United States 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, 2004
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 Identification No.)
incorporation or organization)
215 West 40th Street
New York, NY 10018
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 730-0030
- --------------------------------------------------------------------------------
(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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes__ No. X
Common Stock, $.001 Par Value -- 27,220,393 shares as of August 29, 2004
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
-----------
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - July 31, 2004 and January 31, 2004..................... 3
Condensed Consolidated Statements of Operations - Three and Six Months Ended
July 31, 2004 and 2003................................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended
July 31, 2004............................................................................ 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended
July 31, 2004 and 2003................................................................... 6
Notes to Condensed Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 17
Item 4. Controls and Procedures........................................................................ 17
Part II. Other Information..............................................................................
Item 1. Legal Proceedings............................................................................. 18
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities .............. 18
Item 3. Defaults upon Senior Securities (Not Applicable)...............................................
Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)...........................
Item 5. Other Information (Not Applicable).............................................................
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
Signatures ........................................................................................... 19
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, January 31,
2004 2004
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 1,094 $ 2,794
Accounts receivable, net........................................... 2,810 3,388
Due from factors, net.............................................. 16,959 8,953
Due from affiliate................................................. 183 174
Inventories........................................................ 1,818 7,439
Deferred income taxes.............................................. 1,549 1,549
Prepaid advertising and other...................................... 1,076 1,358
------- -------
Total Current Assets................................................... 25,489 25,655
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 2,674 2,670
Less: Accumulated depreciation and amortization.................... 2,250 2,118
------- -------
424 552
Other assets:
Restricted cash.................................................... 2,900 2,900
Goodwill........................................................... 25,241 25,241
Intangibles, net.................................................... 15,235 16,317
Deferred financing costs, net...................................... 2,279 2,042
Deferred income taxes.............................................. 2,073 2,073
Other.............................................................. 773 65
------- -------
48,501 48,638
------- -------
Total Assets........................................................... $ 74,414 $ 74,845
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $ 13,288 $ 12,775
Accounts payable and accrued expenses.............................. 4,262 10,424
Due to affiliates.................................................. 4,413 2,342
Current portion of deferred revenue............................. 1,264 2,010
Current portion of long-term debt............................... 3,016 2,354
------- -------
Total Current Liabilities.............................................. 26,243 29,905
Deferred revenue....................................................... 663 1,052
Long-term liabilities.................................................. 25,277 25,020
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued
27,220 at July 31, 2004 and 25,915 issued
at January 31, 2004........................................... 28 26
Additional paid-in capital......................................... 73,818 71,008
Retained earnings (deficit)........................................ (50,948) (51,499)
Treasury stock - at cost - 198 shares at July 31, 2004 and
January 31, 2004............................................... (667) (667)
------- -------
Total Stockholders' Equity............................................. 22,231 18,868
------- -------
Total Liabilities and Stockholders' Equity............................. $ 74,414 $ 74,845
======= =======
See notes to condensed consolidated financial statements.
3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------------- -----------------------------------
2004 2003 2004 2003
(000's omitted, except per share data)
Net sales.......................................... $26,590 $40,214 $43,879 $81,077
Licensing income................................... 2,084 1,841 4,020 3,019
------------- ------------ ------------- --------------
Net revenues....................................... 28,674 42,055 47,899 84,096
Cost of goods sold................................. 22,780 32,986 37,063 63,133
------------- ------------ ------------- -------------
Gross profit....................................... 5,894 9,069 10,836 20,963
Operating expenses:
Selling, general and administrative expenses..... 4,636 9,556 8,750 19,417
Special charges.................................... - 2,450 99 2,884
------------- ------------ ------------ --------------
4,636 12,006 8,849 22,307
------------- ------------ ------------ --------------
Operating income (loss)........................... 1,258 (2,937) 1,987 (1,338)
Interest expense.................................. 740 843 1,436 1,716
------------- ------------ ------------ --------------
Income (loss) before income taxes................ 518 (3,780) 551 (3,054)
Income tax benefit............................... - - - -
------------- ------------ ------------ --------------
Net income (loss)................................ $ 518 $(3,780) $ 551 $ (3,054)
============= ============ ============ ==============
Earnings (loss) per common share:
Basic................................... $ 0.02 $ (0.15) $ 0.02 $ (0.12)
============= ============ ============ ==============
Diluted................................. $ 0.02 $ (0.15) $ 0.02 $ (0.12)
============= ============ ============ ==============
Weighted average number of common shares outstanding:
Basic.................................. 26,602 25,068 26,315 25,042
============= ============ ============ ==============
Diluted................................ 27,735 25,068 27,322 25,042
============= ============ ============ ==============
See notes to condensed consolidated financial statements.
4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Six Months Ended July 31, 2004
(000's omitted)
Additional Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
----------------------------------------------------------------------
Balance at February 1, 2004 25,915 $ 26 $ 71,008 $ (51,499) $ (667) $ 18,868
Issuance of common stock to directors ...... 21 -- 50 -- -- 50
Issuance of common stock to designees of
TKO Apparel, Inc..................... 1,000 1 2,184 -- -- 2,185
Issuance of common stock to a non-employee . 10 -- 25 -- -- 25
Exercise of stock options................... 274 1 551 -- -- 552
Net income.................................. -- -- -- 551 -- 551
----------------------------------------------------------------------
Balance at July 31, 2004 27,220 $ 28 $ 73,818 $ (50,948) $ (667) $ 22,231
----------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
--------------------------
July 31, July 31,
2004 2003
----------- ----------
(000's omitted)
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities........................ $ (6,483) $ 1,394
----------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (4) (133)
----------- ----------
Net cash used in investing activities...................................... (4) (133)
----------- ----------
FINANCING ACTIVITIES:
Proceeds from long - term debt..................................... 3,600 -
Payment of long-term debt.......................................... (1,131) (1,055)
Prepaid interest expense - long term............................... (500) -
Deferred financing costs........................................... (430) (89)
Proceeds from common stock issuance................................ 2,184 -
Proceeds from exercise of stock options............................ 551 96
Revolving notes payable - bank..................................... 513 899
----------- ----------
Net cash provided by (used in) financing activities........................ 4,787 (149)
----------- ----------
INCREASE (DECREASE) IN CASH................................................ (1,700) 1,112
Cash at beginning of period................................................ 2,794 1,899
----------- ----------
Cash at end of period...................................................... $ 1,094 $ 3,011
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 1,752 $ 1,636
=========== ==========
See notes to condensed consolidated financial statements.
