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 October 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 November 30, 2000
<PAGE>
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 2000
and January 31, 2000............................................... 2
Condensed Consolidated Statements of Operations - Three and
Nine Months Ended October 31, 2000 and 1999........................ 3
Condensed Consolidated Statement of Stockholders' Equity - Nine
Months Ended October 31, 2000...................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended October 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 ........ 11
Part II. Other Information
Item 1. Legal Proceedings .................................................. 12
Item 2. Changes in Securities and Use of Proceeds .......................... 12
Item 3. Defaults upon Senior Securities (Not Applicable)....................
Item 4. Submission of Matters to a Vote of Security Holders ................ 12
Item 5. Other Information .................................................. 13
Item 6. Exhibits and Reports on Form 8-K ................................... 13
Signatures ............................................................... 14
Index to Exhibits........................................................... 15
1
<PAGE>
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
<TABLE>
<CAPTION>
Candie's, Inc. and Subsidiaries October 31, January 31,
Condensed Consolidated Balance Sheets 2000 2000
-------- --------
(Unaudited)
(000's omitted, except par value)
<S> <C> <C>
Assets
Current Assets
Cash ...................................................................... $ 277 $ 643
Restricted cash ........................................................... -- 2,000
Accounts receivable, net .................................................. 3,726 2,711
Due from factors and accounts receivables, net ............................ 9,561 8,034
Due from affiliate ........................................................ 571 636
Inventories ............................................................... 9,090 14,770
Refundable and prepaid income taxes ....................................... 549 631
Deferred income taxes ..................................................... 2,040 1,448
Prepaid advertising and other ............................................. 1,519 1,622
Other current assets ...................................................... 221 304
-------- --------
Total Current Assets .......................................................... 27,554 32,799
Property and equipment, at cost:
Furniture, fixtures and equipment ......................................... 7,691 6,679
Less: Accumulated depreciation and amortization ........................... 2,975 2,124
-------- --------
4,716 4,555
Other assets:
Goodwill, net ............................................................. 2,045 2,152
Intangibles, net .......................................................... 20,626 22,047
Deferred income taxes ..................................................... 1,582 2,174
Other ..................................................................... 196 331
-------- --------
24,449 26,704
-------- --------
Total Assets .................................................................. $ 56,719 $ 64,058
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks ........................................... $ 11,776 $ 13,764
Litigation settlement ..................................................... -- 4,000
Accounts payable and accrued expenses ..................................... 4,571 6,856
Accounts payable - related party .......................................... 5,039 2,048
Current portion of long-term debt and capital lease obligation ............ 1,151 1,143
Losses in excess of joint venture investment .............................. -- 1,451
-------- --------
Total Current Liabilities ..................................................... 22,537 29,262
-------- --------
Losses in excess of joint venture investment .................................. 767 --
Long-term liabilities and capital lease obligation ............................ 1,150 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 19,341 at October 31, 2000 and 19,209 issued
at January 31, 2000 .................................................. 19 19
Additional paid-in capital ................................................ 59,239 59,094
Retained earnings (deficit) ............................................... (26,560) (25,732)
Treasury stock - at cost - 1,313 shares .................................. (6,433) (6,433)
-------- --------
Total Stockholders' Equity .................................................... 32,265 32,948
-------- --------
Total Liabilities and Stockholders' Equity .................................... $ 56,719 $ 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 Nine Months Ended
October 31, October 31,
------------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net revenues ................................................... $ 22,457 $ 22,175 $ 73,755 $ 76,483
Cost of goods sold ............................................. 17,561 18,877 56,854 61,516
-------- -------- -------- --------
Gross profit ................................................... 4,896 3,298 16,901 14,967
Licensing income ............................................... 1,310 1,151 3,649 2,009
-------- -------- -------- --------
6,206 4,449 20,550 16,976
Operating expenses:
Selling, general and administrative expenses ................... 7,427 8,281 20,496 24,359
Special charges ................................................ 1 1,144 187 2,310
-------- -------- -------- --------
7,428 9,425 20,683 26,669
Operating loss ................................................. (1,222) (4,976) (133) (9,693)
Other expenses:
Interest expense - net ......................................... 418 307 1,318 958
Equity (income) loss in joint venture .......................... (198) 116 (684) 453
-------- -------- -------- --------
220 423 634 1,411
-------- -------- -------- --------
Loss before income taxes ....................................... (1,442) (5,399) (767) (11,104)
Provision (benefit) for income taxes ........................... 26 346 61 (1,090)
-------- -------- -------- --------
Net loss ...................................................... $ (1,468) $ (5,745) $ (828) $(10,014)
======== ======== ======== ========
Loss per common share:
Basic ................................................. $ (.08) $ (.32) $ (.04) $ (.56)
======== ======== ======== ========
Diluted ............................................... $ (.08) $ (.32) $ (.04) $ (.56)
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic ................................................. 19,269 17,896 19,237 17,742
======== ======== ======== ========
Diluted ............................................... 19,269 17,896 19,237 17,742
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 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
Issuance of common stock to directors ....... 30 -- -- 43 -- -- 43
Net loss .................................... -- -- -- -- (828) -- (828)
------ -------- -------- -------- -------- -------- --------
Balance at October 31, 2000 ................. 19,341 $ 19 $ 6,000 $ 59,239 $(26,560) $ (6,433) $ 32,265
====== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 31, October 31,
2000 1999
--------------------------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided in operating activities ..................... $ 3,459 $ 3,965
--------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ...................... (1,147) (1,819)
--------------------------
Net cash used in investing activities ......................... (1,147) (1,819)
--------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ..... -- 98
Capital lease and unsecured loan ......................... -- 3,471
Capital lease reduction .................................. (690) (574)
Revolving notes payable - bank ........................... (1,988) (5,271)
--------------------------
Net cash used in financing activities ......................... (2,678) (2,276)
--------------------------
DECREASE IN CASH .............................................. (366) (130)
Cash at beginning of period ................................... 643 598
--------------------------
Cash at end of period ......................................... $ 277 $ 468
==========================
Interest paid ................................................. $ 1,329 $ 996
==========================
Taxes refunded ................................................ $ (14) $(1,982)
==========================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 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 nine-month periods
ended October 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.
