10-Q 1 form10-q_24256.txt FORM 10-Q 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, 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 November 30, 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 - October 31, 2000 and January 31, 2000............................................... 2 Condensed Consolidated Statements of Operations - Three and Nine Months Ended October 31, 2000 and 1999........................ 3 Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2000...................................... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 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 ........ 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 .................................................. 13 Item 6. Exhibits and Reports on Form 8-K ................................... 13 Signatures ............................................................... 14 Index to Exhibits........................................................... 15 1 Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries October 31, January 31, Condensed Consolidated Balance Sheets 2000 2000 -------- -------- (Unaudited) (000's omitted, except par value) Assets Current Assets Cash ...................................................................... $ 277 $ 643 Restricted cash ........................................................... -- 2,000 Accounts receivable, net .................................................. 3,726 2,711 Due from factors and accounts receivables, net ............................ 9,561 8,034 Due from affiliate ........................................................ 571 636 Inventories ............................................................... 9,090 14,770 Refundable and prepaid income taxes ....................................... 549 631 Deferred income taxes ..................................................... 2,040 1,448 Prepaid advertising and other ............................................. 1,519 1,622 Other current assets ...................................................... 221 304 -------- -------- Total Current Assets .......................................................... 27,554 32,799 Property and equipment, at cost: Furniture, fixtures and equipment ......................................... 7,691 6,679 Less: Accumulated depreciation and amortization ........................... 2,975 2,124 -------- -------- 4,716 4,555 Other assets: Goodwill, net ............................................................. 2,045 2,152 Intangibles, net .......................................................... 20,626 22,047 Deferred income taxes ..................................................... 1,582 2,174 Other ..................................................................... 196 331 -------- -------- 24,449 26,704 -------- -------- Total Assets .................................................................. $ 56,719 $ 64,058 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks ........................................... $ 11,776 $ 13,764 Litigation settlement ..................................................... -- 4,000 Accounts payable and accrued expenses ..................................... 4,571 6,856 Accounts payable - related party .......................................... 5,039 2,048 Current portion of long-term debt and capital lease obligation ............ 1,151 1,143 Losses in excess of joint venture investment .............................. -- 1,451 -------- -------- Total Current Liabilities ..................................................... 22,537 29,262 -------- -------- Losses in excess of joint venture investment .................................. 767 -- Long-term liabilities and capital lease obligation ............................ 1,150 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 19,341 at October 31, 2000 and 19,209 issued at January 31, 2000 .................................................. 19 19 Additional paid-in capital ................................................ 59,239 59,094 Retained earnings (deficit) ............................................... (26,560) (25,732) Treasury stock - at cost - 1,313 shares .................................. (6,433) (6,433) -------- -------- Total Stockholders' Equity .................................................... 32,265 32,948 -------- -------- Total Liabilities and Stockholders' Equity .................................... $ 56,719 $ 64,058 ======== ========
See notes to condensed consolidated financial statements. 2 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31, ------------------------- ------------------------ 2000 1999 2000 1999 -------- -------- -------- -------- (000's omitted, except per share data) Net revenues ................................................... $ 22,457 $ 22,175 $ 73,755 $ 76,483 Cost of goods sold ............................................. 17,561 18,877 56,854 61,516 -------- -------- -------- -------- Gross profit ................................................... 4,896 3,298 16,901 14,967 Licensing income ............................................... 1,310 1,151 3,649 2,009 -------- -------- -------- -------- 6,206 4,449 20,550 16,976 Operating expenses: Selling, general and administrative expenses ................... 7,427 8,281 20,496 24,359 Special charges ................................................ 1 1,144 187 2,310 -------- -------- -------- -------- 7,428 9,425 20,683 26,669 Operating loss ................................................. (1,222) (4,976) (133) (9,693) Other expenses: Interest expense - net ......................................... 418 307 1,318 958 Equity (income) loss in joint venture .......................... (198) 116 (684) 453 -------- -------- -------- -------- 220 423 634 1,411 -------- -------- -------- -------- Loss before income taxes ....................................... (1,442) (5,399) (767) (11,104) Provision (benefit) for income taxes ........................... 26 346 61 (1,090) -------- -------- -------- -------- Net loss ...................................................... $ (1,468) $ (5,745) $ (828) $(10,014) ======== ======== ======== ======== Loss per common share: Basic ................................................. $ (.08) $ (.32) $ (.04) $ (.56) ======== ======== ======== ======== Diluted ............................................... $ (.08) $ (.32) $ (.04) $ (.56) ======== ======== ======== ======== Weighted average number of common shares outstanding: Basic ................................................. 19,269 17,896 19,237 17,742 ======== ======== ======== ======== Diluted ............................................... 19,269 17,896 19,237 17,742 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 3 Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Nine Months Ended October 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 Issuance of common stock to directors ....... 30 -- -- 43 -- -- 43 Net loss .................................... -- -- -- -- (828) -- (828) ------ -------- -------- -------- -------- -------- -------- Balance at October 31, 2000 ................. 19,341 $ 19 $ 6,000 $ 59,239 $(26,560) $ (6,433) $ 32,265 ====== ======== ======== ======== ======== ======== ========