6
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
July 31, 2004
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 period ended
July 31, 2004 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, 2004.
NOTE B STOCK OPTIONS
Pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options has been measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount the employee must pay to acquire the stock.
Under this approach, the Company only recognizes compensation expense for
stock-based awards to employees for options granted at below-market prices, with
the expense recognized over the vesting period of the options.
The stock-based employee compensation cost that would have been included in the
determination of net income if the fair value based method had been applied to
all awards, as well as the resulting pro forma net income and earnings per share
using the fair value approach, are presented in the following table. These pro
forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
(000's omitted except per share data) Three Months Ended Six Months Ended
July 31, July 31,
-------- --------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Net income (loss) - as reported $ 518 $(3,780) $ 551 $(3,054)
Deduct: Stock-based employee compensation
determined under the fair value based
Method (424) (253) (894) (735)
-------------- ------------- ------------- --------------
Pro forma net income (loss) $ 94 $(4,033) $ (343) $(3,789)
============== ============= ============= ==============
Basic and diluted earnings (loss) per share:
As reported $ 0.02 $(0.15) $ 0.02 $(0.12)
============== ============= ============= ==============
Pro forma $ 0.00 $(0.16) $ (0.01) $(0.16)
============== ============= ============= ==============
NOTE C FINANCING AGREEMENTS
In August 2002, IP Holdings LLC ("IPH"), an indirect wholly owned subsidiary of
the Company, issued $20 million of asset-backed notes in a private placement
secured by intellectual property assets (tradenames, trademarks and license
payments thereon). The notes have a 7-year term with a fixed interest rate of
7.93% with quarterly principal and interest payments of approximately $859,000.
7
The notes are subject to a liquidity reserve account of $2.9 million (reflected
as restricted cash in the accompanying balance sheet) funded by a deposit of a
portion of the proceeds of the notes. The net proceeds of $16.2 million were
used to reduce amounts due by the Company under its existing revolving credit
facilities. Concurrent with this payment, the credit facility was further
amended to eliminate the over-advance provision along with certain changes in
the availability formula. Costs incurred to obtain this financing totaled
approximately $2.6 million which amount has been deferred and is being amortized
over the life of the debt.
In April 2004, IPH amended the asset-backed notes to borrow an additional $3.6
million. The additional borrowing matures in August 2009, at a floating interest
rate of LIBOR + 4.45%, with $500,000 of interest prepaid at closing. The net
proceeds of $2.9 million are being used for general working capital purposes.
Costs incurred to obtain this financing totaling approximately $178,500 has been
deferred and amortized over the life of the debt.
See Note F of the Notes to the Condensed Consolidated Financial Statements
regarding the financing agreement of Unzipped Apparel, LLC ("Unzipped"), the
Company's wholly-owned subsidiary.
NOTE D EARNINGS (LOSS) PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
earnings attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects,
in periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options, warrants and convertible preferred
stock. At July 31, 2004, approximately 6.0 million options were outstanding
under the Company's various option plans.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
2004 2003 2004 2003
-------------------------- -------------------------
(000's omitted)
Basic .......................................................... 26,602 25,068 26,315 25,042
Effect of assumed conversions of employee stock options......... 1,133 - 1,007 -
-------------------------- -------------------------
Diluted ........................................................ 27,735 25,068 27,322 25,042
========================== =========================
NOTE E COMMITMENTS AND CONTINGENCIES
In April 2003, the Company settled the Securities and Exchange Commission's
("SEC") investigation of the Company regarding matters that had been under
investigation by the SEC since July 1999.
In connection with the settlement, the Company, without admitting or denying the
SEC's allegations, consented to the entry by the SEC of an administrative order
in which the Company was ordered to cease and desist from committing or causing
any violations and any future violations of certain books and records, internal
controls, periodic reporting and the anti-fraud provisions of the Securities
Exchange Act of 1934 and the anti-fraud provisions of the Securities Act of
1933.
In November 2001, the Company settled a litigation filed in December 2000 in the
United States District Court for Southern District of New York, by Michael
Caruso, as trustee of the Claudio Trust and Gene Montasano (collectively,
"Caruso"). The settlement agreement between the Company and Caruso provides for
the Company to pay to Caruso equal quarterly payments of $62,500, up to a
maximum amount of $1 million, over a period of four years. However, the
Company's obligation to make these quarterly payments will terminate in the
event that the last daily sale price per share of the Company's common stock is
at least $4.98 during any ten days in any thirty day period within such four
year period with any remaining balance to be recognized as income.
In January 2002, Redwood Shoe Corporation ("Redwood"), one of the Company's
former buying agents of footwear filed a complaint against the Company in the
United States District Court for the Southern District of New York, alleging
that the Company breached various contractual obligations to Redwood and seeking
to recover damages in excess of $20 million and its litigation costs. The
Company filed a motion to dismiss certain counts of the complaint based upon
Redwood's failure to state a claim, in response to which Redwood has filed an
amended complaint. The Company moved to dismiss certain parts of the amended
complaint. The magistrate assigned to the matter granted, in part, the Company's
motion to dismiss, and this ruling is currently pending before the District
Court. The Company intends to vigorously defend the lawsuit, and file
counterclaims against Redwood after the District Court rules on the pending
motion to dismiss. At January 31, 2004 and 2003, the payable to Redwood totaled
approximately $1.8 million which is subject to any claims, offsets or other
deductions the Company may assert against Redwood.
