United States Securities and Exchange Commission
Washington, D.C. 20549
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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, 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.
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(Exact name of registrant as specified in its charter)
Delaware 11-2481903
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 West 40th Street
New York, NY 10018
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(Address of principal executive offices) (Zip Code)
(212) 730-0030
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(Registrant's telephone number, including area code)
Not Applicable
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(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 -- 27,942,694 shares as of December 8, 2004
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, 2004 and January 31, 2004.................. 3
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
October 31, 2004 and 2003................................................................ 4
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended
October 31, 2004......................................................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
October 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..................................... 18
Item 4. Controls and Procedures........................................................................ 18
Part II. Other Information..............................................................................
Item 1. Legal Proceedings............................................................................. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (Not Applicable)..................
Item 3. Defaults upon Senior Securities (Not Applicable)...............................................
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 19
Item 5. Other Information (Not Applicable).............................................................
Item 6. Exhibits...................................................................................... 19
Signatures ........................................................................................... 20
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, January 31,
2004 2004
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 692 $2,794
Accounts receivable, net........................................... 2,784 3,388
Due from factors, net.............................................. 2,526 8,953
Due from affiliate................................................. 217 174
Inventories........................................................ 2,055 7,439
Deferred income taxes.............................................. 1,549 1,549
Prepaid advertising and other...................................... 852 1,358
------- -------
Total Current Assets................................................... 10,675 25,655
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 2,701 2,670
Less: Accumulated depreciation and amortization.................... 2,321 2,118
------- -------
380 552
Restricted cash........................................................ 2,900 2,900
Other assets:
Goodwill........................................................... 25,241 25,241
Intangibles, net................................................... 14,943 16,317
Deferred financing costs, net...................................... 2,230 2,042
Deferred income taxes.............................................. 2,073 2,073
Other.............................................................. 2,247 65
------- -------
46,734 45,738
------- -------
Total Assets........................................................... $ 60,689 $74,845
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $ - $ 12,775
Accounts payable and accrued expenses.............................. 5,565 10,424
Due to related parties............................................. 4,819 2,342
Current portion of deferred revenue............................. 1,230 2,010
Current portion of long-term debt............................... 3,102 2,354
------- -------
Total Current Liabilities.............................................. 14,716 29,905
Deferred revenue....................................................... 625 1,052
Long-term liabilities.................................................. 21,332 25,020
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued
27,533 at October 31, 2004 and 25,915 issued
at January 31, 2004........................................... 29 26
Additional paid-in capital......................................... 74,999 71,008
Retained earnings (deficit)........................................ (50,345) (51,499)
Treasury stock - at cost - 198 shares at October 31, 2004 and
January 31, 2004............................................... (667) (667)
------- -------
Total Stockholders' Equity............................................. 24,016 18,868
------- -------
Total Liabilities and Stockholders' Equity............................. $ 60,689 $ 74,845
======= =======
See notes to condensed consolidated financial statements.
3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- -----------------------------------
2004 2003 2004 2003
(000's omitted, except per share data)
Net sales........................................... $ 10,679 $25,305 $54,558 $106,382
Licensing income.................................... 2,725 1,808 6,745 4,827
------------- ------------ ------------- --------------
Net revenues........................................ 13,404 27,113 61,303 111,209
Cost of goods sold.................................. 7,320 21,189 44,383 84,322
------------- ------------ ------------- -------------
Gross profit........................................ 6,084 5,924 16,920 26,887
Operating expenses:
Selling, general and administrative expenses..... 4,824 6,251 13,574 25,668
Special charges..................................... - 764 99 3,648
------------- ------------ ------------ --------------
4,824 7,015 13,673 29,316
------------- ------------ ------------- --------------
Operating income (loss)............................. 1,260 (1,091) 3,247 (2,429)
Interest expense.................................... 657 746 2,093 2,462
------------- ------------ ------------- --------------
Income (loss) before income taxes................... 603 (1,837) 1,154 (4,891)
Income tax expense.................................. - 47 - 47
------------- ------------ ------------- --------------
Net income (loss)................................... $ 603 $(1,884) $ 1,154 $ (4,938)
============= ============ ============ ==============
Earnings (loss) per common share:
Basic...................................... $ 0.02 $ (0.07) $ 0.04 $ (0.20)
============= =========== ============= ==============
Diluted.................................... $ 0.02 $ (0.07) $ 0.04 $ (0.20)
============= ============ ============= ==============
Weighted average number of common shares outstanding:
Basic...................................... 27,264 25,372 26,633 25,153
============= ============ ============ ==============
Diluted.................................... 29,462 25,372 28,037 25,153
============= ============ ============= ==============
See notes to condensed consolidated financial statements.
