-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NVf95CXnc5dR6HrSwEME7E+RDMqDgZMz4MfU06lTM+mTgV5G4aQdmssxeidciEvX O0q2PqVVgGB6eQQp6WecgQ== 0000857737-01-500007.txt : 20020411 0000857737-01-500007.hdr.sgml : 20020411 ACCESSION NUMBER: 0000857737-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481903 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10593 FILM NUMBER: 1796987 BUSINESS ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147698600 MAIL ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 cand10q3_10312001.txt 10Q FOR THE QUARTER ENDED OCTOBER 31, 2001 U.S. Securities and Exchange Commission Washington, D.C. 20549 --------------------------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended October 31, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________. Commission file number 0-10593 CANDIE'S, INC. (Exact name of registrant as specified in its charter) Delaware 11-2481903 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Columbus Avenue Valhalla, NY 10595 (Address of principal executive offices) (Zip Code) (914) 769-8600 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.001 Par Value -- 18,283,723 shares as of November 16, 2001 INDEX FORM 10-Q CANDIE'S, INC. and SUBSIDIARIES
Page No. ----------- Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - October 31, 2001 and January 31, 2001.................. 2 Condensed Consolidated Statements of Operations - Three and Nine Months Ended October 31, 2001 and 2000................................................................ 3 Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2001............................................................................... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31, 2001 and 2000.................................................................................. 5 Notes to Condensed Consolidated Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................... 11 Part II. Other Information Item 1. Legal Proceedings ............................................................................. 12 Item 2. Changes in Securities and Use of Proceeds ..................................................... 12 Item 3. Defaults upon Senior Securities (Not Applicable)............................................... Item 4. Submission of Matters to a Vote of Security Holders ........................................... 12 Item 5. Other Information (Not Applicable)............................................................. Item 6. Exhibits and Reports on Form 8-K .............................................................. 13 Signatures ........................................................................................... 14 Index to Exhibits....................................................................................... 15
Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited) Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
October 31, January 31, 2001 2001 ---------- ---------- (Unaudited) (000's omitted, except par value) Assets Current Assets Cash............................................................... $ 872 $ 366 Accounts receivable, net........................................... 5,710 3,390 Due from factors and accounts receivables, net..................... 7,682 5,854 Due from affiliate................................................. 904 329 Inventories........................................................ 7,842 9,323 Refundable and prepaid income taxes................................ 242 219 Deferred income taxes.............................................. 2,994 2,994 Prepaid advertising and other...................................... 1,613 1,205 Other current assets............................................... 76 92 ------- ------- Total Current Assets................................................... 27,935 23,772 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 8,375 7,408 Less: Accumulated depreciation and amortization.................... 4,128 3,206 ------- ------- 4,247 4,202 Other assets: Goodwill, net...................................................... 1,903 2,010 Intangibles, net................................................... 18,530 19,623 Deferred income taxes.............................................. 628 628 Other.............................................................. 117 135 ------- ------- 21,178 22,396 ------- ------- Total Assets........................................................... $53,360 $50,370 ======= ======= Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks.................................... $11,084 $ 8,898 Accounts payable and accrued expenses.............................. 10,025 9,766 Accounts payable - related party................................... 3,058 4,052 Current portion of long-term debt and capital lease obligation.. 1,069 1,006 Losses in excess of joint venture investment....................... 750 750 ------- ------- Total Current Liabilities.............................................. 25,986 24,472 ------- ------- Other liabilities...................................................... 166 98 Long-term liabilities and capital lease obligation .................... 244 1,055 Stockholders' Equity Preferred and common stock to be issued............................ 6,000 6,000 Preferred stock, $.01 par value - shares authorized 5,000; none issued and outstanding................................... - - Common stock, $.001 par value - shares authorized 30,000; shares issued 19,855 at October 31, 2001 and 19,341 issued at January 31, 2001........................................... 20 19 Additional paid-in capital......................................... 60,089 59,239 Retained earnings (deficit)........................................ (32,268) (33,932) Treasury stock - at cost - 1,635 shares at October 31, 2001 and 1,472 shares at January 31, 2001........................... (6,877) (6,581) ------- ------- Total Stockholders' Equity............................................. 26,964 24,745 ------- ------- Total Liabilities and Stockholders' Equity............................. $53,360 $50,370 ======= =======
