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, 2000
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.)
400 Columbus Avenue
Valhalla, NY 10595
(Address of principal executive offices) (Zip Code)
(914) 769-8600
(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 -- 18,028,602 shares as of August 31, 2000
<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, 2000 and January 31, 2000......................... 2
Condensed Consolidated Statements of Operations - Three and Six Months
Ended July 31, 2000 and 1999....................................................................... 3
Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended
July 31, 2000...................................................................................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended July 31,
2000 and 1999...................................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk (not applicable)....................
Part II. Other Information
Item 1. Legal Proceedings............................................................................... 12
Item 2. Changes in Securities and Use of Proceeds ...................................................... 12
Item 6. Exhibits and Reports on Form 8-K................................................................ 12
Signatures ........................................................................................... 13
Index to Exhibits....................................................................................... 14
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS - (Unaudited)
Candie's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets July 31, January 31,
2000 2000
-------- --------
(Unaudited)
(000's omitted, except par value)
<S> <C> <C>
Assets
Current Assets
Cash ........................................................... $ 1,228 $ 643
Restricted cash ................................................ -- 2,000
Accounts receivable, net ....................................... 4,183 2,711
Due from factors and accounts receivables, net ................. 12,379 8,034
Due from affiliate ............................................. 1,002 636
Inventories .................................................... 11,537 14,770
Refundable and prepaid income taxes ............................ 569 631
Deferred income taxes .......................................... 410 1,448
Prepaid advertising and other .................................. 2,606 1,622
Other current assets ........................................... 155 304
-------- --------
Total Current Assets ............................................... 34,069 32,799
Property and equipment, at cost:
Furniture, fixtures and equipment .............................. 7,305 6,679
Less: Accumulated depreciation and amortization ................ 2,672 2,124
-------- --------
4,633 4,555
Other assets:
Goodwill, net .................................................. 2,081 2,152
Intangibles, net ............................................... 21,087 22,047
Deferred income taxes .......................................... 3,213 2,174
Other .......................................................... 292 331
-------- --------
26,673 26,704
-------- --------
Total Assets ....................................................... $ 65,375 $ 64,058
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks ................................ $ 14,965 $ 13,764
Litigation settlement .......................................... 1,000 4,000
Accounts payable and accrued expenses .......................... 7,829 7,618
Accounts payable - related party ............................... 4,391 1,286
Current portion of long-term debt and capital lease obligation . 1,148 1,143
Losses in excess of joint venture investment ................... -- 1,451
-------- --------
Total Current Liabilities .......................................... 29,333 29,262
-------- --------
Losses in excess of joint venture investment ....................... 965 --
Long-term liabilities and capital lease obligation ................. 1,387 1,848
Stockholders' Equity
Preferred and common stock to be issued ........................ 6,000 6,000
Preferred stock, $.01 par value - shares authorized 5,000;
none issued and outstanding ............................... -- --
Common stock, $.001 par value - shares authorized 30,000;
shares issued 19,311 at July 31, 2000 and 19,209 issued
at January 31, 2000 ....................................... 19 19
Additional paid-in capital ..................................... 59,196 59,094
Retained earnings (deficit) .................................... (25,092) (25,732)
Treasury stock - at cost - 1,313 shares ....................... (6,433) (6,433)
-------- --------
Total Stockholders' Equity ......................................... 33,690 32,948
-------- --------
Total Liabilities and Stockholders' Equity ......................... $ 65,375 $ 64,058
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net revenues ................................................... $ 26,852 $ 33,054 $ 51,298 $ 54,308
Cost of goods sold ............................................. 20,530 26,794 39,293 42,640
-------- -------- -------- --------
Gross profit ................................................... 6,322 6,260 12,005 11,668
Licensing income ............................................... 1,307 468 2,339 858
-------- -------- -------- --------
7,629 6,728 14,344 12,526
Operating expenses:
Selling, general and administrative expenses ................... 7,277 8,932 13,069 16,078
Special charges ................................................ 89 1,166 186 1,166
-------- -------- -------- --------
7,366 10,098 13,255 17,244
Operating income (loss) ........................................ 263 (3,370) 1,089 (4,718)
Other expenses:
Interest expense - net ......................................... 389 368 900 650
Equity (income) loss in joint venture .......................... (336) 221 (486) 337
-------- -------- -------- --------
53 589 414 987
-------- -------- -------- --------
Income (loss) before income taxes .............................. 210 (3,959) 675 (5,705)
