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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2003.
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 (IRS 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 pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered pursuant to 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 [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes____ No__X__
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of the close of business on July 31, 2002,
was approximately $67,362,072.
As of May 12, 2003, 25,021,544 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 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosure about Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners and Management 26
Item 13 Certain Relationships and Related Transactions 27
Item 14 Controls and Procedures 29
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 29
Signatures 30
Consolidated Financial Statements F-1
PART I
Item 1. Business
Introduction
Candie's, Inc. (the "Company") is in the business of licensing the
CANDIE'S(R) and BONGO(R) names on a variety of young women's footwear, apparel
and fashion products and is a leading designer, distributor and marketer of
jeans wear under the BONGO brand through its wholly-owned subsidiary, Unzipped
Apparel, LLC ("Unzipped"), which is managed by Sweet Sportswear, LLC ("Sweet")
The Company also arranges for the manufacture of footwear products for mass
market and discount retailers under the private label brand of the retailer or
other trademarks owned or licensed by the Company The Company operates 21
retail stores under the CANDIE'S name through which it sells a full range of
CANDIE'S and BONGO licensed products.
Recent Developments
On May 1, 2003, the Company granted Kenneth Cole Productions, Inc. the
exclusive worldwide license to design, manufacture, sell, distribute and market
footwear under the BONGO brand. The license agreement expires on December 31,
2007, subject to renewal options for three additional terms of three years each
contingent on Kenneth Cole Productions, Inc. meeting certain performance and
minimum net sales standards.
In addition, on May 12, 2003, the Company granted Steven Madden, Ltd. the
exclusive worldwide license to design, manufacture, sell, distribute and market
footwear under the CANDIE'S brand. The license agreement expires on December 31,
2009, subject to renewal options for four additional terms of three years each
contingent on Steven Madden, Ltd. meeting certain performance and minimum net
sales standards. The foregoing licensing agreements between the Company and each
of Kenneth Cole Productions, Inc. and Steven Madden, Ltd. are collectively
referred to in this report as the "Footwear Licenses".
Prior to executing the Footwear Licenses, a key component of the Company's
business was causing the manufacture of footwear under the CANDIE'S and BONGO
labels, which products it distributed, sold and marketed in the United States
and, to a limited extent, internationally. The effect of the granting of these
licenses will be to eliminate the Company's operations as they relate to the
production and distribution of women's and girl's footwear. The Company will
remain in the business of manufacturing, distributing, selling and marketing
jeans wear under the BONGO label through its Unzipped division which is managed
by Sweet, licensing the CANDIE'S and BONGO brands for a variety of products,
operating retail stores that will continue to sell CANDIE'S footwear, apparel
and accessories and to a more limited degree, BONGO footwear, jeans wear and
accessories and marketing and selling a variety of men's outdoor boots and
casual shoes under private label brands through the Company's wholly owned
subsidiary, Bright Star Footwear, Inc. ("Bright Star").
The Company anticipates shipping its current inventory of CANDIE'S and
BONGO footwear for Spring 2003 orders and then turning over its backlogs for
CANDIE'S and BONGO footwear for Fall 2003 orders, respectively, to Steven
Madden, Ltd. and Kenneth Cole Productions, Inc. Once the business is
transitioned, the Company does not anticipate purchasing, selling, warehousing
or distributing any additional footwear inventory, which, along with the
resulting reduction in operating expenses as described below, will significantly
reduce its borrowing requirements under its existing revolving credit line
Pursuant to the CANDIE'S license, Steven Madden Ltd. will supply the Company
with CANDIE'S footwear for sale at the Company's retail locations at a price
that is a discount off the wholesale price, and Kenneth Cole Productions, Inc.
will, pursuant to the BONGO license, supply the Company with BONGO footwear for
sale at the Company's retail locations at a price that is a discount off the
wholesale price, all of which products are expected to be shipped directly to
the retail location in which they will be sold.
The elimination of the Company's historical footwear operations is also
expected to result in the elimination of certain operating costs primarily
through a substantial reduction in the Company's footwear operations. The
Company also anticipates consolidating its offices into one floor of its New
York City office and closing the other floor in New York City, which lease will
expire on June 30, 2003. The Company also plans to close its office in Valhalla,
New York, and will remain obligated on the Valhalla lease through May 2005,
subject to its ability to sublet the space. In connection with the footwear
licenses and due to the challenging retail environment, the Company expects to
close some or all concepts stores, which are performing below the Company's
expectations. In the fourth quarter of Fiscal 2003, the Company took an
impairment charge of $2.2 million for the net book value of the leasehold
improvements to the concept stores that the Company believes will no longer be
utilized in the Company's business. The Company plans to negotiate lease
settlements with the various landlords of the concept stores. The aggregate
remaining lease obligations for these stores at January 31, 2003, totaled $7.6
million. The estimate of the lease settlements will be recorded in the period(s)
the stores are closed.
The discussion of the Company's historical business set forth below
reflects the operations of the Company in effect throughout the fiscal year
ended January 31, 2003 ("Fiscal 2003") and thereafter but prior to the execution
of the Footwear Licenses discussed above.
2
Historical Business Operations
Prior to executing the Footwear Licenses, Candie's, Inc, which was
incorporated in Delaware in 1978, and its subsidiaries was in the business of
designing, marketing, and distributing fashionable, moderately-priced women's
footwear under the CANDIE'S(R) and BONGO(R) brands and jeans wear under the
BONGO brand. Through a combination of provocative advertising and marketing,
distinctive product design and cross channel retail distribution, the Company
has developed the CANDIE'S and BONGO brands into two names that are
well-recognized by young, style-conscious women across the United States.
The core customers for both the CANDIE'S and the BONGO brands are girls and
women between the ages of 6 and 25 who are attracted to the brands for their fun
image, fashionable designs and moderate prices. These girls and women, who make
up the "millenial" generation, are part of a group of nearly 80 million youths
and teens. The Company has capitalized on this market by understanding the
lifestyle of the target consumer, where she shops, what music she listens to,
what movies and television she watches and how she wants to present herself to
the world, and then gearing its products to appeal to her sensibilities. In
particular, the Company has become known for its high profile marketing
partnerships with celebrities in the music and television industries whom the
Company believes best represent the fun, irreverent and sexy image of its
brands.
In April 2002, the Company diversified its consolidated business by
acquiring BONGO jeans wear, which is operated through its wholly owned
subsidiary, Unzipped. Prior to April 2002, the Company sold and marketed BONGO
jeans wear through its joint venture with Unzipped and was a 50% equity owner of
Unzipped.
In 1998, the Company began to license the CANDIE'S brand for the purpose of
building it into a lifestyle brand serving the millennial generation, and it has
granted licenses for CANDIE'S for apparel, including swimwear and intimates,
fragrance, eyewear and watches. The Company has also pursued an aggressive
licensing strategy for the BONGO brand, and has granted licenses for women's and
childrens' knitwear, sportswear and tops, eyewear, handbags, cold weather
accessories, belts, socks and hosiery, jewelry and bathing suits.
In addition, the Company has pursued a retail strategy through the roll out
of CANDIE'S concept and outlet stores. The stores are designed to create a
distinctive CANDIE'S environment that enhances customer association with the
brand, while simultaneously introducing her to a broader variety of CANDIE'S
products. The stores also serve as marketing and product testing sites that
provide quick product feedback from customers, which the Company believes is an
essential part of identifying key trends in the swift-paced world of teenage
fashion. The Company currently owns and/or operates 11 concept stores and 10
outlet stores and a web store located at www.candies.com. The Company is
contemplating closing some or all of its concept stores which are performing
below expectations and, in some cases, are losing money.
In addition to the CANDIE'S and BONGO footwear businesses and the BONGO
jeans wear business, the Company markets and distributes a variety of men's
workboots, hiking boots, winter boots, and outdoor casual shoes designed and
marketed under private labels through Bright Star, the Company's wholly-owned
subsidiary.
Historical 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, Neil Cole,
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.
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 and certain other
related trademarks and two license agreements for use of the BONGO trademark,
both of which licenses have been terminated Prior to the closing of the
acquisition, Caruso licensed the BONGO trademark to the Company for use on
footwear products, which license was terminated as of the closing of the
acquisition.
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 consideration consisting of three million shares of the
Company's common stock and $11 million which was to be issued in the form of
preferred stock. The Company issued the common stock, and in lieu of the
preferred stock issued to Sweet an 8% senior subordinated note due in 2012. See
3
Notes 2 and 14 of the Notes to Consolidated Financial Statements. In connection
with the acquisition, Unzipped entered into a Management Agreement with Sweet
pursuant to which Sweet is to manage all aspects of Unzipped's business through
a term ending on January 31, 2005 In addition, Unzipped entered into a
Distribution Agreement with Apparel Distribution Services, LLC ("ADS"), and a
Supply Agreement with Azteca Productions International, Inc. ("Azteca"), to
distribute and supply products, respectively, on behalf of Unzipped Both ADS and
Azteca are controlled by Hubert Guez, who also controls Sweet. Mr Guez is also a
member of the Company's Board of Directors and a principal stockholder of the
Company. See "Item 13- Certain Relationships and Related Transactions" for
certain segment information regarding the Company and Note 13 of Notes to
Consolidated Financial Statements for certain segment information regarding the
Company.
Commencing in Fiscal 2003, with the acquisition of Unzipped, the Company's
operations are comprised of two reportable segments: footwear and apparel The
footwear segment includes Candie's footwear, Bongo footwear, private label
footwear, Bright Star, retail stores operations, and licensing The apparel
segment includes Bongo jeanswear. See Note 13 of Notes to Consolidated Financial
Statements for certain segment information regarding the Company.
Historical Products
A description of the revenues attributable to the Company's primary
products for the periods referred to below and a description of those products
are as follows:
Year Ended January 31,
Product 2003 2002 2001
CANDIE'S Footwear $ 73,578 $ 71,648 $ 68,730
BONGO Footwear 13,327 13,614 16,482
BONGO Jeanswear 55,869 - -
BRIGHT STAR 14,009 16,140 9,982
---------------- ---------------- --------------
$ 156,783 $ 101,402 $ 95,194
================ ================ ==============
CANDIE'S Footwear. The CANDIE'S footwear line, consisting of fashion and
casual footwear, was designed primarily for women and girls aged 6-25 The
footwear line featured a variety of styles The retail price of CANDIE'S footwear
generally ranged from $30 - $85 for women's styles and $25 - $45 for girls'
styles This product line includes core products, which were sold year-round,
complemented by a broad range of updated styles, which were designed to
establish or capitalize on market trends The line was targeted at the better
department and specialty store tier.
BONGO Footwear. The Company designed, marketed and distributed 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 mid-priced department and specialty stores.
BONGO Jeanswear. The Company designs, markets and distributes fashion jeans
wear through Unzipped at value price points under the BONGO name for women aged
12-25 The retail prices range from $25-$50. The product line includes core basic
denim products, plus additional fashion items to balance the line The product
line was targeted for mid-priced department and specialty stores.
Private Label. 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. Private label revenues from women's
footwear were less than 2% of the Company's revenues for all years presented.
Bright Star. Bright Star 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. Bright Star's customer base includes discount and
specialty retailers Bright Star's products are generally directed toward the
mid-priced and discount markets. The retail prices of Bright Star's footwear
generally range from $25 to $70. In addition to the sale, for the majority of
orders, Bright Star also earns a commission for its services which in the
aggregate are not material. The substantial majority of Bright Star revenues
were from private label sales.
The Company also licenses the CANDIE'S and BONGO brands for a variety of
other product categories See "Trademarks and Licensing"
4
Retail Operations
The Company pursues its CANDIE'S retail strategy through two retail
formats: the concept store and the factory direct outlet. These CANDIE'S stores
enable the Company to promote a full line of its products in an attractive
environment and offer consumers a wider assortment of products. The stores also
serve as marketing and product testing sites that provide the Company with
valuable sell-through information. This information enables the sales,
merchandising and production staff to respond to market changes, which
information can, in turn, be applied to the wholesale business to help to manage
inventory in an efficient manner in limiting inventory markdowns and customer
returns and allowances. The retail stores also provide an opportunity for the
Company to promote its "lifestyle" concept by showcasing its licensed products
See "Trademarks and Licensing". While the CANDIE'S stores carry primarily
CANDIE'S products, they also carry a broad assortment of BONGO jeans and an
increasing array of other licensed BONGO products.
The Company currently owns 11 concept stores and 3 outlets stores. The
Company expects to close some or all of its concept stores which are performing
below the Company's expectations and, in some cases, are losing money. In
addition the Company operates seven outlet stores through an arrangement with
the Casual Male Retail Group ("CMRG"). In February 2002, CMRG licensed the
CANDIE'S name from the Company for the purpose of operating CANDIE'S outlet
stores. In August 2002, following the assignment of the CANDIE"S trademark to IP
Holdings, LLC ("IPH"), the Company's wholly owned subsidiary, IPH entered into a
five year retail store license agreement pursuant to which it licensed to CMRG
the right to operate outlet stores in the United States and Puerto Rico bearing
Candie's name. Thereafter, on or about February 12, 2003, the license with IPH
was terminated and the Company entered into an agreement with CMRG whereby the
Company agreed to operate seven of the stores for a period of 12 months from
February 2, 2003, and CMRG closed or converted the remaining stores. After 12
months the Company has the option to either assume the leases of the stores it
is operating, continue to operate the stores for another six months, or return
the operations of one or more of the stores to CMRG.
Retail revenues for the fiscal years ended January 31, 2003, 2002 and 2001
were $10.1 million, $8.2 million and $5.0 million, respectively, or 6.4%, 8.1%
and 5.3% of net revenue, respectively
Historical Product Design and Development
Prior to executing the Footwear Licenses, the Company's principal goal in
designing footwear was to generate new and exciting footwear with contemporary
and progressive styling that could be offered to consumers at value prices. To
accomplish this, the designers must analyze, interpret and translate current and
emerging trends. Lifestyle trend information was compiled by designers through
various methods including, review of current trends in music, television, movies
and apparel, travel to domestic and international fashion markets, consultation
with the retail team to confirm selling trends, and participation in major
fashion and footwear trade shows to view competition and keep abreast of the
market. Critical to this process was the designers' understanding of the
CANDIE'S and BONGO brands and the target customer so that all this information
could be effectively translated into shoe styles consistent with the CANDIE'S
and BONGO image and price points.
Once the design of a new shoe was completed (including the production of
samples), which generally takes approximately one to two months, the shoe was
offered for sale to wholesale purchasers. After orders were received by the
Company, the acquisition of raw materials, the manufacture of the shoes and the
shipment to the customer took approximately one to two additional months.
Each season, subsequent to the final determination of that season's
footwear line by the design team and management (including colors, trim,
fabrics, constructions and decorations), members of the design team traveled to
the Company's manufacturers to oversee the production of the initial sample
lines.
