SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended January 31, 2001
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________to
______________.
Commission File Number 0-10593
CANDIE'S, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Columbus Avenue, Valhalla, New York 10595
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 769-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights
(Title of Class)
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 period 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 by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on April 19, 2001, was approximately
$30,120,982.
As of April 19, 2001, 17,823,066 shares of Common Stock, par value $.001 per
share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
CANDIE'S, INC.-FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................................2
Item 2. Properties..................................................................................9
Item 3. Legal Proceedings...........................................................................9
Item 4. Submission of Matters to a Vote of Security Holders........................................10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................10
Item 6. Selected Financial Data....................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..................................18
Item 8. Financial Statements and Supplementary Data................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......18
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................19
Item 11. Executive Compensation.....................................................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................25
Item 13. Certain Relationships and Related Transactions.............................................26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................27
Signatures...................................................................................................28
Consolidated Financial Statements...........................................................................F-1
PART I
Item 1. Business
Introduction
The history of the "CANDIE'S" brand spans over 23 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") is
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R)and
BONGO(R)trademarks for distribution within the United States to department,
specialty, chain and nine company-owned retail stores in the United States and
to specialty stores internationally. The Company markets and distributes
children's footwear under the CANDIE'S and BONGO trademarks, as well as a
variety of men's workboots, hiking boots, winter boots, and outdoor casual shoes
designed and marketed under private labels and the ASPEN(R)brand, which is
licensed by the Company from a third party through Bright Star Footwear, Inc.
("Bright Star"), the Company's wholly-owned subsidiary. In 1998, the Company
began licensing its CANDIE'S trademark for the purpose of building CANDIE'S into
a lifestyle brand serving generation "Y" women and girls, and it currently holds
licenses for fragrance, eyewear, handbags, watches and clothing. The Company
licenses the BONGO trademark on jeanswear and apparel to department, specialty,
and chain stores in the United States through Unzipped Apparel, LLC
("Unzipped"), the Company's joint venture with Sweet Sportswear LLC ("Sweet"), a
subsidiary of Azteca Production International, Inc., and has recently executed
licenses for use of the BONGO brand on kids' clothing and handbags.
The Company believes that it has developed CANDIE'S into a strong footwear
brand appealing to women and girls in the generation "Y" demographic. As a
growth strategy, the Company plans to continue to focus on building market share
in the junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information during its fiscal year ended January 31, 1999
("Fiscal 1999"). The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position or results of operations because the Company
operates in one segment. See Note 14 of the Notes to the Financial Statements.
Background of the Company and Acquisitions
The Company began to license the use of the CANDIE'S trademark from New
Retail Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased
ownership of the CANDIE'S trademark from NRC together with certain pre-existing
licenses of NRC, a then publicly traded company engaged primarily in the
licensing and sublicensing of fashion trademarks and a significant stockholder
of the Company. NRC's principal stockholder was also the Company's President and
Chief Executive Officer. Effective August 18, 1998, the Company completed a
merger with NRC, with the Company as the surviving entity.
The transaction was accounted for using the purchase method of accounting.
The results of operations of NRC are included in the accompanying consolidated
financial statements from the date of the merger. The cost of the acquisition,
including acquisition expenses of $700,000, after netting the value of the
reacquired Company shares, warrants and options totaled approximately $5.6
million. This resulted principally in purchase price allocation to the licenses
acquired of $340,000 and a trademark value of $5.2 million. Deferred tax
liabilities resulting from this transaction totaled approximately $2.1 million,
which amount was recorded as goodwill.
2
Acquisition of Michael Caruso & Co., Inc.
On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso").
As a result of the transaction, the Company acquired the BONGO trademark as well
as certain other related trademarks and two license agreements for use of the
BONGO trademark, one for junior denim and sportswear and one for large size
jeanswear, both of which licenses have been terminated. Prior to the closing of
the acquisition, Caruso was the licensor of the BONGO trademark for use on
footwear products sold by the Company, which license was terminated as of the
closing. The purchase price for the shares acquired was approximately $15.4
million and was paid at the closing in 1,967,742 shares of the Company's Common
Stock (the "Common Stock") (each share being valued at $7.75), plus $100,000 in
cash. See Item 3, "Legal Proceedings."
On March 24, 1999, 547,722 additional shares of the Company's Common Stock
were delivered to the sellers upon the six month anniversary of the closing
based on a contingency clause in the agreement requiring an upward adjustment in
the number of shares delivered at closing. The issuance of the contingent
consideration had no effect on the purchase price.
This transaction was accounted for using the purchase method of accounting.
The results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition.
Formation of Unzipped Apparel LLC
On October 7, 1998, the Company formed Unzipped with its joint venture
partner Sweet, the purpose of which is to market and distribute apparel under
the BONGO label. Candie's and Sweet each have a 50% interest in Unzipped.
Pursuant to the terms of the joint venture, the Company licenses the BONGO
trademark to Unzipped for use in the design, manufacture and sale of certain
apparel products for a term ending March 31, 2003. See Note 2 of the Notes to
the Financial Statements.
Stockholders Rights Plan
In January 2000, the Company's Board of Directors adopted a stockholder
rights plan. Under the plan, each stockholder of the Company's Common Stock
received a dividend of one right for each share of the Company's outstanding
Common Stock, entitling the holder to purchase one thousandth of a share of
Series A Junior Participating Preferred Stock, par value, $0.01 per share of the
Company, at an initial exercise price of $6.00. The rights become exercisable
and will trade separately from the Company's Common Stock ten business days
after any person or group acquires 15% or more of the Company's Common Stock, or
ten business days after any person or group announces a tender offer for 15% or
more of the outstanding the Company's Common Stock.
Products
CANDIE'S Footwear Products. The CANDIE'S brand, consisting of fashion and
casual footwear, is designed primarily for women and girls aged 6-35. The
footwear features a variety of styles. The retail price of CANDIE'S footwear
generally ranges from $30 - $80 for women's styles and $35 - $50 for girls'
styles. Four major and two interim times per year, as part of its Spring and
Fall collections, the Company designs and markets 30 to 50 different styles.
Approximately one-third of CANDIE'S women's styles are "updates" of the
Company's most popular styles from prior periods, which the Company considers
its "core" products. Approximately three-quarters of the girl's styles are
versions of the best selling women's styles and the remaining one quarter are
designed specifically for the girls' line.
The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S image and price
points. Fashion trend information is compiled by the Company's design team
through various methods, including travel to Europe and throughout the world to
identify and confirm seasonal trends and shop relevant markets, utilization of
outside fashion forecasting services and attendance at trade shows. Each season,
subsequent to the final determination of that season's line by the design team
and management (including colors, trim, fabrics, constructions and decorations),
members of the design team travel to the Company's manufacturers to oversee the
production of the initial sample lines.
3
CANDIE'S Handbag Products. In the Fall of 1998, the Company began to
design, market, and distribute women's handbags to department and specialty
stores in the United States at retail prices ranging from $28 - $36. In March
2000, the Company entered into an agreement with Trebbianno LLC ("Trebbianno"),
to license the handbag business to Trebbianno for a three year term with a three
year renewal conditioned on Trebbianno achieving certain minimum sales. See
"Trademarks and Licensing".
BONGO Footwear, Jeanswear and Handbag Products. The Company designs,
markets and distributes fashion and casual footwear at value price points under
the BONGO name for women and girls aged 6-35. In addition, the Company through
its joint venture, Unzipped, designs, markets and distributes jeanswear and
apparel to the same targeted markets. The BONGO product lines are marketed to
department, specialty, and chain stores in the United States. The retail prices
range from $20-$45 for footwear and $20-$50 for jeanswear and $15-$25 for
handbags. As of January 2001, BONGO kids' jeanswear was licensed to Mamiye
Brothers for a term ending March 31, 2003. The BONGO handbag business was
licensed to Innovo Group Inc. in April 2001 for a term ending March 31, 2003.
See "Trademarks and Licensing".
Private Label Products. In addition to sales under the CANDIE'S and BONGO
trademarks, the Company arranges for the manufacture of women's footwear, acting
as agent for mass market and discount retailers, primarily under the retailer's
private label brand. Most of the private label footwear is presold against
purchase orders and is backed by letters of credit opened by the applicable
retailers. In certain instances the Company receives a commission based upon the
purchase price of the products for providing design expertise, arranging for the
manufacturing of the footwear, overseeing production, inspecting the finished
goods and arranging for the sale of the finished goods by the manufacturer to
the retailer.
Bright Star Footwear. Bright Star, acting principally as agent for its
customers, designs, markets and distributes a wide variety of men's branded and
unbranded workboots, hiking boots, winter boots and leisure footwear. Branded
products are marketed under the private label brand names of Bright Star's
customers or under the Company's licensed brand, ASPEN. Bright Star's customer
base includes discount and specialty retailers. Bright Star's products are
generally directed toward the mid-priced market. The retail prices of Bright
Star's footwear generally range from $25 to $75. The majority of Bright Star's
products are sold on a commission basis.
Retail Operations
The Company operates nine retail stores, consisting of five outlets and
four specialty stores, with one additional specialty store scheduled to open in
May 2001. The Company anticipates opening three to five additional retail stores
during the next year as opportunities make themselves available. Retail revenues
for the fiscal year ended January 31, 2001 ("Fiscal 2001") were $5.0 million or
5.3% of net revenues. Retail revenues for the fiscal year ended January 31, 2000
("Fiscal 2000") were $2.8 million or 3.0% of net revenues. Retail revenues for
Fiscal 1999 were $1.7 million or 1.5% of net revenues.
The Company operates its retail stores, which complement its wholesale
business, primarily to establish a direct relationship with the consumer, build
the brand image and test products for the wholesale business. The Company also
believes that retail stores provide an opportunity for the Company to promote
its "lifestyle" concept by showcasing its increasing range of goods, which
currently include apparel, handbags, fragrance, sunglasses and watches.
The success of the Company's new and existing retail stores will depend
on various factors, including general economic and business conditions affecting
consumer spending, the acceptance by consumers of the Company's retail concept,
the ability of the Company to manage its retail operations and the availability
of desirable locations and favorable lease terms.
4
Advertising, Marketing and Website
The Company believes that advertising to promote and enhance primarily the
CANDIE'S, and to a lesser extent, the BONGO brand, is an important part of its
long-term growth strategy. The Company believes that its innovative advertising
campaigns featuring celebrities and performers, which have brought it national
recognition, have resulted in increased sales and consumer awareness of its
branded products. The Company's advertising appears in fashion magazines such as
Marie Claire, Cosmopolitan, InStyle and Glamour, and teenage lifestyle magazines
such as Teen, Teen People and Seventeen, as well as in television commercials,
newspapers, on outdoor billboards and on the Internet.
The Company maintains a website for the CANDIE'S brand, www.candies.com,
which it launched in October 1999. In April 2000, the Company launched its first
e-commerce initiative, a co-branded store to sell the CANDIE'S footwear
collection in partnership with leading teen retailer "Journeys". The Company
also maintains a website for the BONGO brand at www.bongo.com.
The Company also maintains a corporate website that provides financial and
background information about the Company located at www.candiesinc.com.
Information contained in the candiesinc.com website is not a part of this
report.
Manufacturing and Suppliers
The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Italy, Spain and
Taiwan. The Company believes that such diversification permits it to respond to
customer needs and helps reduce the risks associated with foreign manufacturing.
The Company has developed, and seeks to develop, long-term relationships with
suppliers that can produce a high volume of quality products at competitive
prices.
The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract the production
to other manufacturers or suppliers. Finished goods are purchased primarily on
an open account basis, generally payable within 5 to 45 days after shipment.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber) are available from a variety of sources, there can be no assurance that
any such materials will continue to be available on a timely or cost-effective
basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately one to two months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and the
shipment to the customer takes approximately one to two additional months.
For Fiscal 2001 and Fiscal 2000, Redwood Shoe Corp. ("Redwood"), a related
party buying agent for the Company, initiated the manufacture of approximately
66% and 48%, respectively, of the Company's total footwear purchases. At January
31, 2001, the Company had $6,024,178 of open purchase commitments with Redwood,
representing 54% of the Company's total purchase commitments. At January 31,
2000, the Company had $13,775,920 of open purchase commitments with Redwood,
representing 48% of the Company's total purchase commitments. At January 31,
1999, the Company had $28,117,820 of open purchase commitments with Redwood,
representing 87% of the Company's total purchase commitments.
There can be no assurance that, in the future, the capacity or availability
of manufacturers or suppliers will be adequate to meet the Company's product
needs.
5
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule,
the Company pays import duties on its footwear products manufactured outside of
the United States at rates ranging from approximately 3.2% to 48%, depending on
whether the principal component of the product, which varies from product to
product is leather or some other material. Accordingly, the import duties vary
with each shipment of footwear products. Since 1981, there have not been any
quotas or restrictions, other than the duties mentioned above, imposed on
footwear imported by the Company into the United States.
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company.
In addition, other restrictions on the importation of footwear and apparel
are periodically considered by the United States Congress and no assurance can
be given that tariffs or duties on the Company's goods may not be raised,
resulting in higher costs to the Company, or that import quotas respecting such
goods may not be lowered, which could restrict or delay shipment of products
from the Company's existing foreign suppliers.
Backlog
On March 31, 2001, the Company had an estimated backlog of products on
order of approximately $37,147,000, as compared to a backlog of approximately
$33,827,000 at March 31, 2000. The backlog at March 31, 2001 is expected to be
filled during Fiscal 2002. The backlog at any particular time is affected by a
number of factors, including seasonality, the buying policies of retailers,
scheduling of deliveries, and the manufacture and shipment of products.
Seasonality
In previous years, demand for the Company's footwear peaked during the
months of June through August (the Fall/back-to-school selling season). As a
result, shipments of the Company's products in previous years were heavily
concentrated in its second fiscal quarter. Accordingly, historically, operating
results have fluctuated significantly from quarter to quarter.
Customers and Sales
During Fiscal 2001, the Company sold its footwear products to more than
1,100 retail accounts consisting of department stores, including Federated
Department Stores, Nordstrom's and May Company, specialty stores and other
outlets in the United States. Primarily through its Bright Star division, the
Company also sold its products to Wal-Mart and other mass merchandisers. In
Fiscal 2001, no individual customer accounted for more than 10% of the Company's
net revenues. In Fiscal 2000, Wal-Mart accounted for 10.2% of the Company's
revenues.