Provision (benefit) for income taxes ........................... 35 (868) 35 (1,436)
-------- -------- -------- --------
Net income (loss) ............................................. $ 175 $ (3,091) $ 640 $ (4,269)
======== ======== ======== ========
Earnings (loss) per common share:
Basic ................................................. $ 0.01 $ (.17) $ 0.03 $ (.24)
======== ======== ======== ========
Diluted ............................................... $ 0.01 $ (.17) $ 0.03 $ (.24)
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic ................................................. 19,252 17,891 19,220 17,664
======== ======== ======== ========
Diluted ............................................... 21,737 17,891 21,760 17,664
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Six Months Ended July 31, 2000
(000's omitted)
<TABLE>
<CAPTION>
Preferred
& Common Additional Retained
Common Stock Stock to be Paid-In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 2000 .................. 19,209 $ 19 $ 6,000 $ 59,094 $(25,732) $ (6,433) $ 32,948
Issuance of common stock to retirement plan .. 102 -- -- 102 -- -- 102
Net income ................................... -- -- -- -- 640 -- 640
-------- -------- -------- -------- -------- -------- --------
Balance at July 31, 2000 ..................... 19,311 $ 19 $ 6,000 $ 59,196 $(25,092) $ (6,433) $ 33,690
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 31, July 31,
2000 1999
----------------------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided (used) in operating activities ... $ 529 $(2,295)
----------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ........... (689) (1,437)
----------------------
Net cash used in investing activities .............. (689) (1,437)
----------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and warrants ................................ -- 98
Capital lease and unsecured loan .............. -- 3,471
Capital lease reduction ....................... (456) (358)
Revolving notes payable - bank ................ 1,201 275
----------------------
Net cash provided by financing activities .......... 745 3,486
----------------------
INCREASE (DECREASE) IN CASH ........................ 585 (246)
Cash at beginning of period ........................ 643 598
----------------------
Cash at end of period .............................. $ 1,228 $ 352
======================
Interest paid ...................................... 905 693
======================
Taxes paid (refunded) .............................. (27) (1,982)
======================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars are in thousands)
July 31, 2000
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 and six-month periods ended
July 31, 2000 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, 2000.
NOTE B -- FINANCING AGREEMENTS
On October 28, 1999, the Company entered into a new two-year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
("Rosenthal"). On November 23, 1999, First Union National Bank entered into a
co-lending arrangement and became a participant in the Line of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit will
bear interest at 0.50% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of 0.25% of the maximum Line of
Credit. The Line of Credit also contains certain financial covenants including,
minimum tangible net worth, certain specified ratios and other limitations. The
Company has granted the lenders a security interest in substantially all of its
assets. On January 31, 2000 the Company was in default of certain covenants of
its Line of Credit and obtained a waiver that exempted the Company from
compliance with the financial covenants unless a further deterioration of the
Company's financial condition occurred. In addition, the waiver established the
commitment that Rosenthal and the Company would establish mutually agreeable
financial covenants within a reasonable time. Rosenthal and the Company agreed
to the new financial covenants, which became effective on June 1, 2000, and the
Company is currently in compliance with these covenants.
At July 31 and January 31, 2000, borrowings under the Line of Credit totaled $15
million and $13.8 million, respectively, which were secured against factored
receivables and inventory. Interest paid to Rosenthal during the six months
ended July 31, 2000 was $0.8 million. The borrowings bore interest at 8.75%,
which rate is subject to an increase or decrease based on the terms of the
agreement as stated above.
At July 31 and January 31, 2000, the Company had $0.3 million and $0.2 million,
respectively, of outstanding letters of credit. The Company's letters of credit
availability are formula based, taking into account borrowings under the Line of
Credit, as described above.
NOTE C -- EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares outstanding for the period (including a provision for common
shares to be issued in connection with the settlement agreement, See Note
D-Commitments and Contingencies). Diluted earnings per share calculation
includes, the basic shares from above and the impact of the exercise of stock
options, warrants and the conversion of the preferred shares to be issued in
connection with the settlement agreement, in each of the periods which would
result in a dilutive effect.
6
<PAGE>
NOTE C -- EARNINGS PER SHARE - Continued
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
-------------------------- --------------------------
2000 1999 2000 1999
-------------------------- --------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Basic ................................... 19,252 17,891 19,220 17,664
Effect of assumed conversions of employee
stock options ......................... 115 -- 170 --
Effect of assumed conversions of
preferred stock ....................... 2,370 -- 2,370 --
-------------------------- --------------------------
Diluted ................................. 21,737 17,891 21,760 17,664
========================== ==========================
</TABLE>
NOTE D -- COMMITMENTS AND CONTINGENCIES
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 included
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.