4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 31, 2004
(000's omitted)
Additional Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
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Balance at February 1, 2004 25,915 $ 26 $ 71,008 $ (51,499) $ (667) $ 18,868
Issuance of common stock to directors ...... 44 -- 110 -- -- 110
Issuance of common stock to designees of
TKO Apparel, Inc..................... 1,000 1 2,184 -- -- 2,185
Issuance of common stock to B.E.M.
Enterprises, Ltd for asset acquisition 215 1 949 -- -- 950
Issuance of common stock to a non-employee . 10 -- 25 -- -- 25
Exercise of stock options................... 349 1 723 -- -- 724
Net income.................................. -- -- -- 1,154 -- 1,154
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Balance at October 31, 2004 27,533 $ 29 $ 74,999 $ (50,345) $ (667) $ 24,016
===========================================================================
See notes to condensed consolidated financial statements.
5
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------------
October 31, October 31,
2004 2003
-------------------------------
(000's omitted)
OPERATING ACTIVITIES:
Net cash provided by operating activities.................................. $ 4,831 $ 11,265
-------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (31) (133)
-------------------------------
Net cash used in investing activities...................................... (31) (133)
-------------------------------
FINANCING ACTIVITIES:
Proceeds from long - term debt..................................... 3,600 -
Proceeds of loans from related parties............................. 1,711 -
Payment of long-term debt.......................................... (1,869) (1,599)
Prepaid interest expense - long term............................... (500) -
Deferred financing costs........................................... 24 (89)
Proceeds from common stock issuance................................ 2,184 -
Proceeds from exercise of stock options............................ 723 827
Repayment of revolving notes payable - bank........................ (12,775) (11,126)
-------------------------------
Net cash provided by (used in) financing activities........................ (6,902) (11,987)
-------------------------------
INCREASE (DECREASE) IN CASH................................................ (2,102) (855)
Cash at beginning of period................................................ 2,794 1,899
-------------------------------
Cash at end of period...................................................... $ 692 $ 1,044
===============================
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 2,225 $ 2,356
===============================
See notes to condensed consolidated financial statements.
6
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 2004
NOTE A BASIS OF PRESENTATION AND FISCAL YEAR END
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and 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 period ended
October 31, 2004 are not necessarily indicative of the results that may be
expected for a full fiscal year.
On December 7, 2004, the Company announced that beginning January 1, 2005, it
will change its fiscal year to a calendar year beginning on January 1st and
ending on December 31st. The change is designed to align the Company's financial
reporting with that of its licensees. As a result, the current fiscal period
will be reported as an eleven month period ending on December 31, 2004.
