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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended January 31, 2002
OR
[_] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from
_______________to ______________.
Commission File Number 0-10593
CANDIE'S, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Columbus Avenue, Valhalla, New York 10595
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 769-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights
(Title of Class)
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 period 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 by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the common stock held by non-affiliates of
the registrant as of the close of business on April 3, 2002, was approximately $
46,429,745.
As of April 3, 2002, 20,274,998 shares of Common Stock, par value $.001 per
share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
CANDIE'S, INC.-FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................................... 2
Item 2. Properties..................................................................................... 6
Item 3. Legal Proceedings.............................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............................................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 8
Item 6. Selected Financial Data........................................................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...................................... 15
Item 8. Financial Statements and Supplementary Data.................................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 15
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 16
Item 11. Executive Compensation......................................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 21
Item 13. Certain Relationships and Related Transactions................................................. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 23
Signatures................................................................................................... 24
Consolidated Financial Statements............................................................................ F-1
PART I
Item 1 Business
Introduction
The history of the "CANDIE'S" brand spans over 25 years and is known for
young, fun and fashionable, footwear marketed by innovative advertising and
celebrity spokespersons. Candie's, Inc., which was incorporated in Delaware in
1978, and its subsidiaries (collectively, the "Company") is currently engaged
primarily in the design, marketing, and distribution of moderately-priced
women's casual and fashion footwear under the CANDIE'S(R)and BONGO(R)trademarks
for distribution within the United States to department, specialty, chain and 13
Company-owned retail stores, a web store and to specialty stores
internationally. The Company markets and distributes children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R)brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for apparel,
fragrance, eyewear, handbags, watches and cell phone accessories. The Company
also licensed the BONGO trademark on jeanswear through Unzipped Apparel, LLC
("Unzipped"), the Company's joint venture with Sweet Sportswear LLC ("Sweet"), a
subsidiary of Azteca Production International, Inc., as well as on kids'
clothing, handbags and eyewear. On April 23, 2002, the Company acquired the
remaining 50% interest in Unzipped from Sweet for 3 million shares of the
Company's common stock and $11 million in preferred stock. The Company is
required to redeem the preferred stock in 2012. See Notes 2 and 14 of the Notes
to Consolidated Financial Statements.
The target customer for CANDIE'S and BONGO products are women and girls in
the "millenial" generation demographic. As a growth strategy, the Company plans
to continue to build market share in the junior footwear area of better
department and specialty stores, pursue licensing opportunities, and expand its
consumer direct business through the opening of "lifestyle" retail stores and
expanding e-commerce sales of Candie's products through its Candies.com web
store.
Background of the Company and Acquisitions
The Company began to license the use of the CANDIE'S trademark from New
Retail Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased
ownership of the CANDIE'S trademark from NRC together with certain pre-existing
licenses of NRC. At the time, NRC was a publicly traded company engaged
primarily in the licensing and sublicensing of fashion trademarks and a
significant stockholder of the Company. NRC's principal stockholder was also the
Company's President and Chief Executive Officer. Effective August 18, 1998, the
Company completed a merger with NRC, with the Company as the surviving entity.
Acquisition of Michael Caruso & Co., Inc.
On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso").
As a result of the transaction, the Company acquired the BONGO trademark as well
as certain other related trademarks and two license agreements for use of the
BONGO trademark, one for junior denim and sportswear and one for large size
jeanswear, both of which licenses have been terminated. Prior to the closing of
the acquisition, Caruso was the licensor of the BONGO trademark for use on
footwear products sold by the Company, which license was terminated as of the
closing.
Formation of Unzipped Apparel LLC
On October 7, 1998, the Company formed Unzipped with its then joint venture
partner Sweet, for the purpose of marketing and distributing apparel under the
BONGO label. Candie's and Sweet each had a 50% interest in Unzipped. Pursuant to
the terms of the joint venture, the Company licensed the BONGO trademark to
Unzipped for use in the design, manufacture and sale of jeanswear and certain
apparel products for a term ending March 31, 2003.
On April 23, 2002, the Company acquired the remaining 50% interest in
Unzipped from Sweet for 3 million shares of the Company's common stock and $11
million in preferred stock. The Company is required to redeem the preferred
stock in 2012. See Notes 2 and 14 of the Notes to Consolidated Financial
Statements.
Footwear Products
CANDIE'S. The CANDIE'S footwear line, consisting of fashion and casual
footwear, is designed primarily for women and girls aged 6-25. The footwear line
features a variety of styles. The retail price of CANDIE'S footwear generally
ranges from $30 - $100 for women's styles and $25 - $45 for girls' styles. This
product line includes core products, which are sold year-round, complemented by
a broad range of updated styles, which are designed to establish or capitalize
on market trends. Many of the wholesale division's newest styles are
test-marketed at the Company's retail stores. Based on the results of these
tests, the Company rapidly responds to consumer preferences, which the Company
believes is critical for success in the fashion footwear marketplace. The line
is targeted at the better department and specialty store tier and independent
stores.
2
The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S image and price
points. Fashion trend information is compiled by the Company's design team
through various methods, including travel throughout the world to identify and
confirm seasonal trends and shop relevant markets, utilization of outside
fashion forecasting services and attendance at trade shows. Each season,
subsequent to the final determination of that season's line by the design team
and management (including colors, trim, fabrics, constructions and decorations),
members of the design team travel to the Company's manufacturers to oversee the
production of the initial sample lines.
BONGO. The Company designs, markets and distributes fashion and casual
footwear at value price points under the BONGO name for women and girls aged
6-25. The retail prices range from $30-$50 for footwear. This product line is
targeted for the mid-priced market and department and specialty stores in that
tier.
Private Label. In addition to sales under the CANDIE'S and BONGO
trademarks, the Company arranges for the manufacture of women's footwear, acting
as agent for mass market and discount retailers, primarily under the retailer's
private label brand. Most of the private label footwear is presold against
purchase orders and is backed by letters of credit opened by the applicable
retailers. In certain instances the Company receives a commission based upon the
purchase price of the products for providing design expertise, arranging for the
manufacturing of the footwear, overseeing production, inspecting the finished
goods and arranging for the sale of the finished goods by the manufacturer to
the retailer.
Bright Star. Bright Star, acting principally as agent for its customers,
designs, markets and distributes a wide variety of men's branded and unbranded
workboots, hiking boots, winter boots and leisure footwear. Branded products are
marketed under the private label brand names of Bright Star's customers or under
the Company's licensed brand, ASPEN. Bright Star's customer base includes
discount and specialty retailers. Bright Star's products are generally directed
toward the mid-priced market. The retail prices of Bright Star's footwear
generally range from $25 to $70. The majority of Bright Star's products are sold
on a commission basis.
The Company also licenses the CANDIE'S and BONGO brands for a variety of
other product categories. See "Trademarks and Licensing".
Retail Operations
The Company operates 13 retail stores, consisting of five outlets and eight
specialty stores and a web store located at www.candies.com. The Company
anticipates opening 10 to 15 additional retail stores during its fiscal year
ending January 31, 2003 ("Fiscal 2003") as opportunities make themselves
available. Retail revenues for the fiscal year ended January 31, 2002 ("Fiscal
2002") were $8.2 million or 8.1% of net revenue. Retail revenues for the fiscal
year ended January 31, 2001 ("Fiscal 2001") were $5.0 million or 5.3% of net
revenues. Retail revenues for the fiscal year ended January 31, 2000 were $2.8
million or 3% of net revenues.
The Company operates its retail stores, which complement its wholesale
business, primarily to establish a direct relationship with the consumer, build
the brand image, test products for the wholesale business and generate profits
for the Company. The Company also believes that retail stores provide an
opportunity for the Company to promote its "lifestyle" concept by showcasing its
increasing range of goods, which currently include apparel, handbags, fragrance,
eyewear, watches, intimates, belts and costume jewelry.
The success of the Company's new and existing retail stores will depend
on various factors, including general economic and business conditions affecting
consumer spending, the acceptance by consumers of the Company's retail concept,
the ability of the Company to manage its retail operations and the availability
of desirable locations and favorable lease terms.
Advertising, Marketing and Website
The Company believes that advertising to promote and enhance primarily the
CANDIE'S, and to a lesser extent, the BONGO brand, is an important part of its
long-term growth strategy. The Company believes that its innovative advertising
campaigns featuring celebrities and performers, which have brought it national
recognition, have resulted in increased sales and consumer awareness of its
branded products. The Company's advertising appears in fashion magazines such as
Cosmopolitan, InStyle and Glamour, and teenage lifestyle magazines such as Young
Miss, Teen People and Seventeen, as well as in television commercials,
newspapers, on outdoor billboards and on the Internet.
3
The Company maintains a website for the CANDIE'S brand that houses its web
store at www.candies.com. The website was launched in October 1999. In April
2000, the Company launched its first e-commerce initiative, a co-branded store
to sell the CANDIE'S footwear collection in partnership with leading teen
retailer "Journeys". In November 2001, the Company took over the operation of
its web store independently of Journeys. The Company also maintains a website
for the BONGO brand at www.bongo.com. The Company's products are featured on
Nordstrom.com, Zappos.com and Journeys.com.
The Company also maintains a corporate website that provides financial and
background information about the Company located at www.candiesinc.com.
Information contained in the candiesinc.com website is not a part of this
report.
Manufacturing and Suppliers
The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Italy and Spain.
The Company believes that such diversification permits it to respond to customer
needs and helps reduce the risks associated with foreign manufacturing. The
Company has developed, and seeks to develop, long-term relationships with
suppliers that can produce a high volume of quality products at competitive
prices.
The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract the production
to other manufacturers or suppliers. Finished goods are purchased primarily on
an open account basis, generally payable within 5 to 45 days after shipment.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber) are available from a variety of sources, there can be no assurance that
any such materials will continue to be available on a timely or cost-effective
basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately one to two months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and the
shipment to the customer takes approximately one to two additional months.
In Fiscal 2002, Redwood Shoe Corp. ("Redwood"), acting as the Company's
buying agent, initiated the manufacture of approximately $16 million or 32% of
the Company's total footwear purchases as compared to $35 million or 53 % in
Fiscal 2001. In or about July 2001, the Company discontinued its relationship
with Redwood and diversified its relationships with other agents and suppliers
in key countries. There can be no assurance that, in the future, the capacity or
availability of manufacturers or suppliers will be adequate to meet the
Company's product needs, however, the Company believes that a sufficient number
of sources for the Company's footwear are available.
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule,
the Company pays import duties on its footwear products manufactured outside of
the United States at rates ranging from approximately 3.2% to 48%, depending on
whether the principal component of the product, which varies from product to
product is leather or some other material. Accordingly, the import duties vary
with each shipment of footwear products. Since 1981, there have not been any
quotas or restrictions, other than the duties mentioned above, imposed on
footwear imported by the Company into the United States.
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company.
In addition, other restrictions on the importation of footwear and apparel
are periodically considered by the United States Congress and no assurance can
be given that tariffs or duties on the Company's goods may not be raised,
resulting in higher costs to the Company, or that import quotas respecting such
goods may not be lowered, which could restrict or delay shipment of products
from the Company's existing foreign suppliers.
Backlog
The Company had unfilled wholesale customer orders of $24.4 million and
$22.7 million, at April 29, 2002 and, 2001, respectively. The orders at April
29, 2002 are expected to be shipped by July 31, 2002. From February 1, 2002
through April 29, 2002, the Company had shipped $21.1 million of wholesale
customer orders as compared to $19.6 million in the comparable period of the
prior year.
4
The amount of unfilled orders at a particular time is affected by a number
of factors, including the mix of product, the timing of the receipt and
processing of customer orders and scheduling of the manufacture and shipping of
the product, which in some instances is dependent on the desires of the
customer. Backlog is also affected by a continuing trend among customers to
reduce the lead time on their orders. Due to these factors, a comparison of
unfilled orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.
Seasonality
In previous years, demand for the Company's footwear products peaked during
the months of June through August (the Fall/back-to-school selling season). As a
result, shipments of the Company's products in previous years were heavily
concentrated in its second fiscal quarter. Accordingly, historically, operating
results have fluctuated significantly from quarter to quarter. Recently there
has been a shift in the patterns of retailers with respect to their buying and
inventory management systems toward requiring deliveries much closer to an
actual selling season. In response to these developments the Company has
shortened its production lead times in order to meet customer demand.
Customers and Sales
During Fiscal 2002, the Company sold its footwear products to more than
1,100 retail accounts consisting of department stores, including Federated
Department Stores, Nordstrom and May Company, specialty stores and other outlets
in the United States. Primarily through its Bright Star division, the Company
also sold its products to Wal-Mart and other mass merchandisers. In Fiscal 2002,
Bright Star's sales of private label product to Wal-Mart accounted for $12.6
million in revenue or 12.4% of the Company's net revenue. In Fiscal 2001, no
individual customer accounted for more than 10% of the Company's net revenues.
During Fiscal 2002, the Company generated approximately $2 million in sales
to foreign markets, as compared to $2.5 million in Fiscal 2001. The Company
attributes this decline from the prior year to a decline in sales in the latter
part of Fiscal 2002, and a discontinuation of certain distribution relationships
as part of the Company's strategy to build a stronger foundation for expanded
business in the future. The Company is continuing to evaluate existing and
potential opportunities to expand its international business through
distribution arrangements with third parties and through direct sales.
The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.
As of April 1, 2002, the Company utilized the services of eight full time
sales persons, one of whom is an independent contractor who is compensated on a
commission basis. The Company emphasizes customer service in the conduct of its
operations and maintains a customer service department that processes customer
purchase orders and supports the sales representatives by coordinating orders
and shipments with customers.
Trademarks and Licensing
The Company owns federal registrations or has pending federal registrations
in the United States Patent and Trademark Office for CANDIE'S and BONGO in both
block letter and logo format, as well as a variety of ancillary marks for use on
footwear, apparel, fragrance, handbags, watches and various other goods and
services. In addition, from time to time, the Company registers certain of its
trademarks in other countries and regions including Canada, Europe, South and
Central America and Asia.
The Company regards the trademarks and other intellectual property rights
that it owns and uses as valuable assets and intends to defend them vigorously
against infringement. There can be no assurance, however, that the CANDIE'S or
BONGO trademarks, or any other trademark that the Company owns or uses, does
not, and will not, violate the proprietary rights of others, that any such
trademark would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using such trademarks, which event could have a
material adverse effect on the Company. In addition, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend an infringement action.