See notes to condensed consolidated financial statements. Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31, ----------------------------------- ------------------------------- 2001 2000 2001 2000 (000's omitted, except per share data) Net sales...................................... $25,325 $22,457 $78,547 $73,755 Licensing income............................... 1,411 1,310 3,929 3,649 ----------------------------------- ------------------------------- Net revenues................................... 26,736 23,767 82,476 77,404 Cost of goods sold............................. 18,682 17,561 58,288 56,854 ----------------------------------- ------------------------------- Gross profit................................... 8,054 6,206 24,188 20,550 Operating expenses: Selling, general and administrative expenses... 7,309 7,427 21,212 20,496 Special charges................................ 120 1 363 187 ----------------------------------- ------------------------------- 7,429 7,428 21,575 20,683 ----------------------------------- ------------------------------- Operating income (loss)........................ 625 (1,222) 2,613 (133) Other expenses: Interest expense - net......................... 328 418 949 1,318 Equity (income) in joint venture............... - (198) - (684) ----------------------------------- ------------------------------- 328 220 949 634 ----------------------------------- ------------------------------- Income (loss) before income taxes.............. 297 (1,442) 1,664 (767) Provision for income taxes..................... - 26 - 61 ----------------------------------- ------------------------------- Net income (loss).............................. $ 297 (1,468) $ 1,664 (828) =================================== =============================== Earnings (loss) per common share: Basic..................................... $ .02 $ (.08) $ .09 $ (.04) =================================== =============================== Diluted................................... $ .01 $ (.08) .07 $ (.04) =================================== =============================== Weighted average number of common shares outstanding: Basic..................................... 19,407 19,269 19,237 19,237 =================================== =============================== Diluted................................... 22,681 19,269 22,497 19,237 =================================== ===============================
See notes to condensed consolidated financial statements. Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Nine Months Ended October 31, 2001 (000's omitted)
Preferred & Common Additional Retained Common Stock Stock to be Paid-In Earnings Treasury Shares Amount Issued Capital (Deficit) Stock Total ------------------------------------------------------------------------------- Balance at February 1, 2001..... 19,341 $ 19 $ 6,000 $ 59,239 $ (33,932) $(6,581) $ 24,745 Issuance of common stock to retirement plan....... 122 -- -- 133 -- -- 133 Issuance of common stock to directors............. 14 -- -- 40 -- -- 40 Exercise of stock options and warrants.............. 378 1 -- 593 -- -- 594 Options granted to non-employees -- -- -- 84 -- -- 84 Purchase of treasury shares..... -- -- -- -- -- (296) (296) Net income...................... -- -- -- -- 1,664 -- 1,664 ------------------------------------------------------------------------------- Balance at October 31, 2001..... 19,855 $ 20 $ 6,000 $ 60,089 $(32,268) $(6,877) $ 26,964 ===============================================================================
See notes to condensed consolidated financial statements. Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended --------------------------- October 31, October 31, 2001 2000 --------------------------- (000's omitted) OPERATING ACTIVITIES: Net cash (used in) provided by operating activities........................ $ (348) $ 3,459 --------------------------- INVESTING ACTIVITIES: Purchases of property and equipment................................... (967) (1,147) --------------------------- Net cash used in investing activities...................................... (967) (1,147) --------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants.................. 594 - Purchase of treasury stock............................................ (296) - Capital lease payments................................................ (663) (690) Increase (decrease) in revolving notes payable - bank................. 2,186 (1,988) --------------------------- Net cash provided by (used in) financing activities........................ 1,821 (2,678) --------------------------- INCREASE (DECREASE) IN CASH................................................ 506 (366) Cash at beginning of period................................................ 366 643 --------------------------- Cash at end of period...................................................... $ 872 $ 277 =========================== Supplemental disclosure of cash flow information: Interest paid.............................................................. $ 950 $ 1,329 ===========================