During Fiscal 2001 and Fiscal 2000, the Company also generated
approximately $2,538,874 and $249,000, respectively, in sales to international
markets. Sales to international markets in Fiscal 1999 were $208,000. The
Company is continuing to evaluate existing and potential opportunities to expand
its international business through distribution arrangements with third parties
and direct sales.
The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.
As of April 1, 2001, the Company utilized the services of 14 full time
sales persons, four of whom are independent contractors who are compensated on a
commission basis. The Company emphasizes customer service in the conduct of its
operations and maintains a customer service department that
6
processes customer purchase orders and supports the sales representatives by
coordinating orders and shipments with customers.
Trademarks and Licensing
The Company owns federal registrations or has pending federal registrations
in the United States Patent and Trademark Office for CANDIE'S and BONGO in both
block letter and logo format for use on footwear, apparel, fragrance, handbags,
watches and various other goods and services. In addition, from time to time,
the Company registers certain of its trademarks in other countries and regions
including Canada, Europe, South and Central America and Asia.
The Company regards the trademarks and other intellectual property rights
that it owns and uses as valuable assets and intends to defend them vigorously
against infringement. There can be no assurance, however, that the CANDIE'S or
BONGO trademarks, or any other trademark that the Company owns or uses, does
not, and will not, violate the proprietary rights of others, that any such
trademark would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using such trademarks, which event could have a
material adverse effect on the Company. In addition, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend an infringement action.
The Company also owns other registered and unregistered trademarks that it
does not consider to be material to its current operations.
The Company has pursued and intends to pursue licensing opportunities for
its trademarks as an important means for reaching the targeted consumer base,
increasing brand awareness in the marketplace and generating additional income.
Potential licensees are subject to a selective process performed by the
Company's management. The Company will enter into licensing agreements with
additional parties in addition to those described below only if the Company
believes that the prospective licensee has the requisite quality standards,
understanding of the brand, distribution capabilities, experience in a
respective business and financial stability, and that the proposed product can
be successfully marketed. The Company currently holds licenses for the CANDIE'S
trademark for use on fragrance, eyewear, handbags, clothing and watches, and for
the BONGO trademark on clothing, jeanswear (women's and kids) and handbags.
During Fiscal 1999, the Company granted Liz Claiborne Cosmetics, Inc. the
exclusive right to license the CANDIE'S name and other trademarks for a variety
of fragrance and fragrance-related products throughout the world for a term
ending December 31, 2012. The licensee has a renewal option for a term of five
to ten years ending December 31, 2017 or December 31, 2022, as applicable,
depending upon the licensee's sales performance during the initial term. Also,
in Fiscal 1999, the Company granted Viva Optique, Inc. the exclusive right to
license the CANDIE'S brand for sunglasses and eyewear throughout the world for a
term of three years ending January 31, 2002. The licensee has renewed the
license for a term of three years ending January 31, 2005, and has an option to
renew for an additional term ending January 31, 2008, if, among other things, it
achieves threshold minimum sales during the current term.
During Fiscal 2000, the Company entered into three additional licenses for
use of the CANDIE'S trademark. The first is with respect to handbags and small
leather goods with Trebbianno, which grants the exclusive right to use the
trademark for a period of three years throughout the United States, Canada, the
United Kingdom and Japan, with a three year option to renew by the licensee
depending upon its performance during the initial term. The second is with
respect to apparel with Gadzooks, Inc., which license grants the exclusive right
to use the trademark on a year to year term throughout the United States, which
term has just been renewed. The third is with respect to watches with Skagen
Designs, Inc., which license grants the exclusive right to use the trademark in
the United States and Canada for a period of three years, with a three year
option to renew by the licensee dependent upon its performance.
The Company also has a licensing arrangement with Unzipped that grants
Unzipped the exclusive right to use the BONGO trademark in connection with
apparel and jeanswear through March 31, 2003.
During Fiscal 2000, the Company terminated three licenses, one for the use
of the CANDIE'S trademark on legwear, one for the use of the BONGO trademark on
junior denim and sportswear, and one
7
for the use of the BONGO trademark on plus size jeans. On January 1, 2001, the
Company entered into a new exclusive license with Mamiye Brothers for the sale
and distribution of kids' jeanswear and clothing in the United States for a term
ending March 31, 2003. On March 26, 2001, the Company entered into an exclusive
license with Innovo Group Inc. for the sale and distribution of handbags and
small leather and PVC goods for a term ending March 31, 2003.
The Company also assumed from NRC a license agreement with Wal-Mart, which
expires in July 2002, with respect to the NO EXCUSES trademark.
The Company also sells footwear under the ASPEN trademark pursuant to a
license from Aspen Licensing International, Inc. The ASPEN license agreement
grants Bright Star the exclusive right to market and distribute certain
categories of footwear under the ASPEN trademark in the United States, its
territories and possessions, on an order by order basis.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from, among
other brands, Skechers, Steve Madden and Esprit. In general, competitive factors
include quality, price, style, name recognition and service. In addition, the
presence in the marketplace of various fashion trends and the limited
availability of shelf space can affect competition. Many of the Company's
competitors have substantially greater financial, distribution, marketing and
other resources than the Company and have achieved significant name recognition
for their brand names. There can be no assurance that the Company will be able
to compete successfully with the other companies marketing these types of
products.
Employees
As of April 1, 2001, the Company employed a total of 201 persons in its
corporate and retail operations, 132 of whom are full-time employees and 69 of
whom are part-time employees. Four of the Company's employees are executives and
the remainder are management, sales, marketing, product development,
administrative, customer service representatives and retail store personnel.
None of the Company's employees are represented by a labor union. The Company
also utilizes the services of four independent contractors who are engaged in
sales. The Company considers its relations with its employees to be
satisfactory.
Other Material Developments
In or about September 1999, the Company restated its financial statements
for Fiscal 1998 and for the first three quarters of Fiscal 1999. In addition,
the Company restated its previously issued financial statements for the three
quarters ended April 30, 1998, July 31, 1998 and October 31, 1998. As a result
of the restatement, the Company and certain of its current and former officers
were sued for violations of the federal securities laws in the United States
District Court for the Southern District of New York. These lawsuits were
finally settled in July 2000 for total consideration of $10 million, payable to
the class in a combination of $4.0 million in cash and $6.0 million in shares of
the Company's common and convertible preferred stock. See Item 3, "Legal
Proceedings".
The staff of the Securities and Exchange Commission ("SEC") has also
commenced a formal investigation into the Company's actions in connection with
the accounting issues that were raised in connection with the restatement
mentioned above. See Item 3 "Legal Proceedings".
8
Item 2. Properties
The Company currently occupies approximately 13,500 square feet of office
space at 400 Columbus Avenue, Valhalla, New York, 10595, pursuant to a lease,
that expires on July 31, 2005. The monthly rental expense pursuant to the lease
is approximately $24,953 per month depending on the Company's use of
electricity.
The Company also maintains nine domestic retail stores of which two
specialty and one outlet stores are located in suburban shopping malls in
various locations on the East Coast, two are outlet stores located in malls in
New Jersey, one outlet and one specialty store are located in malls in
Pennsylvania, one outlet store is located in Massachusetts and one outlet store
is located in Florida. A tenth specialty store in Connecticut is scheduled to
open in May 2001. The leases for the retail stores expire at various times
between 2002 and 2010. In addition to specified monthly rental payments,
additional rent at all shopping mall locations is based on percentages of annual
gross sales of the retail store exceeding certain and proportionate amounts of
monthly real estate taxes, utilities and other expenses relating to the shopping
mall.
The Company also occupies showrooms on the fifth and sixth floors at 215 W.
40th Street, New York. The lease for provides for monthly rental of $19,280 for
both floors, and a lease expiration of March 31, 2003.
Item 3. Legal Proceedings
In July 2000, the Company settled a stockholder class action brought in the
United States District Court for the Southern District of New York (the "Court")
entitled Willow Creek Capital Partners, L.P., v. Candie's, Inc., which alleged
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for Fiscal 1998 and the
first three quarters of Fiscal 1999, which caused the Company's securities to
trade at artificially inflated prices. Pursuant to the settlement the Company
agreed to pay to the plaintiffs total consideration of $10 million, payable in a
combination of $4 million in cash and the balance in the Company's Common Stock
and convertible preferred stock. The Company has made the required $4 million
cash payment. The remaining $6 million will be paid in the form of the Company's
Common Stock and in preferred stock which will convert to the Company's Common
Stock based on the price of the Company's Common Stock on the first and second
anniversary of the "Effective Date" (August 2000) as defined in the settlement
agreement approved by the Court. The shares of stock have not yet been issued
because the plaintiffs' plan of distribution has not yet been finalized.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, the accounting issues that were raised in
connection with the restatement.
In December 2000, an action for breach of contract and breach of the duty
of good faith and fair dealing was commenced against the Company and one of its
subsidiaries in the United States District Court for the Southern District of
New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano.
The plaintiffs allege that the Company breached certain representations
contained in the September 24, 1998 Stock Purchase Agreement pursuant to which
the defendants acquired the capital stock of the entity that owned the Bongo
trademark. The plaintiffs are seeking to recover unspecified compensatory
damages and costs, including attorneys' fees, and to rescind the Stock Purchase
Agreement and related acquisition. The Company has filed a motion to dismiss the
complaint, which motion has not yet been decided by the court. The Company,
which intends to vigorously defend the action, believes it has defenses
available to it and that any remedy for rescission is unavailable. The Company
is presently unable to assess the financial impact, if any, on the Company as a
result of this action.
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 in this Item 3, the Company
knows of no material legal proceedings,
9
pending or threatened, or judgments entered, against any director or officer of
the Company in his capacity as such.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") since January 22, 1990
(under the symbol "CAND"). The following table sets forth, for the indicated
periods, the high and low sales prices for the Company's Common Stock as
reported by NASDAQ:
High Low
Fiscal Year Ended January 31, 2001
Fourth Quarter................................ $1.22 $0.44
Third Quarter ................................ 1.50 0.75
Second Quarter................................ 1.63 1.00
First Quarter ............................... 2.16 0.88
Fiscal Year Ended January 31, 2000
Fourth Quarter................................ $1.75 $0.63
Third Quarter ............................... 1.75 0.56
Second Quarter................................ 3.13 2.81
First Quarter ............................... 4.00 2.63
As of April 19, 2001, there were approximately 1,350 holders of record of
the Company's Common Stock.
The Company has not paid cash dividends on its common stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future. Cash dividends are subject to approval by Rosenthal &
Rosenthal, Inc. ("Rosenthal"), the Company's lender.
During the fiscal quarter ended January 31, 2001, the Company issued
ten-year options to its employees to purchase an aggregate of 402,500 shares of
the Company's Common Stock at exercise prices of: (i) $0.6875 for 242,500
shares, (ii) $0.8438 for 5,000 shares, (iii) $0.8750 for 150,000 shares, and
(iv) $1.0938 for 5,000 shares. The foregoing options were acquired by the
holders for investment in private transactions exempt from registration by
virtue of either Sections 2(a) (3) or 4(2) of the Securities Act of 1933.
10
Item 6. Selected Financial Data
Selected Historical Financial Data
(in thousands, except earnings per share amounts)
The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
Year Ended January 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating Data:
- --------------
Net revenue $ 95,194 $ 93,747 $ 115,069 $89,381 $45,005
Operating (loss) income (7,174)(1) (22,862)(1) 786 4,889 891
Net (loss) income (8,200) (25,176) (641) 3,405 1,145
(Loss) earnings per share:
Basic $ (0.43) $ (1.41) $ (0.04) $ 0.30 $ 0.13
Diluted (0.43) (1.41) (0.04) 0.25 0.11
Weighted average number of common shares outstanding:
Basic 19,231 17,798 15,250 11,375 9,143
Diluted 19,231 17,798 15,250 13,788 10,152
At January 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
- ------------------
Current Assets $23,772 $32,799 $45,216 $21,459 $ 9,039
Total assets 50,370 64,058 74,600 29,912 14,709
Long-Term debt 1,153 1,848 271 -- --
Total stockholders' equity 24,745 32,948 51,849 23,550 8,608
(1) Includes special charges in 2001 of $2,674 and special charges and
litigation costs in 2000 of $11,002. See Notes 5 and 9 of the Notes to the
Financial Statements
11
Item 7. 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 Item 7 and
elsewhere in this Annual Report on Form 10-K 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, competition,
uncertainties relating to economic conditions in the markets in which the
Company operates, the ability to hire and retain key personnel, the ability to
obtain capital if required, the risks of litigation and regulatory proceedings,
the risks of uncertainty of trademark protection, the uncertainty of marketing
and licensing acquired trademarks and other risks detailed below and in the
Company's other SEC filings, and uncertainty associated with the impact on the
Company in relation to recent events discussed above in this report.
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.
Seasonal And Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of holidays, weather, the timing of
footwear shipments, market acceptance of Company products, the mix, pricing and
presentation of the products offered and sold, the hiring and training of
additional personnel, the timing of inventory write downs, fluctuations in the
cost of materials, the mix between wholesale and licensing businesses, and the
incurrence of other operating costs and factors beyond the Company's control,
such as general economic conditions and the action of competitors. Accordingly,
the results of operations in any quarter will not necessarily be indicative of
the results that may be achieved for a full fiscal year or any future quarter.
In addition, the timing of the receipt of future revenues could be impacted
by the recent trend among retailers in the Company's industry to order goods
closer to a particular selling season than they have historically done so. The
Company continues to seek to expand and diversify its product lines to help
reduce the dependence on any particular product line and lessen the impact of
the seasonal nature of its business. The success of the Company, however, will
still largely remain dependent on its ability to predict accurately upcoming
fashion trends among its customer base, build and maintain brand awareness and
to fulfill the product requirements of its retail channel within the shortened
timeframe required. Unanticipated changes in consumer fashion preferences,
slowdowns in the United States economy, changes in the prices of supplies,
consolidation of retail establishments, among other factors noted herein, could
adversely affect the Company's future operating results.
General Introduction
Of the Company's net loss of $8.2 million for Fiscal 2001, $4.3 million was
attributable primarily to losses on recurring operations, $2.7 million for non
recurring and special charges and $1.7 million of interest expense, which was
partially offset by $0.7 million of joint venture income, which resulted from
the Company's decision to suspend booking its share of joint venture losses
beyond its maximum liability. See Note 2 of the Notes to the Financial
Statements.
