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, 2001
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 -- 18,283,723 shares as of November 16, 2001
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
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Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 2001 and January 31, 2001.................. 2
Condensed Consolidated Statements of Operations - Three and Nine Months
Ended October 31, 2001 and 2000................................................................ 3
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended
October 31, 2001............................................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31,
2001 and 2000.................................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 9
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 (Not Applicable).............................................................
Item 6. Exhibits and Reports on Form 8-K .............................................................. 13
Signatures ........................................................................................... 14
Index to Exhibits....................................................................................... 15
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, January 31,
2001 2001
---------- ----------
(Unaudited)
(000's omitted, except par value)
Assets
Current Assets
Cash............................................................... $ 872 $ 366
Accounts receivable, net........................................... 5,710 3,390
Due from factors and accounts receivables, net..................... 7,682 5,854
Due from affiliate................................................. 904 329
Inventories........................................................ 7,842 9,323
Refundable and prepaid income taxes................................ 242 219
Deferred income taxes.............................................. 2,994 2,994
Prepaid advertising and other...................................... 1,613 1,205
Other current assets............................................... 76 92
------- -------
Total Current Assets................................................... 27,935 23,772
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 8,375 7,408
Less: Accumulated depreciation and amortization.................... 4,128 3,206
------- -------
4,247 4,202
Other assets:
Goodwill, net...................................................... 1,903 2,010
Intangibles, net................................................... 18,530 19,623
Deferred income taxes.............................................. 628 628
Other.............................................................. 117 135
------- -------
21,178 22,396
------- -------
Total Assets........................................................... $53,360 $50,370
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $11,084 $ 8,898
Accounts payable and accrued expenses.............................. 10,025 9,766
Accounts payable - related party................................... 3,058 4,052
Current portion of long-term debt and capital lease obligation.. 1,069 1,006
Losses in excess of joint venture investment....................... 750 750
------- -------
Total Current Liabilities.............................................. 25,986 24,472
------- -------
Other liabilities...................................................... 166 98
Long-term liabilities and capital lease obligation .................... 244 1,055
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 19,855 at October 31, 2001 and 19,341 issued
at January 31, 2001........................................... 20 19
Additional paid-in capital......................................... 60,089 59,239
Retained earnings (deficit)........................................ (32,268) (33,932)
Treasury stock - at cost - 1,635 shares at October 31, 2001
and 1,472 shares at January 31, 2001........................... (6,877) (6,581)
------- -------
Total Stockholders' Equity............................................. 26,964 24,745
------- -------
Total Liabilities and Stockholders' Equity............................. $53,360 $50,370
======= =======
See notes to condensed consolidated financial statements.
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------------- -------------------------------
2001 2000 2001 2000
(000's omitted, except per share data)
Net sales...................................... $25,325 $22,457 $78,547 $73,755
Licensing income............................... 1,411 1,310 3,929 3,649
----------------------------------- -------------------------------
Net revenues................................... 26,736 23,767 82,476 77,404
Cost of goods sold............................. 18,682 17,561 58,288 56,854
----------------------------------- -------------------------------
Gross profit................................... 8,054 6,206 24,188 20,550
Operating expenses:
Selling, general and administrative expenses... 7,309 7,427 21,212 20,496
Special charges................................ 120 1 363 187
----------------------------------- -------------------------------
7,429 7,428 21,575 20,683
----------------------------------- -------------------------------
Operating income (loss)........................ 625 (1,222) 2,613 (133)
Other expenses:
Interest expense - net......................... 328 418 949 1,318
Equity (income) in joint venture............... - (198) - (684)
----------------------------------- -------------------------------
328 220 949 634
----------------------------------- -------------------------------
Income (loss) before income taxes.............. 297 (1,442) 1,664 (767)
Provision for income taxes..................... - 26 - 61
----------------------------------- -------------------------------
Net income (loss).............................. $ 297 (1,468) $ 1,664 (828)
=================================== ===============================
Earnings (loss) per common share:
Basic..................................... $ .02 $ (.08) $ .09 $ (.04)
=================================== ===============================
Diluted................................... $ .01 $ (.08) .07 $ (.04)
=================================== ===============================
Weighted average number of common shares outstanding:
Basic..................................... 19,407 19,269 19,237 19,237
=================================== ===============================
Diluted................................... 22,681 19,269 22,497 19,237
=================================== ===============================
See notes to condensed consolidated financial statements.
