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United States Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended April 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From ________ to ________.
Commission file number 0-10593
CANDIE'S, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 West 40th Street
New York, NY 10018
(Address of principal executive offices) (Zip Code)
(212) 730-0030
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes__ No. X
Common Stock, $.001 Par Value -- 26,120,393 shares as of May 30, 2004
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
-----------
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - April 30, 2004 and January 31, 2004.................... 3
Condensed Consolidated Income Statements - Three Months Ended
April 30, 2004 and 2003.................................................................. 4
Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended
April 30, 2004........................................................................... 5
Condensed Consolidated Statements of Cash Flows - Three Months Ended
April 30, 2004 and 2003.................................................................. 6
Notes to Condensed Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 17
Item 4. Controls and Procedures....................................................................... 17
Part II. Other Information..............................................................................
Item 1. Legal Proceedings............................................................................. 18
Item 2. Changes in Securities and Use of Proceeds ..................................................... 18
Item 3. Defaults upon Senior Securities (Not Applicable)...............................................
Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)...........................
Item 5. Other Information (Not Applicable).............................................................
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
Signatures ........................................................................................... 19
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
April 30, January 31,
2004 2004
---------- ----------
(Unaudited)
(000's omitted, except par value)
Assets
Current Assets
Cash............................................................... $ 2,405 $ 2,794
Accounts receivable, net........................................... 1,631 3,388
Due from factors, net.............................................. 6,998 8,953
Due from affiliate................................................. 174 174
Inventories........................................................ 4,931 7,439
Deferred income taxes.............................................. 1,549 1,549
Prepaid advertising and other...................................... 1,535 1,358
------- -------
Total Current Assets................................................... 19,223 25,655
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 2,674 2,670
Less: Accumulated depreciation and amortization.................... 2,184 2,118
------- -------
490 552
Other assets:
Restricted cash.................................................... 2,900 2,900
Goodwill........................................................... 25,241 25,241
Intangibles, net.................................................... 15,899 16,317
Deferred financing costs, net...................................... 2,127 2,042
Deferred income taxes.............................................. 2,073 2,073
Other.............................................................. 552 65
------- -------
48,792 48,638
------- -------
Total Assets........................................................... $ 68,505 $ 74,845
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $ 10,298 $ 12,775
Accounts payable and accrued expenses.............................. 5,275 10,424
Due to affiliates.................................................. 1,885 2,342
Current portion of deferred revenue............................. 1,645 2,010
Current portion of long-term debt............................... 2,980 2,354
------- -------
Total Current Liabilities.............................................. 22,083 29,905
------- -------
Deferred revenue....................................................... 700 1,052
Long-term liabilities.................................................. 26,439 25,020
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued
26,110 at April 30, 2004 and 25,915 issued
at January 31, 2004........................................... 26 26
Additional paid-in capital......................................... 71,390 71,008
Retained earnings (deficit)........................................ (51,466) (51,499)
Treasury stock - at cost - 198 shares at April 30 and
January 31, 2004............................................... (667) (667)
------- -------
Total Stockholders' Equity............................................. 19,283 18,868
------- -------
Total Liabilities and Stockholders' Equity............................. $ 68,505 $ 74,845
======= =======
See notes to condensed consolidated financial statements.
3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
Three Months Ended
April 30, April 30,
2004 2003
(000's omitted, except per share data)
Net sales $ 11,837 $ 40,863
Licensing income 1,936 1,178
------------------ ------------------
Net revenue 13,773 42,041
Cost of goods sold 8,831 30,147
------------------ ------------------
Gross profit 4,942 11,894
Selling, general and administrative expenses 4,114 9,861
Special charges 99 434
------------------ ------------------
Operating income 729 1,599
Other expenses:
Interest expense - net 696 873
------------------ ------------------
Income before income tax provision 33 726
Income tax provision - -
------------------ ------------------
Net income $ 33 $ 726
================== ==================
Earnings per share:
Basic $ 0.00 $ 0.03
================== ==================
Diluted $ 0.00 $ 0.03
================== ==================
Weighted average number of common shares outstanding:
Basic 26,022 25,015
================== ==================
Diluted 26,903 25,054
================== ==================
See notes to condensed consolidated financial statements.