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 Nine Months Ended
-
October 31, October 31,
----------- -----------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Net income (loss) - as reported $ 603 $(1,884) $ 1,154 $(4,938)
Deduct: Stock-based employee compensation
determined under the fair value based
method (447) (686) (1,341) (1,421)
-------------- ------------- ------------- --------------
Pro forma net income (loss) $ 156 $(2,570) $ (187) $(6,359)
============== ============= ============= ==============
Basic and diluted earnings (loss) per share:
As reported $ 0.02 $(0.07) $ 0.04 $(0.20)
============== ============= ============= ==============
Pro forma $ 0.01 $(0.10) $ (0.01) $(0.25)
============== ============= ============= ==============
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 (trade names, 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 have 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 were 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 (loss) per share includes no dilution and is computed by dividing
earnings (loss) attributable to common shareholders 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, warrants and convertible
preferred stock. At October 31, 2004, approximately 6.5 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 (loss) per share:
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
2004 2003 2004 2003
------------------------------ -----------------------------
(000's omitted)
Basic .......................................................... 27,264 25,372 26,633 25,153
Effect of assumed conversions of employee stock options......... 2,198 - 1,404 -
------------------------------ -----------------------------
Diluted ........................................................ 29,462 25,372 28,037 25,153
============================== =============================
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 provided 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 terminated on or about
November 15, 2004 based upon a provision of the settlement agreement that stated
that in the event that the last daily sale price per share of the Company's
common stock reached at least $4.98 during any ten days within a thirty day
period, the Company's obligation to make the quarterly payments would terminate.
The remaining balance of $238,000 will be recognized as a reduction of special
charges in the fourth quarter of the current fiscal year.
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 October 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").
Plaintiffs amended their Complaint on November 22, 2004. In their Amended
Complaint, 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. Additionally, Plaintiffs allege that Defendants have imported,
distributed and sold goods bearing the Company's BONGO(R) trademarks in
violation of federal and California law. 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 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. Plaintiffs made the required payment into the Court's
escrow account, and Defendants released the BONGO(R) jeans encompassed by the
Court's injunction.
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 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 by the SEC 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 were limited by advance rates against
eligible accounts receivable and inventory balances, as defined. Under the
facility, Unzipped could also arrange for letters of credit in an amount up to
$5 million. The borrowings bore 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 were secured by substantially all of the assets of
Unzipped. In addition, Unzipped had agreed to subordinate its accounts payable
to Azteca, ADS and Sweet to GECCS. Unzipped was required to meet a minimum
tangible net worth covenant, as defined. At October 31, 2004, the loan had been
repaid in full and the borrowing arrangement with GECCS was terminated.
9
Related Party Transactions:
Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to a management
agreement. Unzipped also had a supply agreement with Azteca and a distribution
agreement with ADS. All of these entities are owned or controlled by Hubert
Guez. On August 5, 2004, Unzipped terminated the management agreement with
Sweet, the supply agreement with Azteca and the distribution with ADS, and at
the same time with the Company commenced a lawsuit against Sweet, Azteca, ADS
and Hubert Guez. See Note E of Notes to Condensed Consolidated Financial
Statements.
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"), or $425,000 per quarter. 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 October 31, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if the Guarantee has been met) of $3.1 million. Based
upon the $425,000 quarterly Guarantee, a Shortfall Payment of $3.5 million was
computed for the quarter ended October 31, 2004. Of this total adjustment, $3.1
million 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. The Company believes that it is entitled to the full quarterly
Guarantee of $425,000 for each of the third and fourth quarters under the
management agreement with Sweet notwithstanding the termination of the
management agreement on August 5, 2004. However, for financial statement
purposes, the Company has pro-rated the $425,000 third quarter Guarantee to the
termination date, and has established a reserve of $400,000 for the difference,
pending the outcome of its litigation. See Note E of Notes to Condensed
Consolidated Financial Statements. After adjusting for the Shortfall Payment,
Unzipped's reported net loss for the quarter ended October 31, 2004 was $89,400.
In the fiscal quarter ended October 31, 2004, the Company did not make an
interest payment on the 8% senior subordinated note to partially offset the
Shortfall Payment of January 31, 2004 due from Sweet. Such interest payment is
to be resumed if and when the Shortfall Payment is satisfied.
For the nine months ended October 31, 2004, Unzipped had a net loss (as defined,
for the purpose of determining if the Guarantee has been met) of $4.2 million,
resulting in an adjustment of Shortfall Payment of $5.2 million based on a $1.3
million nine- month Guarantee. Of this total, $4.8 million 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. As discussed above,
the Company believes that it is entitled to a quarterly Guarantee of $425,000
for each of the third and forth quarters under the management agreement with
Sweet notwithstanding the termination of the management agreement on August 5,
2004. After adjusting for the Shortfall Payment, Unzipped's reported net income
for the nine months ended October 31, 2004 was $535,600.