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 31, 2001
(000's omitted)
Preferred
& Common Additional Retained
Common Stock Stock to be Paid-In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
-------------------------------------------------------------------------------
Balance at February 1, 2001..... 19,341 $ 19 $ 6,000 $ 59,239 $ (33,932) $(6,581) $ 24,745
Issuance of common stock
to retirement plan....... 122 -- -- 133 -- -- 133
Issuance of common stock
to directors............. 14 -- -- 40 -- -- 40
Exercise of stock options
and warrants.............. 378 1 -- 593 -- -- 594
Options granted to non-employees -- -- -- 84 -- -- 84
Purchase of treasury shares..... -- -- -- -- -- (296) (296)
Net income...................... -- -- -- -- 1,664 -- 1,664
-------------------------------------------------------------------------------
Balance at October 31, 2001..... 19,855 $ 20 $ 6,000 $ 60,089 $(32,268) $(6,877) $ 26,964
===============================================================================
See notes to condensed consolidated financial statements.
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
---------------------------
October 31, October 31,
2001 2000
---------------------------
(000's omitted)
OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities........................ $ (348) $ 3,459
---------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (967) (1,147)
---------------------------
Net cash used in investing activities...................................... (967) (1,147)
---------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants.................. 594 -
Purchase of treasury stock............................................ (296) -
Capital lease payments................................................ (663) (690)
Increase (decrease) in revolving notes payable - bank................. 2,186 (1,988)
---------------------------
Net cash provided by (used in) financing activities........................ 1,821 (2,678)
---------------------------
INCREASE (DECREASE) IN CASH................................................ 506 (366)
Cash at beginning of period................................................ 366 643
---------------------------
Cash at end of period...................................................... $ 872 $ 277
===========================
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 950 $ 1,329
===========================
See notes to condensed consolidated financial statements.
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 2001
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, 2001 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, 2001.
NOTE B FINANCING AGREEMENTS
On October 28, 1999, the Company entered into a 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 bear
interest at 0.50% above the prime rate. Certain borrowings in excess of an
availability formula bear interest at 2.5% above the prime rate. The Company
also pays 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. As of April
30, 2001, the Company extended its factoring agreement with Rosenthal through
April 30, 2003. The Company has granted the lenders a security interest in
substantially all of its assets. The Company was in default of certain covenants
of its Line of Credit at October 31, 2001, but is negotiating with its current
lender to secure a waiver and with that and other lenders to refinance the loan.
The Company expects to be able to secure such waiver and / or new financing
shortly.
At October 31, 2001 and January 31, 2001, borrowings under the Line of Credit
totaled $11.0 million and $8.9 million, respectively, which were secured against
factored receivables and inventory. Interest paid to Rosenthal during the nine
months ended October 31, 2001 was $0.8 million. The borrowing bore interest at
6.04%, which rate is subject to an increase or decrease based on the conditions
of the factoring agreement as stated above.
At October 31, 2001 and January 31, 2001, the Company had $0.4 million and $0.3
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 (LOSS) PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
earnings attributable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) per share
reflects, in periods in which they have a dilutive effect, the effect of common
shares issuable upon exercise of stock options and warrants.
Included in the calculation of the basic number of shares is the equivalent
number of common shares to be issued in connection with the Settlement Agreement
described in Note D. The diluted weighted average number of shares includes
dilutive options and convertible preferred stock to be issued.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings (loss) per share:
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
2001 2000 2001 2000
------------------------------ -----------------------------
(000's omitted)
Basic .......................................................... 19,407 19,269 19,237 19,237
Effect of assumed conversions of employee stock options......... 1,850 - 1,443 -
Effect of assumed conversions of preferred stock to be issued... 1,424 - 1,817 -
------------------------------ -----------------------------
Diluted ........................................................ 22,681 19,269 22,497 19,237
============================== =============================
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. The
consolidated complaint was brought on behalf of all persons who acquired
securities of the Company between May 28, 1997 and May 12, 1999, and alleged
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for the fiscal year ended
January 31, 1998 and the first three quarters of the fiscal year ended January
31, 1999, which caused the Company's securities to trade at artificially
inflated prices.
On or about January 31, 2000, the Company entered into a settlement agreement
with plaintiffs (the "Settlement Agreement") to settle the class action for
total consideration of $10 million, payable in a combination of cash, the
Company's Common Stock and convertible preferred stock (the "Preferred Stock").