On or about January 31, 2000, the Company entered into a settlement agreement
with the plaintiffs to settle the class action for total consideration of $10
million, payable in a combination of $4.0 million in cash and shares of the
Company's common stock and convertible preferred stock. On July 7, 2000 a
hearing was conducted by the court and on July 12, 2000, the court entered a
final Judgment and Order of Dismissal approving the settlement. On or before
October 1, 2000, the Company is required to make the final cash payment of $1.0
million.
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, the accounting issues
that have been raised and that were the subject of an investigation of the
Special Committee of the Company's Board of Directors.
In connection with the Company's acquisition of Michael Caruso & Co., Inc
("Caruso") in September 1998, the Company made certain representations and
warranties concerning, among other things, its financial statements which could
result in a claim being made by the former stockholders of Caruso against the
Company. The Company is unable to determine the amount of the liability, if any,
which could arise if any claim were made by such stockholders.
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. Except
as set forth above, 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.
NOTE E -- INVESTMENT IN JOINT VENTURE
On October 7, 1998, the Company formed Unzipped Apparel LLC ("Unzipped") with
its joint venture partner Sweet Sportswear LLC ("Sweet"), the purpose of which
was to market and distribute apparel under the BONGO and CANDIE'S labels. The
Company and Sweet each have a 50% interest in Unzipped. Pursuant to the terms of
the joint venture, the Company licensed the CANDIE'S and BONGO trademarks to
Unzipped for use in the design, manufacture and sale of certain designated
apparel products. As of January 31, 2000, the Company believed that Unzipped was
in breach of certain provisions of the agreements among the parties, and
notified Unzipped that the Company did not intend to contribute any additional
capital toward the joint venture. The Company believed that its exposure related
to Unzipped, should the joint venture dissolve, was adequately provided for at
January 31, 2000. Subsequently, the Company resolved its disputes with Unzipped,
and formalized the termination of the Candie's license.
7
<PAGE>
NOTE E -- INVESTMENT IN JOINT VENTURE - Continued
The Company's share of joint venture income for the period ended July 31, 2000
was $0.5 million, based upon Unzipped's unaudited financial statements.
As of July 31 and January 31, 2000, approximately $2.2 million and $2.5 million,
respectively, of the Company's retained deficit represented the Company's
proportionate share of the Unzipped losses.
Pursuant to the terms of the Operating Agreement of Unzipped, on January 31,
2003, the Company must purchase from Sweet, Sweet's entire interest in Unzipped
at the aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for
the fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of common stock. In the event the Company elects to issue shares of
common stock to Sweet, Sweet shall receive registered shares of common stock and
the right to designate a member to the Board of Directors for the Company until
the earlier to occur of (i) the sale of any of such shares or (ii) two years
from the date of closing of such purchase.
The Company recorded royalty income from the joint venture of $0.5 million and
$0.8 million for the three months and six months ended July 31, 2000, and $0.2
million and $0.4 million for the three months and six months ended July 31,
1999, respectively. At July 31, 2000, the receivable balance from Unzipped was
approximately $1.0 million compared to $1.2 million as of July 31, 1999.
Item 2. 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 that are not historical facts contained in this 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 develop successfully
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
risks of litigation, the risks of uncertainty of trademark protection, the
uncertainty of marketing and licensing trademarks and other risks detailed below
and in the Company's other Securities and Exchange Commission filings.
The words "believe", "expect", "anticipate", "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 statements were made.
Seasonal And Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of holidays, weather, the timing of
footwear shipments, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, the timing of inventory write downs,
fluctuations in the cost of materials, the timing of licensing payments and
reporting, and other factors beyond the Company's control, such as general
economic conditions and the action of competitors. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
may be achieved for a full fiscal year or any future quarter.
In addition, the timing of the receipt of future revenues could be impacted by
the recent trend among retailers in the Company's industry to order goods closer
to a particular selling season than they have historically done so. The Company
continues to seek to expand and diversify its product lines to help reduce the
dependence on any particular product line and lessen the impact of the seasonal
nature of its business. However, the success of the Company will still remain
largely dependent on its ability to predict accurately upcoming fashion trends
among its customer base, build and maintain brand awareness and to fulfill the
product requirements of its retail channel within the shortened timeframe
required. Unanticipated changes in consumer fashion preferences, slowdowns in
the United States economy, changes in the prices of supplies, consolidation of
retail chains, among other factors noted herein, could adversely affect the
Company's future operating results.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Results of Operations
Revenues.