See notes to condensed consolidated financial statements. 4 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended -------------------------- October 31, October 31, 2000 1999 -------------------------- (000's omitted) OPERATING ACTIVITIES: Net cash provided in operating activities ..................... $ 3,459 $ 3,965 -------------------------- INVESTING ACTIVITIES: Purchases of property and equipment ...................... (1,147) (1,819) -------------------------- Net cash used in investing activities ......................... (1,147) (1,819) -------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants ..... -- 98 Capital lease and unsecured loan ......................... -- 3,471 Capital lease reduction .................................. (690) (574) Revolving notes payable - bank ........................... (1,988) (5,271) -------------------------- Net cash used in financing activities ......................... (2,678) (2,276) -------------------------- DECREASE IN CASH .............................................. (366) (130) Cash at beginning of period ................................... 643 598 -------------------------- Cash at end of period ......................................... $ 277 $ 468 ========================== Interest paid ................................................. $ 1,329 $ 996 ========================== Taxes refunded ................................................ $ (14) $(1,982) ==========================
See notes to condensed consolidated financial statements. 5 Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) October 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 nine-month periods ended October 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. At October 31 and January 31, 2000, borrowings under the Line of Credit totaled $11.8 million and $13.8 million, respectively, which were secured against factored receivables and inventory. Interest paid to Rosenthal during the nine months ended October 31, 2000 was $1.1 million. The borrowings bore interest at 10%, which rate is subject to an increase or decrease based on the terms of the agreement as stated above. At October 31 and January 31, 2000, the Company had $0.5 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 -- LOSS PER SHARE Basic loss per share includes no dilution and is computed by dividing net 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 loss 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 -- LOSS PER SHARE - continued The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
Three Months Ended October 31, Nine Months Ended October 31, ------------------------------ ----------------------------- 2000 1999 2000 1999 ------------------------------ ----------------------------- (000's omitted) Basic ...................................................... 19,269 17,896 19,237 17,742 Effect of assumed conversions of employee stock options .... -- -- -- -- Effect of assumed conversions of preferred stock ........... -- -- -- -- ------------------------------ ----------------------------- Diluted .................................................... 19,269 17,896 19,237 17,742 ============================== =============================
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 the court conducted a hearing, and on July 12, 2000, the court entered a final Judgment and Order of Dismissal approving the settlement. The Company made the final cash payment on October 30, 2000. 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 were the subject of an investigation of the Special Committee of the Company's Board of Directors. In December 2000 an action for breach of contract and breach of the duty of good faith and fair dealing was commenced against the Company and one of its subsidiaries in the United States District Court for the Southern District of New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano. The plaintiffs' allege that the Company breached certain representations contained in the September 24, 1998 Stock Purchase Agreement pursuant to which the defendants acquired the capital stock of the entity that owned the Bongo trademark. The plaintiffs are seeking to recover unspecified compensatory damages and costs, including attorneys' fees, and to rescind the Stock Purchase Agreement and related acquisition. The Company, which intends to vigorously defend the action, believes it has defenses available to it and that any remedy for rescission is unavailable. The Company is presently unable to assess the financial impact, if any, on the Company as a result of this action. 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 the pending litigation incurred in the normal course of business 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 7 NOTE E -- INVESTMENT IN JOINT VENTURE -continued 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, which resolution included, among other things, the formal termination of the Candie's license to Unzipped. The Company's share of joint venture income for the three months and nine months ended October 31, 2000 was $0.2 million and $0.7 million, respectively, based upon Unzipped's unaudited financial statements. As of October 31 and January 31, 2000, approximately $1.9 million and $2.5 million, respectively, of the Company's retained deficit represented the Company's proportionate share of Unzipped's 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 $0.3 million and $1.1 million for the three months and nine months ended October 31, 2000, respectively, and $0.3 million and $0.8 million for the three months and nine months ended October 31, 1999, respectively. At October 31, 2000, the receivable balance from Unzipped was approximately $571,000. 