The Settlement Agreement provided that on or about May 1, 2000, the Company
would pay to plaintiffs $3 million in cash, and on or after the "Effective
Date", as defined in the Settlement Agreement, the Company would issue shares of
the Company's Common Stock with a value of $2 million. The Company was also
required to pay the Class an additional $1 million on or before October 1, 2000.
The remaining $4 million owed to plaintiffs will be in the form of Preferred
Stock, which will convert to the Company's Common Stock at a rate based on the
price of the Company's Common Stock on the first and second anniversary of the
Effective Date. It was highly unlikely that the Court would not approve the
Settlement; accordingly, the settlement terms, including the shares of Common
and Preferred Stock to be issued, were recorded as of January 31, 2000.
In July 2000, the Court approved the Settlement Agreement. Pursuant to the
Settlement Agreement, the Company paid the plaintiffs $4 million in cash in the
fiscal year ended January 31, 2001. The remaining $6 million owed to plaintiffs
will be paid in the form of Common Stock and in Preferred Stock which will
convert to the Company's Common Stock at a rate based on the price of the
Company's Common Stock on the first and second anniversary of the "Effective
Date" (August 2000) as defined in the Settlement Agreement approved by the
Court. The shares of stock have not yet been issued because the plaintiffs' plan
of distribution has not yet been finalized.
On August 4, 1999, the staff of the SEC 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 raised in
connection with the restatement of certain of the Company's financial
statements.
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 Company has entered into a settlement agreement with Michael Caruso and Gene
Montesano ("Caruso Settlement Agreement"). The settlement provides that Caruso
may participate as a member of the Class in the settlement of the Willow Creek
Class Action and receive its proportionate interest in the class settlement fund
by filing a late proof of claim. In addition, the Company has agreed to pay
Caruso and Montesano the sum of $62,500 in equal quarterly statements, up to a
possible aggregate amount of $1 million, over a period of four years. However,
the obligation to make these payments shall terminate in the event the last
daily sale price per share of the Company's Common Stock reaches $4.98 during
any ten days in any thirty day period within such four year period.
The Caruso Settlement Agreement is not binding unless the Court in the Willow
Creek Class Action issues an Order permitting Caruso and Montesano to file a
late proof of claim and allowing such claim. A proposed Order permitting Caruso
and Montesano to file a late proof of claim and allowing such claim was filed
with the Court on October 19, 2001, and the parties are awaiting the Court's
determination. The Company is unable to predict the outcome of this matter and
accordingly has not recorded any liability in connection with this settlement
agreement.
From time to time, the Company is also made 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 their 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
is to market and distribute apparel under the BONGO label. The Company and Sweet
each have a 50% interest in Unzipped. Pursuant to the terms of the joint
venture, the Company licenses the BONGO trademark to Unzipped for use in the
design, manufacture and sale of certain designated apparel products. As of
January 31, 2001, 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 or otherwise support
the joint venture. Accordingly, as of January 31, 2001, the Company recorded
$750,000, as its maximum liability to Unzipped and has suspended booking its
share of Unzipped losses beyond its liability. As of January 31, 2001, the
Company's proportionate share of Unzipped unaudited losses in excess of the
established liability approximated $1.7 million. The Company believes that its
exposure related to Unzipped, should the joint venture dissolve, is adequately
provided for.
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 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.
At October 31 and January 31, 2001, the affiliate receivable balance from
Unzipped was $282,000 and $232,000, respectively. The Company is entitled to
receive royalty revenue from Unzipped equal to 3% of Unzipped's net sales.
Included in royalty income is $983,000 and $1,100,000 for the nine months ended
October 31, 2001 and 2000, respectively.
NOTE F RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
the fiscal year beginning February 1, 2002 to all goodwill and other intangible
assets recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted primarily for using
the purchase methods. At October 31, 2001, the net carrying amount of goodwill
is approximately $1.9 million, which is being amortized by approximately
$140,000 each year. Currently, the Company is assessing, but has not yet
determined how, the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operations.
NOTE G SUBSEQUENT EVENTS
On November 20, 2001, the Company entered into an agreement to sell one of its
retail outlet stores for approximately $556,000, subject to closing adjustments.
The resulting gain of approximately $100,000 will be recognized in the fourth
quarter. Pursuant to the agreement, the Company will continue to operate the
store through January 7, 2002.
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.