Unzipped's core competency in designing jeans wear lies in its ability to
manufacture and distribute basic denim jeans at a value price point. In addition
to the basic styles, Unzipped also produces several "fashion" styles each season
to supplement the basics line and ensure that the line continues to develop and
be known as a fashion brand. To accomplish this, the jeans wear designers must
be able to analyze, interpret and translate current and emerging trends
Lifestyle trend information is compiled by apparel designers through various
methods including, review of current trends in music, television, movies and
apparel, travel to domestic and international fashion markets, consultation with
retailers as to sell through of items and to confirm selling trends, and
participation in major fashion trade shows to view competition and keep abreast
of the market.
The jeans wear line is shown to key customers 60 - 90 days before
deliveries are made for the season, and then production of the jeans wear is
keyed off these customers' orders and projections for the season New product is
designed six to seven times during the year, with new lines being shown every
six to eight weeks In addition, specialty or fashion items are produced between
seasons to supplement the lines.
Historical Manufacturing and Suppliers
The Company did not own or operate any manufacturing facilities.
5
Prior to executing the Footwear Licenses, the Company's footwear products
were manufactured to its specifications by a number of independent suppliers
currently located primarily in China, and to a somewhat lesser degree in Brazil
and Italy In Fiscal 2003, approximately 50% of the Company's footwear products
were produced in China, 45% were produced in Brazil and 5% in Italy.
With respect to its footwear suppliers, the Company developed, and sought
to develop, long-term relationships with suppliers that could produce a high
volume of quality products at competitive prices, but it did not have contracts
with any of the factories that produced its footwear. Although the Company did
have direct relationships with these suppliers, the Company also relied on its
relationships with buying agents who act on behalf of the Company in negotiating
with the suppliers, and were responsible for, among other things, selecting
manufacturers, monitoring the manufacturing process, inspecting finished goods
and coordinating shipments to the Company. The Company paid its buying agents a
percentage of the order price of products purchased by the Company. By using
suppliers and buying agents rather than manufacturing products itself, the
Company was able to maximize production flexibility while avoiding significant
capital expenditures, materials and work-in-process inventory and costs of
managing a production work force.
Most raw materials necessary for the manufacture of the Company's footwear
were purchased by the Company's suppliers.
Prior to the start of footwear production, the Company submitted
specifications for products to the buying agent or the factory, who then
provided a confirmation sample of each style for inspection by the Company
During production, the buying agent made periodic inspections of the products at
the factory In addition, the Company made its own inspections. The Company also
inspected samples of products that are received at its warehouse.
The Company negotiates the prices of finished products with its suppliers
through its buying agent or directly with the factory. 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, and to a
lesser extent, with letters of credit The Company protects itself against
currency fluctuations by purchasing products in US dollars.
In Fiscal 2003, the Company used numerous buying agents and suppliers to
obtain its footwear products. 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.
With respect to Unzipped's supply chain for jeans wear, prior to the middle
of 2002, Unzipped had manufactured the overwhelming majority of its products at
facilities in Mexico that were owned or controlled by Azteca, an entity
controlled by Hubert Guez, a member of the Company's Board, who also controls
Sweet, the manager of Unzipped See "Item 13-Certain Relationships and Related
Transactions". After Unzipped was acquired by the Company in April 2002,
Unzipped moved substantially all of its product sourcing from Mexico to Hong
Kong, and then, in September 2002, to Vietnam for the purpose of improving its
production capabilities and gross margins. Unzipped will continue to source
fashion or novelty items in Hong Kong, which locale permits shorter lead times
and allows Unzipped to respond to new trends more quickly.
Azteca acts as the agent for Unzipped, identifying factories and following
up with the suppliers throughout the supply chain to be sure that goods are
being produced on schedule and in compliance with quality standards The
factories themselves purchase the fabric, accessories and trim in conformance
with standards provided to them by Azteca.
Pursuant to the terms of a supply agreement between Unzipped and Azteca,
Unzipped, Unzipped shall pay for goods within thirty (30) days afer the invoice
date. In that event, however, that sufficient funds are available to Unzipped,
Unzipped may, in its discretion, make such payments prior to the end of such
period. See "Item 13 - Certain Relationships and Related Transactions".
Tariffs, Import Duties and Quotas
All footwear products manufactured overseas were subject to United States
tariffs, customs duties and quotas. In accordance with the Harmonized Tariff
Schedule, the Company paid import duties on its footwear products manufactured
outside of the United States at rates ranging from approximately 0% to 48% of
its cost, depending on whether the principal component of the product, which
varies from product to product was leather or some other material Accordingly,
the import duties varied with each shipment of footwear products.
6
Unzipped manufactures a portion of its jeans wear in Vietnam Imports from
Vietnam are subject to quotas.
All apparel products manufactured overseas are also subject to United
States tariffs, customs and quotas Unzipped pays import duties from 5-18%.
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear and apparel 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 for footwear of $17.2,
and $24.0 million, at May 12, 2003 and May 12 , 2002, respectively In connection
with the licensing agreements with Steven Madden, Ltd. and Kenneth Cole
Productions, Inc. the Company anticipates transferring its current unfilled
footwear orders for Fall 2003, totaling $13.9 million, to these two licensees
See "Recent Developments" Unzipped had unfilled wholesale customer orders for
apparel of $24.4 million and $33.5 million, at May 12, 2003 and May 12, 2002.
The Company expects to ship the remaining footwear orders by July 31, 2003
Unzipped expects to ship its backlog by July 2003.
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.
Historical Customers and Sales
During Fiscal 2003, the Company sold its footwear products to more than
1,100 retail accounts in the United States and Canada consisting of department
stores, including Federated Department Stores, Nordstrom and May Company,
specialty stores such as Journey's, and numerous 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 2003, Bright Star's
sales of private label product to Wal-Mart accounted for $10.1 million or 6.4%
of the Company's net revenue, as opposed to Fiscal 2002, in which such sales
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 2003, the Company generated approximately $622,000 in sales
to foreign markets, as compared to $2 million in Fiscal 2002 and $2.5 in Fiscal
2001 These sales were primarily generated from Canada. The Company attributes
this decline from the prior year to a discontinuation of certain foreign
distribution relationships as part of the Company's strategy to build a stronger
foundation for expanded business in the future.
The Company generally required payment for goods by its footwear 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 offered its
customers a discount from the purchase price in lieu of returned goods;
otherwise, goods could be returned solely for defects in quality, in which event
the Company returned the goods to the manufacturer for a credit to the Company's
account.
As of May 12, 2003 the Company utilized the services of eight full time
sales persons for footwear, one of whom was an independent contractor who was
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.
During Fiscal 2003, Unzipped sold its apparel products to approximately 200
retail accounts in the United States consisting of mid-tier department stores,
including JC Penney, Belk and Bonton In Fiscal 2003, no individual customer of
Unzipped accounted for more than 10% of the Company's net revenues.
Unzipped does not sell any products outside the United States.
7
Unzipped 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 May 12, 2003, Unzipped utilized the services of seven full time sales
persons for apparel.
Advertising, Marketing and Website
The Company believes that advertising to promote and enhance the CANDIE'S
and BONGO brands, is an important part of its long-term growth strategy. The
Company believes that its innovative advertising campaigns for CANDIE'S
featuring celebrities and performers, which have brought it national
recognition, have resulted in increased sales and consumer awareness of its
branded products Over the past few years, the Company has had successful
marketing partnerships with superstars in the music industry such as Destiny's
Child, Ashanti, the Dixie Chicks, Brandy, Vanessa Carlton, L'il Kim, Lisa Loeb,
Shania Twain and Mark McGrath, and television stars such as Jenny McCarthy,
Alyssa Milano and Kelly Osbourne. The Company also believes that its new BONGO
campaign, which emphasizes the hip, sexy image of the clothing, will help BONGO
to continue to gain market share in the junior jeans wear arena.
The Company's advertising for CANDIE'S and BONGO 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
In addition, the Company has used sweepstakes and radio promotions, often with
personal appearances by celebrities, to generate excitement with its consumers.
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 Journeys, a leading
teen retailer. 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 footwear products are also featured
on customer websites including 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.
Trademarks and Licensing
In August 2002, the Company formed IPH for the purpose of issuing in a
private placement, $20 million of asset-backed notes secured by intellectual
property assets (trade names, trademarks and license payment thereon). See Note
5 of Notes to Consolidated Financial Statements. In connection with this
transaction, the Company assigned its CANDIE'S and BONGO trademarks to IPH IPH,
in turn, licensed the right to use the CANDIE'S and BONGO trademarks back to the
Company for use on footwear, and to Unzipped, the Company's wholly owned
subsidiary, for use on jeans wear.
As a result of the assignment, IPH 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 formats, 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,
IPH registers certain of its trademarks in other countries and regions including
Canada, Europe, South and Central America and Asia.
IPH 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 IPH 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 IPH would, in such an event, not be prevented from
using such trademarks, which event could have a material adverse effect on IPH
and the Company. In addition, there can be no assurance that IPH will have the
financial or other resources necessary to enforce or defend an infringement
action.
The Company continues to own other registered and unregistered trademarks
that it does not consider to be material to its current operations.
In connection with the formation of and assignment of its intellectual
property to IPH, the Company also assigned all of its license agreements for the
CANDIE'S and BONGO trademarks to IPH. The Company, as manager of IPH's licensing
program, has pursued and intends to pursue licensing opportunities for the
CANDIE'S and BONGO trademarks as an important means for reaching the targeted
8
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 has granted licenses for the
CANDIE'S trademark for use on apparel, including swimwear and intimates,
fragrance, eyewear and watches, and for the BONGO trademark on women's and kids'
tops, sportswear and knitwear, cold weather accessories, socks and hosiery,
handbags, jewelry, and bathing suits See "Recent Developments", for a
description of the recent Footwear Licenses granted by the Company, through IPH,
with respect to CANDIE'S and BONGO brands for footwear design, manufacturing,
marketing, sales and distribution.
IPH will only enter into licensing agreements with additional parties if it
and the Company believe 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. Each license requires the licensee to pay to IPH
royalties based upon net sales, and for the majority of the licenses there is
the requirement that the licensee pay 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. All
the licenses contain strict provisions for IPH to preview and approve product,
packaging and any presentation of the brand, which provisions IPH believes are
critical to maintaining the strength and integrity of its brands.
In August 2002, IPH entered into a five year retail store license agreement
pursuant to which it licensed Casual Male Retail Group ("CMRG") the right to
open outlet stores in the United States and Puerto Rico bearing the CANDIE'S
name. In February 2003, IPH and CMRG terminated that license, and thereafter,
the Company entered into an agreement with CMRG whereby the Company agreed to
operate seven of the outlet stores for a period of one year. After 12 months the
Company has the option to either assume the leases of the stores it is
operating, continue to operate the stores for another six months, or return the
operations of one or more of the stores to CMRG
The Company had a license agreement with Wal-Mart, which expired in July
2002, with respect to the NO EXCUSES trademark There are no plans to renew the
license.
Historical Competition
The footwear industry is extremely competitive in the United States and
prior to executing the Footwear Licenses the Company faced substantial
competition in each of its footwear product lines from, among other brands,
Skechers, Steven 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. With respect to royalty payments resulting from the Footwear Licenses,
the Company will be substantially dependent on the ability of such licensees to
compete successfully with other companies marketing these types of footwear
products, of which there can be no assurance.
The apparel and jeans wear industry is extremely competitive in the United
States and Unzipped faces substantial competition in each of its product lines
from, among other brands, LEI, Mudd and Paris Blues. 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 Unzipped'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 Unzipped will be able to
compete successfully with other companies marketing these types of footwear
products.
Employees
As of May 12, 2003, the Company employed a total of 253 persons in its
corporate, Unzipped and retail operations, 130 of whom are full-time employees
and 123 of whom are part-time employees. Of these employees, 7 are employed in
the Unzipped division, 4 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 May 31, 2005. The monthly rental expense pursuant to the lease
is approximately $25,000 per month depending on the Company's use of electricity
See "Recent Developments". The Company also occupies showrooms and offices on
the 5th, 6th and 14th floors at 215 W 40th Street, New York, New York. As of
June 1, 2003, however, the Company is vacating the 5th floor and is planning on
entering into a new two year lease for each of the 6th and 14th floors. The old
lease for the 5th and 6th floors provided for monthly rental of $19,280 for both
floors, and a monthly rental of $10,833 for the 14th floor. The new lease has an
annual rental of $125,000 for the 6th floor and an annual rental of $90,000 for
the 14th floor.
9
The Company also pays rent on 21 domestic retail store leases. There are 11
concept stores located along the northeastern corridor and 10 outlet stores
located on the east and west coasts, seven of which are being operated by the
Company pursuant to an agreement with CMRG. See Item 1 - Retail Operations. The
aggregate rental payment for these properties during Fiscal 2003 was $2.2
million The aggregate rental payment for store leases in Fiscal 2002 was $1.4
million.
The leases for the retail stores other than those that are being operated
pursuant to the agreement with CMRG expire at various times between 2007 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.
Item 3. Legal Proceedings
In April 2003 the Company settled the Securities and Exchange Commission's
("SEC") previously disclosed investigation of the Company regarding matters that
have been under investigation by the SEC since July 1999 and that were also the
subject of a previously disclosed internal investigation completed by a Special
Committee of the Board of Directors of the Company.
In connection with the settlement the Company, without admitting or denying
the SEC's allegations, consented to the entry by the SEC of an administrative
order in which the Company was ordered to cease and desist from committing or
causing any violations and any future violations of certain books and records,
internal controls, periodic reporting and the anti-fraud provisions of the
Securities Exchange Act of 1934 and the anti-fraud provisions of the Securities
Act of 1933.
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.
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp, which assigned to Banc One Leasing
Corporation ("BOLC") all of its rights and interests under the agreement,
including all rights to the rent and other payments due and to become due under
the agreement from July 1, 1999 through the end of the term of the agreement The
outstanding loan balance as of January 31, 2002 was $1.3 million. On June 10,
2002 the Company was sued by BOLC in the Franklin County Court of Common Pleas
(Ohio) to recover on an accelerated basis certain capitalized lease payments
which otherwise would have been due in various installments through April 2003
On October 7, 2002, the parties reached a settlement agreement, and the case was
dismissed with prejudice. The Company paid BOLC $11 million, of which $346,000
was in excess of the recorded amount of the debt The $346,000 was recorded as
interest expense.
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 filed a
motion to dismiss certain counts of the complaint based upon Redwood's failure
to state a claim, in response to which Redwood has filed an amended complaint.
The Company also moved to dismiss certain parts of the amended complaint. The
magistrate assigned to the matter granted, in part, the Company's motion to
dismiss, and this ruling is currently pending before the District Court. The
Company intends to vigorously defend the lawsuit, and file counterclaims against
Redwood after the District Court rules on the pending motion to dismiss In
addition, the Company has recently moved for summary judgment with respect to
another of the claims asserted by Redwood in the Amended Complaint.