At October 31 and January 31, 2000, borrowings under the Line of Credit totaled
$11.8 million and $13.8 million, respectively, which were secured against
factored receivables and inventory. Interest paid to Rosenthal during the nine
months ended October 31, 2000 was $1.1 million. The borrowings bore interest at
10%, which rate is subject to an increase or decrease based on the terms of the
agreement as stated above.
At October 31 and January 31, 2000, the Company had $0.5 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 -- LOSS PER SHARE
Basic loss per share includes no dilution and is computed by dividing net 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 loss 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 -- LOSS 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 October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------------------------ -----------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Basic ...................................................... 19,269 17,896 19,237 17,742
Effect of assumed conversions of employee stock options .... -- -- -- --
Effect of assumed conversions of preferred stock ........... -- -- -- --
------------------------------ -----------------------------
Diluted .................................................... 19,269 17,896 19,237 17,742
============================== =============================
</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 the
court conducted a hearing, and on July 12, 2000, the court entered a final
Judgment and Order of Dismissal approving the settlement. The Company made the
final cash payment on October 30, 2000.
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 were the subject of an investigation of the Special Committee of the
Company's Board of Directors.
In December 2000 an action for breach of contract and breach of the duty of good
faith and fair dealing was commenced against the Company and one of its
subsidiaries in the United States District Court for the Southern District of
New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano.
The plaintiffs' allege that the Company breached certain representations
contained in the September 24, 1998 Stock Purchase Agreement pursuant to which
the defendants acquired the capital stock of the entity that owned the Bongo
trademark. The plaintiffs are seeking to recover unspecified compensatory
damages and costs, including attorneys' fees, and to rescind the Stock Purchase
Agreement and related acquisition. The Company, which intends to vigorously
defend the action, believes it has defenses available to it and that any remedy
for rescission is unavailable. The Company is presently unable to assess the
financial impact, if any, on the Company as a result of this action.
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 the pending litigation incurred in the
normal course of business 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
7
<PAGE>
NOTE E -- INVESTMENT IN JOINT VENTURE -continued
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,
which resolution included, among other things, the formal termination of the
Candie's license to Unzipped.
The Company's share of joint venture income for the three months and nine months
ended October 31, 2000 was $0.2 million and $0.7 million, respectively, based
upon Unzipped's unaudited financial statements. As of October 31 and January 31,
2000, approximately $1.9 million and $2.5 million, respectively, of the
Company's retained deficit represented the Company's proportionate share of
Unzipped's 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 $0.3 million and
$1.1 million for the three months and nine months ended October 31, 2000,
respectively, and $0.3 million and $0.8 million for the three months and nine
months ended October 31, 1999, respectively. At October 31, 2000, the receivable
balance from Unzipped was approximately $571,000.
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 and market new
products successfully, 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 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 done so historically. The Company
continues to seek to
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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.
Results of Operations
Revenues.
For the three months ended October 31, 2000. Net revenues increased by $0.3
million or 1.4% to $22.5 million, from $22.2 million in the comparable period of
the prior year. The increase in revenue, primarily in the areas of Candie's and
Bongo women's footwear of $3.0 million and unbranded merchandise of $0.6
million, reflects a shift of Fall product deliveries by the Company's customers
from the second to the third fiscal quarter as well as continued consumer
acceptance of the Company's brands. Retail store sales increased by $0.6
million, primarily as the result of new locations that were added in the current
year. Deductions for returns and allowances decreased $0.6 million, primarily as
a result of operating improvements targeting this area. Partially offsetting the
increases noted above was a decrease in the Company's private label men's
division of $2.1 million, the discontinuance of the Company's handbag line,
which was licensed in May 2000, that resulted in a sales decrease of $1.6
million, and a decrease in the Company's sales of kids' merchandise of $0.8
million.