8
On August 5, 2004, the Company, along with Unzipped Apparel, LLC. ("Unzipped"),
Michael Caruso & Co., Inc. and IPH (collectively, "Plaintiffs") commenced a
lawsuit in the Superior Court of California, Los Angeles County, against
Unzipped's former manager, former supplier and former distributor, Sweet
Sportswear, LLC ("Sweet"), Azteca Production International, Inc. ("Azteca"), and
Apparel Distribution Services, LLC ("ADS"), and a principal of these entities
and former Company Board member, Hubert Guez (collectively, "Defendants"). The
Plaintiffs allege that Defendants' fraudulently induced Plaintiffs to purchase
Sweet's 50% interest in Unzipped for an inflated price, Sweet and Azteca
committed material breaches of the management, supply and distribution
agreements and Guez materially breached his fiduciary obligations to the
Company while a member of the Company's Board of Directors and seeks damages in
excess of $50 million. On August 31, 2004, the Superior Court granted
Plaintiffs' request for preliminary injunctive relief, and ordered Defendants to
make available to Plaintiffs approximately 657,000 pairs of Bongo(R) jeans
currently in Defendants' possession or control upon Plaintiffs making a $75,600
cash payment into the Court's escrow account and posting a $1.7 million bond
with the Court.
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 herein, the Company knows of
no material legal proceedings, pending or threatened, against the Company.
NOTE F UNZIPPED APPAREL, LLC
Equity Investment:
On October 7, 1998, the Company formed Unzipped with a joint venture partner
Sweet, the purpose of which was to market and distribute apparel under the
BONGO(R) label. The Company and Sweet each had a 50% interest in Unzipped.
Pursuant to the terms of the joint venture, the Company licensed the BONGO
trademark to Unzipped for use in the design, manufacture and sale of certain
designated apparel products.
Acquisition:
On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped
from Sweet for 3 million shares of the Company's common stock and $11 million in
debt evidenced by an 8% senior subordinated note due 2012. In connection with
the acquisition of Unzipped, the Company filed and declared effective a
registration statement with the SEC for the 3 million shares of the Company's
common stock issued to Sweet. The terms of this agreement provided that in the
event the registration statement was not declared effective by April 23, 2003,
the Company would be required to pay penalties to Sweet. Since the registration
statement was not declared effective until July 29, 2003, the Company was
required to pay $82,500 to Sweet as a penalty. The Company recorded $82,500
expense for such penalty in the quarter ended April 30, 2003.
Revolving Credit Agreement:
On February 25, 2003, Unzipped entered into a two-year $25 million credit
facility ("the Unzipped Credit Facility") with GE Capital Commercial Services,
Inc. ("GECCS" or "the Lender"). Borrowings are limited by advance rates against
eligible accounts receivable and inventory balances, as defined. Under the
facility, Unzipped may also arrange for letters of credit in an amount up to $5
million. The borrowings bear interest at a rate of 2.25% per annum in excess of
the 30 day Commercial Paper rate or 3%, whichever is greater.
Borrowings under the facility are secured by substantially all of the assets of
Unzipped. In addition, Unzipped has agreed to subordinate its accounts payable
to Azteca, ADS and Sweet to GECCS. Unzipped is also required to meet a minimum
tangible net worth covenant, as defined. At July 31, 2004, Unzipped's borrowings
totaled $13.4 million under the revolving credit agreement and the availability
under the formula was $2.2 million.
9
Unzipped is in default of certain covenants under the Unzipped Credit Facility,
including the tangible net worth covenant. On September 9, 2004, the Company and
Unzipped entered into a Forbearance Agreement with the Lender whereby the Lender
agreed to forebear from exercising its remedies under the Unzipped Credit
Facility in connection with the defaults, and the Lender agreed to continue to
provide financing under the Unzipped Credit Facility to enable Unzipped to
fulfill its remaining purchase orders until the jeans wear business is
transitioned to TKO Apparel, Inc. ("TKO") under a licensing arrangement that
became effective on August 1, 2004, granting TKO the exclusive right to design,
manufacture, distribute and sell jeanswear under the Bongo brand (the "TKO
License"). Borrowings under the Forbearance Agreement are subject to certain
advance rate and loan limits at the discretion of the Lender. The outstanding
loan amount as of July 31, 2004 was $13.4 million
Related Party Transactions:
Until August 5, 2004, Unzipped had a supply agreement with Azteca for the
development, manufacturing, and supply of certain products bearing the Bongo
trademark. As consideration for the development of the products, Unzipped paid
Azteca pursuant to a separate pricing schedule.
Azteca also allocated expenses to Unzipped for Unzipped's use of a portion of
Azteca's office space, design and production team and support personnel.
Until August 5, 2004, the Company had a management agreement with Sweet for a
term ending January 31, 2005, which provided for Sweet to manage the operations
of Unzipped in return for, commencing in Fiscal 2004, a management fee based
upon certain specified percentages of net income that Unzipped achieved during
the three-year term. In addition, Sweet guaranteed that the net income, as
defined, of Unzipped shall be no less than $1.7 million for each year during the
term commencing in Fiscal 2004 (the "Guarantee"). In the event that the
Guarantee is not met, Sweet is obligated to pay the difference between the
actual net income, as defined, and the Guarantee (the "Shortfall Payment").
For the quarter ended July 31, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if the Guarantee has been met) of $312,400, resulting
in an adjustment of Shortfall Payment of $737,400 against the $425,000 quarterly
Guarantee. This adjustment has been recorded in the condensed consolidated
income statement as a reduction of Unzipped's cost of sales and on the balance
sheet as a reduction of the 8% senior subordinated note due to Sweet, as
provided for in the management agreement. After adjusting for the Shortfall
Payment, Unzipped's reported GAAP net income for the quarter ended July 31, 2004
was $312,500. In the fiscal quarter ended July 31, 2004, the Company stopped
making the interest payment on the 8% senior subordinated note to partially
offset the Shortfall Payment due from Sweet. Such interest payment is to be
resumed after the Shortfall Payment is satisfied.