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 herein, 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
10
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, 2003
Fourth Quarter $1.65 $0.88
Third Quarter 3.50 0.80
Second Quarter 5.28 2.74
First Quarter 3.58 2.04
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
As of May 12, 2003 there were approximately 3,440 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, 2003 the Company issued
ten-year options to its non-employee Board members to purchase an aggregate of
100,000 shares of the Company's Common Stock at exercise prices of $1.18 per
share 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.
See Item 12 - "Securities Ownership of Certain Beneficial Owners and
Management-Equity Compensation Plans" for certain information concerning
securities issued under the Company's equity compensation plans
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.
11
Year Ended January 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Data *:
- ----------------
Net revenue $156,783 $101,402 $95,194 $93,747 $115,069
Operating (loss) income (961)(1) (1,545)(1) (7,174)(1) (22,862)(1) 786
Net (loss) (3,945) (2,282) (8,200) (25,176) (641)
(Loss) per share:
Basic $(0.17) $(0.12) $(0.43) $(1.41) $(0.04)
Diluted (0.17) (0.12) (0.43) (1.41) (0.04)
Weighted average number of common
shares outstanding:
Basic 23,681 19,647 19,231 17,798 15,250
Diluted 23,681 19,647 19,231 17,798 15,250
At January 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data *:
- --------------------
Current assets $51,816 $22,730 $23,772 $32,799 $45,216
Total assets 103,437 50,670 50,370 64,058 74,600
Long-term debt 28,505 638 1,153 1,848 271
Total stockholders'
equity 29,011 23,519 24,745 32,948 51,849
* As of May 1, 2002, the operating results of Unzipped, the Company's Bongo
jeanswear business, have been consolidated Thus, operating results in
Fiscal 2003 are not comparable to prior years.
(1) Includes special charges of $3,566 in Fiscal 2003, $1,791 in Fiscal 2002,
$2,674 in Fiscal 2001, and $11,002 in Fiscal 2000 See Notes 4 and 8 of the
Notes to Consolidated Financial Statements.
12
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 and
suppliers, uncertainties relating to customer plans and commitments, the ability
of licensees to successfully market and sell branded products, 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
Critical Accounting Policies:
During Fiscal 2003, the Company adopted certain new accounting standards
issued by FASB, as described below and summarized in Note 1 of the Notes to
Consolidated Financial Statements The adoption of these new accounting standards
did not have a significant impact on the Company's financial position or results
of operations in Fiscal 2003.
Several of the Company's accounting policies involve management judgments
and estimates that could be significant. 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
writes 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. Distribution charges to customers and
related expenses for the years ended January 31, 2003, 2002, and 2001 amounted
to $326,000, $300,000, and $311,000, respectively, are each included in selling,
general and administrative expenses.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changed the accounting for goodwill from an amortization method
to an impairment-only approach. Upon the Company's adoption of SFAS No. 142 on
February 1, 2002, the Company ceased amortizing goodwill As prescribed under
SFAS No. 142, the Company had goodwill tested for impairment during Fiscal 2003,
and no impairments were necessary.
Impairment losses are recognized for long-lived assets, including certain
intangibles, used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are not
sufficient to recover the assets' carrying amount Impairment losses are measured
by comparing the fair value of the assets to their carrying amount.
Other significant accounting policies are summarized in Note 1 of the Notes
to Consolidated Financial Statements.
13
Recent Developments:
As a result of the Company's grant of the Footwear Licenses, there will be
a material impact on the Company's net revenues, operating expenses, profits and
liquidity, including interest expense. Commencing in the fiscal quarter ending
July 31, 2003 the change in the footwear business will result in substantial
reductions in net sales, net revenues and operating expenses and substantial
increases in licensing income when compared to the comparable prior year's
periods.
Prior to granting the Footwear Licenses, with respect to its footwear
business pursuant to which it imported and sold footwear to customers, the
Company purchased all of its footwear inventory from various suppliers, and took
title to that inventory prior to selling it to its customers. The Company's cash
requirements and borrowings under its Credit Facility therefore fluctuated from
time to time, due to, among other factors, seasonal requirements including the
timing of receipt of merchandise. As a result of the licensing of its footwear
operations, the Company will no longer need to borrow from its Credit Facility
to finance purchases of footwear and therefore its interest expense is expected
to significantly decrease. The Company's revenues will also decrease
substantially, as it will no longer recognize revenues from the sale of its
footwear. The Company is expecting a substantial increase in its licensing
income resulting from certain guaranteed payments under the Company's Footwear
Licenses.
In addition, the Company is expecting to eliminate a substantial portion of
its operating expenses, resulting primarily from the elimination of operations
relating to the former design, development, importing, distribution and sale of
footwear. The Company is also planning on closing its offices in Valhalla, New
York, and a floor of its offices in New York City and consolidating to
approximately 5,000 square feet in New York City. The Company will remain
obligated on the Valhalla lease through May 2005, subject to its ability to
sublet the space.
Due to the anticipated decreases in operating expenses and increases in
licensing income, the Company is projecting that its change from a
manufacturer/distributor of footwear to a licensor of footwear manufacturing and
distribution rights will result in an increase in net profits after giving
effect to certain charges relating to the transition from manufacturing and
distributing footwear products to licensing such rights and the expected closing
of certain retail stores.
Summary of Operating Results:
The Company had a net loss of $3.9 million for Fiscal 2003 Of this amount,
$3.6 million was attributable to special charges and $3.4 million of interest
expense.
The Company's special charges in Fiscal 2003 included an impairment loss
and a provision for anticipated lease termination obligations of $3.1 million
resulting from the closing of certain retail stores, $298,000 of special legal
cost related to prior year legal matters, and $145,000 related to severance pay
of certain employees See Note 4 of the Notes to Consolidated Financial
Statements".
The Company's operating loss was $961,000 in Fiscal 2003, a decrease of
$584,000 from $1.5 million in Fiscal 2002 due primarily to $2.5 million of
income from the jeanswear segment.
As of May 1, 2002, the operating results of Unzipped, the Company's Bongo
jeanswear business, have been consolidated Thus, operating results in Fiscal
2003 are not comparable to Fiscal 2002.
Results of Operations
Fiscal 2003 Compared to Fiscal 2002
Revenues. During Fiscal 2003, net sales increased from Fiscal 2002 by $55.3
million to $151.6 million. Included in this change was a decrease in footwear
net sales from $96.3 million in Fiscal 2002 to $95.8 million in Fiscal 2003 and
an increase of $55.8 million resulting from the inclusion of Unzipped's results
in the Fiscal 2003 period. Wholesale women's footwear sales increased by $1.5
million, or 1.9%. Of this amount, sales of Candie's branded women's footwear
increased by $821,000, or 1.4% from the prior year. Additionally, there was an
increase of $211,000 in sales of Bongo branded women's footwear, or 1.7%,
reflecting initial results of a refocus on Bongo footwear and a leveraging of
the current consumer acceptance of the Bongo brand resulting from Bongo
jeanswear sales. Kids' footwear sales increased $1.9 million, or 25.2%, due to a
change in distribution channel to include independent retailer in addition to
department and specialty stores in the kids' footwear area. There was a decrease
in unbranded sales of $1.4 million or 81.7%, reflecting the Company's focus on
branded product. Deductions for returns and allowances for the wholesale women's
footwear business increased $1.7 million, or 24.8%. Expressed as a percentage of
landed wholesale sales, deductions for returns and allowances increased by 140
basis points to 13.4% from 12.0%, reflecting the weak retail environment in the
second half of the year and an increase in promotional activity for the
Company's footwear. Deductions for returns and allowances for Unzipped were $3.6
million, or 6.1% of its gross sales during Fiscal 2003. In addition, sales at
Candie's retail stores increased by $1.4 million, or 16.6%, as a result of new
locations added in Fiscal 2003, partially offset by a decrease in comparable
stores sales of 9.3%. Men's private label division revenues decreased $2.1
million or 13.2% primarily as a result of significantly reduced sales to K-Mart,
which is retrenching as a result of its bankruptcy filing and associated store
closings.
14
Licensing income increased $65,000 to $5.14 million for Fiscal 2003 from
$5.08 million in the prior year. Comparable licensing income increased $902,000,
as Fiscal 2002 licensing income included $1.3 million of royalties from Unzipped
vs. $414,000 for the first quarter of Fiscal 2003, which royalty payment ceased
with the Company's acquisition of the remaining interest in Unzipped on April
23, 2002. Also included in licensing income for Fiscal 2003 was $268,000 paid by
a licensee to terminate its license with the Company.
Gross Profit. Gross profit increased by $9.6 million to $40.5 million in
Fiscal 2003 from $30.9 million in the prior year. Unzipped's gross profit was
$9.7 million, or 17.3 % of net revenues. Gross profit for the footwear business
decreased by $116,000 to $30.8 million, primarily as a result of the decrease in
sales. As a percentage of net revenues, footwear gross profit margin increased
by 5 basis points to 30.52% from 30.47% in the prior year. The increase is
primarily attributable to (i) higher initial markup on wholesale sales, offset
by the increase in deductions in sales returns and allowances and (ii) an
increase in retail sales that have higher gross profit margins offset by lower
comparative gross profit on such sales.
Operating Expenses. During Fiscal 2003, consolidated selling, general and
administrative expenses increased by $7.2 million to $37.9 million. Of this
amount, $6.5 million was attributable to the operations of Unzipped. Selling,
general and administrative expenses related to the Company's retail operations
increased by $2.0 million as the Company expanded its retail store base with
five new store openings (and three store closings) during Fiscal 2003. Expense
reductions of $1.6 million in the Company's wholesale and corporate operations
partially offset the increases resulting from the retail expansion.
For Fiscal 2003, the Company's special charges included an impairment loss
and lease obligation of $3.1 million resulting from of the closing of certain
retail stores, $298,000 of special legal costs related to prior year legal
matters, and $145,000 related to severance pay for certain terminated employees.
For Fiscal 2002, the Company's special charges included a gain of $188,000 on
the sale of a retail store, less charges of $383,000 related to the securing of
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 Income (Loss). As a result of the foregoing, the Company's net
operating loss decreased to $961,000 for Fiscal 2003, compared to an operating
loss of $1.5 million for Fiscal 2002.
Interest Expense. Interest expense in Fiscal 2003 increased by $2.2 million
to $3.4 million. Included in the interest expenses were $846,000 from the
operations of Unzipped, and $660,000 from the 8% senior subordinated note issued
in connection with the Unzipped acquisition. See Note 2 of the Notes to
Consolidated Financial Statements. Interest expense in Fiscal 2003 associated
with the asset backed notes issued by IPH, a subsidiary of the Company was
$692,000. See Note 5 of the Notes to Consolidated Financial Statements. $346,000
of interest expenses was an adjustment of interest payment associated with a
$3.5 million master lease and loan agreement with Bank One Leasing Corp. in
connection with a litigation settlement. See Note 5 of the Notes to Consolidated
Financial Statements. Net interest expense in footwear decreased by $214,000 to
$828,000 from $1.0 million, excluding $133,000 interest expense paid to Bank One
Leasing Corp. in the prior year. The net interest expense decrease in footwear
resulted from lower average interest rates and lower average outstanding
borrowing as compared with the prior year period.
Equity (Income) Losses in Joint Venture. During the quarter ended April 30,
2002, the Company eliminated the remaining $250,000 liability in connection with
the acquisition of Unzipped. During Fiscal 2002, the Unzipped joint venture had
audited net income of $1.9 million. 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 debt. See Note 2 of the Notes to
Consolidated Financial Statements.
Income Tax Benefit. In Fiscal 2003, the Company recorded $139,000 of
federal income tax benefits resulting from the utilization of net operating
losses from prior years, due to changes in the tax laws. No tax expense other
than state taxes was recorded for Fiscal 2003, 2002 and 2001, due to operating
losses incurred. In Fiscal 2002, the Company recorded $62,000 of income tax
provision, consisting of statutory minimum taxes. 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 $14.8 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
$3.9 million, compared to a net loss of $2.3 million for Fiscal 2002.
15
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 $30.9 million in
Fiscal 2002 or 18.4% from $26.1 million in the prior year. As a percentage of
net revenues, gross profit margin increased to 30.5% from 27.4% 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 $30.6 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 Note 2 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.
Liquidity and Capital Resources
Working Capital. Working capital (current assets less current liabilities)
increased by $9.7 million to $5.9 million at January 31, 2003 from a $3.8
million deficit at January 31, 2002, resulting primarily from the Company's new
$20 million debt financing in Fiscal 2003.
16
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 loans to finance its operations Net cash
used in operating activities totaled $9.9 million in Fiscal 2003, as compared to
net cash provided of $240,000 in Fiscal 2002.
Capital expenditures Capital expenditures were $1.7 million for Fiscal 2003
as compared to $2.6 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
$323,000, and the remainder consisting primarily of office additions. As a
result of the Company's grant of the license to design, manufacture, sell,
distribute and market footwear under the BONGO brand to Kenneth Cole Productions
Inc. and the CANDIE'S brand to Steven Madden Ltd, the Company does not
anticipate any significant capital expenditures in Fiscal 2004.
Financing Activities Financing activities provided $133 million during
Fiscal 2003. Of this amount, $20 million was provided from a private placement
by IPH of asset-backed notes secured by intellectual property assets
(tradenames, trademarks and license payments). The notes are subject to a
liquidity reserve account of $2.9 million (reflected as restricted cash in the
accompanying balance sheet), funded from the proceeds of the notes and $1.7
million of related costs were incurred in Fiscal 2003 in the private placement.
In addition, $1.2 million was provided from the proceeds of the exercise of
stock options and warrants. The Company used $1.3 to reduce its revolving notes
payable to its factors, $1.7 million to reduce long-term debt, and $192,000 to
purchase Company common stock on the open market.
Matters Pertaining to Unzipped. 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 debt evidenced by an 8% senior
subordinated note due 2012. In connection with the acquisition, the Company has
entered into a management agreement with Sweet for a term ending January 31,
2005, which provides for Sweet to manage the operations of Unzipped in return
for a management fee, commencing in Fiscal 2004, based upon certain specified
percentages of net income that Unzipped achieves during the three-year term. In
addition, Sweet guarantees that the net income, as defined, of Unzipped shall be
no less than $1.7 million for each year during the term commencing in Fiscal
2004. See Note 2 of Notes to Consolidated Financial Statements.
In connection with its acquisition of Unzipped, the Company had agreed that
on or before February 1, 2003, it would pay Azteca for all receivables due from
Unzipped for purchases of product that were more than 30 days past due and any
amount remaining under a $5 million subordinated loan between Unzipped and
Azteca. Management of the Company believes that it has fulfilled these
acquisition related obligations. At January 31, 2003, the total amount due to
Azteca and related parties from Unzipped was $6.2 million, all of which, in the
opinion of Company management, constitutes accounts payable less than 30 days
past due. Management of the Company also believes that the subordinated note has
been paid in full. However, because of a dispute with Azteca and Sweet as to the
terms for merchandise supplied by Azteca to Unzipped under the Supply Agreement
and resulting application of payments from Unzipped to invoices and the
subordinated note, Azteca believes that the total of $5.9 million due to it is
comprised of $697,000 of accounts payable less than 30 days past due, $171,000
of interest and $5 million due on the subordinated note. In that event, the
Company would be obligated under the Unzipped acquisition agreement to repay
Azteca the $5 million that Azteca believes is due on the subordinated note. The
interest accrual of $171,000 due to Azteca on the subordinated note is also in
dispute. This amount has been included in interest expense for the year ended
January 31, 2003.