The Company also owns other registered and unregistered trademarks that it
does not consider to be material to its current operations.
The Company has pursued and intends to pursue licensing opportunities for
its trademarks as an important means for reaching the targeted consumer base,
increasing brand awareness in the marketplace and generating additional income.
Potential licensees are subject to a selective process performed by the
Company's management. The Company currently holds licenses for the CANDIE'S
trademark for use on apparel, fragrance, eyewear, handbags, watches and cell
phone accessories, and for the BONGO trademark on kids' apparel, handbags and
eyewear. The Company produces BONGO apparel through its Unzipped division, which
it acquired on April 23, 2002. See Notes 2 and 14 of the Notes to Consolidated
Financial Statements. The Company will enter into licensing agreements with
additional parties only if the Company believes that the prospective licensee
has the requisite quality standards, understanding of the brand, distribution
capabilities, experience in a respective business and financial stability, and
that the proposed product can be successfully marketed.
5
Each license requires the licensee to pay to the Company royalties based
upon net sales, and for the majority of the licenses there is the requirement
that the licensee pay to the Company guaranteed royalties in the event that net
sales do not reach certain specified targets. The licenses also require the
licensee to either pay directly to the Company or to spend certain minimum
amounts to advertise and market the CANDIE'S or BONGO brand, as applicable.
In January 2002, the Company entered into a five year retail store license
agreement pursuant to which the Company has licensed to Designs, Inc.
("Designs") the right to open outlet stores in the United States, Hawaii and
Puerto Rico bearing the CANDIE'S name. The contract requires Designs to open and
operate a minimum of 75 outlet stores over the next five years and to maintain
certain average net sales volumes within the stores to retain its exclusive
rights. It is contemplated that the outlet stores will sell the full range of
CANDIE'S lifestyle products, with Designs purchasing footwear products
principally through the Company, and other categories of products through the
Company's licensees, if applicable, or through its suppliers. The license has a
five-year renewal option available to Designs in the event that it meets the
requirements of the contract with respect to, among other things, the opening of
stores and achieving minimum sales.
The Company has a license agreement with Wal-Mart, which expires in July
2002, with respect to the NO EXCUSES trademark.
The Company also sells footwear under the ASPEN trademark pursuant to a
license from Aspen Licensing International, Inc. The ASPEN license agreement
grants Bright Star the exclusive right to market and distribute certain
categories of footwear under the ASPEN trademark in the United States, its
territories and possessions, on an order by order basis.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from, among
other brands, Skechers, Steve Madden and Aldo. In general, competitive factors
include quality, price, style, name recognition and service. In addition, the
presence in the marketplace of various fashion trends and the limited
availability of shelf space can affect competition. Many of the Company's
competitors have substantially greater financial, distribution, marketing and
other resources than the Company and have achieved significant name recognition
for their brand names. There can be no assurance that the Company will be able
to compete successfully with other companies marketing these types of footwear
products.
Employees
As of April 1, 2002, the Company employed a total of 194 persons in its
corporate and retail operations, 122 of whom are full-time employees and 72 of
whom are part-time employees. Four of the Company's employees are executives and
the remainder are management, sales, marketing, product development,
administrative, customer service and retail store personnel. None of the
Company's employees are represented by a labor union. The Company also utilizes
the services of one independent contractor who is engaged in sales and several
consultants in the advertising and MIS areas. The Company considers its
relations with its employees to be satisfactory.
Item 2 Properties
The Company currently occupies approximately 13,500 square feet of office
space at 400 Columbus Avenue, Valhalla, New York, 10595, pursuant to a lease,
that expires on July 31, 2005. The monthly rental expense pursuant to the lease
is approximately $25,000 per month depending on the Company's use of
electricity. The Company also occupies showrooms and offices on the fifth and
sixth floors at 215 W. 40th Street, New York, New York. The lease provides for
monthly rental of $19,280 for both floors, and a lease expiration of March 31,
2003.
The Company also maintains 13 domestic retail store leases as follows, two
specialty stores and one outlet located in New York, two outlet stores and two
specialty stores located in New Jersey, one specialty store located in
Connecticut, one outlet and one specialty store located in Pennsylvania, one
specialty store located in Massachusetts and one specialty and one outlet store
located in Florida. The aggregate rental payments for these properties during
Fiscal 2002 was $1.4 million. The Company anticipates opening 10-15 additional
stores within the Fiscal 2003.
The leases for the retail stores expire at various times between 2002
and 2010. In addition to specified monthly rental payments, additional rent at
all shopping mall locations is based on percentages of annual gross sales of the
retail store exceeding certain and proportionate amounts of monthly real estate
taxes, utilities and other expenses relating to the shopping mall.
6
Item 3 Legal Proceedings
In July 2000, the United States District Court for the Southern District of
New York (the "Court") approved the Company's settlement of a stockholder class
action entitled Willow Creek Capital Partners, L.P., v. Candie's, Inc. In this
action the plaintiffs alleged that they 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. Pursuant to the settlement
the Company agreed to pay to the plaintiffs total consideration of $10 million,
payable in a combination of $4 million in cash and $6 million in the Company's
Common Stock and convertible preferred stock. The Company received $2 million
from its insurance company and recorded an expense of $8 million in Fiscal 2000.
Pursuant to the settlement and the plaintiffs' plan of distribution, the $4
million cash payment has been distributed as well as $4 million of the Company's
common stock. The remaining $2 million of the Company's preferred stock will
convert to the Company's common stock based on the price of the Company's common
stock on the second anniversary of the "Effective Date" (August 2000) as defined
in the settlement agreement approved by the Court.
In November 2001 the Company settled a litigation filed in December 2000 in
the United States District Court for Southern District of New York, by Michael
Caruso, as trustee of the Claudio Trust and Gene Montasano (collectively,
"Caruso"). The settlement agreement between the Company and Caruso provides for
the Company to pay to Caruso equal quarterly payments of $62,500, up to a
maximum amount of $1 million, over a period of four years. However, the
Company's obligation to make these quarterly payments will terminate in the
event that the last daily sale price per share of the Company's common stock is
at least $4.98 during any ten days in any thirty day period within such four
year period with any remaining balance to be recognized as income. The Company
recognized a charge to income of $857,000 during the quarter ended January 31,
2002, representing the discounted fair value of the future payments to Caruso
referred to above.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, certain accounting issues concerning the
restatement of certain of the Company's financial statements in prior years.
In January 2002, Redwood, one of the Company's former buying agents and a
supplier of footwear to the Company, filed a Complaint in the United States
District Court for the Southern District of New York, alleging that the Company
breached various contractual obligations to Redwood and seeking to recover
damages in excess of $20 million and its litigation costs. The Company has filed
a motion to dismiss the Complaint based upon Redwood's failure to state a claim,
in response to which Redwood has filed an amended complaint, which the Company
is also moving to dismiss. In the event that some or all of the amended
Complaint survives the motion to dismiss, the Company intends to vigorously
defend this lawsuit and to file counterclaims.
From time to time, the Company is also made a party to certain litigation
incurred in the normal course of business. While any litigation has an element
of uncertainty, the Company believes that the final outcome of any of these
routine matters will not have a material effect on the Company's financial
position or future liquidity. Except as set forth in this Item 3, 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 4 Submission of Matters to a Vote of Security Holders
None.
7
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") since January 22, 1990
(under the symbol "CAND"). The following table sets forth, for the indicated
periods, the high and low sales prices for the Company's Common Stock as
reported by NASDAQ:
High Low
Fiscal Year Ended January 31, 2002
Fourth Quarter........................... $3.07 $1.85
Third Quarter .......................... 3.50 1.70
Second Quarter........................... 2.70 1.40
First Quarter .......................... 2.05 1.09
Fiscal Year Ended January 31, 2001
Fourth Quarter........................... $1.22 $0.44
Third Quarter ........................... 1.50 0.75
Second Quarter........................... 1.63 1.00
First Quarter .......................... 2.16 0.88
As of April 3, 2002 there were approximately 3,424 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its common stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future. Cash dividends are subject to approval by CIT Commercial
Services, the Company's lender.
During the fiscal quarter ended January 31, 2002 the Company issued
ten-year options to its employees and three-year options to certain non-employee
consultants to purchase an aggregate of 320,000 shares of the Company's Common
Stock at exercise prices of: (i) $2.00 for 130,000 shares, and (ii) $1.89 for
190,000 shares. The foregoing options were acquired by the holders in
transactions exempt from registration by virtue of either Sections 2(a) (3) or
4(2) of the Securities Act of 1933.
8
Item 6 Selected Financial Data
Selected Historical Financial Data (in thousands, except earnings per share
amounts)
The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
Year Ended January 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operating Data:
- --------------
Net revenue......................... $101,402 $95,194 $93,747 $115,069 $89,381
Operating (loss) income............. (1,545)(1) (7,174)(1) (22,862)(1) 786 4,889
Net (loss) income .................. (2,282) (8,200) (25,176) (641) 3,405
(Loss) earnings per share:
Basic............................ $(0.12) $(0.43) $(1.41) $(0.04) $0.30
Diluted.......................... (0.12) (0.43) (1.41) (0.04) 0.25
Weighted average number of common shares outstanding:
Basic............................ 19,647 19,231 17,798 15,250 11,375
Diluted.......................... 19,647 19,231 17,798 15,250 13,788
At January 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
- ------------------
Current Assets..................... $22,730 $23,772 $32,799 $45,216 $21,459
Total assets ....................... 50,670 50,370 64,058 74,600 29,912
Long-Term debt...................... 638 1,153 1,848 271 -
Total stockholders' equity.......... 23,519 24,745 32,948 51,849 23,550
(1) Includes non recurring items and special charges of $1,791 in Fiscal
2002, special charges of $2,674 in Fiscal 2001, and special charges and
litigation costs of $11,002 in Fiscal 2000. See Notes 4 and 8 of the
Notes to Consolidated Financial Statements
9
Item 7. 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 Item 7 and
elsewhere in this Annual Report on Form 10-K are forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors,
all of which are difficult or impossible to predict and many of which are beyond
the control of the Company, which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward looking
statements.
Such factors include, but are not limited to, uncertainty regarding
continued market acceptance of current products and the ability to successfully
develop and market new products particularly in light of rapidly changing
fashion trends, the impact of supply and manufacturing constraints or
difficulties relating to the Company's dependence on foreign manufacturers,
uncertainties relating to customer plans and commitments, competition,
uncertainties relating to economic conditions in the markets in which the
Company operates, the ability to hire and retain key personnel, the ability to
obtain capital if required, the risks of litigation and regulatory proceedings,
the risks of uncertainty of trademark protection, the uncertainty of marketing
and licensing acquired trademarks and other risks detailed below and in the
Company's other SEC filings, and uncertainty associated with the impact on the
Company in relation to recent events discussed above in this report.
The words "believe", "expect", "anticipate", "seek" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
the statement was made.
General Introduction
Several of the Company's accounting policies involve significant management
judgements and estimates. The policies with the greatest potential effect on the
Company's results of operations and financial position include the estimate of
reserves to provide for the collectibility of accounts receivable and the
recovery value of inventory. For accounts receivable, the Company estimates the
net collectibility considering historical, current and anticipated trends of
co-op advertising deductions, operational deductions taken by customers,
markdowns provided to retail customers to effectively flow goods through the
retail channels, and the possibility of non-collection due to the financial
position of customers. For inventory, the Company estimates the amount of goods
that it will not be able to sell in the normal course of business and write down
the value of these goods to the recovery value expected to be realized through
price reductions and close-outs.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
Revenue is recognized upon shipment with related risk and title passing to
the customers. Estimates of losses for bad debts, returns and other allowances
are recorded at the time of the sale. Shipping charges to customers and related
expenses for the years ended January 31, 2002, 2001, 2000 amounted to $300,000,
$311,000 and $675,000, respectively, are included in selling, general and
administrative expenses.
Other significant accounting policies are summarized in Note 1 of the Notes
to Consolidated Financial Statements.
The Company had a net loss of $2.3 million for Fiscal 2002. Of this amount,
$1.8 million was attributable to non- recurring items and special charges and
$1.2 million of interest expense, which was partially offset by $500,000 of
income from the Unzipped joint venture.
The Company's operating income excluding non-recurring items and special
charges was $246,000 in Fiscal 2002, an improvement of $4.7 million from a $4.5
million operating loss in Fiscal 2001, primarily due to a 6.5% increase in net
revenue combined with a 3.2% basis point increase in the gross profit margin
percentage.
The Company's non recurring items and special charges included a gain of
$188,000 on the sale of a retail store, less charges of $383,000 related to
securing new financing arrangements and establishing the entities necessary to
implement certain financing structures, $857,000 to settle a shareholder
lawsuit, $389,000 of special legal costs related to prior year legal matters,
and a $350,000 reserve for an affiliate receivable. See Item 3 "Legal
Proceedings and Note 4 of the Notes to Consolidated Financial Statements."
10
Results of Operations
Fiscal 2002 Compared to Fiscal 2001
Revenues. During Fiscal 2002, net sales increased by $5.7 million to $96.3
million. Revenue from sales of Candie's women's footwear increased by $4.5
million, or 8.7%, reflecting the Company's focus on increasing in its Candie's
branded footwear business. In addition, sales at Candie's retail stores
increased by $3.2 million, or 63.9%, as a result of new locations added in
Fiscal 2002, as well as an increase in comparable stores sales of 26.9%.
Deductions for returns and allowances decreased $1.7 million or 19.9%, primarily
as a result of operating improvements targeting this area. Men's private label
division revenues increased $6.2 million or 61.7%, primarily as a result of a
shift in transactions recorded as gross sales with lower margins versus net
commission revenues at higher margins. Offsetting the revenue increases noted
above were a decrease of $2.5 million in sales of Bongo women's footwear, or
17.2%, a decrease in sales of kids' footwear of $5.4 million, or 42.2%, due to,
among other things, increased competition in the kids' footwear area, and a
decrease in handbag revenues of $2.0 million, resulting from the discontinuance
of the Company's handbag line which was licensed during Fiscal 2001.