For the six months ended July 31, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if the Guarantee has been met) of $875,400, resulting
in an adjustment of Shortfall Payment of $1.7 million against the $850,000 six
month Guarantee. This adjustment has been recorded in the condensed consolidated
income statement as a reduction of Unzipped's cost of sales and on the balance
sheet as a reduction of the 8% senior subordinated note due to Sweet, as
provided for in the management agreement. After adjusting for the Shortfall
Payment, Unzipped's reported GAAP net income for the six months ended July 31,
2004 was $625,000.
Until August 5, 2004, Unzipped had a distribution agreement with Apparel
Distribution Services (ADS), an entity that shares common ownership with Sweet,
for a term ending January 31, 2005. The agreement provided for a per unit fee
for warehousing and distribution functions and per unit fee for processing and
invoicing orders. The agreement also provided for reimbursement for certain
operating costs incurred by ADS and charges for special handling fees at hourly
rates approved by management.
The related party transactions are summarized as follows ('000 omitted):
Three Months Ended July 31, Six Months Ended July 31,
2004 2003 2004 2003
-------------- ------------- -------------- ---------------
Products purchased from Azteca $15,139 $12,200 $22,450 $28,400
Allocated office space, design and
production team and support
personnel expense from Azteca 59 112 118 230
Management fee - 361 - 477
Expenses of distribution services per
distribution agreement with ADS 1,158 1,186 1,925 2,082
Until August 5, 2004, Unzipped occupied office space in a building rented by ADS
and Commerce Clothing Company, LLC (Commerce), a related party to Azteca.
Amounts due to related parties at July 31, 2004 and included in accounts payable
and accrued expenses, consist of the following (Note - all amounts are
non-interest bearing):
(`000 omitted)
Azteca $ 2,639
Sweet -
ADS 1,774
$ 4,413
Disposition
On June 9, 2004, the Company entered into an agreement to sell Unzipped to TKO
on or before February 1, 2005 for a purchase price based on the tangible net
worth of Unzipped at the time of closing.
10
NOTE G SEGMENT INFORMATION
The Company identifies operating segments based on, among other things, the way
the Company's management organizes the components of its business for purposes
of allocating resources and assessing performance. With the acquisition of
Unzipped, the Company redefined the reportable operating segments. The Company's
operations are now comprised of two reportable segments: footwear and apparel.
Segment revenues are generated from the royalty income from licensees and the
sale of footwear, apparel and accessories through wholesale channels and the
Company's retail locations. The Company defines segment income as operating
income before interest expense and income taxes. Summarized below are the
Company's segment revenues, income (loss) and total assets by reportable
segments for the fiscal quarter ended July 31, 2004.
(000's omitted) Footwear Apparel Consolidated
----------------------------------------------
For the fiscal quarter ended July 31, 2004
Total revenues $ 7,905 $ 20,769 $ 28,674
Segment income 763 495 1,258
Net interest expense 740
Income before provision for income taxes $ 518
For the six months ended July 31, 2004
Total revenues $ 15,770 $ 32,129 $ 47,899
Segment income 1,056 931 1,987
Net interest expense 1,436
Income before provision for income taxes $ 551
Total assets as of July 31, 2004 $ 28,236 $ 46,178 $ 74,414
For the fiscal quarter ended July 31, 2003
Total revenues $ 18,453 $ 23,602 $ 42,055
Segment (loss) income (5,221) 2,284 (2,937)
Net interest expense 843
Loss before provision for income taxes $ (3,780)
For the six months ended July 31, 2003
Total revenues $ 43,245 $ 40,851 $ 84,096
Segment (loss) income (4,471) 3,133 (1,338)
Net interest expense 1,716
Loss before provision for income taxes $ (3,054)
Total assets as of July 31, 2003 $ 45,535 $ 50,654 $ 96,189
NOTE H SUBSEQUENT EVENTS
On August 5, 2004, the Company terminated the management agreement between
Unzipped and with Sweet the supply agreement between Unzipped and Azteca and the
distribution agreement between Unzipped and ADS.
On September 9, 2004, the Company and Unzipped entered into a Forbearance
Agreement with the Lender whereby the Lender agreed to forebear from exercising
its remedies under the Unzipped Credit Facility in connection with the defaults,
and the Lender agreed to continue to provide financing under the Unzipped Credit
Facility, to enable Unzipped to fulfill its remaining purchase orders until the
jeans wear business is transitioned to TKO under a licensing arrangement that
became effective on August 1, 2004. Borrowings under the Forbearance Agreement
are subject to certain advance rate and loan limits at the discretion of the
Lender.
See Note E.
11
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 successfully develop
and market new products, particularly in light of rapidly changing fashion
trends, the impact of supply and manufacturing constraints or difficulties
relating to the Company's dependence on foreign manufacturers, uncertainties
relating to customer plans and commitments, the ability of licensees to sell
branded products, competition, uncertainties relating to economic conditions in
the markets in which the Company or its licensees operate, the ability to hire
and retain key personnel, the ability to obtain capital if required, the risks
of litigation and regulatory proceedings, 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 statement, was made.
General Introduction. In May 2003, the Company changed its business model by
licensing the CANDIE'S and BONGO trademarks for footwear to Steven Madden, Ltd
and Kenneth Cole Productions, Inc., respectively, effectively eliminating the
Company's operations as they related to the production and distribution of
women's and girl's footwear. In conjunction with the elimination of its footwear
operations, the Company closed all of its retail stores during Fiscal 2004. The
Company remains in the business of manufacturing, distributing, selling and
marketing jeanswear under the BONGO label through its Unzipped division until in
or about November, when TKO will take over the business under the TKO License.