Results of Operations
For the three months ended October 31, 2001
Revenues. Net revenues increased by $2.9 million to $26.7 million from $23.8
million in the comparable period of the prior year. The net revenue increase
resulted primarily from increases in sales including an increase of $2.0 million
from the Company's private label men's division and retail store sales. Retail
store sales increased $.7 million, to $2.2 million, as compared to $1.4 million
in the third quarter of the prior year. Retail comparable store sales were up
15.4% in the third quarter of Fiscal 2002. Licensing income increased $100,000,
to $1.4 million from $1.3 million in the same quarter of the prior year.
Gross Profit. Gross profit increased by $1.9 million to $8.1 million as compared
to $6.2 million in the same quarter of the prior year. Gross profit margins
increased, as a percentage of net revenues, by 4.0% to 30.1%, as compared to
26.1% in the third quarter of the prior year. The increase is primarily
attributable to an increase in the gross margin from Candie's women's footwear,
partially offset by reduced margins for the Company's private label men's
division.
Operating Expenses. Operating expenses (including special charges) for the third
quarter were flat at $7.4 million. This resulted from ongoing cost reduction
initiatives, offset by the incremental costs associated with the opening of new
retail stores.
Interest Expense. Interest expense decreased by $90,000 to $328,000 from
$418,000 in the prior year quarter. The decrease resulted from lower average
interest rates and lower average outstanding borrowing as compared with the
comparable prior year period.
Income Taxes. The income tax provision for the quarter was offset by a reduction
in the valuation reserve. As a result, no tax provision was recorded for the
period ended October 31, 2001.
Net Income. The Company recorded net income of $297,000, compared to a loss of
$1.5 million in the prior year quarter.
For the nine months ended October 31, 2001
Revenues. Net revenues increased by $5.1 million to $82.5 million from $77.4
million in the comparable period of the prior year. The net revenue increase
resulted primarily from increases in sales in Candie's women's footwear, the
Company's private label men's division, retail store sales and a reduction in
sales returns and allowances, partially offset by sales decreases in Kid's and
Bongo footwear and the discontinuance of the Company's handbag division. Retail
store sales increased $2.6 million, to $5.9 million, as compared to $3.3 million
in the comparable period of the prior year. Retail comparable store sales
increased 29.4% for the nine months ended October 31, 2001. Licensing income
increased $280,000, to $3.9 million as compared to $3.6 million in the
comparable prior year nine month period.
Gross Profit. Gross profit increased by $3.6 million to $24.2 million as
compared to $20.6 million in the first nine months of the prior year. Gross
profit margins increased, as a percentage of net revenues, by 2.8% to 29.3%, as
compared to 26.5% for the nine months ended October 31, 2000. The increase is
primarily attributable to improved margins in Candie's women's footwear,
reductions in sales returns and allowances, an increase in retail sales that
have higher gross profit margins and an increase in licensing income, partially
offset by lower margins from the Company's private label men's division.
Operating Expenses. Operating expenses (including special charges) increased by
$892,000 to $21.6 million from $20.7 million in the first nine months of the
prior year. The increase is due primarily to the incremental costs associated
with the opening of new retail stores.
Interest Expense. Interest expense decreased by $369,000 to $949,000 from $1.3
million in the first nine months of the prior year. The decrease resulted from
lower average interest rates and lower average outstanding borrowing as compared
with the comparable prior year period.
Income Taxes. The income tax provision for the nine months was offset by a
reduction in the valuation reserve. As a result, no tax provision was recorded
for the nine months ended October 31, 2001.
Net Income. The Company recorded net income of $1.7 million, compared to a loss
of $828,000 in the first nine months of the prior year.
Liquidity and Capital Resources
At October 31, 2001, the current ratio was 1.075 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 used in operating activities totaled
$347,000, compared to cash provided of $3.5 million for the nine months ended
October 31, 2000. The increase in cash used in operating activities resulted
primarily from an increase in factoring and trade receivables, partially offset
by a reduction in inventories.
Capital expenditures for the nine months ended October 31, 2001 were $967,000,
compared to $1.1 million for the comparable period in the prior year. The
Company has forecasted additional capital expenditures of approximately $738,000
in Fiscal 2002.
Current Revolving Credit Facility
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. At October 31, 2001 and January 31, 2001,
borrowings under the Line of Credit totaled $11.1 million and $8.9 million,
respectively, which were secured against factored receivables and inventory.
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. The Company was in default of
certain covenants of its Line of Credit at October 31, 2001, but is negotiating
with its current lender to secure a waiver and with that and other lenders to
refinance the loan. The Company expects to be able to secure such waiver and /
or new financing shortly.
Other Borrowing Arrangements
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining
agreement balance considered to be an unsecured loan. The term of the agreement
is for a period of four years at an effective annual interest rate of 10.48%.