Licensing income increased $548,000 or 12.1% to $5.1 million for Fiscal
2002 from $4.5 million in the prior year. The increase was due primarily to
revenues from licenses added during Fiscal 2001 for a full year in Fiscal 2002,
net of a decrease in revenue from a mature fragrance license and decreased sales
of licensed products during the fourth quarter of Fiscal 2002. Also included in
licensing income for Fiscal 2002 was $318,000 paid by a licensee to terminate
its license with the Company.
Gross Profit. Gross profit increased by $4.8 million to $28.8 million in
Fiscal 2002 or 19.8% from $24.0 million in the prior year. As a percentage of
net revenues, gross profit margin increased to 28.4% from 25.2% in the prior
year. The increase is primarily attributable to higher initial markup on
wholesale sales, reductions in sales returns and allowances, an increase in
retail sales that have higher gross profit margins and an increase in licensing
income.
Operating Expenses. During Fiscal 2002, selling, general and administrative
expenses were unchanged at $28.5 million. Selling, general and administrative
expenses related to the Company's retail operations increased by $1.3 million as
the Company expanded its retail store base with five new store openings (and two
store closings) during Fiscal 2002. Expense reductions of $1.3 million in the
Company's wholesale and corporate operations offset the increases resulting from
the retail expansion.
The Company's non recurring items and special charges included a gain of
$188,000 on the sale of a retail store, less charges of $383,000 related to the
securing new financing arrangements and establishing the entities necessary to
implement certain financing structures, $857,000 to settle a shareholder lawsuit
and $389,000 of special legal costs.
Operating Loss. The Company sustained an operating loss after non-recurring
items and special charges of $1.5 million for Fiscal 2002, compared to an
operating loss of $7.2 million for Fiscal 2001.
Interest Expense. Interest expense in Fiscal 2002 decreased by $486,000 to
$1.2 million, primarily as a result of lower average borrowings and lower
interest rates than in Fiscal 2001 under the Company's credit facilities.
Equity (Income) Losses in Joint Venture. The Unzipped joint venture had
audited net income of $1.9 million for Fiscal 2002. As the Company suspended
booking its share of prior Unzipped losses in Fiscal 2001, it did not record its
share of Unzipped's 2002 net income of $950,000. In March 2002, the Company was
released from its $500,000 guarantee of Unzipped's indebtedness. Accordingly,
the Company reduced its liability to Unzipped and recorded $500,000 as a
reversal of joint venture losses at January 31, 2002. On April 23, 2002, the
Company acquired the remaining 50% interest in Unzipped from Sweet for 3 million
shares of the Company's common stock and $11 million in preferred stock. The
Company is required to redeem the preferred stock in 2012. See Notes 2 and 14 of
the Notes to Consolidated Financial Statements.
Income Tax Provision. The income tax provision of $62,000 consists of
statutory minimum taxes. The income tax benefit, which would have resulted from
the Fiscal 2002 losses, was offset by an increase of $1.1 million in the
Company's deferred tax valuation allowance to $13.3 million. The Company has a
net deferred tax asset of approximately $3.6 million that management believes
will be recoverable from profits to be generated over the next few years. The
valuation allowance of $13.3 million represents amounts that cannot be assured
of recoverability. See Note 12 of the Notes to Consolidated Financial
Statements.
Net Loss. As a result of the foregoing, the Company sustained a net loss of
$2.3 million for Fiscal 2002, compared to a net loss of $8.2 million for Fiscal
2001.
11
Fiscal 2001 Compared to Fiscal 2000
Revenues. During Fiscal 2001, net sales decreased by $129,000 to $90.7
million. Revenue from sales of Candie's and Bongo women's footwear increased by
$6.7 million, or 10.9%, reflecting the Company's focus on improving its core
branded footwear business. In addition, sales at Candie's retail stores
increased by $2.3 million, or 81.4%, as a result of new locations added in
Fiscal 2001, as well as an increase in comparable stores sales of 15.9%.
Deductions for returns and allowances decreased $1.2 million or 12.2%, primarily
as a result of operating improvements targeting this area. Offsetting the
increases noted above were a decrease in handbag revenues of $2.5 million, or
55.6%, resulting from the discontinuance of the Company's handbag line which was
licensed in March 2000, and a decrease in sales of kids' footwear, which
decreased $3.6 million, or 22.3%, due to, among other things, increased
competition in the kids' footwear area. Sales of unbranded merchandise also
decreased by $1.6 million, or 48.3%. Men's private label division sales
decreased $2.7 million or 21.3%, as a result of buying cutbacks from two
significant customers.
Licensing income increased $1.5 million or 53.4% to $4.5 million for Fiscal
2001 from $3.0 million in the prior year. The increase was due to increased
sales from existing licenses and, to a lesser extent, the granting of new
licenses.
Gross Profit. Gross profit increased by $4.6 million to $24.0 million in
Fiscal 2001 or 23.7% from $19.4 million in the prior year. As a percentage of
net revenues, gross profit margin increased by 4.5 percentage points to 25.2%
from 20.7% in the prior year. The increase is primarily attributable to improved
inventory management, reductions in sales returns and allowances, an increase in
retail sales that have higher gross profit margins, and an increase in licensing
income.
Operating Expenses. During Fiscal 2001, selling, general and administrative
expenses decreased by $2.8 million to $28.5 million, compared to $31.3 million
during the prior year. The decreases in operating expenses were attributable to
the Company's expense reduction initiatives and increased contribution by
licensees to the costs of the Company's marketing campaigns. Partially
offsetting these decreases was an increase in overhead expenses relating to the
Company's operations including the overall expansion of retail operations and
the addition of operating locations.
The Company's non recurring and special charges included $1.0 million for
the write off of impaired software costs, $700,000 for restructuring the
Company's sales force and obligations to certain terminated employees, $200,000
for expenses related to warehouse consolidation and the Company's relocation to
new corporate headquarters, $600,000 to write off intangible assets related to
an impaired Bongo license. The Company has also incurred substantial additional
costs in evaluating various new potential borrowing arrangements, the
restatement of its Fiscal 1998 and Fiscal 1999 financial results, the
investigation conducted by the Special Committee of the Board of Directors and
the costs of defending the class action lawsuit and SEC investigation. These one
time charges include $200,000 in Fiscal 2001 and $3.0 million in Fiscal 2000 as
well as an $8.0 million charge for the class action litigation settlement in
Fiscal 2000.
Operating Loss. The Company sustained an operating loss of $7.2 million
for Fiscal 2001, compared to an operating loss of $22.9 million for Fiscal 2000.
Interest Expense. Interest expense in Fiscal 2001 increased by $200,000 to
$1.7 million, primarily as a result of higher average borrowings and higher
interest rates than in Fiscal 2000 under the Company's credit facility.
Equity (Income) Losses in Joint Venture. The Company recorded joint venture
income from Unzipped of $700,000 in Fiscal 2001 resulting from the Company not
recording its share of Unzipped losses since they exceeded the Company's
commitment to fund such losses, compared to a loss of $2.0 million in the prior
year, which resulted primarily from larger losses of Unzipped due to the
discontinuance of the Candie's jeans line in Fiscal 2000. See Note 2 of the
Notes to Financial Statements.
Income Tax Provision. The income tax provision of $66,000 consists of
statutory minimum taxes. The income tax benefit, which would have resulted from
the Fiscal 2001 losses, was offset by an increase of $2.9 million in the
Company's deferred tax valuation allowance to $12.2 million. The Company has a
net deferred tax asset of approximately $3.6 million that management believes
will be recoverable from profits to be generated over the next few years. The
valuation allowance of $12.2 million represents amounts that cannot be assured
of recoverability. See Note 12 of the Notes to the Financial Statements.
Net Loss. As a result of the foregoing, the Company sustained a net loss of
$8.2 million for Fiscal 2001, compared to a net loss of $25.2 million for Fiscal
2000.
12
Liquidity and Capital Resources
Working Capital. Working capital decreased by $3.1 million to a $3.8
million deficit at January 31, 2002 from a $700,000 deficit at January 31, 2001,
resulting primarily from the Company's losses in Fiscal 2002. At January 31,
2002, the current ratio of assets to liabilities was .89 to 1 as compared to .97
to 1 for the prior fiscal year.
The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings from under its revolving loan to finance its operations. Net cash
provided by operating activities totaled $240,000 in Fiscal 2002, as compared
to net cash provided of $7.7 million in Fiscal 2001.
Capital expenditures. Capital expenditures were $2.6 million for Fiscal
2002 as compared to $1.9 million for the prior year. The current year capital
expenditures include net retail store additions of $1.3 million, the acquisition
of data processing software and equipment, and website development costs of $1.0
million, and the remainder consisting primarily of office additions. The
Company's Fiscal 2003 capital expenditure plan of $3.3 million includes $2.9
million for the opening of up to ten additional retail stores and $400,000 for
data processing software and office equipment and furniture. The Company
believes that it will be able to fund these anticipated expenditures primarily
with cash from borrowings under its new credit facility.
Financing Activities. Financing activities provided $2.2 million during
Fiscal 2002. Of this amount, $3.5 million was provided from the Company's new
financing arrangement (as more fully described below) and $868,000 was provided
from proceeds from the exercise of stock options. The Company used $1.1 million
to reduce long-term debt, $296,000 to purchase Company common stock on the open
market, and $741,000 for deferred financing costs.
Matters Pertaining to Unzipped. On or about October 31, 1999, the Company
made a $500,000 capital contribution to Unzipped. In addition, the terms of the
Operating Agreement of Unzipped required the Company to purchase from Sweet on
January 31, 2003, its entire interest in Unzipped at an aggregate purchase price
equal to 50% of 7.5 times EBITDA of Unzipped for the fiscal year commencing on
February 1, 2002 and ending January 31, 2003. The agreement provided the Company
with the right, in its sole discretion, to pay for such interest in cash or
shares of the Company's Common Stock. The agreement also provided that in the
event the Company elected to issue shares of the Company's Common Stock to
Sweet, Sweet would also have the right to designate a member to the Board of
Directors of 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.
Unzipped reported audited net income of $1.9 million for Fiscal 2002 and an
operating loss of $1.6 million for Fiscal 2001. The Company has suspended
booking its share of Unzipped losses beyond its maximum liability.
The above described operating agreement was superseded when on April 23,
2002, the Company acquired the remaining 50% interest in Unzipped from Sweet for
3 million shares of the Company's common stock and $11 million in preferred
stock. The Company is required to redeem the preferred stock in 2012. See Notes
2 and 14 of Notes to Consolidated Financial Statements.
Current Revolving Credit Facility. On January 23, 2002, the Company entered
into a three-year $20 million credit facility ("the Credit Facility") with CIT
Commercial Services ("CIT") replacing its arrangement with Rosenthal &
Rosenthal, Inc ("Rosenthal"). Borrowings under the Credit Facility are formula
based and include a $5 million over advance provision, and will bear interest at
1.00% above the prime rate. It is the intent of the Company and CIT before May
15, 2002 to replace the Credit Facility with a new facility that will include a
$12.5 million formula based revolving facility and a $12.5 million term loan.
The Company has granted the lenders a security interest in substantially all of
its assets.
At January 31, 2002, borrowings totaled $12.4 million at an interest rate
of 5.75%.
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million with the remaining balance
considered to be an unsecured loan. The term of the agreement is four years at
an effective annual interest rate of 10.48%. The outstanding loan balance as of
January 31, 2002 was $1.3 million. The interest paid for Fiscal 2002 was
$200,000. The quarterly payment on the loan is $260,000, including interest.
The Company's cash requirements fluctuate from time to time due to, among
other factors, seasonal requirements, including the timing of receipt of
merchandise. The Company believes that it will be able to satisfy its ongoing
cash requirements for the foreseeable future, including for the proposed
expansion of its retail operations during Fiscal 2003, primarily with cash flow
from operations, and borrowings under its Credit Facility. However, if the
Company's plans change or its assumptions prove to be incorrect, it could be
required to obtain additional capital that may not be available to it on
acceptable terms.
Prior Revolving Credit Facility. On October 28, 1999, the Company entered
into a two-year $35 million revolving line of credit (the "Line of Credit") with
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 were formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit bore
interest at 0.5% above the prime rate. Certain borrowings in excess of an
availability formula bore interest at 2.5% above the prime rate. The Company
also paid an annual facility fee of 0.25% of the maximum Line of Credit. The
minimum factoring commission fee for the initial term was $500,000. As of April
3, 2001, the Company extended its factoring agreement with Rosenthal through
April 30, 2003. As of January 14, 2002, the Company terminated its agreement
with Rosenthal and paid an early termination fee of $250,000, which is included
in special charges. Interest paid to Rosenthal for Fiscal 2002 was $1.0 million.
13
The following is a summary of contractual cash obligations for the
periods indicated that existed as of January 31, 2002, and is based on
information appearing in the Notes to Consolidated Financial Statements (amounts
in thousands):
Contractual 2004 - 2006 - After
Obligations Total 2003 2005 2007 2007
- --------------------------------------------------------------------------------
Notes payable 12,366 12,366 - - -
Long-term debt 1,863 1,225 638 - -
Operating leases 9,052 1,295 2,495 1,874 3,388
- --------------------------------------------------------------------------------
Total Contractual Cash 23,281 14,886 3,133 1,874 3,388
Obligations
There were no outstanding letters of credit at January 31, 2002.
Seasonality
The Company's quarterly results may fluctuate quarter to quarter as a
result of holidays, weather, the timing of product shipments, market acceptance
of Company products, the mix, pricing and presentation of the products offered
and sold, the hiring and training of personnel, the timing of inventory write
downs, fluctuations in the cost of materials, the mix between wholesale and
licensing businesses, and the incurrence of operating costs beyond the Company's
control as may be caused general economic conditions, and other unpredictable
factors such as 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. The success of the Company, however, will
still largely remain 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 establishments, among other factors noted herein, could
adversely affect the Company's future operating results. The Company's products
are marketed primarily for Fall and Spring seasons, with slightly higher volumes
of products sold during the second quarter.
Effects of Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the past few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.
Net Operating Loss Carry Forwards
At January 31, 2002, the Company had available net operating losses of
approximately $38.7 million for income tax purposes, which expire in the years
2006 through 2022. Because of "ownership changes" (as defined in Section 383 of
the Internal Revenue Code) occurring in previous fiscal years, the utilization
of approximately $4.6 million of the net operating losses is limited to $602,000
per year and expires in the years 2006 through 2007. The remaining $34.1 million
is not subject to such limitation and expires 2009 through 2022. See Note 12 of
the Notes to Consolidated Financial Statements.
New Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which changes
the accounting for goodwill and other intangible assets from an amortization
method to an impairment-only approach. Under SFAS No. 142, beginning on February
1, 2002, amortization of trademarks without determinable lives and goodwill will
cease. As prescribed under SFAS No. 142, the Company is in the process of having
goodwill tested for impairment. The Company does not anticipate any material
impairment losses resulting from the adoption of SFAS No. 142.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting
and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a
business. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company is required
to adopt SFAS No. 144 as of February 1, 2002, and it does not expect that the
adoption of the Statement will have a significant impact on the Company's
financial position and results of operations.
14
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor
consideration to any purchasers of the vendor's products at any point along the
distribution chain, regardless of whether the purchaser receiving the
consideration is a direct customer of the vendor. Issue 01-9 is to be applied to
annual or interim periods beginning after December 15, 2001. The Company's
adoption, effective February 1, 2002, will require the Company to reclassify
cooperative advertising expenses from a deduction against revenues to selling,
general and adminstrative expense and will not have a material effect.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company limits exposure to foreign currency fluctuations in most of its
purchase commitments through provisions that require vendor payments in United
States dollars. The Company's earnings may also be affected by changes in
short-term interest rates as a result of borrowings under its line of credit
facility. A two or less percentage point change in interest rates would not
materially effect the Company's Fiscal 2002 and Fiscal 2001 net losses.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
15
PART III
Item 10. Directors and Executive Officers of the Registrant
A list of the directors, executive officers and key employees of the
Company as of April 30, 2002 and their respective ages and positions are as
follows:
Name Age Position
Neil Cole 45 Chairman of the Board, President and Chief Executive Officer
Deborah Sorell Stehr 39 Senior Vice President, Secretary and General Counsel
Richard Danderline 48 Executive Vice President, Finance and Operations
John McPhee (key employee) 39 President of Wholesale Sales
Barry Emanuel 60 Director
Steven Mendelow 59 Director
Peter Siris 57 Director
Ann Iverson 58 Director
Neil Cole has been Chairman of the Board, President and Chief Executive
Officer of the Company since February 23, 1993. Mr. Cole founded the Company in
1992. From February through April 1992, Mr. Cole served as a director and as
acting President of the Company. Mr. Cole also served as Chairman of the Board,
President, Treasurer and a director of New Retail Concepts, Inc. ("NRC"), from
its inception in 1986 until it was merged with and into the Company in August
1998. Mr. Cole is an attorney who graduated from Hofstra law school in 1982.
Deborah Sorell Stehr joined the Company in December 1998 as Vice President
and General Counsel, and was promoted to Senior Vice President in November 1999.
From September 1996 to December 1998, Ms. Sorell Stehr was Associate General
Counsel with Nine West Group Inc. ("Nine West"), a women's' footwear corporation
with sales approximating $2.0 billion, where Ms. Sorell Stehr was primarily
responsible for overseeing legal affairs relating to domestic and international
contracts, intellectual property, licensing, general corporate matters,
litigation and claims. Prior to joining Nine West, Ms. Sorell Stehr practiced
law for nine years at private law firms in New York City and Chicago in the
areas of corporate law and commercial litigation.
Richard Danderline joined the Company as Executive Vice President - Finance
and Operations in June 2000. For the 13 years prior to joining the Company, he
served as Vice President, Treasurer and Chief Financial Officer of AeroGroup
International, Inc ("Aerosoles"), a privately held footwear company. Prior to
joining Aerosoles, he served as Vice President and Chief Financial Officer of
Kenneth Cole Productions, Inc., where he was part of a management-led buyout of
its What's What division, which later became Aerosoles. Mr. Danderline's
experience also includes serving as Vice President and Controller of Energy
Asserts International, Inc. and as Vice President and Controller of XOIL Energy
Resources, Inc. Mr. Danderline is certified public accountant who began his
career with Touche Ross & Co., the predecessor of Deloitte & Touche LLP.
John J. McPhee joined the Company in October 1996 as President of the
Candie's Kids division. Mr. McPhee was promoted to President of Wholesale Sales
in March 2000. From October 1992 to October 1996 Mr. McPhee was President of the
Children's Footwear Division of Sam & Libby, Inc. Prior to Sam & Libby, Mr.
McPhee held various executive positions with Jumping-Jacks Shoes. Mr. McPhee is
a graduate of Santa Clara University.
Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York.
Steven Mendelow has been a principal with the accounting firm of Konigsberg
Wolf & Co. and its predecessor, which is located in New York, New York since
1972. Mr. Mendelow was a director of NRC from April 1, 1992 until NRC merged
into the Company in August 1998.
16
Peter Siris has been active in the apparel, retail and financial industries
for over 25 years. During the past two years, Mr. Siris has been the Managing
Director of Guerrilla Capital Management, while completing his best selling
book, "Guerilla Investing", and working as a columnist for the "New York Daily
News". Between 1995 and 1997, he served as Senior Vice President of Warnaco,
Inc. and Director of Investor Relations of Authentic Fitness Corporation and
Senior Vice President of ABN-Amro Incorporated. Between 1970 and 1995, Mr. Siris
served as Managing Director of Union Bank of Switzerland, Securities, Executive
Vice President and Director of The Buckingham Research, Executive Vice President
and Director of Sirco International Corporation, President of MERIC, Inc. and
President of Urban Innovations, Inc. Mr. Siris, who earned his MBA from Harvard
University, is also an expert on trade in China and authored a novel on that
subject, "The Peking Mandate".
Ann Iverson joined the Board in March 2001. Since 1998, she has been the
President and CEO of International Link, Inc., a consulting company providing
value to corporations in making strategic decisions. From June 1995 until
forming International Link, Ms. Iverson worked as the Group Chief Executive of
Laura Ashley in the United Kingdom. Prior to that she was the President and CEO
of KayBee Toy Stores and CEO of Mothercare UK, Ltd based in England. In addition
to being a member of the Company's board, Ms. Iverson currently sits on the
board of Owens Corning, Inc., a leader in the building materials systems and
composites systems industry, and serves as a member of its Audit Committee. Ms
Iverson is also Chairman of Portico Bed & Bath Inc., and a board member at
Brooks Sports, Inc. Ms. Iverson, who brings to the Board over 40 years of
experience in the fashion and retail industry, has been the recipient of
numerous industry awards, including the Ellis Island Medal of Honor and Retailer
of the Year in the United Kingdom.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified. All officers serve at the
discretion of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
The Board has a Compensation Committee, on which Messrs. Mendelow, Siris
and Emanuel and Ms. Iverson sit. Prior to forming the Compensation Committee,
decisions as to executive compensation were made by the Company's Board of
Directors, primarily upon the recommendation of Mr. Cole. During Fiscal 2002,
Mr. Cole, the Company's Chief Executive Officer, in his capacity as a director,
also engaged in the deliberations of the Compensation Committee regarding the
determination of executive officer compensation. During Fiscal 2002, none of the
executive officers of the Company has served on the board of directors or the
compensation committee of any other entity, any of whose officers serves on the
Company's Board of Directors or Compensation Committee.
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of Securities Exchange Act of 1934 requires the Company
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10 percent owners are required by certain SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during Fiscal 2002, there was compliance with
the filing requirements applicable to its officers, directors and 10%
stockholders of the Common Stock.
17
Item 11. Executive Compensation
The following table sets forth all compensation paid or accrued by the
Company for the Fiscal 2002, 2001 and 2000, to or for the Chief Executive
Officer and for the other persons that served as executive officers of the
Company during Fiscal 2002 whose salaries exceeded $100,000 and for John J.
McPhee who is a key employee but not an executive officer of the Company
(collectively, the "Named Persons"):
Summary Compensation Table
--------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards
----------------------------------- ------------------------------------
Other Securities
Name & Principal Positions Fiscal Annual Com- Underlying
Year Salary Bonus(1) pensation (2) Options
- --------------------------------------------------------------------------------------------------------------------------
Neil Cole 2002 $ 500,000 $ - $ - 350,000
Chairman, President & 2001 500,000 - 10,000 617,250
Chief Executive Officer 2000 500,436 - (3) 12,500 410,000
Deborah Sorell Stehr 2002 180,000 25,000 - 40,000
Senior Vice President & 2001 166,667 25,000 - 80,000
General Counsel 2000 132,692 25,000 - 50,000
Richard Danderline 2002 214,968 50,000 - -
Executive Vice President - 2001 120,513 (4) 25,000 - 160,000
Finance & Operations
John McPhee 2002 275,000 - - 140,000
President of Wholesale Sales 2001 228,642 25,000 - 110,000
2000 243,284 25,000 - 50,000
(1) Represents bonuses accrued under employment agreements.
(2) Represents amounts earned as director's fees.
(3) As a result of the Company's restatement of certain financial statements, the $105,500 bonus to Mr. Cole previously
reported was repaid by Mr. Cole to the Company in Fiscal 2001.
(4) For the period from June 26, 2000 through January 31, 2001.
Option Grants in Fiscal 2002 Year
The following table provides information with respect to individual stock
options granted during Fiscal 2002 to each of the Named Persons who received
options during Fiscal 2002:
Shares % of Total Potential Realizable Value
Underlying Options Granted at Assumed Annual Rates
Options to Employees Exercise Expiration of Stock Price Appreciation
Name Granted (1) in Fiscal Year Price Date for Option Term (2)
- -----------------------------------------------------------------------------------------------------------------------------------
5% 10%
---------------- --------------
Neil Cole 350,000 21.9% $2.300 10/26/11 $506,260 $1,282,963
Deborah Sorell Stehr 40,000 2.5 1.700 09/21/11 42,765 108,374
Richard Danderline - - - - - -
John McPhee 100,000 7.1 2.125 11/11/06 4,468 61,287
40,000 2.8 1.700 09/21/11 42,765 108,374
(1) Mr. Cole's options vested in full on October 26, 2001. The
options granted to Ms. Stehr and the 40,000 options granted to
Mr. McPhee vest as to one-third on each of September 21, 2001,
2002 and 2003.
(2) The potential realizable value columns of the table illustrate
values that might be realized upon exercise of the options
immediately prior to their expiration, assuming the Company's
Common Stock appreciates at the compounded rates specified over
the term of the options. These amounts do not take into account
provisions of options providing for termination of the option
following termination of employment or non-transferability of the
options and do not make any provision for taxes associated with
exercise. Because actual gains will depend upon, among other
things, future performance of the Common Stock, there can be no
assurance that the amounts reflected in this table will be
achieved.
18
The following table sets forth information as of January 31, 2002, with
respect to exercised and unexercised stock options held by the Named Persons. No
options were exercised by any of the Named Persons during Fiscal 2002. On
December 11, 2001, 10,000 options owned by Neil Cole expired.
Aggregated Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at January 31, 2002 Options at January 31, 2002(1)
------------------------------------------ -------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ------------------ --------------------- ---------------------- ------------------
Neil Cole 3,091,000 - $ 771,104 $ -
Deborah Sorell Stehr 143,333 56,667 104,550 41,400
Richard Danderline 60,000 100,000 52,665 77,880
John McPhee 233,333 66,667 122,000 49,500
- ------------------------------------------------------------------------------------------------------------------------------
(1) An option is "in-the-money" if the year-end closing market price
per share of the Company's Common Stock exceeds the exercise
price of such options. The closing market price on January 31,
2002 was $2.06.
Employment Contracts and Termination and Change-in-Control Arrangements
In April 2002, the Company entered into a new employment agreement with
Neil Cole to serve as President and Chief Executive Officer for a term expiring
on December 31, 2005, at an annual base salary of $500,000. Under the new
employment agreement, if the Company meets at least 66 2/3% of its net income
target (as determined by the Board) for the fiscal year, the Company will pay to
Mr. Cole a bonus in an amount equal to his base salary multiplied by a fraction,
the numerator of which is the actual net income for such fiscal year and the
denominator of which is the target net income for such fiscal year. Mr. Cole
also entitled to customary benefits, including participation in management
incentive and benefit plans, reimbursement for automobile expenses, reasonable
travel and entertainment expenses and a life insurance policy to benefit Mr.
Cole's designated beneficiaries in the amount of $3,000,000, $4,000,000, and
$5,000,000, respectively, for each year in the term. The employment agreement
provides that Mr. Cole would receive an amount equal to three times his annual
compensation, plus accelerated vesting or payment of deferred compensation,
options, stock appreciation rights or any other benefits payable to Mr. Cole in
the event that within twelve months of a "Change in Control", as defined in the
agreement, Mr. Cole is terminated by the Company without "Cause" or if Mr. Cole
terminates his agreement for "Good Reason", as such terms are defined in his
employment agreement. If the Company is sold, Mr. Cole will receive a payment
equal to 5% of the sale price in the event that sale price is at least $5 per
share or equivalent with respect to an asset sale. In connection with his new
employment agreement, Mr. Cole was granted under one of the Company's stock
option plans, options to purchase 600,000 shares of Common Stock at $2.75 per
share. There options vest over a three year period.
In February 2002, the Company entered into a two year employment
arrangement with Deborah Sorell Stehr for a term expiring on January 31, 2004 at
a base salary of $225,000 for the first year and $235,000 for the second year.
Ms. Sorell Stehr is also eligible for a bonus pursuant to the Company's
executive bonus program and to customary benefits, including participation in
management incentive and benefit plans, reimbursement for automobile expenses,
reasonable travel and entertainment expenses and a life insurance policy. The
agreement provides that Ms. Sorell Stehr would receive an amount equal to $100
less than three times her annual compensation, plus accelerated vesting or
payment of deferred compensation, options, stock appreciation rights or any
other benefits payable to Ms. Sorell Stehr in the event that within twelve
months of a "Change in Control", Ms. Sorell Stehr is terminated by the Company
without "Cause" or Ms. Sorell Stehr terminates her agreement for "Good Reason",
as such terms are defined in her employment agreement.