Until August 5, 2004, Unzipped had a distribution agreement with ADS 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.
Prior to August 5, 2004, 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.
The related party transactions are summarized as follows ('000 omitted):
Three Months Ended October 31, Nine Months Ended October 31,
2004 2003 2004 2003
-------------- ------------- -------------- ---------------
Products purchased from Azteca $ 436 $ 9,939 $22,886 $38,317
Allocated office space, design and
production team and support
personnel expense from Azteca - 112 118 342
Management fee - (75) - 402
Expenses of distribution services per
distribution agreement with ADS 480 581 2,405 2,663
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.
10
On June 9, 2004, the Company entered into a license agreement with TKO
Licensing, Inc. ("TKO"), pursuant to which the Company entered into a license to
design, manufacture, sell and distribute BONGO(R) name on jeans wear effective
August 1, 2004. The Company also 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.
On September 21, 2004, Unzipped entered into an agreement with Bongo Apparel,
Inc ("Bongo Apparel", an affiliate of TKO) to assist the Company with the
management of Unzipped through January 31, 2005. As part of the agreement, Bongo
Apparel agreed to lend Unzipped up to $2.5 million under a revolving note due
January 31, 2005 at a rate of prime rate plus 1% (5.75% at October 31, 2004) per
annum. At October 31, 2004, Unzipped had $1.5 million outstanding under the
note. In connection with this agreement, Unzipped was charged $189,000 of fees
and expenses by Bongo Apparel during the quarter.
On September 14, 2004, the Company borrowed $400,000 from Neil Cole, the
President and CEO of the Company. The Company repaid $200,000 on October 12,
2004. The balance was repaid on December 1, 2004. The loan bore interest at the
rate of 2% per annum.
Amounts due to related parties at October 31, 2004 consist of the following:
(`000 omitted)
Azteca $ 2,261
Sweet -
ADS 847
Due from Bongo Apparel 1,511
Due from Neil Cole 200
---------
$ 4,819
=========
NOTE G BADGLEY MISCHKA LICENSING LLC
On October 29, 2004 (the "Closing Date"), the Company acquired the principal
assets (the "Purchased Assets") of B.E.M. Enterprise, Ltd. ("BEM"), the holding
company for the designer business "Badgley Mischka" from parent company Escada
U.S.A. The purchased assets include the Badgley Mischka trademark, two existing
licenses and the rights to operate the existing Badgley Mischka retail store
located on Rodeo Drive in Beverly Hills, California. The purchase price for the
transaction was $950,000, which was paid by the Company's issuance of 214,981
shares of the Company's common stock. The purchase price of the Purchased Assets
is subject to an upward adjustment in the event that the closing sale price of
the Company's common stock on the date which is 180 days after the Closing Date
is less than the closing sale price on the Closing Date. Any such adjustment
will also be paid in shares of the Company's common stock. The Company filed a
registration statement with the SEC for the resale of the 214,981 shares of the
Company's common stock issued to BEM. The registration statement was declared
effective by the SEC on December 1, 2004.
In the accompanying balance sheet, the purchase price is reflected as other long
term assets. The Company is in the process of obtaining a third party valuation
of the acquired intangible assets, thus the allocation of the purchase price is
subject to change.
The Company was advised in the transaction by UCC Capital Corporation ("UCC"),
of which Robert D'Loren, a director of the Company, is President. In connection
with the services provided in the acquisition, UCC received 50,000 stock options
and will receive a fee of 5% of the gross revenues that the Company derives from
the Badgley Mischka Trademark and all derivative trademarks. In addition, should
the Company sell all or substantially all of the acquired assets, UCC will
receive a cash payment calculated under a formula based on the sales price.
NOTE H 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 October 31, 2004.