In connection with the acquisition of Unzipped, the Company agreed to file
and have declared effective a registration statement with the SEC for the 3
million shares of the Company's common stock issued to Sweet. The terms of this
agreement provided that in the event the registration statement was not declared
effective by April 23, 2003, the Company would be required to pay $82,500 to
Sweet as a penalty and thereafter be required to pay $82,500 per calendar
quarter for each calendar quarter thereafter in which the registration statement
has not been effective for more than 30 days of such calendar quarter. A
registration statement has been filed but has not yet been declared effective.
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 originally included a $5 million over advance provision with interest
at 1.00% above the prime rate. In June 2002, the Company agreed to amend the
Credit Facility to increase the over advance provision to $7 million and include
certain retail inventory in the availability formula. Borrowings under the
amended Credit Facility bear interest at 1.5% above the prime rate.
At January 31, 2003, borrowings under the Credit Facility totaled $8.4
million and availability under the formula was $995,000.
Unzipped had a credit facility with Congress Financial Corporation
("Congress"). Under the facility as amended, Unzipped was entitled to borrow up
to $15 million under revolving loans until September 30, 2002. The facility was
further amended to extend its expiration on a month-to-month basis through
January 31, 2003. Borrowings under the facility were limited by advance rates
against eligible accounts receivable and inventory balances, as defined. The
borrowings under the facility bore interest at the lender's prime rate or at a
rate of 2.25% per annum in excess of
17
the Eurodollar rate. At January 31, 2003, Unzipped's borrowings totaled $13.2
million under the revolving credit agreement with Congress and the availability
under the formula was $715,000,
On February 25, 2003 Unzipped entered into a two-year $25 million credit
facility ("the Unzipped Credit Facility") with GE Capital Commercial Services,
Inc. ("GECCS") replacing its arrangement with Congress. Borrowings are limited
by advance rates against eligible accounts receivable and inventory balances, as
defined. Under the facility, Unzipped may also arrange for letters of credit in
an amount up to $5 million. The borrowings bear interest at a rate of 2.25% per
annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater.
Borrowings under the facility are secured by substantially all of the
assets of Unzipped. In addition, Unzipped has agreed to subordinate $3.9 million
of its accounts payable to Azteca Productions to GECCS. Unzipped is also
required to meet certain financial covenants including tangible net worth
minimums and a fixed charge coverage ratio, as defined.
Bond Financing. In August 2002 IPH, an indirect wholly owned subsidiary of
the Company, issued in a private placement $20 million of asset-backed notes
secured by intellectual property assets (tradenames, trademarks and license
payments thereon). The notes have a 7-year term with a fixed interest rate of
7.93% with quarterly principal and interest payments of approximately $859,000.
The notes are subject to a liquidity reserve account of $2.9 million, funded by
a deposit of a portion of the proceeds of the notes. The net proceeds of $16.2
million were used to reduce amounts due by the Company under its existing
revolving credit facilities. Concurrently with this payment, the Credit Facility
was further amended to eliminate the over advance provision along with certain
changes in the availability formula. Costs incurred to obtain this financing
totaled approximately $2.4 million which have been deferred and are being
amortized over the life of the debt.
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp, which assigned to Banc One Leasing
Corporation ("BOLC") all of its rights and interests under the agreement,
including all rights to the rent and other payments due and to become due under
the agreement from July 1, 1999 through the end of the term of the agreement.
The agreement required 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 was four years at an effective annual interest rate of
10.48%. The outstanding loan balance as of January 31, 2002 was $1.3 million. On
June 10, 2002 the Company was sued by BOLC in the Franklin County Court of
Common Pleas (Ohio) to recover on an accelerated basis certain capitalized lease
payments which otherwise would have been due in various installments through
April 2003. On October 7, 2002, the parties reached a settlement agreement, and
the case was dismissed with prejudice. The Company paid BOLC $1.1 million, of
which $346,000 was in excess of the recorded amount of the debt. The $346,000
was recorded as interest expense.
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, 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.
At January 31, 2003, borrowings under revolving credit facilities totaled
$21.6 million at a weighted average interest rate of 4.83%.
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.
The following is a summary of contractual cash obligations for the periods
indicated that existed as of January 31, 2003, and is based on information
appearing in the Notes to Consolidated Financial Statements (amounts in
thousands):
18
Contractual 2005 - 2007 - After
Obligations Total 2004 2006 2008 2008
- --------------------------------------------------------------------------------
Notes payable $21,577 $21,577 $ - $ - $ -
Long-term debt 31,153 2,648 4,872 5,224 18,409
Operating leases 11,900 1,778 3,128 2,512 4,482
- --------------------------------------------------------------------------------
Total Contractual Cash $64,630 $26,003 $8,000 $7,736 $22,891
Obligations
At January 31, 2003, the Company had $826,000 outstanding letters of
credit.
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, 2003, the Company had available net operating losses of
approximately $38.5 million for income tax purposes, which expire in the years
2006 through 2023. 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 $33.9 million
is not subject to such limitation and expires 2009 through 2023. 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. Upon the Company's adoption of SFAS No.
142 on February 1, 2002, the Company ceased amortizing goodwill. As prescribed
under SFAS No. 142, the Company tested goodwill for impairment during Fiscal
2003, and no impairments were noted.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting
and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a
business. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted SFAS
No. 144 as of February 1, 2002, and it did not have a significant impact on the
Company's financial position and results of operations.
19
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, requires the Company to reclassify
cooperative advertising expenses from a deduction against revenues to selling,
general and administrative expense. See Note 1 of Notes to Consolidated
Financial Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which changes the accounting for
costs such as lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The adoption of this standard will
impact the Company's restructuring plans in connection with store closings..
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (an amendment of SFAS No. 123), which
amended SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations including Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB No. 25. The pro forma information
required by SFAS 123 is provided in Note 6 of the Notes to Consolidated
Financial Statements.
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 change in interest rates of two percentage points or less would not
materially effect the Company's Fiscal 2003 and Fiscal 2002 net losses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required to be submitted in
response to this Item 8 are set forth in Part IV, Item 15 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
20
PART III
Item 10. Directors and Executive Officers of the Registrant
A list of the directors and executive officers of the Company and their
respective ages and positions are as follows:
Name Age Position
Neil Cole 46 Chairman of the Board, President and Chief Executive Officer
Deborah Sorell Stehr 40 Senior Vice President, Secretary and General Counsel
Richard Danderline 49 Executive Vice President - Finance and Operations
Barry Emanuel 61 Director
Steven Mendelow 60 Director
Ann Iverson 59 Director
Hubert Guez 50 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. In
April 2003, Mr. Cole, without admitting or denying the SEC's allegations,
consented to the entry by the SEC of an administrative order in which Mr. Cole
was ordered to cease and desist from violating or causing any violations or
future violation of certain books and records and periodic reporting provisions
and the anti-fraud provisions of the Securities Exchange Act of 1934. In
addition, Mr. Cole also paid a $75,000 civil monetary fine.
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.
She has served as Secretary of the Company since June 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.
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 director of the Company since December 1999 and
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. Mr. Mendelow also serves as the head of the Audit Committee of Urecoats
Industries Inc., a public company listed on the American Stock Exchange.
21
Ann Iverson has been a director of the Company since March 2001. Since
1998, she has been the President and Chief Executive Officer 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 Chief Executive Officer 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 directors 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 the Board of Portico Bed & Bath Inc.,
a home decorating and accessories company, and Chairman of the board at Brooks
Sports, Inc., an athletic footwear company. 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.
Hubert Guez has been a director of the Company since April 2002, and has
been involved in the apparel industry for over 25 years. Mr. Guez is a managing
member of Sweet, the current manager of Unzipped and the entity from which the
Company acquired the remaining 50% interest in Unzipped in April 2002. From
October 1998 through May 2002, Mr. Guez was the Vice-Chairman, CEO, and Manager
of Unzipped Apparel, LLC, the licensee for the Bongo brand apparel. From 1996 to
1998, Mr. Guez served as President of Commerce Clothing Company, LLC, the
licensee for CK Kids apparel. In September 1991, Mr. Guez founded Azteca
Production International, Inc., where he continues to serve as the Chief
Executive Officer and President. From 1985 through 1991, he was employed with FX
Systems, Inc. a software company that he founded specializing in operating
systems for the apparel industry. Between 1981 and 1985, Mr. Guez served as
President of Sasson Jeans LA, the licensee for Sasson women's jeans. Mr. Guez
was appointed by Sweet as a member of the Company's Board of Directors in
accordance with the provisions of the acquisition by the Company of the
remaining 50% interest in Unzipped from Sweet in April 2002.
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.
In connection with the acquisition by the Company of the remaining 50%
interest in Unzipped from Sweet in April 2002, the Company agreed that, until
the later of (a) the expiration or termination of Sweet's management agreement
for the management of Unzipped, (b) the payment by the Company in full of the 8%
senior subordinated note in the principal amount of $11 million, or (c) the date
on which Sweet or its permitted transferees cease to own all of the 3 million
shares of the Company's Common Stock issued to Sweet in connection with the
acquisition, the Company will recommend and include Hubert Guez on the slate of
nominees for members of the Board of Directors in connection with the annual
meeting of stockholders for election of directors. The agreement further
provides that during such period Sweet has the right to designate a replacement
nominee for director in the event that the Company objects to the continuance of
Mr. Guez as a director.
Compensation Committee Interlocks and Insider Participation
The Board has a Compensation Committee, consisting of Ms. Iverson and
Messrs. Mendelow and Emanuel. 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 2003,
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 2003, none of the
executive officers of the Company 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 2003, there was compliance with
the filing requirements applicable to its officers, directors and 10%
stockholders of the Common Stock.
22
Item 11. Executive Compensation
The following table sets forth all compensation paid or accrued by the
Company for Fiscal 2003, 2002 and 2001, to or for the Chief Executive Officer
and for the other persons that served as executive officers of the Company
during Fiscal 2003 whose salaries for Fiscal 2003 exceeded $100,000 and for John
J. McPhee who was a key employee until April 4, 2003, but not an executive
officer of the Company (collectively, the "Named Persons"):
Summary Compensation Table
Long-Term
Compensation
Awards
------------
Other Securities All Other
Name & Principal Positions Fiscal Annual Compensation Annual Com- Underlying Compensations
Year Salary Bonus(1) pensation (2) Options
Neil Cole 2003 $ 487,500 $ - $ - 615,000 $ 31,503(5)
Chairman, President & 2002 500,000 - - 350,000 -
Chief Executive Officer 2001 500,000 - 10,000 617,250 -
Deborah Sorell Stehr 2003 215,625 - - - -
Senior Vice President & 2002 180,000 25,000 - 40,000 -
General Counsel 2001 166,667 25,000 - 80,000 -
Richard Danderline 2003 219,375 50,000 - - -
Executive Vice President - 2002 214,968 50,000 - - -
Finance & Operations 2001 120,513 (3) 25,000 - 160,000 -
John McPhee 2003 316,875 - - - -
President of Wholesale 2002 275,000 - - 140,000 -
Sales(4) 2001 228,642 25,000 - 110,000 -
(1) Represents bonuses accrued under employment agreements.
(2) Represents amounts earned as director's fees. Except as set forth in the
table, the table does not reflect certain perquisites granted to the Named
Persons that as to each such person in any year do not exceed the lesser of
10% of their respective salaries or $50,000.
(3) For the period from June 26, 2000 through January 31, 2001.
(4) Mr. McPhee resigned as the President of Wholesales Sales and became a
part-time employee of the Company on April 4, 2003.
(5) Represents Company paid premiums on a life insurance for the benefit of the
beneficiaries of Mr. Cole.
Option Grants in Fiscal 2003 Year
The following table provides information with respect to individual stock
options granted during Fiscal 2003 to each of the Named Persons who
received options during Fiscal 2003:
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates
Underlying Options Granted Exercise of Stock Price Appreciation
Options to Employees Price Expiration for Option Term (2)
Name Granted (#) (1) in Fiscal Year ($/share) Date 5% ($) 10%
- ------------------------ ----------------- ------------------ --------------- -------------- -----------------------------------
Neil Cole 600,000 57.6% 2.750 04/23/12 1,037,676 2,629,675
15,000 1.4 4.410 05/22/12 41,601 105,426
Deborah Sorell Stehr - - - - - -
Richard Danderline - - - - - -
John McPhee - - - - - -
23
(1) Mr. Cole's 600,000 options vest as to one-third on each of February 1,
2003, 2004 and 2005, and 15,000 options vested fully at May 22, 2002.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These amounts do
not take into account provisions of options providing for termination of
the option following termination of employment or non-transferability of
the options and do not make any provision for taxes associated with
exercise. Because actual gains will depend upon, among other things, future
performance of the Common Stock, there can be no assurance that the amounts
reflected in this table will be achieved.
The following table sets forth information as of January 31, 2003, with
respect to exercised and unexercised stock options held by the Named Persons.
Ms. Sorell Stehr and Mr. McPhee exercised 10,000 and 45,000 options,
respectively, during Fiscal 2003. No options were exercised by any other Named
Persons during Fiscal 2003. 10,000 and 400,000 options owned by Neil Cole
expired on June 30, 2002 and January 31, 2003, respectively.
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options at January 31, 2003(#) Options at January 31, 2003($)(1)
Acquired on Value -------------------------------- ---------------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------------- ------------ --------------- ---------------- ---------------- ----------------
Neil Cole - - 2,895,875 400,000 3,280 -
Deborah Sorell Stehr 10,000 31,625 176,666 13,334 7,000 -
Richard Danderline - - 85,000 75,000 4,125 -
John McPhee 45,000 153,013 241,666 13,334 3,750 -
- ---------------------------------------------------------------------------------------------------------------------
(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, 2003 was $1.10.
Employment Contracts and Termination and Change-in-Control Arrangements
The Company has entered into an 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. In November 2002 Mr. Cole agreed
to a reduction in his annual base salary to $450,000 which reduction is still
effect as of the date of this report. Under the employment agreement, if the
Company meets at least 66 2/3% of its net income target (as determined by the
Board) for a 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 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 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 will 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 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, which
options vest over a three year period.
The Company has entered into an employment agreement with Deborah Sorell
Stehr that expires on January 31, 2004 and provides for her to receive a base
salary of $225,000 for the first year and $235,000 for the last year of the
agreement. In November 2002 Ms. Sorell Stehr agreed to a reduction in her base
salary to $202,500 which reduction is still effect as of the date of this
report, however, as of January 31, 2003, Ms. Sorell Stehr's salary was raised to
$212,5000. 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 will 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.