19
On or about May 19, 2000, the Company entered into an employment agreement
with Richard Danderline for a term expiring on June 26, 2002, at an annual base
salary of $200,000 for the period ended June 26, 2001, and $225,000 for the 12
months ended June 26, 2002. Mr. Danderline is entitled to receive a bonus up to
an amount of $100,000 the first year and $150,000 the second year calculated as
one half of 1% of the pre-tax profit of the Company for every 1% that selling,
general and administrative expenses of the Company decrease as a percentage of
revenues using Fiscal 2001 as the base year, but in no event less than $50,000
for each year of employment. In connection with his employment, Mr. Danderline
received a grant of 150,000 options, vesting over a period of five years. Mr.
Danderline is also entitled to customary benefits, including participation in
management incentive and benefit plans, reimbursement for automobile expenses,
reasonable travel and entertainment expenses and a life insurance policy. In the
event of a "change in control", defined as the cessation of Neil Cole being the
Chairman of the Board, or a sale or merger of the Company with a non-affiliate,
Mr. Danderline `s options vest immediately.
On or about March 1, 2000, the Company entered into an employment agreement
with John McPhee for a term expiring on January 31, 2003, at an annual base
salary of $200,000 for the two months ended March 15, 2000, $225,000 for the
period from March 16, 2000 through January 21, 2001, $275,000 for the 12 months
ending January 31, 2002, and $325,000 for the 12 months ending January 31, 2003.
Pursuant to the employment agreement, Mr. McPhee serves as President of
Wholesale Sales for the Company devoting substantially all of his business time
and his best efforts to the business of the Company. Mr. McPhee is also entitled
to an annual bonus during the term of the agreement equal to one percent of the
Company's income before income taxes but in no event less than $25,000 for
Fiscal 2000. Under the agreement, Mr. McPhee receives customary benefits,
including participation in management incentive and benefit plans, reimbursement
for automobile expenses, reasonable travel and entertainment expenses and a life
insurance policy. Pursuant to the agreement, Mr. McPhee is entitled to his full
base salary for one year or through the term of the agreement, whichever is
greater, if there is a "Change of Control in the Company" or if he leaves the
Company for "Good Reason" as those terms are defined in the agreement.
Compensation of Directors
During Fiscal 2002, Messrs. Emanuel, Mendelow and Siris and Ms. Iverson
(each an "Outside Directors") each received a grant of Common Stock from the
Company under the Non-Employee Director Stock Incentive Plan having a value of
$10,000 in compensation for attending board meetings. Each Outside Director also
received $500 for each Committee meeting that he or she attended. Each Outside
Director is also entitled to an additional grant of stock having a value of
$10,000 during Fiscal 2003.
Under the Company's 2000 Stock Option Plan (the "2000 Plan") and 1997 Stock
Option Plan (the "1997 Plan"), non-employee directors are eligible to be granted
non-qualified stock options.
The Company's Board of Directors, or the Stock Option Committee of the 2000
Plan or the 1997 Plan, if one is appointed, has discretion to determine the
number of shares subject to each non-qualified option (subject to the number of
shares available for grant under the 2000 Plan or the 1997 Plan, as applicable),
the exercise price thereof (provided such price is not less than the par value
of the underlying shares of the Company's Common Stock under the 2000 Plan or
not less than the fair value of Common Stock under the 1997 Plan), the term
thereof (but not in excess of 10 years from the date of grant, subject to
earlier termination in certain circumstances), and the manner in which the
option becomes exercisable (amounts, intervals and other conditions). No
non-qualified options were granted to non-employee directors under the 2000 Plan
or the 1997 Plan during Fiscal 2002.
20
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 3, 2002,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Named
Persons; (iii) each of the Company's directors; and (iv) all executive officers
and directors as a group:
Amount and
Nature of Percentage of
Name and Address of Beneficial Beneficial
Beneficial Owner (1) Ownership (2) Ownership
- -------------------------------------------------- ------------------------------ ------------------------------------
Neil Cole 3,949,925( 3 ) 16.8%
Claudio Trust dated February 2, 1990 1,886,597 9.3%
2925 Mountain Maple Lane
Jackson, WY 83001
Michael Caruso 1,986,597( 4 ) 9.7%
Barry Emanuel 93,575( 5 ) *
Steven Mendelow 139,575( 6 ) *
Deborah Sorell Stehr 143,333( 7 ) *
Richard Danderline 60,000( 8 ) *
John McPhee 310,883( 9 ) 1.5%
Peter Siris 75,450( 10) *
Ann Iverson 63,450( 11) *
All executive officers and directors as a 4,836,191( 3 ) (5) (6) (7) 19.9%
group (eight persons) (8) (9) (10) (11)
* Less than 1%
(1) Unless otherwise indicated, each beneficial owner has an address
at 400 Columbus Avenue, Valhalla, New York 10595-1335.
(2) A person is deemed to have beneficial ownership of securities
that can be acquired by such person within 60 days of April 3,
2002, upon exercise of warrants or options. Consequently, each
beneficial owner's percentage ownership is determined by assuming
that warrants or options held by such person (but not those held
by any other person) and which are exercisable within 60 days
from April 3, 2002, have been exercised. Unless otherwise noted,
the Company believes that all persons referred to in the table
have sole voting and investment power with respect to all shares
of Common Stock reflected as beneficially owned by them.
(3) Includes 3,291,000 shares of Common Stock issuable upon exercise
of options owned by Neil Cole. Also includes 658,925 shares of
Common Stock owned by Mr. Cole's former wife over which Mr. Cole
has certain voting rights but no rights to dispose of or
pecuniary interest.
(4) Represents shares held by Claudio Trust dated February 2, 1990,
of which Mr. Caruso is the trustee and includes 100,000 shares of
Common Stock issuable upon exercise of options owned by Michael
Caruso.
(5) Includes 80,125 shares of Common Stock issuable upon exercise of
options.
(6) Includes 13,450 shares of Common Stock issued to Mr. Mendelow,
and 60,750 shares of Common Stock owned by C&P Associates, of
which Mr. Mendelow and his wife are affiliated.
(7) Represents shares of Common Stock issuable upon exercise of
options.
(8) Represents shares of Common Stock issuable upon exercise of
options.
(9) Represents 273,333 shares of Common Stock issuable upon exercise
of options and 37,000 shares of Common Stock owned by Mr. McPhee.
(10) Represents 70,000 shares of Common Stock issuable upon exercise
of options and 5,450 shares of Common Stock owned by Mr. Siris'
minor daughter.
(11) Represents shares of Common Stock issuable upon exercise of
options.
21
Item 13. Certain Relationships and Related Transactions
During Fiscal 2002, the Company purchased approximately $16 million of
footwear through Redwood, a company with which Mark Tucker, a former director of
the Company who resigned as of June 2001, is affiliated. The Company is no
longer purchasing footwear through Redwood. See Item 3 - Legal Proceedings.
During Fiscal 2002, Neil Cole, Chairman of the Board, President and CEO of
Candie's, Inc. founded the Candie's Foundation ("the Foundation"), a charitable
foundation whose purpose is to raise national awareness concerning to the
problems of teenage pregnancy. During the year, the Company advanced an
aggregate of $1,058,0000 to the Foundation on which interest is being charged at
a rate per annum that is equal to the prime rate, and at January 31, 2002 had a
balance due of $699,000. The Company has reserved $350,000 against this
receivable. Although the Company believes that the amount due will be recovered
in full, the reserve was established because of the Foundation's limited
operating history in fund raising activities.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedule.
See accompanying Financial Statements and Financial Statement
Schedule filed herewith submitted as separate section of this
report - See F-1.
(b) Reports on Form 8-K
None.
(c) See the attached Index to Exhibits
23
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Neil Cole
-------------------------
Neil Cole
Chief Executive Officer
Dated: May 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature and Name Capacity in Which Signed Date
/s/ Neil Cole Chairman of the Board, President and May 1, 2002
- ------------- Chief Executive Officer
Neil Cole
/s/Richard Danderline Executive Vice President, Finance and Operations May 1, 2002
- --------------------- (Principal Financial and Accounting Officer)
Richard Danderline
/s/ Barry Emanuel Director May 1, 2002
- -----------------
Barry Emanuel
/s/ Steven Mendelow Director May 1, 2002
- -------------------
Steven Mendelow
/s/ Peter Siris Director May 1, 2002
- ---------------
Peter Siris
/s/ Ann Iverson Director May 1, 2002
- ---------------
Ann Iverson
24
Index to Exhibits
Exhibit
Numbers Description
2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.(8)
2.2 Stock Purchase Agreement dated September 24, 1998 by and among
the Company, Licensing Acquisition Corp., Michael Caruso & Co.,
Inc. ("Caruso") and the stockholders of Caruso (9)
3.1 Certificate of Incorporation, as amended through October 1994
(1)(3)
3.2 Amendment to Certificate of Incorporation filed November 1994 (2)
3.3 Amendments to Certificate of Incorporation filed in August 1998
and February 2000 (14)
3.4 Restated and Amended By-Laws (14)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)
10.2 1989 Stock Option Plan of the Company (1)
10.3 1997 Stock Option Plan of the Company (7)
10.4 Employment Agreement between Neil Cole and the Company dated
February 23, 1993 (4)*
10.5 Amendment dated February 28, 1997 to Employment Agreement dated
February 23, 1993 between Neil Cole and the Company (6)*
10.6 Lease with respect to the Company's executive offices (15)
10.7 Agreement dated as of April 3, 1996 between the Company and
Redwood Shoe Corp. (5)
10.8 Amendment dated as of September 30, 1996 to agreement dated as of
April 3, 1996 between the Company and Redwood Shoe Corp. (6)
10.9 Employment Agreement between Richard Danderline and the Company.
(16)*
10.10 Employment Agreement between John J. McPhee and the Company.
(18)
10.11 Employment Agreement between Deborah Sorell Stehr and the
Company dated October 13, 1998 (11)*
10.12 Limited Liability Company Operating Agreement of Unzipped
Apparel LLC (10)
10.13 Escrow Agreement by and among the Company, the stockholders of
Caruso and Tenzer Greenblatt LLP(9)
10.14 Registration Rights Agreement between the Company and the
stockholders of Caruso (9)
10.15 Amendment to Lease Agreement with respect to the Company's
executive offices. (11)
10.16 Amendment dated January 27, 2000 to Employment Agreement dated
February 23, 1993 between Neil Cole and the Company (14)*
10.17 Amendment dated January 27, 2000 to Employment Agreement dated
October 13, 1998 between Deborah Sorell Stehr and the Company
(14)*
10.18 2000 Stock Option Plan of the Company (17)
10.19 Rights Agreement dated January 26, 2000 between the Company and
Continental Stock Transfer and Trust Company (13)
10.20 Factoring Agreement between Rosenthal & Rosenthal, Inc. and the
Company (12)
25
10.21 Inventory Security Agreement between Rosenthal & Rosenthal, Inc.
and the Company (12)
10.22 Factoring Agreement between Rosenthal & Rosenthal, Inc. and
Bright Star Footwear, Inc. (12)
10.23 Inventory Security Agreement between Rosenthal & Rosenthal, Inc.
and Bright Star Footwear, Inc. (12)
10.24 Non-Employee Director Stock Incentive Plan (19)
10.25 Employment Agreement between Neil Cole and the Company dated
February 1, 2002 (18)*
10.26 Employment Agreement between Deborah Sorell Stehr and the
Company dated February 1, 2002 (18)*
10.27 Factoring Agreement between the CIT Group/Commercial Services,
Inc. and the Company (18)
10.28 Factoring Agreement between the CIT Group/Commercial Services,
Inc. and Bright Star Footwear, Inc. (18)
10.29 2001 Stock Option Plan of the Company (18)*
21 Subsidiaries of the Company (18)
23 Consent of BDO Seidman, LLP (18)
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-18 (File 33-32277-NY) and incorporated by reference
herein.
(2) Filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended January 31, 1995, and incorporated by
reference herein.
(3) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (File 33-53878) and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended January 31, 1994 and incorporated by reference
herein.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1996, and incorporated by
reference herein.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1997, and incorporated by
reference herein.
(7) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1997, and incorporated by
reference herein.
(8) Filed as an exhibit to the Company's Annual Report on form 10-K
for the year ended January 31, 1998 and incorporated herein by
reference.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K
dated September 24, 1998 and incorporated by reference herein.
(10) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1998 and incorporated by
reference herein.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended January 31, 1999 and incorporated by reference
herein.
(12) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1999 and incorporated by
reference herein.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 26, 2000 and incorporated by reference herein.
(14) Filed as an exhibit to the Company's Annual Report as Form 10-K
for the year ended January 31, 2000, and incorporated by
reference herein.
(15) Filed as an exhibit to the Company's Quarterly Report as Form
10-Q for the quarter ended April 30, 2000 and incorporated by
reference herein.
(16) Filed as an exhibit to the Company's Quarterly Report as Form
10-Q for the quarter ended July 31, 2000 and incorporated by
reference herein.
(17) Filed as Exhibit A to the Company's definitive Proxy Statement
dated July 18, 2000 as filed on Schedule 14A and incorporated by
reference herein.
(18) Filed herewith.
(19) Filed as Appendix B to the Company's definitive Proxy Statement
date July 3, 2001 as filed on Schedule 14A and incorporated by
reference herein.
* Denotes management compensation plan or arrangement.
26
Annual Report on Form 10-K
Item 8, 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Year Ended January 31, 2002
Candie's, Inc. and Subsidiaries
F-1
Candie's, Inc. and Subsidiaries
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:
Report of Independent Certified Public Accountants........................................... F-3
Consolidated Balance Sheets - January 31, 2002, and 2001..................................... F-4
Consolidated Statements of Operations for the Years ended
January 31, 2002, 2001, and 2000......................................................... F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 2002, 2001, and 2000..................................... F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 2002, 2001, and 2000......................................................... F-7
Notes to Consolidated Financial Statements................................................... F-8
The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):
Report of Independent Certified Public Accountants on Financial Statement
Schedule for the Years Ended January 31, 2002, 2001, and 2000............................ S-1
Schedule II Valuation and qualifying accounts ............................................... S-2
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
F-2
Report of Independent Certified Public Accountants
The Stockholders and Directors of
Candie's, Inc.
We have audited the accompanying consolidated balance sheets of Candie's,
Inc. and subsidiaries as of January 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended January 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Candie's,
Inc. and subsidiaries at January 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2002, in conformity with accounting principles generally accepted in
the United States of America.