4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Three Months Ended April 30, 2004
(000's omitted)
Additional Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
--------------------------------------------------------------------------
Balance at February 1, 2004 ............ 25,915 $ 26 $ 71,008 $ (51,499) $ (667) $ 18,868
Issuance of common stock to directors .. 21 -- 50 -- -- 50
Exercise of stock options............... 174 -- 332 -- -- 332
Net income.............................. -- -- -- 33 -- 33
--------------------------------------------------------------------------
Balance at April 30, 2004 26,110 $ 26 $ 71,390 $ (51,466) $ (667) $ 19,283
--------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
---------------------------
April 30, April 30,
2004 2003
----------- ------------
(000's omitted)
OPERATING ACTIVITIES:
Net cash used in operating activities...................................... $ (594) $ (2,868)
----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (4) (246)
----------- ------------
Net cash used in investing activities...................................... (4) (246)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from long - term debt..................................... 3,600 -
Payment of long - term debt........................................ (567) (522)
Prepaid interest expense - long term............................... (500) -
Deferred financing costs........................................... (179) (89)
Proceeds from exercise of stock options............................ 332 -
Revolving notes payable - bank..................................... (2,477) 3,292
----------- ------------
Net cash provided by financing activities.................................. 209 2,681
----------- ------------
DECREASE IN CASH........................................................... (389) (433)
Cash at beginning of period................................................ 2,794 1,899
----------- ------------
Cash at end of period...................................................... $ 2,405 $ 1,466
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 1,198 $ 731
=========== ============
See notes to condensed consolidated financial statements.
6
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
April 30, 2004
NOTE A BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended April 30, 2004
are not necessarily indicative of the results that may be expected for a full
fiscal year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended January 31, 2004.
NOTE B STOCK OPTIONS
Pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options has been measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount the employee must pay to acquire the stock.
Under this approach, the Company only recognizes compensation expense for
stock-based awards to employees for options granted at below-market prices, with
the expense recognized over the vesting period of the options.
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. These pro
forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
(000's omitted except per share data) Three Months Ended April 30,
----------------------------
2004 2003
------------------- -----------------
Net income - as reported $ 33 $726
Deduct: Stock-based employee compensation
determined under the fair value based
Method (470) (482)
------------------- -----------------
Pro forma net income $(437) $244
=================== =================
Basic and diluted earnings per share:
As reported $ 0.00 $0.03
=================== =================
Pro forma $(0.02) $0.01
=================== =================
NOTE C FINANCING AGREEMENTS
In August 2002, IP Holdings LLC ("IPH"), an indirect wholly owned subsidiary of
the Company, issued $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 $859,000.
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.
7
In April 2004, IPH amended the asset-backed notes to borrow an additional $3.6
million. The additional borrowing matures in August 2009, with a floating
interest rate of LIBOR + 9%, with quarterly principal and interest payments and
$500,000 of interest prepaid at closing. The net proceeds of $2.9 million are
being used for general working capital purposes. Costs incurred to obtain this
financing totaling approximately $178,500 will be deferred and amortized over
the life of the debt.
See Note F of the Notes to the Condensed Consolidated Financial Statements
regarding the financing agreement of Unzipped Apparel, LLC ("Unzipped"), the
Company's wholly-owned subsidiary.
NOTE D EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
earnings attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects,
in periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options, warrants and convertible preferred
stock. At April 30, 2004, 5.9 million shares of stock options were outstanding
under the Company's various option plans.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
April 30,
----------------------------
2004 2003
----------------------------
(000's omitted)
Basic................................................................... 26,022 25,015
Effect of assumed conversions of employee stock options................. 881 39
----------------------------
Denominator for diluted earnings per share.............................. 26,903 25,054
============================
NOTE E COMMITMENTS AND CONTINGENCIES
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 $62.5, 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.