See notes to condensed consolidated financial statements. Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) October 31, 2001 NOTE A BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended October 31, 2001 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended January 31, 2001. NOTE B FINANCING AGREEMENTS On October 28, 1999, the Company entered into a two year $35 million revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc. ("Rosenthal"). On November 23, 1999, First Union National Bank entered into a co-lending arrangement and became a participant in the Line of Credit. Borrowings under the Line of Credit are formula based and available up to the maximum amount of the Line of Credit. Borrowings under the Line of Credit bear interest at 0.50% above the prime rate. Certain borrowings in excess of an availability formula bear interest at 2.5% above the prime rate. The Company also pays an annual facility fee of 0.25% of the maximum Line of Credit. The Line of Credit also contains certain financial covenants including, minimum tangible net worth, certain specified ratios and other limitations. As of April 30, 2001, the Company extended its factoring agreement with Rosenthal through April 30, 2003. The Company has granted the lenders a security interest in substantially all of its assets. The Company was in default of certain covenants of its Line of Credit at October 31, 2001, but is negotiating with its current lender to secure a waiver and with that and other lenders to refinance the loan. The Company expects to be able to secure such waiver and / or new financing shortly. At October 31, 2001 and January 31, 2001, borrowings under the Line of Credit totaled $11.0 million and $8.9 million, respectively, which were secured against factored receivables and inventory. Interest paid to Rosenthal during the nine months ended October 31, 2001 was $0.8 million. The borrowing bore interest at 6.04%, which rate is subject to an increase or decrease based on the conditions of the factoring agreement as stated above. At October 31, 2001 and January 31, 2001, the Company had $0.4 million and $0.3 million, respectively, of outstanding letters of credit. The Company's letters of credit availability are formula based, taking into account borrowings under the Line of Credit, as described above. NOTE C EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share includes no dilution and is computed by dividing earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants. Included in the calculation of the basic number of shares is the equivalent number of common shares to be issued in connection with the Settlement Agreement described in Note D. The diluted weighted average number of shares includes dilutive options and convertible preferred stock to be issued. The following is a reconciliation of the shares used in calculating basic and diluted earnings (loss) per share:
Three Months Ended October 31, Nine Months Ended October 31, ------------------------------ ----------------------------- 2001 2000 2001 2000 ------------------------------ ----------------------------- (000's omitted) Basic .......................................................... 19,407 19,269 19,237 19,237 Effect of assumed conversions of employee stock options......... 1,850 - 1,443 - Effect of assumed conversions of preferred stock to be issued... 1,424 - 1,817 - ------------------------------ ----------------------------- Diluted ........................................................ 22,681 19,269 22,497 19,237 ============================== =============================
NOTE D COMMITMENTS AND CONTINGENCIES On May 17, 1999, a purported stockholder class action complaint was filed in the United States District Court for the Southern District of New York, against the Company and certain of its current and former officers and directors which together with certain other complaints subsequently filed in the same court alleging similar violations were consolidated in one lawsuit, Willow Creek Capital Partners, L.P., v. Candie's, Inc. A consolidated complaint was served on the Company on or about August 24, 1999. The consolidated complaint included claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The consolidated complaint was brought on behalf of all persons who acquired securities of the Company between May 28, 1997 and May 12, 1999, and alleged that the plaintiffs were damaged by reason of the Company's having issued materially false and misleading financial statements for the fiscal year ended January 31, 1998 and the first three quarters of the fiscal year ended January 31, 1999, which caused the Company's securities to trade at artificially inflated prices. On or about January 31, 2000, the Company entered into a settlement agreement with plaintiffs (the "Settlement Agreement") to settle the class action for total consideration of $10 million, payable in a combination of cash, the Company's Common Stock and convertible preferred stock (the "Preferred Stock"). The Settlement Agreement provided that on or about May 1, 2000, the Company would pay to plaintiffs $3 million in cash, and on or after the "Effective Date", as defined in the Settlement Agreement, the Company would issue shares of the Company's Common Stock with a value of $2 million. The Company was also required to