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 and market new products successfully, 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 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 done so historically. The Company continues to seek to 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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 Revenues. For the three months ended October 31, 2000. Net revenues increased by $0.3 million or 1.4% to $22.5 million, from $22.2 million in the comparable period of the prior year. The increase in revenue, primarily in the areas of Candie's and Bongo women's footwear of $3.0 million and unbranded merchandise of $0.6 million, reflects a shift of Fall product deliveries by the Company's customers from the second to the third fiscal quarter as well as continued consumer acceptance of the Company's brands. Retail store sales increased by $0.6 million, primarily as the result of new locations that were added in the current year. Deductions for returns and allowances decreased $0.6 million, primarily as a result of operating improvements targeting this area. Partially offsetting the increases noted above was a decrease in the Company's private label men's division of $2.1 million, the discontinuance of the Company's handbag line, which was licensed in May 2000, that resulted in a sales decrease of $1.6 million, and a decrease in the Company's sales of kids' merchandise of $0.8 million. For the nine months ended October 31, 2000. Net revenues decreased by $2.7 million or 3.5% to $73.8 million, from $76.5 million in the comparable period of the prior year. The declines in revenue in the areas of kids' footwear of $3.1 million and unbranded merchandise of $0.7 million, were due in part to the Company's decision to focus on higher margin sales over greater volume. Also contributing to the revenue decline was the discontinuance of the Company's handbag line, which was licensed in May 2000, that resulted in a sales decrease of $1.3 million. The Company's private label men's division decreased by $3.1 million as a result of buying cutbacks from two significant customers. Partially offsetting the declines were increases in Candie's and Bongo women's sales of $3.2 million, reflecting continued consumer acceptance of the Company's brands. Retail store sales increased by $1.3 million, primarily as the result of additional stores added in the current year. Deductions for returns and allowances decreased $1.0 million primarily as a result of operating improvements targeting this area. Gross Profit. For the three months ended October 31, 2000. Gross profit margins increased to 21.8% from 14.9% 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 nine months ended October 31, 2000. Gross profit margins increased to 22.9% from 19.6% in the comparable period of the prior year. The increase was primarily attributable to improved inventory management and reductions in sales returns and allowances. Licensing Income For the three months ended October 31, 2000. Licensing income increased by $0.2 million or 13.8% to $1.3 million from $1.1 million in the comparable period of the prior year. The increase was due to increased sales from existing licenses granted to the Company and, to a lesser extent, the granting of a new license. For the nine months ended October 31, 2000. Licensing income increased by $1.6 million or 81.6% to $3.6 million from $2 million in the comparable period of the prior year. The increase was due to increased sales from existing licenses granted to the Company and, to a lesser extent, the granting of a new license. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Operating Expenses For the three months ended October 31, 2000. Selling and administrative expenses decreased by $0.9 million or 10.3% to $7.4 million from $8.3 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 99.9% from the comparable period of the prior year. The special charges were comprised of professional fees relating to the special investigation of the Company conducted in the prior year. For the nine months ended October 31, 2000. Selling and administrative expenses decreased by $3.9 million or 15.9% to $20.5 million from $24.4 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 $2.1 million or 91.3% to $0.2 million from $2.3 million in the comparable period of the prior year. The special charges were comprised of professional fees relating to the special investigation of the Company conducted in the prior year. Interest Expense, net For the three months ended October 31, 2000. Interest expense net, increased $0.1 million or 36.2% from the comparable period of the prior year. This increase resulted primarily from an increase in the average outstanding borrowings as well as interest rates that were higher in the current period than in the comparable period for the prior year. For the nine months ended October 31, 2000. Interest expense net, increased $0.4 million or 37.6% to $1.3 million from $0.9 million in the comparable period of the prior year. This increase resulted primarily from an increase in the average outstanding borrowings as well as interest rates that were higher in the current period than in the comparable period for the prior year. Equity Income (Loss) in Joint Venture For the three months ended October 31, 2000. Income in joint venture increased by $0.3 million to $0.2 million from a $0.1 million loss in the comparable period of the prior year. The increase was due to increased sales of the Company's apparel products, which increase was partially offset by an increase in sales returns in the current period. For the nine months ended October 31, 2000. Income in joint venture increased by $1.1 million to $0.7 million from a $0.4 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 nine months ended October 31, 2000. As the result of losses for both the three and nine month periods, only minimum state tax obligations were recorded. Net Loss. For the three months ended October 31, 2000. As a result of the foregoing, the Company's net loss in the current period was $1.5 million, compared to net loss of $5.7 million in the corresponding 1999 period. For the nine months ended October 31, 2000. As a result of the foregoing, the Company's net loss in the current period was $0.8 million, compared to net loss of $10.0 million in the corresponding 1999 period. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Liquidity and Capital Resources Working capital at October 31, 2000 increased approximately $1.5 million to $5.0 million from $3.5 million at January 31, 2000, primarily due to the reclassification of certain current liabilities to long term and certain long term assets to current, which was partially offset by the net loss recorded for the nine months ended October 31, 2000. At October 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 $3.4 million for the nine months ended October 31, 2000, compared to $4 million for the comparable period in 1999. Cash used in financing activities totaled $2.6 million compared to $2.3 million for the comparable period last year. The cash generated from operating activities resulted primarily from a decrease in inventories. Capital expenditures were $1.1 million during the nine months ended October 31, 2000, compared to $1.8 million for the nine months ended October 31, 1999. The Company anticipates capital expenditures of approximately $0.6 million primarily relating to 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. At October 31 and January 31, 2000, borrowings under the Line of Credit totaled $11.8 million and $13.8 million, respectively, which were secured against factored receivables and inventory. Interest paid to Rosenthal during the nine months ended October 31, 2000 was $1.1 million. The borrowings bore interest at 10%, which rate is subject to an increase or decrease based on the terms of the agreement as stated above. At October 31 and January 31, 2000, the Company had $0.5 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 October 31, 2000 is $2.3 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 the court conducted a hearing, and on July 12, 2000, the court entered a final Judgment and Order of Dismissal approving the settlement. The Company made the final cash payment on October 30, 2000. 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 were the subject of an investigation of the Special Committee of the Company's Board of Directors. In December 2000 an action for breach of contract and breach of the duty of good faith and fair dealing was commenced against the Company and one of its subsidiaries in the United States District Court for the Southern District of New York by Michael Caruso, as trustee of the Claudio Trust, and Gene Montesano. The plaintiffs' allege that the Company breached certain representations contained in the September 24, 1998 Stock Purchase Agreement pursuant to which the defendants acquired the capital stock of the entity that owned the Bongo trademark. The plaintiffs are seeking to recover unspecified compensatory damages and costs, including attorneys' fees, and to rescind the Stock Purchase Agreement and related acquisition. The Company, which intends to vigorously defend the action, believes it has defenses available to it and that any remedy for rescission is unavailable. The Company is presently unable to assess the financial impact, if any, on the Company as a result of this action. 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 the pending litigation incurred in the normal course of business 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, 2000, the Company granted certain of its employees and directors 10 year non-qualified stock options to purchase a total of 620,500 shares of its common stock at prices ranging from $1.00 to $1.25 per share (an average of $1.106 per share). The 620,500 stock options were unregistered. 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 18, 2000 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 2000 Stock Option Plan which provides for the grant of options to purchase up to 2,000,000 shares of the Company's common stock. The results of the vote were as follows: Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Peter Siris and Mark Tucker 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. 12 PART II. Other Information - continued Item 4. Submission of Matters to a Vote of Security Holders. - continued The votes cast by stockholders with respect to the election of Directors were as follows: Votes Cast Votes Director "For" Withheld -------- ----- -------- Neil Cole 13,264,158 939,918 Barry Emanuel 13,338,882 865,194 Steven Mendelow 13,358,628 845,448 Peter Siris 13,354,658 849,418 Mark Tucker 13,344,767 859,309 The Company's 2000 Stock Option Plan was approved by the stockholders. The votes cast by stockholders with respect to the 2000 Stock Option Plan were as follows: Votes Cast "For" Votes Cast "Against" Votes "Abstaining" ---------------- -------------------- ------------------ 2,999,989 1,350,606 89,290 In addition, there were 9,764,191 "broker non-votes" with respect to the proposal to adopt the Company's 2000 Stock Option Plan. Item 5. Other Information. The Company has recently been notified by Nasdaq that its common stock is trading below the $1.00 bid price requirement necessary for continued trading on Nasdaq and Nasdaq has given the Company 90 days from the notification date to regain compliance. The Company's common stock must trade at or above the $1.00 bid price for the period of time required by Nasdaq to maintain its listing. The Company believes that it has alternatives available to it to obtain compliance with the Nasdaq requirements within the 90 day period. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 10.1 - Candie's Inc. 2000 Stock Option Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated July 18, 2000 contained in the Company's Schedule 14A filed with the SEC on July 18, 2000). Exhibit 27 - Financial Data Schedule (for SEC use only) b. Reports on Form 8-K-None 13 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: December 14, 2000 by: /s/ Neil Cole -------------------- -------------------------------- Neil Cole Chairman of the Board, President and Chief Executive Officer Date: December 14, 2000 by: /s/ Richard Danderline -------------------- -------------------------------- Richard Danderline Executive Vice President of Finance and Operations 14 Index to Exhibits Exhibit Numbers Description ------- ----------- 10.1 Candie's Inc. 2000 Stock Option Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated July 18, 2000 contained in the Company's Schedule 14A filed with the SEC on July 18, 2000). 27 Financial Data Schedule (for SEC use only) 15