For the three months ended July 31,2000. Net revenues decreased by $6.2 million
or 18.8% to $26.9 million, from $33.1 million in the comparable period of the
prior year. The decline in revenue, primarily in the areas of Candie's women's,
kids and unbranded merchandise, was due in part to the Company's decision to
focus on higher margin sales over greater volume, plus with respect to Candie's
women's merchandise, a shift of Fall product deliveries by the Company's
customers to the third fiscal quarter. Also contributing to the revenue decline
was the discontinuance of the Company's handbag line, which was licensed May
2000.
For the six months ended July 31,2000. Net revenues decreased by $3.0 million or
5.5% to $51.3 million, from $54.3 million in the comparable period of the prior
year. The decline in revenue, primarily in the areas of kids and unbranded
merchandise, was due in part to the Company's decision to focus on higher margin
sales over greater volume. Candie's women's sales were flat when compared to the
comparitive period last year. Also contributing to the revenue decline was the
discontinuance of the Company's handbag line, which was licensed May 2000.
Gross Profit.
For the three months ended July 31,2000. Gross profit margins increased to 23.5%
from 18.9% in the comparable period of the prior year. The increase was
primarily attributable to improved inventory management and reductions in sales
returns and allowances.
For the six months ended July 31,2000. Gross profit margins increased to 23.4%
from 21.5% in the comparable period of the prior year. The increase was
primarily attributable to improved inventory management and reductions in sales
returns and allowances realized primarily in the quarter ended July 31, 2000.
Licensing Income
For the three months ended July 31,2000. Licensing income increased by $0.8
million or 179.3% to $1.3 million from $0.5 million in the comparable period of
the prior year. The increase was due to increased sales from existing licenses
and, to a lesser extent, the addition of a new license.
For the six months ended July 31,2000. Licensing income increased by $1.4
million or 172.6% to $2.3 million from $0.9 million in the comparable period of
the prior year. The increase was due to increased sales from existing licenses
and, to a lesser extent, the addition of a new license.
Operating Expenses
For the three months ended July 31,2000. Selling and administrative expenses
decreased by $1.6 million or 18.5% to $7.3 million from $8.9 million in the
comparable period of the prior year. The decreases in operating expenses were
attributable to the Company's expense reduction initiatives and increased
licensee contribution to the costs of the Company's marketing campaigns. These
decreases were partially offset by increased retail store expenses associated
with the increased number of operating locations. Special charges decreased by
$1.1 million or 92.4% to $0.1 million from $1.2 million in the comparable period
of the prior year. The special charges were professional fees relating to the
special investigation of the Company conducted in the prior year.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -continued
For the six months ended July 31,2000. Selling and administrative expenses
decreased by $3.0 million or 18.7% to $13.1 million from $16.1 million in the
comparable period of the prior year. The decreases in operating expenses were
attributable to the Company's expense reduction initiatives and increased
licensee contribution to the costs of the Company's marketing campaigns. These
decreases were partially offset by increased retail store expenses associated
with the increased number of operating locations. Special charges decreased by
$1.0 million or 84.1% to $0.2 million from $1.2 million in the comparable period
of the prior year. The special charges were professional fees relating to the
special investigation of the Company conducted in the prior year.
Interest Expense.
For the three months ended July 31,2000. Interest expense increased 5.7% or
$21,000 from the comparative period of the prior year. This increase resulted
primarily from higher interest rates in the current period as average
outstanding borrowings were relatively consistent with the prior year.
For the six months ended July 31,2000. Interest expense increased $250 thousand
or 38.5% to $0.9 million from $0.6 million in the comparable period of the prior
year. This increase was the result of increased borrowings (primarily in the
first quarter) at higher rates over the comparable period in the prior year.
Equity Income (Loss) in Joint Venture
For the three months ended July 31,2000. Income in joint venture increased by
$0.6 million to $0.3 million from a $0.3 million loss in the comparable period
of the prior year. The increase was due to increased sales of the Company's
apparel products.
For the six months ended July 31,2000. Income in joint venture increased by $0.8
million to $0.5 million from a $0.3 million loss in the comparable period of the
prior year. The increase was due to increased sales of the Company's apparel
products.
Income Taxes.
For the three and six months ended July 31,2000. The income tax provision for
the quarter and year to date were offset by a reduction in the valuation reserve
established in the prior year. As a result, only minimum state tax obligations
were recorded for the period ended July 31, 2000.
Net Income.
For the three months ended July 31,2000. As a result of the foregoing, the
Company achieved net income of $0.2 million, compared to net loss of $3.1
million in the corresponding 1999 period.
For the six months ended July 31,2000. As a result of the foregoing, the Company
achieved net income of $0.6 million, compared to net loss of $4.2 million in the
corresponding 1999 period.