24
The Company has entered into a two year employment agreement with Richard
Danderline, which expires on June 26, 2004. Under the agreement, Mr. Danderline
was to receive an annual base salary of $225,000, which was reduced to $202,500
in November 2002 and which reduction is still in effect as of the date of this
report. Mr. Danderline is entitled to receive a bonus under the Company's
executive bonus plan. In connection with his employment in 2000, 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.
Compensation of Directors
During Fiscal 2003, Messrs. Emanuel and Mendelow and Ms. Iverson (each an
"Outside Director") each received a grant of Common Stock from the Company under
the Company's Non-Employee Director Stock Incentive Plan having a value of
$20,000 in compensation for attending board meetings. Each Outside Director also
received $500 for each Committee meeting that he or she attended. During Fiscal
2004, each Outside Director is entitled to an additional grant of Common Stock
under the Non-Employee Director Stock Inventive Plan having a value of $20,000
plus $1,000 for each committee meeting. In addition the chair of each of the
Company's Audit, Compensation and Governance Committees received a fee of $5,000
per year.
Under the Company's 2002 Stock Option Plan (the "2002 Plan"), 2001 Stock
Option Plan ("2001 Plan"), 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 2002
Plan, 2001 Plan, 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 2002 Plan, 2001 Plan ,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, 2001 Plan and 2002 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 2002 Plan, 2001 Plan, 2000 Plan or the 1997
Plan during Fiscal 2003.
25
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of May 12, 2003,
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 3,448,000( 3 ) 12.3%
Claudio Trust dated February 2, 1990 1,886,597( 4 ) 7.5%
2925 Mountain Maple Lane
Jackson, WY 83001
Michael Caruso 1,886,597( 4 ) 7.5%
Barry Emanuel 142,538( 5 ) *
Steven Mendelow 188,538( 6 ) *
Deborah Sorell Stehr 176,666( 7 ) *
Richard Danderline 85,000( 8 ) *
John McPhee 259,216( 9 ) 1.0%
Ann Iverson 147,538(10) *
Sweet Sportswear, LLC 3,067,900(11) 12.3%
Hubert Guez
All executive officers and directors as a 7,256,180 (3) (5) (6) (7) 25.5%
group (seven persons) (8) (10) (11)
* Less than 1%
(1) Unless otherwise indicated, each beneficial owner has an address c/o the
Company 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 May 12, 2003, 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 May 12, 2003, 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 2,895,875 shares of Common Stock issuable upon exercise of
options, 70,000 shares of Common Stock owned by Mr. Neil Cole, and 20,000
shares of Common Stock owned by Mr. Cole's children. Also includes 462,925
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. Does not include 400,000 shares of Common Stock underlying
non-exercisable options and 15,194 shares held in Mr. Cole's account under
the Company's 401(k) savings plan for which Mr. Cole has no current voting
or dispositive powers. Does not give effect to voting rights that may be
held by Mr. Cole pursuant to the proxy described in greater detail in
footnote (11) below.
(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 110,000 shares of Common Stock issuable upon exercise of options.
(6) Includes 95,250 shares of Common Stock issuable upon exercise of options,
and 60,750 shares of Common Stock owned by C&P Associates, of which Mr.
Mendelow and his wife are affiliated.
26
(7) Represents shares of Common Stock issuable upon exercise of options. Does
not include 9,985 shares held in Ms. Sorell Stehr's account under the
Company's 401(k) savings plan for which Ms. Sorell Stehr has no current
voting or dispositive powers.
(8) Represents shares of Common Stock issuable upon exercise of options. Does
not include 1,889 shares held in Mr. Danderline's account under the
Company's 401(k) savings plan for which Mr. Danderline has no current
voting or dispositive powers.
(9) Includes 241,666 shares of Common Stock issuable upon exercise of options,
17,550 shares of Common Stock owned by Mr. McPhee. Does not include 12,906
shares held in Mr. McPhee's account under the Company's 401(k) savings plan
for which Mr. McPhee has no current voting or dispositive powers. On April
4, 2003, Mr. McPhee resigned as the President of Wholesales Sales and
became a part-time employee of the Company.
(10) Includes 125,000 shares of Common Stock issuable upon exercise of options.
(11) Represents 3,000,000 shares of Common Stock held by Sweet Sportswear, LLC,
and 67,900 shares of Common Stock owned by Mr. Guez. Mr. Guez, an appointed
member of the Company's Board of Directors, is a managing member of Sweet
Sportswear, LLC. Sweet has granted an irrevocable proxy with respect to all
3 million shares in favor of Messrs. Cole, Guez and/or such other members
of the Company's Board designated from time to time by a majority of the
Board, to vote at any meeting of the Company's stockholders or provide
consent in lieu of a meeting, as the case may be, but only in favor of a
matter approved by the Board or otherwise at the direction of the Board.
The proxy expires on April 23, 2012 provided, however, that the proxy will
expire earlier with respect to any shares up to an aggregate of 2 million
shares subject to the proxy, to the extent such shares are transferred by
Sweet after April 23, 2003 to persons other than (i) an officer or member
of Sweet, (ii) any affiliate of Sweet or its officer or member or (iii) any
family member of such persons (collectively referred to as "Restricted
Transferee"). Moreover, the proxy will expire with respect to any of the
other 1 million shares subject to the proxy, to the extent that such shares
are transferred by Sweet after April 23, 2004 to a transferee that is not a
Restricted Transferee.
Equity Compensation Plans
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of January 31, 2003.
Number of securities remaining
Number of securities to be Weighted-average available for issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, warrants outstanding options, (excluding securities reflected
and rights warrants and rights in column (a))
Plan Category (a) (b) (c)
- ---------------------------------- ------------------------------ ----------------------- ----------------------------------
Equity compensation plans
approved by security holders: 4,408,025 $2.67 2,533,375
Equity compensation plans not
approved by security holders (1): 2,031,500(1) $2.27 725,000(2)
- -----------------------------------------------------------------------------------------------------------------------------
Total 6,439,525 $2.34 3,253,375
============================================================================================================================-
(1) Represents the aggregate number of shares of common stock issuable upon
exercise of individual arrangements with option and warrant holders,
including 1,230,000 issued under the terms of the Company's 2001 Stock
Option Plan. These options and warrants are up to three years in duration,
expire at various dates between September 12, 2004 and December 12, 2012,
contain anti-dilution provisions providing for adjustments of the exercise
price under certain circumstances and have termination provisions similar
to options granted under stockholder approved plans. See Notes 1 and 6 of
Notes to Consolidated Financial Statements for a description of the
Company's Stock Option Plans.
(2) Represents shares eligible for issuance upon the exercise of options that
may be granted under the Company's 2001 Stock Option Plan.
Item 13. Certain Relationships and Related Transactions
On May 1, 2003, the Company granted Kenneth Cole Productions, Inc. the
exclusive worldwide license to design, manufacture, sell, distribute and market
footwear under the BONGO brand. The CEO and Chairman of Kenneth Cole
Productions, Inc. is Kenneth Cole, who is the brother of Neil Cole, the CEO and
President of the Company.
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 Fiscal 2002, the Company advanced
$1,058,000 to the Foundation on which interest was charged at a rate per annum
27
that was equal to the prime rate, and at January 31, 2002 the Company had a
balance of $699,000 due from the Foundation. The Company had originally recorded
$350,000 reserve against its receivable in Fiscal 2002. During Fiscal 2003, the
Foundation paid the Company $470,000, and the Company reversed the reserve of
$350,000 recorded in Fiscal 2002. At January 31, 2003, the Company had a balance
of $230,000 due from the Foundation. The Company believes that the amount due
will be recovered in full although the Foundation's operating history in fund
raising activities is limited.
The Company has a license for Bongo branded bags and small leather/PVC
goods with Innovo Group, Inc. ("Innovo"), a company in which Hubert Guez, a
director of the Company and principal of Sweet, Manager of Unzipped, is a
principal shareholder. Under this license, which expires March 31, 2007, the
Company recorded $214,000 and $58,000 in royalty income for the years ended
January 31, 2003 and 2002, respectively, and royalties receivable from Innovo
were $179,000 and $49,000 at January 31, 2003 and 2002, respectively.
Unzipped has a supply agreement with Azteca for the development,
manufacturing, and supply of certain products bearing the Bongo trademark for
the exclusive use by Unzipped. Hubert Guez is the Chief Executive Officer and
President of Azteca. As consideration for the development of the products,
Unzipped pays Azteca pursuant to a separate pricing schedule. For the year ended
January 31, 2003, Unzipped purchased $49.9 million of products from Azteca.
Azteca also allocates expenses to Unzipped for Unzipped's use of a portion of
Azteca's office space, design and production team and support personnel. For the
year ended January 31, 2003, Unzipped incurred $440 of such allocated expenses.
In connection with the Company's acquisition of the remaining 50% interest
in Unzipped from Sweet, the Company has entered into a management agreement with
Sweet for a term ending January 31, 2005, which provides for Sweet to manage the
operations of Unzipped in return for a management fee based upon certain
specified percentages of net income that Unzipped achieves during the three-year
term. The fee does not commence until Fiscal 2004. Hubert Guez is a managing
member of Sweet.
Unzipped has a distribution agreement with Apparel Distribution Services
(ADS), an entity that shares common ownership with Sweet for a term ending
January 31, 2005. The agreement provides for a per unit fee for warehousing and
distribution functions and per unit fee for processing and invoicing orders. For
the year ended January 31, 2003, Unzipped incurred $2.6 million for such
services. The agreement also provides for reimbursement for certain operating
costs incurred by ADS and charges by ADS for special handling fees at hourly
rates approved by management.
Unzipped occupies office space in a building rented by ADS and Commerce
Clothing Company, LLC (Commerce), a related party to Azteca.
At January 31, 2003, the total amounts (included in accounts payable and
accrued expenses) due to Azteca and ADS were $5.8 million and $335,000
respectively.
See Notes 2 and 9 of Notes to Consolidated Financial Statements.
28
Item 14 - Controls and Procedures
Within the 90 days prior to the filing date of this Annual Report on Form
10-K, an evaluation was carried out (the "Controls Evaluation"), under the
supervision and with the participation of Company's management, including its
Chief Executive Officer ("CEO") and its Chief Financial Officer ("CFO"), of the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Section 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934
("Disclosure Controls")). Based upon that evaluation, the CEO and CFO have
concluded that the Disclosure Controls are effective to ensure that the
information required to be disclosed by the Company in reports it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as required by the rules and forms of the Securities
Exchange Commission.
The CEO and CFO note that, since the date of the Controls Evaluation to the
date of this Annual Report on Form 10-K, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
Item 15. 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
29
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 15, 2003
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 16, 2003
- -------------
Neil Cole Chief Executive Officer
/s/Richard Danderline Executive Vice President - Finance and Operations May 16, 2003
- ---------------------
Richard Danderline (Principal Financial and Accounting Officer)
/s/ Barry Emanuel Director May 16, 2003
- -----------------
Barry Emanuel
/s/ Steven Mendelow Director May 16, 2003
- -------------------
Steven Mendelow
/s/ Ann Iverson Director May 16, 2003
- ---------------
Ann Iverson
Director
Hubert Guez
30
CERTIFICATION
I, Neil Cole, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Candie's, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Neil Cole
President and Chief Executive Officer
31
CERTIFICATION
I, Richard Danderline, Executive Vice President - Finance and Operations,
certify that:
1. I have reviewed this annual report on Form 10-K of Candie's, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Richard Danderline
Executive Vice President - Finance and Operations,
Principal Financial Officer
32
Index to Exhibits
Exhibit
Numbers Description
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 (9)
3.4 Amendment to Certificate of Incorporation dated June 24, 2002 (16)
3.5 Restated and Amended By-Laws (9)
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 (4) (*)
10.4 Candie's, Inc. 401(K) Savings Plan (17)
10.5 Option Agreement of Neil Cole dated November 29, 1999 (17)(*)
10.6 Option Extension Agreement between the Company and John McPhee dated
September 21, 2001 (17)
10.7 Lease with respect to the Company's executive offices (10)
10.8 Employment Agreement between Richard Danderline and the Company dated June
26, 2002. (17)*
10.9 Employment Agreement between John J. McPhee and the Company. (13)
10.10 Limited Liability Company Operating Agreement of Unzipped Apparel LLC (6)
10.11 Registration Rights Agreement between the Company and the stockholders of
Michael Caruso & Co. (5)
10.12 Amendment to Lease Agreement with respect to the Company's executive
offices. (7)
10.13 2000 Stock Option Plan of the Company (12)(*)
10.14 Rights Agreement dated January 26, 2000 between the Company and
Continental Stock Transfer and Trust Company (8)
10.15 Non-Employee Director Stock Incentive Plan (14)
10.16 Employment Agreement between Neil Cole and the Company dated February 1,
2002 (13)*
10.17 Employment Agreement between Deborah Sorell Stehr and the Company dated
February 1, 2002 (13)*
10.18 Factoring Agreement between the CIT Group/Commercial Services, Inc. and
the Company (13)
10.19 Factoring Agreement between the CIT Group/Commercial Services, Inc. and
Bright Star Footwear, Inc. (13)
10.20 2001 Stock Option Plan of the Company (13)*
10.21 2002 Stock Option Plan of the Company (15)*
10.22 Equity Acquisition Agreement between Michael Caruso & Co., Inc., Candie's,
Inc. and Sweet Sportwear, LLC dated as of April 23, 2002. (16)
10.23 8% Senior Subordinated Note due 2012 of Candie's, Inc. payable to Sweet
Sportwear, LLC. (16)
10.24 Collateral Pledge Agreement dated October 18, 2002 between Candie's, Inc.,
Michael Caruso & Co., and Sweet Sportswear LLC. (16)
21 Subsidiaries of the Company (17)
23 Consent of BDO Seidman, LLP (17)
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(17)
99.2 Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (17)
33
- ---------------
(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 Quarterly Report on Form 10-Q for the
quarter ended October 31, 1997, and incorporated by reference herein.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 24, 1998 and incorporated by reference herein.
(6) 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.
(7) 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.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 26, 2000 and incorporated by reference herein.
(9) 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.
(10) Filed as an exhibit to the Company's Quarterly Report as Form 10-Q for the
quarter ended May 1, 2000 and incorporated by reference herein.
(11) 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.
(12) 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.
(13) Filed as an exhibit to the Company's Annual report on Form 10-K for the
year ended January 31, 2002 and incorporated by reference herein..
(14) Filed as Appendix B to the Company's definitive Proxy Statement dated July
3, 2001 as filed on Schedule 14A and incorporated by reference herein.
(15) Filed as Appendix A to the Company's definitive proxy statement dated May
28, 2002 as filed on Schedule 14A and incorporated by reference herein.
(16) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2002 and incorporated herein by reference.
(17) Filed herewith.
* Denotes management compensation plan or arrangement.