8
In January 2002, Redwood Shoe Corporation ("Redwood"), one of the Company's
former buying agents of footwear filed a complaint against the Company 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 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. At January 31, 2004 and 2003, the payable to Redwood totaled
approximately $1.8 million which is subject to any claims, offsets or other
deductions the Company may assert against Redwood
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, against the Company.
NOTE F UNZIPPED APPAREL, LLC
Equity Investment:
On October 7, 1998, the Company formed Unzipped with a joint venture partner
Sweet Sportswear LLC ("Sweet"), the purpose of which was to market and
distribute apparel under the BONGO(R) label. The Company and Sweet each had a
50% interest in Unzipped. Pursuant to the terms of the joint venture, the
Company licensed the BONGO trademark to Unzipped for use in the design,
manufacture and sale of certain designated apparel products.
Acquisition:
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 of Unzipped, the Company filed and 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 penalties to Sweet. Since the registration
statement was not declared effective until July 29, 2003, the Company was
required to pay $82,500 to Sweet as a penalty. The Company recorded $82,500
expense for such penalty in the quarter ended April 30, 2003.
Revolving Credit Agreement:
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" or "the Lender"). 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 its accounts payable
to Azteca Productions International, Inc. ("Azteca"), Apparel Distribution
Services, LLC ("ADS") and Sweet to GECCS. Unzipped is also required to meet a
minimum tangible net worth covenant, as defined. At April 30, 2004, Unzipped's
borrowings totaled $10.3 million under the revolving credit agreement and the
availability under the formula was $5,600.
Unzipped is in default of certain covenants under the Unzipped Credit Facility,
including the tangible net worth covenant. Unzipped has not obtained a waiver
for these defaults and there can be no assurance that it will be able to do so.
As a result, the Lender could, in addition to other possible remedies, reduce
the advance rates, cease advancing funds, or demand immediate repayment of the
outstanding loan amount of $10.3 million as of April 30, 2004, any of which
could negatively impact the operations and financial condition of Unzipped.
While the Company believes that it is unlikely that the Lender will accelerate
Unzipped's obligations under the Unzipped Credit Facility, in the event that it
did so and Unzipped could not immediately repay the existing loan balance, it
could result in the Lender foreclosing on Unzipped's assets, among other
remedies.
9
In the event that the Lender forecloses on the Unzipped Credit Facility, the
Company believes, based on Unzipped's current financial condition, that Unzipped
would have more than sufficient assets and net worth to allow the Lender to
recoup its entire loan, although there can be no assurance that it will be able
to do so. An acceleration of the Unzipped Credit Facility would impact the
operating results and financial condition of Unzipped in Fiscal 2005 (including
a possible write-off or impairment of assets), which could result in a reduction
in the Company's consolidated revenues in Fiscal 2005. Sweet, the manager of
Unzipped, has guaranteed that the net income of Unzipped, as defined in the
Management Agreement, in Fiscal 2005 shall be no less than $1.7 million and the
Company believes that this guarantee is enforceable even in the event of
foreclosure or acceleration of the Unzipped Credit Facility. Additionally, the
Company, as the parent of Unzipped, is not a signatory or a guarantor of the
Unzipped Credit Facility and would not be liable for Unzipped's obligations
thereunder. The Company also believes that it has sufficient liquidity from
revenues generated from its licensing and men's private label activity, which
are separate from Unzipped, as well as from the additional borrowing obtained
under the IPH bond financing (see "Bond Financing"), to satisfy the Company's
anticipated working capital requirements for the foreseeable future. In
addition, on June 9, 2004 the Company licensed the rights to BONGO jeanswear to
a third party licensee (See Note H to Condensed Consolidated Financial
Statements), which would provide the Company with additional licensing revenues
commencing upon the effective date of the agreement. Unzipped currently has a
royalty free non-exclusive sublicense for Bongo jeanswear.