11
(000's omitted) Footwear Apparel Consolidated
-------------------------------------------------
For the fiscal quarter ended October 31, 2004
Total revenues $ 10,039 $ 3,365 $ 13,404
Segment income 1,256 4 1,260
Net interest expense 657
Income before provision for income taxes $ 603
For the nine months ended October 31, 2004
Total revenues $ 25,809 $ 35,494 $ 61,303
Segment income 2,312 935 3,247
Net interest expense 2,093
Income before provision for income taxes $ 1,154
Total assets as of October 31, 2004 $ 27,581 $ 33,108 $ 60,689
For the fiscal quarter ended October 31, 2003
Total revenues $ 14,347 $ 12,766 $ 27,113
Segment (loss) income (719) (372) (1,091)
Net interest expense 746
Loss before provision for income taxes $ (1,837)
For the nine months ended October 31, 2003
Total revenues $ 57,592 $ 53,617 $ 111,209
Segment (loss) income (5,191) 2,762 (2,429)
Net interest expense 2,462
Loss before provision for income taxes $ (4,891)
Total assets as of October 31, 2003 $ 36,276 $ 40,899 $ 77,175
NOTE I SUBSEQUENT EVENTS
On December 6, 2004, a license agreement (the "License Agreement") was entered
into by and among the Company, IPH, and Kohl's Department Stores, Inc.
("Kohl's"). Pursuant to the License Agreement, the Company granted Kohl's the
exclusive right to design, manufacture, sell and distribute a broad range of
products under the CANDIE'S(R) trademark, including women's, juniors' and
children's apparel, accessories (except optical), beauty and personal care
products, home accessories and electronics. Kohl's was also granted the
non-exclusive right to sell footwear and handbags bearing the CANDIE'S brand
through December 31, 2006, which rights become exclusive to Kohl's on January 1,
2007.
In connection with the Kohl's License Agreement, on December 6, 2004, the
Company also amended the Company's existing exclusive footwear license agreement
with Steve Madden Ltd. ("SML") dated May 12, 2003, to provide Kohl's with the
exclusive rights to footwear commencing January 1, 2007. In connection with the
amendment, the Company is forgoing certain minimum royalties from SML. The
amendment also provides for the Company to make certain payments to SML in the
event that Kohl's fails to purchase certain amounts of footwear from SML through
January 2011.
On December 7, 2004, the Company announced that beginning January 1, 2005, it
will change its fiscal year to a calendar year beginning on January 1st and
ending on December 31st. The change is designed to align the Company's financial
reporting with that of its licensees. As a result, the current fiscal period
will be reported as an eleven month period ending on December 31, 2004.
Subsequent to October 31, 2004, the Company's obligation to make quarterly
payments pursuant to the settlement agreement with Caruso (See Note E of Notes
to Condensed Consolidated Financial Statements) was terminated as the last daily
sales price per share of the Company's common stock exceeded the $4.98 per share
requirement for any ten days within a thirty day period. As a result, the
Company will realize the remaining balance of $238,000 as a reduction of special
charges in the fourth quarter.
12
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 of licensees 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 their 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 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(R) and BONGO(R) 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. On
June 9, 2004, the Company licensed its jean wear business to TKO effective
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. 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. 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, which was declared
effective on July 2, 2004.
As a result of the Company's 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.
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.
13
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 $603,000 and $1.2 million for the quarter
("Third Quarter")and nine months ("Nine Months") ended October 31, 2004,
respectively, compared to net losses of $1.9 million and $4.9 million for the
quarter and nine months ended October 31, 2003, respectively. In the Third
Quarter, there were no special charges compared to $764,000 in the quarter ended
October 31, 2003. Interest expense in the Third Quarter was $657,000 as compared
to $746,000 of interest expense for the comparable period a year ago. In the
Nine Months, there was $99,000 of special charges and $2.1 million of interest
expense as compared to $3.6 million of special charges and $2.5 million of
interest expense for the comparable period a year ago.
The Company's operating income was $1.3 million and $3.2 million for the
Third Quarter and the Nine Months respectively, compared to an operating loss of
$1.1 million and $2.4 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 and subsequent periods.