34
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, 2003
Candie's, Inc. and Subsidiaries
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, 2003, and 2002 F-4
Consolidated Statements of Operations for the Years ended
January 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 2003, 2002, and 2001 F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 2003, 2002, and 2001 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 15(d):
Report of Independent Certified Public Accountants on Financial Statement
Schedule for the Years Ended January 31, 2003, 2002, and 2001 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.
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, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2003. 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, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1, effective February 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/s/: BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
April 18, 2003, except for Note 15 which is as of May 12, 2003.
F - 3
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
January 31,
---------------------------
2003 2002
--------- ---------
Assets
Current Assets:
Cash $ 1,899 $ 636
Accounts receivable, net of allowances of
$370 in 2003 and $356 in 2002 8,456 4,674
Due from factor, net of allowances of
$2,612 in 2003 and $822 in 2002 17,966 5,791
Due from affiliates, net of a reserve of $350 in 2002 230 565
Inventories, net 19,016 8,368
Deferred income taxes 3,109 1,881
Prepaid advertising and other 1,140 815
--------- ---------
Total Current Assets 51,816 22,730
--------- ---------
Property and equipment, at cost:
Furniture, fixtures and equipment 9,157 9,618
Less: Accumulated depreciation and amortization 6,514 4,470
--------- ---------
2,643 5,148
--------- ---------
Other Assets:
Restricted cash 2,900 -
Goodwill, net of accumulated amortization of
$794 in 2002 25,241 1,868
Other intangibles, net 17,818 18,158
Deferred financing costs, net 2,326 741
Deferred income taxes 513 1,741
Other 180 284
--------- ---------
48,978 22,792
--------- ---------
Total Assets $103,437 $50,670
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks $21,577 $ 12,366
Accounts payable and accrued expenses 15,493 12,672
Due to affiliates 6,203 -
Exposure related to joint venture investment - 250
Current portion of long-term debt 2,648 1,225
--------- ---------
Total current liabilities 45,921 26,513
--------- ---------
Long-term debt ($11,000 to related party in 2003) 28,505 638
Stockholders' Equity:
Preferred and common stock to be issued - 2,000
Preferred stock, $01 par value - shares authorized 5,000;
none issued or outstanding - -
Common stock, $001 par value - shares authorized 75,000;
shares issued 24,992 in 2003 and 20,400 in 2002 25 20
Additional paid-in capital 69,812 58,188
Retained earnings (deficit) (40,159) (36,214)
Less: Treasury stock - at cost - 198 shares in 2003
and 113 shares in 2002 (667) (475)
--------- ---------
Total stockholders' equity 29,011 23,519
--------- ---------
Total Liabilities and Stockholders' Equity $103,437 $50,670
========= =========
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,
---------------------------------------------------------
2003 2002 2001
------------------ ------------------- ------------------
Net sales $ 151,643 $ 96,327 $ 90,667
Licensing income 5,140 5,075 4,527
------------------ ------------------- ------------------
Net revenue 156,783 101,402 95,194
Cost of goods sold 116,306 70,468 69,054
------------------ ------------------- ------------------
Gross profit 40,477 30,934 26,140
Selling, general and administrative expenses 37,872 30,688 30,640
Special charges 3,566 1,791 2,674
------------------ ------------------- ------------------
Operating loss (961) (1,545) (7,174)
Other expenses:
Interest expense 3,373 1,175 1,661
Equity (income) in joint venture (250) (500) (701)
------------------ ------------------- ------------------
3,123 675 960
------------------ ------------------- ------------------
Loss before income taxes (4,084) (2,220) (8,134)
Provision (benefit) for income taxes (139) 62 66
------------------ ------------------- ------------------
Net loss $ (3,945) $ (2,282) $ (8,200)
================== =================== ==================
Loss per share:
Basic $ (0.17) $ (0.12) $ (0.43)
================== =================== ==================
Diluted $ (0.17) $ (0.12) $ (0.43)
================== =================== ==================
Weighted average number of common shares outstanding:
Basic 23,681 19,647 19,231
================== =================== ==================
Diluted 23,681 19,647 19,231
================== =================== ==================
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, 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 30 - - 43 - - 43
directors
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 122 - - 133 - - 133
benefit plan
Exercise of stock options 536 1 - 867 - - 868
Issuance of common stock to 14 - - 40 - - 40
directors
Issuance of common stock to
shareholders in connection with 387 - (4,000) (2,402) - 6,402 -
class action litigation
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
Issuance of common stock to 35 - - 54 - - 54
benefit plan
Exercise of stock options 849 1 - 1,150 - - 1,151
Issuance of common stock to 34 - - 90 - - 90
directors
Acquisition of Unzipped Apparel, 3,000 3 - 8,247 - - 8,250
LLC
Issuance of common stock to
shareholders in connection with 674 1 (2,000) 1,999 - - -
class action litigation
Options granted to non-employees - - - 84 - - 84
Purchase of treasury shares - - - - - (192) (192)
Net loss - - - - (3,945) - (3,945)
----------- ------------ ------------ ------------ ----------- ------------ -----------
Balance at January 31, 2003 24,992 $ 25 $ - $ 69,812 $(40,159) $ (667) $ 29,011
=========== ============ ============ ============ =========== ============ ===========
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,
2003 2002 2001
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Cash flows (used in) provided by operating activities:
Net loss $(3,945) $(2,282) $(8,200)
Items in net income not affecting cash:
Depreciation of property and equipment 1,629 1,414 1,213
Amortization of intangibles 1,686 1,768 2,157
Gain on sale of retail store - (188) -
Issuance of common stock 90 40 43
Stock option compensation non - employees 84 144 -
Reserve on affiliate receivable - 350 -
Equity (income) loss in Joint Venture (250) (500) (701)
Litigation settlement - 857 -
Write-off of property and equipment - 47 -
Write-off of impaired assets 2,761 - 1,581
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable (2,854) (1,870) (372)
Factored accounts receivables and payable to factor, net (5,038) 63 2,180
Inventories (5,163) 818 5,447
Prepaid advertising and other (327) 487 417
Refundable and prepaid taxes (35) 219 412
Other assets 212 (154) 408
Accounts payable and accrued expenses 1,283 (973) 3,114
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Net cash provided by (used in) operating activities (9,867) 240 7,699
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Cash flows used in investing activities:
Purchases of property and equipment (1,729) (2,554) (1,871)
Proceeds from sale of retail store - 500 -
Trademarks (450) (160) (161)
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Net cash used in investing activities (2,179) (2,214) (2,032)
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Cash flows (used in) provided by financing activities:
Revolving notes payable - bank (1,301) 3,468 (4,866)
Proceeds from long -term debt 20,000 - -
Proceeds from exercise of stock options and warrants 1,151 868 -
Payment of long-term debt (1,710) (1,055) (930)
Purchase of treasury stock (192) (296) (148)
Restricted cash (2,900) - -
Deferred financing costs (1,739) (741) -
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Net cash provided (used in) by financing activities 13,309 2,244 (5,944)
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,263 270 (277)
Cash and cash equivalents, beginning of year 636 366 643
- ---------------------------------------------------------------------------- ----------------- ---------------- ---------------
Cash and cash equivalents, end of year $ 1,899 $ 636 $ 366
============================================================================ ================= ================ ===============
Supplemental disclosure of cash flow information: Cash paid during the year:
Interest $ 2,400 $ 1,176 $ 1,650
================= ================ ===============
Income tax benefits $ (139) $ (161) $ (353)
================= ================ ===============
Supplemental disclosures of non-cash investing and financing activities:
Issuance of common stock to benefit plan $ 54 $ 133 $ 102
================= ================ ===============
Reversal of indirect guarantees of the value of stock option grants $ - $ 167 $ -
================= ================ ===============
Non-cash acquisition of Unzipped (stock and debt) $19,250 $ - $ -
================= ================ ===============
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, 2003 and 2002
(dollars are in thousands, except per share data)
The Company
Candie's, Inc., which was incorporated in Delaware in 1978, and its subsidiaries
(collectively, the "Company") is in the business of designing, marketing, and
distributing fashionable, moderately-priced women's footwear under the
CANDIE'S(R) and BONGO(R) brands and jeans wear and other apparel under the BONGO
brand. Through a combination of provocative advertising and marketing,
distinctive product design and cross channel retail distribution, the Company
has developed the CANDIE'S and BONGO brands into two names that are
well-recognized by young, style-conscious women across the United States.
Subsequent to the year end, the Company licensed the CANDIE'S and BONGO
trademarks. See Note 15.
The core customers for both the CANDIE'S and the BONGO brands are girls and
woman between the ages of 6 and 25 who are attracted to the brands for their fun
image, fashionable designs and moderate prices. These girls and women, who make
up the "Millenial" generation, are part of a group of nearly 80 million youths
and teens. The Company has capitalized on this market by understanding the
lifestyle of the target consumer, where she shops, what music she listens to,
what movies and television she watches and how she wants to present herself to
the world, and then gearing its products to appeal to her sensibilities. In
particular, the Company has become known for its high profile marketing
partnerships with celebrities in the music industry whom the Company believes
best represent the fun, irreverent and sexy image of its brands.
In April 2002, the Company diversified its consolidated business by acquiring
BONGO jeans wear, which is operated through its wholly owned subsidiary,
Unzipped Apparel ("Unzipped"). Prior to April 2002, the Company sold and
marketed BONGO jeans wear through its joint venture with Unzipped and was a 50%
equity owner of Unzipped.
In 1998, the Company began to license the CANDIE'S brand for the purpose of
building it into a lifestyle brand serving the millennial generation, and it
currently holds licenses for CANDIE'S for apparel, fragrance, eyewear and
watches. The Company has also pursued an aggressive licensing strategy for the
BONGO brand, and currently holds licenses for women's and childrens' knitwear,
sportswear and tops, eyewear, handbags, cold weather accessories, belts, socks
and hosiery and jewelry
The Company had pursued a retail strategy through the roll out of CANDIE'S
concept and outlet stores. The concept stores are designed to create a
distinctive CANDIE'S environment that enhances customer association with the
brand, while simultaneously introducing her to a broader variety of CANDIE'S
products. The stores also serve as marketing and product testing sites that
provide quick product feedback from customers. The Company currently owns and/or
operates 11 concept stores and 10 outlet stores and a web store. Since the 11
concept stores are performing below expectations, the Company is considering
closing them, see Note 15.
In addition to the CANDIE'S and BONGO footwear businesses and the BONGO jeans
wear business, the Company markets and distributes a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary.
In connection with the acquisition of Unzipped in April 2002, the Company began
reporting a second operating segment (apparel). See Note 13.
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 was accounted for under the equity method prior to its acquisition
in April 2002. 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.
F - 8
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"), one customer accounted for 12.4% of the Company's total net sales. No
customers exceeded 10% in Fiscal 2003 or 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. Inventory reserves are determined by marking down inventory to
the lower of cost or market, based on existing and subsequent sales orders, and
where no such orders exist, management's estimate of future market conditions.
Deferred Financing Costs
The Company incurred costs (primarily professional fees and placement agent
fees) in connection with the Fiscal 2003 bond financing. These costs have been
deferred and are being amortized over the life of the debt (7 years).
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, other than goodwill, 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 and in Fiscal 2003 in connection with the closing of retail stores
wrote-off leasehold improvements of $2.8 million. See Note 4.
Goodwill and Other Intangibles
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 without determinable lives
from an amortization method to an impairment-only approach. Other intangibles
with determinable lives, primarily trademarks, are amortized on a straight-line
basis over the estimated useful lives of the assets, approximately 20 years.
Under SFAS No. 142, beginning on February 1, 2002, amortization of goodwill
ceased and the Company annually tests goodwill for impairment.
The changes in the carrying amount of goodwill for the year ended January 31,
2003, by segment and in total, are as follows:
(in thousands) Footwear Apparel Consolidated
Balance at February 1, 2002 $ 1,868 $ - $ 1,868
Acquisition of Unzipped (Note 2) - 23,373 23,373
----------- ----------- ------------
Balance at January 31, 2003 $ 1,868 $ 23,373 $ 25,241
=========== =========== ============
Goodwill was initially tested in the first quarter of Fiscal 2003 for
impairment upon adoption of SFAS No. 142 and is further tested for impairment
during the third fiscal quarter of each year. There have been no impairments to
the carrying amount of goodwill.
The following table presents a comparison of reported net loss and loss per
share for each of the years in the three-year period ended January 31, 2003 to
the respective adjusted amounts that would have been reported had SFAS No. 142
been in effect during all periods presented.
F - 9
Year ended January 31, 2003 2002 2001
----------------------------------------------
(in thousands)
Reported net loss $ (3,945) $ (2,282) $ (8,200)
Add back goodwill amortization - 142 142
------------- -------------- -------------
Adjusted net loss $ (3,945) $ (2,140) $ (8,058)
============= ============== =============
Basic and diluted loss per share
Reported net loss $ (0.17) $ (0.12) $ (0.43)
Goodwill amortization - 0.01 0.01
------------- -------------- -------------
Adjusted net loss $ (0.17) $ (0.11) $ (0.42)
============= ============== =============
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to the
customers. Allowances for chargebacks, returns and other charges are recorded at
the sales date based on customer specific projections as well as historical
rates of such allowances. Retail revenues are recognized at the "point of sale,"
which occur when merchandise is sold "over the counter" in retail stores.
Shipping Expenses
Shipping expenses for the years ended January 31, 2003, 2002, and 2001 amounted
to $326, $300, and $311, respectively, and 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
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (an amendment of SFAS No. 123), which
amended SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations including Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB No. 25. Accordingly, the Company
recognizes no compensation expense for employee 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.
Both the stock-based employee compensation included in the reported net income
and the stock-based employee compensation cost that would have been included in
the determination of net income if the fair value based method had been applied
to all awards, as well as the resulting pro forma net income and earnings per
share using the fair value approach, are presented in the following table. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the weighted-average assumptions
presented in Note 6.
F - 10
January 31,
--------------------------------------------------
2003 2002 2001
Net loss - as reported ($3,945) ($2,282) ($8,200)
Add: Stock-based employee compensation
included in reported net income, net
of tax - - -
Deduct: Stock-based employee compensation
determined under the fair value based
method, net of tax (1,077) (2,088) (1,593)
--------------------------------------------------
Pro forma net loss ($5,022) ($4,370) ($9,793)
Basic and diluted loss per share:
As reported ($0.17) ($0.12) ($0.43)
Pro forma ($0.21) ($0.22) ($0.51)
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31, 2003
and 2002.
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.
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, 2003 and 2002 were $931 and $1,339,
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, 2003, 2002,
and 2001 amounted to $3,005, $3,414, and $4,590, respectively.
Store Opening Costs
Store opening costs are expensed in the periods they are incurred.
