-----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, OX3HBC2M8cbNJGN5m1E/ykF4eghkdaV09of6a/iedTRGkAv02lq4zFOAXfLl4vFc //hUU04A8tqfJdbbBYcXwQ== 0000857737-02-000017.txt : 20020614 0000857737-02-000017.hdr.sgml : 20020614 20020614155843 ACCESSION NUMBER: 0000857737-02-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020430 FILED AS OF DATE: 20020614 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: 02679575 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 cand_10q043002.txt FORM 10Q 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 April 30, 2002 -------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________. Commission file number 0-10593 -------- CANDIE'S, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2481903 - ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 -- 24,175,283 shares as of May 31, 2002 INDEX FORM 10-Q CANDIE'S, INC. and SUBSIDIARIES
Page No. ----------- Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - April 30, 2002 and January 31, 2002.................... 3 Condensed Consolidated Statements of Operations - Three Months Ended April 30, 2002 and 2001.................................................................. 4 Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended April 30, 2002........................................................................... 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30, 2002 and 2001.................................................................. 6 Notes to Condensed Consolidated Financial Statements........................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 13 Part II. Other Information.............................................................................. Item 1. Legal Proceedings.............................................................................. 14 Item 2. Changes in Securities and Use of Proceeds ..................................................... 14 Item 3. Defaults upon Senior Securities (Not Applicable)............................................... Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)........................... Item 5. Other Information (Not Applicable)............................................................. Item 6. Exhibits and Reports on Form 8-K............................................................... 14 Signatures ........................................................................................... 15 2
Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited) Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
April 30, January 31, 2002 2002 ---------- ---------- (Unaudited) (000's omitted, except par value) Assets Current Assets Cash............................................................... $ 187 $ 636 Accounts receivable, net........................................... 4,238 4,674 Due from factors and accounts receivables, net..................... 18,559 5,791 Due from affiliate................................................. 387 565 Inventories........................................................ 16,120 8,368 Refundable income taxes............................................ 168 - Deferred income taxes.............................................. 1,881 1,881 Prepaid advertising and other...................................... 787 718 Other current assets............................................... 164 97 ------- ------- Total Current Assets................................................... 42,491 22,730 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 10,144 9,618 Less: Accumulated depreciation and amortization.................... 5,035 4,470 ------- ------- 5,109 5,148 Other assets: Goodwill, net...................................................... 23,565 1,868 Intangibles, net.................................................... 17,790 18,158 Deferred financing costs........................................... 741 741 Deferred income taxes.............................................. 1,741 1,741 Other.............................................................. 259 284 ------- ------- 44,096 22,792 ------- ------- Total Assets........................................................... $91,696 $50,670 ======= ======= Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks.................................... $28,086 $12,366 Accounts payable and accrued expenses.............................. 17,960 12,672 Current portion of long-term debt............................... 1,225 1,225 Losses in excess of joint venture investment....................... - 250 ------- ------- Total Current Liabilities.............................................. 47,271 26,513 ------- ------- Long-term liabilities.................................................. 591 638 Redeemable preferred stock............................................. 11,000 - Stockholders' Equity Preferred and common stock to be issued........................... 2,000 2,000 Preferred stock, $.01 par value - shares authorized 5,000; none issued and outstanding................................... - - Common stock, $.001 par value - shares authorized 30,000; shares issued 23,508 at April 30, 2002 and 20,400 issued at January 31, 2002........................................... 23 20 Additional paid-in capital......................................... 66,627 58,188 Retained earnings (deficit)........................................ (35,149) (36,214) Treasury stock - at cost - 198 shares at April 30, 2002 and 113 shares at January 31, 2002................................ (667) (475) ------- ------- Total Stockholders' Equity............................................. 32,834 23,519 ------- ------- Total Liabilities and Stockholders' Equity............................. $91,696 $50,670 ======= =======
