U.S. Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------
FORM 10-Q/A
(Amendment No. 1 to Form 10-Q)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended October 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ________ to ________
Commission file number 0-10593
CANDIE'S, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue
Purchase, NY 10577
(Address of principal executive offices) (Zip Code)
(914) 694-8600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Common Stock, $.001 Par Value -- 17,212,384 shares as of December 14, 1998
INDEX
FORM 10-Q/A
(Amendment No. 1)*
CANDIE'S, INC. and SUBSIDIARIES
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 1998
and January 31, 1998................................................... 3
Condensed Consolidated Statements of Income - Three and Nine Months
Ended October 31, 1998 and 1997........................................ 4
Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended October 31, 1998..................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended October 31, 1998 and 1997........................................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 15
Part II. Other Information
Item 1. Legal Proceedings................................................... 16
Item 2. Changes in Securities............................................... 16
Item 6. Exhibits and Reports on Form 8-K.................................... 16
Signatures ............................................................... 17
Index to Exhibits........................................................... 18
* This amended Form 10-Q is being filed to reflect the restatement of certain
previously reported financial information as more fully described in Note H of
Notes to Condensed Consolidated Financial Statements contained herein. Portions
of Part I-Item 1.-"Financial Statements", Part I-Item 2-"Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Exhibit
27-"Financial Data Schedule" have been amended to reflect the restatement. The
remaining information in this amended Form 10-Q has not been updated to reflect
any changes in information that may have occurred subsequent to the date of the
reporting period to which the Form 10-Q relates.
2
Part I. Financial Information
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, January 31,
1998 1998
-------- --------
(Unaudited) (Note)
(Restated) (Restated)
(000's omitted)
Assets
Current Assets
Cash ....................................................... $ 107 $ 367
Accounts receivable, net ................................... 3,576 1,397
Inventories ................................................ 16,871 17,664
Due from factors and trade receivables ..................... 15,968 --
Refundable and prepaid income taxes ........................ 143 143
Deferred income taxes ...................................... 170 520
Prepaid advertising and other .............................. 4,670 764
Other current assets ....................................... 422 604
-------- --------
Total Current Assets 41,927 21,459
Property and equipment, at cost:
Furniture, fixtures and equipment .......................... 2,600 1,810
Less: Accumulated depreciation and amortization ............ 1,281 959
-------- --------
1,319 851
Other assets:
Deferred income taxes ...................................... 6,124 2,423
Intangibles ................................................ 28,211 4,860
Investment in joint venture ................................ 500 --
Other ...................................................... 1,030 319
-------- --------
35,865 7,602
-------- --------
Total Assets ..................................................... $ 79,111 $ 29,912
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Due to factor, net ......................................... $ -- $ 900
Accounts payable and accrued expenses ...................... 10,681 5,401
Revolving notes payable - banks ............................ 6,287 --
Bankers acceptance - net ................................... 4,959 --
-------- --------
Total Current Liabilities ........................................ 21,927 6,301
Long-term liabilities and deferred taxes ......................... 3,524 61
Stockholders' Equity
Preferred stock, $.01 par value
-- authorized 5,000 shares; none issued and outstanding
Common stock, $.001 par value
-- authorized 30,000 shares; issued 18,515 shares at
October 31, 1998 and 12,425 shares issued and
outstanding at January 31, 1998 ...................... 18 12
Additional paid-in capital ....................................... 58,680 23,453
Retained earnings* ............................................... 1,394 85
Less: Treasury stock - at cost - 1,313 shares .................. (6,432) --
-------- --------
Total Stockholders' Equity ....................................... 53,660 23,550
-------- --------
Total Liabilities and Stockholders' Equity ....................... $ 79,111 $ 29,912
======== ========
* Accumulated since February 28, 1993, deficit eliminated of $27,696
Note: The balance sheet at January 31, 1998 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Restated) (Restated)
(000's omitted, except per share data)
Net revenues ....................... $ 28,919 $ 23,780 $ 90,627 $ 70,367
Cost of goods sold ................. 23,330 17,673 69,042 52,535
-------- -------- -------- --------
Gross profit ....................... 5,589 6,107 21,585 17,832
Licensing income ................... 100 -- 100 --
Selling and administrative expenses 6,208 4,488 18,728 12,267