See Note F of Notes to Condensed Consolidated Financial Statements. The Company
also markets and sells a variety of men's outdoor boots and casual shoes under
private label brands through Bright Star Footwear, LLC ("Bright Star").
On June 9, 2004, the Company entered into an agreement with TKO whereby TKO
agreed to purchase Unzipped on or before February 1, 2005 for a purchase price
based on the tangible net worth of Unzipped on the date of closing. See Note F
of Notes to Condensed Consolidated Financial Statements. The Company also
entered into a licensing agreement with TKO for the exclusive rights to design,
manufacture, distribute and market jeanswear under the BONGO brand, effective on
August 1, 2004. The license expires on December 31, 2007 subject to certain
renewal options and is subject to TKO meeting certain performance and minimum
net sales standards. Further, in June 2004, TKO agreed that it or its designees
would purchase 1 million shares of the Company's restricted common stock for an
aggregate price of $2.2 million and the Company sold the shares to such
designees. In connection therewith, the Company subsequently filed with SEC a
registration statement, effective as of July 2, 2004, covering the re-sale of
the 1 million shares sold by it to the TKO designees. The Company has agreed to
pay certain penalties to the TKO designees if the shares cannot be publicly sold
within a specified period of time.
As a result of the Company's transitions ("Transition") to a licensing business,
the Company's operating results are not comparable to prior years. Further,
since there will be no net sales attributable to women's wholesale and retail
footwear activities in Fiscal 2005 and thereafter the results for Fiscal 2005
and 2006 are also expected to be non-comparable to Fiscal 2004 and prior years.
Seasonal and Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of its licensees' businesses as well as
a result of holidays, weather, the timing of product shipments, market
acceptance of Company products, the mix, pricing and presentation of the
products offered and sold, the hiring and training of personnel, the timing of
inventory write downs, fluctuations in the cost of materials, the mix between
wholesale and licensing businesses, and the incurrence of operating costs beyond
the Company's control as may be caused general economic conditions, and other
unpredictable factors such as 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.
12
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 under license to
help reduce the dependence on any particular product line and lessen the impact
of the seasonal nature of its business. The success of the Company, however,
will still largely remain dependent on its ability to contract with and retain
key licensees and the licensees' ability to retain key licenses, to predict
accurately upcoming fashion trends among its customer base, to build and
maintain brand awareness and to fulfill the product requirements of the 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 establishments, among other
factors noted herein, could adversely affect the Company's future operating
results. The Company's products are marketed primarily for Fall and Spring
seasons, with slightly higher volumes of products sold during the second fiscal
quarter.
Effects of Inflation. The Company does not believe that the relatively moderate
rates of inflation experienced over the past few years in the United States,
where it primarily competes, have had a significant effect on revenues or
profitability.
Summary of Operating Results:
The Company had net income of $518,000 and $551,000 for the quarter
("Second Quarter")and six months ("Six Months") ended July 31, 2004,
respectively, compared to net loss of $3.8 million and $3.1 million for the
quarter and six months ended July 31, 2003, respectively. In the Second Quarter,
there was no special charge compared to $2.5 million of special charges in the
quarter ended July 31, 2003. Interest expense in the Second Quarter was $740,000
as compared to $843,000 of interest expense for the comparable period a year
ago. In the Six Months, there was $99,000 of special charges and $1.4 million of
interest expense as compared to $2.9 million of special charges and $1.7 million
of interest expense for the comparable period a year ago.
The Company's operating income were $1.3 million and $2.0 million for the
Second Quarter and the Six Months, respectively, compared to operating loss of
$2.9 million and $1.3 million in the comparable prior year periods,
respectively.
During Fiscal 2004, the Company exited the operating footwear business,
closing its wholesale and retail footwear businesses and granting footwear
licenses to third party licensees, which significantly impacted its operating
results and its comparability to prior periods.
Results of Operations
For the three months ended July 31, 2004
Revenues. During the Second Quarter, consolidated net sales decreased from the
comparable prior year quarter by $13.6 million to $26.6 million. As a result of
the Company's license of its footwear operations in May 2003, there were no
wholesale or retail women's footwear net sales in the Second Quarter as compared
to $10.6 million in the prior year quarter. There will be no net sales for
wholesale and retail women's footwear for the remainder of Fiscal 2005 and
thereafter.
Unzipped's net sales decreased by $2.8 million from $23.6 million in the prior
year quarter to $20.8 million in Second Quarter. This decrease consists of a
$4.5 million decrease related to the number of units sold, partially offset by
$953,000 related to unit price increases and a $811,000 decrease in deductions
for returns and allowances. Deductions for returns and allowances for Unzipped
in the Second Quarter were $1.6 million or 7.0% of its gross sales as compared
to $2.4 million, or 9.2% of its gross sales during the comparable prior year
period.
Bright Star men's private label footwear net revenues decreased from $6.0
million in the prior year quarter to $5.8 million in the Second Quarter.
Licensing income increased $243,000, or 13.2% to $2.1 million in the Second
Quarter from $1.8 million in the prior year quarter. The increase was due
primarily to revenue generated by new licenses as the Company transitioned from
an operating footwear business to a licensing business.
Gross Profit. Consolidated gross profit decreased by $3.2 million to $5.9
million in the Second Quarter from $9.1 million in the prior year quarter. There
was no gross profit from wholesale and retail women's footwear in the Second
Quarter as compared to $1.1 million in the prior year quarter. Unzipped's gross
profit in Second Quarter was $3.3 million, or 15.7 % of its net revenues as
compared to $5.4 million, or 22.9% of net revenues in the prior year quarter.
Unzipped's gross profit in the Second Quarter included $737,400 adjustment from
the Shortfall Payment (See Note F to Condensed Consolidated Financial
Statements). Unzipped's gross profit before the adjustment was $2.5 million or
12.1% of its net revenues, a 10.8% decrease from 22.9% achieved in the prior
year quarter, primarily resulting from the increase in reserves in obsolete
inventories and deductions for returns and allowances discussed above. Bright
Star gross profit decreased by $139,000 from $693,000 in the prior year quarter
to $554,000 in the Second Quarter.