For the nine months ended October 31, 2000. Net revenues decreased by $2.7
million or 3.5% to $73.8 million, from $76.5 million in the comparable period of
the prior year. The declines in revenue in the areas of kids' footwear of $3.1
million and unbranded merchandise of $0.7 million, were due in part to the
Company's decision to focus on higher margin sales over greater volume. Also
contributing to the revenue decline was the discontinuance of the Company's
handbag line, which was licensed in May 2000, that resulted in a sales decrease
of $1.3 million. The Company's private label men's division decreased by $3.1
million as a result of buying cutbacks from two significant customers. Partially
offsetting the declines were increases in Candie's and Bongo women's sales of
$3.2 million, reflecting continued consumer acceptance of the Company's brands.
Retail store sales increased by $1.3 million, primarily as the result of
additional stores added in the current year. Deductions for returns and
allowances decreased $1.0 million primarily as a result of operating
improvements targeting this area.
Gross Profit.
For the three months ended October 31, 2000. Gross profit margins increased to
21.8% from 14.9% 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 nine months ended October 31, 2000. Gross profit margins increased to
22.9% from 19.6% in the comparable period of the prior year. The increase was
primarily attributable to improved inventory management and reductions in sales
returns and allowances.
Licensing Income
For the three months ended October 31, 2000. Licensing income increased by $0.2
million or 13.8% to $1.3 million from $1.1 million in the comparable period of
the prior year. The increase was due to increased sales from existing licenses
granted to the Company and, to a lesser extent, the granting of a new license.
For the nine months ended October 31, 2000. Licensing income increased by $1.6
million or 81.6% to $3.6 million from $2 million in the comparable period of the
prior year. The increase was due to increased sales from existing licenses
granted to the Company and, to a lesser extent, the granting of a new license.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Operating Expenses
For the three months ended October 31, 2000. Selling and administrative expenses
decreased by $0.9 million or 10.3% to $7.4 million from $8.3 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 99.9% from the comparable period of the prior year. The special
charges were comprised of professional fees relating to the special
investigation of the Company conducted in the prior year.
For the nine months ended October 31, 2000. Selling and administrative expenses
decreased by $3.9 million or 15.9% to $20.5 million from $24.4 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
$2.1 million or 91.3% to $0.2 million from $2.3 million in the comparable period
of the prior year. The special charges were comprised of professional fees
relating to the special investigation of the Company conducted in the prior
year.
Interest Expense, net
For the three months ended October 31, 2000. Interest expense net, increased
$0.1 million or 36.2% from the comparable period of the prior year. This
increase resulted primarily from an increase in the average outstanding
borrowings as well as interest rates that were higher in the current period than
in the comparable period for the prior year.
For the nine months ended October 31, 2000. Interest expense net, increased $0.4
million or 37.6% to $1.3 million from $0.9 million in the comparable period of
the prior year. This increase resulted primarily from an increase in the average
outstanding borrowings as well as interest rates that were higher in the current
period than in the comparable period for the prior year.
Equity Income (Loss) in Joint Venture
For the three months ended October 31, 2000. Income in joint venture increased
by $0.3 million to $0.2 million from a $0.1 million loss in the comparable
period of the prior year. The increase was due to increased sales of the
Company's apparel products, which increase was partially offset by an increase
in sales returns in the current period.
For the nine months ended October 31, 2000. Income in joint venture increased by
$1.1 million to $0.7 million from a $0.4 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 nine months ended October 31, 2000. As the result of losses
for both the three and nine month periods, only minimum state tax obligations
were recorded.
Net Loss.
For the three months ended October 31, 2000. As a result of the foregoing, the
Company's net loss in the current period was $1.5 million, compared to net loss
of $5.7 million in the corresponding 1999 period.
For the nine months ended October 31, 2000. As a result of the foregoing, the
Company's net loss in the current period was $0.8 million, compared to net loss
of $10.0 million in the corresponding 1999 period.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Liquidity and Capital Resources
Working capital at October 31, 2000 increased approximately $1.5 million to $5.0
million from $3.5 million at January 31, 2000, primarily due to the
reclassification of certain current liabilities to long term and certain long
term assets to current, which was partially offset by the net loss recorded for
the nine months ended October 31, 2000. At October 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
$3.4 million for the nine months ended October 31, 2000, compared to $4 million
for the comparable period in 1999. Cash used in financing activities totaled
$2.6 million compared to $2.3 million for the comparable period last year.
