-----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, CI9z2YdRFul2qOMYcztjfWoV9SwhLtM6FrAzseit2Wh940D0kicUq3Vplp3BMQXP GT/b2yub0Yq8V/F09r6vkA== 0000891554-99-001821.txt : 19990923 0000891554-99-001821.hdr.sgml : 19990923 ACCESSION NUMBER: 0000891554-99-001821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [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: 99714866 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 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 April 30, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________ Commission file number 0-10593 CANDIE'S, INC. (Exact name of registrant as specified in its charter) Delaware 11-2481903 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2975 Westchester Avenue Purchase, NY 10577 (Address of principal executive offices) (Zip Code) (914) 694-8600 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.001 Par Value -- 17,897,166 shares as of September 7, 1999 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, 1999 and January 31, 1999............ 3 Condensed Consolidated Statements of Operations - Three Months Ended April 30, 1999 and 1998.......................................................... 4 Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended April 30, 1999......................................................................... 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30, 1999 and 1998.......................................................................... 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......................... 14 Part II. Other Information Item 1. Legal Proceedings.................................................................. 15 Item 2. Changes in Securities.............................................................. 15 Item 6. Exhibits and Reports on Form 8-K................................................... 15 Signatures ............................................................................... 16 Index to Exhibits........................................................................... 17
2 Part I. Financial Information Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
April 30, January 31, 1999 1999 --------- ---------- (Unaudited) (000's omitted, except par value) Assets Current Assets Cash ....................................................... $ 741 $ 598 Accounts receivable, net ................................... 3,785 2,774 Due from affiliate ......................................... 861 796 Due from factors and trade receivables ..................... 12,882 15,138 Inventories ................................................ 17,619 19,031 Refundable and prepaid income taxes ........................ 2,536 2,623 Deferred income taxes ...................................... 2,598 2,598 Prepaid advertising and other .............................. 2,253 1,182 Other current assets ....................................... 272 476 -------- -------- Total Current Assets ............................................. 43,547 45,216 Property and equipment, at cost: Furniture, fixtures and equipment .......................... 4,483 3,860 Less: Accumulated depreciation and amortization ............ 1,453 1,258 -------- -------- 3,030 2,602 Other assets: Intangibles, net ........................................... 25,680 26,179 Deferred income taxes ...................................... 433 -- Investment and equity in joint venture - net ............... -- 51 Other ...................................................... 516 552 -------- -------- 26,629 26,782 -------- -------- Total Assets ..................................................... $ 73,206 $ 74,600 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks ............................ $ 13,252 $ 16,874 Accounts payable and accrued expenses ...................... 4,501 4,416 Accounts payable - Redwood Shoe ............................ 4,252 943 Losses in excess of joint venture investment ............... 65 -- Current portion of long-term liabilities and capital lease obligation ............................ 97 97 -------- -------- Total Current Liabilities ........................................ 22,167 22,330 Long-term liabilities and deferred taxes ......................... 194 421 Stockholders' Equity Preferred stock, $.01 par value -- authorized 5,000 shares; none issued and outstanding Common stock, $.001 par value -- authorized 30,000 shares; issued 19,129 shares at April 30, 1999 and 18,525 shares issued at January 31, 1999 .................................. 19 18 Additional paid-in capital ................................. 58,992 58,819 Retained earnings (deficit) ................................ (1,734) (556) Treasury stock - at cost - 1,313 shares .................... (6,432) (6,432) -------- -------- Total Stockholders' Equity ....................................... 50,845 51,849 -------- -------- Total Liabilities and Stockholders' Equity ....................... $ 73,206 $ 74,600 ======== ========
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, 1999 1998 -------- -------- (000's omitted, except per share data) (Restated) Net revenues ........................................ $ 21,254 $ 23,358 Cost of goods sold .................................. 15,846 17,109 -------- -------- Gross profit ........................................ 5,408 6,249 Licensing income .................................... 390 -- -------- -------- . ................................................... 5,798 6,249 Selling, general and administrative expenses ........ 7,146 5,338 -------- -------- Operating (loss) income ............................. (1,348) 911 Other expenses: Interest expense - net ......................... 282 274 Equity loss in joint venture ................... 116 -- -------- -------- 398 274 -------- -------- (Loss) income before income taxes ................... (1,746) 637 Provision (benefit) for income taxes ................ (568) 255 -------- -------- Net (loss) income ................................... $ (1,178) $ 382 ======== ======== (Loss) earnings per common share: Basic .................................... $ (.07) $ .03 ======== ======== Diluted .................................. $ (.07) $ .02 ======== ======== Weighted average number of common shares outstanding: Basic .................................... 17,430 13,656 ======== ======== Diluted .................................. 17,430 16,015 ======== ========