Results of Operations
For the three months ended October 31, 2004
Revenues. During the Third Quarter, consolidated net sales decreased from the
comparable prior year quarter by $14.6 million to $10.7 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 Third Quarter as compared
to $5.5 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 $9.4 million from $12.8 million in the prior
year quarter to $3.4 million in Third Quarter. This decrease resulted primarily
from transitioning of the jeans wear business from an operating business to a
licensing business. The Company entered into a licensing agreement with TKO for
Bongo jeans wear that was effective on August 1, 2004. The Company anticipates
that this transition will be complete as of December 31, 2004 and as a result
anticipates that Unzipped's net sales and gross profit in the fourth quarter
will be significantly less than those reported in the prior year comparable
quarter.
Bright Star men's private label footwear net revenues increased from $7.0
million in the prior year quarter to $7.3 million in the Third Quarter.
Licensing income increased $917,000, or 50.7% to $2.7 million in the Third
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 increased by $160,000 to $6.1 million in
the Third Quarter from $5.9 million in the prior year quarter. There was no
gross profit from wholesale and retail women's footwear in the Third Quarter as
compared to $1.9 million in the prior year quarter. Unzipped's gross profit in
Third Quarter was $2.6 million as compared to $1.5 million in the prior year
quarter. Unzipped's gross profit in the Third Quarter included $3.1 million
adjustment for the Shortfall Payment of $3.5 million with $400,000 recorded as a
reserve pending the outcome of its litigation (See Note F to Condensed
Consolidated Financial Statements). Bright Star gross profit increased by
$30,000 from $699,000 in the prior year quarter to $729,000 in the Third
Quarter.
Operating Expenses. During the Third Quarter, consolidated selling, general and
administrative expenses decreased by $1.5 million to $4.8 million from $6.3
million in the prior year quarter. Selling, general and administrative expenses
related to the Company's activities other than Unzipped decreased by $2.1
million to $2.2 million in the Third Quarter as compared to $4.3 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 Third Quarter 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. Selling, general and
administrative expenses for Bright Star were $233,000 in the Third Quarter,
$104,000 increase from $129,000 in the prior year quarter.
14
Unzipped's selling, general and administrative expenses increased $712,000 in
the Third Quarter to $2.6 million as compared to $1.9 million in the prior year
quarter. This increase was due primarily to additional costs associated with the
transition of the business as well as costs incurred relating to litigation. See
Note E of Notes to Condensed Consolidated Financial Statements.
For the Third Quarter, the Company incurred no special charges as compared to
$764,000 in the prior year quarter. (See Note F to Condensed Consolidated
Financial Statements)
Interest Expense. Interest expense decreased by $89,000 in the Third Quarter to
$657,000, compared to $746,000 in the prior year quarter. Included in interest
expense in the Third Quarter was $93,000 from Unzipped's revolving credit
facility, as compared to $147,000 in the prior year period, a decrease of
$54,000. The Unzipped interest expense decrease resulted primarily from lower
average outstanding borrowing as compared to the prior year period. There was no
interest expense under the revolving credit facility for the operating footwear
business in the Third Quarter, compared to $48,000 in the prior year quarter, as
the Company closed its operating wholesale and retail footwear business. Also
included in interest expense in the Third Quarter was $165,000 from the 8%
senior subordinated note in connection with the Unzipped acquisition as compared
to $203,000 in the prior year quarter. Interest expense in the Third Quarter
associated with the asset backed notes issued by IPH, a subsidiary of the
Company was $400,000 as compared to $360,000 in the comparable period in the
prior year.
Income Tax Expense. No tax expense was recorded for the Third quarter, due to a
reduction in the valuation reserve, which offsets the income tax provision. A
$47,000 provision for local income taxes was recorded in the prior year quarter
from the separate earnings of Unzipped.
Net Income(loss). The Company recorded net income of $603,000, compared to $1.9
million net loss in the comparable quarter of prior year.
