-----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, AKFbITgSAvLRm0MvnepCZ6uB1SecnB7lfAYsTjyhhGzDp+u80GsDMysM6n6v7amV 3rEKpc9gfCTXIHkRSH/v0Q== /in/edgar/work/20000914/0000891554-00-002150/0000891554-00-002150.txt : 20000922 0000891554-00-002150.hdr.sgml : 20000922 ACCESSION NUMBER: 0000891554-00-002150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20000914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: [3140 ] IRS NUMBER: 112481930 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10593 FILM NUMBER: 722746 BUSINESS ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9146948600 MAIL ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10-q_23606.txt QUARTERLY REPORT 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 July 31, 2000 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 -- 18,028,602 shares as of August 31, 2000 INDEX FORM 10-Q CANDIE'S, INC. and SUBSIDIARIES
Page No. -------- Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - July 31, 2000 and January 31, 2000......................... 2 Condensed Consolidated Statements of Operations - Three and Six Months Ended July 31, 2000 and 1999....................................................................... 3 Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended July 31, 2000...................................................................................... 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended July 31, 2000 and 1999...................................................................................... 5 Notes to Condensed Consolidated Financial Statements............................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk (not applicable).................... Part II. Other Information Item 1. Legal Proceedings............................................................................... 12 Item 2. Changes in Securities and Use of Proceeds ...................................................... 12 Item 6. Exhibits and Reports on Form 8-K................................................................ 12 Signatures ........................................................................................... 13 Index to Exhibits....................................................................................... 14
Part I. Financial Information Item 1. FINANCIAL STATEMENTS - (Unaudited) Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets July 31, January 31, 2000 2000 -------- -------- (Unaudited) (000's omitted, except par value) Assets Current Assets Cash ........................................................... $ 1,228 $ 643 Restricted cash ................................................ -- 2,000 Accounts receivable, net ....................................... 4,183 2,711 Due from factors and accounts receivables, net ................. 12,379 8,034 Due from affiliate ............................................. 1,002 636 Inventories .................................................... 11,537 14,770 Refundable and prepaid income taxes ............................ 569 631 Deferred income taxes .......................................... 410 1,448 Prepaid advertising and other .................................. 2,606 1,622 Other current assets ........................................... 155 304 -------- -------- Total Current Assets ............................................... 34,069 32,799 Property and equipment, at cost: Furniture, fixtures and equipment .............................. 7,305 6,679 Less: Accumulated depreciation and amortization ................ 2,672 2,124 -------- -------- 4,633 4,555 Other assets: Goodwill, net .................................................. 2,081 2,152 Intangibles, net ............................................... 21,087 22,047 Deferred income taxes .......................................... 3,213 2,174 Other .......................................................... 292 331 -------- -------- 26,673 26,704 -------- -------- Total Assets ....................................................... $ 65,375 $ 64,058 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks ................................ $ 14,965 $ 13,764 Litigation settlement .......................................... 1,000 4,000 Accounts payable and accrued expenses .......................... 7,829 7,618 Accounts payable - related party ............................... 4,391 1,286 Current portion of long-term debt and capital lease obligation . 1,148 1,143 Losses in excess of joint venture investment ................... -- 1,451 -------- -------- Total Current Liabilities .......................................... 29,333 29,262 -------- -------- Losses in excess of joint venture investment ....................... 965 -- Long-term liabilities and capital lease obligation ................. 1,387 1,848 Stockholders' Equity Preferred and common stock to be issued ........................ 6,000 6,000 Preferred stock, $.01 par value - shares authorized 5,000; none issued and outstanding ............................... -- -- Common stock, $.001 par value - shares authorized 30,000; shares issued 19,311 at July 31, 2000 and 19,209 issued at January 31, 2000 ....................................... 19 19 Additional paid-in capital ..................................... 59,196 59,094 Retained earnings (deficit) .................................... (25,092) (25,732) Treasury stock - at cost - 1,313 shares ....................... (6,433) (6,433) -------- -------- Total Stockholders' Equity ......................................... 33,690 32,948 -------- -------- Total Liabilities and Stockholders' Equity ......................... $ 65,375 $ 64,058 ======== ========