Related Party Transactions:
Unzipped has a supply agreement with Azteca Productions, Inc ("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 quarters ended April 30,
2004 and 2003, Unzipped purchased $7.3 million and $16.1 million, respectively,
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.
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
quarter ended April 30, 2004, Unzipped incurred $59,100 of such allocated
expenses, as compared to $46,500 in the prior year quarter.
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 Management Agreement is
terminable by the manager under certain circumstances, including if the right
to the BONGO trademark is licensed to another party for use on jeanswear. The
fee commenced in Fiscal 2004. In the April 30, 2003 period, Unzipped expensed
$105,000 for the management fee. 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 (the "Guarantee"). In the event that
the Guarantee is not met, Sweet is obligated to pay the difference between the
actual net income, as defined, and the Guarantee (the "Shortfall Payment").
For the quarter ended April 30, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if the Guarantee has been met) of $563,000, resulting
in an adjustment of Shortfall Payment of $988,000 against the $425,000 quarterly
Guarantee. This adjustment has been recorded in the condensed consolidated
income statement as a reduction of Unzipped's cost of sales and on the balance
sheet as a reduction of the 8% senior subordinated note due to Sweet, as
provided for in the management agreement. After adjusting for the Shortfall
Payment, Unzipped's reported GAAP net income for the quarter ended April 30,
2004 was $312,500.
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 quarter
ended April 30, 2004, Unzipped incurred $767,500 for such services, as compared
to $896,000 in the prior year quarter. 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.
During the quarter ended April 30, 2003, Azteca transferred $3.9 million of
Unzipped obligations to the Guez Living Trust, an entity controlled by Hubert
Guez, a principal of Sweet and a former member of the Company's Board of
Directors.
10
Amounts due to related parties at April 30, 2004 and 2003 and included in
accounts payable and accrued expenses, consist of the following (Note - all
amounts are non-interest bearing):
(000's omitted)
As of April 30,
----------------------
2004 2003
---------------- ---------------
Azteca $1,158 $ 317
Guez Living Trust - 3,900
Sweet - 104
ADS 727 540
---------------- ---------------
$1,885 $4,861
================ ===============
NOTE G 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 acquisition of
Unzipped, the Company redefined the reportable operating segments. The Company's
operations are now comprised of two reportable segments: footwear and apparel.
Segment revenues are generated from the royalty income from licensees and 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 quarter ended April 30, 2003.
(000's omitted) Footwear Apparel Consolidated
---------------------------------------------
For the fiscal quarter ended April 30, 2004
Total revenues $ 2,413 $ 11,360 $ 13,773
Segment income 293 436 729
Net interest expense 696
Income before provision for income taxes $ 33
Capital additions $ - $ 4 $ 4
Depreciation and amortization expenses $ 357 $ 127 $ 484
Total assets as of April 30, 2004 $ 28,309 $ 40,196 $ 68,505
For the fiscal quarter ended April 30, 2003
Total revenues $ 24,792 $ 17,249 $ 42,041
Segment income 750 849 1,599
Net interest expense 873
Income before provision for income taxes $ 726
Capital additions $ 238 $ 8 $ 246
Depreciation and amortization expenses $ 368 $ 13 $ 381
Total assets as of April 30, 2003 $ 54,794 $ 49,078 $ 103,872
NOTE H SUBSEQUENT EVENTS
On June 9, 2004, the Company entered into an agreement with TKO Apparel ("TKO")
whereby TKO agreed to purchase, on or before February 1, 2005, the Company's
wholly owned subsidiary, Unzipped, for a purchase price based on the tangible
net worth of Unzipped on the date of closing. The Company also entered into a
licensing agreement with TKO for the exclusive rights to design, manufacture,
distribute and market jeanswear under the BONGO brand, effective on August 1,
2004. The license expires on December 31, 2007 subject to certain renewal
options and is subject to TKO meeting certain performance and minimum net sales
standards. Further, TKO agreed that it will purchase 1 million shares of the
Company's restricted common stock for an aggregate price of $2.2 million. In
connection therewith, the Company has agreed to file a registration statement
covering the 1 million shares to be sold and agreed to pay certain penalties if
the shares cannot be publicly sold within a specified period of time.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements that are not historical facts contained in this Form 10-Q
are forward looking statements that involve a number of known and unknown risks,
uncertainties and other factors, all of which are difficult or impossible to
predict and many of which are beyond the control of the Company, which may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements.