The Company's operating loss excluding non-recurring and special charges
decreased by $7.4 million to $4.5 million in Fiscal 2001, from $11.9 million in
Fiscal 2000, primarily due to a 3.4% increase in the gross profit margin, a 9.4%
decrease in selling, general and administrative expenses and a 53% increase in
licensing income.
12
The Company's non recurring and special charges included $1.0 million for
the write off of impaired software costs, $0.7 million for restructuring the
Company's sales force and obligations to certain terminated employees, $0.2
million for expenses related to warehouse consolidation and the Company's
relocation to new corporate headquarters, $0.6 million to write off intangible
assets related to an impaired Bongo license and $0.2 million of special legal
costs related to matters connected with the restatement of the Company's results
for Fiscal 1998 and the first three quarters of Fiscal 1999. See Item 3 "Legal
Proceedings."
In Fiscal 2001, the Company recorded net income of $ 0.7 million related to
the Unzipped joint venture. The income resulted from the Company's suspension of
recording losses of Unzipped in excess of its commitment to fund such losses.
See Note 2 of the Notes to the Financial Statements.
As part of its plan to improve its operating results, the Company is
focusing its efforts on its core branded footwear business, including increasing
sales through its own retail stores, while continuing to expand its licensing
program, which it believes will enhance the Company's brands and will generate
additional income. The Company continues to focus on its initiative to improve
inventory turn, which it believes should result in improved gross profit
margins.
Results of Operations
Fiscal 2001 Compared to Fiscal 2000
Revenues. During Fiscal 2001, net sales decreased by $129,000 to $90.7
million. Revenue from sales of Candie's and Bongo women's footwear increased by
$6.7 million, or 10.9%, reflecting the Company's focus on improving in its core
branded footwear business. In addition, sales at Candie's retail stores
increased by $2.3 million, or 81.4%, as a result of new locations added in
Fiscal 2001, as well as an increase in comparable stores sales of 15.9%.
Deductions for returns and allowances decreased $1.2 million or 12.2%, primarily
as a result of operating improvements targeting this area. Offsetting the
increases noted above were a decrease in handbag revenues of $2.5 million, or
55.6%, resulting from the discontinuance of the Company's handbag line which was
licensed in March 2000, and a decrease in sales of kids' footwear, which
decreased $3.6 million, or 22.3%, due to, among other things, increased
competition in the kids' footwear area. Sales of unbranded merchandise also
decreased by $1.6 million, or 48.3%. Men's private label division sales
decreased $2.7 million or 21.3%, as a result of buying cutbacks from two
significant customers.
Licensing income increased $1.5 million or 53.4% to $4.5 million for Fiscal
2001 from $3.0 million in the prior year. The increase was due to increased
sales from existing licenses and, to a lesser extent, the granting of new
licenses.
Gross Profit. Gross profit increased by $4.6 million to $24.0 million in
Fiscal 2001 or 23.7% from $19.4 million in the prior year. As a percentage of
net revenues, gross profit margin increased by 4.5 percentage points to 25.2%
from 20.7% in the prior year. The increase is primarily attributable to improved
inventory management, reductions in sales returns and allowances, an increase in
retail sales that have higher gross profit margins, and an increase in licensing
income.
Operating Expenses. During Fiscal 2001, selling, general and administrative
expenses decreased by $2.8 million to $28.5 million, compared to $31.3 million
during the prior year. The decreases in operating expenses were attributable to
the Company's expense reduction initiatives and increased contribution by
licensees to the costs of the Company's marketing campaigns. Partially
offsetting these decreases was an increase in overhead expenses relating to the
Company's operations including the overall expansion of retail operations and
the addition of operating locations.
The Company's non recurring and special charges included $1.0 million for
the write off of impaired software costs, $0.7 million for restructuring the
Company's sales force and obligations to certain terminated employees, $0.2
million for expenses related to warehouse consolidation and the Company's
relocation to new corporate headquarters, $0.6 million to write off intangible
assets related to
13
an impaired Bongo license and $0.2 million of special legal costs related to
matters connected with the restatement of the Company's results for Fiscal 1998
and the first three quarters of Fiscal 1999. The Company has also incurred
substantial additional costs in evaluating various new potential borrowing
arrangements, the restatement of its Fiscal 1998 and Fiscal 1999 financial
results, the investigation conducted by the Special Committee of the Board of
Directors and the costs of defending the class action lawsuit and SEC
investigation. These one time charges include $0.2 million in Fiscal 2001 and
$3.0 million in Fiscal 2000 as well as an $8.0 million charge for the litigation
settlement in Fiscal 2000.
Operating Loss. The Company sustained an operating loss of $7.2 million for
Fiscal 2001, compared to an operating loss of $22.9 million for Fiscal 2000.
Interest Expense. Interest expense in Fiscal 2001 increased by $0.2 million
to $1.7 million, primarily as a result of higher average borrowings and higher
interest rates than in Fiscal 2000 under the Company's credit facility.
Equity (Income) Losses in Joint Venture. The Company recorded joint venture
income from Unzipped of $0.7 million in Fiscal 2001 resulting from the Company
not recording its share of Unzipped losses since they exceeded the Company's
commitment to fund such losses, compared to a loss of $2.0 million in the prior
year, which resulted primarily from larger losses of Unzipped due to the
discontinuance of the Candie's jeans line in Fiscal 2000. See Note 2 of the
Notes to Financial Statements.
Income Tax Provision. The income tax provision of $66 thousand consists of
statutory minimum taxes. The income tax benefit, which would have resulted from
the Fiscal 2001 losses, was offset by an increase of $2.9 million in the
Company's deferred tax valuation allowance to $12.2 million. The Company has a
net deferred tax asset of approximately $3.6 million that management believes
will be recoverable from profits to be generated over the next few years. The
valuation allowance of $12.2 million represents amounts that can not be assured
of recoverability. See Note 13 of the Notes to the Financial Statements.
Net Loss. As a result of the foregoing, the Company sustained a net loss of
$8.2 million for Fiscal 2001, compared to a net loss of $25.2 million for Fiscal
2000.
Fiscal 2000 Compared to Fiscal 1999
Revenues. During Fiscal 2000, net revenues decreased by $23.9 million or
20.8% to $90.8 million due primarily to decreased sales of CANDIE'S brand
footwear of $15.1 million, decreased private label sales of $5.3 million,
decreased sales of girls footwear of $2.4 million and the absence of the Fiscal
1999, one time revenues of $2.1 million generated in connection with certain
customers. These decreases in Fiscal 2000 net revenues were partially offset by
sales increases in handbags of $1.2 million and retail sales increases of $1.1
million. The decline in footwear revenue was attributable to decreased consumer
acceptance of the footwear styles the Company offered in Fiscal 2000.
Licensing Income increased $2.6 million to $3.0 million for Fiscal 2000.
This increase was attributable to the acquired Bongo license and newly granted
fragrance and eyewear licensing arrangements.
Gross Profit. Gross profit decreased in Fiscal 2000 by $7.2 million or
27.2% to $19.4 million from $26.6 million in the prior year. As a percentage of
net revenues, gross profit in Fiscal 2000 decreased to 24.7% from 23.2% in
Fiscal 1999. This decline in gross profit rate was primarily attributable to
promotional pricing discounts. The decreased gross profit was comprised as
follows: $2.9 million for girls' footwear, $4.9 million for CANDIE'S brand
footwear, $1.2 for Bongo, $0.3 for handbags and $1.1 for private label, which
were partially offset by the increased retail store profits of $0.5 million.
Operating Expenses. Selling, general and administrative expenses increased
by approximately $5.4 million to $31.3 million during Fiscal 2000. As a
percentage of net revenues, selling, general and administrative expenses
increased to 34.4% for Fiscal 2000 from 22.5% for the prior year. These
increases reflect costs attributable to increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($1.6 million),
increased advertising and website expenditures ($1.8 million), coupled with
14
increased salary expenses incurred as a result of management changes ($0.9
million) as well as increased freight, rent, legal, other and finance fee
expenses ($1.1 million).
In addition, the Company incurred significant non recurring litigation and
legal and administrative costs to investigate and respond to certain issues and
claims relating to the restatement of its Fiscal 1999 quarterly results and
Fiscal 1998 results. These one-time charges include, a litigation settlement of
$8 million and $3 million in legal and administrative and certain litigation
costs. See Item 3 "Legal Proceedings."
Operating Income (Loss.) As a result of the foregoing, the Company
sustained an operating loss of $22.9 million for Fiscal 2000, compared to
operating income of $0.8 million for the prior fiscal year.
Interest Expense. Interest expense increased by $0.4 million to $1.4
million, or 1.6% of net revenues, primarily as a result of higher average
borrowings and higher interest rates under the Company's revolving credit
facility.
Equity Losses in Joint Venture. The Unzipped joint venture recorded a loss
of $4.0 million for Fiscal 2000 primarily due to the discontinuance of the
CANDIE'S jeans line. The Company's share of this loss was $2.0 million or 2.2%
of net revenues, as compared to the prior fiscal year loss of $1.1 million with
the Company's portion being $0.5 million.
Income Tax Benefit. The income tax benefit was limited to $1.1 million or
4% of pre tax losses due to the establishment of a valuation provision of $9.3
million in Fiscal 2000. The Company has a net deferred tax asset of
approximately $3.6 million that management believes will be recoverable from
profits to be generated over the next few years. The valuation allowance of $9.3
million represents amounts that can not be assured of recoverability. See Note
13 of the Notes to the Financial Statements.
Net Loss. As a result of the foregoing, the Company sustained a net loss of
$25.2 million for Fiscal 2000, compared to a net loss of $0.6 million, for the
prior fiscal year.
Liquidity and Capital Resources
Working Capital. Working capital decreased $4.3 million to negative $0.7
million at January 31, 2001 from approximately $3.5 million at January 31, 2000.
The decrease is due primarily to losses in Fiscal 2001. At January 31, 2001, the
current ratio of assets to liabilities was 0.97 to 1 as compared to 1.12 to 1
for the prior fiscal year.
The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings from its factor to finance its operations. Net cash provided from
operating activities totaled $7.7 million in Fiscal 2001, as compared to $3.3
million in Fiscal 2000.
Capital expenditures. Capital expenditures were $1.9 million for Fiscal
2001 as compared to $2.8 million for the prior year. The current year capital
expenditures include retail store additions of $0.1 million, the acquisition of
data processing software and equipment, and website development costs of $0.8
million, and the remainder consisting primarily of in store shops, showroom and
office additions. The Company's 2002 capital expenditure plan of $3.0 million
includes $1.3 million for up to five additional retail stores, $1.1 million for
data processing software and equipment, $0.4 million for website development,
and $0.2 million for in store shops. The Company believes that it will be able
to fund these anticipated expenditures primarily with cash from operations
supplemented by borrowings under its existing revolving credit facility.
Financing Activities. During Fiscal 1999, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of approximately $7.16 million from the
exercise of the Warrants. The proceeds were used to repay short-term borrowings.
Each Warrant entitled the holder thereof to purchase one share of the Company's
Common Stock at an exercise price of $5.00. In addition, in Fiscal 1999, the
Company received proceeds of $1.17 million, in connection with the issuance of
the Company's Common Stock relating to the exercise of outstanding stock
options.
15
On August 18, 1998, the Company completed the merger with NRC. Each issued
and outstanding share of NRC Common Stock and each issued and outstanding option
to purchase one share of NRC Common Stock, prior to the effective date, were
converted, respectively, into 0.405 shares of the Company's Common Stock and
into options to purchase 0.405 shares of common stock, respectively. The merger
was accounted for using the purchase method of accounting.
At the effective date, there were 5,743,639 outstanding shares of NRC
Common Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of the Company's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of the Company's Common Stock. NRC also owned 1,227,696 shares of
the Company's Common Stock and had options and warrants to purchase an
additional 800,000 shares of the Company's Common Stock. These options and
warrants were extinguished upon consummation of the merger.
On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Caruso. Pursuant to the agreement, the
Company acquired the BONGO trademark as well as certain other related trademarks
and two license agreements, one for children's and one for large size jeans
wear. Prior to the acquisition, Caruso licensed certain trademarks relating to
footwear to the Company, which license was terminated as of the closing date.
The purchase price for the shares acquired was approximately $15.4 million
and was paid at the closing in 1,967,742 shares of the Company's Common Stock
(each share being valued at $7.75), plus $0.1 million in cash. In March 1999, an
additional 547,722 shares of the Company's Common Stock were delivered to the
sellers based on a clause in the agreement requiring an upward adjustment in the
number of shares delivered at the closing.
Matters Pertaining to Unzipped. On or about October 31, 1999, the Company
made a $0.5 million capital contribution to Unzipped. In addition, pursuant to
the terms of the Operating Agreement of Unzipped, on January 31, 2003, the
Company must purchase from Sweet, Sweet's entire interest in Unzipped at the
aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for the
fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of the Company's Common Stock. In the event the Company elects to
issue shares of the Company's Common Stock to Sweet, Sweet shall receive shares
of the Company's Common Stock and the right to designate a member to the Board
of Directors for the Company until the earlier to occur of (i) the sale of any
of such shares or (ii) two years from the date of closing of such purchase.
Unzipped reported an unaudited operating loss of $1.7 million for the Fiscal
2001 and an operating loss of $4.0 million for Fiscal 2000. The Company's share
of the losses are $0.9 million and $2.0 million respectively. The Company has
suspended booking its share of Unzipped losses beyond its maximum liability. See
Note 2 of the Notes to the Financial Statements.
Current Revolving Credit Facility. On October 28, 1999, the Company entered
into a two-year $35 million revolving line of credit (the "Line of Credit") with
Rosenthal & Rosenthal, Inc. ("Rosenthal") and terminated its former credit
facility. On November 23, 1999, First Union National Bank entered into a
co-lending arrangement and became a participant in the Line of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit bear
interest at 0.5% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company also pays an annual facility fee of 0.25% of the maximum Line of Credit.
The minimum factoring commission fee for the initial term is $0.5 million. As of
April 3, 2001, the Company extended its factoring agreement with Rosenthal
through April 30, 2003. As of January 31, 2001 the outstanding borrowing under
the facility was $8.9 million, including outstanding letters of credit.
Borrowings under the Line of Credit were secured against factored receivables of
$7.5 million and inventory. Interest paid to Rosenthal for Fiscal 2001 was $1.4
million.