For the nine months ended October 31, 2004
Revenues. During the Nine Months, consolidated net sales decreased from the
comparable prior year period by $51.8 million to $54.6 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 Nine
Months as compared to $36.2 million in the prior year 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 $18.2 million from $53.7 million in the prior
year period to $35.5 million in Nine Months. This decrease resulted primarily
from transitioning of the jeanswear business from an operating business to a
licensing business. The Company entered into a licensing agreement with TKO for
Bongo jeanswear that was effective on August 1, 2004. The Company anticipates
that this transition will be complete as of December 31, 2004 and as a result
anticipates Unzipped net sales and gross profit in the fourth quarter will be
significantly less than those reported in the prior year comparable quarter.
In the Nine Months, Bright Star men's private label footwear net revenues
increased from $16.6 million in the prior year period to $19.1 million primarily
as a result of a growth in its business with Wal-Mart.
Licensing income increased $1.9 million, or 39.7% to $6.6 million in the Nine
Months from $4.7 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 $10.0 million to $16.9
million in the Nine Months from $26.9 million in the prior year period. There
was no gross profit from wholesale and retail women's footwear in the Nine
Months as compared to $9.8 million in the prior year period. Unzipped's gross
profit in Nine Months was $8.4 million as compared to $10.3 million in the prior
year period. Unzipped's gross profit in the Nine Months included $5.2 million
adjustment from the Shortfall Payment (See Note F to Condensed Consolidated
Financial Statements). Bright Star gross profit increased from $1.7 million in
the prior year period to $1.8 million in the Nine Months.
15
Operating Expenses. During the Nine Months, consolidated selling, general and
administrative expenses decreased by $12.1 million to $13.6 million from $25.7
million in the prior year period. Selling, general and administrative expenses
related to the Company's activities other than Unzipped decreased by $12.1
million to $6.1 million in the Nine Months as compared to $18.2 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 Nine
Months 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 $41,000 in the
Nine Months to $7.4 million as compared to $7.5 million in the prior year
period. Selling, general and administrative expenses for Bright Star were
$734,000 in the Nine month, $7,000 decrease from $741,000 in prior year period,
primarily due to the recovery of bad debt written off in prior year end.
For the Nine Months, the Company's special charges included $99,000, as compared
to $3.6 million in the prior year period. (See Note F to Condensed Consolidated
Financial Statements)
Interest Expense. Interest expense decreased by $369,000 in the Nine Months to
$2.1 million, compared to $2.5 million in the prior year period. Included in
interest expense in the Nine Months were $399,000 from Unzipped's revolving
credit facility, as compared to $547,000 in the prior year period, a decrease of
$148,000. The Unzipped interest expense decrease resulted primarily from lower
average outstanding borrowing as compared to the prior year period. There was no
interest expense under the revolving credit facility for the operating footwear
business in the Nine Months, compared to $171,000 in the prior year period, as
the Company closed its operating wholesale and retail footwear business. Also
included in interest expense in the Nine Months were $534,000 from the 8% senior
subordinated note in connection with the Unzipped acquisition as compared to
$643,000 in the prior year period. Interest expense associated with the asset
backed notes issued by IPH, a subsidiary of the Company was $1.2 million in the
Nine Months, virtually the same as in the prior year comparable period.
Income Tax Expense. No tax expense was recorded for the Nine Months and
comparable prior year period, due to a reduction in the valuation reserve, which
offsets the income tax provision. A $47,000 provision for local income taxes was
recorded in the prior year quarter from the separate earnings of Unzipped.
Net Income(loss). The Company recorded net income of $1.2 million, compared to
$4.9 million net loss in the comparable period of prior year.
Liquidity and Capital Resources
Working Capital.
At October 31, 2004, the current ratio of assets to liabilities was 0.73 to 1 as
compared to 1.14 to 1 at October 31, 2003.
The Company continues to rely upon revenues generated from licensing operations
and men's private label activity, as well as borrowings under Unzipped's
revolving loan to finance its operations. Net cash provided in operating
activities totaled $4.8 million in the nine months ended October 31, 2004, as
compared to net cash provided of $11.3 million in the prior year comparable
period.
Capital Expenditures.