Such factors include, but are not limited to, uncertainty regarding continued
market acceptance of current products and the ability to successfully develop
and market new products, particularly in light of rapidly changing fashion
trends, the impact of supply and manufacturing constraints or difficulties
relating to the Company's dependence on foreign manufacturers, uncertainties
relating to customer plans and commitments, the ability of licensees to sell
branded products, competition, uncertainties relating to economic conditions in
the markets in which the Company or its licensees operate, 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 trademarks and other
risks detailed below and in the Company's other Securities and Exchange
Commission filings.
The words "believe", "expect", "anticipate", "seek" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
the statement, was made.
General Introduction. In May 2003, the Company changed its business model by
licensing the CANDIE'S and BONGO trademarks for footwear to Steven Madden and
KCP, respectively, effectively eliminating the Company's operations as they
related to the production and distribution of women's and girl's footwear. In
conjunction with the elimination of its footwear operations, the Company closed
all of its retail stores during Fiscal 2004. The Company remains in the business
of manufacturing, distributing, selling and marketing jeanswear under the BONGO
label through its Unzipped division. The Company also markets and sells a
variety of men's outdoor boots and casual shoes under private label brands
through Bright Star Footwear, LLC ("Bright Star").
The Company's management agreement with Sweet along with the supply and
distribution agreements with Azteca and ADS, respectively, all expire on January
31, 2005. However, consistent with the Company's current licensing structure,
the Company has recently licensed the rights to BONGO jeanswear to a third party
licensee. (See Note H to the Condensed Consolidated Financial Statements)
As a result of the Company's transitions to a licensing business, the Company's
operating results are not comparable to prior years. Further, since there will
be no net sales attributable to wholesale and retail footwear activities in
Fiscal 2005 and thereafter as a result of the Company's transition to a
licensing business the results for Fiscal 2005 and 2006 are also expected to be
non-comparable to Fiscal 2004 and prior years.
Seasonal and Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of its licensees' businesses as well 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 under license 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 and its licensees ability to contract
with and retain key licensees, to predict accurately upcoming fashion trends
among its customer base, to build and maintain brand awareness and to fulfill
the product requirements of the 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 fiscal quarter.
12
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.
Summary of Operating Results:
The Company had net income of $33,000 for the quarter ended April 30, 2004
("First Quarter") compared to $726,000 for the comparable period of the prior
year. In the First Quarter, there was $99,000 of special charges and $696,000 of
interest expense as compared to $434,000 of special charges and $873,000 of
interest expense for the quarter ended April 30, 2003.
The Company's operating income was $729,000 in the First Quarter, compared
to $1.6 million in the comparable prior year quarter.
During Fiscal 2004, the Company exited the operating footwear business,
closing its wholesale and retail footwear businesses and granting footwear
licenses to third party licensees, which significantly impacted its operating
results and its comparability to prior periods.
Results of Operations
For the three months ended April 30, 2004
Revenues. During the First Quarter, consolidated net sales decreased from the
comparable prior year quarter by $29.0 million to $11.8 million. As a result of
the Company changing to licensing arrangements in its footwear operations in May
2003, there were no wholesale or retail women's footwear net sales in the First
Quarter as compared to $20.0 million in the prior year quarter. There will be no
net sales for wholesale and retail women's footwear for the remainder of Fiscal
2005 and thereafter.
Unzipped's net sales decreased by $5.8 million from $17.2 million in the prior
year quarter to $11.4 million in First Quarter. This decrease consists of a $3.4
million decrease related to the number of units sold, $2.0 million related to
unit price decreases and a $400,000 increase in deductions for returns and
allowances. During the quarter ended April 30, 2003, Unzipped sold approximately
320,000 units of prior season merchandise in an effort to reduce its inventory.