-------- -------- -------- --------
Operating (loss) income ............ (519) 1,619 2,957 5,565
Other expenses:
Interest expense - net 289 305 786 833
-------- -------- -------- --------
(Loss) income before income taxes .. (808) 1,314 2,171 4,732
(Benefit) provision for income taxes (306) 505 862 905
-------- -------- -------- --------
Net (loss) income .................. $ (502) $ 809 $ 1,309 $ 3,827
======== ======== ======== ========
(Loss) earnings per common share:
Basic ..................... $ (0.03) $ 0.07 $ 0.09 $ 0.35
======== ======== ======== ========
Diluted ................... $ (0.03) $ 0.06 $ 0.08 $ 0.28
======== ======== ======== ========
Weighted average number of common
shares outstanding:
Basic ..................... 15,841 11,966 14,577 11,025
======== ======== ======== ========
Diluted ................... 15,841 14,454 16,723 13,447
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 31, 1998
(000's omitted)
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- --------- --------- --------- --------- -----------
Balances at January 31, 1998, as Restated 12,425 $ 12 $ 23,453 $ 85 -- $ 23,550
Exercise of stock options and warrants 1,780 2 8,302 -- -- 8,304
Issuance of common stock to retirement plan 16 -- 78 -- -- 78
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
Tax benefit from exercise of stock options -- -- 285 -- -- 285
Stock buy-back -- -- -- -- (371) (371)
Net income -- -- -- 1,309 -- 1,309
-------- -------- -------- -------- -------- --------
Balances at October 31, 1998, as Restated 18,515 $ 18 $ 58,680 $ 1,394 $ (6,432) $ 53,660
======== ======== ======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
----------------------
October 31, October 31,
1998 1997
----------------------
(Restated)
(000's omitted)
OPERATING ACTIVITIES:
Net cash used in operating activities ................... $(18,496) $ (8,600)
---------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ................ (521) (256)
Investment in joint venture ........................ (500) --
---------------------
Net cash used in investing activities ................... (1,021) (256)
---------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 8,382 9,268
Revolving notes payable - bank ..................... 6,287 --
Bankers acceptance - net ........................... 4,959 --
Purchase of common stock for treasury .............. (371) --
---------------------
Net cash provided by financing activities ............... 19,257 9,268
---------------------
(DECREASE) INCREASE IN CASH ............................. (260) 412
Cash at beginning of period ............................. 367 389
---------------------
Cash at end of period ................................... $ 107 $ 801
=====================
Supplemental disclosures of non-cash investing
and financing activities:
Merger and acquisition of businesses ............... $ 15,250 --
=====================
Common stock issued for merger & acquisition -
net of treasury stock acquired $ 5,255 --
=====================
See notes to condensed consolidated financial statements.
6
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
October 31, 1998 are not necessarily indicative of the results that may be
expected for a full fiscal year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended January 31, 1998.
NOTE B -- MERGER
The Company began to license the use of the CANDIE'S(R) trademark from New
Retail Concepts, Inc. ("NRC") in June 1991 and in March 1993 purchased ownership
of the CANDIE'S(R) 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 shareholder
of the Company. NRC's principal shareholder was also the Company's President and
Chief Executive Officer.
Effective August 18, 1998, the Company completed its previously announced merger
with NRC. 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, were 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 shares were converted to 2,326,173 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. The 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 condensed
financial statements from the date of the merger.
The total cost of the acquisition, including acquisition expenses of
approximately $700,000 and 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 $5,214,000. Deferred tax liabilities, resulting from
this transaction, totaled approximately $2, 110, 000, which amount was recorded
as goodwill.
7
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Continued
NOTE C -- ACQUISITION AND JOINT VENTURE INVESTMENT
On September 24, 1998 the Company, through a wholly owned subsidiary, acquired
all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso"). Under
the terms of 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 jeanswear. Caruso was a licensor of certain trademarks
relating to 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 $100,000 in cash. The consideration may be subject
to upward adjustment based on the closing market price of Candie's Common Stock
during the six month period immediately following the closing.
This transaction was accounted for using the purchase method of accounting. The
total purchase of approximately $15.6 million, including acquisition expenses of
approximately $250,000, but excluding the contingency consideration described
above, resulted principally in purchase price allocation to the licenses
acquired of $2.7 million and a trademark value of $11.8 million. If and when the
additional contingency consideration, referred to above, is issued, there will
be no effect on the above purchase price allocation.