The Line of Credit contains two financial covenants for tangible net worth
and working capital. The Company was not in compliance with these financial
covenants as of January 31, 2001 and received an waiver from Rosenthal that
exempts the financial covenants through July 31, 2001. The Company is
negotiating with Rosenthal and other lenders to refinance this loan and expects
to be able to do so by July 31, 2001.
16
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million with the remaining balance
considered to be an unsecured loan. The term of the agreement is four years at
an effective annual interest rate of 10.48%. The outstanding loan balance as of
January 31, 2001 was $1.9 million. The interest paid for Fiscal 2001 was $1.2
million. The quarterly payment on the loan is $260,000, including interest.
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, including for the proposed
expansion of its retail operations during Fiscal 2002, primarily with cash flow
from operations, supplemented by borrowings under its existing revolving 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.
Prior Revolving Credit Facility. In May 1998, the Company entered into a
three year $35 million revolving credit facility (the "Facility"). During Fiscal
2000 the Company failed to comply with certain covenants of the Facility and the
Facility was repaid in full with proceeds from the Line of Credit in October
1999.
Seasonality
The Company's quarterly results may fluctuate quarter to quarter as a
result of holidays, weather, the timing of footwear shipments, market acceptance
of Company products, the mix, pricing and presentation of the products offered
and sold, the hiring and training of additional personnel, the timing of
inventory write downs, fluctuations in the cost of materials, the mix between
wholesale and licensing businesses, the incurrence of other operating costs and
factors beyond the Company's control, such as general economic conditions and
the action of competitors. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that may be achieved for a
full fiscal year or any future quarter.
The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volumes of products sold during the second 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.
Net Operating Loss Carry Forwards
At January 31, 2001, the Company had available net operating losses of
approximately $31.1 million for income tax purposes, which expire in the years
2006 through 2021. Because of "ownership changes"(as defined in Section 383 of
the Internal Revenue Code) occurring in previous fiscal years, the utilization
of approximately $4.6 million of the net operating losses is limited to $0.6
million per year and expires 2006 through 2007. The remaining $26.1 million is
not subject to such limitation and expires 2009 through 2021. See Note 13 of the
Notes to the Financial Statements.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 in Fiscal 2002 is
not expected to have a material effect on the Company's financial statements.
17
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101. SAB No. 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. This SAB was adopted in
Fiscal 2001 and it did not have a material effect on the Company's revenue
recognition policy.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company limits exposure to foreign currency fluctuations in most of its
purchase commitments through provisions that require vendor payments in United
States dollars. The Company's earnings may also be affected by changes in
short-term interest rates as a result of borrowings under its line of credit
facility. A two or less percentage point change in interest rates would not
materially effect the Company's Fiscal 2001 and Fiscal 2000 net loss.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
As previously reported, on June 17, 1999, the Company dismissed Ernst &
Young LLP ("E&Y") as its independent auditors. The reports of E&Y on the
financial statements of the Company for Fiscal 1998 and the fiscal year ended
January 31, 1997 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
The information with respect to the Company's change in auditors was
reported in the Company's Form 8-K for the event dated June 17, 1999.
18
PART III
Item 10. Directors and Executive Officers of the Registrant
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Set forth below is a list of the directors, executive officers and key
employees of the Company and their respective ages and positions are as follows:
Name Age Position
Neil Cole 44 Chairman of the Board, President and Chief Executive Officer
Deborah Sorell Stehr 38 Senior Vice President, Secretary and General Counsel
Richard Danderline 47 Executive Vice President, Finance and Operations
John McPhee (key employee) 38 President of Wholesale Sales
Barry Emanuel 59 Director
Mark Tucker 53 Director
Steven Mendelow 58 Director
Peter Siris 56 Director
Ann Iverson 57 Director
Neil Cole has been Chairman of the Board, President and Chief Executive
Officer of the Company since February 23, 1993. Mr. Cole's family began the
Candie's business in the late 1970's. After the brand was sold by the family,
Mr. Cole re-purchased the brand and founded the Company in 1992. From February
through April 1992, Mr. Cole served as a director and as acting President of the
Company. Mr. Cole also served as Chairman of the Board, President, Treasurer and
a director of New Retail Concepts, Inc. ("NRC"), from its inception in 1986
until it was merged with and into the Company in August 1998. Mr. Cole is an
attorney who graduated from Hofstra law school in 1982.
Deborah Sorell Stehr joined the Company in December 1998 as Vice President
and General Counsel, and was promoted to Senior Vice President in November 1999.
From September 1996 to December 1998, Ms. Sorell Stehr was Associate General
Counsel with Nine West Group Inc. ("Nine West"), a women's' footwear corporation
with sales approximating $2.0 billion, where Ms. Sorell Stehr was primarily
responsible for overseeing legal affairs relating to domestic and international
contracts, intellectual property, licensing, general corporate matters,
litigation and claims. Prior to joining Nine West, Ms. Sorell Stehr practiced
law for nine years at private law firms in New York City and Chicago in the
areas of corporate law and commercial litigation.
Richard Danderline joined the Company as Executive Vice President - Finance
and Operations in June 2000. For the thirteen years prior to joining the
Company, he served as Vice President, Treasurer and Chief Financial Officer of
AeroGroup International, Inc ("Aerosoles"), a privately held footwear company.
Prior to joining Aerosoles, he served as Vice President and Chief Financial
Officer of Kenneth Cole Productions, Inc., where he was part of a management-led
buyout of its What's What division, which later became Aerosoles. Mr.
Danderline's experience also includes serving as Vice President and Controller
of Energy Asserts International, Inc. and as Vice President and Controller of
XOIL Energy Resources, Inc. Mr. Danderline is certified public accountant who
began his career with Touche Ross & Co., the predecessor of Deloitte & Touche
LLP.
19
John J. McPhee joined the Company in October 1996 as President of the
Candie's Kids division. Mr. McPhee was promoted to President of Wholesale Sales
in March 2000. From October 1992 to October 1996 Mr. McPhee was President of the
Children's Footwear Division of Sam & Libby, Inc. Prior to Sam & Libby, Mr.
McPhee held various executive positions with Jumping-Jacks Shoes. Mr. McPhee is
a graduate of Santa Clara University.
Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York.
Mark Tucker has been a director of the Company since May 1996. From August
1993 to the present, Mr. Tucker has been a principal of Mark Tucker, Inc., a
family owned business engaged in the design and import of shoes. Mr. Tucker has
also been affiliated with Redwood Shoe Corp. ("Redwood"), a manufacturer and
distributor of footwear since June 1993. From December 1992 to August 1993, he
was an independent consultant to the shoe industry. From July 1992 to December
1992, Mr. Tucker was employed as Director of Far East Shoe Wholesale Operations
for United States Shoe Far East Limited, a subsidiary of U.S. Shoe Corp. For
more than five years prior to July 1992, Mr. Tucker was a principal of Mocambo
Ltd., a family owned shoe design and import company
Steven Mendelow has been a principal with the accounting firm of Konigsberg
Wolf & Co. and its predecessor, which is located in New York, New York since
1972. Mr. Mendelow was a director of NRC from April 1, 1992 until NRC merged
into the Company in August 1998.
Peter Siris has been active in the apparel, retail and financial industries
for over 25 years. During the past two years, Mr. Siris has been the Managing
Director of Guerrilla Capital Management, while completing his best selling
book, "Guerilla Investing", and working as a columnist for the "New York Daily
News". Between 1995 and 1997, he served as Senior Vice President of Warnaco,
Inc. and Director of Investor Relations of Authentic Fitness Corporation and
Senior Vice President of ABN-Amro Incorporated. Between 1970 and 1995, Mr. Siris
served as Managing Director of Union Bank of Switzerland, Securities, Executive
Vice President and Director of The Buckingham Research, Executive Vice President
and Director of Sirco International Corporation, President of MERIC, Inc. and
President of Urban Innovations, Inc. Mr. Siris, who earned his MBA from Harvard
University, is also an expert on trade in China and authored a novel on that
subject, "The Peking Mandate".
Ann Iverson joined the Board in March 2001. Since 1998, she has been the
President and CEO of International Link, Inc., a consulting company providing
value to corporations in making strategic decisions. From June 1995 until
forming International Link, Ms. Iverson worked as the Group Chief Executive of
Laura Ashley in the United Kingdom. Prior to that she was the President and CEO
of KayBee Toy Stores and CEO of Mothercare UK, Ltd based in England. In addition
to being a member of the Company's board, Ms. Iverson currently sits on the
board of Owens Corning, Inc., a leader in the building materials systems and
composites systems industry, and serves as a member of its Audit Committee. Ms.
Iverson is also Chairman of Portico Bed & Bath Inc., and a board member at
Brooks Sports, Inc. Ms. Iverson, who brings to the Board over 40 years of
experience in the fashion and retail industry, has been the recipient of
numerous industry awards, including the Ellis Island Medal of Honor and Retailer
of the Year in the United Kingdom.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified. All officers serve at the
discretion of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
In or about January 2001, the Company formed a Compensation Committee of
the Board of Directors, which was initially comprised of Messrs. Mendelow, Siris
and Emanuel. Prior to forming the Compensation Committee, decisions as to
executive compensation were made by the Company's Board of Directors, primarily
upon the recommendation of Mr. Cole. During Fiscal 2001, Mr. Cole, the Company's
Chief Executive Officer, in his capacity as a director, also engaged in Board
deliberations regarding the determination of executive officer compensation. Mr.
Tucker, in his capacity as a director also participated in the determination of
executive officer compensation. Mr. Tucker is affiliated with Redwood, the
Company's principal buying agent. During Fiscal 2001, none of the executive
officers of the Company served on the board of directors or the compensation
committee of any other entity. In or about March
20
2001, Ms. Iverson joined the Board and was appointed to the Compensation
Committee. Ms. Iverson also serves on the compensation committee of Brooks
Sports, Inc.
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of Securities Exchange Act of 1934 requires the Company
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10 percent owners are required by certain SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during Fiscal 2001, filing requirements
applicable to its officers, directors and 10% stockholders of the Common Stock
were complied with, except that Mr. Siris failed to file timely a Form 3 in
March 2000, when he became a director of the Company.
Item 11. Executive Compensation
The following table sets forth all compensation paid or accrued by the
Company for the Fiscal 2001, 2000 and 1999, to or for the Chief Executive
Officer and for the other persons that served as executive officers of the
Company during Fiscal 2001 whose salaries exceeded $100,000 and for John J.
McPhee who is a key employee but not an executive officer of the Company
(collectively, the "Named Persons"):
Summary Compensation Table
-----------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards
--------------------------- ----------------------------
Other Securities
Name & Principal Fiscal Annual Com- Underlying
Positions Year Salary Bonus(1) pensation (2) Options (3)
- --------------------------- -------- ----------- ----------- --------------- ------------
Neil Cole 2001 $ 500,000 $ $ 10,000 617,250
Chairman, President & 2000 500,436 -- (4) 12,500 410,000
Chief Executive Officer 1999 445,833 -- -- 1,506,124(5)
Deborah Sorell Stehr 2001 166,667 25,000 -- 80,000
Senior Vice President & 2000 132,692 25,000 -- 50,000
General Counsel 1999 24,167 -- -- 30,000
Richard Danderline 2001 $ 120,513 25,000 -- 160,000
Executive Vice President -
Finance & Operations
John McPhee 2001 $ 228,642 25,000 -- 110,000
President of Wholesale Sales 2000 243,284 25,000 -- 50,000
1999 214,037 100,000 -- --
John M. Needham 2001 113,333 7,000 -- --
Vice President of Finance 2000 3,923 -- -- 75,000(6)
(1) Represents bonuses accrued under employment agreements.
(2) Represents amounts earned as director's fees.
(3) On December 11, 1998, certain options were re-priced to $3.50.
(4) As a result of the Company's restatement of certain financial
statements, the $105,500 bonus to Mr. Cole previously reported was
repaid by Mr. Cole to the Company in Fiscal 2001.
21
(5) 446,124 options of the Company's Common Stock were granted to the
Named Persons for compensation for services provided to NRC prior to
the merger with the Company. Also includes 10,000 options to purchase
shares earned as director's fees.
(6) Mr. Needham left the Company on September 22, 2000, and pursuant to
his stock option agreement such options expired upon his termination.
Option Grants in Fiscal 2001 Year
The following table provides information with respect to individual stock
options granted during Fiscal 2001 to each of the Named Persons who received
options during Fiscal 2001:
Shares % of Total Potential Realizable Value
Underlying Options Granted at Assumed Annual Rates
Options to Employees Exercise Expiration of Stock Price Appreciation
Name Granted in Fiscal Year Price Date for Option Term
- -------------------------- ------------- ----------------- ---------- ------------ ---------------------------
5% 10%
----------- ----------
Neil Cole 260,500 12.6% $ 1.25 08/18/10 $204,784 $518,962
331,750 16.1 1.13 07/18/10 234,715 594,815
25,000 1.2 0.97 01/01/10 15,232 38,600
Deborah Sorell Stehr 70,000 3.4 1.00 10/13/10 44,023 111,562
10,000 0.5 0.69 12/21/10 4,324 10,957
Richard Danderli 150,000 7.3 1.28 06/26/10 120,861 306,285
10,000 0.5 0.69 12/21/10 4,324 10,957
John McPhee 100,000 4.8 1.06 03/01/10 66,820 169,335
10,000 0.5 0.69 12/21/10 4,324 10,957
The following table sets forth information as of January 31, 2001, with
respect to exercised and unexercised stock options held by the Named Persons. No
options were exercised by any of the Named Persons during Fiscal 2001. On March
14, 2000, June 20, 2000 and July 7, 2000, 400,000, 10,125, and 162,000 options,
respectively, owned by Neil Cole expired. Mr. Needham's employment with the
Company ceased on September 22, 2000 and accordingly, as of that date all of his
options were terminated.
Aggregated Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at January 31, 2001 Options at January 31, 2001(1)
------------------------------------------------ ------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------------------------------------------------ ------------------------------------------
Neil Cole 2,676,542 84,583 3,125 --
Deborah Sorell Stehr 80,000 80,000 5,939 4,690
Richard Danderline 35,000 125,000 4,063 --
John McPhee 170,000 90,000 5,002 2,191
(1) An option is "in-the-money" if the year-end closing market price per
share of the Company's Common Stock exceeds the exercise price of such
options. The closing market price on January 31, 2001 was $1.09.