Approximately 70,000 units of prior season merchandise was sold in the First
Quarter. Deductions for returns and allowances for Unzipped in the First Quarter
were $1.8 million or 13.7% of its gross sales as compared to $1.4 million, or
7.4% of its gross sales during the comparable prior year period. This increase
reflects a shift in Unzipped's customer base toward department stores, which
require more vendor support in the form of markdowns and advertising
contributions.
Bright Star men's private label footwear net revenues (including commission
income) decreased from $3.6 million in the prior year quarter to $477,000 in the
First Quarter. Due to a change in the structure of its customer transactions,
whereby the customers open letters of credit directly to manufacturers thereby
eliminating Bright Star's inventory risk, Bright Star recorded only the net
commission earned on such transactions in the First Quarter and will continue to
do so in the future. While revenues decreased, there is no cost of sales
associated with the net commission income, and gross profit increased from
$266,000 in the prior year quarter to $477,000 in the First Quarter, reflecting
the growth in its business with Wal-Mart, which now represents over 90% of
Bright Star's sales.
Licensing income increased $758,000, or 64.3% to $1.9 million in the First
Quarter from $1.2 million in the prior year quarter. The increase was due
primarily to revenue generated by new licenses as the Company transitioned from
an operating footwear business to a licensing business.
Gross Profit. Consolidated gross profit decreased by $7.0 million to $4.9
million in the First Quarter from $11.9 million in the prior year quarter. There
was no gross profit from wholesale and retail women's footwear in the First
Quarter as compared to $7.4 million in the prior year quarter. Unzipped's gross
profit in First Quarter was $2.5 million, or 22.3 % of its net revenues as
compared to $3.3 million, or 19.2% of net revenues in the prior year quarter.
Unzipped's gross profit in the First Quarter included $988,000 adjustment from
the Shortfall Payment (See Note F to Condensed Consolidated Financial
Statements). Unzipped's gross profit before the adjustment was $1.5 million or
13.6% of its net revenues, a 5.6% decrease from 19.2% achieved in the prior year
quarter, primarily resulting from the increase in deductions for returns and
allowances discussed above. As discussed above, Bright Star gross profit
increased from $266,000 in the prior year quarter to $477,000 in the First
Quarter.
13
Operating Expenses. During the First Quarter, consolidated selling, general and
administrative expenses decreased by $5.8 million to $ 4.1 million from $9.9
million in the prior year quarter. Selling, general and administrative expenses
related to the Company's activities other than Unzipped and Bright Star
decreased by $5.4 million to $1.8 million in the First Quarter as compared to
$7.2 million in the comparable prior year period. The decrease resulted from the
Company's closing its wholesale and retail women's footwear operations and
transitioning to a licensing business during the second half of Fiscal 2004. The
Company anticipates further significant decreases in selling, general and
administrative expenses for the remainder of Fiscal 2005, its first full year
under the licensing model when compared to the prior year periods.
Unzipped's selling, general and administrative expenses decreased $375,000 in
the First Quarter to $2.1 million as compared to $2.5 million in the prior year
quarter 2003. As a percentage of net sales, Unzipped's selling, general and
administrative expenses increased to 18.4% in the First Quarter as compared to
14.3% in prior year quarter. Selling, general and administrative expenses for
Bright Star were $243,000 in the First Quarter, virtually flat with the prior
year.