On October 7, 1998, the Company entered into a joint venture with Sweet
Sportswear LLC ("Sweet") to market and distribute certain apparel under the
Candie's and Bongo labels. Candie's and Sweet each have a fifty percent (50%)
interest in the joint venture, named Unzipped Apparel, LLC ("Unzipped"). Under
the terms of the joint venture, Candie's licensed each of its Candie's and Bongo
trademarks to Unzipped for use in the design, manufacture and sale of certain
designated apparel products.
The following summarized unaudited pro-forma condensed consolidated financial
information are based on the assumption that the merger of NRC (See Note B) and
the acquisition of Caruso had occurred at the beginning of each of the
respective periods:
Pro-Forma Financial Information (Unaudited)
Nine Months Ended
October 31,
--------------------------------
1998 1997
------------ ------------
(Restated)
(000's omitted except per-share data)
Net revenues $ 90,627 $ 70,367
============ ============
Licensing income $ 200 $ 316
============ ============
Net income $ 736 $ 3,890
============ ============
Earnings per share:
Basic $ .05 $ .28
============ ============
Diluted $ .04 $ .24
============ ============
The unaudited pro-forma financial information has been provided for comparative
purposes only and are not necessarily indicative of the results of operations
that would have been achieved had the merger and acquisition been consummated at
the beginning of the periods presented, nor are they necessarily indicative of
future operations or the financial results of the combined companies.
8
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Continued
NOTE D -- FINANCING AGREEMENTS
On May 27, 1998, the Company entered into a three year $35 million revolving
credit facility (the "Facility"). Under certain conditions, including the
addition of a second lender, the Facility may increase to a maximum of $50
million. On August 4, 1998, BankBoston, N.A. entered into a co-lending
arrangement and became a participant in the revolving credit Facility with
NationsBanc Commercial Corporation.
Borrowings under the Facility currently bear interest at 1.75% below the prime
rate (8% at October 31, 1998) and the Company also has the option to borrow at
either LIBOR plus 1.25% or the banker's acceptance rate plus 1%. These rates are
fixed and subject to an increase or decrease based on certain conditions
beginning in November 1998. The Company pays a commitment fee of 1/4% on the
unused portion of the Facility.
Borrowings under the Facility are formula based and available up to the maximum
amount of the Facility. The Facility also contains certain financial covenants
including, minimum tangible net worth, certain specified ratios and other
limitations, as defined therein. The Company has granted the lenders a security
interest in substantially all of its assets.
Simultaneously with the above, the Company entered into a new factoring
agreement whereby the Company has the option to sell any or all of its accounts
receivable, principally without recourse, subject to maximum credit limits
established by the lender for individual accounts. Receivables assigned but not
sold to the lender or in excess of such maximum credit limits are subject to
recourse.
NOTE E -- EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share" SFAS No. 128, which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Earnings per share amounts and weighted average shares for 1997 have been
restated in accordance with the SFAS No. 128 requirements.
9
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Continued
NOTE E -- EARNINGS PER SHARE (Continued)
The following is a reconciliation of the numerator and denominators of the basic
and diluted EPS computations and other related disclosures required by SFAS No.
128:
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------------------------ -----------------------------
(000's omitted, except per share data)
(Restated) (Restated)
Numerator:
Numerator for basic and diluted
earnings per share .......... $ (502) $ 809 $ 1,309 $ 3,827
============================== =============================
Denominator:
Denominator for basic earnings per
share ........................ 15,841 11,966 14,577 11,025
Effect of dilutive securities ....... -- 2,488 2,146 2,422
------------------------------ -----------------------------
Denominator for diluted earnings per
share ........................ 15,841 14,454 16,723 13,447
============================== =============================
Basic earnings per share ............ $ (.03) $ .07 $ .09 $ .35
============================== =============================
Diluted earnings per share .......... $ (.03) $ .06 $ .08 $ .28
============================== =============================
For the three and nine months periods ended October 31, 1998 and 1997,
outstanding options and warrants to purchase 285,000 and 252,500, 135,000 and
142,000 shares of Common Stock, respectively, at exercise prices exceeding the
average market price of the Common Stock were not included in the computation of
diluted earnings per share as the effect would have been anti-dilutive.