See notes to condensed consolidated financial statements. 3 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended ----------------------------- April 30, April 30, 2002 2001 -------------- -------------- (000's omitted, except per share data) Net sales............................................ $ 24,190 $ 22,652 Licensing income...................................... 1,427 1,202 -------------- -------------- Net revenue........................................... 25,617 23,854 Cost of goods sold.................................... 17,587 16,187 -------------- -------------- Gross profit.......................................... 8,030 7,667 Selling, general and administrative expenses.......... 7,062 6,884 Special charges....................................... 15 65 -------------- -------------- Operating income...................................... 953 718 Other expenses: Interest expense - net........................ 277 325 Equity income in joint venture................ (250) - -------------- -------------- 27 325 -------------- -------------- Income before income tax benefit...................... 926 393 Income tax benefit.................................... (139) - -------------- -------------- Net income............................................ $ 1,065 $ 393 ============== ============== Earnings per share: Basic................... $ 0.05 $ 0.02 ============== ============== Diluted................. $ 0.05 $ 0.02 ============== ============== Weighted average number of common shares outstanding: Basic................... 20,642 19,135 ============== ============== Diluted................. 23,104 22,392 ============== ==============
See notes to condensed consolidated financial statements. 4 Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended April 30, 2002 (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, 2002 20,400 $ 20 $ 2,000 $ 58,188 $ (36,214) $ (475) $ 23,519 Issuance of common stock to retirement plan... 35 -- -- 54 -- -- 54 Exercise of stock options..................... 73 -- -- 98 -- -- 98 Options granted to non-employees.............. -- -- -- 40 -- -- 40 Purchase of treasury shares................... -- -- -- -- -- (192) (192) Acquisition of Unzipped Apparel, LLC.......... 3,000 3 -- 8,247 -- -- 8,250 Net income.................................... -- -- -- -- 1,065 -- 1,065 ------------------------------------------------------------------------------------ Balance at April 30, 2002 23,508 $ 23 $ 2,000 $ 66,627 $ (35,149) $ (667) $ 32,834 ------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 5 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended ------------------------- April 30, April 30, 2002 2001 ----------- ---------- (000's omitted) OPERATING ACTIVITIES: Net cash used in operating activities...................................... $ (5,324) $ (3,590) ----------- ---------- INVESTING ACTIVITIES: Purchases of property and equipment................................... (239) (359) ----------- ---------- Net cash used in investing activities...................................... (239) (359) ----------- ---------- FINANCING ACTIVITIES: Proceeds from exercise of stock options............................... 98 - Capital lease reduction............................................... - (217) Revolving notes payable - bank..................................... 5,208 3,953 Purchase of treasury stock......................................... (192) (153) ----------- ---------- Net cash provided by financing activities.................................. 5,114 3,583 ----------- ---------- DECREASE IN CASH........................................................... (449) (366) Cash at beginning of period................................................ 636 366 ----------- ---------- Cash at end of period...................................................... $ 187 $ - =========== ========== Supplemental disclosure of cash flow information: Cash paid for interest................................................ $ 278 $ 326 =========== ========== Common and preferred shares issued to acquire Unzipped Apparel, LLC... $ 19,250 $ - =========== ==========
See notes to condensed consolidated financial statements. 6 Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) April 30, 2002 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 period ended April 30, 2002 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, 2002. NOTE B FINANCING AGREEMENTS On January 23, 2002, the Company entered into a three-year $20 million credit facility ("the Credit Facility") with CIT Commercial Services ("CIT") replacing its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal"). Borrowings under the Credit Facility are formula based and include a $5 million over advance provision with interest at 1.00% above the prime rate. Subsequent to April 30, 2002, the Company agreed to amend the Credit Facility to increase the over advance provision to $7 million and include certain retail inventory in the availability formula. Borrowing under the amended Credit Facility will bear interest at 1.5% above the prime rate. At April 30, 2002, borrowings totaled $28.1 million at an average interest rate of 5.38% See Note E of the Notes to the Condensed Consolidated Financial Statements regarding the financing agreement of Unzipped Apparel, LLC. NOTE C EARNINGS PER SHARE Basic earnings per share includes no dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants and convertible preferred stock. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
April 30, ------------------------- 2002 2001 ------------------------- (000's omitted) Basic................................................................... 20,642 19,135 Effect of assumed conversions of employee stock options................. 1,630 886 Effect of assumed conversions of preferred stock........................ 832 2,371 ------------------------- Denominator for diluted earnings per share.............................. 23,104 22,392 =========================