For the First Quarter, the Company's special charges included $99,000,
consisting primarily of legal and professional fees as compared to $434,000 in
the prior year quarter, which consisted of $352,000 of legal fees related to the
settlement of the Company's SEC investigation and $82,500 penalty paid to Azteca
for late stock registration in connection with the Unzipped acquisition (See
Note F to Condensed Consolidated Financial Statements)
Interest Expense. Interest expense decreased by $177,000 in the First Quarter to
$696,000, compared to $873,000 in the prior year quarter. Included in interest
expense in the First Quarter was $123,000 from Unzipped's revolving credit
facility, as compared to $211,000 in the prior year, a decrease of $88,000. The
Unzipped interest expense decrease resulted from lower average outstanding
borrowing and, to a lesser extent, lower average interest rates as compared to
the prior year period. There was no interest expense under the revolving credit
facility for the operating footwear business in the First Quarter, compared to
$63,000 in the prior year quarter, as the Company closed its operating wholesale
and retail footwear business. Also included in interest expense in the First
Quarter was $203,000 from the 8% senior subordinated note in connection with the
Unzipped acquisition as compared to $220,000 in the prior year quarter. Interest
expense in the First Quarter associated with the asset backed notes issued by
IPH, a subsidiary of the Company was $370,000 as compared to $379,000 in the
comparable period in the prior year.
Income Tax Expense. No tax expense was recorded for the current and prior year
quarter, due to a reduction in the valuation reserve, which offsets the income
tax provision.
Net Income. The Company recorded net income of $33,000, compared to $726,000 in
the comparable quarter of prior year.
Liquidity and Capital Resources
Working Capital.
At April 30, 2004, the current ratio of assets to liabilities was 0.87 to 1 as
compared to 0.83 to 1 at April 30, 2003.
The Company continues to rely upon revenues generated from operations,
especially licensing and men's private label activity, as well as borrowings
under Unzipped's revolving loan to finance its operations. Net cash used in
operating activities totaled $594,000 in the First Quarter as compared to net
cash used of $2.9 million in the prior year quarter.
Capital Expenditures.
There were $4,000 capital expenditures in the First Quarter as compared to
$246,000 for the prior year quarter. The Company does not anticipate significant
capital expenditures for the remainder of Fiscal 2005.
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 Guarantee for
each year during the term commencing in Fiscal 2004. In the event that the
Guarantee is not met, Sweet is obligated to pay the Shortfall Adjustment, the
difference between the actual net income, as defined, and the Guarantee. See
Note F of Notes to Condensed Consolidated Financial Statements.
14
For the quarter ended April 30, 2004, Unzipped had a net loss (as defined, for
the purpose of determining if Guarantee has been met) of $563,000, resulting in
a Shortfall Payment of $988,000 against the $425,000 quarterly Guarantee. This
payment has been recorded in the condensed consolidated income statement as a
reduction of Unzipped's cost of sales and on the balance sheet as a reduction of
the 8% senior subordinated note due to Sweet, as provided for in the management
agreement. After adjusting for the Shortfall Payment, Unzipped's reported GAAP
net income for the quarter ended April 30, 2004 was $312,500.
In connection with the acquisition of Unzipped, the Company filed and 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 panties to Sweet. Since the
registration statement was not declared effective until July 29, 2003, the
Company was required to pay $82,500 to Sweet as a penalty. The Company recorded
$82,500 expense for such penalty in the quarter ended April 30, 2003.
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. 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 bore interest at 1.5%
above the prime rate.
At April 30, 2004, there were no outstanding borrowings under the Credit
Facility which was terminated by an agreement dated January 15, 2004.
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.
At April 30, 2004, Unzipped's borrowings totaled $10.3 million under the
revolving credit agreement and the availability under the formula was $5,600.
Unzipped is in default of certain covenants under the Unzipped Credit Facility,
including the tangible net worth covenant. As of June 10 2004, Unzipped had not
obtained a waiver for these defaults and there can be no assurance that it will
be able to do so. As a result, the Lender could, in addition to other possible
remedies, reduce the advance rates, cease advancing funds, or demand immediate
repayment of the outstanding loan amount (which was approximately $10.3 million
as of April 30, 2004), any of which could negatively impact the operations and
financial condition of Unzipped. While the Company believes that it is unlikely
that the Lender will accelerate Unzipped's obligations under the Unzipped Credit
Facility, in the event that it did so and Unzipped could not immediately repay
the existing loan balance, it could result in the Lender foreclosing on
Unzipped's assets, among other remedies.