See notes to condensed consolidated financial statements. 2 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended July 31, July 31, ------------------------- ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (000's omitted, except per share data) Net revenues ................................................... $ 26,852 $ 33,054 $ 51,298 $ 54,308 Cost of goods sold ............................................. 20,530 26,794 39,293 42,640 -------- -------- -------- -------- Gross profit ................................................... 6,322 6,260 12,005 11,668 Licensing income ............................................... 1,307 468 2,339 858 -------- -------- -------- -------- 7,629 6,728 14,344 12,526 Operating expenses: Selling, general and administrative expenses ................... 7,277 8,932 13,069 16,078 Special charges ................................................ 89 1,166 186 1,166 -------- -------- -------- -------- 7,366 10,098 13,255 17,244 Operating income (loss) ........................................ 263 (3,370) 1,089 (4,718) Other expenses: Interest expense - net ......................................... 389 368 900 650 Equity (income) loss in joint venture .......................... (336) 221 (486) 337 -------- -------- -------- -------- 53 589 414 987 -------- -------- -------- -------- Income (loss) before income taxes .............................. 210 (3,959) 675 (5,705) Provision (benefit) for income taxes ........................... 35 (868) 35 (1,436) -------- -------- -------- -------- Net income (loss) ............................................. $ 175 $ (3,091) $ 640 $ (4,269) ======== ======== ======== ======== Earnings (loss) per common share: Basic ................................................. $ 0.01 $ (.17) $ 0.03 $ (.24) ======== ======== ======== ======== Diluted ............................................... $ 0.01 $ (.17) $ 0.03 $ (.24) ======== ======== ======== ======== Weighted average number of common shares outstanding: Basic ................................................. 19,252 17,891 19,220 17,664 ======== ======== ======== ======== Diluted ............................................... 21,737 17,891 21,760 17,664 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 3 Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Six Months Ended July 31, 2000 (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 January 31, 2000 .................. 19,209 $ 19 $ 6,000 $ 59,094 $(25,732) $ (6,433) $ 32,948 Issuance of common stock to retirement plan .. 102 -- -- 102 -- -- 102 Net income ................................... -- -- -- -- 640 -- 640 -------- -------- -------- -------- -------- -------- -------- Balance at July 31, 2000 ..................... 19,311 $ 19 $ 6,000 $ 59,196 $(25,092) $ (6,433) $ 33,690 ======== ======== ======== ======== ======== ======== ========
See notes to condensed consolidated financial statements. 4 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended ---------------------- July 31, July 31, 2000 1999 ---------------------- (000's omitted) OPERATING ACTIVITIES: Net cash provided (used) in operating activities ... $ 529 $(2,295) ---------------------- INVESTING ACTIVITIES: Purchases of property and equipment ........... (689) (1,437) ---------------------- Net cash used in investing activities .............. (689) (1,437) ---------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants ................................ -- 98 Capital lease and unsecured loan .............. -- 3,471 Capital lease reduction ....................... (456) (358) Revolving notes payable - bank ................ 1,201 275 ---------------------- Net cash provided by financing activities .......... 745 3,486 ---------------------- INCREASE (DECREASE) IN CASH ........................ 585 (246) Cash at beginning of period ........................ 643 598 ---------------------- Cash at end of period .............................. $ 1,228 $ 352 ====================== Interest paid ...................................... 905 693 ====================== Taxes paid (refunded) .............................. (27) (1,982) ======================