22
Employment Contracts and Termination and Change-in-Control Arrangements
In January 2000, the Company entered into an amended employment agreement
with Neil Cole to serve as President and Chief Executive Officer for a term
expiring on February 28, 2003, at an annual base salary of $500,000. Under the
amended employment agreement, Mr. Cole is entitled to receive a portion of an
annual bonus pool equal to 5% of the Company's annual pre-tax profits, if any,
as determined by the Company's Board of Directors, and to customary benefits,
including participation in management incentive and benefit plans, reimbursement
for automobile expenses, reasonable travel and entertainment expenses and a life
insurance policy in the amount of $1,000,000. Mr. Cole is also entitled to
receive any additional bonuses as the Board of Directors may determine. The
amended employment agreement provides that Mr. Cole would receive an amount
equal to $100 less than three times his annual compensation, plus accelerated
vesting or payment of deferred compensation, options, stock appreciation rights
or any other benefits payable to Mr. Cole in the event that within twelve months
of a "Change in Control", as defined in the agreement, Mr. Cole is terminated by
the Company without "Cause" or if Mr. Cole terminates his agreement for "Good
Reason", as such terms are defined in his employment agreement.
In January 2000, the Company entered into an amended employment arrangement
with Deborah Sorell Stehr for a term expiring on February 28, 2003 at an annual
base salary of $180,000. Ms. Sorell Stehr is also entitled to receive a bonus in
the amount of $25,000 for each year that she is employed. In connection with her
employment agreement, Ms. Stehr also received 30,000 options, which vest over a
period of two years. Ms. Sorell Stehr is also entitled to customary benefits,
including participation in management incentive and benefit plans, reimbursement
for automobile expenses, reasonable travel and entertainment expenses and a life
insurance policy. The agreement provides that Ms. Sorell Stehr would receive an
amount equal to $100 less than three times her annual compensation, plus
accelerated vesting or payment of deferred compensation, options, stock
appreciation rights or any other benefits payable to Ms. Sorell Stehr in the
event that within twelve months of a "Change in Control", Ms. Sorell Stehr is
terminated by the Company without "Cause" or Ms. Sorell Stehr terminates her
agreement for "Good Reason", as such terms are defined in her employment
agreement.
On or about May 19, 2000, the Company entered into an employment agreement
with Richard Danderline for a term expiring on June 26, 2002, at an annual base
salary of $200,000 for the period ended June 26, 2001, and $225,000 for the 12
months ended June 26, 2002. Mr. Danderline is entitled to receive a bonus up to
an amount of $100,000 the first year and $150,000 the second year calculated as
one half of 1% of the pre-tax profit of the Company for every 1% that selling,
general and administrative expenses of the Company decrease as a percentage of
revenues using Fiscal 2001 as the base year, but in no event less than $50,000
for each year of employment. In connection with his employment, Mr. Danderline
received a grant of 150,000 options, vesting over a period of five years. Mr.
Danderline is also entitled to customary benefits, including participation in
management incentive and benefit plans, reimbursement for automobile expenses,
reasonable travel and entertainment expenses and a life insurance policy. In the
event of a "change in control", defined as the cessation of Neil Cole being the
Chairman of the Board, or a sale or merger of the Company with a non-affiliate,
Mr. Danderline's options vest immediately.
On or about March 1, 2000, the Company entered into an employment agreement
with John McPhee for a term expiring on January 31, 2003, at an annual base
salary of $200,000 for the two months ended March 15, 2000, $225,000 for the
period from March 16, 2000 through January 21, 2001, $275,000 for the 12 months
ending January 31, 2002, and $325,000 for the 12 months ending January 31, 2003.
Pursuant to the employment agreement, Mr. McPhee serves as President of
Wholesale Sales for the Company devoting substantially all of his business time
and his best efforts to the business of the Company. Mr. McPhee is also entitled
to an annual bonus during the term of the agreement equal to one percent of the
Company's income before income taxes but in no event less than $25,000 for
Fiscal 2000. Under the agreement, Mr. McPhee receives customary benefits,
including participation in management incentive and benefit plans, reimbursement
for automobile expenses, reasonable travel and entertainment expenses and a life
insurance policy. Pursuant to the agreement, Mr. McPhee is entitled to his full
base salary for one year or through the term of the
23
agreement, whichever is greater, if there is a "Change of Control in the
Company" or if he leaves the Company for "Good Reason" as those terms are
defined in the agreement.
Compensation of Directors
During Fiscal 2001, Messrs. Emanuel, Tucker, Mendelow and Siris each
received a grant of Common Stock from the Company having a value of $10,000 in
compensation for attending board meetings. Mr. Cole received $10,000 in cash
compensation for attending board meetings. Mr. Siris also received 60,000
options to purchase the Common Stock of the Company pursuant to a consulting
arrangement. Ann Iverson, who joined the Company's Board in March 2001, was
issued options to purchase 50,000 shares of the Common Stock of the Company
pursuant to a consulting arrangement.
Under the Company's 2000 Stock Option Plan (the "2000 Plan") and 1997 Stock
Option Plan (the "1997 Plan"), non-employee directors are eligible to be granted
non-qualified stock options.
The Company's Board of Directors or the Stock Option Committee of the 2000
Plan or the 1997 Plan, if one is appointed, has discretion to determine the
number of shares subject to each non-qualified option (subject to the number of
shares available for grant under the 2000 Plan or the 1997 Plan, as applicable),
the exercise price thereof (provided such price is not less than the par value
of the underlying shares of the Company's Common Stock under the 2000 Plan or
not less than the fair value of Common Stock under the 1997 Plan), the term
thereof (but not in excess of 10 years from the date of grant, subject to
earlier termination in certain circumstances), and the manner in which the
option becomes exercisable (amounts, intervals and other conditions). No
non-qualified options were granted to non-employee directors under the 2000 Plan
or the 1997 Plan during Fiscal 2001.
24
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 19, 2001,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Named
Persons; (iii) each of the Company's directors; and (iv) all executive officers
and directors as a group:
Amount and
Nature of Percentage of
Name and Address of Beneficial Beneficial
Beneficial Owner (1) Ownership (2) Ownership
- ------------------------------------------------- ---------------------------------- -------------------
Neil Cole 3,423,626(3) 16.7%
Claudio Trust dated February 2, 1990 1,886,597 10.6%
2925 Mountain Maple Lane
Jackson, WY 83001
Michael Caruso 1,986,597(4) 11.1%
Mark Tucker 880,000(5) 4.9%
Barry Emanuel 90,125(6) *
Steven Mendelow 136,050(7) *
Deborah Sorell Stehr 80,000(8) *
Richard Danderline 35,000(9) *
John McPhee 170,000(10) *
Peter Siris 72,000(11) *
Ann Iverson 60,000(12) *
All executive officers and directors as a 4,946,801 (3)(5)(6)(7) 23.5%
group (eight persons) (8)(9)(10)(11)(12)
* Less than 1%
(1) Unless otherwise indicated, each beneficial owner has an address at
400 Columbus Avenue, Valhalla, New York 10595-1335.
(2) A person is deemed to have beneficial ownership of securities that can
be acquired by such person within 60 days of April 19, 2001, upon
exercise of warrants or options. Consequently, each beneficial owner's
percentage ownership is determined by assuming that warrants or
options held by such person (but not those held by any other person)
and which are exercisable within 60 days from April 19, 2001, have
been exercised. Unless otherwise noted, the Company believes that all
persons referred to in the table have sole voting and investment power
with respect to all shares of Common Stock reflected as beneficially
owned by them.
(3) Includes 2,676,542 shares of Common Stock issuable upon exercise of
options owned by Neil Cole.
25
(4) Represents shares held by Claudio Trust dated February 2, 1990, of
which Mr. Caruso is the trustee and includes 100,000 shares of Common
Stock issuable upon exercise of options owned by Michael Caruso.
(5) Includes 45,000 shares of Common Stock issuable upon exercise of
options, and 825,000 shares held by Redwood with which Mr. Tucker is
affiliated.
(6) Includes 80,125 shares of Common Stock issuable upon exercise of
options.
(7) Includes 10,000 shares of Common Stock issued to Mr. Mendelow, and
60,750 shares of Common Stock owned by C&P Associates, of which Mr.
Mendelow and his wife are affiliated.
(8) Represents shares of Common Stock issuable upon exercise of options.
(9) Represents shares of Common Stock issuable upon exercise of options.
(10) Represents shares of Common Stock issuable upon exercise of options.
(11) Represents 70,000 shares of Common Stock issuable upon exercise of
options and 2,000 shares of Common Stock owned by Mr. Siris' minor
daughter.
(12) Represents shares of Common Stock issuable upon exercise of options.
Item 13. Certain Relationships and Related Transactions
In 1996, the Company entered into an agreement with Redwood, a company with
which Mark Tucker, a director of the Company, is affiliated, to satisfy in full
certain trade payables amounting to $1,680,000. Under the terms of the
agreement, the Company issued Redwood 1,050,000 shares of Common Stock and an
option to purchase 75,000 shares of Common Stock at an exercise price of $1.75
and made a cash payment to Redwood of $50,000. For Fiscal 2001, Redwood, as
buying agent for the Company, initiated the manufacture of approximately 66% of
the Company's total footwear purchases. At January 31, 2001, the Company had
placed $6,024,172 of open purchase commitments with Redwood. In Fiscal 2001 and
Fiscal 2000, the Company purchased approximately $35 million and $38 million,
respectively of footwear products through Redwood. At January 31, 2001 and 2000,
the payable to Redwood totaled approximately $4,052,000 and $1,286,000,
respectively.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedule. See
accompanying Financial Statements and Financial Statement Schedule
filed herewith submitted as separate section of this report - See F-1.
(b) Reports on Form 8-K None.
(c) See the attached Index to Exhibits
27
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Neil Cole
----------------------
Neil Cole
Chief Executive Officer
Dated: May 1, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature and Name Capacity in Which Signed Date
- ------------------ ------------------------ ----
/s/ Neil Cole Chairman of the Board, President and Chief May 1, 2001
- ----------------- Executive Officer
Neil Cole
/s/Richard Danderline Executive Vice President, Finance and May 1, 2001
- --------------------- Operations (Principal Financial and Accounting
Richard Danderline Officer)
/s/ Barry Emanuel Director May 1, 2001
- -------------------
Barry Emanuel
/s/ Mark Tucker Director May 1, 2001
- -----------------
Mark Tucker
/s/ Steven Mendelow Director May 1, 2001
- ---------------------
Steven Mendelow
/s/ Peter Siris Director May 1, 2001
- ---------------
Peter Siris
/s/ Ann Iverson Director May 1, 2001
- ---------------
Ann Iverson
28
Index to Exhibits
Exhibit
Numbers Description
- ------- -----------
2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.(8)
2.2 Stock Purchase Agreement dated September 24, 1998 by and among
the Company, Licensing Acquisition Corp., Michael Caruso & Co.,
Inc. ("Caruso") and the stockholders of Caruso (9)
3.1 Certificate of Incorporation, as amended through October 1994
(1)(3)
3.2 Amendment to Certificate of Incorporation filed November 1994 (2)
3.3 Amendments to Certificate of Incorporation filed in August 1998
and February 2000 (14)
3.4 Restated and Amended By-Laws (14)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)
10.2 1989 Stock Option Plan of the Company (1)
10.3 1997 Stock Option Plan of the Company (7)
10.4 Employment Agreement between Neil Cole and the Company (4)
10.5 Amendment to Employment Agreement between Neil Cole and the
Company (6)
10.6 Lease with respect to the Company's executive offices (15)
10.7 Agreement dated as of April 3, 1996 between the Company and
Redwood Shoe Corp. (5)
10.8 Amendment dated as of September 30, 1996 to agreement dated as of
April 3, 1996 between the Company and Redwood Shoe Corp. (6)
10.9 Employment Agreement between Richard Danderline and the Company.
(16)
10.10 Employment Agreement between John J. McPhee and the Company. (18)
10.11 Employment Agreement between Deborah Sorell Stehr and the Company
(11)
10.12 Limited Liability Company Operating Agreement of Unzipped Apparel
LLC (10)
10.13 Escrow Agreement by and among the Company, the stockholders of
Caruso and Tenzer Greenblatt LLP(9)
10.14 Registration Rights Agreement between the Company and the
stockholders of Caruso (9)
10.15 Amendment to Lease Agreement with respect to the Company's
executive offices. (11)
10.16 Amendment dated January 27, 2000 to Employment Agreement between
Neil Cole and the Company (14)
10.17 Amendment dated January 27, 2000 to Employment Agreement between
Deborah Sorell Stehr and the Company (14)
29
10.18 2000 Stock Option Plan of the Company (17)
10.19 Rights Agreement dated January 26, 2000 between the Company and
Continental Stock Transfer and Trust Company (13)
10.20 Factoring Agreement between Rosenthal & Rosenthal, Inc. and the
Company (12)
10.21 Inventory Security Agreement between Rosenthal & Rosenthal, Inc.
and the Company (12)
10.22 Factoring Agreement between Rosenthal & Rosenthal, Inc. and
Bright Star Footwear, Inc. (12)
10.23 Inventory Security Agreement between Rosenthal & Rosenthal, Inc.
and Bright Star Footwear, Inc. (12)
21 Subsidiaries of the Company (18)
23 Consent of BDO Seidman, LLP (18)
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-18
(File 33-32277-NY) and incorporated by reference herein.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for
the year ended January 31, 1995, and incorporated by reference herein.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File 33-53878) and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended January 31, 1994 and incorporated by reference herein.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended January 31, 1996, and incorporated by reference herein.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended January 31, 1997, and incorporated by reference herein.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1997, and incorporated by reference herein.