/s/: BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
April 12, 2002, except for Note 14, which is April 23, 2002
F-3
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
January 31,
-------------------------
2002 2001
------- -------
Assets
Current Assets:
Cash...................................................... $ 636 $ 366
Accounts receivable, net of allowances of
$356 in 2002 and $1,882 in 2001...................... 4,674 3,390
Due from factor and accounts receivable, net of allowances of
$822 in 2002 and $1,650 in 2001...................... 5,791 5,854
Due from affiliates, net of a reserve of $350 in 2002..... 565 329
Inventories, net.......................................... 8,368 9,323
Refundable and prepaid income taxes....................... - 219
Deferred income taxes..................................... 1,881 2,994
Prepaid advertising and other............................. 718 1,205
Other current assets...................................... 97 92
------- -------
Total Current Assets.............................................. 22,730 23,772
------- -------
Property and equipment, at cost:
Furniture, fixtures and equipment......................... 9,618 7,408
Less: Accumulated depreciation and amortization........... 4,470 3,206
------- -------
5,148 4,202
------- -------
Other Assets:
Goodwill, net of accumulated amortization of
$794 in 2002 and $651 in 2001........................ 1,868 2,010
Other intangibles, net.................................... 18,158 19,623
Deferred financing costs.................................. 741 -
Deferred income taxes..................................... 1,741 628
Other..................................................... 284 135
------- -------
22,792 22,396
------- -------
Total Assets...................................................... $50,670 $50,370
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks............................... $12,366 $ 8,898
Accounts payable and accrued expenses......................... 10,769 9,766
Accounts payable - Redwood.................................... 1,903 4,052
Exposure related to joint venture investment.................. 250 750
Current portion of long-term debt ............................ 1,225 1,006
------- -------
Total current liabilities......................................... 26,513 24,472
------- -------
Other liabilities................................................. - 98
Long-term debt.................................................... 638 1,055
------- -------
638 1,153
------- -------
Stockholders' Equity:
Preferred and common stock to be issued....................... 2,000 6,000
Preferred stock, $.01 par value - shares authorized 5,000;
none issued or outstanding........................... - -
Common stock, $.001 par value - shares authorized 30,000;
shares issued 20,400 in 2002 and 19,341 in 2001...... 20 19
Additional paid-in capital.................................... 58,188 59,239
Retained earnings (deficit)................................... (36,214) (33,932)
Less: Treasury stock - at cost - 113 shares in 2002
and 1,472 shares in 2001..................... (475) (6,581)
------- -------
Total stockholders' equity................................... 23,519 24,745
------- -------
Total Liabilities and Stockholders' Equity........................ $50,670 $50,370
======= =======
See accompanying notes to consolidated financial statements.
F-4
Candie's, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except earnings per share data)
Year ended January 31,
---------------------------------------------------------
2002 2001 2000
------------------ ------------------- ------------------
Net sales....................................................... $ 96,327 $ 90,667 $ 90,796
Licensing income................................................ 5,075 4,527 2,951
------------------ ------------------- ------------------
Net revenue..................................................... 101,402 95,194 93,747
Cost of goods sold.............................................. 72,642 71,186 74,347
------------------ ------------------- ------------------
Gross profit.................................................... 28,760 24,008 19,400
Selling, general and administrative expenses.................... 28,514 28,508 31,260
Non recurring items and special charges......................... 1,791 2,674 11,002
------------------ ------------------- ------------------
Operating loss.................................................. (1,545) (7,174) (22,862)
Other expenses:
Interest expense - net.................................. 1,175 1,661 1,415
Equity (income) loss in joint venture................... (500) (701) 2,002
------------------ ------------------- ------------------
675 960 3,417
------------------ ------------------- ------------------
Loss before income taxes........................................ (2,220) (8,134) (26,279)
Provision (benefit) for income taxes............................ 62 66 (1,103)
------------------ ------------------- ------------------
Net loss........................................................ $ (2,282) $ (8,200) $ (25,176)
================== =================== ==================
Loss per share:
Basic............................. $ $ $
(0.12) (0.43) (1.41)
================== =================== ==================
Diluted........................... $ $ $
(0.12) (0.43) (1.41)
================== =================== ==================
Weighted average number of common shares outstanding:
Basic............................. 19,647 19,231 17,798
================== =================== ==================
Diluted........................... 19,647 19,231 17,798
================== =================== ==================
See accompanying notes to consolidated financial statements.
F-5
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Preferred
& Common Additional Retained
Common Stock Stock to be Paid - In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
=========== ============ ============ =========== =========== ============ ===========
Balance at February 1, 1999 .......... 18,525 18 - 58,819 (556) (6,432) 51,849
Exercise of stock options and
warrants......................... 99 - - 148 - - 148
Issuance of common stock to
benefit plan..................... 37 - - 128 - - 128
Preferred and common stock to be
issued for litigation settlement - - 6,000 - - - 6,000
Additional contingent shares
issued for the Acquisition of
Michael Caruso & Co., Inc. ...... 548 1 - (1) - - -
Other.............................. - - - - - (1) (1)
Net loss........................... - - - - (25,176) - (25,176)
=========== ============ ============ =========== =========== ============ ===========
Balance at January 31, 2000 .......... 19,209 19 6,000 59,094 (25,732) (6,433) 32,948
Issuance of common stock to
benefit plan..................... 102 - - 102 - - 102
Issuance of common stock to
directors........................ 30 - - 43 - - 43
Purchase of treasury shares........ - - - - - (148) (148)
Net loss........................... - - - - (8,200) - (8,200)
=========== ============ ============ =========== =========== ============ ===========
Balance at January 31, 2001........... 19,341 19 6,000 59,239 (33,932) (6,581) 24,745
Issuance of common stock to
benefit plan..................... 122 - - 133 - - 133
Exercise of stock options.......... 536 1 - 867 - - 868
Issuance of common stock to
directors........................ 14 - - 40 - - 40
Issuance of common stock to
shareholders in connection with
class action litigation.......... 387 - (4,000) (2,402) - 6,402 -
Options granted to non-employees... - - - 144 - - 144
Reversal of indirect guarantee of
the value of stock option grants. - - - 167 - - 167
Purchase of treasury shares........ - - - - - (296) (296)
Net loss........................... - - - - (2,282) - (2,282)
=========== ============ ============ =========== =========== ============ ===========
Balance at January 31, 2002........... 20,400 $ 20 $ 2,000 $58,188 $ (36,214) $ (475) $ 23,519
=========== ============ ============ ============ =========== ============ ===========
See accompanying notes to consolidated financial statements.
F-6
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended January 31,
2002 2001 2000
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows (used in) provided by operating activities:
Net loss...................................................... $ (2,282) $ (8,200) $ (25,176)
Items in net income not affecting cash:
Depreciation of property and equipment.................. 1,414 1,213 877
Amortization of intangibles............................. 1,768 2,157 2,145
Gain on sale of retail store............................ (188) - -
Issuance of common stock ............................... 40 43 -
Stock option compensation non - employees............... 144 - -
Reserve on affiliate receivable......................... 350 - -
Equity (income) loss in Joint Venture................... (500) (701) 2,002
Litigation settlement................................... 857 - 8,000
Write-off of property and equipment..................... 47 - -
Write-off of impaired assets............................ - 1,581 -
Deferred income taxes................................... - - (1,174)
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,870) (372) 63
Factored accounts receivables and payable to factor, net 63 2,180 7,104
Inventories............................................. 818 5,447 4,261
Prepaid advertising and other........................... 487 417 (139)
Refundable and prepaid taxes............................ 219 412 1,992
Other assets............................................ (154) 408 221
Accounts payable and accrued expenses................... (973) 3,114 3,205
Long-term liabilities................................... - - (52)
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by operating activities..................... 240 7,699 3,329
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows used in investing activities:
Purchases of property and equipment..................... (2,554) (1,871) (2,832)
Proceeds from sale of retail store...................... 500 - -
Other................................................... (160) (161) (165)
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in investing activities......................... (2,214) (2,032) (2,997)
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows (used in) provided by financing activities:
Revolving notes payable - bank.......................... 3,468 (4,866) (3,110)
Proceeds from loans..................................... - - 3,471
Proceeds from exercise of stock options and warrants.... 868 - 148
Payment of long-term debt............................... (1,055) (930) (796)
Purchase of treasury stock.............................. (296) (148) -
Deferred financing costs................................ (741) - -
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash (used in) provided by financing activities........... 2,244 (5,944) (287)
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Net increase (decrease) in cash and cash equivalents.......... 270 (277) 45
Cash and cash equivalents, beginning of year............ 366 643 598
- --------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents, end of year.................. $ 636 $ 366 $ 643
===================================================================== ================== =================== ==================
Supplemental disclosure of cash flow information: Cash paid during the year:
Interest............................................... $ 1,176 $ 1,650 $ 1,452
================== =================== ==================
Income taxes........................................... $ (161) $ (353) $ 163
================== =================== ==================
Supplemental disclosures of non-cash investing and financing activities:
Preferred and common stock to be issued............... $ - $ - $ 6,000
================== =================== ==================
Issuance of common stock to benefit plan.............. $ 133 $ 102 $ 128
================== =================== ==================
Reversal of indirect guarantees of the value
of stock option grants................................. $ 167 $ - $ -
================== =================== ==================
Capital contributions to Unzipped..................... $ - $ - $ 500
================== =================== ==================
See accompanying notes to consolidated financial statements.
F-7
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Information as of and for the Years Ended January 31, 2002and 2001
(dollars are in thousands, except per share data)
The Company
The history of the "CANDIE'S" brand spans over 25 years and is known for
young, fun and fashionable, footwear marketed by innovative advertising and
celebrity spokespersons. Candie's, Inc., which was incorporated in Delaware in
1978, and its subsidiaries (collectively, the "Company") is currently engaged
primarily in the design, marketing, and distribution of moderately-priced
women's casual and fashion footwear under the CANDIE'S(R)and BONGO(R)trademarks
for distribution within the United States to department, specialty, chain and 13
company-owned retail stores, a web store and to specialty stores
internationally. The Company markets and distributes children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R)brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for apparel,
fragrance, eyewear, handbags, watches and cell phone accessories. The Company
also licensed the BONGO trademark on jeanswear through Unzipped Apparel, LLC
("Unzipped"), the Company's joint venture with Sweet Sportswear LLC ("Sweet"), a
subsidiary of Azteca Production International, Inc., as well as on kids'
clothing, handbags and eyewear. On April 23, 2002, the Company acquired the
remaining 50% interest in Unzipped from Sweet for 3 million shares of the
Company's common stock and $11 million in preferred stock. The Company is
required to redeem the preferred stock in 2012. See Notes 2 and 14 of the Notes
to Consolidated Financial Statements.
The target customer for CANDIE'S and BONGO products are women and girls in
the "millenial" generation demographic. As a growth strategy, the Company plans
to continue to build market share in the junior footwear area of better
department and specialty stores, pursue licensing opportunities, and expand its
consumer direct business through the opening of "lifestyle" retail stores and
expanding e-commerce sales of Candie's products through its Candies.com web
store.
1. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
items have been eliminated in consolidation. The Company's 50% equity interest
in Unzipped is accounted for under the equity method. The Company suspended
recording its share of losses for Unzipped in Fiscal 2002. See Note 2.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
Concentration of Credit Risk
Concentration of credit risk is limited due to the large number of
customers to which the Company sells its products and the use of a factor to
assign invoices for sales to its customers. For fiscal years ended January 31,
2002 ("Fiscal 2002") and 2000("Fiscal 2000"), one customer accounted for 12.4%
and 10.2%, respectively, of the Company's total net sales. No customer exceeded
10% of total revenues in Fiscal 2001.
Inventories
Inventories, which consist entirely of finished goods, are stated at the
lower of cost or net realizable value. Cost is determined by the first-in,
first-out ("FIFO") method.
F-8
Deferred Financing Costs
The Company incurred costs (primarily professional fees) in connection with
a planned capital financing which it expects to close in Fiscal 2003. These
costs have been deferred and will be amortized over the life of the debt. If the
debt does not close, these costs will be written-off.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization
are determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets ranging from three to seven years.
Leasehold improvements are amortized by the straight-line method over the term
of the related lease or estimated useful life, whichever is less.
Impairment of Long-Lived Assets
When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value, based
on discounted cash flow, is necessary. During fiscal 2001 the Company wrote off
computer software and a license aggregating $1,581. See Note 4.
Goodwill and Other Intangibles
The net assets of businesses purchased are recorded at their fair value at
the acquisition date. Any excess of acquisition costs over the fair value of
identifiable net assets acquired is included in goodwill and amortized on a
straight-line basis over 20 years. Trademarks and other intangible assets are
recorded at cost and amortized using the straight-line method over the estimated
lives of the assets, 4 to 20 years.
The CANDIE'S trademark is stated at cost in the amount of $6,190 and
$6,064, net of accumulated amortization of $2,591 and $2,272, at January 31,
2002 and 2001, respectively, as determined primarily by its fair value relative
to other assets and liabilities at February 28, 1993, the date of the quasi
reorganization. In connection with the quasi reorganization, the Company's
assets, liabilities and capital accounts were adjusted to eliminate the
stockholders' deficiency.
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to
the customers. Estimates of losses for bad debts, returns and other allowances
are recorded at the time of the sale. Shipping charges to customers and related
expenses for the years ended January 31, 2002, 2001, 2000 amounted to $300, $311
and $675, respectively, are included in selling, general and administrative
expenses.
Taxes on Income
The Company uses the asset and liability approach of accounting for income
taxes under Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". The Company provides deferred income taxes for
temporary differences that will result in taxable or deductible amounts in
future years based on the reporting of certain costs in different periods for
financial statement and income tax purposes. Valuation allowances are recorded
when recoverability of the asset is not assured.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted when the exercise price of the option is the same as the market value of
the Company's Common Stock at the time of grant. As prescribed under SFAS No.
123, "Accounting for Stock Based Compensation," the Company has disclosed the
pro-forma effects on net income and earnings per share of recording compensation
expense for the fair value of the options granted.
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31,
2002 and 2001.
Loss Per Share
Basic loss per share includes no dilution and is computed by dividing loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share reflects, in periods
in which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants.