See notes to condensed consolidated financial statements. 5 Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (dollars are in thousands) July 31, 2000 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 six-month periods ended July 31, 2000 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, 2000. NOTE B -- FINANCING AGREEMENTS On October 28, 1999, the Company entered into a new two-year $35 million revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc. ("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 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. On January 31, 2000 the Company was in default of certain covenants of its Line of Credit and obtained a waiver that exempted the Company from compliance with the financial covenants unless a further deterioration of the Company's financial condition occurred. In addition, the waiver established the commitment that Rosenthal and the Company would establish mutually agreeable financial covenants within a reasonable time. Rosenthal and the Company agreed to the new financial covenants, which became effective on June 1, 2000, and the Company is currently in compliance with these covenants. At July 31 and January 31, 2000, borrowings under the Line of Credit totaled $15 million and $13.8 million, respectively, which were secured against factored receivables and inventory. Interest paid to Rosenthal during the six months ended July 31, 2000 was $0.8 million. The borrowings bore interest at 8.75%, which rate is subject to an increase or decrease based on the terms of the agreement as stated above. At July 31 and January 31, 2000, the Company had $0.3 million and $0.2 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 PER SHARE Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period (including a provision for common shares to be issued in connection with the settlement agreement, See Note D-Commitments and Contingencies). Diluted earnings per share calculation includes, the basic shares from above and the impact of the exercise of stock options, warrants and the conversion of the preferred shares to be issued in connection with the settlement agreement, in each of the periods which would result in a dilutive effect. 6 NOTE C -- EARNINGS PER SHARE - Continued The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
Three Months Ended July 31, Six Months Ended July 31, -------------------------- -------------------------- 2000 1999 2000 1999 -------------------------- -------------------------- (000's omitted) Basic ................................... 19,252 17,891 19,220 17,664 Effect of assumed conversions of employee stock options ......................... 115 -- 170 -- Effect of assumed conversions of preferred stock ....................... 2,370 -- 2,370 -- -------------------------- -------------------------- Diluted ................................. 21,737 17,891 21,760 17,664 ========================== ==========================
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. On or about January 31, 2000, the Company entered into a settlement agreement with the plaintiffs to settle the class action for total consideration of $10 million, payable in a combination of $4.0 million in cash and shares of the Company's common stock and convertible preferred stock. On July 7, 2000 a hearing was conducted by the court and on July 12, 2000, the court entered a final Judgment and Order of Dismissal approving the settlement. On or before October 1, 2000, the Company is required to make the final cash payment of $1.0 million. On August 4, 1999, the staff of the Securities and Exchange Commission 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 have been raised and that were the subject of an investigation of the Special Committee of the Company's Board of Directors. In connection with the Company's acquisition of Michael Caruso & Co., Inc ("Caruso") in September 1998, the Company made certain representations and warranties concerning, among other things, its financial statements which could result in a claim being made by the former stockholders of Caruso against the Company. The Company is unable to determine the amount of the liability, if any, which could arise if any claim were made by such stockholders. The Company is also 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 -- 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 was to market and distribute apparel under the BONGO and CANDIE'S labels. The Company and Sweet each have a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licensed the CANDIE'S and BONGO trademarks to Unzipped for use in the design, manufacture and sale of certain designated apparel products. As of January 31, 2000, the Company believed that Unzipped was in breach of certain provisions of the agreements among the parties, and notified Unzipped that the Company did not intend to contribute any additional capital toward the joint venture. The Company believed that its exposure related to Unzipped, should the joint venture dissolve, was adequately provided for at January 31, 2000. Subsequently, the Company resolved its disputes with Unzipped, and formalized the termination of the Candie's license. 7 NOTE E -- INVESTMENT IN JOINT VENTURE - Continued The Company's share of joint venture income for the period ended July 31, 2000 was $0.5 million, based upon Unzipped's unaudited financial statements. As of July 31 and January 31, 2000, approximately $2.2 million and $2.5 million, respectively, of the Company's retained deficit represented the Company's proportionate share of the Unzipped losses. 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 registered 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. The Company recorded royalty income from the joint venture of $0.5 million and $0.8 million for the three months and six months ended July 31, 2000, and $0.2 million and $0.4 million for the three months and six months ended July 31, 1999, respectively. At July 31, 2000, the receivable balance from Unzipped was approximately $1.0 million compared to $1.2 million as of July 31, 1999. 