NOTE F -- STOCKHOLDERS' EQUITY
STOCK BUY-BACK
On September 15, 1998, the Board of Directors of the Company authorized
management to repurchase up to two million shares of Candie's Common Stock.
As of October 31, 1998, 85,200 shares were repurchased in the open market,
at an aggregate cost of approximately $371,000. No additional shares have
been repurchased since October 31, 1998. The Company intends, subject to
certain conditions, to buy shares on the open market from time-to-time,
depending on market conditions.
10
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Continued
NOTE G -- SUBSEQUENT EVENT
On December 11, 1998, the Board of Directors of the Company authorized and
ratified the repricing of certain employee stock options to $3.50 per share, an
amount above the then market value. The aggregate amount of option shares
subject to such exercise repricing was approximately 2,000,000 option shares at
original exercise prices ranging from $4.00 to $7.50 per share.
NOTE H -- RESTATEMENT
During the course of the audit of the Company's financial statements for the
year ended January 31, 1999, and the re-audit of the financial statements for
the year ended January 31, 1998, the Company became aware of certain required
adjustments primarily in inventory valuation, accounts receivable/due from
factor balances as of October 31, 1998. The financial statements for the quarter
ended October 31, 1998 have been restated to reflect these adjustments, as
summarized below:
Three Months Ended Nine Months Ended
October 31, 1998 October 31, 1998
Net income, as previously reported $ 822 $ 5,239
------------ ------------
Adjustments - Increase (Decrease):
Inventory valuation -- 550
Revenues (gross profit effect) (579) (636)
Receivable reserves (1,801) (6,237)
Other 250 (95)
Tax effect on these adjustments 806 2,488
------------ ------------
(1,324) (3,930)
============ ============
Net income, as adjusted $ (502) $ 1,309
============ ============
Per share amounts:
Basic:
As previously reported $ .05 $ .36
Adjustments (.08) (.27)
------------ ------------
As adjusted $ (.03) $ .09
============ ============
Diluted:
As previously reported $ .05 $ .31
Adjustments (.08) (.23)
------------ ------------
As adjusted $ (.03) $ .08
============ ============
11
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 which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors, all of which are
difficult or impossible to predict and many of which are beyond the control of
the Company, which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements.
Such factors include, but are not limited to, uncertainty regarding continued
market acceptance of current products and the ability to successfully develop
and market new products particularly in light of rapidly changing fashion
trends, the impact of supply and manufacturing constraints or difficulties
particularly in light of 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 additional capital if required, the risks of uncertainty of trademark
protection and other risks detailed below and in the Company's Securities and
Exchange Commission filings, and the uncertainty regarding the ability to
successfully integrate the Caruso acquisition into the Company's operations.
The words "believe", "expect", "anticipate", and "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.
Results of Operations (Restated)
Revenues. Net revenues increased by $5.1 million or 21.6% to $28.9 million
in the three months ended October 31, 1998, from $23.8 million in the comparable
period of the prior year. Net revenues increased by $20.3 million or 28.8% to
$90.6 million in the nine months ended October 31, 1998, from $70.4 million in
the same period in 1997. The increase was primarily due to increased brand
awareness and consumer acceptance of the Company's products due to the Company's
increased sales and marketing efforts, coupled with increased sales in all
product categories, the successful introduction of children's footwear products
and, in part, increased selling prices.
Gross Profit. Gross profit margins decreased to 19.3% in the three months
ended October 31, 1998 from 25.7% in the comparable period of the prior year.
Gross profit margins decreased to 23.8% in the nine months ended October 31,
1998 from 25.3% in the same period in 1997. The increases were primarily
attributable to changes in product mix.