pay the Class an additional $1 million on or before October 1, 2000. The remaining $4 million owed to plaintiffs will be in the form of Preferred Stock, which will convert to the Company's Common Stock at a rate based on the price of the Company's Common Stock on the first and second anniversary of the Effective Date. It was highly unlikely that the Court would not approve the Settlement; accordingly, the settlement terms, including the shares of Common and Preferred Stock to be issued, were recorded as of January 31, 2000. In July 2000, the Court approved the Settlement Agreement. Pursuant to the Settlement Agreement, the Company paid the plaintiffs $4 million in cash in the fiscal year ended January 31, 2001. The remaining $6 million owed to plaintiffs will be paid in the form of Common Stock and in Preferred Stock which will convert to the Company's Common Stock at a rate based on the price of the Company's Common Stock on the first and second anniversary of the "Effective Date" (August 2000) as defined in the Settlement Agreement approved by the Court. The shares of stock have not yet been issued because the plaintiffs' plan of distribution has not yet been finalized. On August 4, 1999, the staff of the SEC advised the Company that it had commenced a formal investigation into the actions of the Company and others in connection with, among other things, the accounting issues that were raised in connection with the restatement of certain of the Company's financial statements. In December 2000, an action for breach of contract and breach of the duty of good faith and fair dealing was commenced against the Company and one of its subsidiaries in the United States District Court for the Southern District of New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano. The Company has entered into a settlement agreement with Michael Caruso and Gene Montesano ("Caruso Settlement Agreement"). The settlement provides that Caruso may participate as a member of the Class in the settlement of the Willow Creek Class Action and receive its proportionate interest in the class settlement fund by filing a late proof of claim. In addition, the Company has agreed to pay Caruso and Montesano the sum of $62,500 in equal quarterly statements, up to a possible aggregate amount of $1 million, over a period of four years. However, the obligation to make these payments shall terminate in the event the last daily sale price per share of the Company's Common Stock reaches $4.98 during any ten days in any thirty day period within such four year period. The Caruso Settlement Agreement is not binding unless the Court in the Willow Creek Class Action issues an Order permitting Caruso and Montesano to file a late proof of claim and allowing such claim. A proposed Order permitting Caruso and Montesano to file a late proof of claim and allowing such claim was filed with the Court on October 19, 2001, and the parties are awaiting the Court's determination. The Company is unable to predict the outcome of this matter and accordingly has not recorded any liability in connection with this settlement agreement. From time to time, the Company is also made a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not have a material effect on the Company's financial position or future liquidity. Except as set forth above, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in their capacity as such. NOTE E INVESTMENT IN JOINT VENTURE On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with its joint venture partner Sweet Sportswear, LLC ("Sweet"), the purpose of which is to market and distribute apparel under the BONGO label. The Company and Sweet each have a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licenses the BONGO trademark to Unzipped for use in the design, manufacture and sale of certain designated apparel products. As of January 31, 2001, the Company believed that Unzipped was in breach of certain provisions of the agreements among the parties, and notified Unzipped that the Company did not intend to contribute any additional capital or otherwise support the joint venture. Accordingly, as of January 31, 2001, the Company recorded $750,000, as its maximum liability to Unzipped and has suspended booking its share of Unzipped losses beyond its liability. As of January 31, 2001, the Company's proportionate share of Unzipped unaudited losses in excess of the established liability approximated $1.7 million. The Company believes that its exposure related to Unzipped, should the joint venture dissolve, is adequately provided for. Pursuant to the terms of the Operating Agreement of Unzipped, on January 31, 2003, the Company must purchase from Sweet, Sweet's entire interest in Unzipped at the aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for the fiscal year commencing on February 1, 2002 and ending January 31, 2003. The Company has the right, in its sole discretion, to pay for such interest in cash or shares of common stock. In the event the Company elects to issue shares of common stock to Sweet, Sweet shall receive shares of common stock and the right to designate a member to the Board of Directors for the Company until the earlier to occur of (i) the sale of any of such shares or (ii) two years from the date of closing of such purchase. At October 31 and January 31, 2001, the affiliate receivable balance from Unzipped was $282,000 and $232,000, respectively. The Company is entitled to receive royalty revenue from Unzipped equal to 3% of Unzipped's net