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, 1999 (000's omitted)
Additional Retained Common Stock Paid-In Earnings Treasury Shares Amount Capital (Deficit) Stock Total ------------------------------------------------------------------ Balance at January 31, 1999 .................................. $ 18,525 $ 18 $ 58,819 $ (556) $ (6,432) $ 51,849 Exercise of stock options ................................ 19 -- 31 -- -- 31 Issuance of common stock to retirement plan .............. 37 -- 129 -- -- 129 Additional contingent shares issued for the Acquisition of Michael Caruso & Co., Inc. .......... 548 1 (1) -- -- 0 Tax benefit from exercise of stock options ............... -- -- 14 -- -- 14 Net loss ................................................. -- -- -- (1,178) -- (1,178) -------- -------- -------- -------- -------- -------- Balance at April 30, 1999 .................................... $ 19,129 $ 19 $ 58,992 $ (1,734) $ (6,432) $ 50,845 ======== ======== ======== ======== ======== ========
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, 1999 1998 ------------------ (000's omitted) OPERATING ACTIVITIES: Net cash provided by (used in) operating activities ...... $ 4,397 $(8,435) ------------------ INVESTING ACTIVITIES: Purchases of property and equipment ................. (623) (190) ------------------ Net cash used in investing activities .................... (623) (190) ------------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants 31 8,277 Capital lease reduction ............................. (40) -- Revolving notes payable - bank ...................... (3,622) -- ------------------ Net cash (used in) provided by financing activities ...... (3,631) 8,277 ------------------ INCREASE (DECREASE) IN CASH .............................. 143 (348) Cash at beginning of period .............................. 598 367 ------------------ Cash at end of period .................................... $ 741 $ 19 ================== See notes to condensed consolidated financial statements. 6 Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (dollars are in thousands) April 30, 1999 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, 1999 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, 1999. NOTE B -- FINANCING AGREEMENTS At April 30 and January 31, 1999, the Company had $280 and $1,174, respectively, of outstanding letters of credit. The Company's letters of credit availability are formula based which takes into account borrowings under the Facility, as described below. On May 27, 1998, the Company entered into a three year $35 million revolving credit facility (the "Facility"). Under certain conditions, including the addition of a second lender, the Facility may increase to a maximum of $50 million. On August 4, 1998, BankBoston, N.A. entered into a co-lending arrangement and became a participant in the Facility with Bank of America Commercial Corporation. Prior to January 31, 1999, borrowings under the Facility, which totaled $16,874 at January 31, 1999, bore interest at 1.50% below the prime rate (7.75% at January 31, 1999) and the Company also had the option to borrow at either LIBOR plus 1.25% or the banker's acceptance rate plus 1%. These rates were fixed and subject to an increase or decrease based on certain conditions beginning in November 1998. Effective January 31, 1999 the Facility was amended and borrowings under the Facility bear interest at .25% below the prime rate (7.75% at January 31, 1999). The Company pays a commitment fee of 1/4% on the unused portion of the Facility. Borrowings under the Facility are formula based and available up to the maximum amount of the Facility. The Facility also contains certain financial covenants including, minimum tangible net worth, certain specified ratios and other limitations, as defined therein. The Company has granted the lenders a security interest in substantially all of its assets. The Company is in default of certain covenants of its Facility and the lenders have indicated their desire to terminate the Facility arrangement. The lenders have been extending the due date of the Facility by issuing periodic forbearance agreements to the Company. The current forbearance agreement is through October 30, 1999. The Company received a commitment from a new institution to refinance the Facility and expects to consummate the new financing shortly. 7 NOTE C -- EARNINGS PER SHARE Basic earnings per share includes no dilution and is computed by dividing net (loss) income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share: April 30, ---------------- 1999 1998 ---------------- (000's omitted) Basic......................................................... 17,430 13,656 Effect of assumed conversions of employee stock options....... -- 2,359 ---------------- Denominator for diluted earnings per share.................... 