13
Operating Expenses. During the Second Quarter, consolidated selling, general and
administrative expenses decreased by $4.9 million to $4.7 million from $9.6
million in the prior year quarter. Selling, general and administrative expenses
related to the Company's activities other than Unzipped decreased by $4.5
million to $1.9 million in the Second Quarter as compared to $6.4 million in the
comparable prior year period. The decrease resulted from the Company's closing
its wholesale and retail women's footwear operations and transitioning to a
licensing business during the second half of Fiscal 2004. The Company
anticipates further significant decreases in selling, general and administrative
expenses for the remainder of Fiscal 2005, its first full year under the
licensing model when compared to the prior year periods. Included in the Second
Quarter was $232,000 from the recovery of a bad debt written off in the prior
year. Selling, general and administrative expenses for Bright Star were $257,000
in the Second Quarter, $70,000 decrease from $327,000 in the prior year quarter,
primarily due to the recovery of bad debt written off in prior year end.
Unzipped's selling, general and administrative expenses decreased $328,000 in
the Second Quarter to $2.8 million as compared to $3.1 million in the prior year
quarter. As a percentage of net sales, Unzipped's selling, general and
administrative expenses decreased to 13.8% in the Second Quarter as compared to
13.3% in prior year quarter.
For the Second Quarter, the Company incurred no special charges as compared to
$2.4 million in the prior year quarter, which consisted of $2.1 million charges
related to the Transition, $260,000 severance pay and other benefits for
terminated employees, and $81,000 legal fees related to the settlement of the
Company's SEC investigation. (See Note F to Condensed Consolidated Financial
Statements)
Interest Expense. Interest expense decreased by $103,000 in the Second Quarter
to $740,000, compared to $843,000 in the prior year quarter. Included in
interest expense in the Second Quarter was $182,000 from Unzipped's revolving
credit facility, as compared to $189,000 in the prior year period, a decrease of
$7,000. The Unzipped interest expense decrease resulted from lower average
outstanding borrowing and, to a lesser extent, lower average interest rates as
compared to the prior year period. There was no interest expense under the
revolving credit facility for the operating footwear business in the Second
Quarter, compared to $65,000 in the prior year quarter, as the Company closed
its operating wholesale and retail footwear business. Also included in interest
expense in the Second Quarter was $165,000 from the 8% senior subordinated note
in connection with the Unzipped acquisition as compared to $220,000 in the prior
year quarter. Interest expense in the Second Quarter associated with the asset
backed notes issued by IPH, a subsidiary of the Company was $391,000 as compared
to $369,000 in the comparable period in the prior year.
Income Tax Expense. No tax expense was recorded for the current and prior year
quarter, due to a reduction in the valuation reserve, which offsets the income
tax provision.
Net Income(loss). The Company recorded net income of $518,000, compared to $3.8
million net loss in the comparable quarter of prior year.
For the six months ended July 31, 2004
Revenues. During the Six Months, consolidated net sales decreased from the
comparable prior year period by $36.2 million to $47.9 million. As a result of
the Company changing to licensing arrangements in its footwear operations in May
2003, there were no wholesale or retail women's footwear net sales in the Six
Months as compared to $30.7 million in the prior year period. The revenues in
Six Months reflect an increase of $5.5 million in sales and cost of sales in the
first quarter ended April 30, 2004 from the Company's Bright Star subsidiary to
recognize, as gross sales, certain revenues previously recorded as net sales.
This change will be reported in an amended 10Q filing for the quarter ended
April 30, 2004. This reclassification does not affect the previously reported
gross profit, operating income, net income or earnings per share and no similar
change is required for prior period. There will be no net sales for wholesale
and retail women's footwear for the remainder of Fiscal 2005 and thereafter.
Unzipped's net sales decreased by $8.7 million from $40.8 million in the prior
year period to $32.1 million in Six Months. This decrease consists of a $8.0
million decrease related to the number of units sold, and $1.1 million related
to unit price decreases, partially offset by a $400,000 decrease in deductions
for returns and allowances.
14
In the Six Months, Bright Star men's private label footwear net revenues
increased from $9.6 million in the prior year period to $11.8 million. As
mentioned above, the revenues in Six Months reflect an increase of $5.5 million
in sales and cost of sales in the first quarter ended April 30, 2004 from the
Company's Bright Star subsidiary to recognize, as gross sales, certain revenues
previously recorded as net sales. This change will be reported in an amended 10Q
filing for the quarter ended April 30, 2004. This reclassification does not
affect the previously reported gross profit, operating income, net income or
earnings per share.
Licensing income increased $1.0 million, or 33.2% to $4.0 million in the Six
Months from $3.0 million in the prior year period. The increase was due
primarily to revenue generated by new licenses as the Company transitioned from
an operating footwear business to a licensing business.
Gross Profit. Consolidated gross profit decreased by $10.1 million to $10.8
million in the Six Months from $20.9 million in the prior year period. There was
no gross profit from wholesale and retail women's footwear in the Six Months as
compared to $8.3 million in the prior year period. Unzipped's gross profit in
Six Months was $5.8 million, or 18.0 % of its net revenues as compared to $8.7
million, or 21.4% of net revenues in the prior year period. Unzipped's gross
profit in the Six Months included $1.7 million adjustment from the Shortfall
Payment (See Note F to Condensed Consolidated Financial Statements). Unzipped's
gross profit before the adjustment was $4.1 million or 12.6% of its net
revenues, a 8.8% decrease from the gross proft percentage of 21.4% achieved in
the prior year period, primarily resulting from the increase in reserves in
obsolete inventories and deductions for returns and allowances discussed above.