NOTE D COMMITMENTS AND CONTINGENCIES 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, certain accounting issues concerning the restatement of certain of the Company's financial statements in prior years. 7 In January 2002, Redwood, one of the Company's former buying agents and a supplier of footwear to the Company, filed a Complaint in the United States District Court for the Southern District of New York, alleging that the Company breached various contractual obligations to Redwood and seeking to recover damages in excess of $20 million and its litigation costs. The Company has filed a motion to dismiss the Complaint based upon Redwood's failure to state a claim, in response to which Redwood has filed an amended complaint, which the Company has moved to dismiss. In the event that some or all of the amended Complaint survives the motion to dismiss, the Company intends to vigorously defend this lawsuit and to file counterclaims. 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. NOTE E UNZIPPED APPAREL, LLC Equity Investment: On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with a joint venture partner Sweet Sportswear LLC ("Sweet"), the purpose of which was to market and distribute apparel under the BONGO label. The Company and Sweet each had a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licensed the BONGO trademark to Unzipped for use in the design, manufacture and sale of certain designated apparel products. At January 31, 2002 and 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, consisting primarily of a guarantee of bank debt, and suspended booking its share of Unzipped losses beyond its liability. During the fourth quarter of fiscal 2002, the Company reduced its liability by $500,000 with the termination of the guarantee of the bank debt. During the quarter ended April 30, 2002, the Company reduced the remaining $250,000 in connection with the acquisition of Unzipped (see below). In addition, the terms of the operating agreement of Unzipped required the Company to purchase from Sweet on January 31, 2003, its entire interest in Unzipped at an 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 was entitled to receive an advertising royalty from Unzipped equal to 3% of Unzipped's net sales. Included in licensing income is $414,000 and $280,000 of such royalties for the period ended April 30, 2002 and 2001, respectively. Acquisition: On April 23, 2002, the Company, through a subsidiary, acquired Sweet's 50% interest in Unzipped for 3 million shares of the Company's common stock and an additional $11 million which is expected to be in the form of an 8% senior preferred stock which the Company will be required to redeem in 2012. The Company may issue a subordinated debt in lieu of the redeemable preferred stock, subject to the approval of Sweet. The acquisition was recorded as of April 30, 2002. Accordingly the operations of Unzipped will be reflected beginning May 1, 2002. The following table shows the value of assets and liabilities recorded for the purchase of Unzipped, adjusted to reflect changes in fair value of assets and liabilities and purchase accounting liabilities: (000's omitted) Cash $ (15) Accounts receivable, net 593 Due from factors and accounts receivable, net 7,926 Inventories 7,485 Prepaid advertising and other 61 Property and equipment, net 156 Other assets 11 --------- Total assets acquired 16,217 Revolving notes payable - banks 10,512 Accounts payable and accrued expenses 8,152 --------- Total liabilities assumed 18,664 --------- Net assets acquired $ (2,447) ========= 8 The excess purchase price over net assets acquired of $21.7 million has been recorded as goodwill. The Company is in the process of obtaining a third party valuation of certain intangible assets; thus the allocation of the purchases price is subject to change. The following unaudited pro-forma information presents a summary of the Company's consolidated results of operations as if the Unzipped acquisition and its related financing had occurred on February 1, 2001. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on February 1, 2001, or which may result in the future.
Three months ended April 30, 2002 2001 --------------------------------- (000's omitted, except per share) Total net revenues $38,760 $32,805 Operating income $1,605 $1,065 Net income $996 $202 Basic earnings per common share $0.04 $0.01 Diluted earnings per common share $0.04 $0.01
Revolving Credit Agreement: Unzipped has a credit facility with Congress Financial Corporation ("Congress"). Under the facility as amended, Unzipped may borrow up to $15 million under revolving loans until September 30, 2002. Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit. The borrowings bear interest at the lender's prime rate or at a rate of 2.25% per annum in excess of the Eurodollar rate. Borrowings under the facility are secured by substantially all of the assets of Unzipped and are guaranteed by the Chairman/Manager of Unzipped and his family trust, with such guarantee being limited to $500,000. The Company has agreed to cause the guarantee of the Chairman/Manager and his family trust to be released on or before February 1, 2003. At April 30, 2002, borrowings totaled $10.5 million and approximately $400,000 of additional funds were available to be borrowed under the revolving credit agreement. The facility requires Unzipped to be in compliance with certain financial and nonfinancial covenants. At January 31, 2002, Unzipped was required to have a minimum members' equity balance of $750,000. Unzipped obtained an amendment to the facility dated March 15, 2002, under which the minimum members' equity balance was waived for the period from November 1, 2001 through February 28, 2002. In consideration for the amendment, Azteca Production International, Inc.