Operating Expenses. Selling and administrative expenses increased by $1.7
million or 38.3% to $6.2 million in the three months ended October 31, 1998 from
$4.5 million in the comparable period of the prior year. As a percentage of net
revenues, selling and administrative expenses increased 2.6% to 21.5% for the
three months ended October 31, 1998 from 18.9% for the comparable period of the
prior year. Selling and administrative expenses increased by $6.4 million or
52.7% to $18.7 million in the nine months ended October 31, 1998 from $12.3
million in the comparable period of the prior year. As a percentage of net
revenues, selling and administrative expenses increased 3.3% to 20.7% for the
nine months ended October 31, 1998 from 17.4% for the comparable period of the
prior year. These increases reflect costs which are directly associated with the
increase in net revenues, coupled with the costs incurred in implementing the
Company's strategic plan to strengthen its management team and infrastructure,
which the Company believes has created the foundation for future growth.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Results of Operations -Continued
Interest Expense. Interest expense for the third quarter of fiscal 1999 was
$289,000, compared to $305,000 for the third quarter of fiscal 1998. Interest
expense for the nine months ended October 31, 1998 was $786,000, compared to
$833,000 for the comparable period in the previous year. The decrease resulted
from lower average borrowings and, to a lesser extent, lower interest rates
under the Company's new revolving credit facility.
Net (Loss) Income. As a result of the foregoing, the net loss was $502,000
in the three months ended October 31, 1998, compared to net income of $809,000
in the corresponding period a year ago. Net income decreased to $1,039,000 for
the nine months ended October 31, 1998, compared to net income of $3,827,000 for
the same period in 1997.
(Loss) Earnings Per Share. The loss per share in the three months ended
October 31, 1998 was $.03 on a diluted basis, compared to earnings of $.06 per
diluted share in the comparable quarter of the prior year. Earnings per share in
the nine months ended October 31, 1998 was $.08 on a diluted basis, which
reflects an additional 3.3 million weighted average shares outstanding, compared
to $.28 per diluted share in the same period in 1997. The prior year's
computation of earnings per share has been restated to comply with the
requirements of SFAS No. 128. The increase in the weighted average shares
outstanding for the three and nine month periods ended October 31, 1998 are
primarily the result of the exercise of approximately 1.8 million warrants and
options since the beginning of fiscal 1999 and the shares issued and issuable in
connection with the merger and acquisition described in the Notes to Condensed
Consolidated Financial Statements.
Liquidity and Capital Resources (Restated)
Working capital increased approximately $4.8 million to $20 million at October
31, 1998 from $15.1 million at January 31, 1998. The current ratio at October
31, 1998 was approximately 1.9 to 1. Inventory levels at October 31, 1998
decreased by $800,000 to $16.9 million from $17.7 million at January 31, 1998.
The Company has relied in the past primarily upon revenues generated from
operations, borrowings from its factor and sales of securities to finance its
liquidity and capital needs. Net cash used in operating activities totaled $18
million for the nine months ended October 31, 1998, compared to $8.6 million for
the nine months ended October 31, 1997.
Capital expenditures were $521,000 for the nine months ended October 31, 1998,
compared to $256,000 for the nine months ended October 31, 1997.
During the nine month period ended October 31, 1998, 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 such Warrants. The proceeds were used to repay short-term
borrowings. Each Warrant entitled the holder thereof to purchase one share of
Common Stock at an exercise price of $5.00. In addition, the Company received
proceeds of approximately $1.14 million in connection with the issuance of
Common Stock relating to the exercise of outstanding stock options and certain
underwriters' warrants.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Liquidity and Capital Resources - Continued
Effective August 18, 1998, the Company completed its previously announced merger
with NRC. 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, were 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 shares were converted to 2,326,173 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. The 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 Michael Caruso & Co., Inc. ("Caruso"). Under
the terms of the agreement, the Company acquired the BONGO trademark as well as
certain other related trademarks and two license agreements, one for kids' and
one for large size jeanswear. Caruso was a licensor of certain trademarks
relating to 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 $100,000 in cash. The transaction may be subject to
adjustment based on the closing market price of Candie's Common Stock during the
six month period immediately following the closing.
On September 15, 1998, the Board of Directors of the Company authorized
management to repurchase up to two million shares of Candie's Common Stock. As
of October 31, 1998, 85,200 shares were repurchased in the open market, at an
aggregate cost of approximately $371,000. No additional shares have been
repurchased since October 31, 1998. The Company intends, subject to certain
conditions, to buy shares on the open market from time-to-time, depending on
market conditions.
On May 27, 1998, the Company entered into a three year $35 million revolving
credit facility (the "Facility"). Under certain conditions, including the
addition of a second lender, the Facility may increase to a maximum of $50
million. On August 4, 1998, BankBoston, N.A. entered into a co-lending
arrangement and became a participant in the revolving credit Facility with
NationsBanc Commercial Corporation.