(8) Filed as an exhibit to the Company's Annual Report on form 10-K for the
year ended January 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 24, 1998 and incorporated by reference herein.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1998 and incorporated by reference herein.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended January 31, 1999 and incorporated by reference herein
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1999 and incorporated by reference herein
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 26, 2000 and incorporated by reference herein
(14) Filed as an exhibit to the Company's Annual Report as Form 10-K for the
year ended January 31, 2000, and incorporated by reference herein
(15) Filed as an exhibit to the Company's Quarterly Report as Form 10-Q for the
quarter ended April 30, 2000 and incorporated by reference herein
30
(16) Filed as an exhibit to the Company's Quarterly Report as Form 10-Q for the
quarter ended July 31, 2000 and incorporated by reference herein
(17) Filed as Exhibit A to the Company's definitive Proxy Statement dated July
18, 2000 as filed on Schedule 14A and incorporated by reference herein
(18) Filed herewith
31
Annual Report on Form 10-K
Item 8, 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Year Ended January 31, 2001
Candie's, Inc. and Subsidiaries
F-1
Candie's, Inc. and Subsidiaries
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:
Report of Independent Certified Public Accountants.................. F-3
Consolidated Balance Sheets - January 31, 2001, and 2000............ F-4
Consolidated Statements of Operations for the Years ended
January 31, 2001, 2000, and 1999................................ F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 2001, 2000, and 1999............ F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 2001, 2000, and 1999................................ F-7
Notes to Consolidated Financial Statements.......................... F-8
The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):
Report of Independent Certified Public Accountants on Financial Statement
Schedule for the Years Ended January 31, 2001, 2000, and 1999... S-1
Schedule II Valuation and qualifying accounts ...................... S-2
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
Report of Independent Certified Public Accountants
The Stockholders and Directors of
Candie's, Inc.
We have audited the accompanying consolidated balance sheets of Candie's, Inc.
and subsidiaries as of January 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Candie's, Inc. and
subsidiaries at January 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP
New York, New York
April 19, 2001
F-3
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
January 31,
------------------------------
2001 2000
--------- ----------
Assets
Current Assets:
Cash ................................................................... $ 366 $ 643
Restricted cash ........................................................ -- 2,000
Accounts receivable, net of allowances of
$1,882 in 2001 and $2,992 in 2000 ................................. 3,390 2,711
Due from factor and accounts receivable, net of allowances of
$1,650 in 2001 and $1,830 in 2000 ................................. 5,854 8,034
Due from affiliates .................................................... 329 636
Inventories ............................................................ 9,323 14,770
Refundable and prepaid income taxes .................................... 219 631
Deferred income taxes .................................................. 2,994 1,448
Prepaid advertising and other .......................................... 1,205 1,622
Other current assets ................................................... 92 304
-------- --------
Total Current Assets ........................................................... 23,772 32,799
-------- --------
Property and equipment, at cost:
Furniture, fixtures and equipment ...................................... 7,408 6,679
Less: Accumulated depreciation and amortization ........................ 3,206 2,124
-------- --------
4,202 4,555
-------- --------
Other Assets:
Goodwill, net of accumulated amortization of
$651 in 2001 and $509 in 2000 ..................................... 2,010 2,152
Other intangibles, net ................................................. 19,623 22,047
Deferred income taxes .................................................. 628 2,174
Other .................................................................. 135 331
-------- --------
22,396 26,704
-------- --------
Total Assets ................................................................... $ 50,370 $ 64,058
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks ............................................ $ 8,898 $ 13,764
Litigation settlement ...................................................... -- 4,000
Accounts payable and accrued expenses ...................................... 9,766 6,856
Accounts payable - Redwood Shoe ............................................ 4,052 2,048
Losses in excess of joint venture investment ............................... 750 1,451
Current portion of long-term debt .......................................... 1,006 1,143
-------- --------
Total current liabilities ...................................................... 24,472 29,262
-------- --------
Other liabilities .............................................................. 98 --
Long-term liabilities .......................................................... 1,055 1,848
Stockholders' Equity:
Preferred and common stock to be issued .................................... 6,000 6,000
Preferred stock, $.01 par value - shares authorized 5,000;
none issued or outstanding ........................................ -- --
Common stock, $.001 par value - shares authorized 30,000;
shares issued 19,341 in 2001 and 19,209 in 2000 ................... 19 19
Additional paid-in capital ................................................. 59,239 59,094
Retained earnings (deficit) ................................................ (33,932) (25,732)
Less: Treasury stock - at cost - 1,472 shares in 2001
and 1,313 shares in 2000 .......................................... (6,581) (6,433)
-------- --------
Total Stockholders' Equity ..................................................... 24,745 32,948
-------- --------
Total Liabilities and Stockholders' Equity ..................................... $ 50,370 $ 64,058
======== ========
See accompanying notes to consolidated financial statements
F-4
Candie's, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except earnings per share data)
Year ended January 31,
----------------------------------------------------
2001 2000 1999
--------------- ------------------- ----------------
Net sales ................................................................ $ 90,667 $ 90,796 $ 114,696
Licensing income ......................................................... 4,527 2,951 373
-------- -------- ---------
Net revenue .............................................................. 95,194 93,747 115,069
Cost of goods sold ....................................................... 71,186 74,347 88,427
-------- -------- ---------
Gross profit ............................................................. 24,008 19,400 26,642
Selling, general and administrative expenses ............................. 28,508 31,260 25,856
Special charges .......................................................... 2,674 3,002 --
Litigation settlement, net ............................................... -- 8,000 --
-------- -------- ---------
Operating (loss) income .................................................. (7,174) (22,862) 786
Other expenses:
Interest expense - net ........................................... 1,661 1,415 1,005
Equity (income) loss in joint venture ............................ (701) 2,002 545
-------- -------- ---------
960 3,417 1,550
-------- -------- ---------
Loss before income taxes ................................................. (8,134) (26,279) (764)
Provision (benefit) for income taxes ..................................... 66 (1,103) (123)
-------- -------- ---------
Net loss ................................................................. $ (8,200) $(25,176) $ (641)
======== ======== =========
Loss per share:
Basic ................................................ $ (0.43) $ (1.41) $ (.04)
======== ======== =========
Diluted .............................................. $ (0.43) $ (1.41) $ (.04)
======== ======== =========
Weighted average number of common shares outstanding:
Basic ................................................ 19,231 17,798 15,250
======== ======== =========
Diluted .............................................. 19,231 17,798 15,250
======== ======== =========
See accompanying notes to consolidated financial statements.
F-5
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Preferred
& Common Additional Retained
Common Stock Stock to be Paid - In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
--------------------------------------------------------------------------------
Balance at January 31, 1998 ................... 12,425 12 -- 23,453 85 -- 23,550
Exercise of stock options and .............. 1,790 2 -- 8,329 -- -- 8,331
warrants
Net effect of merger with New
Retail Concepts, Inc. .................... 2,326 2 -- 11,314 -- (6,061) 5,255
Stock acquisition of Michael
Caruso & Co., Inc. ....................... 1,968 2 -- 15,248 -- -- 15,250
Issuance of common stock to
benefit plan ............................. 16 -- -- 78 -- -- 78
Purchase of treasury shares ................ -- -- -- -- -- (371) (371)
Stock option compensation .................. -- -- -- 102 -- -- 102
Tax benefit from exercise of stock
options .................................. -- -- -- 295 -- -- 295
Net loss ................................... -- -- -- -- (641) -- (641)
--------------------------------------------------------------------------------
Balance at January 31, 1999 ................... 18,525 18 -- 58,819 (556) (6,432) 51,849
Exercise of stock options and .............. 99 -- -- 148 -- -- 148
warrants
Issuance of common stock to
benefit plan ............................. 37 -- -- 128 -- -- 128
Preferred and common stock to be
issued for litigation settlement ......... -- -- 6,000 -- -- -- 6,000
Additional contingent shares
issued for the Acquisition of
Michael Caruso & Co., Inc. ............... 548 1 -- (1) -- -- --
Other ...................................... -- -- -- -- -- (1) (1)
Net loss ................................... -- -- -- -- (25,176) -- (25,176)
--------------------------------------------------------------------------------
Balance at January 31, 2000 ................... 19,209 19 6,000 59,094 (25,732) (6,433) 32,948
Issuance of common stock to
benefit plan ............................. 102 -- -- 102 -- -- 102
Issuance of common stock to ................ 30 -- -- 43 -- -- 43
directors
Purchase of treasury shares ................ -- -- -- -- -- (148) (148)
Net loss ................................... -- -- -- -- (8,200) -- (8,200)
--------------------------------------------------------------------------------
Balance at January 31, 2001 ................... 19,341 $19 $6,000 $ 59,239 $(33,932) $(6,581) $ 24,745
===============================================================================
See accompanying notes to consolidated financial statements.
F-6
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended January 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows (used in) provided by operating activities:
Net loss ............................................................................... $(8,200) $(25,176) $ (641)
Items in net income not affecting cash:
Depreciation of property and equipment ........................................... 1,213 877 547
Amortization of intangibles ...................................................... 2,157 2,145 1,023
Issuance of common stock to directors ............................................ 43 -- --
Stock option compensation ........................................................ -- -- 102
Equity (income) loss in Joint Venture ............................................ (701) 2,002 545
Litigation settlement ............................................................ -- 8,000 --
Write-off of impaired assets ..................................................... 1,581 -- --
Deferred income taxes ............................................................ -- (1,174) (811)
Changes in operating assets and liabilities:
Accounts receivable .............................................................. (372) 63 (1,488)
Factored accounts receivables and payable to factor, net ......................... 2,180 7,104 (16,038)
Inventories ...................................................................... 5,447 4,261 (1,367)
Prepaid advertising and other .................................................... 417 (139) (418)
Refundable and prepaid taxes ..................................................... 412 1,992 (2,480)
Other assets ..................................................................... 408 221 (154)
Accounts payable and accrued expenses ............................................ 3,114 3,205 (835)
Long-term liabilities ............................................................ -- (52) (9)
- ---------------------------------------------------------------------------------------- -------------------------------------
Net cash provided by (used in) operating activities .................................... 7,699 3,329 (22,024)
- ---------------------------------------------------------------------------------------- -------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment .............................................. (1,871) (2,832) (1,923)
Investment in joint venture ...................................................... -- -- (500)
Other ............................................................................ (161) (165) (156)
- ---------------------------------------------------------------------------------------- -------------------------------------
Net cash used in investing activities .................................................. (2,032) (2,997) (2,579)
- ---------------------------------------------------------------------------------------- -------------------------------------
Cash flows (used in) provided by financing activities:
Revolving notes payable - bank ................................................... (4,866) (3,110) 16,874
Proceeds from loans .............................................................. -- 3,471 --
Proceeds from exercise of stock options and warrants ............................. -- 148 8,331
Proceeds from long-term debt and capital lease obligation ........................ (930) (796) --
Purchase of treasury stock ....................................................... (148) -- (371)
- ---------------------------------------------------------------------------------------- -------------------------------------
Net cash (used in) provided by financing activities .................................... (5,944) (287) 24,834
- ---------------------------------------------------------------------------------------- -------------------------------------
Net increase (decrease) in cash and cash equivalents ................................... (277) 45 231
Cash and cash equivalents, beginning of year ..................................... 643 598 367
- ---------------------------------------------------------------------------------------- -------------------------------------
Cash and cash equivalents, end of year ........................................... $ 366 $ 643 $ 598
======================================================================================== =====================================
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest ........................................................................ $ 1,650 $ 1,452 $ 1,013
=====================================
Income taxes .................................................................... $ (353) $ 163 $ 2,859
=====================================
Supplemental disclosures of non-cash investing and financing activities:
Preferred and common stock to be issued ........................................ -- $ 6,000 $ --
=====================================
Issuance of common stock to benefit plan ....................................... $ 102 $ 128 $ 78
=====================================
Capital contribution - Unzipped ................................................ -- $ 500 $ --
=====================================
Tax benefit from exercise of stock options ..................................... -- $ -- $ 295
=====================================
Capital lease for property and equipment ....................................... -- $ -- $ 316
=====================================
Merger and acquisition of businesses ........................................... -- $ -- $ 15,250
=====================================
Common stock issued for merger & acquisition - net of
treasury stock acquired....................................................... $ -- $ 5,255
=====================================
See accompanying notes to consolidated financial statements.
F-7
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Information as of and for the Years Ended January 31, 2001 and 2000
(dollarsare in thousands, except per share data)
The Company
The history of the "CANDIE'S" brand spans over 23 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") are
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R) and
BONGO(R) trademarks for distribution within the United States to department,
specialty, chain and nine company-owned retail stores in the United States and
to specialty stores internationally. The Company markets and distributes,
children's footwear under the CANDIE'S and BONGO trademarks, as well as a
variety of men's workboots, hiking boots, winter boots, and outdoor casual shoes
designed and marketed under private labels and the ASPEN(R) brand, which is
licensed by the Company from a third party, through Bright Star Footwear, Inc.
("Bright Star"), the Company's wholly-owned subsidiary. In 1998, the Company
began licensing its CANDIE'S trademark for the purpose of building CANDIE'S into
a lifestyle brand serving generation "Y" women and girls, and it currently holds
licenses for fragrance, eyewear, leg wear, handbags, watches and clothing.
Through Unzipped Apparel, LLC ("Unzipped"), the Company's joint venture with
Sweet Sportswear LLC ("Sweet"), the Company markets and distributes jeanswear
and apparel under the BONGO label to department, specialty, and chain stores in
the United States, and has licenses for use of the BONGO brand on kids' clothing
and handbags.
The Company believes that it has developed CANDIE'S into a strong footwear brand
appealing to women and girls in the generation "Y" demographic. As a growth
strategy, the Company plans to continue to focus on building market share in the
junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.
1. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
items have been eliminated in consolidation. The Company's 50% equity interest
in Unzipped is accounted for under the equity method. The Company suspended
recording its share of losses for Unzipped in Fiscal 2001. See Note 2.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
Concentration of Credit Risk
Concentration of credit risk is limited due to the large number of customers to
which the Company sells its products and the use of a factor to assign invoices
for sales to its customers. For fiscal year ended January 31, 2000 ("Fiscal
2000"), one customer accounted for 10.2% of the Company's total net sales. No
customer in any of the other years presented exceeded 10% of total revenues.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments purchased with
a maturity date of three months or less. Cash equivalents are stated at cost,
which approximates market value.
F-8
Inventories
Inventories, which consist entirely of finished goods, are stated at the lower
of cost or net realizable value. Cost is determined by the first-in, first-out
("FIFO") method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are
determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets ranging from three to seven years.
Leasehold improvements are amortized by the straight-line method over the term
of the related lease or estimated useful life, whichever is less.
Impairment of Long-Lived Assets
When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value, based
on discounted cash flow, is necessary. During fiscal 2001 the Company wrote off
computer software and a license aggregating $1,581. See Note 5.
Goodwill and Other Intangibles
The net assets of businesses purchased are recorded at their fair value at the
acquisition date. Any excess of acquisition costs over the fair value of
identifiable net assets acquired is included in goodwill and amortized on a
straight-line basis over 20 years. Trademarks and other intangible assets are
recorded at cost and amortized using the straight-line method over the estimated
lives of the assets, 4 to 20 years.
