loss per share in the three months ended
July 31, 1999 was $(.17) on a basic and diluted basis, which reflects additional
3.7 million weighted shares outstanding, compared to net income of $.09 per
diluted share in the comparable quarter of the prior year. The loss per share
for the six months ended July 31, 1999 was $(.24) on a basic and diluted basis,
which also reflects additional 3.7 million weighted shares outstanding, compared
to net income of $.11 per diluted share in the same period in fiscal 1999. The
increase in the weighted average shares outstanding for the three and six months
periods ended July 31, 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 $ 3.4 million to approximately
$19.4 million at July 31, 1999 from approximately $22.9 million at January 31,
1999. At July 31, 1999, the current ratio was 1.7 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 used in operating activities totaled $ 2.3
million for the six months ended July 31, 1999, compared to cash used of $ 30.0
million for the six months ended July 31, 1998.
Capital expenditures were $ 1.4 million for the six months ended July 31,
1999, compared to $349,000 for the six months ended July 31, 1998.
During the six month period ended July 31, 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.
The Company is obligated on or prior to October 31, 1999 to make a $500,000
capital contribution to Unzipped Apparel, LLC ("Unzipped"). Unzipped, the
Company's joint venture with Sweet Sportswear LLC, markets and distributes
jeanswear and apparel under the Candie's and BONGO label.
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 will bear interest at .25% below the prime rate (8.00% at July 31,
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Liquidity and Capital Resources - Continued
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 has received a commitment letter from a
new financial institution to refinance the 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 July 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 insure 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
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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 operation as the Company's products are sourced through 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 section 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
1. The Registrant filed a report on Form 8-K dated June 17,
1999 with respect to the change in Registrant's independent
auditors.
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 30, 1999 /s/ Neil Cole
--------------------------- ----------------------------
Neil Cole
Chief Executive Officer
(on Behalf of the Registrant)
Date September 30, 1999 /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
JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JUL-31-1999
<CASH> 352
<SECURITIES> 0
<RECEIVABLES> 22,128
<ALLOWANCES> 0
<INVENTORY> 18,155
<CURRENT-ASSETS> 46,324
<PP&E> 5,297
<DEPRECIATION> 1,652
<TOTAL-ASSETS> 77,238
<CURRENT-LIABILITIES> 26,881
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 47,821
<TOTAL-LIABILITY-AND-EQUITY> 77,238
<SALES> 54,308
<TOTAL-REVENUES> 54,308
<CGS> 42,640
<TOTAL-COSTS> 42,640
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650
<INCOME-PRETAX> (5,705)
<INCOME-TAX> (1,436)
<INCOME-CONTINUING> (4,269)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,269)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 360
<SECURITIES> 0
<RECEIVABLES> 33,921
<ALLOWANCES> 0
<INVENTORY> 18,534
<CURRENT-ASSETS> 56,434
<PP&E> 2,250
<DEPRECIATION> 1,163
<TOTAL-ASSETS> 67,063
<CURRENT-LIABILITIES> 33,121
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 33,852
<TOTAL-LIABILITY-AND-EQUITY> 67,063
<SALES> 61,708
<TOTAL-REVENUES> 61,708
<CGS> 45,712
<TOTAL-COSTS> 45,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497
<INCOME-PRETAX> 2,979
<INCOME-TAX> 1,168
<INCOME-CONTINUING> 1,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,811
<EPS-BASIC> .13
<EPS-DILUTED> .11
</TABLE>