("Azteca"), a company that shares common ownership with Sweet, agreed to increase the amount of a subordinated loan that Azteca previously made to Unzipped from $3.5 million to $5 million. In connection with its acquisition of the remaining interest in Unzipped, the Company agreed that on or before February 1, 2003, it will pay any amount remaining due under the subordinated loan made to Unzipped by Azteca. Related Party Transactions: Unzipped has a supply agreement with Azteca for the development, manufacturing, and supply of certain products bearing the Bongo trademark for the exclusive use by Unzipped. As consideration for the development of the products, Unzipped pays Azteca pursuant to a separate pricing schedule. The supply agreement was consummated upon Unzipped's formation and originally extended through January 31, 2003. In connection with the acquisition, the Company agreed to renew its supply agreement with Azteca for a three year period, the details of which are not yet finalized. Azteca also allocates expenses to Unzipped for Unzipped's use of a portion of Azteca's office space, design and production team and support personnel. 9 In connection with the acquisition, the Company agreed to enter into a three-year management agreement with Sweet or its designee that provides for Sweet or its designee to manage the operations of Unzipped in return for a management fee which is based upon certain specified percentages of net income that Unzipped achieves during the three-year term. Unzipped has a distribution agreement with Apparel Distribution Services (ADS), an entity that shares common ownership with Sweet. The agreement provides for a $0.35 per unit fee for warehousing and distribution functions and $0.15 per unit fee for processing and invoicing orders. The agreement also provides for reimbursement for certain operating costs incurred by ADS and charges for special handling fees at hourly rates approved by management. These rates can be adjusted annually by the parties to reflect changes in economic factors. The distribution agreement was consummated upon Unzipped's formation and extends through December 31, 2002. In connection with the acquisition, the Company agreed to cause Unzipped to renew its distribution agreement with ADS for a three-year period, the details of which are not yet finalized. Unzipped occupies office space in a building rented by ADS and Commerce Clothing Company, LLC (Commerce), a related party to Azteca. Amounts due to related parties at April 30, 2002 and included in accounts payable and accrued expenses, consist of the following: Azteca $ 3,028,000 ADS 4,664,000 Commerce 93,000 ------------------- $ 7,785,000 =================== NOTE F INCOME TAX BENEFIT The income tax benefit of $139,000 in the quarter ended April 30, 2002 resulted from a change in the tax law during the period which permitted the Company to recover income taxes paid in prior years. NOTE G RECENT ACCOUNTING STANDARDS In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which changes the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill totaled $36 in the quarter ended April 30, 2001. Under SFAS No. 142, beginning on February 1, 2002, amortization of goodwill ceased. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a business. SFAS No. 144 is effective for the fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 as of February 1, 2002, and the adoption of the Statement did not have a significant impact on the Company's financial position and results of operations. In November 2001, the FASB Emerging Issues Task Force released Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor consideration to any purchasers of the vendor's products at any point along the distribution chain, regardless of whether the purchaser receiving the consideration is a direct customer of the vendor. Issue 01-9 was adopted in the first quarter of fiscal 2002. The effect was not material. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this Form 10-Q are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to successfully develop and market new products, particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties relating to the Company's dependence on foreign manufacturers, uncertainties relating to customer plans and commitments, 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 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 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 April 30,2002 Revenues. Net revenues increased by $1.7 million to $25.6 million from $23.9 million in the comparable period of the prior year. The 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 licensing income, partially offset by sales decreases in the Company's international division and private label women's division. Retail store sales increased $500,000 to $2.1 million, resulted primarily from four new stores, as compared to $1.6 million in the first quarter of the prior year. Licensing income increased $225,000 to $1.4 million as compared to $1.2 million in the comparable quarter of the prior year. Gross Profit. Gross profit increased by $363,000 to $8.0 million as compared to $7.7 million in the comparable quarter of the prior year. Gross profit margins decreased, as a percentage of net revenues, by 0.8% to 31.3% as compared to 32.1% in the first quarter of the prior year. The decrease is primarily attributable to a higher level of clearance activity in the period compared to the year-ago quarter. Operating Expenses. Operating expenses (including special charges) increased by $128,000 to $7.1 million from $6.9 million in the prior year quarter. The increase is due to the incremental costs associated with the opening of new retail stores. As a percentage of net revenues, operating expenses (including special charges) were 27.6%, as compared to 29.1% in the prior year quarter. 