The cash generated from operating activities resulted primarily from a decrease
in inventories.
Capital expenditures were $1.1 million during the nine months ended October 31,
2000, compared to $1.8 million for the nine months ended October 31, 1999. The
Company anticipates capital expenditures of approximately $0.6 million primarily
relating to 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.
At October 31 and January 31, 2000, borrowings under the Line of Credit totaled
$11.8 million and $13.8 million, respectively, which were secured against
factored receivables and inventory. Interest paid to Rosenthal during the nine
months ended October 31, 2000 was $1.1 million. The borrowings bore interest at
10%, which rate is subject to an increase or decrease based on the terms of the
agreement as stated above.
At October 31 and January 31, 2000, the Company had $0.5 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 October 31, 2000 is $2.3 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 the
court conducted a hearing, and on July 12, 2000, the court entered a final
Judgment and Order of Dismissal approving the settlement. The Company made the
final cash payment on October 30, 2000.
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 were the subject of an investigation of the Special Committee of the
Company's Board of Directors.
In December 2000 an action for breach of contract and breach of the duty of good
faith and fair dealing was commenced against the Company and one of its
subsidiaries in the United States District Court for the Southern District of
New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano.
The plaintiffs' allege that the Company breached certain representations
contained in the September 24, 1998 Stock Purchase Agreement pursuant to which
the defendants acquired the capital stock of the entity that owned the Bongo
trademark. The plaintiffs are seeking to recover unspecified compensatory
damages and costs, including attorneys' fees, and to rescind the Stock Purchase
Agreement and related acquisition. The Company, which intends to vigorously
defend the action, believes it has defenses available to it and that any remedy
for rescission is unavailable. The Company is presently unable to assess the
financial impact, if any, on the Company as a result of this action.
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 the pending litigation incurred in the
normal course of business 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 three months ended October 31, 2000, the Company granted certain of
its employees and directors 10 year non-qualified stock options to purchase a
total of 620,500 shares of its common stock at prices ranging from $1.00 to
$1.25 per share (an average of $1.106 per share). The 620,500 stock options were
unregistered. 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 4. Submission of Matters to a Vote of Security Holders.
On August 18, 2000 the Company held an Annual Meeting of Stockholders at which
the holders of the Company's common stock voted on: (i) the election of
directors and (ii) a proposal to approve the adoption of the Company's 2000
Stock Option Plan which provides for the grant of options to purchase up to
2,000,000 shares of the Company's common stock. The results of the vote were as
follows:
Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Peter Siris and Mark Tucker
were elected to serve as members of the Company's Board of Directors for the
ensuing year and until the election and qualification of their successors.
12
<PAGE>
PART II. Other Information - continued
Item 4. Submission of Matters to a Vote of Security Holders. - continued
The votes cast by stockholders with respect to the election of Directors were as
follows:
Votes Cast Votes
Director "For" Withheld
-------- ----- --------
Neil Cole 13,264,158 939,918
Barry Emanuel 13,338,882 865,194
Steven Mendelow 13,358,628 845,448
Peter Siris 13,354,658 849,418
Mark Tucker 13,344,767 859,309
The Company's 2000 Stock Option Plan was approved by the stockholders. The votes
cast by stockholders with respect to the 2000 Stock Option Plan were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
2,999,989 1,350,606 89,290
In addition, there were 9,764,191 "broker non-votes" with respect to the
proposal to adopt the Company's 2000 Stock Option Plan.
Item 5. Other Information.
The Company has recently been notified by Nasdaq that its common stock is
trading below the $1.00 bid price requirement necessary for continued trading on
Nasdaq and Nasdaq has given the Company 90 days from the notification date to
regain compliance. The Company's common stock must trade at or above the $1.00
bid price for the period of time required by Nasdaq to maintain its listing. The
Company believes that it has alternatives available to it to obtain compliance
with the Nasdaq requirements within the 90 day period.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.1 - Candie's Inc. 2000 Stock Option Plan (incorporated
herein by reference to Exhibit A to the Company's Proxy Statement
dated July 18, 2000 contained in the Company's Schedule 14A filed with
the SEC on July 18, 2000).
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K-None
13
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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: December 14, 2000 by: /s/ Neil Cole
-------------------- --------------------------------
Neil Cole
Chairman of the Board, President
and Chief Executive Officer
Date: December 14, 2000 by: /s/ Richard Danderline
-------------------- --------------------------------
Richard Danderline
Executive Vice President of Finance
and Operations
14
<PAGE>
Index to Exhibits
Exhibit
Numbers Description
------- -----------
10.1 Candie's Inc. 2000 Stock Option Plan (incorporated herein by
reference to Exhibit A to the Company's Proxy Statement dated
July 18, 2000 contained in the Company's Schedule 14A filed with
the SEC on July 18, 2000).
27 Financial Data Schedule (for SEC use only)
15