The outstanding loan balance as of October 31, 2001 was $1.3 million. The
quarterly payment on the loan is $260,000 including interest.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II. Other Information
Item 1. Legal Proceedings
In July 2000, the Company settled a stockholder class action brought in the
United States District Court for the Southern District of New York (the "Court")
entitled Willow Creek Capital Partners, L.P., v. Candie's, Inc., which alleged
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for the fiscal year ended
January 31, 1998 and the first three quarters of the fiscal year ended January
31, 1999, which caused the Company's securities to trade at artificially
inflated prices. Pursuant to the settlement the Company agreed to pay to the
plaintiffs total consideration of $10 million, payable in a combination of $4
million in cash and the balance in the Company's Common Stock and convertible
preferred stock. The Company has made the required $4 million cash payment. The
remaining $6 million will be paid in the form of the Company's Common Stock and
in preferred stock which will convert to the Company's Common Stock based on the
price of the Company's Common Stock on the first and second anniversary of the
"Effective Date" (August 2000) as defined in the settlement agreement approved
by the Court. The shares of stock have not yet been issued because the
plaintiffs' plan of distribution has not yet been finalized.
On August 4, 1999, the staff of the SEC 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 raised in
connection with the restatement.
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 Company has entered into a settlement agreement with Michael Caruso and Gene
Montesano ("Caruso Settlement Agreement"). The settlement provides that Caruso
may participate as a member of the Class in the settlement of the Willow Creek
Class Action and receive its proportionate interest in the class settlement fund
by filing a late proof of claim. In addition, the Company has agreed to pay
Caruso and Montesano the sum of $62,500 in equal quarterly statements, up to a
possible aggregate amount of $1 million, over a period of four years. However,
the obligation to make these payments shall terminate in the event the last
daily sale price per share of the Company's Common Stock reaches $4.98 during
any ten days in any thirty day period within such four year period.
The Caruso Settlement Agreement is not binding unless the Court in the Willow
Creek Class Action issues an Order permitting Caruso and Montesano to file a
late proof of claim and allowing such claim. A proposed Order permitting Caruso
and Montesano to file a late proof of claim and allowing such claim was filed
with the Court on October 19, 2001, and the parties are awaiting the Court's
determination.
From time to time, the Company is also made 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 three months ended October 31, 2001, the Company granted certain of
its employees and directors non-qualified stock options to purchase a total of
996,000 shares of its common stock at prices ranging from $1.70 to $2.50 per
share (an average of $2.1877 per share). The 996,000 stock options were
registered. 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 9, 2001 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
Non-Employee Director Stock Incentive Plan under which up to 300,000 shares of
Common Stock may be issued to all members of the Company's Board of Directors
who are not current employees of the Company or any of its subsidiaries.
Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Peter Siris and Ann Iverson
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.
The votes cast by stockholders with respect to the election of Directors were as
follows:
Votes Cast Votes
Director "For" "Withheld"
Neil Cole 11,949,577 101,643
Barry Emanuel 11,954,554 96,666
Steven Mendelow 11,957,079 94,141
Peter Siris 11,921,523 129,697
Ann Iverson 11,973,093 78,127
The Company's Non-Employee Director Stock Incentive Plan was approved by the
stockholders. The votes cast by stockholders with respect to the Non-Employee
Director Stock Incentive Plan were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
11,610,822 380,692 59,706
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits Exhibit 10.1 - Candie's Inc. Non-Employee Director Stock Incentive
Plan (incorporated herein by reference to Exhibit A to the Company's Proxy
Statement dated July 3, 2001 contained in the Company's Schedule 14A filed with
the SEC on July 3, 2001). Exhibit 27 - Financial Data Schedule (for SEC use
only) b. Reports on Form 8-K-None
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: November 20, 2001 by:/s/ Neil Cole
--------------------------- -----------------------------------
Neil Cole
Chairman of the Board, President
and Chief Executive Officer
Date: November 20, 2001 by:/s/ Richard Danderline
--------------------------- -----------------------------------
Richard Danderline
Executive Vice President of Finance
and Operations
Index to Exhibits
Exhibit
Numbers Description
10.1 Candie's Inc. Non-Employee Director Stock Incentive Option Plan
(incorporated herein by reference to Exhibit A to the Company's Proxy
Statement dated July 3, 2001 contained in the Company's Schedule 14A filed
with the SEC on July 3, 2001).
27 Financial Data Schedule (for SEC use only)