11 Interest Expense. Interest expense decreased by $48,000 to $277,000 from $325,000 in the prior year quarter. The decrease resulted from lower average interest rates, partially offset by higher average borrowings, as compared with the comparable period of prior year. Equity Income in Joint Venture. During the quarter ended April 30, 2002, the Company reduced the remaining $250,000 liability in connection with the acquisition of Unzipped. See Note E of Notes to Condensed Consolidated Financial Statements. Income Tax Benefit. In the quarter ended April 30, 2002, the Company recorded $139,000 of income tax benefit resulting from the utilization of net operating losses to recover previously recorded minimum statutory taxes. No tax expense was recorded for the current and prior year quarter, due to a reduction in the valuation reserve, which offset the income tax provision. Net Income. The Company recorded net income of $1.1 million compared to $393,000 in the comparable quarter of prior year. Liquidity and Capital Resources Working Capital. At April 30, 2002, the current ratio of assets to liabilities was .90 to 1 as compared to .86 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 under its revolving loan to finance its operations. Net cash used in operating activities totaled $5.3 million, compared to cash used of $3.6 million in the prior year quarter. The increase in cash used in operating activities resulted primarily from an increase in factoring and trade receivables. In addition to the above, the Company continues to pursue other long term capital financing alternatives including, but not limited, debt collateralized by its intellectual property. The Company has incurred certain costs (primarily professional fees), in connection with this financing that are included in deferred financing costs. These costs have been deferred and will be amortized over the life of the debt. If the debt does not close, these costs will be written-off. Capital Expenditures. Capital expenditures for the period ended April 30, 2002 were $190,000, compared to $359,000 for the three months ended April 30, 2001. The Company has forecasted additional capital expenditures of approximately $2 million in Fiscal 2003. The Company believes that it will be able to fund these anticipated expenditures primarily with cash from borrowings under its Credit Facility. Current Revolving Credit Facilities. On January 23, 2002, the Company entered into a three-year $20 million credit facility ("the Credit Facility") with CIT Commercial Services ("CIT") replacing its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal"). Borrowings under the Credit Facility are formula based and include a $5 million over advance provision with interest at 1.00% above the prime rate. Subsequent to April 30, 2002, the Company agreed to amend the Credit Facility to increase the over advance provision to $7 million and include certain retail inventory in the availability formula. Borrowing under the amended Credit Facility will bear interest at 1.5% above the prime rate. Unzipped has a credit facility with Congress Financial Corporation which expires on September 30, 2002. Under the facility as amended, Unzipped may borrow up to $15 million under revolving loans. Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit. The borrowings bear interest at the lender's prime rate or at a rate of 2.25% per annum in excess of the Eurodollar rate. The Company expects to complete a long term capital financing arrangement (see above) prior to the expiration of the Unzipped facility. 12 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 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 April 30, 2002 was $1.3 million. The quarterly payment on the loan is $260,000, including interest. Other In connection with its acquisition of Unzipped (See Note E of the Notes to Condensed Consolidated Financial Statements), the Company has agreed that on or before February 1, 2003, it will pay Azteca for all receivables due from Unzipped for purchases of product that are more than 30 days past due and any amount remaining under the subordinated loan between Unzipped and Azteca. As of April 30, 2002, these amounts aggregated $3.0 million. Item 3. Quantitative and Qualitative Disclosures 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. 13 PART II. Other Information Item 1. Legal Proceedings 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, certain accounting issues concerning the restatement of certain of the Company's financial statements in prior years. In January 2002, Redwood, one of the Company's former buying agents and a supplier of footwear to the Company, filed a Complaint in the United States District Court for the Southern District of New York, alleging that the Company breached various contractual obligations to Redwood and seeking to recover damages in excess of $20 million and its litigation costs. The Company has filed a motion to dismiss the Complaint based upon Redwood's failure to state a claim, in response to which Redwood has filed an amended complaint, which the Company has moved to dismiss. In the event that some or all of the amended Complaint survives the motion to dismiss, the Company intends to vigorously defend this lawsuit and to file counterclaims. 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 April 30, 2002, the Company granted certain of its employees and directors, pursuant to a stock option plan, 10-year non-qualified stock options to purchase a total of 610,000 shares of its common stock at prices ranging from $2.17 to $2.75 per share (an average of $2.74 per share). 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. Effective on April 23, 2002, the Company issued 3 million shares of its common stock to Sweet in connection with the acquisition of Unzipped pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K A. Exhibit 10.1- 2002 Stock Option Plan of Candie's, Inc (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated May 28, 2002 contained in the Company's Schedule 14A filed with the SEC on May 29, 2002) B. Reports on Form 8-K - None 14 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 June 14, 2002 /s/ Neil Cole ------------------- ------------------------------------------------ Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date June 14, 2002 /s/ Richard Danderline ------------------- ------------------------------------------------ Richard Danderline Executive Vice President, Finance and Operations Principal Financial and Accounting Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----