The CANDIE'S trademark is stated at cost in the amount of $6,064 and $5,952, net
of accumulated amortization of $2,272 and $1,963, at January 31, 2001 and 2000,
respectively, as determined primarily by its fair value relative to other assets
and liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency.
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to the
customers. Estimates of losses for bad debts, returns and other allowances are
recorded at the time of the sale. Shipping charges to customers and related
expenses that are included in selling, general and administrative expenses are
immaterial.
Taxes on Income
The Company uses the asset and liability approach of accounting for income taxes
under Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting
for Income Taxes". The Company provides deferred income taxes for temporary
differences that will result in taxable or deductible amounts in future years
based on the reporting of certain costs in different periods for financial
statement and income tax purposes. Valuation allowances are recorded when
recoverability of the asset is not assured.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted when the exercise price of the option is the same as the market value of
the Company's Common Stock. As prescribed under SFAS No. 123, "Accounting for
Stock Based Compensation," the Company has disclosed the pro-forma effects on
net income and earnings per share of recording compensation expense for the fair
value of the options granted.
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31, 2001
and 2000.
F-9
Loss Per Share
Basic loss per share includes no dilution and is computed by dividing loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share reflects, in periods
in which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants.
Computer Software and Web-site Costs
Internal and external direct and incremental costs incurred in obtaining and
developing computer software for internal use and web-site costs are capitalized
in property and equipment and amortized, under the straight-line method, over
the estimated useful life of the software, three years.
Advertising Campaign Costs
The Company records national advertising campaign costs as an expense concurrent
with the first showing of the related advertising and other advertising costs
when incurred. Advertising expenses for the years ended January 31, 2001, 2000
and 1999 amounted to $4,590, $7,091, and $6,423, respectively.
Licensing Revenue
The Company has entered into various trade name license agreements that provide
revenues based on minimum royalties and additional revenues based on a
percentage of defined sales. Minimum royalty revenue is recognized on a
straight-line basis over each period, as defined, in each license agreement.
Royalties exceeding the defined minimum amounts are recognized as income during
the period corresponding to the licensee's sales.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 in Fiscal 2002 is
not expected to have a material effect on the Company's financial statements.
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101. SAB No. 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. This SAB was adopted in
fiscal 2001 and it did not have a material effect on the Company's revenue
recognition policy.
Presentation of Prior Year Date
Certain reclassifications have been made to conform prior year data with the
current presentation.
2. Investment in Joint Venture
On October 7, 1998, the Company formed Unzipped with its joint venture partner
Sweet, the purpose of which was to market and distribute apparel under the BONGO
label. The Company and Sweet each have a 50% interest in Unzipped. Pursuant to
the terms of the joint venture, the Company licenses the BONGO trademark to
Unzipped for use in the design, manufacture and sale of certain designated
apparel products. At January 31, 2001 and 2000, the Company believed that
Unzipped was in breach of certain provisions of the agreements among the
parties, and notified Unzipped that the Company did not intend to contribute any
additional capital or otherwise support the joint venture. Accordingly, as of
January 31, 2001 and 2000, the Company recorded $750 and $1,451, respectively,
as its maximum liability to Unzipped and has suspended booking its share of
Unzipped losses beyond its liability. As of January 31, 2001, the Company's
proportionate share of Unzipped unaudited losses in excess of the established
liability approximated $1,700. The Company believes that its exposure related to
Unzipped, should the joint venture dissolve, is adequately provided for. The
income of $701 recorded in fiscal 2001 represents the reduction in the liability
relating to Unzipped due to a corresponding reduction in exposure.
Pursuant to the terms of the Operating Agreement of Unzipped, on January 31,
2003, the Company must purchase from
F-10
Sweet, Sweet's entire interest in Unzipped at the aggregate purchase price equal
to 50% of 7.5 times EBITDA of Unzipped for the fiscal year commencing on
February 1, 2002 and ending January 31, 2003. The Company has the right, in its
sole discretion, to pay for such interest in cash or shares of common stock. In
the event the Company elects to issue shares of common stock to Sweet, Sweet
shall receive shares of common stock and the right to designate a member to the
Board of Directors for the Company until the earlier to occur of (i) the sale of
any of such shares or (ii) two years from the date of closing of such purchase.
In October 1999, the Company made a non-cash $500 capital contribution to
Unzipped by foregoing affiliate receivables to satisfy its obligation. At
January 31, 2001 and 2000, the affiliate receivable balance from Unzipped was
$232 and $636, respectively. As of the date of this report, the January 31, 2001
receivable had been fully paid by Unzipped. The Company is entitled to receive
licensing revenue from Unzipped equal to 3% of Unzipped's net sales.
Prospectively, the Company will recognize license income from Unzipped as
received. Included in license income is $1,289, $920, and $96 for Fiscal 2001,
2000 and 1999, respectively.
3. Other Intangibles, net
Other intangibles, net consist of the following:
(In thousands, except for estimated lives which are stated in years)
January 31,
----------------------------------
Estimated lives 2001 2000
- ----------------------------------------------------------------------------------------------------
Trademarks 20 $ 23,180 $23,019
Non-compete agreement 15 2,275 2,275
Licenses 4 1,526 3,047
- ----------------------------------------------------------------------------------------------------
26,981 28,341
Less accumulated amortization (7,358) (6,294)
- ----------------------------------------------------------------------------------------------------
$ 19,623 $22,047
====================================================================================================
4. Acquisitions
Caruso
On September 24, 1998, the Company, through a wholly owned subsidiary, acquired
all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso"). As a
result of the transaction, the Company acquired the BONGO trademark as well as
certain other related trademarks and two license agreements for use of the BONGO
trademark, one for children's and one for large size jeanswear, both of which
licenses have been terminated. Prior to the closing of the acquisition, Caruso
was the licensor of the BONGO trademark for use on footwear products sold by the
Company, which license was terminated as of the closing.
The purchase price for the shares acquired was approximately $15.4 million and
was paid at the closing in 1,967,742 shares of Candie's Common Stock (each share
being valued at $7.75), plus $100 in cash. On March 24, 1999, 547,722 additional
shares of Candie's Common Stock were delivered to the sellers upon the six month
anniversary of the closing based on a contingency clause in the agreement
requiring an upward adjustment in the number of shares delivered at closing. The
issuance of the contingent consideration had no effect on the purchase price.
This transaction was accounted for using the purchase method of accounting. The
results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition. The total purchase price of
approximately $15.6 million, including acquisition expenses of approximately
$250, resulted principally in a purchase price allocation to the licenses
acquired of $2.7 million and a trademark value of $11.8 million.
NRC
The Company began to license the use of the CANDIE'S trademark from New Retail
Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased ownership of
the CANDIE'S trademark from NRC together with certain pre-existing licenses of
NRC, a then publicly traded company engaged primarily in the licensing and
sublicensing of fashion trademarks and a significant stockholder of the Company.
NRC's principal stockholder was also the Company's President and Chief Executive
Officer.
F-11
Effective August 18, 1998 (the "Effective Date"), the Company completed a merger
with NRC (the "Merger"). Each issued and outstanding share of NRC common stock
$.01 par value (the "NRC Common Stock"), and each issued and outstanding option
to purchase one share of NRC Common Stock, prior to the Effective Date, was
converted, respectively, into 0.405 shares of common stock, $.001 par value of
the Company (the "Candie's Common Stock"), and into options to purchase 0.405
shares of Candie's Common Stock, respectively.
At the Effective Date, there were 5,743,639 outstanding shares of NRC Common
Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.
This transaction was accounted for using the purchase method of accounting. The
results of operations of NRC are included in the accompanying financial
statements from the date of the Merger.
The cost of the acquisition, including acquisition expenses of $700, after
netting the value of the reacquired Company shares, warrants and options,
totaled approximately $5.6 million. This resulted principally in purchase price
allocation to the licenses acquired of $340 and a trademark value of $5.2
million. Deferred tax liabilities resulting from this transaction totaled
approximately $2.1 million, which amount was recorded as goodwill.
5. Special Charges
Special charges consist of the following:
Fiscal Year ended January 31,
----------------------------------
2001 2000
----------------------------------
Professional fees for the SEC investigation and
defending the class action lawsuit (A) $ 205 $3,002
Termination, severance pay of certain employees and
buyout of employment contracts (B)
688 --
Write-off of a license acquired from Caruso (C)
570 --
Warehouse consolidation and costs associated with
an office move 200 --
Write-off of computer software (D)
1,011 --
-----------------------------
$2,674 $3,002
=============================
(A) In connection with a class action lawsuit and SEC investigation more
fully described in Note 9, the Company incurred professional fees and
other related costs in the amount of $205 and $3,002 for the years
ended January 31, 2001 and 2000, respectively.
(B) During Fiscal 2001, the Company restructured its sales force, and
terminated certain other employees who, at the time of their
termination, had employment contracts with the Company. For the year
ended January 31, 2001, the Company incurred $688 primarily to buy out
the employment contracts or otherwise settle with these terminated
employees.
(C) In September 1998, the Company acquired certain Bongo trademarks and
licenses from Caruso (See Note 4). One of these licenses, for large
size jeanswear was terminated in the fourth quarter of Fiscal 2001 and
the Company has not, to date, found a replacement licensee for this
category. Accordingly, the Company has written off the net book value
of the license of $570.
F-12
(D) In March 1999, the Company purchased an integrated software package
intended to be an enterprise wide solution, covering all aspects of
the Company's business and replacing the existing legacy systems.
Through January 31, 2001, the Company had implemented only the general
ledger and accounts payable modules and had not implemented the order
processing, purchasing, inventory management, distribution or billing
modules because of lack of certain functionality required by the
Company to effectively manage its business. After evaluating
alternatives, including the likelihood of obtaining the lacking
functionality in the software, the Company concluded that it should
not proceed with further implementation and abandoned the software. As
a result, the Company wrote off $1,011 of capitalized costs related to
the abandoned software.
6. Financing Agreement and Related Loan
Current Revolving Credit Facility
On October 28, 1999, the Company entered into a new two year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
On November 23, 1999, First Union National Bank entered into a co-lending
arrangement and became a participant in the Line of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit will
bear interest at 0.50% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of 0.25% of the maximum Line of
Credit. The Line of Credit also contains certain financial covenants including,
minimum tangible net worth, certain specified ratios and other limitations. The
Company has granted the lenders a security interest in substantially all of its
assets. The Company was in default of certain covenants of its Line of Credit
and has obtained a waiver that exempts the financial covenants through July 31,
2001. The Company is negotiating with these and other lenders to refinance this
loan and expects to be able to do so by July 31, 2001.
At January 31, 2001, borrowings under the Line of Credit totaled $8.9 million,
which was secured against factored receivables of $7.5 million and inventory.
The borrowing bore interest at 9.5%, which rate is subject to an increase or
decrease based on the conditions of the agreement as stated above.
At January 31, 2001, the Company had $328 of outstanding letters of credit. The
Company's letters of credit availability are formula based which takes into
account borrowings under the Line of Credit, as described above.
Other Borrowing Arrangements
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp.. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining
agreement balance considered to be an unsecured loan. The agreement's term is
for a period of four years at an effective annual interest rate of 10.48%. The
outstanding loan balance as of January 31, 2001 was $1.9 million. The quarterly
payment on the loan is $260 including interest.
7. Stockholders' Equity
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Effects of applying SFAS 123 for providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
Pro forma information regarding net loss per share is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
F-13
January 31,
-------------------------------------------------
2001 2000 1999
-------------------------------------------------
Expected Volatility.................................... .604-.791 .468 .618-.940
Expected Dividend Yield................................ 0% 0% 0%
Expected Life (Term)................................... 3-7years 3-7 years 3-7 years
Risk-Free Interest Rate................................ 4.65-6.82% 4.91-6.21% 3.60-9.56%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the option is
expensed when the option's are vested. The Company's pro forma information
follows:
January 31,
------------------------------------------------------
2001 2000 1999
------------------------------------------------------
Pro forma net loss..................................... $ (9,793) $ (25,773) $(3,410)
Pro forma loss per share:
Basic............................................. $ (0.51) $ (1.45) $ (.22)
Diluted........................................... $ (0.51) $ (1.45) $ (.22)
The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 2001, 2000, and 1999 was $0.72, $0.46, and $1.91,
respectively.
In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminated on August 1, 1999.
Under the 1989 Plan, ISO's were to be granted at not less than the market price
of the Company's Common Stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") were granted at prices determined by the Board of Directors. Under
the 1989 Plan 60,800, 85,800, and 120,300 of ISO's as of January 31, 2001, 2000,
and 1999, respectively, were outstanding.
On September 4, 1997, the Company's stockholders approved the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of
common stock options to purchase up to 3,500,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.
On August 18, 2000, the Company's shareholders approved the Company's 2000 Stock
Option Plan (the "2000 Plan"). The 2000 Plan authorizes the granting of common
stock options to purchase up to 2,000,000 shares of Company common stock. All
employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 2000 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 2000 Plan terminates in 2010.
Additionally, at January 31, 2001, 2000 and 1999, NQSO's covering 2,046,000,
2,907,500, and 2,763,000 shares of common stock, respectively, were outstanding,
which are not part of either the 1989 or 1997 Plans.
The options that were granted under the 1989 and 1997 Plans expire between five
and ten years from the date of grant.
F-14
On November 4, 1999, the Company granted 400,000 NQSO's at an exercise price of
$1.50 per share, to its Chief Executive Officer to replace 400,000 NQSO's with
an exercise price of $1.50 that expired August 1, 1999 and granted 10,000 NQSO's
at an exercise price of $1.25 and simultaneously cancelled 10,000 NQSO's with an
exercise price of $1.25 that were to expire on December 20, 1999. These options
were at or above the stocks fair value at the date of the grant and, therefore,
did not result in any compensation expense. On January 15, 1998, the Company
granted 400,000 NQSO's at an exercise price of $5.00 per share, to its Chief
Executive Officer and simultaneously cancelled 400,000 NQSO's with an exercise
price of $5.00 that were to expire February 23, 1998.