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 August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting
and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a
business. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted SFAS
No. 144 as of February 1, 2002, and it did not have a significant impact on the
Company's financial position and results of operations.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor
consideration to any purchasers of the vendor's products at any point along the
distribution chain, regardless of whether the purchaser receiving the
consideration is a direct customer of the vendor. The adoption, effective
February 1, 2002, required the Company to reclassify cooperative advertising
expenses from a deduction against revenues to a selling, general and
administrative ("SG&A") expense. As a result, net sales, gross profit and SG&A
expenses for the Fiscal 2003 increased by $610. The calculation of this
reclassification for the prior year was deemed impractical but was expected to
be immaterial.
F - 11
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which changes the accounting for costs such
as lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The adoption of this standard will
impact the Company's restructuring plans in connection with store closings.
Presentation of Prior Year Data
Certain reclassifications have been made to conform prior year data with the
current presentation. Warehousing and distribution costs of $2.2 million and
$2.1 million for Fiscal 2002 and Fiscal 2001, have been included in SG&A
expenses in the consolidated statements of income. The Company had previously
included such expenses in cost of goods sold.
2. Unzipped Apparel, LLC
Equity Investment:
On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with
joint venture partner Sweet Sportswear LLC ("Sweet"), the purpose of which was
to market and distribute apparel under the BONGO label. The Company and Sweet
each had a 50% interest in Unzipped. The Company was entitled to receive an
advertising royalty from Unzipped equal to 3% of Unzipped's net sales. Included
in licensing income is $414, $1,254, and $1,289 for Fiscal 2003, 2002, and 2001,
respectively. 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, consisting
primarily of a guarantee of bank debt, and suspended booking its share of
Unzipped losses beyond its liability. During the fourth quarter of Fiscal 2002,
the Company reduced its liability by $500 with the termination of the guarantee
of the bank debt. During the quarter ended April 30, 2002, the Company reduced
the remaining $250 in connection with the acquisition of Unzipped.
Acquisition:
On April 23, 2002, the Company acquired Sweet's 50% interest in Unzipped for
$19.3 million payable in the form of 3 million shares of the Company's common
stock valued at a price of $2.75 per share, totaling $8.3 million, and an
additional $11 million obligation evidenced by an 8% senior subordinated note
with interest due quarterly and principal due in 2012. The original purchase
agreement indicated that $11 million would be issued as redeemable preferred
stock and the $11 million was originally classified as redeemable preferred
stock and $220 of dividends were recorded in the period ended July 31, 2002.
During the third quarter, the agreement was revised and the $11 million was
retroactively changed to debt. Thus, the obligation was reclassified to debt and
the dividend charge was reclassified to interest expense. The debt is
subordinated to the Company's Credit Facility (See Note 5) and is collaterized
by the shares of stock of a subsidiary which owns the royalty rights to the
Company's trademarks. The acquisition was recorded as of April 30, 2002.
Accordingly the operations of Unzipped have been included beginning May 1, 2002.
In connection with the acquisition, the Company agreed to file and have declared
effective a registration statement with the SEC for the 3 million shares of the
Company's common stock issued to Sweet. In the event that the registration
statement is not declared after April 23, 2003, the Company is required to pay
$83 to Sweet as a penalty. Subsequently, the Company is required to pay $83 per
calendar quarter for each calendar quarter thereafter in which the registration
statement has not been effective for more than 30 days of such calendar quarter.
The Company has filed the registration statement, but as of May 12, 2003, the
registration statement had not yet been declared effective.
The following table shows the value of assets and liabilities recorded for the
purchase of Unzipped, adjusted to reflect changes in fair value of assets and
liabilities and purchase accounting liabilities:
F - 12
(000's omitted)
Accounts receivable, net $ 593
Due from factors and accounts receivable, net 7,509
Inventories 5,485
Prepaid advertising and other 61
Property and equipment 156
Other assets 11
---------
Total assets acquired 13,815
Revolving notes payable - banks 10,512
Accounts payable and accrued expenses 8,167
---------
Total liabilities assumed 18,679
---------
Net assets acquired $ (4,864)
=========
The excess purchase price over net assets acquired had originally been recorded
based on estimates, as follows: $21.8 million as goodwill and $2.4 million as
other intangible assets. In the fourth quarter of Fiscal 2003, the Company
obtained a third party valuation of certain intangible assets, resulting in a
reallocation of the purchase price of $23.4 million to goodwill and $900 to
other intangible assets. Accordingly, the Company reversed $187 of amortization
recorded in the prior two quarters of Fiscal 2003, reflecting the reduction of
intangible assets. Goodwill is not tax deductible for income tax purposes.
The following unaudited pro-forma information presents a summary of the
Company's consolidated results of operations as if the Unzipped acquisition and
its related financing had occurred on February 1, 2001. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition occurred on February 1, 2001, or which may result in the future.
Twelve months ended
January 31,
2003 2002
---------------------------------
(000's omitted, except per share)
Total net revenues $169,476 $140,301
Operating income ($895) $541
Net loss ($4,600) ($1,737)
Basic and diluted loss per common share ($0.19) ($0.08)
Revolving Credit Agreement:
Unzipped had a credit facility with Congress Financial Corporation ("Congress").
Under the facility as amended, Unzipped was entitled to borrow up to $15 million
under revolving loans until September 30, 2002. The facility was further amended
to extend its expiration on a month-to-month basis through January 31, 2003.
Borrowings under the facility were limited by advance rates against eligible
accounts receivable and inventory balances, as defined. The borrowings under the
facility bore interest at the lender's prime rate or at a rate of 2.25% per
annum in excess of the Eurodollar rate. At January 31, 2003, Unzipped's
borrowings totaled $13.2 million under the revolving credit agreement with
Congress.
On February 25, 2003 Unzipped entered into a two-year $25 million credit
facility ("the Unzipped Credit Facility") with GE Capital Commercial Services,
Inc. ("GECCS") replacing its credit facility with Congress Borrowings are
limited by advance rates against eligible accounts receivable and inventory
balances, as defined. Under the facility, Unzipped may also arrange for letters
of credit in an amount up to $5 million. The borrowings bear interest at a rate
of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%,
whichever is greater.
Borrowings under the new facility are secured by substantially all of the assets
of Unzipped. In addition, Unzipped has agreed to subordinate $3.9 million of its
accounts payable to Azteca Productions to GECCS. Unzipped is also required to
meet certain financial covenants including tangible net worth minimums and a
fixed charge coverage ratio, as defined.
Related Party Transactions:
Unzipped has a supply agreement with Azteca for the development, manufacturing,
and supply of certain products bearing the Bongo trademark. As consideration for
the development of the products, Unzipped pays Azteca pursuant to a separate
pricing schedule. For the year ended January 31, 2003, Unzipped purchased $49.9
million of products from Azteca. The supply agreement was consummated upon
Unzipped's formation and originally extended through January 31, 2003, and was
amended and restated effective April 23, 2002 through January 31, 2005.
F - 13
Azteca also allocates expenses to Unzipped for Unzipped's use of a portion of
Azteca's office space, design and production team and support personnel. For the
year ended January 31, 2003, Unzipped incurred $440 of such allocated expenses.
In connection with the acquisition, the Company has a management agreement with
Sweet for a term ending January 31, 2005, which provides for Sweet to manage the
operations of Unzipped in return for a management fee based upon certain
specified percentages of net income that Unzipped achieves during the three-year
term. The fee does not commence until Fiscal 2004. In addition, Sweet guarantees
that the net income, as defined, of Unzipped shall be no less than $1.7 million
for each year during the term commencing in Fiscal 2004.
Unzipped has a distribution agreement with Apparel Distribution Services (ADS),
an entity that shares common ownership with Sweet for a term ending January 31,
2005. The agreement provides for a per unit fee for warehousing and distribution
functions and per unit fee for processing and invoicing orders. For the year
ended January 31, 2003, Unzipped incurred $2.6 million for such services. The
agreement also provides for reimbursement for certain operating costs incurred
by ADS and charges for special handling fees at hourly rates approved by
management. These rates can be adjusted annually by the parties to reflect
changes in economic factors. The distribution agreement was consummated upon
Unzipped's formation and was amended and restated on substantially the same
terms effective April 23, 2002 through January 31, 2005.
Unzipped occupies office space in a building rented by ADS and Commerce Clothing
Company, LLC (Commerce), a related party to Azteca.
Amounts due to related parties at January 31, 2003 and included in accounts
payable and accrued expenses, consist of the following:
Azteca $5,868
ADS 335
------------
$6,203
============
In connection with its acquisition of Unzipped, the Company had agreed that on
or before February 1, 2003, it would pay Azteca for all receivables due from
Unzipped for purchases of product that were more than 30 days past due and any
amount remaining under a $5 million subordinated loan between Unzipped and
Azteca.
Management of the Company believes that it has fulfilled all of its acquisition
related obligations as described above. At January 31, 2003, the total amount
due to Azteca and related parties from Unzipped was $6.2 million, all of which,
in the opinion of Company management, constitutes accounts payable less than 30
days past due. Management of the Company also believes that the subordinated
note has been paid in full. However, because of a dispute with Azteca and Sweet
as to the terms for merchandise supplied by Azteca to Unzipped under the Supply
Agreement and resulting application of payments from Unzipped to invoices and
the subordinated note, Azteca believes that the total of $5.9 million is
comprised of $697 of accounts payable less than 30 days past due, $171 of
interest and $5 million due on the subordinated note. In that event, the Company
would be obligated under the Unzipped acquisition agreement to repay Azteca the
$5 million that it believes is due on the subordinated note. The interest
accrual of $171 due to Azteca on the subordinated note is also in dispute. This
amount has been included in interest expense for the year ended January 31,
2003.
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 2003 2002
------------------------------------- ----------- ---------------------------- --------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization amount amortization
------------------------------------- ----------- ---------------------------- --------------------------------
Trademarks 20 $23,630 $6,639 $23,340 $5,472
Non-compete agreement 15 2,275 2,179 2,275 2,139
Licenses 4 1,526 1,526 1,526 1,372
Other intangibles 4 900 169 - -
------------------------------------- ----------- ---------------------------- --------------------------------
$28,331 $10,513 27,141 $8,983
===================================== =========== ============================ ================================
F - 14
Amortization expense for intangible assets was $1.7 million, $1.8 million and
$2.1 million for the years ended January 31, 2003, 2002 and 2001, respectively.
Amortization expense for intangible assets subject to amortization for each of
the years in the five-year period ending January 31, 2008 is estimated to be
$1.4 million in 2004, $1.4 million in 2005, $1.4 million in 2006, $1.2 million
in 2007 and $1.2 million in 2008.
4. Special Charges
Special charges consist of the following:
Fiscal Year ended January 31,
2003 2002 2001
----------------------------------------------
Gain on sale of retail store $ - $ (188) $ -
Impairment loss on retail stores expected to be
closed in Fiscal 2004. See Note 15. (A) 2,200 - -
Impairment loss and lease obligations on Fiscal
2003 retail store closings (B) 923 - -
Professional fees for the SEC investigation and
various litigation and litigation settlement. 298 389 205
See Note 8. (C)
Termination, severance pay of certain employees and
buyout of employment contracts (D) 145 - 688
Write-off of a license acquired from Caruso (E) - - 570
Warehouse consolidation and costs associated with
an office move - - 200
Write-off of computer software (F) - - 1,011
Costs relating to new financing arrangements (G) - 383 -
Reserve for receivable from affiliate (H) - 350 -
Caruso shareholder lawsuit settlement (I) - 857 -
----------------------------------------------
$ 3,566 $ 1,791 $ 2,674
==============================================
(A) In the fourth quarter of Fiscal 2003, the Company recorded $2.2 million
special charges for the write-off of leasehold improvements of the 11
concept stores which the Company expects to close and will not be able to
recoup its investment. See Note 15.
(B) In connection with the closing of 4 retail stores. The 2003 charge includes
the write-off of leasehold improvements of $623 and an estimated cost of
lease obligations of $300.
(C) 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.
(D) During Fiscal 2003, the Company incurred $145 related to severance pay for
certain terminated employees. In 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.
(E) 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.
F - 15
(F) 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.
(G) 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.
(H) The Company established a reserve for advances made to the Candie's
Foundation. The reserve was established because of the Foundation's limited
operating experience in fund raising activities and questions regarding the
recovery of the advances.
(I) See Note 8.
5. Debt Arrangements
Current Revolving Credit Facilities
On January 23, 2002, the Company entered into a three-year $20 million
credit facility ("the Credit Facility") with CIT Commercial Services ("CIT")
replacing its arrangement with Rosenthal & Rosenthal, Inc. ("Rosenthal").
Borrowings under the Credit Facility are formula based and originally included a
$5 million over advance provision with interest at 1.00% above the prime rate.
In June 2002, the Company agreed to amend the Credit Facility to increase the
over advance provision to $7 million and include certain retail inventory in the
availability formula for its footwear business. Borrowings under the amended
Credit Facility bear interest at 1.5% above the prime rate.
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 May 1, 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.
See Note 2 for Unzipped's credit facilities.
At January 31, 2003, total borrowings under revolving credit facilities,
including Unzipped, were $21.6 million at a weighted average interest rate of
4.83%.
At January 31, 2003, the Company had $826 of outstanding letters of credit. The
letters of credit availability of the Company's footwear business are formula
based which takes into account borrowings under the Credit Facility, as
described above.
Bond Deal
In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the
Company, issued in a private placement $20 million of asset-backed notes in a
private placement secured by intellectual property assets (tradenames,
trademarks and license payments thereon). The notes have a 7-year term with a
fixed interest rate of 7.93% with quarterly principal and interest payments of
approximately $859. The notes are subject to a liquidity reserve account of $2.9
million (reflected as restricted cash in the accompanying balance sheet), funded
by a deposit of a portion of the proceeds of the notes. The net proceeds of
$16.2 million were used to reduce amounts due by the Company under its existing
revolving credit facilities. Concurrently with this payment, the Credit Facility
was further amended to eliminate the over advance provision along with certain
changes in the availability formula. Costs incurred to obtain this financing
totaled approximately $2.4 million which amount has been deferred and is being
amortized over the life of the debt.
F - 16
Capital Lease
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp, which assigned to Banc One Leasing
Corporation ("BOLC") all of its rights and interests under the agreement,
including all rights to the rent and other payments due and to become due under
the agreement from July 1, 1999 through the end of the term of the agreement.
The agreement required 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 was 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 quarterly payment on the loan was $260, including interest. The debt was
paid off in Fiscal 2003 through a lawsuit settlement agreement. See Note 8.
Other
Also included in Long-term debt is $366 and $810 for the Michael Caruso
shareholder lawsuit settlement as of January 31, 2003 and 2002, respectively,
see Note 4.
Debt Maturities
The Companies debt maturities are the following:
Total 2004 2005 2006 2007 2008 thereafter
------------------------------------------------------------------------------
Revolving notes payable - banks $21,577 $ 21,577 $ - $ - $ - $ - $ -
Due to Sweet (Note 2) 11,000 - - - - - 11,000
Long - term debt
20,153 2,648 2,371 2,501 2,509 2,715 7,409
------------------------------------------------------------------------------
Total Debt $52,730 $ 24,225 $2,371 $2,501 $2,509 $2,715 $18,409
==============================================================================
6. Stockholders' Equity
Stock Options
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.