sales. Included in royalty income is $983,000 and $1,100,000 for the nine months ended October 31, 2001 and 2000, respectively. NOTE F RECENT ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in the fiscal year beginning February 1, 2002 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted primarily for using the purchase methods. At October 31, 2001, the net carrying amount of goodwill is approximately $1.9 million, which is being amortized by approximately $140,000 each year. Currently, the Company is assessing, but has not yet determined how, the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. NOTE G SUBSEQUENT EVENTS On November 20, 2001, the Company entered into an agreement to sell one of its retail outlet stores for approximately $556,000, subject to closing adjustments. The resulting gain of approximately $100,000 will be recognized in the fourth quarter. Pursuant to the agreement, the Company will continue to operate the store through January 7, 2002. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this Form 10-Q are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to develop successfully and market new products, particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties relating to the Company's dependence on foreign manufacturers, uncertainties relating to customer plans and commitments, competition, uncertainties relating to economic conditions in the markets in which the Company operates, the ability to hire and retain key personnel, the ability to obtain capital if required, the risks of litigation, the risks of uncertainty of trademark protection, the uncertainty of marketing and licensing trademarks and other risks detailed below and in the Company's other Securities and Exchange Commission filings. The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. Seasonal And Quarterly Fluctuations. The Company's quarterly results may fluctuate quarter to quarter as a result of holidays, weather, the timing of footwear shipments, market acceptance of the Company's products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, the timing of inventory write downs, fluctuations in the cost of materials, the timing of licensing payments and reporting, and other factors beyond the Company's control, such as general economic conditions and the action of competitors. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, the timing of the receipt of future revenues could be impacted by the recent trend among retailers in the Company's industry to order goods closer to a particular selling season than they have historically done so. The Company continues to seek to expand and diversify its product lines to help reduce the dependence on any particular product line and lessen the impact of the seasonal nature of its business. However, the success of the Company will still remain largely dependent on its ability to predict accurately upcoming fashion trends among its customer base, build and maintain brand awareness and to fulfill the product requirements of its retail channel within the shortened timeframe required. Unanticipated changes in consumer fashion preferences, slowdowns in the United States economy, changes in the prices of supplies, consolidation of retail chains, among other factors noted herein, could adversely affect the Company's future operating results. Results of Operations For the three months ended October 31, 2001 Revenues. Net revenues increased by $2.9 million to $26.7 million from $23.8 million in the comparable period of the prior year. The net revenue increase resulted primarily from increases in sales including an increase of $2.0 million from the Company's private label men's division and retail store sales. Retail store sales increased $.7 million, to $2.2 million, as compared to $1.4 million in the third quarter of the prior year. Retail comparable store sales were up 15.4% in the third quarter of Fiscal 2002. Licensing income increased $100,000, to $1.4 million from $1.3 million in the same quarter of the prior year. Gross Profit. Gross profit increased by $1.9 million to $8.1 million as compared to $6.2 million in the same quarter of the prior year. Gross profit margins increased, as a percentage of net revenues, by 4.0% to 30.1%, as compared to 26.1% in the third quarter of the prior year. The increase is primarily attributable to an increase in the gross margin from Candie's women's footwear, partially offset by reduced margins for the Company's private label men's division. Operating Expenses. Operating expenses (including special charges) for the third quarter were flat at $7.4 million. This resulted from ongoing cost reduction initiatives, offset by the incremental costs associated with the opening of new retail stores. Interest Expense. Interest expense decreased by $90,000 to $328,000 from $418,000 in the prior year quarter. The decrease resulted from lower average interest rates and lower average outstanding borrowing as compared with the comparable prior year period. Income Taxes. The income tax provision for the quarter was offset by a reduction in the valuation reserve. As a result, no tax provision was recorded for the period ended October 31, 2001. Net Income. The Company recorded net income of $297,000, compared to a loss of $1.5 million in the prior year quarter. For the nine months ended October 31, 2001 Revenues. Net revenues increased by $5.1 million to $82.5 million from $77.4 million in the comparable period of the prior year. The net revenue increase resulted primarily