A summary of the Company's stock option activity, and related information for
the years ended 2001, 2000, and 1999 follows:
Weighted-Average
Shares Exercise Price
-------------------------
Outstanding January 31, 1998 4,052,300 $ 2.72
Granted 2,519,925 3.24
Canceled (175,000) 2.60
Exercised (162,000) 2.34
Expired (220,000) 2.68
---------------------------
Outstanding January 31, 1999
6,015,225 2.78
Granted 1,567,250 1.54
Canceled (363,250) 3.52
Exercised (99,675) 0.99
Expired (771,125) 1.70
---------------------------
Outstanding January 31, 2000 6,348,425 2.59
Granted 2,088,750 1.07
Canceled (858,000) 2.54
Exercised -- --
Expired (877,125) 1.19
---------------------------
Outstanding January 31, 2001
6,702,050 $ 2.30
===========================
At January 31, 2001, 2000, and 1999, exercisable stock options totaled
5,697,967, 5,356,257 and 4,877,475 and had weighted average exercise prices of
$2.46, $2.58, and $2.53, respectively.
On December 11, 1998, the Company's Board of Directors authorized the repricing
of 2,626,750 options at $3.50. These options, which had original exercise prices
ranging from $3.88 to $7.44, retained all of the original terms and vesting
rights from their respective grant date.
Options outstanding and exercisable at January 31, 2001 were as follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------- ----------------------------
$0.24-1.14 ..................... 1,444,500 9.48 $ 0.97 944,000 $ 0.95
$1.15-1.50 ..................... 1,478,500 7.47 $ 1.30 1,115,500 $ 1.32
$1.51-2.50 ..................... 1,109,000 1.65 $ 2.01 1,108,000 $ 2.01
$2.51-3.50 ..................... 2,525,050 6.02 $ 3.47 2,385,467 $ 3.47
$3.51-5.00 ..................... 45,000 2.01 $ 4.55 45,000 $ 4.55
$5.01-12.00 .................... 100,000 1.59 $ 9.22 100,000 $ 9.22
- ----------------------------------------------------------------------------------- ----------------------------
6,702,050 6.27 $ 2.30 5,697,967 $ 2.46
=================================================================================== ============================
At January 31, 2001, 3,413,325 common shares were reserved for issuance on
exercise of stock options under the 1997 Stock Option Plan.
F-15
Stockholder Rights Plan
In January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of Candie's Common Stock received a
dividend of one right for each share of the Company's outstanding common stock,
entitling the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the Candie's Common Stock ten business days after any person or
group acquires 15% or more of the Candie's Common Stock, or ten business days
after any person or group announces a tender offer for 15% or more of the
outstanding Candie's Common Stock.
Stock Repurchase Program
On September 15, 1998, the Company's Board of Directors authorized the
repurchase of up to two million shares of the Company's Common Stock, which was
replaced with a new agreement on December 21, 2000, authorizing the repurchase
of up to three million shares of the Company's Common Stock. In fiscal 1999,
85,200 shares were repurchased in the open market, at an aggregate cost of
approximately $371. In fiscal 2001, 158,700 shares were repurchased in the open
market, at an aggregate cost of approximately $148. The Company intends, subject
to certain conditions, to buy shares on the open market from time-to-time,
depending on market conditions.
Preferred and Common Stock to be Issued
See Note 9 for the related terms of the preferred stock to be issued in
connection with the Litigation settlement.
8. Loss Per Share
Included in the calculation of the number of shares is the equivalent number of
common shares to be issued in connection with the Litigation Settlement (see
Note 9). The diluted weighted average number of shares does not include any
outstanding options or convertible preferred stock because they were
antidilutive.
The Company has granted 75,000 stock options to a related party, which vest
based upon the achievement of certain targeted criteria. These shares have not
been included in the computation of diluted earnings per share as the targeted
criteria has not been met and the exercise price exceeded the market price and,
therefore, the effect would have been antidilutive.
9. Commitments and Contingencies
On May 17, 1999, a purported stockholder class action complaint was filed in the
United States District Court for the Southern District of New York, against the
Company and certain of its current and former officers and directors which
together with certain other complaints subsequently filed in the same court
alleging similar violations were consolidated in one lawsuit, Willow Creek
Capital Partners, L.P., v. Candie's, Inc. A consolidated complaint was served on
the Company on or about August 24, 1999. The consolidated complaint included
claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The
consolidated complaint was brought on behalf of all persons who acquired
securities of the Company between May 28, 1997 and May 12, 1999, and alleged
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for Fiscal 1998 and the
first three quarters of Fiscal 1999, which caused the Company's securities to
trade at artificially inflated prices.
On or about January 31, 2000, the Company entered into a settlement agreement
with plaintiffs (the "Settlement Agreement") to settle the class action for
total consideration of $10 million, payable in a combination of cash, the
Company's Common Stock and convertible preferred stock (the "Preferred Stock").
The Settlement Agreement provided that on or about May 1, 2000, the Company
would pay to plaintiffs $3 million in cash, and on or after the "Effective
Date", as defined in the Settlement Agreement, the Company would issue shares of
the Company's Common Stock with a value of $2 million. The Company was also
required to pay the Class an additional $1 million on or before October 1, 2000.
The remaining $4 million owed to plaintiffs will be in the form of Preferred
Stock, which will convert to the Company's Common Stock at a rate based on the
price of the Company's Common Stock on the first and second anniversary of the
Effective Date. It was highly unlikely that the Court would not approve the
Settlement; accordingly, the settlement terms, including the shares of Common
and Preferred Stock to be issued, were recorded as of January 31, 2000. The
Company received $2 million from its insurance company for this matter, which
proceeds were placed in escrow and would only be used to pay the cash portion of
the settlement. The cash received from the insurance company has been classified
as restricted cash at January 31, 2000 in the
F-16
accompanying balance sheet.
In July 2000, the Court approved the Settlement Agreement. Pursuant to the
Settlement Agreement, the Company paid the plaintiffs $4 million in cash in
Fiscal 2001. The remaining $6 million owed to plaintiffs will be in the form of
Common Stock and in Preferred Stock which will convert to the Company's Common
Stock at a rate based on the price of the Company's Common Stock on the first
and second anniversary of the "Effective Date" (August 2000) as defined in the
Settlement Agreement by the Court. The shares of stock have not yet been issued
because the plaintiffs plan of distribution has not yet been finalized.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, the accounting issues that were raised in
connection with the restatement.
In December 2000, an action for breach of contract and breach of the duty of
good faith and fair dealing was commenced against the Company and one of its
subsidiaries in the United States District Court for the Southern District of
New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano.
The plaintiffs allege that the Company breached certain representations
contained in the September 24, 1998 Stock Purchase Agreement pursuant to which
the defendants acquired the capital stock of the entity that owned the Bongo
trademark. The plaintiffs are seeking to recover unspecified compensatory
damages and costs, including attorneys' fees, and to rescind the Stock Purchase
Agreement and related acquisition. The Company has filed a motion to dismiss the
complaint which motion has not yet been decided by the court. The Company, which
intends to vigorously defend the action, believes it has defenses available to
it and that any remedy for rescission is unavailable. The Company is presently
unable to assess the financial impact, if any, on the Company as a result of
this action.
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. The Company knows of no material legal
proceedings, pending or threatened, or judgments entered, against any director
or officer of the Company in their capacity as such.
10. Related Party Transactions
On April 3, 1996, the Company entered into an agreement with Redwood Shoe
("Redwood"), a principal buying agent of footwear products, to satisfy in full
certain trade payables (the "Payables") amounting to $1,680. Under the terms of
the agreement, the Company (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50. The Company purchased
approximately $35, $38 million, and $68 million in 2001, 2000, and 1999,
respectively, of footwear products through Redwood. At January 31, 2001, the
Company had approximately $6 million of open purchase commitments with Redwood.
At January 31, 2001 and 2000, the payable to Redwood totaled approximately
$4,052 and $2,048, respectively.
11. Operating Leases
Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 2001 are as follows:
2002 ..................................... $1,401
2003 ..................................... 1,359
2004 ..................................... 1,091
2005 ..................................... 995
2006 ..................................... 687
Thereafter ............................... 1,860
------
Totals ................................... $7,393
======
Rent expense was approximately $1,647, $946, and $691 for the years ended
January 31, 2001, 2000, and 1999, respectively.
12. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $133, $112, and $134 to the Savings Plan for the years ended
January 31, 2001, 2000 and 1999, respectively.
F-17
The Company has certain incentive compensation arrangements with its Chief
Executive Officer pursuant to his employment agreement. The incentive
compensation aggregates 5% of pre-tax earnings, as defined.
13. Income Taxes
At January 31, 2001, the Company had available net operating losses of
approximately $31.1 million for income tax purposes, which expire in the years
2006 through 2021. Because of "ownership changes" (as defined in Section 382 of
the Internal Revenue Code) occurring in previous fiscal years, the utilization
of approximately $4.6 million of the net operating losses is limited to $602 per
year and expires in 2006 through 2007. The remaining $26.5 million is not
subject to such limitation and expires 2009 through 2021.
During the years ended January 31, 2001 and 2000, the Company recorded an
increase in its valuation allowance for deferred tax assets of $2.9 million and
2.4 million, respectively, representing that portion of the deferred tax assets
that cannot be reasonably determined to be recoverable from estimated earnings
over the next few years.
The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of operations consists of the following:
January 31,
----------------------------------------
2001 2000 1999
----------------------------------------
Current:
Federal .................................................... $ 0 $ (48) $ 406
State ...................................................... 66 119 282
--- ------- -----
Total current .............................................. 66 71 688
--- ------- -----
Deferred:
Federal .................................................... -- (838) (675)
State ...................................................... -- (336) (136)
--- ------- -----
Total deferred ............................................. -- (1,174) (811)
--- ------- -----
Total provision (benefit) .................................. $66 $(1,103) $(123)
=== ======= =====
The following summary reconciles the income tax provision at the Federal
statutory rate with the actual provision (benefit):
January 31,
---------------------------------------
2001 2000 1999
---------------------------------------
Income taxes (benefit) at statutory rate ................... $(2,766) $(8,935) $(260)
Non-deductible amortization ................................ 285 193 153
Change in valuation allowance of deferred tax assets ....... 2,894 9,257 --
State provision, net of federal income tax benefit ......... (419) (1,906) 99
Adjustment for estimate of prior year taxes ................ 41 235 (138)
Other ...................................................... 31 53 23
------- ------- -----
Total income tax provision (benefit) ....................... $ 66 $(1,103) $(123)
======= ======= =====
F-18
The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
---------------------
2001 2000
---------------------
Compensation expense ....................... $ -- $ 96
Alternative minimum taxes .................. 96 96
Inventory valuation ........................ 441 964
Litigation settlement ...................... 2,508 3,344
Net operating loss carryforwards ........... 12,995 8,294
Accounts and factoring receivable valuation 1,476 2,016
Depreciation ............................... 129 112
Other ...................................... 99 74
---------------------
Total net deferred tax assets .............. 17,744 14,996
Valuation allowance ........................ (12,151) (9,257)
---------------------
Total deferred tax assets .................. 5,593 5,739
Trademarks and licenses .................... (1,806) (1,952)
Other deferred tax liabilities ............. (165) (165)
---------------------
Total deferred tax liabilities ............. (1,971) (2,117)
---------------------
Total net deferred tax assets .............. $ 3,622 $ 3,622
=====================
14. Segment Information
Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position.
The Company has one reportable segment that is engaged in the manufacture and
marketing of branded footwear, including casual shoes and boots to the retail
sector. Revenues of this segment are derived from the sale of branded footwear
products to external customers and the Company's retail division as well as
royalty income from the licensing of the Company's trademarks and brand names to
licensees. The business units comprising the branded footwear segment
manufacture or source, market and distribute products in a similar manner.
Branded footwear is distributed through wholesale channels and under licensing
and distributor arrangements.
F-19
15. Unaudited Consolidated Financial Information
Unaudited interim consolidated financial information for the two years ended
January 31 is summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------
(in thousands except per share data)
Fiscal 2001
Net sales $ 24,446 $ 26,852 $ 22,457 $ 16,912
Total revenues 25,478 28,159 23,767 17,790
Gross profit 6,715 7,629 6,206 3,458
Operating income 826 263 (1,222) (7,041)
Net income (loss) 465 175 (1,468) (7,372)
Basic and diluted earnings
(loss) per share $ 0.02 $ 0.01 $ (0.08) $ (0.38)
Fiscal 2000
Net sales $ 21,254 $ 33,054 $ 22,175 $ 14,313
Total revenues 21,644 33,522 23,326 15,255
Gross profit 5,798 6,728 4,449 2,424
Operating income (1,348) (3,370) (4,976) (13,169)
Net income (loss) (1,178) (3,091) (5,745) (15,162)
Basic and diluted (loss) per
share $ (0.07) $ (0.17) $ (0.32) $ (0.84)
During the fourth quarter ended January 31, 2001, the Company recorded certain
significant expenses, as mentioned in Note 5, as follows: $688 for termination,
buyouts and severance pay for certain employment contracts, $570 for write-off
of a license acquired from Caruso, $200 for warehouse consolidation and an
office relocation, and $1,011 for impairment of computer software. Also in the
fourth quarter of fiscal 2001, the Company changed its presentation of gross
profit to include licensing income.
F-20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Candies, Inc.
The audits referred to in our report dated April 19, 2001, relating to the
consolidated financial statements of Candie's, Inc. and Subsidiaries, which is
contained in Item 8 of the Form 10-K included the audits of the financial
statement schedule listed in the accompanying index for each of the three years
in the period ended January 31, 2001. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP
April 19, 2001
New York, New York
S-1
Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
(In thousands)
Column A Column B Column C Column D (a) Column E
- ---------------------------------------- ------------ -------------- --------------- ------------
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ---------------------------------------- ------------ -------------- --------------- ------------
Reserves and allowances deducted from asset
accounts:
Year ended January 31, 2001:
Allowance for uncollectible accounts $2,992 $ 1,676 $ 2,786 $1,882
====== ======= ======= ======
Allowance for chargebacks $1,830 $ 5,599 $ 5,779 $1,650
====== ======= ======= ======
Year ended January 31, 2000:
Allowance for uncollectible accounts $ 950 $ 2,042 $ -- $2,992
====== ======= ======= ======
Allowance for chargebacks $2,579 $ 8,294 $ 9,043 $1,830
====== ======= ======= ======
Year ended January 31, 1999:
Allowance for uncollectible accounts $ 27 $ 993 $ 70 $ 950
====== ======= ======= ======
Allowance for chargebacks $1,731 $14,104 $13,256 $2,579
====== ======= ======= ======
(a) Uncollectible receivables charged against the allowance provided.
S-2