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. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Results of Operations Revenues. For the three months ended July 31,2000. Net revenues decreased by $6.2 million or 18.8% to $26.9 million, from $33.1 million in the comparable period of the prior year. The decline in revenue, primarily in the areas of Candie's women's, kids and unbranded merchandise, was due in part to the Company's decision to focus on higher margin sales over greater volume, plus with respect to Candie's women's merchandise, a shift of Fall product deliveries by the Company's customers to the third fiscal quarter. Also contributing to the revenue decline was the discontinuance of the Company's handbag line, which was licensed May 2000. For the six months ended July 31,2000. Net revenues decreased by $3.0 million or 5.5% to $51.3 million, from $54.3 million in the comparable period of the prior year. The decline in revenue, primarily in the areas of kids and unbranded merchandise, was due in part to the Company's decision to focus on higher margin sales over greater volume. Candie's women's sales were flat when compared to the comparitive period last year. Also contributing to the revenue decline was the discontinuance of the Company's handbag line, which was licensed May 2000. Gross Profit. For the three months ended July 31,2000. Gross profit margins increased to 23.5% from 18.9% in the comparable period of the prior year. The increase was primarily attributable to improved inventory management and reductions in sales returns and allowances. For the six months ended July 31,2000. Gross profit margins increased to 23.4% from 21.5% in the comparable period of the prior year. The increase was primarily attributable to improved inventory management and reductions in sales returns and allowances realized primarily in the quarter ended July 31, 2000. Licensing Income For the three months ended July 31,2000. Licensing income increased by $0.8 million or 179.3% to $1.3 million from $0.5 million in the comparable period of the prior year. The increase was due to increased sales from existing licenses and, to a lesser extent, the addition of a new license. For the six months ended July 31,2000. Licensing income increased by $1.4 million or 172.6% to $2.3 million from $0.9 million in the comparable period of the prior year. The increase was due to increased sales from existing licenses and, to a lesser extent, the addition of a new license. Operating Expenses For the three months ended July 31,2000. Selling and administrative expenses decreased by $1.6 million or 18.5% to $7.3 million from $8.9 million in the comparable period of the prior year. The decreases in operating expenses were attributable to the Company's expense reduction initiatives and increased licensee contribution to the costs of the Company's marketing campaigns. These decreases were partially offset by increased retail store expenses associated with the increased number of operating locations. Special charges decreased by $1.1 million or 92.4% to $0.1 million from $1.2 million in the comparable period of the prior year. The special charges were professional fees relating to the special investigation of the Company conducted in the prior year. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued For the six months ended July 31,2000. Selling and administrative expenses decreased by $3.0 million or 18.7% to $13.1 million from $16.1 million in the comparable period of the prior year. The decreases in operating expenses were attributable to the Company's expense reduction initiatives and increased licensee contribution to the costs of the Company's marketing campaigns. These decreases were partially offset by increased retail store expenses associated with the increased number of operating locations. Special charges decreased by $1.0 million or 84.1% to $0.2 million from $1.2 million in the comparable period of the prior year. The special charges were professional fees relating to the special investigation of the Company conducted in the prior year. Interest Expense. For the three months ended July 31,2000. Interest expense increased 5.7% or $21,000 from the comparative period of the prior year. This increase resulted primarily from higher interest rates in the current period as average outstanding borrowings were relatively consistent with the prior year. For the six months ended July 31,2000. Interest expense increased $250 thousand or 38.5% to $0.9 million from $0.6 million in the comparable period of the prior year. This increase was the result of increased borrowings (primarily in the first quarter) at higher rates over the comparable period in the prior year. Equity Income (Loss) in Joint Venture For the three months ended July 31,2000. Income in joint venture increased by $0.6 million to $0.3 million from a $0.3 million loss in the comparable period of the prior year. The increase was due to increased sales of the Company's apparel products. For the six months ended July 31,2000. Income in joint venture increased by $0.8 million to $0.5 million from