Bright Star gross profit increased from $959,000 in the prior year period to
$1.0 million in the Six Months.
Operating Expenses. During the Six Months, consolidated selling, general and
administrative expenses decreased by $10.7 million to $8.7 million from $19.4
million in the prior year period. Selling, general and administrative expenses
related to the Company's activities other than Unzipped decreased by $9.9
million to $3.9 million in the Six Months as compared to $13.8 million in the
comparable prior year period. The decrease resulted from the Company's closing
its wholesale and retail women's footwear operations and transitioning to a
licensing business during the second half of Fiscal 2004. Included in the Second
Quarter was $232,000 from the recovery of a bad debt written off in the prior
year. The Company anticipates further significant decreases in selling, general
and administrative expenses for the remainder of Fiscal 2005, its first full
year under the licensing model when compared to the prior year periods.
Unzipped's selling, general and administrative expenses decreased $753,000 in
the Six Months to $4.9 million as compared to $5.6 million in the prior year
period. As a percentage of net sales, Unzipped's selling, general and
administrative expenses increased to 15.1% in the Six Months as compared to
13.7% in prior year period. Selling, general and administrative expenses for
Bright Star were $545,000 in the Six Month, $67,000 decrease from $612,000 in
prior year period, primarily due to the recovery of bad debt written off in
prior year end.
For the Six Months, the Company's special charges included $99,000, consisting
primarily of legal and professional fees as compared to $2.9 million in the
prior year period, which consisted of $2.1 million charges related to the
Transition, $260,000 severance pay and other benefits for terminated employees,
$432,000 legal fees related to the settlement of the Company's SEC investigation
and $82,500 penalty paid to Sweet for late stock registration in connection with
the Unzipped acquisition (See Note F to Condensed Consolidated Financial
Statements)
Interest Expense. Interest expense decreased by $280,000 in the Six Months to
$1.4 million, compared to $1.7 million in the prior year period. Included in
interest expense in the Six Months were $305,000 from Unzipped's revolving
credit facility, as compared to $400,000 in the prior year period, a decrease of
$95,000. The Unzipped interest expense decrease resulted from lower average
outstanding borrowing and, to a lesser extent, lower average interest rates as
compared to the prior year period. There was no interest expense under the
revolving credit facility for the operating footwear business in the Six Months,
compared to $123,000 in the prior year period, as the Company closed its
operating wholesale and retail footwear business. Also included in interest
expense in the Six Months were $368,000 from the 8% senior subordinated note in
connection with the Unzipped acquisition as compared to $440,000 in the prior
year period. Interest expense in the Six Months associated with the asset backed
notes issued by IPH, a subsidiary of the Company was $758,000 as compared to
$748,000 in the comparable period in the prior year.
Income Tax Expense. No tax expense was recorded for the Six Months and
comparable prior year period, due to a reduction in the valuation reserve, which
offsets the income tax provision.
15
Net Income(loss). The Company recorded net income of $551,000, compared to $3.1
million net loss in the comparable period of prior year.
Liquidity and Capital Resources
Working Capital.
At July 31, 2004, the current ratio of assets to liabilities was 0.97 to 1 as
compared to 1.11 to 1 at July 31, 2003.
The Company continues to rely upon revenues generated from operations,
especially licensing and men's private label activity, as well as borrowings
under Unzipped's revolving loan to finance its operations. Net cash used in
operating activities totaled $6.5 million in the six months ended July 31, 2004,
as compared to net cash provided of $1.4 million in the prior year period.
Capital Expenditures.
There were $4,000 capital expenditures for the six months ended July 31, 2004,
compared to $133,000 for the six months ended July 31, 2003. The Company does
not anticipate any material additional capital expenditures for the reminder of
Fiscal 2005.
Matters Pertaining to Unzipped.
On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped
from Sweet for 3 million shares of the Company's common stock and $11 million in
debt evidenced by an 8% senior subordinated note due 2012. In connection with
the acquisition, the Company has entered into a management agreement with Sweet
for a term ending January 31, 2005, which provides for Sweet to manage the
operations of Unzipped in return for a management fee, commencing in Fiscal
2004, based upon certain specified percentages of net income that Unzipped
achieves during the three-year term. In addition, Sweet guarantees that the net
income, as defined, of Unzipped shall be no less than $1.7 million Guarantee for
each year during the term commencing in Fiscal 2004. In the event that the
Guarantee is not met, Sweet is obligated to pay the Shortfall Adjustment, the
difference between the actual net income, as defined, and the Guarantee. See
Note F of Notes to Condensed Consolidated Financial Statements.
For the six months ended July 31, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if the Guarantee has been met) of $875,400, resulting
in an adjustment of Shortfall Payment of $1.7 million against the $850,000 six
month Guarantee. This adjustment has been recorded in the condensed consolidated
income statement as a reduction of Unzipped's cost of sales and on the balance
sheet as a reduction of the 8% senior subordinated note due to Sweet, as
provided for in the management agreement. After adjusting for the Shortfall
Payment, Unzipped's reported GAAP net income for the six months ended July 31,
2004 was $625,000. In the fiscal quarter ended July 31, 2004, the Company
stopped making the interest payment on the 8% senior subordinated note to
partially offset the Shortfall Payment due from Sweet. Such interest payment is
to be resumed after the Shortfall Payment is satisfied.
In connection with the acquisition of Unzipped, the Company filed and declared
effective a registration statement with the SEC for the 3 million shares of the
Company's common stock issued to Sweet. The terms of this agreement provided
that in the event the registration statement was not declared effective by April
23, 2003, the Company would be required to pay penalties to Sweet. Since the
registration statement was not declared effective until July 29, 2003, the
Company was required to pay $82,500 to Sweet as a penalty. The Company recorded
$82,500 expense for such penalty in the quarter ended April 30, 2003.
Current Revolving Credit Facilities.