There were $31,000 capital expenditures for the nine months ended October 31,
2004, compared to $133,000 for the nine months ended October 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 entered into a management agreement with Sweet, a
supply agreement with Azteca and a distribution agreement with ADS. All of these
agreements have been terminated as of August 5, 2004. See Notes E and F of Notes
to Condensed Consolidated Financial Statements.
16
For the nine months ended October 31, 2004, Unzipped had a net loss (as defined,
for the purpose of determining if the Guarantee has been met) of $4.2 million,
resulting in an adjustment of Shortfall Payment of $5.2 million based on a $1.3
million nine month Guarantee. $4.8 million of 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. The Company
believes that it is entitled to a quarterly Guarantee of $425,000 for each of
the third and fourth quarters under the management agreement with Sweet
notwithstanding that it was terminated on August 5, 2004. However, for financial
statement purposes, the Company has pro-rated the $425,000 third quarter
Guarantee to the termination date, and has established a reserve of $400,000 for
the difference, pending the outcome of its litigation. See Note E of Notes to
Condensed Consolidated Financial Statements. After adjusting for the Shortfall
Payment, Unzipped's reported net income for the nine months ended October 31,
2004 was $535,600.
For each of the quarters ended July 31, and October 31, 2004, the Company did
not make a interest payment on the 8% senior subordinated note to partially
offset the Shortfall Payment of January 31, 2004 due from Sweet. Such interest
payment is to be resumed after the Shortfall Payment is satisfied.
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.
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 October 31, 2004, there were no outstanding borrowings under the Credit
Facility which was terminated by an agreement dated January 15, 2004.
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 (trade names, 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 October 31, 2004, the unamortized portion of such costs was $2.0
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 flow fluctuates from time to time due to, among other
factors, seasonal variations in the sales and related royalty payments to the
Company by its licensees of licensed products. The Company believes that it will
be able to satisfy its ongoing cash requirements for the foreseeable future,
primarily with cash flow from operations. 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.
17
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 October 31, 2004
that is sensitive to changes in interest rates.
The IPH's amended asset-backed notes for an additional $3.6
million had an average interest rate of 4.95% for the three
month period ended October 31, 2004 $ 3.4 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.
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 October 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 October 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 4. Submission of Matters to a Vote of Security-Holders.
At the Company's Annual Meeting of Stockholders held on September 8, 2004, the
stockholders voted to elect the seven individuals named below to serve as
Directors of the Company and to ratify the appointment of BDO Seidman, LLP
("BDO") as the Company's independent auditors for the fiscal year ending January
31, 2005.
Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Robert D'Loren, Michael
Caruso, Michael Groveman and Drew Cohen 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 19,008,515 185,570
Barry Emanuel 19,014,410 179,675
Steven Mendelow 19,014,658 179,427
Robert D'Loren 19,071,713 122,372
Michael Caruso 19,071,841 122,244
Michael Groveman 19,014,201 179,884
Drew Cohen 19,014,836 179,249
The ratification of the appointment of BDO as the Company's independent auditors
for the fiscal year ending January 31, 2005 was approved by the stockholders.
The votes cast by stockholders with respect to the ratification of the
appointment of BDO as the Company's independent auditors for the fiscal year
ending January 31, 2005 were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
19,123,786 39,198 31,101
Item 6. Exhibits
Exhibit 10.1 - Asset Purchase Agreement dated October 29, 2004 by
and among B.E.M. Enterprise, Ltd., Escada (USA) Inc, .Candie's, Inc.
and Badgley Mischka Licensing LLC.
Exhibit 10.2 - Letter Agreement dated October 29, 2004 among UCC
Funding Corporation, Content Holdings Inc., Candie's, Inc. and Badgley
Mischka Licensing LLC.
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
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANDIE'S, INC.
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(Registrant)
Date: December 15, 2004 /s/ Neil Cole
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Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date: December 15, 2004 /s/ Richard Danderline
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Richard Danderline
Executive Vice President - Finance and Operations
Principal Financial and Accounting Officer
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