Liquidity and Capital Resources
Working capital at July 31, 2000 increased approximately $1.2 million to $4.7
million from $3.5 million at January 31, 2000, primarily due to the
reclassification of certain current liabilities to long term and net income
recorded for the six month period ended July 31,2000. At July 31, 2000, the
current ratio was 1.2 to 1.
In the past, the Company has relied 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
$0.5 million for the six months ended July 31, 2000, compared to cash used of
$2.3 million for the comparable period in 1999. Cash provided from financing
activity totaled $0.7 million compared to $ 3.5 million for comparable period
last year.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -continued
The increases in cash generated from operating activities resulted from a
decrease in inventories, factor and trade receivables and an increase in certain
payables.
Capital expenditures were $0.7 million during the six months ended July 31,2000,
compared to $1.4 million, for the six months ended July 31, 1999. The Company
anticipates capital expenditures of approximately $0.7 million primarily for new
store openings and website development for the fiscal year ending January 31,
2001.
Current Revolving Credit Facility.
On October 28, 1999, the Company entered into a new two-year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
("Rosenthal"). On November 23, 1999, First Union National Bank entered into a
co-lending arrangement and became a participant in the Line of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit will
bear interest at 0.50% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of 0.25% of the maximum Line of
Credit. The Line of Credit also contains certain financial covenants including,
minimum tangible net worth, certain specified ratios and other limitations. The
Company has granted the lenders a security interest in substantially all of its
assets. On January 31, 2000 the Company was in default of certain covenants of
its Line of Credit and obtained a waiver that exempted the Company from
compliance with the financial covenants unless a further deterioration of the
Company's financial condition occurred. In addition, the waiver established the
commitment that Rosenthal and the Company would establish mutually agreeable
financial covenants within a reasonable time. Rosenthal and the Company agreed
to the new financial covenants which, became effective on June 1, 2000, and the
Company is currently in compliance with these covenants.
At July 31 and January 31, 2000, borrowings under the Line of Credit totaled $15
million and $13.8 million, respectively, which were secured against factored
receivables and inventory. Interest paid to Rosenthal during the six months
ended July 31, 2000 was $0.8 million. The borrowings bore interest at 8.75%,
which rate is subject to an increase or decrease based on the terms of the
agreement as stated above.
At July 31 and January 31, 2000, the Company had $0.3 million and $0.2 million,
respectively, of outstanding letters of credit. The Company's letters of credit
availability are formula based which takes into account borrowings under the
Line of Credit, as described above.
Other Borrowing Arrangements
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 balance considered to be an
unsecured loan. The term of the agreement is four years. The remaining balance
as of July 31, 2000 is $1.4 million.
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 its financing
agreement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
11
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PART II. Other Information
Item 1. Legal Proceedings
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 included
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.
On or about January 31, 2000, the Company entered into a settlement agreement
with the plaintiffs to settle the class action for total consideration of $10
million, payable in a combination of $4.0 million in cash and shares of the
Company's common stock and convertible preferred stock. On July 7, 2000 a
hearing was conducted by the court and on July 12, 2000, the court entered a
final Judgment and Order of Dismissal approving the settlement. On or before
October 1, 2000, the Company is required to make the final cash payment of $1.0
million.
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, the accounting issues
that have been raised and that were the subject of an investigation of the
Special Committee of the Company's Board of Directors.
In connection with the Company's acquisition of Michael Caruso & Co., Inc
("Caruso") in September 1998, the Company made certain representations and
warranties concerning, among other things, its financial statements which could
result in a claim being made by the former stockholders of Caruso against the
Company. The Company is unable to determine the amount of the liability, if any,
which could arise if any claim were made by such stockholders.
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. Except
as set forth above, 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 2. Changes in Securities and Use of Proceeds.
During the six months ended July 31,2000, the Company granted certain of its
employees and directors 10 year non-qualified stock options to purchase a total
of 717,000 shares of its common stock at process ranging from $0.9688 to $1.2812
per share (an average of $1.1591 per share). A total of 379,500 of the 717,000
options were granted during the three months ended July 31,2000. The options
were granted in private transactions pursuant to the exemption from registration
under Sections 2(a) (3) and 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K-None
12
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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 11, 2000 /s/ Neil Cole
--------------------------- ------------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date September 11, 2000 /s/ Richard Danderline
--------------------------- ------------------------------------
Richard Danderline
Executive Vice President of Finance
And Operations
13
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Index to Exhibits
Exhibit
Numbers Description
10.1 Employment agreement dated May 19, 2000 between Candie's Inc.
and Richard Danderline
27 Financial Data Schedules (for SEC use only)
14