a $0.3 million loss in the comparable period of the prior year. The increase was due to increased sales of the Company's apparel products. Income Taxes. For the three and six months ended July 31,2000. The income tax provision for the quarter and year to date were offset by a reduction in the valuation reserve established in the prior year. As a result, only minimum state tax obligations were recorded for the period ended July 31, 2000. Net Income. For the three months ended July 31,2000. As a result of the foregoing, the Company achieved net income of $0.2 million, compared to net loss of $3.1 million in the corresponding 1999 period. For the six months ended July 31,2000. As a result of the foregoing, the Company achieved net income of $0.6 million, compared to net loss of $4.2 million in the corresponding 1999 period. Liquidity and Capital Resources Working capital at July 31, 2000 increased approximately $1.2 million to $4.7 million from $3.5 million at January 31, 2000, primarily due to the reclassification of certain current liabilities to long term and net income recorded for the six month period ended July 31,2000. At July 31, 2000, the current ratio was 1.2 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 provided by operating activities totaled $0.5 million for the six months ended July 31, 2000, compared to cash used of $2.3 million for the comparable period in 1999. Cash provided from financing activity totaled $0.7 million compared to $ 3.5 million for comparable period last year. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued The increases in cash generated from operating activities resulted from a decrease in inventories, factor and trade receivables and an increase in certain payables. Capital expenditures were $0.7 million during the six months ended July 31,2000, compared to $1.4 million, for the six months ended July 31, 1999. The Company anticipates capital expenditures of approximately $0.7 million primarily for new store openings and website development for the fiscal year ending January 31, 2001. Current Revolving Credit Facility. On October 28, 1999, the Company entered into a new two-year $35 million revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc. ("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 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. On January 31, 2000 the Company was in default of certain covenants of its Line of Credit and obtained a waiver that exempted the Company from compliance with the financial covenants unless a further deterioration of the Company's financial condition occurred. In addition, the waiver established the commitment that Rosenthal and the Company would establish mutually agreeable financial covenants within a reasonable time. Rosenthal and the Company agreed to the new financial covenants which, became effective on June 1, 2000, and the Company is currently in compliance with these covenants. At July 31 and January 31, 2000, borrowings under the Line of Credit totaled $15 million and $13.8 million, respectively, which were secured against factored receivables and inventory. Interest paid to Rosenthal during the six months ended July 31, 2000 was $0.8 million. The borrowings bore interest at 8.75%, which rate is subject to an increase or decrease based on the terms of the agreement as stated above. At July 31 and January 31, 2000, the Company had $0.3 million and $0.2 million, respectively, of outstanding letters of credit. The Company's letters of credit availability are formula based which takes into account borrowings under the Line of Credit, as described above. Other Borrowing Arrangements In May 1999, the Company entered into a $3.5 million master lease agreement with a financial organization. The agreement requires the Company to collateralize property and equipment of $2.4 million, of which $1.4 million had been collateralized as of May 1999, with the remaining balance considered to be an unsecured loan. The term of the agreement is four years. The remaining balance as of July 31, 2000 is $1.4 million. 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 its financing agreement. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 11 PART II. Other Information Item 1. Legal Proceedings 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. On or about January 31, 2000, the Company entered into a settlement agreement with the plaintiffs to settle the class action for total consideration of $10 million, payable in a combination of $4.0 million in cash and shares of the Company's common stock and convertible preferred stock. On July 7, 2000 a hearing was conducted by the court and on July 12, 2000, the court entered a final Judgment and Order of Dismissal approving the settlement. On or before October 1, 2000, the Company is required to make the final cash payment of $1.0 million. On August 4, 1999, the staff of the Securities and Exchange Commission 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 have been raised and that were the subject of an investigation of the Special Committee of the Company's Board of Directors. In connection with the Company's acquisition of Michael Caruso & Co., Inc ("Caruso") in September 1998, the Company made certain representations and warranties concerning, among other things, its financial statements which could result in a claim being made by the former stockholders of Caruso against the Company. The Company is unable to determine the amount of the liability, if any, which could arise if any claim were made by such stockholders. The Company is also 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 six months ended July 31,2000, the Company granted certain of its employees and directors 10 year non-qualified stock options to purchase a total of 717,000 shares of its common stock at process ranging from $0.9688 to $1.2812 per share (an average of $1.1591 per share). A total of 379,500 of the 717,000 options were granted during the three months ended July 31,2000. 