from increases in sales in Candie's women's footwear, the Company's private label men's division, retail store sales and a reduction in sales returns and allowances, partially offset by sales decreases in Kid's and Bongo footwear and the discontinuance of the Company's handbag division. Retail store sales increased $2.6 million, to $5.9 million, as compared to $3.3 million in the comparable period of the prior year. Retail comparable store sales increased 29.4% for the nine months ended October 31, 2001. Licensing income increased $280,000, to $3.9 million as compared to $3.6 million in the comparable prior year nine month period. Gross Profit. Gross profit increased by $3.6 million to $24.2 million as compared to $20.6 million in the first nine months of the prior year. Gross profit margins increased, as a percentage of net revenues, by 2.8% to 29.3%, as compared to 26.5% for the nine months ended October 31, 2000. The increase is primarily attributable to improved margins in Candie's women's footwear, reductions in sales returns and allowances, an increase in retail sales that have higher gross profit margins and an increase in licensing income, partially offset by lower margins from the Company's private label men's division. Operating Expenses. Operating expenses (including special charges) increased by $892,000 to $21.6 million from $20.7 million in the first nine months of the prior year. The increase is due primarily to the incremental costs associated with the opening of new retail stores. Interest Expense. Interest expense decreased by $369,000 to $949,000 from $1.3 million in the first nine months of the prior year. The decrease resulted from lower average interest rates and lower average outstanding borrowing as compared with the comparable prior year period. Income Taxes. The income tax provision for the nine months was offset by a reduction in the valuation reserve. As a result, no tax provision was recorded for the nine months ended October 31, 2001. Net Income. The Company recorded net income of $1.7 million, compared to a loss of $828,000 in the first nine months of the prior year. Liquidity and Capital Resources At October 31, 2001, the current ratio was 1.075 to 1. In the past, the Company has relied primarily upon revenues generated from operations, borrowings from its factor and sales of securities to finance its liquidity and capital needs. Net cash used in operating activities totaled $347,000, compared to cash provided of $3.5 million for the nine months ended October 31, 2000. The increase in cash used in operating activities resulted primarily from an increase in factoring and trade receivables, partially offset by a reduction in inventories. Capital expenditures for the nine months ended October 31, 2001 were $967,000, compared to $1.1 million for the comparable period in the prior year. The Company has forecasted additional capital expenditures of approximately $738,000 in Fiscal 2002. Current Revolving Credit Facility Borrowings under the Line of Credit are formula based and available up to the maximum amount of the Line of Credit. At October 31, 2001 and January 31, 2001, borrowings under the Line of Credit totaled $11.1 million and $8.9 million, respectively, which were secured against factored receivables and inventory. Borrowings under the Line of Credit will bear interest at 0.50% above the prime rate. Certain borrowings in excess of an availability formula will bear interest at 2.5% above the prime rate. The Company will also pay an annual facility fee of 0.25% of the maximum Line of Credit. The Line of Credit also contains certain financial covenants including, minimum tangible net worth, certain specified ratios and other limitations. The Company has granted the lenders a security interest in substantially all of its assets. The Company was in default of certain covenants of its Line of Credit at October 31, 2001, but is negotiating with its current lender to secure a waiver and with that and other lenders to refinance the loan. The Company expects to be able to secure such waiver and / or new financing shortly. Other Borrowing Arrangements In May 1999, the Company entered into a $3.5 million master lease and loan agreement with OneSource Financial Corp. The agreement requires the Company to collateralize property and equipment of $1.9 million, with the remaining agreement balance considered to be an unsecured loan. The term of the agreement is for a period of four years at an effective annual interest rate of 10.48%. The outstanding loan balance as of October 31, 2001 was $1.3 million. The quarterly payment on the loan is $260,000 including interest. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. PART II. Other Information Item 1. Legal Proceedings In July 2000, the Company settled a stockholder class action brought in the United States District Court for the Southern District of New York (the "Court") entitled Willow Creek Capital Partners, L.P., v. Candie's, Inc., which alleged that the plaintiffs were damaged by reason of the Company's having issued materially false and misleading financial statements for the fiscal year ended January 31, 1998 and the first three quarters of the fiscal year ended January 31, 1999, which caused the Company's securities to trade at artificially inflated prices. Pursuant to the settlement the Company agreed to pay to the plaintiffs total consideration of $10 million, payable in a combination of $4 million in cash and the balance in the Company's Common Stock