In the event that the Lender forecloses on the Unzipped Credit Facility, the
Company believes, based on Unzipped's current financial condition, that Unzipped
would have more than sufficient assets and net worth to allow the Lender to
recoup its entire loan, although there can be no assurance that it will be able
to do so. An acceleration of the Unzipped Credit Facility would impact the
operating results and financial condition of Unzipped in Fiscal 2005 (including
a possible write-off or impairment of assets), which could result in a reduction
in the Company's consolidated revenues in Fiscal 2005. Sweet, the manager of
Unzipped, has guaranteed that the net income of Unzipped, as defined in the
Management Agreement, in Fiscal 2005 shall be no less than $1.7 million and the
Company believes that this guarantee is enforceable even in the event of
foreclosure or acceleration of the Unzipped Credit Facility. Additionally, the
Company, as the parent of Unzipped, is not a signatory or a guarantor of the
Unzipped Credit Facility and would not be liable for Unzipped's obligations
thereunder. The Company also believes that it has sufficient liquidity from
revenues generated from its licensing and men's private label activity, which
are separate from Unzipped, as well as from the additional borrowing obtained
under the IPH bond financing (see "Bond Financing"), to satisfy the Company's
anticipated working capital requirements for the foreseeable future. In
addition, on June 9, 2004 the Company licensed the rights to Bongo jeanswear to
a third party licensee (See Note F to Condensed Consolidated Financial
Statements), which would provide the Company with additional licensing revenues
commencing upon the effective date of the agreement. Unzipped currently has a
royalty free non-exclusive sublicense for Bongo jeanswear.
15
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. 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. At April 30,
2004, the unamortized portion of such costs were $2.0 million.
During the First Quarter, IPH amended the asset-backed notes whereby it borrowed
an additional $3.6 million. The additional borrowing matures in August 2009 with
a floating interest rate of LIBOR + 9%, with quarterly principal and interest
payments and $500,000 of interest prepaid at closing. The net proceeds of $2.9
million are being used for general working capital purposes. Costs incurred to
obtain this financing totaling approximately $178,500 will be deferred and
amortized over the life of the debt.
Other
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 the Unzipped 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, or at all.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a result of the Company's and Unzipped variable rate credit facilities, the
Company is exposed to the risk of rising interest rates. The following table
provides information on the Company's fixed maturity debt as of April 30, 2004
that is sensitive to changes in interest rates.
The Unzipped Credit Facility had an average interest rate of
4% for the three month period ended April 30, 2004 $10.3 million
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of internal control over financial reporting ("Internal Control")
to determine whether any changes in Internal Control occurred during the quarter
ended April 30, 2004 that have materially affected or which are reasonably
likely to materially affect Internal Control. Based on that evaluation, there
has been no such change during the quarter ended April 30, 2004.
16
PART II. Other Information
Item 1. Legal Proceedings
See Note E of Notes to Condensed Consolidated Financial Statements.
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended April 30, 2004, the Company granted certain of its
employees and directors, pursuant to a stock option plan, 10-year non-qualified
stock options to purchase a total of 500,000 shares of its common stock at a
price of $2.06 per share. The options were granted in private transactions
pursuant to the exemption from registration under Sections 2(a) (3) and 4(2) of
the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
31.1 Certification of Chief Executive Officer Pursuant To Rule
13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As
Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.
31.2 Certification of Chief Financial Officer Pursuant To Rule
13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As
Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.
32.1 Certification of Chief Executive Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
32.2 Certification of Chief Financial Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002.
B. Reports on Form 8-K - During the quarter ended April 30, 2004, the
Company furnished a report on Form 8-K to report its results for
the quarter and year ended January 31, 2004.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANDIE'S, INC.
-------------------------------------------------
(Registrant)
Date June 10, 2004 /s/ Neil Cole
----------------- -------------------------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date June 10, 2004 /s/ Richard Danderline
----------------- -------------------------------------------------
Richard Danderline
Executive Vice President - Finance and Operations
Principal Financial and Accounting Officer
18