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,
--------------------------------------------------
2003 2002 2001
Expected Volatility .714-.725 .715-.811 .604-.791
Expected Dividend Yield 0% 0% 0%
Expected Life (Term) 2.1-7 years 1.4-7 years 3-7 years
Risk-Free Interest Rate 3.73-5.18% 2.26-5.13% 4.65-6.82%
The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 2003, 2002, and 2001 was $2.17, $1.42, and $0.72,
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.
F - 17
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 53,300, 53,300 and 60,800 of ISO's as of January 31, 2003, 2002,
and 2001, 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.
The Company's shareholders approved the Company's 2002 Stock Option Plan (the
"2002 Plan"). The 2002 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 ISO's
and NQSO's under the 2002 Plan. The 2002 Plan terminates in 2012.
Additionally, at January 31, 2003, 2002, and 2001, NQSO's covering 2,712,600,
1,324,000, and 2,046,000 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.
A summary of the Company's stock option activity, and related information for
the years ended 2003, 2002, and 2001 follows:
Weighted-Average
Shares Exercise Price
-------------------------------
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
Granted 1,041,000 3.02
Canceled (169,500) 1.92
Exercised (849,400) 1.35
Expired (768,000) 4.12
-------------------------------
Outstanding January 31, 2003 6,439,525 $ 2.34
===============================
F - 18
At January 31, 2003, 2002, and 2001, exercisable stock options totaled
5,299,689, 6,200,590, and 5,697,967, and had weighted average exercise prices of
$2.28, $2.42, and $2.46, respectively.
Options outstanding and exercisable at January 31, 2003 were as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------- ----------------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------- ----------------------------------
$0.24-1.14 ........ 1,064,375 7.39 $1.01 1,040,375 $1.01
$1.15-1.50 ........ 1,197,500 5.58 $1.33 1,122,500 $1.33
$1.51-2.50 ........ 1,370,600 7.65 $2.07 1,112,264 $2.10
$2.51-3.50 ........ 2,477,050 6.33 $3.29 1,877,050 $3.46
$3.51-5.00 ........ 305,000 9.28 $4.20 122,500 $4.29
$5.01-12.00 ........ 25,000 0.32 $6.88 25,000 $6.88
- ------------------------------------------------------------------------------------- ----------------------------------
6,439,525 6.76 $2.34 5,299,689 $2.28
===================================================================================== ==================================
At January 31, 2003 2,000,000, 1,940,000, 1,617,600, and 3,205,325 common shares
were reserved for issuance on exercise of stock options under the 2002, 2001,
2000 and 1997 Stock Option Plan, respectively.
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 2003 and
2002, 84,500 and 163,150 shares, respectively, were repurchased in the open
market, at an aggregate cost of $192 and $296, respectively.
Preferred and Common Stock to be Issued
In connection with the settlement of a class action litigation, the Company was
obligated during Fiscal 2000 to issue Common Stock over a 3 year period in the
aggregate amount of $6 million. These shares are reflected in the financial
statements as "Preferred and Common Stock to be Issued." As of January 31, 2003,
all of the shares have been issued.
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 April 2003 the Company settled the SEC's previously disclosed investigation
of the Company of matters that have been under investigation by the SEC since
July 1999 and that were also the subject of a previously disclosed internal
investigation completed by a Special Committee of the Board of Directors of the
Company.
In connection with the settlement the Company, without admitting or denying the
SEC's allegations, consented to the entry by the SEC of an administrative order
in which the Company was ordered to cease and desist from committing or causing
any violations and any future violations of certain books and records, internal
controls, periodic reporting and the anti-fraud provisions of the Securities
Exchange Act of 1934 and the anti-fraud provisions of the Securities Act of
1933.
F - 19
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 $63, 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 during the quarter ended January 31, 2002, representing
the discounted fair value of the future payments to Caruso referred to above.
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp, which assigned to Banc One Leasing
Corporation ("BOLC") all of its rights and interests under the agreement,
including all rights to the rent and other payments due and to become due under
the agreement from July 1, 1999 through the end of the term of the agreement.
The outstanding loan balance as of January 31, 2002 was $1.3 million. On June
10, 2002 the Company was sued by BOLC in the Franklin County Court of Common
Pleas (Ohio) to recover on an accelerated basis certain capitalized lease
payments which otherwise would have been due in various installments through
April 2003. On October 7, 2002, the parties reached a settlement agreement, and
the case was dismissed with prejudice. The Company paid BOLC $1.1 million, of
which $346 was in excess of the recorded amount of the debt. The $346 was
recorded as interest expense.
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 filed a
motion to dismiss certain counts of the the Complaint based upon Redwood's
failure to state a claim, in response to which Redwood has filed an Amended
Complaint. The Company also moved to dismiss certain parts of the Amended
Complaint. The magistrate assigned to the matter granted, in part, the Company's
motion to dismiss, and this ruling is currently pending before the District
Court. The Company intends to vigorously defend the lawsuit, and file
counterclaims against Redwood after the District Court rules on the pending
motion to dismiss. In addition, the Company has recently moved for summary
judgment with respect to another of the claims asserted by Redwood in the
Amended Complaint.
In connection with the closing of certain retail locations during Fiscal 2003,
certain litigation has been brought by the landlords pursuant to the Company's
obligations on the respective leases. The Company has recorded approximately
$300 for the above lease obligations representing its estimate of the amount it
will pay to settle the future obligations of these leases.
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 noted herein, 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.
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 and $35 million in 2002 and 2001, 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, 2003 and 2002, the payable
to Redwood totaled approximately $1.8 million and $1.9 million, respectively.
The payable at January 31, 2003 is subject to any claims, offsets or other
deductions the Company may assert against Redwood. (See Note 8)
The Company has a license for Bongo branded bags and small leather/PVC goods
which commenced in Fiscal 2002 with Innovo Group, Inc. ("Innovo"), a company
controlled by Hubert Guez, a director of the Company and principal of Sweet
Sportswear, LLC, Manager of Unzipped. Under this license, which expires March
31, 2007, the Company recorded $214,000 and $58,000 in royalty income for the
years ended January 31, 2003 and 2002, respectively, and royalties receivable
from Innovo were $179,000 and $49,000 at January 31, 2003 and 2002,
respectively. (See Note 2)
F - 20
See Note 2 for related party transactions related to Unzipped and Note 15.
10. Operating Leases
Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 2003 are as follows:
2004 $ 1,778
2005 1,650
2006 1,478
2007 1,251
2008 1,261
Thereafter 4,482
--------
Totals $ 11,900
========
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 $3,047, $2,089, and $1,647 for the years ended
January 31, 2003, 2002, and 2001, 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 $24, $56, and $133 to the Savings Plan for the years ended
January 31, 2003, 2002, and 2001, respectively.
12. Income Taxes
At January 31, 2003 the Company had available net operating losses ("NOL") of
approximately $38.5 million for income tax purposes, which expire in the years
2006 through 2023. 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 $33.9 million is not
subject to such limitation and expires 2009 through 2023. Included in the NOL is
$2.5 million as of January 31, 2003 from the exercises of stock options, the
benefit of the utilization of this NOL will go into additional paid in capital.
The federal tax benefit for the year ended January 31, 2003 of $139 relates to a
change in tax law enabling the Company to carryback and seek refunds of prior
years' losses.
During the years ended January 31, 2003 and 2002, the Company recorded an
increase in its valuation allowance for deferred tax assets of $1.8 million and
$704, 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.
The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of operations consists of the following:
January 31,
-----------------------------------------------------
2003 2002 2001
------------------ ----------------- ----------------
Current:
Federal $ (178) $ 0 $ 0
State 39 62 66
------------------ ----------------- ----------------
Total current (139) 62 66
------------------ ----------------- ----------------
Deferred:
Federal - - -
State - - -
------------------ ----------------- ----------------
Total deferred - - -
------------------ ----------------- ----------------
Total provision (benefit) $ (139) $ 62 $ 66
================== ================= ================
F - 21
The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
------------------ -----------------
2003 2002
------------------ -----------------
Inventory valuation $ 1,307 $ 368
Litigation settlement 258 836
Net operating loss carryforwards 16,105 16,174
Receivable reserves 1,288 639
Depreciation 207 172
Store closing reserves (asset impairments) 1,023 -
Accrued compensation 8 52
Alternative minimum taxes - 96
Other 144 133
------------------ -----------------
Total net deferred tax assets 20,340 18,470
Valuation allowance (14,703) (12,855)
------------------ -----------------
Total deferred tax assets 5,637 5,615
Trademarks and licenses (1,850) (1,828)
Other deferred tax liabilities (165) (165)
------------------ -----------------
Total deferred tax liabilities (2,015) (1,993)
------------------ -----------------
Total net deferred tax assets $ 3,622 $ 3,622
================== =================
13. Segment Information
The Company identifies operating segments based on, among other things, the way
the Company's management organizes the components of its business for purposes
of allocating resources and assessing performance. With the recent acquisition
of Unzipped, the Company has redefined the reportable operating segments. The
Company's operations are now comprised of two reportable segments: footwear and
apparel. Footwear segment includes Candie's footwear, Bongo footwear, private
label footwear, retail store operations, and licensing. Apparel segment includes
Bongo jeanswear. Segment revenues are generated from the sale of footwear,
apparel and accessories through wholesale channels and the Company's retail
locations. The Company defines segment income as operating income before
interest expense and income taxes. Summarized below are the Company's segment
revenues, income (loss) and total assets by reportable segments for the fiscal
year January 31, 2003.
(000's omitted) Footwear Apparel Elimination Consolidated
-----------------------------------------------------------------
For the fiscal year ended January 31, 2003
Total revenues $101,027 $55,869 $ (113) $156,783
Segment income (4,156) 3,195 - (961)
Interest expense 3,373
Loss before income tax provision $(4,084)
Capital additions $1,551 $178 $ - $1,729
Depreciation and amortization expenses $3,278 $37 $ - $3,315
Total assets as of January 31, 2003 $57,375 $46,062 $ - $103,437
14. Unaudited Consolidated Financial Information
Unaudited interim consolidated financial information for the two years ended
January 31 is summarized as follows:
F - 22
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------
(in thousands except per share data)
Fiscal 2003
Net sales $ 24,190 $ 48,218 $ 41,792 $ 37,443
Total revenues 25,617 49,563 43,226 38,377
Gross profit 8,030 13,995 11,387 7,065
Operating income(loss) 953 4,019 477 (6,410)
Net income (loss) 1,065 3,311 (788) (7,533)
Basic earnings (loss) per share $ 0.05 $ 0.14 $ (0.03) $ (0.30)
Diluted earnings (loss) per share $ 0.05 $ 0.12 $ (0.03) $ (0.30)
Fiscal 2002
Net sales $ 22,652 $ 30,570 $ 25,325 $ 17,779
Total revenues 23,854 31,886 26,736 18,926
Gross profit 8,309 9,131 8,459 5,035
Operating income 718 1,270 625 (4,157)
Net income (loss) 393 974 297 (3,945)
Basic earnings (loss) per share $ 0.02 $ 0.05 $ 0.02 $ (0.19)
Diluted earnings (loss) per share $ 0.02 $ 0.05 $ 0.02 $ (0.19)
During the fourth quarter of Fiscal 2003, the Company recorded certain
significant expenses as follows: (i) $3.1 million for costs relating to
impairment loss and lease obligations for retail store closing and $298 of
special legal costs related to legal costs related to prior year legal matters;
(ii) $1 million increase in its inventory reserve due to the softening of retail
market, (iii) the Company reversed $187 of amortization expense recorded in the
prior two quarters of Fiscal 2003, reflecting the reallocation of the Unzipped
purchase price.
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.
15. Subsequent Events.
In April 2003 the Company settled the SEC's previously disclosed investigation
of the Company of matters that have been under investigation by the SEC since
July 1999 and that were also the subject of a previously disclosed internal
investigation completed by a Special Committee of the Board of Directors of the
Company.
In connection with the settlement the Company, without admitting or denying the
SEC's allegations, consented to the entry by the SEC of an administrative order
in which the Company was ordered to cease and desist from committing or causing
any violations and any future violations of certain books and records, internal
controls, periodic reporting and the anti-fraud provisions of the Securities
Exchange Act of 1934 and the anti-fraud provisions of the Securities Act of
1933.
On May 1, 2003, Candie's Inc. (the "Company") granted Kenneth Cole Productions,
Inc. the exclusive worldwide license to design, manufacture, sell, distribute
and market footwear under the BONGO brand. The CEO and Chairman of Kenneth Cole
Productions, Inc. is the brother of the Company's CEO. The license agreement
expires on December 31, 2007, subject to renewal options for three additional
terms of three years each contingent on Kenneth Cole Productions, Inc. meeting
certain performance and minimum net sales standards.
F - 23
In addition on May 12, 2003, the Company granted Steven Madden, Ltd. the
exclusive worldwide license to design, manufacture, sell, distribute and market
footwear under the CANDIE'S brand. The agreement expires on December 31, 2009,
subject to renewal options for four additional terms of three years each
contingent on Steven Madden, Ltd. meeting certain performance and minimum net
sales standards.
In connection with the footwear licenses and due to the challenging retail
environment, the Company is considering closing some or all concepts stores,
which are performing below expectations. In the fourth quarter of Fiscal 2003,
the Company took an impairment charge of $2.2 million for the net book value of
the leasehold improvements. The Company plans to negotiate lease settlements
with the various landlords. The aggregate remaining lease obligations for these
stores at January 31, 2003, totaled $7.6 million. The estimate of the lease
settlements will be recorded in the period(s) the stores are closed.
F - 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Candies, Inc.
The audits referred to in our report dated April 18, 2003, May 12, 2003 for Note
15, relating to the consolidated financial statements of Candie's, Inc. and
Subsidiaries, which is contained in Item 15 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, 2003. 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 18, 2003
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 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, 2003:
Accounts receivable reserves (b) $1,178 $ 14,313 (b) $ 12,509 (a) $2,982
====== ======== ======== ======
Year ended January 31, 2002:
Accounts receivable reserves $3,532 $7,050 (b) $9,404 (a) $1,178
====== ======== ======== ======
Year ended January 31, 2001:
Accounts receivable reserves $4,822 $7,275 (b) $ 8,565 (a) $3,532
====== ======== ======== ======
Year ended January 31, 2003:
Inventory reserves $ 439 $ 4,239 $1,431 $3,247
====== ======== ======== ======
Year ended January 31, 2002:
Inventory reserves $ 480 $ 184 $ 225 $ 439
====== ======== ======== ======
Year ended January 31, 2001:
Inventory reserves $1,390 $ 612 $ 1,522 $ 480
====== ======== ======== ======
(a) Uncollectible receivables charged against the allowance provided.
(b) These amounts include reserves for chargebacks, markdowns, co-op
advertising allowances, and bad debts.
S - 2