17,430 16,015 ================ NOTE D -- SEGMENT INFORMATION Effective February 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position. The Company has one reportable segment that is engaged in the manufacture and marketing of branded footwear, including casual shoes and boots to the retail sector. Revenues of this segment are derived from the sale of branded footwear products to external customers and the Company's retail division as well as royalty income from the licensing of the Company's trademarks and brand names to licensees. The business units comprising the branded footwear segment manufacture or source, market and distribute products in a similar manner. Branded footwear is distributed through wholesale channels and under licensing and distributor arrangements. The Company measures segment profits as earnings before income taxes. The accounting policies used to determine profitability and total assets of the branded footwear segment are the same as disclosed in the summary of significant accounting policies (see Note 1, Summary of Significant Accounting Policies). 8 NOTE E -- RESTATEMENT During the course of the audit of the Company's financial statements for the year ended January 31, 1999, and the re-audit of the financial statements for the year ended January 31, 1998, the Company became aware of certain required adjustments primarily in inventory and accounts receivable/due from factor balances as of April 30, 1998. The financial statements for the quarter ended April 30, 1998 have been restated to reflect these adjustments, as summarized below: Net income, as previously reported . $ 1,056 ------- Adjustments - Increase (Decrease): Inventory valuation ........... 550 Revenues (gross profit effect) (21) Receivable reserves ........... (1,678) Other ......................... 30 Tax effect on these adjustments 445 ------- (674) ------- Net income, as adjusted ............ $ 382 ======= Per share amounts: Basic: As previously reported ........ $ .08 Adjustments ................... (.05) ------- As adjusted ................... $ .03 ======= Diluted: As previously reported ........ $ .07 Adjustments ................... (.05) ------- As adjusted ................... $ .02 ======= NOTE F -- COMMITMENTS AND CONTINGENCIES Several lawsuits have recently been filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York. There can be no assurance that the Company will successfully defend these lawsuits. 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 includes claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The consolidated complaint is brought on behalf of all persons who acquired securities of the Company between May 28, 1997 and May 12, 1999, and alleges that the plaintiffs were damaged by reason of the Company's having issued materially false and misleading financial statements for Fiscal 1998 and the first three quarters of Fiscal 1999, which caused the Company's securities to trade at artificially inflated prices. An unfavorable resolution of this action could have a material adverse effect on the business, results of operations, financial condition or cash flows of the Company. 9 On August 4, 1999, the staff of the Securities and Exchange Commission advised the Company that it had commenced a formal investigation into the Company's actions in connection with certain accounting issues and transactions. 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. NOTE G -- SUBSEQUENT EVENT 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 agreement balance considered to be an unsecured loan. The agreement's term is for a period of four years. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements which are not historical facts contained in this Quarterly Report on Form 10-Q are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to successfully develop and market new products particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties 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 risk of litigation, the risks of uncertainty of trademark protection, year 2000 compliance, the uncertainty of marketing and licensing the trademarks acquired during Fiscal 1999 and other risks detailed below and in the Company's Securities and Exchange Commission filings. The words "believe", "expect", "anticipate", and "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Results of Operations Revenues. Net revenues decreased by $2.1 million or 10% to $21.3 million in the three months ended April 30, 1999, from $23.4 million in the comparable restated period of the prior year. The decrease was primarily due to decreased wholesale volume with department stores. Gross Profit. Gross profit margins decreased to 25.4% in the three months ended April 30, 1999 from 26.7% in the comparable period of the prior year. The decrease was primarily attributable to lower wholesale revenue and higher private label business at lower margins. Operating Expenses. Selling and administrative expenses increased by $1.8 million or 33.9% to $7.1 million in the three months ended April 30, 1999 from $5.3 million in the comparable period of the prior year. As a percentage of net revenues, selling and administrative expenses increased 10.8% to 33.6% for the three months ended April 30, 1999 from 22.8% for the comparable period of the prior year. These increases reflect costs which are directly associated with implementation of the Company's strategic plan to strengthen its management team and infrastructure, the expansion outside of its core footwear products to include, handbags, international distribution channels and the growth of licensing as well as increased intangible amortization relating to the Company's Fiscal 1999 acquisitions. Interest Expense. Interest expense for the three months ended April 30, 1999 was $282,000, compared to $274,000 for the comparable period in the previous year. Net (loss) Income. As a result of the foregoing, the Company sustained a net loss of $1.2 million in the three months ended April 30, 1999, compared to net income of $382,000 in the corresponding 1998 period. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Results of Operations -Continued (Loss) Earnings Per Share. The loss per share in the three months ended April 30, 1999 was $(.07) on a basic and diluted basis, which reflects an additional 3.8 million weighted average shares outstanding, compared to net income of $.02 per diluted share in the comparable quarter of the prior year. The increase in the weighted average shares outstanding for the three month period ended April 30, 1999 is primarily the result of the shares issued in connection with the Company's Fiscal 1999 acquisitions Liquidity and Capital Resources Working capital decreased approximately $1.5 million to $21.4 million at April 30, 1999 from $22.9 million at January 31, 1999, primarily due to the net loss for the period. At April 30, 1999, the current ratio was 2.0 to 1. The Company has relied in the past primarily upon revenues generated from operations, borrowings from its factor and sales of securities to finance its liquidity and capital needs. Net cash provided by operating activities totaled $4.3 million for the three months ended April 30, 1999, compared to cash used of $8.4 million for the three months ended April 30, 1998. This change primarily reflects the change in the Company's agreements with its factor in fiscal 1999. This resulted in the grossing up of advances from the factor and amounts borrowed under the factoring and financing agreements compared to the prior period when these amounts were netted. Capital expenditures were $623,000 for the three months ended April 30, 1999, compared to $190,000 for the three months ended April 30, 1998. The Company is obligated on or prior to October 31, 1999 to make a $500,000 capital contribution to Unzipped Apparel, LLC ("Unzipped"), the Company's joint venture with Sweet Sportswear, LLC. During the three month period ended April 30, 1998, substantially all of the Company's outstanding Class C warrants ("Warrants") were exercised and the Company received aggregate proceeds of approximately $7.16 million from the exercise of such Warrants. The proceeds were used to repay short-term borrowings. In addition, the Company received proceeds of approximately $1.12 million in connection with the issuance of Common Stock relating to the exercise of outstanding stock options and certain underwriters' warrants. On May 27, 1998, the Company entered into a three year $35 million revolving credit facility (the "Facility"). On August 4, 1998, BankBoston, N.A. entered into a co-lending arrangement and became a participant in the Facility with Bank of America Commercial Corporation. Effective January 31, 1999 the Facility was amended and borrowings under the Facility bear interest at .25% below the prime rate (7.75% at April 30, 1999). Borrowings under the Facility are formula based and available up to the maximum amount of the Facility. The Facility also contains certain financial covenants including, minimum tangible net worth, certain specified ratios and other limitations, as defined therein. The Company has granted the lenders a security interest in substantially all of its assets. The Company is in default of certain covenants of its Facility and the lenders have indicated their desire to terminate the Facility arrangement. The lenders have been extending the due date of the Facility by issuing periodic forbearance agreements to the Company. The current forbearance agreement is through October 30, 1999. The Company received a commitment from a new institution to refinance the 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Liquidity and Capital Resources - Continued Facility and expects to consummate the new financing shortly. 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 agreement balance considered to be an unsecured loan. The agreement's term is for a period of four years. 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 a new financing agreement. Year 2000 In preparation for the Year 2000, the Company has completed an inventory and assessment of its information systems, including its computer software and hardware. The Company determined over a year ago that its existing systems would be adversely affected by the Year 2000 and that its operational needs would be best served by upgrading its entire system. Accordingly, the Company is currently in the process of implementing throughout all operating areas of the Company, JBA's ERP Software Solution (the "JBA Solution"), which has been certified "Year 2000 Compliant" by the ITAA (Information Technology Association of America). The implementation has progressed to the testing phase. The testing and implementation of the JBA Solution includes assessment of all internal software that will integrate with the JBA Solution and an upgrade of the IBM AS/400 operating system on which the JBA Solution will run. In addition, the Local Area Network and networked PC's have been or will be upgraded. The goal is to complete all testing and achieve full system implementation during the fourth quarter of Fiscal 2000. Since the implementation of the JBA Solution will not be complete prior to December 31, 1999, the Company has contracted with Millennium Solutions 400 Ltd. to license software and to implement a remedial system, MS4, that will permit the Company to bring its current system into compliance. The MS4 system uses an encapsulation process that will make the Company's existing system Year 2000 compliant. The algorithm that will be used by this system will ensure that the Company's existing system is Year 2000 compliant and will work until the year 2027. Additionally, the Company has inventoried and analyzed substantially all of its embedded information systems throughout its operations, including, telephones, voice mail, alarms and personal computers. The results of this analysis did not indicate that embedded systems would not present a material Year 2000 risk to the Company. The Company will continue to test selected embedded systems and remediate and certify systems that exhibit Year 2000 issues. The Company intends to complete the testing and remediation of these systems by the fourth quarter of Fiscal 2000. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Year 2000 - Continued The Company's Year 2000 strategy addresses its relationships with critical third parties, including suppliers, customers and service providers. The Company's evaluation of these business partners includes written inquiry of such third parties' Year 2000 readiness and evaluation of responses. The Company has or intends to follow up with those third parties that indicate material problems with continued operations, particularly as the Company's products are sourced from third parties abroad into the Year 2000. The Company is working jointly with customers, strategic vendors and business partners to identify and resolve any Year 2000 issues that may impact the Company. The Company anticipates that this evaluation will be on-going through the third quarter of Fiscal 2000. An assessment of the capability of electronic data interface trading partners to operate with respect to Year 2000 has been completed. The Company expects its total costs to address the Year 2000 issue to be approximately $1,000,000 in connection with the implementation of the JBA Solution and $100,000 for the purchase of the MS4 remedial system. Approximately $750,000 of these costs have been incurred through August 31, 1999, and the Company expects to incur the balance of such costs to complete the compliance plan in Fiscal 2000. The balance of such costs is expected to be funded through operating cash flows. The Company's cost estimates do not include costs associated with addressing and resolving issues as a result of the failure of third parties to become Year 2000 compliant. The Company does not expect the Year 2000 issue to pose significant operational or financial problems for the Company. The Company bases this expectation on the progress it has made in upgrading and remediating its internal information systems and the assurances it has received so far from its suppliers. Nevertheless, the Year 2000 issue could have a material impact on the Company's operations and financial condition in the future in the event that the Company or its key suppliers, such as off-shore manufacturers of shoes for the Company or the shipping companies that carry those shoes to the Company, are unable to resolve Year 2000 issues on a timely manner or if the Company becomes the subject of litigation or other proceedings regarding any Year 2000-related events. The amount of potential loss cannot be reasonably estimated at this time. A contingency plan in the event of a problem with the MS4 system is being developed and will be updated and implemented as necessary to address risks identified. In the event of a worst case scenario in which the JBA Solution is not fully implemented and the MS4 does not fully remediate the system, the Company will modify its existing systems so as to permit business operations to continue pending the implementation of the JBA Solution. No contingency plans are being developed for the availability of key public services and utilities in the United States or abroad or to deal with a failure by any of the Company's key suppliers. A failure to develop a contingency plan in the future could have a material adverse effect on the Company. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 14 PART II. Other Information Item 1. Legal Proceedings Several lawsuits have recently been filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York. There can be no assurance that the Company will successfully defend these lawsuits. 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 includes claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The consolidated complaint is brought on behalf of all persons who acquired securities of the Company between May 28, 1997 and May 12, 1999, and alleges that the plaintiffs were damaged by reason of the Company's having issued materially false and misleading financial statements for Fiscal 1998 and the first three quarters of Fiscal 1999, which caused the Company's securities to trade at artificially inflated prices. An unfavorable resolution of this action could have a material adverse effect on the business, results of operations, financial condition or cash flows of the Company. 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, certain accounting issues and transactions. 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. Item 2. Changes in Securities On March 30, 1999, the Registrant issued 547,722 additional shares of its common stock in connection with the Fiscal 1999 acquisition of all the outstanding shares of Michael Caruso & Co., Inc., in a private transaction exempt from registration by Section 4(2) of the Securities Act of 1933, as amended. Item 6. Exhibits and Reports on Form 8-K A. Exhibit 10.1 - None B. Exhibit 27 - Financial Data Schedules C. Reports on Form 8-K - None 15 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 21, 1999 By: /s/ Neil Cole ---------------------------- Neil Cole Chief Executive Officer (on Behalf of the Registrant) Date September 21, 1999 By: /s/ Frank Marcinowski ---------------------------- Frank Marcinowski Vice President and Chief Financial Officer 16 Index to Exhibits Exhibit Numbers Description - ------- ----------- 10.1 None 27 Financial Data Schedules 17 EX-27 2 FINANCIAL DATA SCHEDULE -- CANDIE'S, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JAN-31-2000 APR-30-1999 741 0 20,412 3,745 17,619 43,547 4,483 1,453 73,206 22,167 0 0 0 19 50,826 73,206 21,254 21,254 15,846 15,846 0 0 282 (1,746) (568) (1,178) 0 0 0 (1,178) (.07) (.07)
EX-27 3 CANDIE'S, INC. -- FINANCIAL DATA SCHEDULE
5 RESTATED ART 5. FDS RESTATED FOR QUARTER ENDED APRIL 30, 1998 3-MOS JAN-31-1999 APR-30-1998 19 0 15,831 2,103 10,266 26,912 2,014 1,056 36,230 3,759 0 0 0 14 32,397 36,230 23,358 23,358 17,109 17,109 0 0 274 637 255 382 0 0 0 382 .03 .02
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