and convertible preferred stock. The Company has made the required $4 million cash payment. The remaining $6 million will be paid in the form of the Company's Common Stock and in preferred stock which will convert to the Company's Common Stock based on the price of the Company's Common Stock on the first and second anniversary of the "Effective Date" (August 2000) as defined in the settlement agreement approved by the Court. The shares of stock have not yet been issued because the plaintiffs' plan of distribution has not yet been finalized. On August 4, 1999, the staff of the SEC advised the Company that it had commenced a formal investigation into the actions of the Company and others in connection with, among other things, the accounting issues that were raised in connection with the restatement. In December 2000, an action for breach of contract and breach of the duty of good faith and fair dealing was commenced against the Company and one of its subsidiaries in the United States District Court for the Southern District of New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano. The Company has entered into a settlement agreement with Michael Caruso and Gene Montesano ("Caruso Settlement Agreement"). The settlement provides that Caruso may participate as a member of the Class in the settlement of the Willow Creek Class Action and receive its proportionate interest in the class settlement fund by filing a late proof of claim. In addition, the Company has agreed to pay Caruso and Montesano the sum of $62,500 in equal quarterly statements, up to a possible aggregate amount of $1 million, over a period of four years. However, the obligation to make these payments shall terminate in the event the last daily sale price per share of the Company's Common Stock reaches $4.98 during any ten days in any thirty day period within such four year period. The Caruso Settlement Agreement is not binding unless the Court in the Willow Creek Class Action issues an Order permitting Caruso and Montesano to file a late proof of claim and allowing such claim. A proposed Order permitting Caruso and Montesano to file a late proof of claim and allowing such claim was filed with the Court on October 19, 2001, and the parties are awaiting the Court's determination. From time to time, the Company is also made a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not have a material effect on the Company's financial position or future liquidity. Except as set forth above, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. Item 2. Changes in Securities and Use of Proceeds During the three months ended October 31, 2001, the Company granted certain of its employees and directors non-qualified stock options to purchase a total of 996,000 shares of its common stock at prices ranging from $1.70 to $2.50 per share (an average of $2.1877 per share). The 996,000 stock options were registered. The options were granted in private transactions pursuant to the exemption from registration under Sections 2(a) (3) and 4(2) of the Securities Act of 1933. Item 4. Submission of Matters to a Vote of Security Holders On August 9, 2001 the Company held an Annual Meeting of Stockholders at which the holders of the Company's common stock voted on: (i) the election of directors and (ii) a proposal to approve the adoption of the Company's Non-Employee Director Stock Incentive Plan under which up to 300,000 shares of Common Stock may be issued to all members of the Company's Board of Directors who are not current employees of the Company or any of its subsidiaries. Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Peter Siris and Ann Iverson were elected to serve as members of the Company's Board of Directors for the ensuing year and until the election and qualification of their successors. The votes cast by stockholders with respect to the election of Directors were as follows: Votes Cast Votes Director "For" "Withheld" Neil Cole 11,949,577 101,643 Barry Emanuel 11,954,554 96,666 Steven Mendelow 11,957,079 94,141 Peter Siris 11,921,523 129,697 Ann Iverson 11,973,093 78,127 The Company's Non-Employee Director Stock Incentive Plan was approved by the stockholders. The votes cast by stockholders with respect to the Non-Employee Director Stock Incentive Plan were as follows: Votes Cast "For" Votes Cast "Against" Votes "Abstaining" 11,610,822 380,692 59,706 Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 10.1 - Candie's Inc. Non-Employee Director Stock Incentive Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated July 3, 2001 contained in the Company's Schedule 14A filed with the SEC on July 3, 2001). Exhibit 27 - Financial Data Schedule (for SEC use only) b. Reports on Form 8-K-None Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. ----------------------------------- (Registrant) Date: November 20, 2001 by:/s/ Neil Cole --------------------------- ----------------------------------- Neil Cole Chairman of the Board, President and Chief Executive Officer Date: November 20, 2001 by:/s/ Richard Danderline --------------------------- ----------------------------------- Richard Danderline Executive Vice President of Finance and Operations Index to Exhibits Exhibit Numbers Description 10.1 Candie's Inc. Non-Employee Director Stock Incentive Option Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated July 3, 2001 contained in the Company's Schedule 14A filed with the SEC on July 3, 2001). 27 Financial Data Schedule (for SEC use only) -----END PRIVACY-ENHANCED MESSAGE-----