Borrowings under the Facility currently bear interest at 1.75% below the prime
rate (8% at October 31, 1998) and the Company also has the option to borrow at
either LIBOR plus 1.25% or the banker's acceptance rate plus 1%. These rates are
fixed and subject to an increase or decrease based on certain conditions
beginning in November 1998. The Company pays a commitment fee of 1/4% on the
unused portion of the Facility.
Borrowings under the Facility are formula based and available up to the maximum
amount of the Facility. The Facility also contains certain financial covenants
including, minimum tangible net worth, certain specified ratios and other
limitations, as defined therein. The Company has granted the lenders a security
interest in substantially all of its assets.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Liquidity and Capital Resources - Continued
Cash requirements fluctuate from time to time due to seasonal requirements,
including the timing of receipt of merchandise and various other factors. The
Company believes that it will be able to satisfy its ongoing cash requirements
for the foreseeable future, including requirements for its expansion, primarily
with cash flow from operations, supplemented by borrowings under the Facility.
Year 2000
The Company has assessed the issues associated with its existing computer system
with respect to a two-digit year value as the year 2000 approaches. The Company
believes a significant portion of the Company's Year 2000 issues will be
resolved by the installation of a Year 2000 compliant information system. The
new systems are designed to handle the Company's information systems for order
processing, warehousing and finance on a fully integrated enterprise-wide basis.
In addition, the Company has been in contact with its suppliers and other third
parties with which it does business to determine the extent which they may be
vulnerable to Year 2000 issues. As this assessment progresses, matters may come
to the Company's attention which could give rise to the need for remedial
measures which have not yet been identified. The Company cannot currently
predict the potential effect of third parties Year 2000 issues on its business.
Throughout 1998 and 1999 the Company intends to address all material internal
systems and third party issues. The Company intends to utilize both internal and
external resources to replace and test the systems for the Year 2000
modifications.
The Company does not expect expenditures relating to the Year 2000 issues to be
material and does not expect costs associated with the Year 2000 to have a
significant impact on the Company's results of operations or financial position.
However, there can be no assurance that the Company will not experience
unexpected difficulties in connection with the Year 2000 or that the systems of
other companies on which the Company's systems rely will be timely converted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
15
PART II. Other Information
Item 1. Legal Proceedings
The Company is 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 matters will not have a material adverse effect on the Company's
financial position or future liquidity.
Item 2. Changes in Securities
During the quarter ended October 31, 1998, the Registrant issued
five-year options to purchase an aggregate of 1,403,000 shares of its
common stock at an average exercise price of $4.32. The foregoing
options were acquired by the holders for investment in private
transactions exempt from registration by Sections 2(a)(3) or 4(2) of
the Securities Act of 1933.
On August 18, 1998, the Registrant issued 2,326,173 shares of its
common stock in connection with the merger with New Retail Concepts,
Inc.
On September 24, 1998, the Registrant issued 1,967,742 shares of its
common stock in connection with the acquisition of all the outstanding
shares of Michael Caruso & Co., Inc., in a private transaction exempt
from registration by Section 4(2) of the Securities Act of 1933, as
amended.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 10.1 - Joint Venture Agreement
B. Exhibit 27 - Financial Data Schedule
C. Reports on Form 8-K
1. The Registrant filed a report on Form 8-K dated August 18, 1998 with
respect to the merger with the New Retail Concepts, Inc.
2. The Registrant filed a report on Form 8-K dated September 24, 1998
regarding the acquisition of Michael Caruso & Co., Inc.
3. The Registrant filed an Amendment No.1 on Form 8-K/A on December 4, 1998
with respect to the inclusion of financial statements and pro-forma
financial information related to the Michael Caruso & Co., Inc. acquisition
which were not included in the original Form 8-K filling on September 24,
1998.
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANDIE'S, INC.
----------------------------
(Registrant)
Date October 4, 1999 /s/ Neil Cole
--------------------------- ----------------------------
Neil Cole
Chief Executive Officer
(on Behalf of the Registrant)
Date October 4, 1999 /s/ Frank Marcinowski
--------------------------- ----------------------------
Frank Marcinowski
Vice President and
Chief Financial Officer
17
Index to Exhibits
Exhibit
Numbers Description
- ------- -----------
10.1 Joint Venture Agreement*
27 Financial Data Schedule
* Previously filed
18