F-9
Computer Software and Web-site Costs
Internal and external direct and incremental costs incurred in obtaining
and developing computer software for internal use and web-site costs are
capitalized in property and equipment and amortized, under the straight-line
method, over the estimated useful life of the software, three years. The net
amounts capitalized for these costs at January 31, 2002 and 2001 were $1,339 and
$1,276, respectively.
Advertising Campaign Costs
The Company records national advertising campaign costs as an expense
concurrent with the first showing of the related advertising and other
advertising costs when incurred. Advertising expenses for the years ended
January 31, 2002, 2001 and 2000 amounted to $3,414, $4,590, and $7,091,
respectively.
Licensing Revenue
The Company has entered into various trade name license agreements that
provide revenues based on minimum royalties and additional revenues based on a
percentage of defined sales. Minimum royalty revenue is recognized on a
straight-line basis over each period, as defined, in each license agreement.
Royalties exceeding the defined minimum amounts are recognized as income during
the period corresponding to the licensee's sales.
New Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which changes
the accounting for goodwill from an amortization method to an impairment-only
approach. The amortization of goodwill totaled $142 in fiscal 2002. Under SFAS
No. 142, beginning on February 1, 2002, amortization of goodwill will cease. As
prescribed under SFAS No. 142, the Company is in the process of having its
goodwill tested for impairment. The Company does not anticipate any material
impairment losses resulting from the adoption of SFAS No. 142.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting
and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a
business. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company is required
to adopt SFAS No. 144 as of February 1, 2002, and it does not expect that the
adoption of the Statement will have a significant impact on the Company's
financial position and results of operations.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor
consideration to any purchasers of the vendor's products at any point along the
distribution chain, regardless of whether the purchaser receiving the
consideration is a direct customer of the vendor. Issue 01-9 is to be applied to
annual or interim periods beginning after December 15, 2001. Our adoption,
effective February 1, 2002, will require us to reclassify cooperative
advertising expenses from a deduction against revenues to an SG&A expense and is
not expected to have a material effect.
Presentation of Prior Year Data
Certain reclassifications have been made to conform prior year data with
the current presentation.
2. Investment in Joint Venture
On October 7, 1998, the Company formed Unzipped with its joint venture
partner Sweet, the purpose of which was to market and distribute apparel under
the BONGO label. The Company and Sweet each had a 50% interest in Unzipped.
Pursuant to the terms of the joint venture, the Company licensed the BONGO
trademark to Unzipped for use in the design, manufacture and sale of certain
designated apparel products. At January 31, 2002 and 2001, the Company believed
that Unzipped was in breach of certain provisions of the agreements among the
parties, and notified Unzipped that the Company did not intend to contribute any
additional capital or otherwise support the joint venture. Accordingly, as of
January 31, 2001, the Company recorded $750, as its maximum liability to
Unzipped which consisted primarily of a guarantee of bank debt, and suspended
booking its share of Unzipped losses beyond its liability. Subsequent to January
2002, the guarantee of bank debt was terminated and, accordingly, the Company
reduced its liability by $500. No further adjustments were made in Fiscal 2002.
As of January 31, 2002, the Company's proportionate share of Unzipped unaudited
losses in excess of the established liability approximated $1,170. The income of
$500 and $701 recorded in Fiscal 2002 and 2001, respectively, represents the
reduction in the liability relating to Unzipped due to a corresponding reduction
in exposure.
F-10
In addition, the terms of the operating agreement of Unzipped required the
Company to purchase from Sweet on January 31, 2003, its entire interest in
Unzipped at an aggregate purchase price equal to 50% of 7.5 times EBITDA of
Unzipped for the fiscal year commencing on February 1, 2002 and ending January
31, 2003. The agreement provided the Company with the right, in its sole
discretion, to pay for such interest in cash or shares of the Company's Common
Stock. The agreement also provided that in the event the Company elected to
issue shares of the Company's Common Stock to Sweet, Sweet would also have the
right to designate a member to the Board of Directors of 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 above described operating agreement was superseded when on April 23,
2002, the Company acquired the remaining 50% interest in Unzipped from Sweet for
3 million shares of the Company's common stock and $11 million in preferred
stock. The Company is required to redeem the preferred stock in 2012. See Note
14 of the Notes to Consolidated Financial Statements.
In October 1999, the Company made a non-cash $500 capital contribution to
Unzipped by foregoing affiliate receivables to satisfy its obligation. At
January 31, 2002 and 2001, the affiliate receivable balance from Unzipped was
$201 and $232, respectively. As of the date of this report, the January 31, 2002
receivable had been fully paid by Unzipped. The Company was entitled to receive
an advertising royalty from Unzipped equal to 3% of Unzipped's net sales.
Included in licensing income is $1,254, $1,289, and $920 for Fiscal 2002, 2001
and 2000, respectively.
3. Other Intangibles, net
Other intangibles, net consist of the following: (In thousands, except for
estimated lives which are stated in years)
January 31,
----------------------------------
Estimated lives 2002 2001
-------------------------------------------- ------------------ ---------------- -----------------
Trademarks 20 $ 23,340 $ 23,180
Non-compete agreement 15 2,275 2,275
Licenses 4 1,526 1,526
-------------------------------------------- ------------------ ---------------- -----------------
27,141 26,981
Less accumulated amortization (8,983) (7,358)
-------------------------------------------- ------------------ ---------------- -----------------
$ 18,158 $ 19,623
============================================ ================== ================ =================
4. Non Recurring Items and Special Charges
Non recurring items and special charges consist of the following:
Fiscal Year ended January 31,
----------------------------------------------
2002 2001 2000
----------------------------------------------
Gain on sale of retail store $ (188) $ - $ -
Professional fees for the SEC investigation and
various litigation and litigation settlement.
See Note 8. (A) 389 205 3,002
Litigation settlement. See Note 8. (A) - - 8,000
Termination, severance pay of certain employees and
buyout of employment contracts (B) - 688 -
Write-off of a license acquired from Caruso (C) - 570 -
Warehouse consolidation and costs associated with
an office move - 200 -
Write-off of computer software (D) - 1,011 -
Costs relating to new financing arrangements (E) 383 - -
Reserve for receivable from affiliate (F) 350 - -
Caruso shareholder lawsuit settlement (G) 857 - -
----------------------------------------------
$ 1,791 $2,674 $11,002
==============================================
F-11
(A) In connection with a class action lawsuit and other litigation
more fully described in Note 8 the Company incurred professional
fees and other related costs.
(B) During Fiscal 2001, the Company restructured its sales force, and
terminated certain other employees who, at the time of their
termination, had employment contracts with the Company. For the
year ended January 31, 2001, the Company incurred $688 primarily
to buy out the employment contracts or otherwise settle with
these terminated employees.
(C) In September 1998, the Company acquired certain Bongo trademarks
and licenses from Caruso. One of these licenses, for large size
jeanswear was terminated in the fourth quarter of Fiscal 2001.
(D) In March 1999, the Company purchased an integrated software
package intended to be an enterprise wide solution, covering all
aspects of the Company's business and replacing the existing
legacy systems. Through January 31, 2001, the Company had
implemented only the general ledger and accounts payable modules
and had not implemented the order processing, purchasing,
inventory management, distribution or billing modules because of
lack of certain functionality required by the Company to
effectively manage its business. After evaluating alternatives,
including the likelihood of obtaining the lacking functionality
in the software, the Company concluded that it should not proceed
with further implementation and abandoned the software.
(E) During the year ended January 31, 2002, the Company sought to
replace its existing $35 million revolving line of credit with
Rosenthal & Rosenthal. In January 2002, the Company entered into
a financing arrangement with CIT Commercial services, as more
fully described in Note 5. In order to enter into this new
agreement, the Company paid $258 to Rosenthal & Rosenthal as a
termination fee and $125 to establish new entities necessary to
implement certain financing structures related to the new
financing arrangement.
(F) The Company established a reserve for advances made to the
Candie's Foundation. Although the Company believes that the
amount due will be recovered in full, the reserve was established
because of the Foundation's limited operating experience in fund
raising activities.
(G) See Note 8.
5. Debt Arrangements
Current Revolving Credit Facility
On January 23, 2002, the Company entered into a three-year $20 million
credit facility ("the Credit Facility") with CIT Commercial Services ("CIT")
replacing its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal").
Borrowings under the Credit Facility are formula based and include a $5 million
over advance provision, and will bear interest at 1.00% above the prime rate. It
is the intent of the Company and CIT before May 15, 2002 to replace the Credit
Facility with a new facility that will include a $12.5 million formula based
revolving facility and a $12.5 million term loan. The Company has granted the
lenders a security interest in substantially all of its assets. The interim
Credit Facility restricts the Company's ability to pay dividends.
On October 28, 1999, the Company entered into a two-year $35 million
revolving line of credit (the "Line of Credit") with 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 were
formula based and available up to the maximum amount of the Line of Credit.
Borrowings under the Line of Credit bore interest at 0.5% above the prime rate.
Certain borrowings in excess of an availability formula bore interest at 2.5%
above the prime rate. The Company also paid an annual facility fee of 0.25% of
the maximum Line of Credit. The minimum factoring commission fee for the initial
term was $500. As of April 3, 2001, the Company extended its factoring agreement
with Rosenthal through April 30, 2003. As of January 14, 2002, the Company
terminated its agreement with Rosenthal and paid an early termination fee of
$250, which is included in special charges. Interest paid to Rosenthal for
Fiscal 2002 was $1.0 million.
F-12
At January 31, 2002, borrowings totaled $12.4 Million at an interest rate
of 5.75%.
At January 31, 2002, the Company had no outstanding letters of credit. The
Company's letters of credit availability are formula based which takes into
account borrowings under the Credit Facility, as described above.
Capital Lease
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp.. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining
agreement balance considered to be an unsecured loan. The agreement's term is
for a period of four years at an effective annual interest rate of 10.48%. The
outstanding loan balance as of January 31, 2002 was $1.1 million. The quarterly
payment on the loan is $260 including interest.
Other
Also included in Long-term debt is $810 for the Michael Caruso shareholder
lawsuit settlement, see Note 4.
Debt Maturities
The Companies debt maturities are the following:
Total 2003 2004 2005 2006
-------------------------------------------------------------
Revolving notes payable - banks $12,366 $12,366 $ - $ - $ -
Capital lease 1,053 975 78 - -
Long - term debt 810 250 250 250 60
-------------------------------------------------------------
Total Debt $14,229 $13,591 $328 $ 250 $ 60
6. Stockholders' Equity
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Effects of applying SFAS
123 for providing pro forma disclosures are not likely to be representative of
the effects on reported net income for future years.
Pro forma information regarding net loss per share is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
January 31,
--------------------------------------------------
2002 2001 2000
Expected Volatility .715-.811 .604-.791 0.468
Expected Dividend Yield 0% 0% 0%
Expected Life (Term) 1.4-7years 3-7years 3-7 years
Risk-Free Interest Rate 2.26-5.13% 4.65-6.82% 4.91-6.21%
F-13
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
option is expensed when the option's are vested. The Company's pro forma
information follows:
January 31,
--------------------------------------------------
2002 2001 2000
Pro forma net loss ($4,370) ($9,793) ($25,773)
Pro forma loss per share:
Basic ($0.22) ($0.51) ($1.45)
Diluted ($0.22) ($0.51) ($1.45)
The weighted-average fair value of options granted (at their grant date)
during the years ended January 31, 2002, 2001, and 2000 was $1.42, $0.72, and
$0.46, respectively.
In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminated on August 1, 1999.
Under the 1989 Plan, ISO's were to be granted at not less than the market
price of the Company's Common Stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") were granted at prices determined by the Board of Directors. Under
the 1989 Plan 60,800, 85,800, and 120,300 of ISO's as of January 31, 2001, 2000,
and 1999, respectively, were outstanding.
On September 4, 1997, the Company's stockholders approved the Company's
1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting
of common stock options to purchase up to 3,500,000 shares of Company common
stock. All employees, directors, independent agents, consultants and attorneys
of the Company, including those of the Company's subsidiaries, are eligible to
be granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.
On August 18, 2000, the Company's shareholders approved the Company's 2000
Stock Option Plan (the "2000 Plan"). The 2000 Plan authorizes the granting of
common stock options to purchase up to 2,000,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 2000 Plan. The 2000 Plan terminates in 2010.
The Company has adopted the 2001 Stock Option Plan (the "2001 Plan"). The
2001 Plan authorizes the granting of common stock options to purchase up to
2,000,000 shares of Company common stock. All employees, directors, independent
agents, consultants and attorneys of the Company, including those of the
Company's subsidiaries, are eligible to be granted NQSO's under the 2001 Plan.
The 2001 Plan terminates in 2011.
Additionally, at January 31, 2002, 2001 and 2000, NQSO's covering
1,324,000, 2,046,000, and 2,907,500 shares of common stock, respectively, were
outstanding, which are not part of either the 1989 or 1997 Plans.
The options that were granted under the Plans expire between five and ten
years from the date of grant.
F-14
On November 4, 1999, the Company granted 400,000 NQSO's at an exercise
price of $1.50 per share, to its Chief Executive Officer to replace 400,000
NQSO's with an exercise price of $1.50 that expired August 1, 1999 and granted
10,000 NQSO's at an exercise price of $1.25 and simultaneously cancelled 10,000
NQSO's with an exercise price of $1.25 that were to expire on December 20, 1999.
These options were at or above the stocks fair value at the date of the grant
and, therefore, did not result in any compensation expense. On January 15, 1998,
the Company granted 400,000 NQSO's at an exercise price of $5.00 per share, to
its Chief Executive Officer and simultaneously cancelled 400,000 NQSO's with an
exercise price of $5.00 that were to expire February 23, 1998.
A summary of the Company's stock option activity, and related information
for the years ended 2002, 2001, and 2000 follows:
Weighted-Average
Shares Exercise Price
-------------------------------
Outstanding January 31, 1999 6,015,225 2.78
Granted 1,567,250 1.54
Canceled (363,250) 3.52
Exercised (99,675) 0.99
Expired (771,125) 1.70
-------------------------------
Outstanding January 31, 2000 6,348,425 2.59
Granted 2,088,750 1.07
Canceled (858,000) 2.54
Exercised - -
Expired (877,125) 1.19
-------------------------------
Outstanding January 31, 2001 6,702,050 $ 2.30
Granted 1,596,000 2.05
Canceled (134,625) 3.99
Exercised (535,500) 1.62
Expired (442,500) 4.56
-------------------------------
Outstanding January 31, 2002 7,185,425 $ 2.31
===============================
At January 31, 2002, 2001, and 2000, exercisable stock options totaled
6,200,590, 5,697,967, and 5,356,257 and had weighted average exercise prices of
$2.42, $2.46, and $2.58, respectively.