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 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27 - Financial Data Schedule (for SEC use only) b. Reports on Form 8-K-None 12 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 September 11, 2000 /s/ Neil Cole --------------------------- ------------------------------------ Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date September 11, 2000 /s/ Richard Danderline --------------------------- ------------------------------------ Richard Danderline Executive Vice President of Finance And Operations 13 Index to Exhibits Exhibit Numbers Description 10.1 Employment agreement dated May 19, 2000 between Candie's Inc. and Richard Danderline 27 Financial Data Schedules (for SEC use only) 14 EX-10.1 2 ex10-1_23606.txt EMPLOYMENT AGREEMENT DATED MAY 19, 2000 BY FAX May 19, 2000 Richard Danderline 429 Valley Road Montclair, NJ 07043 Dear Mr. Danderline: I am pleased to offer you a position as Executive Vice President of Candie's, Inc. ("Candie's"), supporting both operations and finance, commencing as of June 26, 2000. The terms are as follows: 1. The term of your employment will be two years commencing on your first day of employment. This is a guarantee of salary for two years unless you are terminated prior to the end of the Term for cause 2. You will be paid a base salary of $200,000 for the first year and $225,000 for the second year of your employment in accordance with Candie's payroll practices and procedures. 3. You will be paid a bonus for each year of employment, calculated as follows: 1/2 of 1% of the pre-tax profit for every 1% that selling, general and administrative expenses of Candie's decrease as a percentage of revenues from the base year (FY 2001), up to a maximum of $100,000 the first year and $150,000 the second year, but in no event less than $50,000 in each of the two years regardless of performance. For the purposes of calculating your bonus, "selling general and administrative expenses" shall exclude advertising expenses and retail operations, but will include warehousing and distribution expenses. 4. You will be paid a signing bonus of $25,000, payable within 30 days of the date that you commence employment. 5. You will be entitled to a car or car allowance commensurate with other senior executives at Candie's, including reimbursement of all related expenses, including insurance, upon presentation of documentation acceptable to Candie's. 6. In connection with your acceptance of this offer and your joining Candie's as an employee, you will be granted an option to purchase 150,000 shares of Candie's common stock at the closing price of the stock on the date hereof. The shares will vest, if applicable, over five years as follows: 25,000 on the date that you commence employment, 25,000 on the first anniversary date of your employment and 25,000 on the second anniversary of your employment, 25,000 on the third anniversary of your employment, 25,000 on the fourth anniversary of your employment, and 25,000 on the fifth anniversary of your employment. It is understood that all options will vest immediately upon a change of control in the Company, which shall be defined as a cessation of Neil Cole being the Chairman of the Board of the Company in connection with a sale or merger of the Company with a non-affiliate of the Company. 7. You will be entitled to company benefits commensurate with other senior executives of the Company, including vacation, participation in our 401(k) plan, our Oxford medical health plan and life insurance, which shall commence as soon as possible pursuant to the terms thereof. Rich, I am confident you will be an integral part of our management team. Please indicate your acceptance by signing in the space provided below. Candie's Inc. Agreed to and Accepted By: /s/ Neil Cole /s/ Richard Danderline --------------------------- ------------------------------ Neil Cole Richard Danderline Date: May 19, 2000 EX-27 3 0003.txt ART 5. FDS FOR QUARTER ENDED JULY 31, 2000
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT JULY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-31-2001 JUL-31-2000 1,228 0 17,564 0 11,537 34,069 7,305 2,672 65,375 29,333 0 0 4,000 2,019 27,671 65,375 51,298 51,298 39,293 39,293 0 0 900 675 35 640 0 0 0 640 .03 .03 (1) PREFERRED SHARES TO BE ISSUED IN CONNECTION WITH THE LITIGATION SETTLEMENT. (2) INCLUDES COMMON SHARES TO BE ISSUED IN CONNECTION WITH THE LITIGATION SETTLEMENT.
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