On January 23, 2002, the Company entered into a three-year $20 million credit
facility ("the Credit Facility") with CIT Commercial Services. Borrowings under
the Credit Facility are formula based and originally included a $5 million over
advance provision with interest at 1.00% above the prime rate. In June 2002, the
Company agreed to amend the Credit Facility to increase the over advance
provision to $7 million and include certain retail inventory in the availability
formula. Borrowings under the amended Credit Facility bore interest at 1.5%
above the prime rate.
At July 31, 2004, there were no outstanding borrowings under the Credit Facility
which was terminated by an agreement dated January 15, 2004.
16
On February 25, 2003, Unzipped entered into a two-year $25 million credit
facility ("the Unzipped Credit Facility") with GE Capital Commercial Services,
Inc. ("GECCS") replacing its arrangement with Congress Financial Corporation.
Borrowings are limited by advance rates against eligible accounts receivable and
inventory balances, as defined. Under the facility, Unzipped may also arrange
for letters of credit in an amount up to $5 million. The borrowings bear
interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper
rate or 3%, whichever is greater.
At July 31, 2004, Unzipped's borrowings totaled $13.4 million under the
revolving credit agreement and the availability under the formula was $2.2
million.
Unzipped is in default of certain covenants under the Unzipped Credit Facility,
including the tangible net worth covenant. On September 9, 2004, the Company and
Unzipped entered into a Forbearance Agreement with the Lender whereby the Lender
agreed to forebear from exercising its remedies under the Unzipped Credit
Facility in connection with the defaults, and the Lender agreed to continue to
provide financing under the Unzipped Credit Facility, to enable Unzipped to
fulfill its remaining purchase orders until the jeans wear business is
transitioned to TKO under a licensing arrangement that became effective on
August 1, 2004. Borrowings under the Forbearance Agreement are subject to
certain advance rate and loan limits at the discretion of the Lender. The
outstanding loan as of July 31, 2004 was $13.4 million.
Bond Financing
In August 2002, IPH, an indirect wholly owned subsidiary of the Company, issued
in a private placement $20 million of asset-backed notes secured by intellectual
property assets (tradenames, trademarks and license payments thereon). The notes
have a 7-year term with a fixed interest rate of 7.93% with quarterly principal
and interest payments of approximately $859,000. The notes are subject to a
liquidity reserve account of $2.9 million, funded by a deposit of a portion of
the proceeds of the notes. The net proceeds of $16.2 million were used to reduce
amounts due by the Company under its existing revolving credit facilities. Costs
incurred to obtain this financing totaled approximately $2.6 million which have
been deferred and are being amortized over the life of the debt. At July 31,
2004, the unamortized portion of such costs were $1.9 million.
During the fiscal quarter ended April 30, 2004, IPH amended the asset-backed
notes whereby it borrowed an additional $3.6 million. The additional borrowing
matures in August 2009, at a floating interest rate of LIBOR + 4.45%, with
$500,000 of interest prepaid at closing. The net proceeds of $2.9 million are
being used for general working capital purposes. Costs incurred to obtain this
financing totaling approximately $178,500 will be deferred and amortized over
the life of the debt.
Other
The Company's cash requirements fluctuate from time to time due to, among other
factors, seasonal requirements, including the timing of receipt of merchandise.
The Company believes that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, and borrowings under the Unzipped Credit Facility. However, if the
Company's plans change or its assumptions prove to be incorrect, it could be
required to obtain additional capital that may not be available to it on
acceptable terms, or at all.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a result of the Company's and Unzipped variable rate credit facilities, the
Company is exposed to the risk of rising interest rates. The following table
provides information on the Company's fixed maturity debt as of July 31, 2004
that is sensitive to changes in interest rates.
The Unzipped Credit Facility had an average interest rate of
4.25% for the three month period ended July 21, 2004 $13.4 million
The IPH's amended asset-backed notes for an additional $3.6
million had an average interest rate of 5.59% for the three
month period ended July 31, 2004 $ 3.6 million
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
17
The principal executive officer and principal financial officer also conducted
an evaluation of internal control over financial reporting ("Internal Control")
to determine whether any changes in Internal Control occurred during the quarter
ended July 31, 2004 that have materially affected or which are reasonably likely
to materially affect Internal Control. Based on that evaluation, there has been
no such change during the quarter ended July 31, 2004.
18
PART II. Other Information
Item 1. Legal Proceedings
See Note E of Notes to Condensed Consolidated Financial Statements for a
description of certain pending legal proceedings.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the three months ended July 31, 2004, the Company sold 1 million shares
of its unregistered common stock at $2.20 per share to a limited number of
individual investors who were the designees of TKO and granted certain of its
employees and directors, pursuant to a stock option plan, 10-year non-qualified
stock options to purchase a total of 310,000 shares of its common stock at
prices ranging from $2.54 to $2.73 per share (an average of $2.59 per share).
The shares of common stock were issued in a private transaction that was exempt
from registration under Section 4(2) of the Securities Act of 1933 (the "Act")
and Regulation D promulgated thereunder. The options were granted in private
transactions pursuant to the exemption from registration under Sections 2(a) (3)
and 4(2) of the Act.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 10.1 - Employment Agreement Between the Company and David Conn
dated May 28, 2004
Exhibit 10.2 - Non-Qualified Stock Option Agreement Between the Company
and Robert D'Loren dated August 25, 2004
Exhibit 10.3 - Sales of Unzipped Interest to TKO Apparel, Inc.
Exhibit 10.4 - Stock Purchase Agreement Between the Company and certain
designees of TKO Apparel, Inc.
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K - During the quarter ended July 31, 2004, the
Company furnished a report on Form 8-K to report its financial results
for the quarter ended April 30, 2004.
19
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 14, 2004 /s/ Neil Cole
---------------------- -------------------------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date: September 14, 2004 /s/ Richard Danderline
---------------------- ------------------------------------------------
Richard Danderline
Executive Vice President - Finance and Operations
Principal Financial and Accounting Officer
20