Options outstanding and exercisable at January 31, 2002 were as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual LifeExercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------- ----------------------------
$0.24-1.14................. 1,359,375 8.49 $0.97 1,108,375 $0.97
$1.15-1.50................. 1,299,000 6.27 $1.32 1,177,000 $1.32
$1.51-2.50................. 1,892,500 7.61 $2.00 1,280,665 $2.02
$2.51-3.50................. 2,489,550 5.08 $3.47 2,489,550 $3.47
$3.51-5.00................. 45,000 1.01 $4.55 45,000 $4.55
$5.01-12.00................ 100,000 0.59 $9.22 100,000 $9.22
- ------------------------------------------------------------------------------- ----------------------------
7,185,425 6.52 $2.31 6,200,590 $2.42
=============================================================================== ============================
At January 31, 2002 1,980,000, and 3,283,825 common shares were reserved
for issuance on exercise of stock options under the 2000 and 1997 Stock Option
Plan, respectively.
F-15
Stockholder Rights Plan
In January 2000, the Company's Board of Directors adopted a stockholder
rights plan. Under the plan, each stockholder of Candie's Common Stock received
a dividend of one right for each share of the Company's outstanding common
stock, entitling the holder to purchase one thousandth of a share of Series A
Junior Participating Preferred Stock, par value, $0.01 per share of the Company,
at an initial exercise price of $6.00. The rights become exercisable and will
trade separately from the Candie's Common Stock ten business days after any
person or group acquires 15% or more of the Candie's Common Stock, or ten
business days after any person or group announces a tender offer for 15% or more
of the outstanding Candie's Common Stock.
Stock Repurchase Program
On September 15, 1998, the Company's Board of Directors authorized the
repurchase of up to two million shares of the Company's Common Stock, which was
replaced with a new agreement on December 21, 2000, authorizing the repurchase
of up to three million shares of the Company's Common Stock. In fiscal 2002 and
2001, 163,150 and 158,700 shares, respectively, were repurchased in the open
market, at an aggregate cost of $296 and $148, respectively.
Preferred and Common Stock to be Issued
See Note 8 for the related terms of the preferred stock to be issued in
connection with the Litigation settlement.
7. Loss Per Share
Included in the calculation of the number of shares is the equivalent
number of common shares to be issued in connection with the Litigation
Settlement (see Note 8). The diluted weighted average number of shares does not
include any outstanding options or convertible preferred stock because they were
antidilutive.
8. Commitments and Contingencies
In July 2000, the United States District Court for the Southern District of
New York (the "Court") approved the Company's settlement of a stockholder class
action entitled Willow Creek Capital Partners, L.P., v. Candie's, Inc. In this
action the plaintiffs alleged that they 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. Pursuant to the settlement
the Company agreed to pay to the plaintiffs total consideration of $10 million,
payable in a combination of $4 million in cash and $6 million in the Company's
Common Stock and convertible preferred stock. The Company received $2 million
from its insurance company and recorded an expense of $8 million in Fiscal 2000.
Pursuant to the settlement and the plaintiffs' plan of distribution, the $4
million cash payment has been distributed as well as $4 million of the Company's
common stock. The remaining $2 million of the Company's preferred stock will
convert to the Company's common stock based on the price of the Company's common
stock on the second anniversary of the "Effective Date" (August 2000) as defined
in the settlement agreement approved by the Court.
In November 2001 the Company settled a litigation filed in December 2000 in
the United States District Court for Southern District of New York, by Michael
Caruso, as trustee of the Claudio Trust and Gene Montasano (collectively,
"Caruso"). The settlement agreement between the Company and Caruso provides for
the Company to pay to Caruso equal quarterly payments of $62,500, up to a
maximum amount of $1 million, over a period of four years. However, the
Company's obligation to make these quarterly payments will terminate in the
event that the last daily sale price per share of the Company's common stock is
at least $4.98 during any ten days in any thirty day period within such four
year period with any remaining balance to be recognized as income. The Company
recognized a charge to income of $857,000 during the quarter ended January 31,
2002, representing the discounted fair value of the future payments to Caruso
referred to above.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, certain accounting issues concerning the
restatement of certain of the Company's financial statements in prior years.
In January 2002, Redwood, one of the Company's former buying agents and a
supplier of footwear to the Company, filed a Complaint in the United States
District Court for the Southern District of New York, alleging that the Company
breached various contractual obligations to Redwood and seeking to recover
damages in excess of $20 million and its litigation costs. The Company has filed
a motion to dismiss the Complaint based upon Redwood's failure to state a claim,
in response to which Redwood has filed an amended complaint, which the Company
is also moving to dismiss. In the event that some or all of the amended
Complaint survives the motion to dismiss, the Company intends to vigorously
defend this lawsuit and to file counterclaims.
From time to time, the Company is also made a party to certain litigation
incurred in the normal course of business. While any litigation has an element
of uncertainty, the Company believes that the final outcome of any of these
routine matters will not have a material effect on the Company's financial
position or future liquidity. Except as set forth in this Item 3, 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.
F-16
9. Related Party Transactions
On April 3, 1996, the Company entered into an agreement with Redwood Shoe
("Redwood"), a principal buying agent of footwear products, to satisfy in full
certain trade payables (the "Payables") amounting to $1,680. Under the terms of
the agreement, the Company (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50. The Company purchased
approximately $16 million, $35 million, and $38 million in 2002, 2001, and 2000,
respectively, of footwear products through Redwood while it was a related party.
During the year ended January 31, 2002, Redwood sold its Common Stock and a
representative from Redwood resigned from the board of directors of the Company.
In doing so it is no longer considered a related party. At January 31, 2002 and
2001, the payable to Redwood totaled approximately $1,903 and $4,052,
respectively. The payable at January 31, 2002 is subject to any claims, offsets
or other deductions the Company may assert against Redwood. (See Note 8)
10. Operating Leases
Future net minimum lease payments under noncancelable operating lease
agreements as of January 31, 2002 are as follows:
2003................. $ 1,295
2004................. 1,266
2005................. 1,229
2006................. 1,051
2007................. 823
Thereafter........... 3,388
-----
Totals............... $ 9,052
=======
The leases require the Company to pay additional taxes on the properties,
certain operating costs and contingent rents based on sales in excess of stated
amounts.
Rent expense was approximately $2,089, $1,647, and $946 for the years ended
January 31, 2002, 2001, and 2000, respectively. Contingent rent amounts have
been immaterial for all periods.
11. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which
covers all eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $56, $133, and $112 to the Savings Plan for the years ended
January 31, 2002, 2001 and 2000, respectively.
The Company has certain incentive compensation arrangements with its Chief
Executive Officer pursuant to his employment agreement. The incentive
compensation aggregates 5% of pre-tax earnings, as defined.
12. Income Taxes
At January 31, 2002 the Company had available net operating losses ("NOL")
of approximately $38.7 million for income tax purposes, which expire in the
years 2006 through 2022. Because of "ownership changes" (as defined in Section
382 of the Internal Revenue Code) occurring in previous fiscal years, the
utilization of approximately $4.6 million of the net operating losses is limited
to $602 per year and expires in 2006 through 2007. The remaining $34.1 million
is not subject to such limitation and expires 2009 through 2022. Included in the
NOL is $955 as of January 31, 2002, the benefit of the utilization of this NOL
will go into additional paid in capital.
During the years ended January 31, 2002 and 2001, the Company recorded an
increase in its valuation allowance for deferred tax assets of $704 and $2.9
million, respectively, representing that portion of the deferred tax assets that
cannot be reasonably determined to be recoverable from estimated earnings over
the next few years.
F-17
The income tax provision (benefit) for Federal and state income taxes in
the consolidated statements of operations consists of the following:
January 31,
-----------------------------------------------------
2002 2001 2000
------------------ ----------------- ----------------
Current:
Federal.............................................. $ 0 $ 0 $ (48)
State................................................ 62 66 119
------------------ ----------------- ----------------
Total current........................................ 62 66 71
------------------ ----------------- ----------------
Deferred:
Federal.............................................. - - (838)
State................................................ - - (336)
------------------ ----------------- ----------------
Total deferred....................................... - - (1,174)
------------------ ----------------- ----------------
Total provision (benefit)............................ $ 62 $ 66 $ (1,103)
================== ================= ================
The following summary reconciles the income tax provision at the Federal
statutory rate with the actual provision (benefit):
January 31,
-----------------------------------------------------
2002 2001 2000
------------------ ----------------- ----------------
Income taxes (benefit) at statutory rate............. $ (753) $ (2,766) $(8,935)
Non-deductible amortization.......................... 288 285 193
Change in valuation allowance of deferred tax assets 704 2,894 9,257
State provision, net of federal income tax benefit... (114) (419) (1,906)
Adjustment for estimate of prior year taxes.......... - 41 235
Other................................................ (63) 31 53
------------------ ----------------- ----------------
Total income tax provision (benefit)................. $ 62 $ 66 $ (1,103)
================== ================= ================
The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
------------------------------------
2002 2001
------------------ -----------------
Accrued compensation................................. $ 52 $ -
Alternative minimum taxes............................ 96 96
Inventory valuation.................................. 368 441
Litigation settlement................................ 836 2,508
Net operating loss carryforwards..................... 16,174 12,995
Receivable reserves.................................. 639 1,476
Depreciation......................................... 172 129
Other ............................................... 133 99
------------------ -----------------
Total net deferred tax assets........................ 18,470 17,744
Valuation allowance.................................. (12,855) (12,151)
------------------ -----------------
Total deferred tax assets............................ 5,615 5,593
Trademarks and licenses.............................. (1,828) (1,806)
Other deferred tax liabilities....................... (165) (165)
------------------ -----------------
Total deferred tax liabilities....................... (1,993) (1,971)
------------------ -----------------
Total net deferred tax assets........................ $ 3,622 $ 3,622
================== =================
F-18
13. 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.
14. Subsequent Events
On April 23, 2002, the Company acquired the remaining 50% interest in
Unzipped from Sweet for 3 million shares of the Company's common stock and $11
million in preferred stock. The Company is required to redeem the preferred
stock in 2012. The preferred stock will pay a dividend of 8% per annum,
beginning in Fiscal 2004. The acquisition will be accounted for under the
purchase method of accounting for business combinations. Accordingly, the post
acquisition consolidated financial statements will include the results of
operations of Unzipped from the acquisition date. The purchase price will be
allocated to Unzipped assets and liabilities, tangible and intangible (as
determined by an independent appraiser), with the excess of the purchase price
over the fair value of the net assets acquired to be recorded as goodwill.
15. Unaudited Consolidated Financial Information
Unaudited interim consolidated financial information for the two years
ended January 31 is summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------
(in thousands except per share data)
Fiscal 2002
Net sales $ 22,652 $ 30,570 $ 25,325 $ 17,779
Total revenues 23,854 31,886 26,736 18,926
Gross profit 7,667 8,467 8,054 4,571
Operating income 718 1,270 625 (4,157)
Net income (loss) 393 974 297 (3,945)
Basic and diluted earnings
(loss) per share $ 0.02 $ 0.05 $ 0.02 $ (0.19)
Fiscal 2001
Net sales $ 24,446 $ 26,852 $ 22,457 $ 16,912
Total revenues 25,478 28,159 23,767 17,790
Gross profit 6,715 7,629 6,206 3,458
Operating income 826 263 (1,222) (7,041)
Net income (loss) 465 175 (1,468) (7,372)
Basic and diluted earnings
(loss) per share $ 0.02 $ 0.01 $ (0.08) $ (0.38)
F-19
During the fourth quarter ended January 31 2002 the Company recorded
certain significant expenses, as mentioned in Note 4, as follows: $383 for costs
relating to financing arrangements, and $857 for the Michael Caruso shareholder
lawsuit settlement, and $350 valuation reserve for the receivable to the
Candie's Foundation, partially offset by $500 of loss reversal from the release
of the guarantee of Unzipped bank debt. (See Note 2)
During the fourth quarter ended January 31 2001 the Company recorded
certain significant expenses, as mentioned in Note 4, as follows: $688 for
termination, buyouts and severance pay for certain employment contracts, $570
for write-off of a license acquired from Caruso, $200 for warehouse
consolidation and an office relocation, and $1,011 for impairment of computer
software. Also in the fourth quarter of fiscal 2001, the Company changed its
presentation of gross profit to include licensing income.
F-20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Candies, Inc.
The audits referred to in our report dated April 12, 2002 (April 23, 2002
for Note 14) relating to the consolidated financial statements of Candie's, Inc.
and Subsidiaries, which is contained in Item 8 of the Form 10-K included the
audits of the financial statement schedule listed in the accompanying index for
each of the three years in the period ended January 31, 2002. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/: BDO Seidman, LLP
BDO Seidman, LLP
April 12, 2002
New York, New York
S-1
Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
(In thousands)
Column A Column B Column C Column D (a) Column E
- ----------------------------------------------- -------------- ------------- ------------- -------------
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ----------------------------------------------- -------------- ------------- ------------- -------------
Reserves and allowances deducted from asset accounts:
Year ended January 31, 2002:
Accounts receivable reserves $3,532 $7,050 $9,404 $1,178
============== ============= ============= =============
Year ended January 31, 2001:
Accounts receivable reserves $4,822 $7,275 $ 8,565 $3,532
============== ============= ============= =============
Year ended January 31, 2000:
Accounts receivable reserves $3,529 $10,336 $ 9,043 $4,822
============== ============= ============= =============
Year ended January 31, 2002:
Inventory reserves $ 480 $ 184 $ 225 $ 439
============== ============= ============= =============
Year ended January 31, 2001:
Inventory reserves $1,390 $ 612 $ 1,522 $ 480
============== ============= ============= =============
Year ended January 31, 2000:
Inventory reserves $1,684 $ 441 $ 735 $1,390
============== ============= ============= =============
(a) Uncollectible receivables charged against the allowance provided.
S-2